Shanghai down 6.4% today
BI: What’s your take on the current situation in China? Paul Krugman: “China scares me. China has a huge adjustment problem. They have an economy that is based upon unsustainable levels of investment and needs to radically shift from investment to consumption. They don’t seem to be managing it. They have a large internal debt problem and a government that doesn’t seem to be thinking clearly about it. At this point their response to economic difficulty seems to be to crack down on the financial press and to tell them to write happy stories.”
Europe up 2%
BI: Turning to Europe, what do you think about Brexit? Paul Krugman:” It would be disastrous for the European project. In the end it would hurt Britain quite a lot. The case for close economic integration within Europe is huge. For Britain to be pulling out of that is a bad thing economically. The European project of peace and prosperity through integration is critical. Even if the currency was a bad idea. The broader project is still very critical. Britain needs Europe and Europe needs Britain.
BI: You are especially critical of Germany’s austerity policy. What was this policy’s worst effect? Paul Krugman: The European economy as a whole has been very weak with catastrophic effects on Southern German Chancellor Angela listens during joint news conference in Berlin I would argue that the ramifications run very deep. It’s not just that there’s a huge cost in terms of lost output and lost jobs. Years of terrible economic performance have also done enormous damage to the European project and have basically left Europeans no longer believing in the whole message. The cost has been enormous. Once the bubble burst, there was going to be a difficult time for the Euro, regardless. But it’s been far worse than it needed to be and Germany bears some of the responsibility because of turning what should have been viewed as essentially a technical economic problem into a morality play. That has been a very unfortunate story.”
Investment Strategy: it’s a Bear Market! Sell rallies!
The big news is that J.P. Morgan is doubling its reserve oil loan losses $1.3 billion. I do not believe this is nearly enough. However it does give an indication of the changing landscape of the way the public is looking at loan losses from energy-related companies. The news is out. The banks the United States and in Europe are holding billions of dollars of loans that will probably default. Banks have built up their assets due to differential between low interest rates and the rates they can charge the public. As I have said in previous market letters, “ Banks have built up their assets on the backs of the middle class. In cooperation with the Federal Reserve, Interest rates are at virtually at zero, penalizing savers and retirees and weakening the middle class as banks make huge profits from consumers who pay high rates on credit cards and small businesses on loans. Because banks can borrow at almost nothing, whatever they charge above zero is pure profit. Auto and mortgage rates are 3% or 4%,( there are $1 trilllon of subprime auto loans), industrial loans are between eight and 12% (growth down 11% this year ) and credit cards are anywhere from 15% to 29%.This is high-way robbery and this is weakening middle-class consumers, small businesses and retirees, with the result, as I have said many times, ‘All boats will sink!” This loan reevaluation by J.P. Morgan is just the tip of the iceberg.
Once again, Congress has shown how uncompromising it is with the Obama administration. Harry Mitch McConnell, has said his main goal is to assure that the Obama administration will have as few accomplishments as possible, rather than putting the country first. The latest gridlock is the nomination of a new Supreme Court justice to replace Scalia. Scalia pioneered ’ orginalism’, which is a theory holding that the Constitution should be interpreted in line with the beliefs of white men, many of them slaveowners, who ratified it in the late eighteenth century. Justice Samuel Alito interrupted one of Scalia’s ratings of a lawyer by quipping, “I think that what justice wants to know, is what James Madison thought about video games.” On social issues, where the court has the final word, real problems for conservatives is that they are out of step with the rest of the nation. The public wants diversity not intolerance, gay rights, a broader interpretation of women’s rights for contraception and choice, a broader and more encompassing view of voters rights, fewer execution, the demise of Citizens United, less money in politics not more and the end of gerrymandering congressional districts. The president has the right to make a nomination. The public gave him that right with more than 2 million more votes than his Republican counterpart in the last election. For Mitch McConnell to say, he will not consider any candidate, no matter how well-qualified, speaks of the uncompromising nature of the Congress and its inability to deal with a future financial crisis, which in my opinion is about to hit this Congress will a blast, before the end of the year.
I don’t tell the market what to do. The market tells me what it is doing. On Thursday the Dow Jones industrial average broke its August 25 low of 15,666 by closing at 15,660. This was the last major index or average to not break below August lows. All major indexes and averages worldwide have now broken below the August 25 lows and are officially in a BEAR Market.
Investmet Strategy: sell rallies!
FOUR NEW BOOKS and ONE CLASSIC TO READ
- The Age of Stagnation by Satvajit Das. This book explains the failures of central banks to stop an economic and financial catastrophe. His solution is austerity, which seems unlikely to happen
- The Only Game in Town by El-Erain. He believes that central banks cannot avoid a financial catastrophe with monetary policy alone and needs fiscal policy to aid the economy. With Republican Congress, this does not seem possible.
- Dark Money and the rise of the radical right, by Jane Mayer. This book explains how economic growth is unsustainable if eighty people own 50% of the world’s wealth and 1% of people own more than the 90% of wealth in the US. (dah!)
- The Fourth Industrial Revolution by Klaus Schwab. This book shows what a wonderful world of technological wonders awaiting us once we get through this economic and financial catastrophe. EVENTUALLY, the only problem is, once Artificial Intelligence has access to unlimited knowledge in the cloud and is able to reproduce itself, silicon based intelligence will not need carbon based intelligence The next step in evolution?. However, that’s a problem for another day.
- Don’t’ forget the classic THIS TIME ITS DIFFERENT by Carmen Reinhart: It tells the story of eight centuries of Financial Folly. Each time after a catastrophe, such as the Great Depression or 2008, economists agree that it could never happen again. Who could be so stupid as to let six banks control 70% of the US assets (to big to fail) and allow all the economic growth to go to the 1%, while eighty people own 50% of the world’s wealth? NAH!
2/12/16 THREE MAIN REASONS FOR THE DECLINE
My forecasts for 2016 call for the Dow Jones Industrial average to be as low as 14,688 to 12,000, the NASDAQ to be as low as 4,000 to 3,000 and the S&P 500 to be as low as 1,560 to 1,400 because of three factors! (See previous market letters)
|Current noon||Dow||NASDAQ||S&P 500|
|Foretasted Trend||DJIA||NASDAQ||S&P 500|
|Long Term||Bear Market||Bear Market||Bear Market|
|Breakout Points||DJIA||NASDAQ||S&P 500|
|Short Term Up (Resistance)||16,912||5,057||2,062|
|Short Term Down (Support)||15,845/15,484
|Int. Term Up (Resistance)||18,352||5,231||2,134|
|Int. Term Down (Support)||/15,370 /14,688/ 13,377||3,986/3294||1,560|
|Long Term Up (Resistance)||18,352||5,231||2,134|
|Long Term Down Fibonacci Support||50%12,000
2008 LOW 6,627
2008 LOW 1,204
2008 LOW 666
|10 Treasury 1.71%%||Gold 1,242||Oil 26.59low now 31.60|