August 8,-2011,Editor of the Wellington Letter
Traders are smart. On Friday, the selling started after about 15 minutes, and the DJI was quickly driven for a loss of 244 points. That’s a turnaround of more than 410 points. In the meantime, all the “analysts” visiting financial TV were advising to go “bargain hunting, this is not a recession, it is not a bear market, go for the long-term,” and all the other baloney they told you in 2008 before the meltdown.
False optimism is a great disserve to the viewers. Investors are still licking their wounds from the 2008 disaster. Our subscribers were able to prosper during that terrible year, but my views were only seldom heard in the media. Bears were not welcomed.
There is now a concerted effort to reduce selling of stocks with “talk.” Well, talk doesn’t change the facts. It doesn’t change the $1.7 TRILLION of bad debt the Chinese government admits to be in its banking system which is now imploding. It doesn’t change the severe credit crunch in China which will envelope all of Asia and the globe. It doesn’t change the $3.4 TRILLION of questionable loans coming due in the EU banking system in the next 2 years. It doesn’t change the fact that $43 out of each $100 spent in Washington is borrowed money.
The IMF, BIS, the rating agencies, have all warned about these global debt problems. The false optimism from governmental leaders doesn’t change that there is no job creation because of all the obstacles imposed by governments, both in the US and Europe.
The crisis in Europe is escalating. However, the politicians there are also trying to reassure the market with the typical empty words. EU commissioner Olli Rehn said that “the markets have it wrong.” Every financial disaster in history was preceded by such political statements.
The European Central Bank (ECB) responded to another terrible day in Europe on Friday saying it is ready to buy Spanish and Italian government bonds if Italy commits to reforms. This is something the ECB has refused to say until now, but the crisis is getting very serious. However, so far the ECU countries haven’t even approved the last bailout plan. It’s all talk.
In the US we complain about excessive governmental regulations which hinder job growth. Well,
for Europe multiply that by 10. Change in this area will be impossible.
The big money of the world now knows government is impotent. The gas tank of our economic engine is empty. All the governmental stimuli only created a two year rally in a secular bear market. But it failed to create a sustainable recovery, and now the governments are stuck with trillions of added debt they created for the stimuli.
The world now knows that the trillions of artificial money created by their central banks just created another credit bubble in some sectors, but as soon as it is removed, the house of cards
starts collapsing again.
It’s just as Austrian economists von Hayek and von Mises predicted seven decades ago. They said that such efforts always fail and just make the eventual collapse that much worse.
She said that every dollar we give the unemployed creates $2 in the economy because they spend it. If that is true, than we should all quit our jobs, get unemployment checks, and the economy would boom.
I wonder if she realizes how absurd her statements are. She said she is waiting for “private corporations to step up to the plate and hire.”
Really! So why does Washington create so many obstacles for small businesses? Here comes the “blame the greedy corporation” warfare. President Elliot Roosevelt did that during the Depression. He actually threatened companies who dared to lay off workers. As a result, the companies just went bankrupt, and instead of some people losing their jobs, they all did.
THURSDAY: Thursday was an exciting day in the markets. The DJI posted a loss of 512 points. Every rally attempt failed. The hedge funds, mutual funds, and Wall Street firms were regurgitating their overloaded stock portfolios.
Margin calls were going out en masses. So, they have to sell whatever is liquid. The gold and silver miners plunged even while gold was up $20 at a new record high. They were throwing out the baby with the bath water just to raise cash.
In the media, the conflicted money managers who got caught with their pants down, are saying “all is well, just another buying opportunity. It’s a soft patch, it’s just a pullback.” They tell you that a bear market doesn’t start until the S&P is down 20%. Well, by that time your stocks will be down 40% or more.
All this is so reminiscent of 2008, and will probably end the same way. More on that below.
The DJI is now down 1400 points in 10 days. It’s the severest plunge in decades, by some measures worse than at the beginning of the 2008 meltdown.
The decline in the value of the stocks in the S&P 500 today alone was $1.3 TRILLION. If you take all the listed stocks, it was probably over $3 TRILLION. Perhaps the PPT (plunge protection team) should go short instead of buying and with the profits resolve the country’s deficit. Globally, over $4 TRILLION of wealth was wiped out. We predicted it!
The analysts still tell you to diversify. Obviously, they aren’t aware that all the sectors, except the precious metals, are now 92% correlated to the S&P. That means that there is no sense to diversify. However, gold and silver are only 11% correlated.
What caused the plunge? The pundits say it was band news out of Europe. Nonsense! Those problems are old. The real reason: we have been warning for 3 months that eventually money managers and Wall Street will wake up and realize that the recession has started, and that their view of a strong economy in the second half was an illusion. This means that all the euphoric profit forecasts are out the window. Yet, for public consumption, they still talk about “good profits” and “low P/E’s.”
Bert Dohmen’s TM Wellington LetterBert Dohmen’s Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049 Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: client@dohmencapital.com
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