Principles of the Stock Market : Inflation

US Dollar Peaking?

Richard Schwartz — Tue, 17 Mar 2009 13:18:00 GMT

US Dollar’s Possible Turning Point. A Possible Trade For Traders? Written St. Patrick’s Day.

The US Dollar Index (symbol DXY) has fallen back just after breaking out above an old high. Hm, very interesting as some predict the US dollar weakening will be a first sign of normalcy coming back into the marketplace, that it will signal increased liquidity and a return to a bull market. We’ll find out whether these prognosticators are right or not and about the relationship between the buck and stocks over time.

Today though, this doubling back by the US dollar is a bad sign for continuing dollar strength This chart formation is what “Trader Vic” calls a 2B. That’s when a new high is set but quickly reversed. Let’s see, the DXY on March 2^nd closed above its prior closing high of 88.191 set back on November 21^st at 88.940 (Interesting. November 21 was almost exactly when the November to January stock market rally began.)

Anyway the US dollar index stayed up above that November high for seven days and then last Wednesday closed below that November close, at 87.868. Now, for the last four days, as stocks have risen, it’s stayed below its high and fallen further. “Trader Vic” in his first book, METHODS OF A WALL STREET MASTER wrote: “At major market turning points, long-term 2B’s, the new high or low will usually break within seven to ten days.” In this current case, the US dollar index fell back below its old high after seven days of being above its November high. That fits Vic’s time frame nicely. Let’s review a bit further back as well. This US dollar rally started last July 15^th or its run for eight months now. OK, could have run its course. The question is whether we have a “short the dollar play” here or not. For more evidence, let me go check another dollar index, Bloomberg symbol USTW$, the related, broader-based dollar index, which measures a much larger basket of currencies including a lot of developing market currencies. You may remember that most all currencies have been falling versus the dollar over the last year as the old rule has held up, “When America sneezes the rest of the world gets a cold.” Just meaning that tough times get real tough elsewhere when America stops buying; you can imagine the hardship this brings to other exporting countries, etc. Anyway, the broad based index has tracked the DXY pretty closely, moving higher since last July. It’s last high was 84.91 set back on November 21^st last year. Then on February 27^th, it closed higher, at 84.93. And stayed higher for the next ten trading days or until last Friday. Today it’s trading lower, at 84.628, as I write. So after ten days above its November high, it also has reversed lower or doubled back. Net, net, there does seem to me a trading opportunity. And in today’s modern age of investing we have vehicles to easily short the US dollar. In the ProFunds mutual fund family, there’s the ProFunds Falling US Dollar fund (FDPIX), in the Rydex family, there’s Rydex Weakening Dollar 2x Strategy Fund (RYWBX) and over in the ETF (exchange traded fund) market there is PowerShares DB US Dollar Index Bearish Fund (UDN). Obviously the ETF allows you greater liquidity because it trades like a stock, you can buy and/or sell it any day during the trading day.

SCHWARTZ RECOMMENDATION. Ok, after looking at the evidence let me recommend for an intermediate term trade going short the dollar using one of the three vehicles above. Do so in a very modest way and as just one of a variety of strategies. While keeping lots of cash on the sidelines. Also figure I’m wrong … and thus you need to sell to cover, if the DXY index again reverses upward and closes above its old high, higher than 89.105, your mental stop loss point. Your risk is about a point in UDN while the reward if the dollar has turned down from a major top is much larger. I like that risk vs. reward.

Disclaimer! I hold no positions in the three symbols above but can and do change positions without notice.

SCHWARTZ TIP: Finally, there are three very useful trading tips spelled out in Trader Vic Sperandeo’s two great, early 1990s published books: METHODS etc. and PRINCIPLES OF PROFESSIONAL SPECULATION. I’ve used them repeatedly over the last couple of years and they’ve proven reliable, not perfect but reliable. So I’d suggest any market follower needs to be aware of, knowledgeable about and applying all three in everyday activity. They are the two I refer to in today’s letter; the 2B Rule and the 4-Day Rule. The other is the “As easy as 1-2-3” change-of-trend rule. Actually there are more tips in his two books that are very useful too. But for any trader or speculator, spotting change of trends early on is very useful and profitable information. Get his books, know his rules. “Yay Trader Vic!”

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Big Names Predict Problematic Inflation: What's An Investor To Do?

Richard Schwartz — Wed, 11 Mar 2009 13:48:00 GMT

ECONOMIC VIEW. Rising Inflation Expected. So predicts a whole slew of big names, everyone seems to be jumping on board this train in the last few days. Now Warren Buffett and Bill Gross have joined Marc Faber and Jim Rogers and more in predicting problematic inflation just out there over the horizon. Yep, as soon as deflation became the consensus buzz word – recessions kill inflation is what I’ve heard repeated from many sources – we’re getting a groundswell of opposite opinion. Well, not quite opposite but close enough, let me explain. Everyone agrees this slump will preclude problematic inflation but all say that’s a temporary phenomenon. No one predicting rising inflation will go so far as to say just WHEN rising inflation is going to emerge but more and more observers are saying it’s definitely coming, arriving when this economic slump is over, whenever that is. Again, rising inflation, no, out of control inflation, no, to put it more accurately, hyperinflation is my biggest worry. That America printing money galore – yes, for bailing out businesses too important to the financial system to allow them to fail, and, yes, for keeping the economy greased and running, and, yes, for stimulating new growth and maintaining existing economic activity, and, yes, for overall deficit spending in this economic downturn – will come back to bite us in a big way. I can handle some inflation, I know how to shop for bargains which will help in food and clothing needs, what I’m worried about is a major currency devaluation which wipes out mine and America’s buffer. America’s savings becoming worthless as has happened time and again across the globe when some country’s finances just go kafluey. When a country can’t pay its bills compounded by a wholesale lack of trust in its currency. Schwartz View: Hasn’t happened in the US yet, but …

So I get more nervous when I hear Warren Buffett, America’s richest man and known as the best value investor of our time, say inflation could go as high as it was in the 1970s, that’s almost double digits! I get even more nervous when Bill Gross, who manages one of the largest bond funds going, says that US government efforts to break this recession will cause “costs for goods and services” to rise. I respect both these guys and their opinions. Now they join long term forecaster Jim Rogers, who is also more worried about rising inflation than deflation, best I can figure. He’s long been predicting an US dollar crisis and really bad inflation ahead and says he’s just waiting for the proper moment to essentially “short US Treasury bonds.” Rogers sees commodity inflation returning with a vengeance since today’s global economic slump in his view is just improving the fundamentals underpinning commodity prices. In other words today’s credit crunch and resulting recession causing miners to delay or even shut down exploration and thus leading to a further drop in supply. He loves to mention that global food inventories are already down to 50 year lows. Finally, Marc Faber, the well regarded international investor and past BARRON’S Roundtable panelist, sees rising inflation from another angle. He figures that the US government is going to have all kinds of problems in raising interest rates down the road or in effect withdrawing all the money it’s pushing into the system now to try to end today’s credit crisis. Schwartz View: This rising inflation camp is growing now, with many others predicting a forthcoming inflation problem as well. I am too.

Schwartz Recommendation. If you also worry about rising inflation, one strategy available today is to buy an inverse ETF or inverse sector fund. One that goes up when long term US interest rates go higher. That’s the natural reaction if inflation rises, yields generally rise forcing bond prices down. For example ProFunds has two such funds, RTPIX and RRPIX while Rydex offers up RYJUX and in the ETF camp there’s TBT which “correspond to twice the inverse” of the US Treasury bond. I recommend such.

Disclaimer! I don’t own any of the above now but can and do change positions without notice.

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To Stimulate Or Not To Stimulate The US Economy

Richard Schwartz — Thu, 05 Mar 2009 19:29:00 GMT

ANTI-Stimulus Protest Demonstrations; Say What?

That’s a big global fear surrounding this global economic slump. History shows economic debacles like this breed unrest, anger, frustration among those losing their jobs, etc. and thus protest demonstrations. If one watches www.worldfocus.com or any other news global news show, you’ll see violent protests happening globally. In Eastern Europe as one example. In China too and especially. China’s government’s big fear, knowing it’s own history, is protests which bring down the government there. Making the upturn in global protests there and elsewhere important for all investors to track.

Yesterday’s Investor’s Business Daily (IBD) newspaper had a front page article reporting that anti-stimulus demonstrations have occurred in 35 American cities. Yes, these are small demonstrations so far, 100 or 200 people and organized by interest groups, but maybe they will grow in size after IBD gave them face time, i.e. publicity -- I hadn’t even heard about these protests at all until yesterday -- and also gave them such a nationalistic and catchy name: “Nationwide Tea Parties.” I read where these events are being organized by those groups who sarcastically say we should: “Legalize Capitalism!” Or who believe: “The best government, governs least.” And those who sardonically and exaggeratedly say: “No to socialism!” And are epitomized by one protestor’s sign which read: “Your mortgage is not my problem!”

Obviously US government stimulus spending to try to keep this weakened economy from getting worse is anathema to those who believe in the strict Austrian school of economics. That economic school says things just get screwed up terribly whenever the government gets involved. And who knows, maybe doing nothing, to try to shorten this downturn, was indeed the right move. But as I see it it’s too late now; we’re already committed. I’ve given up opining on what were the right and wrong roads to follow but let me also report there are a lot of other angry people in America today, those that say they are tired of lavish retreats and concerts, tired of private jets, tried of companies paying out huge bonuses with or without government money. Regular readers know I’ve been angry and pounding the table for many years about these excesses. So maybe we do or will have class warfare, that is if these anti-stimulus demonstrations get larger and cause more of a divide among all kinds of angry Americans.

Schwartz View: But as I see it, we’re now committed to this “bail out” path, we got committed a year ago when we bailed out the first company, Bear Stearns or whoever came first. This far along this path I can’t foresee us stopping now. Plus it only makes common sense for any government to try to stimulate the economy when the two other major sources of normal demand, consumer spending and business investment, are in total hunker down mode. The even bigger picture, as I see things from up on the mountaintop looking down at the valley and what’s happening, is that these demonstrations by those who say your problem is not my problem, are the last desperate efforts by those who still believe in the “me first” path America has been on for roughly three decades now. As I see it, the results of the recent US presidential election announced that the majority of Americans want big change in America, a change which returns the America Dream to the average working person once again and returns us to a more level playing field. And that means, even though there is some opposition, that America has now crossed the Rubicon, so to speak. Meaning we’ve just begun a 10-year or so cycle which puts public interest over private interest. History shows we do swing back and forth from longer periods, or about 20 years, of letting capitalism run unchecked and America showing strong economic growth as a result to shorter periods of about 10 years or so where we put the unfortunate and forgotten Americans first, which yes, also means slower economic growth as a result. (Please read Arthur Schlesinger Jr.’s THE CYCLES OF AMERICAN HISTORY if you’d like more on this repetitive cycle.) All signs that I can detect today tell me that America is going to level the playing field, get rid of the excesses, the corruption and scamming of the system, in general just the overall greed which always naturally arises from allowing capitalism unchecked to run for too darn long. Again, I’m just observing what I see happening not opining whether it’s right or not. As for investment implications, for now stay hunkered down, practice extreme patience and proper money management while out waiting this Papa Bear market.

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Good trading, speculating and investing!

Monday Weekly Strategy

Richard Schwartz — Mon, 22 Dec 2008 14:37:00 GMT

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Monday, December 22^nd, 2008: So here it is, last letter ‘till Monday, January 5^th, as Lucy & I fly off to the white sand, warm blue waters of the Caribbean, maybe on a last hurrah (if the economy keeps sliding). I’m taking Cycles of American History & Rethinking the Great Depression books. Our routine is: Go to the beach, play backgammon, read & go out to dinner. Day after day. Warm our bones & work on new tans.

THE BIG PICTURE

Friday I saw John Bogle, who has been on Wall Street for 50 years and who created the first index fund, the Vanguard 500 Index Fund back in 1975, say investment bankers and bankers generally owe the country a huge apology (which I doubt we ever get). Their imprudent speculations and greed for massive fees from too complex speculations led to today’s financial sector problems, problems which have now fed out to the real economy hurting innocent, hard working, everyday Americans. Mr. Bogle says greed has even spread out to our whole economy, that we’ve morphed into in a “me first” society and it’s something we have to seriously take a look at. Thus capitalism, allowing markets to work unfettered of regulation and based on trust and trusting, has now been “deeply discredited.” Even the underpinnings of capitalism have changed radically. We’re no longer an ownership society whereby individual stockholders used to select and then hold 92% of all common shares; institutions 8%. Now institutions control 75% of shares through huge sums entrusted to them by others and have not invested prudently. Again, because of the incredible fees they got for investing. Mr. Bogle says they sure wouldn’t manage their own monies so recklessly. These institutions were supposed to be wiser than individuals but, again, it’s not their money. Supporting Mr. Bogle’s view is the revelation that 29 of the 30 largest losers in the Bernie Madoff Ponzi scheme scandal were institutions whereby just one of these fund of fund companies was paid $160 million in 2007 alone for recommending the Madoff “hedge fund.” In other words, where was the fiduciary responsibility, the prudency, the probity expected when we entrust institutions to manage 75% of our investments? Schwartz View: Regular readers know I’ve been distressed and pounding the table about a number of these societal issues for years. About capitalism running amuck, culminating its 30-year trend toward widening the gap between it and its counterpart, democracy, with President Bush’s skewed one way Texas twang policy saying the be all and end all is that “bidness is bidness” and thus stifling regulation. And about society becoming so uncivilized, we ended up booing our own hometown, beloved sports teams! So while no one wants to live through what may come next in the economy, I have to say America has finally woken up, albeit after the nightmare it usually takes to precipitate major change, and that we are now started down a long and arduous path, but one finally pointed in the right direction again. As one example, we’ve even started to SAVE once again; amazing! So, for myself, I guess sort of a contrary indicator in recent years, I’m becoming more optimistic and bullish on our future. Finally! “Go America Go!”

THE ECONOMY

It became apparent that the US economy was suddenly falling-off-a-cliff right after Lehman Brothers became the one firm chosen NOT to be bailed out by the Federal Reserve and US Treasury Department. (Looked back upon as a colossal mistake in strategy I’ve read.) Lehman’s bankruptcy rippled out far and wide and led directly to losses in some money market funds, a “breaking of the buck,” and thus then to a total loss of confidence. Now, by all accounts, the economy is in total free fall. This sudden screeching halt in US business activity has caused the same in our global trading partners and most everywhere I look is now in corresponding economic free fall. You extrapolate it for yourselves from here. One view I’m pondering is that many times sharp declines lead to the second leg of a V-move, back up, and we’re overdue. Maybe stocks, with their recent unwillingness to keep going lower on bad news, means Mr. Market (the consensus of large investors) sees some end out there to the economic free fall. Still, we’d have to see some economic revival to expect a sustained V snapback in stocks. For now, I see 2009 providing a steady stream of bad news every time we look up. Just like in the second year of the last Papa Bear bear market, back in 1974, a continuing stream of bad news back then ultimately overwhelmed all attempts to rally until the final months of that year. Schwartz View: The consensus I’m hearing is that this sudden, fall-off-the-cliff global economic contraction is NOT going to lead to a repeat of the depression-spawned 1930s starting with its four-year long period of contraction followed by its anemic recovery, a.k.a. the Great Depression. I hate to follow any consensus especially when this one’s been so wrong for so long. But my own history look backs and studies by Federal Reserve Bank Chairman Ben Bernanke, an expert on what went wrong in the 1930s, turning a recession into a depression, show that we raised taxes, cut spending and blocked global trade, just the wrong policies. So I sure don’t expect any exact repeat of those failed policies. Leading me to think out of the box and that maybe today’s Fed policy of battling a deflationary depression is also implementing incorrect strategy. How about worrying against runaway inflation spawning from all the money the US and now the world has and is still throwing at this economic slump? Just the problems we worried about in the early 1930s but didn’t occur. You know the old saying, people fight the wrong war, the old war, because that’s what’s still fresh in their minds. Thus, summing up, maybe we can’t expect much creativeness from the Fed pointing in the less obvious direction of battling inflation since they are entrusted with getting us through hard times. They will naturally, after learning certain lessons from the 1930s well, not break much new ground. One reason being that if their policies didn’t work, they would be heavily criticized for experimenting. Thus while everyone pooh-poohs an inflation problem, I still worry about one. Seems like the consensus, which may be correct, among the minority expecting and talking about an inflation problem, doesn’t expect one until 2010 at the earliest. Keeps me thinking about that quote I printed here back on Friday, December 5^th, from Sir John Templeton: “It’s impossible to produce a superior performance unless you do something different from the majority.”

THE STOCK MARKET

Maybe we’ve started off on a new, lasting stock market rally as many now say. Maybe the November 20^th closing low and November 21^st intraday low did end this bear market or at least this phase of it and start us up and on a new mini bull market. But I don’t think we can determine that from these final days of stock market trading this year. This jig jag, saw-tooth modest rally we’ve had in December – the Dow remains down -2.8% this month, but up +13.6% from its closing low on November 20^th – still looks like just a time killer rally to me after stocks fell -6% in September, -14% in October and another -5% in November. So while I’m off on my annual winter beach vacation, I’m leaving my managed portfolios hedged with a slight long bias, still with my modest overall about 20% or less market exposure which I’ve carried since late last year. You remember late last year? At least as a lesson learned for the future, if for no other reason. After the stock market rallied back from its original car wreck in July, in what amounted to a head fake, false move, dead cat bounce and pretty obvious sucker’s rally, and a failed break out to new highs by the Dow and S&P (while the rest of the stock market refused to confirm).

Anyway, last week I ended the letter by noting that psychologically we should rally since bad news couldn’t drive prices down in recent days. Technically we had what could prove to be two months of base building everywhere I looked on the charts (but bases which could easily prove false). Fundamentally we even finally had low enough market valuations, like P/E ratios, to support a rally as well. But how about a catalyst? Well, let me offer up: (1) much lower gasoline prices which keeps our wallets and purses fuller and healthier, and (2) the good feelings anyone watching our president-elect making non-partisan, non-political, non-ideological selections for his cabinet, should feel. There may be a wellspring of good feeling, a sort of honeymoon psychological effect on investors, business, consumers and most all of us as we hope our new president can perform miracles. Schwartz View: Unfortunately no one man is going to remake America overnight. So, while keeping an open mind and watching all unfolding developments, for now I’ll back history which says this “worst financial crisis since the Great Depression” has to lead to an extended Papa Bear market, one which lasts at least a couple of years. Not just for one year, where we stand today.

PORTFOLIO STRATEGY

I hate to follow or even agree with some of what I’m hearing about going forward strategy, especially if such is espoused by those who were so wrong all this year. I’m speaking specifically about Bob Doll, now at BlackRock as their “Trillion Dollar” fund manager. I don’t want to pick on anyone but since he’s been leading the charge forward as stock markets collapse and getting all the face time doing such, I guess I have to. I start off very skeptical because my belief is that these big money managers are not going to get on TV and recommend anything before they and their clients get first crack at their thinking, ideas and recommendations and position themselves accordingly. I already wrote awhile back many old stock market books talk extensively about how big money always used to try to sucker the little investors. The age old technical Wall Street term “distribution” implied big guys needed little guys to unload their big positions on to when they foresaw a bear market ahead and thus put on a bullish face. It took much time to unload huge positions these large investors stockpiled so much frenzied excitement about the stock market had to be built up as big money sold. What better way today than Bob Doll coming on CNBC ubiquitously and always saying we are now in a bottoming process. He said that back in March and those who followed him are much the worst after the October panic crash. Anyway, that’s all secondary, although supporting, my main point. My main point is that Mr. Doll now says next year is going to be a good one for those taking on risk, not for those playing it safe. Again sounds good to me, at least at first blush. We all know what goes down the most generally can bounce tremendously when psychology changes. But do we really want to buy really risky investments in just the early part of the second year of a big, bad bear market? I say no. Bear markets of this size and scope historically have taken a lot longer than one year to work through.

Net, net, probably Mr. Doll will be proven correct about taking on risk, if one doesn’t factor in any time period. I’d guess risky asset classes will move fast when this bear market ultimately does end but do I really believe its going to end soon? No. And if we do have a 2009 mini bull market, say because stocks have fallen so much, then I’m not going to count on Bob and other institutional investors to tell me and us exactly when to get back out. No, starting off next year next week, I’d suggest still playing our cards close to the vest. Yes, play modestly for a continuing rally but look at it for now as just a bear market rally.

Happy Holidays & Happy New Year!

Richard

Re-Regulation Begins a Multi-Decade Road

Richard Schwartz — Mon, 06 Oct 2008 14:39:00 GMT

THE BIG PICTURE

Today’s Big Picture view revolves around the probable coming re-regulation of the financial markets. History shows regulation of markets is similar to a grandfather’s clock pendulum swinging back and forth although not as regular. A brief look back to the start of the 20^th century, shows free markets and a first age of globalization, with the introduction of the telegraph and telephone, steamships and railways, at a peak. Millions even migrated without passports while trade flourished meaning free markets were in charge.

· Governments Take Charge. Then, in August 1914, with World War I, that age ended abruptly. WWI left people disillusioned and looking for something better and many turned to socialism and communism. The Russian Revolution in 1917 drew followers and essentially sought to end capitalism for good, making private property illegal. Socialists and other government controlled economic systems were winning the battle of ideas, governments were in charge, free markets were in retreat. In less than 30 years, one third of humanity, including Eastern Europe, China and the Soviet Union, would be living under socialism or communism. Capitalism looked to be doomed except for in America. The 1920s in America was still a boom time, Americans buying cars, buying illegal gin, buying stock. Radio was the Internet of the 1920s. It was a classic bubble. Finally the 1929 stock market crash started Americans on the way to despair, a complete economic collapse "with no ability to earn, repay, spend, consume." Everything spiraled downward while about half the banks in the US closed. America turned toward government for help and thus re-regulation with President Roosevelt’s numerous new government regulatory agencies. Around the globe, governments gained power … over free markets. In Italy, Spain and Germany fascism took charge. World War II then arrived and even afterwards people all around the globe still blamed capitalism for causing the depression. The whole world kept moving towards more regulated economies. England even went socialistic as Winston Churchill, the great war leader, was beaten by the socialists! Most of the world operated under this sort of government planning process for the next 30 years.

· Free Markets Regain Control. But in the 1970s free markets began a resurgence. Margaret Thatcher came to power in England with free market thoughts as did Ronald Regan here in the US. with his Reganomics. Both cut back on government regulations, giving markets more ascendancy and free markets again starting coming to the forefront. England started privatizing its economy while President Regan cut taxes and let free markets regain control as epitomized by breaking the air controllers strike. Thus capitalism got a free hand which lasted for aboutt 30 years, even through the dot.com boom and bust. But after last year’s incredible debacle with investment banks, money center banks, insurance companies, etc. losing billions after irresponsibly leveraging up their investments 20 or 30 times, it’s apparent to most everyone that, just like in the 1930s, we can’t afford to have any similar financial market collapse spawning from totally free markets to happen again any time soon.

Schwartz View: So after reviewing the history of the 20th century and seeing how over long periods, market regulation swings back and forth, I have to figure we’ve just started a long term swing back on the way to re-regulation. For more on this topic, I recommend you watch Commanding Heights, the Battle for the World Economy, by Daniel Yergin and Joseph Stanislaw which was turned into a DVD and a PBS prouction, a wonderful esplanation of the battle for economic minds in the 20th century. Filled in some missing pieces for me and should for you all as well.

Two Technicals: 1. Why No Capitulation; 2. How Inflation Returns

Richard Schwartz — Wed, 16 Jul 2008 16:40:00 GMT

TECHNICAL VIEW. The Principle of History. Two historical technical observations today:

1. Capitulation: Where the Heck is It? CNBC keeps interviewing floor traders and reporting from the New York Stock Exchange that everyone there is anxiously looking for that big bout of capitulation, selling, to end this latest market decline. But their wishes aren’t coming true. Guess they haven’t read my stock market letter as a study of the price action after the Bank Panic of 1907 , the most similar comparison to today’s credit crisis I could find, showed no capitulation back then. The reason and explanation was that since investors were so darn bearish, they shorted any and all rallies and thus stocks never got “quite out of hand” or saw that one day of massive selling or capitulation today’s traders want to see. Schwartz View: Similar to market crashes, we have to get blindsided to get capitulation. Or the problems and pressures have to get extremely severe with no light at the end of the tunnel. Today, we sure aren’t getting blindsided and numerous remedies are being floated and tried left and right, like economic stimulus packages, Fed rate cuts, Treasury announcements, yesterday’s SEC pronouncement about short selling, etc. Again, let me point out, it’s sort of ironic that we all preach free market capitalism when times are good but when times turn bad, we all scream for the government to bail us out.

2. The Return of Inflation. This commodity inflation -- rising prices in metals, oil and now food -- is the first bout of rising inflation we’ve seen since the early 1980s when then Fed chair Paul Volker jacked interest rates up through the roof and led the US into recession but in so doing also broke the back of multi-decade, out of control inflation. As my regular readers know, widely-followed big picture guru Jim Rogers says commodities are going to keep running up in price for approximately the next ten years, that a commodity bull market is in full force. And I don’t disagree. But let me add my alpha to the picture. My studies have shown that many, maybe most times, when any new trend begins it begins with a big burst. Then we get a large pullback in the early states of this new trend (whatever the time frame the new trend is, days, weeks, years, decades). Then after this large pullback, say because there remains many disbelievers who can’t quite believe things have changed, or because these quick gains need to be consolidated, or because the trend is moving too fast and has outrun itself, the new trend becomes more steady and reliable. Check back to the bull market which started in 1982, this pattern applies. Or think a bit about this new bear market. How stocks dropped last year in July and August when the subprime news first broke and then had a big bounce (to slight new highs) before the new down trend reasserted itself. Schwartz View: So it makes sense that inflation and this commodity bull are due for a big correction downward before reasserting themselves for the next few years.

One American's View on $4 Gas

Richard Schwartz — Thu, 26 Jun 2008 13:56:00 GMT

ECONOMIC VIEW. One American’s View. Yep, Mine! With a bear market upon us, and myself and hopefully my readers all with hunkered down investment portfolios which thus don’t need constant care and attention, let me turn the spotlight on one American’s new travails, resulting views & future plans.

Travail. I borrowed Lucy’s car to drive out over the mountain to play golf at the Hudson Valley Resort (VJ Singh recently bought an interest in the resort, for you golfers out there) for the Tuesday night golf league this week. And then borrowed it again to go take my nightly swim at the Ulster County pool last night. My car’s being temperamental, some type of under the dashboard wiring issue which cuts off the engine, I’m taking it in on Saturday. Anyway I like to put gas in her car when I use it. At $4.21 a gallon I figure gas is not cheap anymore and I don’t want to short Lucy.

View. Thus, figuring gas mileage in my head and how much it costs to drive, say 40 miles, I started thinking about what today’s higher gas prices reverberate, they are about double last summer. Means less people driving and everyone taking shorter and fewer trips. The county pool, for example, about three miles out of town, has been quite empty this year. Thus I see much higher gas is going to hurt tourist stops such as Lake Placid, NY and Lake Tahoe, CA/NV. Already we’ve rebooked twice, at lower prices, at the casino/hotel we’re staying at in Lake Tahoe. Must be many fewer people driving there from San Francisco and the rest of California, especially with California having the highest gas prices in the nation, about $4.60 last I heard. I can sure understand why. We’ve driving a SUV from San Jose to Lake Tahoe (between four and five hours) and Lucy’s best friend who we’re visiting in San Jose says the total gas price may cost us $80. I figure double that by the time we take the three hour drive around the lake once or twice, billed as the “most beautiful drive in America,” by the way. And maybe go see Squaw Valley (where the Olympics were once held) and maybe Reno too. Our visit wasn’t going to be cancelled just because gas prices have doubled since we planned this vacation. But today’s gas prices will be factored into our future trips, surely, knowing myself. Yep, Americans plans in general will be wound down or changed slowly. Planning now has to include gas prices as parties and family get-togethers can’t place everyone under big cost pressures.

Future. Thus I see higher gas prices really having long, negative coattails for business. All those convenience stores along major highways, all the tourist towns including New Paltz, all the recreational destinations, like Las Vegas, Disneyland and the various small businesses surrounding, all will see fewer people and thus lower revenues. This winding down of travel and changing of plans will be a major issue.

Schwartz View: Bottom line, as bad as being asked for new financial discipline and sacrifice, this process is exactly what America needs. For our longer term health and global competitiveness. Unhappily this sacrifice is being forced on us but likely America and Americans wouldn’t cut our deeply ingrained, bad overspending habit any other way. Spending less and saving more has been the needed antidote for our economic stresses for many, many years. Thus I can’t wait to turn bullish on us as America gets back on the right track. That’s one reason my first choice of books to take and read on the planes and during the three hour waits in two airport terminals is long range forecasters predicting bullish happenings ahead.

UPDATE ON THE STOCK MARKET: Written Wed., June 18, 2008: 6:30 a.m.

Richard Schwartz — Wed, 18 Jun 2008 14:02:00 GMT

Wednesday, June 18^th, 2008: Woke up singing this morning … “Doo-da, Doo-da”… and I don’t sing! Watched the coronation of the Boston Celtics as NBA champs last night … “Goin’ to run all night, Goin’ to run all day” … and loved this epitome of team play. What a team! “Celts and Tiger win it all … Oh, de doo-da day” Yep, I’m on Cloud 9 with Tiger, the role model for the world, & the Celtics, both winning!

UPDATE ON THE STOCK MARKET. Another rough, rocky early summer bear market day in the stock market yesterday. The stock market media and their mostly, bullish-biased guests still searching far and wide for catchy ideas and some reasons to keep others involved and interested in this “pros-only” stock market. I mean a market environment or backdrop whereby, for some, the jury remains out on whether the bad news is pretty much all out and Mr. Market is all done factoring it in and is now ready to morph back into bull market mode. Rationalizing that the credit crisis is over, there’s no recession ahead and that rising inflation will soon recede. Let me respond to that with a “Sure Carm!” as we used to say as kids when we didn’t believe for a second what was told us. Today, what’s being told or fed us is called “spin.” Anyhow, I don’t believe any of the above, that the credit crisis is past, that there’s no recession lying ahead and that we have no inflation problem now. I liken all this rationalizing to stock market impatience. Market players and the financial media wanting to get past all bad news, now, immediately. But, hey, it just doesn’t work that way. Economics and economic trend changes take time, lots of time. My reading, reading and more reading tells me that today’s bullish view is rationalizing and is normal investor psychology about 1/3^rd of the way through a bear market, the stage where investors still cling to, believe in the bull and thus mentally fight and rail against the stark fact that a bear market has begun. Schwartz View: Yep, I see yesterday’s down day, led by the once again weak financials, being just a normal day in an extended bear market, a bear market spawned by a boom gone bust, and now driven by economic causes, the down phase of the business cycle. For most I would hunker down, position your portfolios to ride out a storm and maybe take a summer vacation this year. In fact, that’s what I’m doing, unusual for me as I usually just go to the beach in the winter time. This year Lucy and I are going to find our “way to San Jose” to visit her best friend in two weeks. (In fact, I have to soon audition stock market books to read on the plane flight out and back).

Group of Eight (G-8) Meeting Key

Richard Schwartz — Wed, 11 Jun 2008 14:00:00 GMT

UPDATE ON THE STOCK MARKET. Written Wednesday, June 11th, 2008: 6:30 a.m. Today’s stock market has no real leadership. The Dow’s up, the Dow’s down, all day long. Yesterday it was more of the same. No real trend except for in ENERGY and GOLD, both selling off big time, sort of reversing their up trends from last week. Other market indices were indecisive but mostly lower. Still under the surface, it looks like institutional investors are now preparing for some big news out of the Group of Eight (G-8) in Japan this weekend. I figure they figure that the US dollar is going to get some support. Maybe coordinated central bank intervention to prop up the dollar. For the first time since 1995 I believe. Whatever, it now looks like some big money is being reallocated now toward a stronger US dollar. I see commodities selling off, gold starting up then falling back, the yen breaking down, US Treasury yields moving up. These are all movements which would dovetail with a stronger , and higher, not lower, US interest rates. Fed heads are suddenly talking hawkish about rising inflation as well, maybe setting the stage for a Fed rate hike. Hm, we’ll soon know.

Schwartz View: Yep, the tone has changed. Now Ben & Hank, that’s Federal Reserve Chairman Ben Bernanke and US Treasury Secretary Henry Paulson, are talking publicly about supporting the US dollar. Obviously, the rise in oil prices to above $130 has gotten to a critical point and gotten their attention. Thus, let me reiterate, it looks like many investors are preparing for renewed strength in the US dollar, maybe propped up by coordinated central bank intervention, maybe by rate hikes, maybe by some G-8 statement. Yes, a possible Fed change of heart and a rate hike although some think that’s not likely as they see the US economy too weak to handle increased rates. Still the Fed seems that its now shifted its focus from fighting Bogey man #1, the credit crisis, to fighting Bogeyman #2, fighting inflation. I guess Bogeyman #3, fending off an US recession, is the last item on the pecking list as Ben set forth his priorities by saying “the economy improved last month.” Say what? Yep, Ben said the risk of a substantial downturn in US economic growth has diminished. Hey, he must not be having much contact with the general public, my assessment is just the opposite; maybe Ben’s just looking at the stats and not much else. Ben needs to have some good economic reason for a change of focus, wouldn’t you say? Since the 2^nd of the Fed’s now dual mandates is to fight inflation, keep prices stable, the sooner he gets back at it the better. Of course, raising interest rates to fight inflation is likely to hurt the economy as well so it’s important that the economy’s on the improve, at least for the record. It’s a high wire act Ben’s walking and jawboning is part of his tool kit.

Schwartz 2^ndView: Usually central banks intervene when they think some trend is changing anyway and that they maybe can accelerate or help this new trend. That’s only common sense, to strike when the iron is hot. The problem I have is with the bull’s latest argument. That is that if the dollar rises, all will be well. A stronger and higher dollar would depress commodity prices and lessen our inflation problem, so say the bulls. The flaw is that a stronger dollar would hurt exports, the only factor keeping the US economy going.

Once a Century Day of Reckoning Starting?

Richard Schwartz — Mon, 09 Jun 2008 13:44:00 GMT

THE BIG PICTURE

Ok, here’s a Big Picture of where America and we Americans stand today. A fairly downbeat Big Picture so buckle your seatbelts. America has been on the verge of a major comeuppance for many, many years. But its been postponed and postponed. Because the US dollar is the world’s reserve currency we’ve been able to play by different rules than the rest of the world but now we’ve pushed that special benefit to the limit and beyond. But each time we’ve come close to going into a major economic recession, which almost by definition means a near term cleansing out and thus longer term strengthening of the economy, we get “bailed out,” so to speak, by the Federal Reserve or by our much deteriorated if not totally corrupted political system, i.e., by the sitting president and his staff or by Congress. Our economic problems which terribly need to be resolved, just get more and more money thrown at them (which just makes them worse and more deeply entrenched) say by President Bush’s multiple tax cuts upon taking office in 2000 or by the Fed dropping interest rates rapidly or through the floor or both. For example, former Fed Chairman Alan Greenspan numerous, back to back to back interest rate cuts in 2001 and 2002 and current Fed Chairman Ben Bernanke’s dramatic rate cuts since September. So our economy has been artificially pumped up and stimulated by what I call, financial “steroids.” time and time again for many years now. But now this use of steroids just isn’t working. Now all the money the Fed is pumping into the system to mitigate the credit crunch and crisis is just causing a big bubble in gasoline (and heating fuel prices) in America which at $4.00+ a gallon is now being felt widely. I say $4.00 is the tipping point and things are going to get worse quickly now because of the four following examples over the past weekend. First, Lucy let her Honda get down to a quarter of a tank for the first time in a long time. She called the dollar cost to fill it up

“eye-opening” numerous times as we drove off and away. I could hear the wheels turning in her head. Second, a real estate owner told me he was feeling this recession with a massive increase in real estate taxes, etc. and that he never felt any previous economic downturns in his life. Knowing me I probably blurted out it was just beginning, but I hope not. Third, awhile after my Sunday early morning bird walk, while reading the paper and drinking my coffee I heard the morning manager of Stewart’s, the local all purpose convenience store, tell another customer, a bit desperately, she couldn’t afford to drive to work now. And lastly, when I called to wish my brother-in-law Happy Birthday, my sister, retired but who was a bank trust officer in Buffalo for many years, says she’s never seen anything like this looming downturn. All in all, I expect $4 gas or out of control oil prices in general, is what the stock market discounted roughly six months back, it’s normal advance foresight time frame, when it really collapsed back in January, it’s first leg down in this bear market.

Now, Price Inflation. This commodity inflation, this cost of living inflation or price inflation, is starting to work its way through the economy in food prices as well. Watching the free marketplace work, in effect dramatically weeding out, killing off cattle herds because it costs too much to feed the cattle, that’s going to reverberate into higher hamburger and steak prices down the road. Plus Chinese wage demands will now work their way into much US clothing prices as well during this cycle. And if the US dollar keeps dropping, as it will because the US balance sheet is in such terrible shape, all prices will rise even faster. I’d go so far as to say commodity guru Jim Rogers’ and Peter Schiff’s predictions of hyperinflation are becoming a distinct possibility. All this rising inflation as the economy sinks and US wages stagnate or go lower and jobs shrink. So it’s not a pretty picture. And it’s possibly worse than a normal recession because we’ve put off this day of reckoning for so, so long. For example, in Trader Vic Sperandeo’s two early 1990s books, Trader Vic – Methods of a Wall Street Trader and Trader Vic II – Principles of Professional Speculation, he predicted a day of reckoning right then or very soon. And related to us a little history of how the US government operates, trying to paper over our problems by lowering rates, cutting taxes and whatever else they can think up to throw more money at our problems. This works and works and works … until it doesn’t work anymore. So far no one really has been able to predict when the day of reckoning will arrive. In the late 1980s/early 1990s was a flash point for trouble but we muddled through. Then another flash point around the dot.com bust from 2000 to 2002. But lower taxes and lower interest rates got us through. But now, 2008 -- 10 is the next flash point. Who knows? This time may indeed by the real thing. It sure looks it. Why? Obviously because the extremely important financial sector, the very area which has been driving the stock market higher by soaking up all the Fed and other government liquidity and manipulating it to make things look better and better on paper, has now imploded and gone bust. As Peter Schiff writes in his 2007 book, Crash Proof and Robert Prechter Jr. wrote in his 2002 book Conquer The Crash manipulating financial paper/assets/capital around to make it seem like we’re getting wealthier is a lot different than when America did grow wealthy by actual manufacturing, producing things people need and thus were willing to pay for. In the 1950s and 1960s we were the manufacturing colossus we lived on some of our profit and saved the rest. That’s how you build wealth. This disparity is one of Mr. Schiff’s key theses. Also one of Mr. Prechter’s major theses as well, just illustrated differently. Mr. Prechter, a chartist, says the US economy performed its best in the 2^nd leg up of this long term business cycle, say from the 1950s through the 1970s which shows this 3^rd leg up is nearing a major top. Schwartz View: So it’s all coming together now, seemingly. All the wrong paths we’ve followed for years coming home to roost now. That’s my guesstimate anyway. So, is this latest market decline really the beginning of America’s day of reckoning whereby the rest of the world finally loses confidence in America, waking up to the deception of the dollar as the world’s reserve currency, as Mr. Schiff describes it? Does the US dollar really head down as the world unloads our Treasury bonds, thus forcing up long term interest rates, which in turn ratchets up the already gigundo squeeze on America and us individual Americans and make the situation even worse? No one really knows for sure as Mr. Prechter reports these true economic disasters only occur about once a century! Like in the 1930s in the just departed 20^th century and once in the 19^th century as well. Why would this once in a century event be beginning now? As bad as things now look, maybe somehow we’ll get bailed out and the day of reckoning postponed once again. But since I began this stock market letter, 18 years ago in September 1990, I’ve watched things get worse and worse, not on the surface where we had a great stock market run in the 1990s, but under the surface, as democracy got pushed back and back, as labor unions lost power, as corporate statesmen became extinct, as much needed government regulation somehow morphed into a swear word and became despised, as liberalism or helping the unfortunate became obsolete behavior and as capitalism ran away unchecked, benefiting from fiscal and monetary stimulus over and over again whenever the economy lapsed into the normal down wave of a business cycle leaving us today with just a shell of the old wealth producing US economy. Yep, all looming economic crises and recessions have been pushed to the back burner by our dysfunctional political system which now listens only to corporations through their lobbying efforts. A system which even business if fed up with. Social Security, Medicare & Medicaid, pensions, health care, energy, the environment, a big wow! when I write them all down, all these long term vital issues have been avoided because of capitalism gone wild, because doing anything about them would “… hurt the economy and be bad for business … .” The same mantra Congress just used as its reason last week to kill a critical climate bill! Just awful action. Politicians should know there’s more to the economy than keeping the steroid sham going year after year, there’s more than keeping the business lobbyists happy near term and there’s more than their next election result. The US economy needs to be cleansed out from time to time and thus made fundamentally stronger for the longer term and more competitive in today’s new global economy. We still have the strongest, most fundamentally sound economic, financial and social system going from all I can tell. And the country has more than just our economy to worry about and strengthen for the longer run. We also need to re-strengthen our democracy once again after the loss of common man representation that’s taken place over the last 30 to 40 years. Actually, it’s no one’s fault, this push into Supercapitalism as Robert Reich terms it in his latest book of the same name, what has happened in America over the last few decades. But now it’s time to look at and push the flip side of the coin, to reawake democracy which is vital to American life as well. We need to regain representation for little towns and smaller groups, non-profits, etc., etc., all those groups who can’t get their sides of the story heard any more today as corporate lobbyists dominate. Again, I don’t blame anyone for what’s evolved. That’s capitalism, if left “unfettered” as even Republican presumptive presidential nominee Senator John McCain has described today’s economy, it will go to an extreme … as it now has. * For the record, one can get all five books I’ve just mentioned above from www.Amazon.com or elsewhere. And I recommend them all.

US Slowdown Spreading Global

Richard Schwartz — Wed, 04 Jun 2008 13:49:00 GMT

GLOBAL VIEW. Yep, when I started reading the Bloomberg newswire this morning, I found: (1) that European “retail sales declined -2.9% in April, more than three times as much as economists forecast,” (2) that March’s retail spending was revised downward from -1.6% to -2.3%, (3) that UK services “unexpectedly contracted for the first time in five years,” taking the reading below the 50 level which delineates expansion from contraction and which shows “…service companies shed jobs at the fastest pace since 1996,” (4) that S&P says the risk of default is rising in Europe and that (5) which we already knew, that European inflation is rising at the fastest pace in 16 years. So it’s no wonder Europe is having a really bad stock market day today. Schwartz View: My sense is that the US economic slowdown is fast going global, well, slowly if you operate on right now Wall Street time, but fast if you really think about how economics works, almost always with a time lag. Thus Europe today is just providing me with more evidence today that my sub-section headline in this space yesterday:

“INFLATION IS RISING, WORLDWIDE, & THINGS KEEP GETTING WORSE”

is right on track. My best advice? Hunker down with what you plan on holding if we do experience the worst economy and worst stock market since the Papa Bear market of 1973 – 1974 over the next couple of years. (1973-1974 was a period very similar to today if you take a look back at comparables.)

Get Back Into Gold!

Richard Schwartz — Wed, 04 Jun 2008 13:19:00 GMT

GOLD VIEW. It’s Time to Buy Back into GOLD! I must say the gold chart looks ripe for a rally and the background economics are screaming rising inflation here in the US and all around the globe, so I would recommend buying back into gold. Gold pulled back from its big Round Number of $1000 in almost perfect fashion for those of us like myself who believe Round Numbers are meaningful & insightful. If you remember gold traded over $1000 an ounce for just two days, on Friday, March 14^th and again on Monday, March 17^th, found that it didn’t have enough buyers to propel it higher and promptly rolled over, sold off and said sayonara to $1000. So it’s been down for the normal three weeks to three months which normally encompasses counterswing rallies to primary down trends . Since then it’s bottomed at $852.70, then at $864.00 and then $877.90. So it’s made a series of higher lows which is bullish. And, as I mentioned earlier, all I see is rising inflation around the world, from here in the US to Europe to Asia to the developing world to the new “frontier” world. Sensible because food and energy are soaring everywhere.

Schwartz View: Since gold reversed direction around the “fateful weekend” when the Fed showed they were backstopping the whole financial system, it just makes sense that if the stock market rally which began around that same time is over or in its last throes, the other counterswings that began the same time may be over as well. One such counterswing has been in gold. So, I recommend buying gold today.

Like always let me recommend buying the gold bullion tracking stock, now called SPDR Gold Trust (symbol GLD) instead of the gold mining companies. Buying GLD takes the added, now unnecessary risk of buying the gold miners themselves out of the mix. Regular readers know I want to take that geopolitical risk out. The recent risk that developing countries all want to renegotiate their contracts with all the mining companies including the gold miners. (And who can blame them?) They want better deals than which they made back when gold was at $250 an ounce. Renegotiating would hurt gold mining profits, so in spite of us having the right investment idea we could lose; you know being in church but in the wrong pew.

Bottom line, I have to think with global wide inflation rearing its head for the first time in some 25 years, gold will surely benefit over the longer run. And since we just pulled back, it’s a good time to get back in. Thus I would buy a little gold here and buy more on weakness, paying close attention to the correct percentage exposure for your own circumstances and also how much you buy each time in. Overall through your gold exposure starting today should be much larger than the normal 3% to 5% exposure that many advisors normally and historically recommend. It’s gold’s time to shine again after being out of favor for 25 or so years. Be sure to get some as it should prove a great hedge against your long portfolio.

Disclaimer! I own a little GLD and plan to buy more although please remember I can switch my views and thus my positions at any time.

Oil Near a Peak? Yes.

Richard Schwartz — Thu, 29 May 2008 18:56:00 GMT

OIL VIEW. I’ve been reading a lot about oil, the current state and the history of oil as we see prices keep rising and we all wonder where a top is. So below are some interesting tidbits which I’ve unearthed from the Internet (a great modern day development!) for you to ponder, some obvious, some insightful (I hope):

· OPEC has used oil as a weapon against western countries in the past. Schwartz View: A bad precedent. The October 1973 embargo effectively raised prices quickly and sharply to a new plateau (from $3 a barrel in 1972 to $12 a barrel) which lasted for the rest of the 1970s.

· The Iran revolution (getting rid of the Shah) in 1978 and the following war between Iraq and Iran in September 1980 again raised the price of oil quickly, doubling oil prices from $14 to $35 a barrel by 1981. Schwartz View: So both times oil rose sharply in price and stayed there.

· Oil is notoriously price inelastic according to some researchers. Another reports says: “The supply and demand for oil are both inelastic in the short run …” Which is what commodity guru Jim Rogers sees, that it takes many years for oil supplies to increase when demand increases which is his basis for the whole commodity complex to keep rising. Schwartz View: I’ve been waiting a year or so now for “higher prices to resolve higher prices.” Now I understand this is a too simplistic argument and why it hasn’t happened that way just yet. Another reason is because we are much less dependent on oil today. “Energy costs;’ share of GDP has fallen from 8% in 1973 to 2% today.” (From an Internet article written in 2005).

· Over time though, the supply and demand for oil is more elastic. Schwartz View: Thus the past history of oil prices rising sharply, then slowly sliding lower over time as more supply comes on board. Probably the price pattern we’ll follow again although we’ve likely raised the base price level or floor such as transpired in the past.

· Commodity (and China) guru Jim Rogers says his research shows commodity bull markets last roughly 17 years. Schwartz View: I see the price of oil slid from 1981 to November 1998 when it bottomed out about $13 a barrel. Just about when Rogers called a new commodity bull market.

· From the last bear market bottom in oil in 1998, we’ve had the first bull market leg up from the bottom in November 1998 to June 2000 as oil rose from $11 to $35 a barrel. Then after a price correction downward and a breather, we put in a 2^nd bull leg up from November 2001 at $20 to a peak around Hurricane Katrina at about $75. After that blow off peak, prices fell for five months coming back to $50. Since it’s been straight up in a third bull market leg. Schwartz View: Since we’ve now put in the normal three legs up which compose a full bull market we could easily be due for a sharp and severe pullback in oil.. Especially so since I see a guest on CNBC talking up $200 oil, bullish predictions being a normal sign of bulls getting carried away just before a top.

· The US placed price controls on domestically produced oil during the first energy shock in the early 1970s. This caused US consumers to pay less for gasoline than they otherwise would have. Longer term, price controls kept America from reducing our oil consumption in the middle 1970s and thus our dependence on foreign oil producers. Thus when the 2^nd oil shock hit in the late 1970s we were much more negatively impacted by prices jumping sharply. Schwartz View: This is why I advocate keeping oil prices high now, let America take the pain now, so money keeps flowing into developing alternate energy sources. Let’s not repeat the mistakes of the 1970s!

· History shows higher oil prices in the early 1970s, the late 1970s and then in 1990 after Iraq invaded Kuwait all led to recessions. Schwartz View: Maybe it will be different this time around but we all know predicting “this time it’s different” usually proves disastrously wrong.

· Here’s the rationale behind higher oil prices leading to recession: “Higher oil prices have historically led to recessions because they act as a tax on spending by absorbing consumer dollars that would be spent elsewhere, by reducing corporate profits through increased costs and lower demand, and by causing higher inflation which in turn causes higher interest rates.” Schwartz View: All of which seem to be developing today except, so far, higher interest rates because the Fed has been lowering shot term rates to free up the frozen-up financial system. These lower rates which ultimately should lead to even higher inflation.

· The 1970s were characterized by “stagflation” after sharply higher oil prices raised inflation levels while simultaneously reducing economic growth. Schwartz View: Isn’t the same economic ripple effect happening right now? I’d say yes.

· The 10-year US Treasury bond yield rose from 6% to 15% during the oil shocks in the early and late 1970s. Schwartz View: This time the 10-year, benchmark Treasury bond yield has stayed low because of the credit crunch and the “flight to safety” trade by investors. Doesn’t it seem logical that when the Fed stops lowering rates and/or says the credit markets are back to normal, long term interest rates will once again rise? Does to me. In fact, higher long term rates may be happening now. That’s one big reason why I’m not recommending bonds and haven’t been.

SCHWARTZ SUMMING UP. Actually I could go on and on researching and commenting on oil. And I’m interested in continuing my research so I may add a few more comments/insights in coming days. But for now the history & current spike higher in oil makes me predict that soon we’ll see some type of peak in oil very soon!

Don't Be Waylaid by Economic Spin!

Richard Schwartz — Wed, 28 May 2008 15:03:00 GMT

THE BIG PICTURE

Last Monday I presented the bull’s three pronged case, that: (1) the credit crisis is past it’s worst stages, (2) that we can skirt a recession or just experience a mild one and (3) that we have good value in stocks today. I offered the bull’s view up for balance, to see both sides to a story but I have to admit I don’t fully believe in it. Sure no one can predict the future therefore the bull’s argument may turn out to be correct but after trying to look at both sides fairly, I still wouldn’t doubt that the credit crisis lingers, that we do have an US recession which spreads out globally and that stocks thus really don’t offer good value here, not with the economy getting worse, not better, which is still my conclusion.

Thus today, for today’s Big Picture perspective, let me highlight a few key points made in Peter Schiff’s 2007 book, Crash Proof. First, Mr. Schiff (who gets lots of face time on CNBC anytime they want a bear on) says America is headed in the wrong direction morphing from an industrial economy over to a service economy. He says we need to continue to produce goods, one key way to produce wealth. Schwartz: Sort of a shocker to me as I haven’t read many economists taking this position. But it makes good common sense, right? Manufacturing is what got America this wealthy in the first place. Today’s service economy – flipping hamburgers, working in Macy’s, processing lawsuits, etc. – doesn’t seem like it’s producing any wealth. Second, Mr. Schiff has a big problem with measuring how much Americans spend as equal to economic growth. Schwartz: Again, common sense agrees with Mr. Schiff. Spending doesn’t produce wealth, just the opposite, it uses up what wealth we’ve built up. Third, people have to live within their means, why shouldn’t countries like America be bound by the same rules? Schwartz: As a country, we’ve gotten around balancing our budget because of the Bretton Woods Conference & agreement in 1944 which established the US dollar as the world’s exchange currency. But nothing lasts forever and the trend today is away from the dollar. Fourth, that the US government and our Federal Reserve has lost its way. The Fed was set up in 1913, after the Bank Panic of 1907, to provide an elastic money supply, expanding during economic expansions and shrinking during economic contractions. Schwartz: But somehow the money supply now just keeps expanding through good times and bad. Fifth, the US government keeps pumping up inflation by its constant increase in the money supply but keeps concealing inflation’s rise through the use of distorted economic data which they change whenever it serves their purposes. Schwartz: We all know that kicking out food and energy is a big ruse. That inflation today indeed is a lot higher than reported. Sixth, recessions are normal occurrences and serve an important purpose. Sure, economic fallbacks are no fun but they do clean out the imbalances built and fostered during previous economic expansions. Schwartz: Today, politicians go out of their way to attempt to avoid recessions. You know why, because of their own self interests.

Schwartz View: I’m only halfway through Mr. Schiff’s book but one key point I’m unearthing in chapter after chapter is his application of pure common sense when it comes to economics. Liars figure is an old saying and maybe what this generation of investors has lost is plain old common sense, sort of disguised by government figuring and refiguring in their data reporting. And of course, today we now have constant, 24-hour media coverage of financial markets which obviously is going to always highlight Pollyanna bulls like Larry Kudlow. Thus we have to fight through this constant bullish spin which can be incredibly tough to do. After spin after spin takes over any argument, eventually we’re all lost at sea about what the truth is. Mr. Schiff tries to cut through this maze by bringing common sense back to the equation. Thanks Peter! (You can get his book on www.Amazon.com. I recommend it.)

1973-1974 Redux

Richard Schwartz — Thu, 22 May 2008 14:09:00 GMT

The Principle of History. Knowing one’s history gives us guidelines and a basis to work from. So yesterday I began to compare the last Papa Bear market we lived through, 1973-1974, which encompassed the first really oil crisis, to today’s ongoing bear market and oil shock. I said I was printing research off the (wonderful!) Internet & get back to you. Well, I’m baaack.

1973-1974 OIL CRISIS COMPARED TO TODAY

Studying the 1972 through 1974 period in more depth yesterday, please let me note that:

There were three separate legs down in the two-year Papa Bear bear market of 1973-1974:
The first leg down was sharp and came in January 1973. From a peak on January 11^th, 1973, the Dow fell -10% over the next 30 trading days. Then kept sawtoothing lower until late August when it completed a seven-month loss of over -18%. This first leg down can be compared to what the Dow has recently gone through, since its peak on October 9^th last year. From Dow 14,164.50 to the Dow low of 11,740.20 the Dow lost -17.12%. Schwartz View: So about comparable in time, seven months versus five months, and extent, -19% to -17% to the first leg down in the Papa Bear market of 1973-1974.
The stock market in 1973 then rallied +15% from its lows over the following two months. That brought us back to within about -6% of its old January 1973 high and peak. Schwartz View: This time around the Dow has rallied +11% from the March 10^th lows to the May 2^nd highs, so for just under two months. And has brought the Dow within -7.8% of its old highs. So a weaker, shorter rally, which may be bad, IF it’s indeed over.
Going forward from that bear market ally high in August 1973, the two-month rally where some investors “were likely lulled into believing that a new leg up was occurring” the market began its second leg down, which brings us up to date and to today.
Looking back again to what happened in 1973, and projecting forward to what unfolds today, the 1973 second leg down began in August and ran until December and the Dow dropped an additional and even more severe -20%. The leadership of that era, the “Nifty Fifty,” resolved its previous divergence, holding up while the smaller cap stocks got hurt during the first leg down, and caught up on the downside as shown by the -20% Dow drop. This drop took roughly three to four months. Schwartz View: Thus I have to project a second and more severe leg down starting now or soon. Probably including the remaining leading energy and commodity sector taking a hit.

Other similarities and/or dissimilarities from the oil shock and crisis back in 1973-1974 to today’s oil shock which I unearthed in my research yesterday are:

1. Rising inflation was a big issue in both periods.

2. The Vietnam War ended during that past bear market, something similar to what I expect to happen during this bear, us getting out of Iraq.

3. The US dollar was under pressure back then even in the early stages of the bear market, in February 1973, it was devalued by 10%. It’s losing value again, now.

4. Oil jumped from $3 a barrel to $5.11 a barrel, beginning with the October 1973 OPEC oil embargo, a quick jump of 70%. We all know oil has soared the last couple of years as well.

5. We had massive layoffs of 142,000 in the auto industry in 1974; yesterday American Airlines announced “large layoffs” ahead.

6. We had Franklin National Bank be declared insolvent in 1974; this year Bear Stearns effectively was declared insolvent by the Fed. Other banks, investment and money center remain under great pressure.

7. BARRON’s Roundtable was unanimously bullish starting off 1973; same thing from Barron’s Roundtable kicking off last year.

8. The US economy from 1972 to 1974 dropped from a growth rate of +7.2% to -2.1%. And the UK economy dropped from +5.1% to -1.1%. This time around both the US and UK economies are also dropping quickly.

9. Stocks priced in gold were priced very low back then. Same low valuation in terms of gold today with gold at 900$+.

10. We had a new Fed chairman, Arthur Burns, arrive in 1970, who encouraged inflation. We have a new Fed Chairman, Ben Bernanke, who is also encouraging inflation today.

SCHWARTZ SUMMING UP. No use looking out too far, looking at the third leg down in 1974 for instance, which came after another always-to-be-expected stock market rally and multi-month trading range. Let’s hope this time around isn’t so bad although I must say things do look pretty bad to me.