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. S & P 500 earnings for the 3rd quarter are down -4.4% and more worrisome, revenue is down -2.9%. What is the real unemployment rate of those who have stopped seeking employment or have settled for poverty wages? the economy is in trouble and without fical policy changes from the do-nothing Congress, the Fed is at the opposite end of the Fed funds spectrum to help. Another quantitative easing will just make the end game worse, as the Fed already owns $4 trillion worth of questionable securities. They can’t ease and they cant’t taper .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

ADDITIONAL INFORMATION IS AVAILABLE UPON REQUEST
Mr Birkelbach does not offer investment advice, but merely his own personal opinion. This report has been prepared from original sources and data we believe reliable but make no representations as to the accuracy or completeness. Mr.Birkelbach , his affiliates and subsidiaries and/or their officers and employees may from time to time acquire, hold or sell a position in securities. Past performance is no guarantee of future success. Upon request, we will supply additional information. CarlBis@aol.com