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THE FED IF FRIGHTENED! – NO INTEREST RATE RISE!

The Federal Reserve decided to hold to their zero interest rate policy. They are concerned that if they raise rates, the economic crisis in the world will go mainstream. There only tool is to use monetary policy, as there is no fiscal policy collaboration with the do-nothing Congress.The primary driver of our present financial bubble in the United States has been the Federal Reserve. Through quantitative easing and zero interest rates, they have tried to encourage inflation, which has remained close to zero. They mention in this report that international considerations have influenced their decision, which for the first time is not unanimous. China is definitely part of a bigger problem. In today’s Wall Street Journal James Chanos said “As long as China adds credit faster than its growth, the real story is months and years ahead.” The Fed has done everything it can to bolster inflation. However, nothing yet has worked. The Fed says that it will delay any interest rate rise until December or 2016. This may give the stock market one more short-term boost. This will only delay the inevitable. Zero interest rates and overnight lending has directly created debt bubbles in numerous areas. The Fed QE1,2,3,bought $4 trillion worth of bonds and flooded the economy with dollars and still, they couldn’t stir up inflation.  CPI in August was down -0.1% and is only up 0,2%in the last year. They are out of bullets to help the economy. All they can do is delay or slow reverse tapering. If oil goes down anywhere close to the $20 a barrel, as forecast by Goldman Sachs, it will have the same effect as the mortgage debacle, when mortgage bonds defaulted causing another financial crisis. Oil-producing nations have bonds that will be in trouble. Jim Flores the vice chairman of Free Port McMoran said “Whe’re all going to get wet. A few people are going to drown” Oil-producing companies have bonds that will be in trouble. The banks hold more derivatives on these trouble securities than they did of mortgage bonds in 2008. Once again, the banks are a house of cards. If the economy is doing so well, why is the capacity utilization rate at 77%? Before the recession it was at 80% and during the 1990s averaged 82%? What is the real unemployment rate of those who have stopped seeking employment or have settled for poverty wages?

THE REPUBLICAN DEBATE In my opinion the world is headed for an economic catastrophe and the Republican debate didn’t give us any answers. They are all on the same page when it comes to immigration, Planned Parenthood worth shutting down the government, gay marriage, abortion, Obama-care, the cancellation of the Iran deal, being tough with Russia, less regulation, lower taxes, denial of climate change, more drilling for oil and gun control. They all want a bigger defense budget and for our military to take an active role. We already have a $700 billion defense budget that is larger than all the military budgets of other economies put together. Cary Fiornia was the biggest hawk, suggesting a process to confront Russia that would once again take money away from social programs and infrastructure. There are consequences for military intervention which in most cases are more negative than positive There were no solutions given about how Trump is going to take care of women, what is the alternative to Obama care, how do we obtain a promised 4% growth in our economy and how we can prevent the demise of the middle class.The answer the Republicans gave to any foreign-policy problem was to use the military. The answers they gave to help the economy was that anything that helped the rich is capitalism and anything that helps the poor was socialists..

Here are the problems as I see it without proposing mature solutions. They did all agree with each other as though they were taking a litmus test. as follows:1) Send 11 million of our undocumented workers and 4 million children back to Mexico will make the current refugee problem in the Middle East look like a trickle. I suggest they all see the movie “A Day without Mexicans” where the earth stood still in the United States. A deportation plan and the wall would cost trillions and our economy would be crippled without Mexican workers. As the debate was at the Reagan Library, they could’ve taken the advice from Reagan, who offered amnesty during his ministration. During the Obama administration Mexican immigration has stopped to a trickle. We could use some legislation, but the Republicans are resistant to collaboration. 2)  They claimed the Planed Parenthood video was shocking. The video taking body parts from a fetus was not a Planned Parenthood video. Harvesting stem cells is legal. What is more shocking than the video, is the insistence of the Republican Congress that we shut down the government in October on this issue.3) Abortion, if you don’t like it, don’t have one. I am also pro-life, but I would not and will not insist that my values he thrust on others. That’s what Islamic Shari law does. Family planning avoids unwanted children. In California birth control is public and is the only state where unwanted pregnancies have almost disappeared. There is no alternative to abortion and birth control except to take care of those children that are unwanted through public care, educational and health programs  that would be very costly and are unwilling to be paid for by evangelistic capitalists. If you promote unwanted children, in my opinion, then you have the complete responsibility of taking care of them 4) What’s the alternative to the insistence that Obama-care be canceled. What are they going to do about the 15 million people that now have health insurance? The uninsured have gone down by 50% because of Obama-care. It’s a success. Don’t break what is not broken! 5) The Iran deal is an international agreement. And as Reagan said, when he dealt with Gorbachev to reduce nuclear weapons from 36,000 warheads to the mere 2000 we have now, “trust but verify.” The alternative is war with Iran and if you haven’t noticed it borders Russia. All the Republicans want to be tough with Russia. As their position with Iran, how brave of them. The’re not talking about their lives, we’re talking about the lives of our troops. Diplomacy is an alternative to military action, which should always be the last alternative. 6) All the Republicans are unified against gay marriage. 50% of American marriages end in divorce. Let’s see how much they like it. Love is love. Sex when viewed by the third-party can be vulgar. Judge not that ye shall not be judged.7) All the Republicans want less regulation. The Glass Steigle Act would have kept us out of the 2008 debacle. Enforcement of the Dodd/Frank could keep this out of the next debacle. However, with the influence of Citizens United, our Congress is bought and sold to big business. If corporations are people, then in my opinion, corporations are sociopaths, and should be institutionalized under government care. Both capitalism and socialism has tendencies to be selfish and only government overseers can keep the playing field level. Which if you read my LONE BEAR LETTER BELOW, you will find that labor and capital are out of balance and are due for either collaboration or mutual destruction. 8). Lowering taxes? Kansas tried it and now they’re bankrupt. Taxes have to be lowered for the middle class and increased for the top 1%, so that educational programs, social programs and infrastructure programs can be initiated to make this country great again. Even Trump agrees. 9) The Republicans not only deny climate change, they say even if it is true, we can’t afford to do anything about it. The Defense Department said, “if climate change continues at its present course they will not be able to defend this country.” This year is the hottest year on record since records have been kept in 1880. Scientist’s consensus is that CO2 levels are causing climate change. Why is that so difficult to understand and to deal with? The government has a great history of denial. Atmospheric A-bombs tests do not cause damaging radiation, smoking does not cause cancer, lead in paint and gas is not dangerous, Iraq had weapons of mass destruction and fracking does not cause earthquakes in Kansas.  The era of wood is over, the area of steam is over and the era of oil is over. The sooner the better. For the Middle East countries 10)Congress he is beholding to the gun lobby. There are enough guns in each one of our cities to sink a battleship. How many murders and attacks will it take for common sense to prevail and for collaboration to reach a reasonable compromise without endangering the public.


LONE BEAR LETTER #8

INTEREST RATES ARE A SHORT TERM PROBLEM, WHICH IS DISTRACTING INVESTORS AWAY FROM THE LONG TERM PROBLEM! The Federal Reserve has been punishing savers and retirees at the expense of a higher stock market. They are the primary driver of this massive financial bubble now in place and most of the world’s markets. Most of this was accomplished with a zero interest rate policy. Zero interest rates and overnight lending has directly created debt bubbles in numerous areas. They bought $4 trillion worth of bonds and flooded the economy with dollars and still, they couldn’t stir up inflation.  CPI in August was down -0.1% and is only up 0,2%in the last year. They are out of bullets to help the economy. All they can do is delay or slow reverse tapering. If oil goes down anywhere close to the $20 a barrel, as forecast by Goldman Sachs, it will have the same effect as the mortgage debacle, when mortgage bonds defaulted causing another financial crisis. Oil-producing nations have bonds that will be in trouble. Jim Flores the vice chairman of Free Port McMoran said “where all going to get wet. A few people are going to drown” Oil-producing companies have bonds that will be in trouble. The banks hold more derivatives on these trouble securities than they did of mortgage bonds in 2008. Once again, the banks are a house of cards. If the economy is doing so well, why is the capacity utilization rate at 77%? Before the recession it was at 80% and during the 1990s averaged 82%? The shrinking middle class cannot hold up their consumer’s end of the market, as all income increases have gone to the top 1%. Bernie Sanders has got it right; it’s all about income inequality. The big corporations and top 1% think they are immune to the worries of the shrinking middle class. Not so! Commodity prices are down 20% across-the-board.  Inflation has become unsustainable.  The problem with that is; deflation is unacceptable. As I have repeatedly said, the markets fall first, and then when he find out why.

SORRY ABOUT THE BAD NEWS: You can’t believe how hostile everybody is to my position.  Is it unpatriotic to be negative about the US stock market? Nobody wants to hear the bad news. Negative economic reports in Muslim countries, Russia, China will get you jailed. Recently an analyst Nirhin Mangle in India was put in jail, because he wrote a negative report on an Indian firm. It was George Orwell, of 1984 fame who said: “Anyone who challenges the prevailing authority can find himself suddenly silenced,” I don’t like being the messenger! However, I’m not attached to the financial industry and its success and I am out of stock market, so I don’t have to feed on the Kool-Aid the hype and positive mental attitude. Yes, you need to be positive to be great and this is a great nation. However, sometimes the hubris is nothing more than an illusion. And yes, I want this nation to be great again. We were great in the 1950s when big labor, big government and big business were in balance. Now big business, through Citizens United runs and will ruin everything. We are being governed by those elected  that are beholding to big business and big money. Unless the balance is restored between labor and capital, I believe all boats will sink. Capitalism has an Achilles heel. Read Thomas Piketty’s ‘ CAPITAL IN THE 21ST CENTURY. However, maybe everyone is so involved with the hype, that thing will just keep on going on. After all, the money in our pockets is nothing more than paper, which gets passed on in full acceptance. Illusion works if everybody believes it. It’s three men in a tub, rub a dub dub, nobody please pull the plug.

However, here are some facts that are hard to ignore: 1) It is estimated by Oxfam America that the top 1% in the world own 99% of the world wealth and most of that belongs to the top 1/10 of 1%. 2) Only 80 billionaires control 50% of the global wealth. They own more than the 3.5 billion people in the bottom half. 3) In the United States all income growth in the last 15 years has gone to the top 1% of the economic ladder whereas wages, adjusted for inflation are down 4.3%.  4) It has been estimated that in the United States, the top 1% own 90% of the total wealth of the country. 5) Home ownership in the United States has gone down from 48% to 32%. Upward mobility is gone. The middle class can no longer afford a modest house, college education for their children and healthcare for their family. This is ‘class warfare’ where in my opinion; everybody in the long run will lose. 6)  It is estimated at only 400 families control over 50% of the wealth in the United States. How many bars of soap and how many cars can each of these wealthy people buy? 7) Corporate CEOs are getting 500 times the average wage of their employees and hedge fund managers are getting 5000 times the average wage of an employee and paying low taxes. When the CEO gets $42 million a year in wages, in my opinion, they appear to be more of a gangster and interested in their own self interest, rather than a corporate representative of their company. At least Capone and dictators take all the money they can blatantly using violence. Our CEOs and hedge fund managers hide behind the pretense of respectability. These excessive conditions, in my opinion are taking the breath out of the US and world economies that has not yet been seen in the metrics or in a reaction from the working poor.

I am reminded of the time when labor did rise up and ask for its share of the pie. Just to name a few instances: In 1886 there was a riot in Chicago’s Haymarket Square for the eight hour workday where there were 4 deaths and 72 injuries, the 1894 Pullman strike for union recognition, were there were 30 deaths and 70 injuries, the 1937 Republic Steel Memorial Day massacre were 10 were killed and 37 were injured for proper working conditions and pay. Labor was out of balance with capital and rather than government playing the role, the workers took to the streets in protest. The process eventually righted itself and the United States became the most prosperous nation in the world and its working middle class prospered. We have not yet heard the old shout of “workers unite.” Instead, we have had the perpetrators of union demise, like Scott Walker of Wisconsin, received public support from those that are suffering. There’s the old saying, that those who do not learn from history are cursed to repeat its errors. There are solutions. The Bernie Sanders agenda calls for a government run health care program that covers every American, plus large sums to rebuild roads and bridges and the expansion of Social Security and tuition free at public colleges. How much will this cost? Probably $10 trillion, over 10 years. However, that the a lot less than the demise and disruptions in our government, should we not take this route. In my opinion, the adjustment in the re balancing of labor and capital will occur in one of two ways. The redistribution of wealth can occur violently as I fear, or politically. As of now, the political solution seems unlikely. There is nothing wrong with the accumulation of wealth. However, the excessiveness of our current wealth accumulation, I believe, will have a stifling effect on the US and world consumer-based economies and could make future economic growth unsustainable. To me, it makes common sense to fix it if we can.

However, part of the problem that we are now facing, cannot be fixed. Times have changed because globalization and technology  as follows: 1) Globalization has forced many Americans and well-developed countries and their workers to compete with worldwide poor workers who are willing to accept lower wages.2) Computers and modern technologies are replacing human labor in numerous ways 3)  Basic education outside the US is quickly progressing, giving competition also in a high level jobs 4) Outsourcing has replaced many jobs and cut employees free without a safety net.5) The very nature of the Internet and high-technology makes pricing extremely competitive and will thereby continue to squeeze profit margins, causing companies to trim their workforce in order to maintain competitiveness.

I believe that as happened in 2000 and 2008, the so-called experts will tell you it’s only a correction. I believe it’s much worse than a correction. I believe it’s going to take a major readjustment of our capitalistic system to upright the sinking boats and to get them all to rise again together. The whole world has moved Left, to universal healthcare and affordable education. Here, our evangelistic home schooled children are being taught that the earth was created 5000 years ago and science has nothing to do with evolution or global warming. The United States is ranked number 39th in the world on basic education. We are behind the times and we’re falling further behind.  Every President at the end of the speech has to say, And God bless America. If you believe in the Christian God, that’s wonderful for you. But in my opinion evangelist ideologies are over influencing our political system. The tail is wagging the dog and that’s not good for the general welfare of everyone in this colorful nation of ours. That could not happen in Europe, where Tony Blair had to play down his Christianity in order to be electable. We have to be pragmatic to solve our problems. God and prayer will not save us from this shaky economic situation.

People are frightened! There is a very dark nasty side to the current environment that includes racial slurs of our black president, hateful remarks about our Mexican immigrants and their anchor children and frightening fear of Islamic people and African American people in cities. It reminds me of the fear that caused Nazism. The economic and social fabric of this country is being weakened by these verbal abuses. In the next 25 years it is estimated that over 70% of people in the world will live in cities. We will have to learn how to coexist. Most wealthy people in the United States, move from monochromatic suburb to one that looks just like it outside of another city. I was grateful for such an existence, but now that I live in the city, I see textures black and white and various other colors  that need to blend together to become the United States of America. We are not a Christian nation, we are secular nation, which by our Constitution does not repress or judge those of different faiths or different ideas or atheists. WE HE PEOPLE need couple of things 1) A level playing field. 2) Upward mobility 3) The right to a good education 4) Access to universal healthcare. And  Social Security. I have a great deal of faith, that no matter what happens, it will all happen for the best and in the end the United States will be stronger, more unified and the pursuit of happiness will be more equalized. However, the process may be painful.

The economy increased at a revised +3.7% pace in the second quarter. That is almost 1.5% percent stronger than initial estimates for that period. Personal disposable income rose 0.4% after adjusting for inflation in the month of July. That is faster than consumer spending, which instant edged up 0.3% during the month. All good news! Then why is the market so weak? Harry Truman, is quoted as saying, “There is nothing new in the world except the history you do not know.

Read the book book: This Time Is Different, Eight Centuries of Economic Folly by Carmen M Reinhart.

Remember the Markets went down in 2000 and 2008 before the bad news became public. The market’s current weakness, I believe is telling us something. It is telling us that there are weaknesses that have not yet been revealed. I have talked about those weaknesses over the months in The Investment Strategy Letter. SEE BEAR MARKET LETTERS 1,2,3,4,5,6,7,ABOVE

 Current Dow NASDAQ S&P 500
16,674 4,893 1,990
Short Term DOWN DOWN DOWN
Int. Term DOWN DOWN DOWN
Long Term Down? Down? Down?
Forecasted Trend DJIA NASDAQ S&P 500
Short Term Down Down Down
Int. Term Down Down Down
Long Term Bear Market? Bear Market? Bear Market?
Breakout Points DJIA NASDAQ S&P 500
Short Term Up (Resistance) 18,352 5,231 2,134
Short Term Down (Support) 15,855/ 4605/4,545 1970
Int. Term Up (Resistance) 18,352 5,157 2,134
Int. Term Down (Support)       /15,370 /14,688/ 13,377 4,116/ 3,986/3294 1,820 /1,560
Long Term Up (Resistance) 18,312 5,231 2,131
Long Term Down Fibonacci Support 50%12,000  62% 10,750     50%2,958  62% 2,555 50%1,390 62% 1,177
 10Treasury 2.18% Gold 1,107 Oil 44.12

 

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