History in the Making   (September 27, 2008)

It is a rare experience to be living in a present which we know will have momentous consequences. While many of us refer back to the trauma of 9/11 when we think of "history in the making," I think more of the Watergate era, which like the current financial "credit crisis" took many months to unfold and then play out to the endgame.

Let's step back to the stagflationary misery of 1979. Chrylser Corporation was essentially bankrupt, and over howls of protest, proclamations of irresponsible largesse and a Rubicon being crossed, the Federal Government extended Chrysler a loan of a then-stupendous amount: $1.2 billion. In today's dollars, that would be $3.6 billion.

Chrysler eventually paid back the loan, with interest, by the mid-80s. (Restricting Japanese-made imported vehicles in 1981 helped.) Nonetheless it is instructive to recall the great debate and general horror at the government "bailing out" a private enterprise with taxpayer funds.

Almost 30 years later, President Bush and his gang of cronies now demand that $700 billion in taxpayer funds be given--not lent--to private enterprises: a sum 200 times the size of the horrendously controversial Chrysler bailout. As the saying goes: Where is the outrage?

History is being made this weekend, dear readers, for the bailout, should it pass, will mark a Rubicon in the demise of American capitalism and lock in the coming Depression. The Depression lies just ahead, regardless of what version of the bailout is passed into law; but the bailout will lengthen the Depression and deepen the pain which will be inflicted on taxpayers/wage earners.

In a masterstroke, Paulson and Bernanke birthed this "emergency" just as members of Congress were anxious to go home to campaign. With multiple guns thus held firmly to their sweat-soaked little heads, congressmen/women will likely pass a hasty, ill-contrived bailout of some sort by Sunday just to get home and try to hold their seats by campaigning how they "did the responsible thing" and "saved the economy."

A few stalwarts will be able to claim they "tried to kill the bailout" but alas, their courageous efforts were for naught. But even these stalwarts will be glad to have the issue behind them so they can begin campaigning in earnest.

In a just world, every incumbent of both parties would lose their seat in the November election as their reward for enabling this monstrosity. But if the past is any guide, standard-issue voters will hold their noses and re-elect about 95% of incumbents, thus justifying the congressional intuition that voting for the bailout was the "safe" thing to do.

Meanwhile, for the rest of us with a few bucks in a retirement account, the question boils down to: how can we avoid losing our shirt/blouse in the coming Depression? Let's start with a look at the one-year chart of the Dow Jones Industrial Average (DJIA).

It looks like Wall Street is expecting a nice fat "relief rally" when the bailout is passed Sunday.

Here are a few observations: and as usual, please read the HUGE GIANT BIG FAT DISCLAIMER below; this is not investment advice, just the off-hand notes of an amateur chart-watcher.

1. The DJIA has been in a downtrend for about a year. To signal a sustainable uptrend, the DJIA would need to clear the 11,722 resistance and then move decisively above its 200-day moving average at around 12,200.

2. The last-hour 120-point jump Friday suggests players want to be long to pick up the huge gains they anticipate will result from the bailout being approved. If players are fearful/uncertain, they exit positions on Friday for the safety of cash. Buying stocks at the close suggests a supreme confidence that the bailout will not only pass Sunday but that it will trigger a massive "relief rally" now that the "market uncertainty" is supposedly cleared.

3. There are bullish indications that a rally is likely. weak buys in MACD and the stochastic readings are visible, and ADX is trendless/neutral. Furthermore, there is a bullish divergence in MACD (i.e. it is rising even as the market fell).

4. A wedge has formed, suggesting a major break up or down is imminent. If we subtract any fundamental bias, we would have to conclude the evidence suggests the break will be up--at least for awhile.

Bush and Co. (and of course McCain and Co. as well) would like nothing better than a massive rally running into the election, to secure their party's hold on administrative power, and we can anticipate that Bush appointees/cronies Paulson and Bernanke will pull literally every trick in the book to accomplish that goal.

Thus we can also anticipate the possibility of a "surprise" Fed rate cut of a half-point announced Sunday evening, so that the "good news" will goose Asian stock markets, insuring a giant rally Monday morning in U.S. and European markets.

Nonetheless there are a few flies in the ointment of a sustainable rally. Note how MACD rose very bullishly from late January through May, but price never even reached the previous high set in December. Also note how the market has tried again and again to break through the congestion formed by the Jan. 2000 high of 11,722 and the Jan. 2008 low around 11,500.

The January 2008 high around 12,800 seems awfully distant--1,700 points, requiring a full 15% rally from 11,100.

Let's refer back to the longer-term chart from earlier this week:

The overhead resistance around 11,700 is mighty. If the stock market is truly a discounting time-machine which looks ahead six months, we have to inquire: which companies will be earning fatter profits six months hence? What could possibly justify the expectation of higher profits and more generous price-earnings ratios?

Put another way: what are the market Bulls smoking/imbibing? Handfuls of Euphorestra? Having destroyed whatever shards of trust remained after eight years of legalized looting by Wall Street, does any rational observer really believe there will be a resurgence of faith and trust and confidence in Wall Street or indeed, in its partner in theivery and lies, the U.S. Government?

Just as a semi-random guess, I'd anticipate one more "bailout rally" which will push the DJIA back up to 11,700 resistance. There it will fail as the inefficacy and unintended consequences of the bailout become painfully clear. The market will then head for 7,200, a 35% decline. The only question will be: will it fall 35% in a matter of days, weeks, months or years?

As the saying goes: better keep your eye on the dealer.

A few books of related interest:

The Long Emergency: Surviving the End of Oil, Climate Change, and Other Converging Catastrophes of the Twenty-First Century by James Howard Kunstler

The Misbehavior of Markets

The Black Swan: The Impact of the Highly Improbable by Nassim Nicholas Taleb

Extraordinary Popular Delusions and the Madness of Crowds by Charles MacKay

Manias, Panics, and Crashes: A History of Financial Crises by Charles Kindleberger

Against the Gods: The Remarkable Story of Risk by Peter L. Bernstein

Devil Take the Hindmost: A History of Financial Speculation by Edward Chancellor

The Great Crash 1929 by John Kenneth Galbraith

The Crowd by Gustave Le Bon

When Genius Failed: The Rise and Fall of Long-Term Capital Management

The Rise and Decline of Nations: Economic Growth, Stagflation, and Social Rigidities

Fiasco: The Inside Story of a Wall Street Trader

Web of Debt

Financial Armageddon: Protecting Your Future from Four Impending Catastrophes

Reader Essays:

A 70 Trillion Dollar Counterfeiting Ring
(Zeus Y., September 23, 2008)

According to several sources the market for so-called “credit default swaps” last year alone was nearly equal to the total global GDP, around 70 trillion dollars by some estimates. Yet these derivatives have no discernible “origin” or value.

The MacRib is Back!
(Chris Sullins, Septmber 23, 2008)
I want to assure you this is not a viral ad campaign. There is going to be a point to the title because it contains a small story within a much larger one. Also, the title contains a unique spelling for a reason.

New Book Notes: My new "little book of big ideas," Weblogs & New Media: Marketing in Crisis is now available on amazon.com for $10.99.

"Charles Hugh Smith's Weblogs & New Media: Marketing in Crisis is one of the most important business analyses I have ever read. It is the first to squarely face converging global crises from a business perspective: peak oil, climate change, resource depletion, and the junction of key social cycles will radically alter the business landscape in coming decades...."

"This guy is THE leading visionary on reality. He routinely discusses things which no one else has talked about, yet, turn out to be quite relevant months later."
--An anonymous comment about CHS posted on another blog.

HUGE GIANT BIG FAT DISCLAIMER: Nothing on this site should be construed as investment advice or guidance. It is not intended as investment advice or guidance, nor is it offered as such. It is solely the opinion of the writer, who is NOT an investment counselor/professional. All the content of this website is solely an expression of his personal interests and is posted as free-of-charge opinion and commentary. If you seek investment advice, consult a registered, qualified investment counselor (As with any other professional service, confirm their track record and referrals).

NOTE: contributions are acknowledged in the order received. Your name and email remain confidential and will not be given to any other individual, company or agency.

Thank you, David D. ($50), for your outrageously generous donation to this site. I am greatly honored by your ongoing support and readership.

Or send him coins, stamps or quatloos via mail--please request P.O. Box address.

Your readership is greatly appreciated with or without a donation.

For more on this subject and a wide array of other topics, please visit my weblog.


All content, HTML coding, format design, design elements and images copyright © 2008 Charles Hugh Smith, All rights reserved in all media, unless otherwise credited or noted.

I would be honored if you linked this wEssay to your site, or printed a copy for your own use.


consulting   blog  fiction/novels   articles  my hidden history   books/films   what's for dinner   home   email me