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The Daily Reckoning Monday, August 17, 2009 The Dow loses close to 200 points this morning... Exceptional things don't remain exceptional for very long... What defines American capitalism... The Mogambo on the absurdity of purposeful inflation...and more! What Goes Up... by Bill Bonner Ouzilly, France You could look at market cycles narrowly - just by keeping your eye on price movements. Or you can look at the Big Picture...all the connections between markets and the rest of the world...in the hopes of understanding what is BEHIND the price movements and where it might take them. Friday, the Dow dropped 76 points. It's probably going down soon...but maybe not yet. The Dow would have to rise to about 10,350 to equal the '29 bounce. And heck, it's not September yet. September is traditionally the worst month for investors...followed by October, November, December, January, February, March, April, May, June, July and August. But what's this? The morning news: Chinese stocks suffered their worst day since November - with the Shanghai index down 6%. The rally is probably not over; still we wouldn't want to be long when the market opens in New York this morning. [Ed. Note: By the time the US edition of the DR came out, the Dow had lost close to 200 points.] Many analysts regard everything beyond the price data as noise. You never know whose ideas or whose explanation or whose predictions are correct, they say. All you really know for sure is the price. According to the Efficient Market Hypothesis, the price has in it all the information, theories and delusions of all the players in the world. By this reasoning, the price information is 'perfect.' No one can know more about what a stock should sell for. Many analysts think they can watch the patterns of price movements and find some clues at to what they will do next. They see 'heads and shoulders,' ascending triangles and descending tops...and think they mean something. For us, here at The Daily Reckoning, price movements tell us something, but only in their extreme form...and only because we have an intuition about the way nature works. When we see a price that has suddenly shot up, for example, we expect that it will suddenly shoot down sometime in the future. When we see a series of price increases over a long period of time, on the other hand, we expect to see a series of price declines over a long period of time, too. If we look closely, we find that the price at the end of the long incline is exceptionally high...and the price at the end of the long decline is exceptionally low. We believe - intuitively and logically - that exceptional things don't remain exceptional for very long. That's why they are exceptional. Broadly, when prices are exceptionally high they will fall - to the point where they are exceptionally low, and vice versa. Beyond that, we draw little nourishment from the price numbers. They don't tell us why things are happening. And while we recognize that it is impossible ever to really know why anything happens (the number of butterflies possibly flapping their wings in China is beyond our comprehension), we are nevertheless heirs to the old story-telling tradition of our deathward marching tribe. We want to know why things happen the way they do...we want heroes and villains...we want winners and losers...we want a plausible story that explains what is going on. [Speaking of knowing what's going on, Dan Amoss has pinpointed yet another bank that's on it's way to the great bank graveyard in the sky. He's going to uncover to his Strategic Short Report readers what could be the biggest banking lie of the last 64 years next Monday - and if you aren't a subscriber, you could be...for just $1 dollar. Get in now.] Let's see what The 5 Min. Forecast has for us today: "Investing in this market is like trying to take cheese out of a set mousetrap," Chris Mayer writes in today's issue of The 5. "It's very tempting to make a grab, but you are also fairly certain about what will happen if you do. The market's 50% rise from its March lows is stunning. It's like the cheese in the trap. But we also know that no market moves up like that for long. The kill bar is never far from such rallies." "Investors might forget that because investing this year has looked easy," continues Chris. "Those who have missed out on the rally must be tearing their hair out. Their money burns a hole in their pockets. "In fact, the evidence is that most investors have the attention span and patience of a field mouse. Here's the average holding period for a stock on the New York Stock Exchange: "What jumps out at you right away is that the average holding period is less than a year. That means that, on average, an 'investor' typically holds an NYSE stock for a matter of months. This is not investing, which is why I put the term in quotes. I don't know what it is. Mindless gambling comes to mind. "It's no surprise that the last time we were down here was in the Roaring Twenties. We all know what that was the opening act for. "This chart also speaks to a larger problem in the markets today - there are too few owners and too many renters. Just as in real estate, owners generally take better care of a property than renters. Why should it be different with companies?" For more from Chris, make sure you check out his special report, which details a way you can protect yourself from the current economic downturn: with your own 'personal bailout'. Get all the details here. And back to Bill, with more thoughts: We have maintained an episodic correspondence with Jack Lessinger for nearly 20 years. Jack is a "socio economist." That is, he's looking at the big picture of economic trends as they fit into the wider world of social life. What Jack sees - in his new book, The Great Prosperity of 2020, is a series of booms and busts that correspond to the way people think about themselves...what they want...and how they want to live. This is what defines American capitalism, he believes. And then he connects these phases of American capitalism to development patterns and real estate trends. Since about the beginning of the 19th century, he sees three major forms of capitalism - the small-scale frontier capitalism which peaked out about the mid-1800s...followed by large- scale industrial development which reached its zenith, according to Jack, at the beginning of the 20th century...followed by the consumer society that we grew up with. Each major trend rises and falls. Prices rise and fall with them. The first wave of development raised prices of frontier land, first in the Mississippi River basin...and then out on the prairies. In real terms, farmland in some part of the mid-west hit peaks in the speculative fever of the 1880s that have never been seen since. Then, the development of the next phase pushed up values in major industrial centers - particularly in Chicago - whose growth far surpassed the older cities such as New York and Philadelphia. There too, prices in inner city Rust Belt metropolises have never been higher. Then, came the Material Age...when the consumer was king. Every king wanted his own suburban castle...and his carriage, with horsepower provided by Chevrolet or Ford. The bigger picture was that energy was cheap and US manufacturing was leading the world in the post-WWII era. Cheap energy seemed to make suburban life a sensible, affordable alternative to the city. In the suburbs you had the advantages of being close to a major city - with access to jobs, entertainment and education. You also had the advantages of country living - backyard swimming pools, gardens, lawns, fresh air, and space. Movement to suburbia began in the '20s. By then, the first suburbs were being built north of Baltimore...connected to the downtown area by tramways and paved roads. The richest families began by buying summer places on the high ground of Guilford and Mount Washington. Then, as transportation improved...and the cities became more and more crowded with immigrants and factory workers...the rich lived year-round in their leafy refuges. As the trend developed, the suburbs spread...and the middle classes joined the exodus. By the '80s, practically all that was left in the central cities were drug addicts and welfare recipients. Meanwhile, in the early phase of the consumer trend, wages for ordinary working stiffs were going up rapidly. A guy could graduate from high school, get a decent job, and expect to earn more and more money. This gave him the wherewithal to buy more and more stuff. So buying stuff became a national pastime. "He who dies with the most stuff wins," was the basic rule of the game. The first challenges to stuff culture came early, says Jack. The hippies and counter-culture movements of the '60s were basically a reaction to the excesses of consumerism and suburbanism. Then, prodded by the oil crisis, there was a counter-trend movement towards self- sufficiency and independence in the '70s. Those early attacks were beaten back by credit and bubble markets. It seemed crazy not to enjoy the benefits of stuff culture when it was at its apogee in the late 20th century. But now the consumer economy has played itself out, says Jack. It is spent, wornout and passé. Here at The Daily Reckoning we described the Bubble Epoque - the final, blowout phase of the trend - day by day, during the 2001-2007 period. Now, we are describing the bust-up. The consumers are broke. The suburbs are démodé. The lust for stuff has given way to a lust for security, stability, and simplicity. [And energy certainly isn't cheap anymore...and most likely will never be again.] The shift from one major trend to another one is typically marked by depressions. The transition period requires retooling, re-pricing and often, relocating. The suburbs are unlikely to be a growth area in the next socio-economic trend. Instead, it is likely that suburban property hit its all-time high in 2005-2006. We will never see those prices again - ever. People will move. They will move to new areas. The "season of depression," to use Jack's term, usually lasts 20-30 years. We are in one now. He puts the end of the depression - and the beginning of a new period of prosperity - at 2020. "You couldn't get away with that in the US. I was amazed. It was like a Las Vegas show...but a wild Las Vegas show..." The boys were excited Friday night. They found a nightclub that would send a bus to pick them up at midnight...and bring them back at 5AM. The club was about 20 miles away...in the middle of rural France. It seemed improbable...but there it was...advertising a 'Dental Floss' night. (Referring to those micro-size underpants worn by young women...) And so they made their arrangements by telephone. And at midnight...the bus came to pick up three of our boys...plus a French friend and an Irish writer who is spending a few days with us. Your editor went to bed. "I can't believe they wanted to do that," said Elizabeth. "Imagine being trapped in a nightclub for 5 hours...and what could you do...the loud music...the cheap alcohol...it just sounds like torture." It sounded like torture to us. But the boys seemed to enjoy it. We awoke to sounds of laughing and talking. It was 5:30AM. The boys were back. From the sounds coming through our bedroom window, it sounded as though they had had a ball. We had to wait until noon on Saturday, after they finally woke up, for a report: "It was amazing. They had dancing go-go girls who were practically naked. They did some dance numbers...and then they visited the tables. They were very friendly. "It was run very professionally...the bouncers did their jobs well. Someone spent a lot of money building the club." "What did you do?" "We danced. We drank. We joked. The girls seemed especially interested in Edward (15). We had a good time...." "Didn't anyone ask for Edward's ID?" "No, no one seemed to care how old he was. Edward really enjoyed himself. Of course, his eyes almost popped out of his head. And he's probably ruined for normal life...he'll spend the rest of his life trying to recapture that excitement of his first nightclub experience..." Until tomorrow, Bill Bonner The Daily Reckoning --------------------- Special Offer --------------------------- The Next Major Bank Stock Set to Crash Imagine if you knew that Lehman Bros. was going to go under, 5 months before it went belly-up. You could've made a fortune. Well, our analyst Dan Amoss did know...and his readers made as much as $200,000 because of it. Now he's identified the next major bank stock set to crash, and you've got an exclusive opportunity to find out what it is. Click here for all the info. --------------------------------------------------------------- The Daily Reckoning PRESENTS: According to the Mighty Mogambo, inflation is the worst thing that can happen to an economy. Why, then, are Paul Krugman and Ben Bernanke suggesting that we permit such as disastrous economic phenomenon? Well, according to the Mogambo, it's because they're low-life ignoramuses who don't know what they're talking about - AKA Keynesians. Read on... Let Them Inflate by The Mogambo Guru Tampa Bay, Florida I think that Paul Krugman is one of those absurd guys that has no idea what in the hell he is talking about and who owes his undeserved prominence to being a real butt-kissing sucker-upper to Alan Greenspan and his Federal Reserve, and now he's doing the same thing to the laughable Ben Bernanke and his disastrous Federal Reserve, although I will admit that I don't know why anybody listens to this guy. I say this with such obvious disrespect because Mr. Krugman is on record has having advised the Bank of Japan to purposely cause inflation, as, "The way to make monetary policy effective is for the central bank to credibly promise to be irresponsible - to make a persuasive case that it will permit inflation to occur, thereby producing the negative real interest rates the economy needs", although he never actually says where he is going to find guys stupid enough to loan money at negative interest rates, or in what bizarre alternate universe he lives where high inflation in consumer prices, particularly sustained high inflation, is anything other than a total disaster, which is why most of economics is concerned with the problem of preventing inflation while fostering growth! In fact, he thinks that a central bank trying to reflate a collapsing economy should announce a deliberate plan to raise the level of prices (such as the Consumer Price Index) from current low levels to some dramatically higher value (a so-called "price-level gap") that it would have theoretically reached if a "moderate" and constant amount of inflation in prices had, in fact, occurred! Gaaahhhh! To make it more Theater of the Absurd, he then says to keep creating more inflation in prices! Gaaahhhh! This is insane! This is beyond insane! This would be bad enough coming from just another egghead academic dork from Princeton, but a terrifying quote from Ben Bernanke, chairman of the Federal Reserve, shows that he agrees with this with nonsense! In fact, Bernanke said, "A successful effort to eliminate the price- level gap would proceed, roughly, in two stages. During the first stage, the inflation rate would exceed the long-term desired inflation rate, as the price-level gap was eliminated and the effects of previous deflation undone. Call this the reflationary phase of policy. Second, once the price-level target was reached, or nearly so, the objective for policy would become a conventional inflation target or a price- level target that increases over time at the average desired rate of inflation." This is so dangerously preposterous that one's hands shake in fear and paranoia at the calamity that awaits a nation that takes such ridiculous advice, and there is nothing to be done except to buy more gold, silver and oil, as the last 4,500 years of history have proven that these are the things that have lasting value, unlike the bitter disappointment and dismay of paper money and "true love." "...inflation in prices is the worst thing that can happen to us, and which is exactly what is going to happen to us because the damnable Federal Reserve is creating unbelievable, staggering amounts of money and credit..." Obviously, people do not have to be around me very long before they learn that I am perpetually scared, to one degree or another, of inflation in prices, such as the other day, for example, when I had saved up enough money to have dinner alone at a restaurant so that I could eat one lousy meal without the wife and kids all the time whining and complaining about how they need more money, and want more money, and how they want me to give it to them, and how I am a terrible person for not giving them more money, how I am too stupid to get a better job to make more money and how I am too lazy to get a second job with which to earn more money. So instead of having to listen to them talk about how much they hate me, I am enjoying the peaceful qualities of the restaurant when a guy seated at the next table sees me eating my steak and asks me how I liked it. So I told him, "I like it fine, except I wanted lobster! Rich, flakey lobster to dip into real melted butter so wickedly delicious that you can actually hear your arteries hardening from just looking at it; but I can't order lobster because inflation in prices caused by the Federal Reserve creating so much money and credit all these years has resulted in the ugly news that they now charge too much for lobster, and inflation is so bad that some crappy, weak iced tea is almost two bucks a lousy glassful, most of which is ice!" Out of the corner of my eye, I can see the other people in the restaurant have stopped eating and they are all looking at me. Figuring that they want me to further enlighten them, I go on, "So don't you ask to me about how I like my steak, when you should be asking me how I like inflation in prices, which I don't! Not one little bit! And if you weren't so stupid, you would realize that inflation in prices is the worst thing that can happen to us, and which is exactly what is going to happen to us because the damnable Federal Reserve is creating unbelievable, staggering amounts of money and credit so that the federal government can borrow and spend it in an orgy of deficit- spending that will end badly!" Well, pretty soon the manager comes over and tries to censor the Heroic And Brave Mogambo (HABM) by telling me to shut up and sit down, although he might have been interested in the actual inflation figures, which are pretty bad! For instance, producer price inflation shot up 1.8% in June, and it seems especially interesting that the Labor Department figures that the Consumer Price Index rose 0.7% in June, and although 0.7% does not seem like that much in one month, it adds up to a lot over the course of time; like for instance, in a year, when this 0.7% per month inflation compounds to 8.7% per year inflation! Yow! Until next time, The Mogambo Guru for The Daily Reckoning P.S. And if you want another reason to buy gold, silver and oil - as if you could possibly need another reason after the trillions of other reasons to do so that are smacking you in the face every time you turn around - then this is it, although there is no reason to hurry, as this is only the beginning of something that is going to be Very, Very Long (VVL) and Very, Very Ugly (VVU). Thank goodness buying gold and silver as investments is so easy! Whee! Editor's Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter - an avocational exercise to heap disrespect on those who desperately deserve it. The Mogambo Guru is quoted frequently in Barron's, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page. koning - Special Reports: Gold: The Truth About Gold Fiat Currency: Using the Past to See into the Future Introducing the Single Best Way to Make Sure You'll Never Run Out of Money.