Posts Tagged ‘stock market’

There have been many articles and books written about the cause of the Stock Market Crash of 1929.  As in many manmade disasters it can be difficult to determine THE CAUSE because there are in fact multiple causes which combine to generate the eventual catastrophe. Many so-called experts like to point to one cause or another for an event, when in actuality, the whole thing was due to a complex interrelationship of factors, none of which is the sole cause or the sine qua non.  There is, however, one thing that is certain about the events that led up to the 1929 disaster – the stock market was being manipulated. At the time there was no law against manipulating the market and small groups of very wealthy people did just that.

The wealthy investors would, as a group, begin buying shares of a single stock and then, through their connections in the news media, the average person would be told that such and such stock was rapidly going up and it looked like a sure bet. Before long a lot of small investors would buy the stock and its price would shoot further upward, thus luring even more small investors to buy in. The big boys would sit on the sideline and watch, waiting for their moment.  Then, in one coordinated movement they would sell all their shares at a hefty profit. The stock price would then plummet and the small investor, who fell for the fake news stories about the stock would lose a lot of money, maybe 90% or more.

It was practices like this that caused the Crash and the resulting Great Depression. President Roosevelt created the SEC in order to put an end to these predatory practices.  Law were passed.  Restrictions put in place. These sorts of schemes must never happen again, everyone said.  It is now 80 years since the great stock market crash.  During the intervening years laws have been changed.  The SEC has fallen asleep at the wheel. Men like Bernie Madoff have prospered. One can only wonder, have some of the old schemes been revived?  Have new ones been created? Is the stock market a straight and honest place where stocks are bought and sold without manipulation of any sort?

Consider the past several months behavior of the DOW.  There is a curious behavior in the prices of this average. Notice how the DOW tends to increase rather gradually and then periodically drops precipitously.  It’s sort of a sawtooth effect. One would expect that if very large groups of investors were buying and selling throughout the day that periodic, abrupt changes in stock prices wouldn’t happen. It seems highly unlikely that everyone would decide to sell at the same time. If they did, wouldn’t they also decide to buy that way?

Today the stock market has taken a steep drop.  Yesterday it took a steep rise. The pundits at the various news media all claim to have an explanation as to why the rise and drop occur.  The Wall Street Journal quoted one doomsayer who claims that we are headed for a disaster in commercial real estate.  Yet, only a few days ago we were exuberantly buying stock and congratulating ourselves that we have finally broken the 10,000 mark. We just heard that the economy has returned to positive economic growth.  Despite this wonderful news, CNN posts an article questioning whether things are getting better. Better? Isn’t 10,000 better than 6,500?

While the media are currently broadcasting a message of fear – which can only drive people to sell off their stocks – Nouriel Roubini, the economist who correctly predicted the world economic meltdown doesn’t seem too afraid. He is no longer talking about a W-shaped recovery and seems to have accepted a V-shaped recovery.  Mr. Roubini, seems more concerned about the Carry Trade, trading in currency, and its effect on the dollar’s value than anything else. He says we are now in the Mother of All Carry Trades.  Even so, the Fed has control of this through interest rates. Dr. Doom is no longer forecasting imminent doom for the world.  However, as before the great meltdown, his views don’t get much publicity. He says that the government’s intervention in the economy has led to a recovery. Yet, for many people there is skittishness and resulting volatility in the market – a perfect environment for predators to take advantage of the little investors who will jump to buy at news that a certain stock will rise and who will equally bail out immediately with the slightest hint that a particular stock might drop.

Listen to the so-called analysts who profess to know the cause of the stock market either rising or falling.  How often are they actually correct? There are many times when their reasons contradict their story from just yesterday.  One can only wonder whether there is more to this than meets the eye. The behavior of stocks, the pattern of steady rise and precipitous drops, both during a single day and over multiple days, might well indicate manipulation by large investors. Of course, it might not.  After all, sometimes you can flip a coin and it actually will come up heads ten times in a row.

But you have to wonder.

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One year ago, the entire American banking system was on life support.  It was only through the intervention of the Federal government, using the promise of a semi-infinite supply of tax dollars that some of the banks survived.  If this infusion of billions and billions of dollars of cash had not been made our entire banking system would certainly have collapsed. The question we need to ask – but we haven’t – is this: is there a message here?

Thanks to the extreme measures the Federal Government took with the TARP program we still have some functioning banks, but a more important thing to consider is this: do we have a functioning economy?  The answer to that question is to be found in the history of the Dow Jones Industrials average for the past forty years.  The thing to note is the behavior of the Dow before the year 2000 and after the year 2000.  Notice anything? How about those two massive bumps?  I mean the one about ten years ago and the one a year ago. You know what those are? Those are bubbles, the signs of an economy that is being artificially and irrationally stimulated – an economy on drugs.

The other thing to note is that Bump #1 didn’t start in the year 2000, it started long before, its roots were in the 1980’s. Until then the Dow had been pretty tame, slowly inching upward ever since World War II. So what happened in the 80’s? The government created 401k plans and artificially stimulated massive investment in the stock market by average people who would have otherwise never invested in the market.  The same thing happened again with the 529 plans.

However, for the people who run our government that wasn’t enough. So they changed the tax laws again to provide a massive income tax credit for anyone who sold their house – and they made a provision so that you could do that every two years. That artificially fired up the housing market.  Then we had also the tech boom – a boom that the Fed actually opposed.  They didn’t like all these upstart companies on the NASDAQ sucking up all the investment money from the old money firms that made up the DOW.  So, the Fed killed Tech by ratcheting up interest rates until Tech collapsed.  After Tech was a smoking ruin, the Fed drastically cut interest rates and thereby fueled the housing bubble even more.

The thing to realize is that our economy, for the past twenty or thirty years has been a dying economy, kept alive by infusions of money from unsuspecting citizens contributing to their 401k plans and their 529 plans. It has been kept alive by people buying and flipping houses every two years.  It has been kept alive by one scheme or another while the true engine of our economy, manufacturing, was exported to China.  But nobody cared because you could buy Chinese stuff cheap at Wal-Mart and everyone was doing well in the stock market or the housing market.

Well, the party’s over, isn’t it?  True, the banks are alive again, having dined on the lifeblood of the taxpayers.  However, there are very few green shoots out there. Does anyone have an idea where our new economic engine will come from? Is it possible for our government to think of another economic scam that will power the country for another ten years? Or, are they running out of ideas?  Does anyone really think we can get by on our American manufacturing capability?  Let’s face it we just don’t make enough stuff anymore.  The future of manufacturing, at least for the next twenty years or so is in Asia, not North America. So what is our government thinking? Well, since the only thing they saved is the banks, one must assume that they figure that’s where the money will come from – i.e. lending at interest. But, let’s face it, the lendees are unlikely to be Americans, are they? No, the money (that’s your tax dollars that you gave them as TARP rescue money) will go to developing countries so they can develop their businesses and then pay back the banks at high interest rates.

Meanwhile, back at the ranch, what can we expect?  The truth is: not much. Our Capitalist engine doesn’t have a transmission anymore. In fact we lost it a long time ago.  We’ve just been coasting along.  The thing we don’t want to…don’t like to…admit, is that we are witnessing the failure of Capitalism.  Unregulated Capitalism – something we have had from many years – soon morphs into Predation: the strong preying on the weak. We have witnessed that. The Predators in our society, i.e. the financial community, have feasted on us.  There’s not much blood left to drink anymore.  They’ll move on, looking for victims in other countries – still propped up by our government.

Here, in the USA, we won’t admit Capitalism has failed – we can’t – it’s like denying religion or something. It’s like being unpatriotic.  It’s like stepping on the flag.  Capitalism is sacred in America – beyond criticism. It’s hard to figure why – after all, can’t we all see that it doesn’t work?  We can’t we simply acknowledge that it is an economic theory and system that just doesn’t work?  I know, I know ,we’re all afraid of the other two “isms”, Socialism and Communism. So we stick with our belief in Capitalism, even though the wheels have come off and we no longer have an engine for our economy – we still believe. We believe. We believe even though we are in a screaming nose dive.

If the past twenty or thirty years have proved anything, they have proved that unfettered Capitalism is a disaster. For proof just look at your bank account.  If we can’t bear to consider Socialism or Communism, then there is only one solution.  We need a new “ism”.  Call it Americanism if you like.  We need a new approach to economics. We need creative minds in our government who can see beyond the payoffs from lobbyists and the pressures of the fat cat bankers.  We need a new voice in economics, a voice of intelligence who can lead our economic recovery with a sound understanding of what went wrong. We don’t need idealogues, whether they are Capitalists, Socialists, or Communists; we need realists: practical, intelligent people who can understand what is broken and fix it. We simply need a new way of running our economy, a new economic theory for the 21st Century.

The question is this: do we have the intelligence and the courage to change the way we do business? Because if we don’t, it won’t be long before we don’t have any business.

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There are a lot of Americans who are invested in the stock market one way or another.  Many have 401k retirement plans.  Many have 529 college fund plans.  Some have IRAs and others simply buy stocks or bonds directly through a broker.  One way or another, I would guess that perhaps half or more of the adult population has investments in the stock market.  Let’s say that is about 100 million people, give or take.

Today, the Dow Jones fell precipitously from the opening bell.  It fell very quickly and stayed low the entire day without a lot of up and down motion after its initial drop.  By the time the market had closed the Dow had dropped 2%.  There are a few curious things about this.  First, the Chinese market had fallen 5.8% earlier.  Interestingly, the Japanese market had also fallen.  The Nikkei fell by 3.1 %, despite the report that Japan had just exited from recession and was now in an economic recovery. So one has to wonder a bit.  Did those 100 million or so American investors suddenly wake up in their sleep, perhaps due to a bad dream about the stock market, and sometime in the wee hours of the morning place a massive amount of sell orders before the U.S. market opened?

And if they did, why did they also bail on the Japanese economy?  Japan is now the third major country, after Germany and France, to announce that they have recovered from the recent economic meltdown.  Wouldn’t you have thought those sleepy Americans would have held onto their Japanese stocks? Or was it maybe the Japanese citizens themselves who panicked when they heard the dire news that they had recovered from the recession? And what got into all those people who had invested in Chinese stocks? China has the largest stimulus package in this corner of the universe and they also own several tons of U.S. treasury bills.  Did the investors suddenly forget that?  Why would all these little investors suddenly wake up in the middle of the night and scream, “Sell all my Chinese stocks!”

Why indeed.  Unless there is more to this instantaneous worldwide sell off than meets the eye.  I wonder.  Could it be that this massive, worldwide purge of investments wasn’t the result of millions or billions of investors all making the same “sell” decision at the same instant?  Could it be that perhaps something else was going on?  Could it be that maybe this was an orchestrated sell off instigated by a relatively small group of traders?  And if so why?  Why would any group of traders that control maybe 5 0r 10% of the entire world’s stock markets suddenly sell everything?  What could they gain – except to maybe trigger a massive number of stop losses.

And even if they did.  What good would that do for them?  What would they do then?  What would you do?  Perhaps we’ll see tomorrow.

Of course, I could be wrong.  Maybe everybody did just run to the same side of the boat at the same time.  It could happen…. Right???  Couldn’t it?

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The 401(k) section of the Internal Revenue Service code was approved by the U.S. Government in 1978 and became effective on January 1, 1980. This plan supposedly allows employees to invest in the stock market in order to create funding for a comfortable retirement.  Ever since the 401(k) provision was created Congress has passed more and more 401(k) related legislation to encourage more workers to invest more of their retirement money in the stock market.  Employers loved the idea because it removed their obligation to provide defined benefitension plans for their employees, i.e. plans that provided a specific, guaranteed income.  Instead, employees were sold the story that these 401 (k) “defined contribution” plans could provide them fabulous amounts of money because the stock market always goes up.

Take a look at the history of the Dow Jones average since 1900 until now.  First of all notice that the chart is logarithmic.  Stock analysts like to use log charts, they seem so much more well-behaved than linear charts.  However if you look at a few dates and take the numbers from the vertical scale you can see that, in the linear world, they are not so well-behaved – and, by the way, the world we live in, and the money we own, is linear, not logarithmic.  For example, lets take the extreme case.  Suppose you had invested all your money in the Dow components in the 1920’s. By 1929 the Dow had reached a peak value of about 380.  By 1932 it had dropped to about 43.  This is a drop of about 89% in value.  And remember, this is the Dow – a 30 stock index of the biggest companies in America.

On the other hand, suppose you had a 401k plan in 1929 but a lot of it was not invested in the Dow but in some of the smaller companies.  It is likely you would have lost even more because a lot of the small companies simply evaporated as the country entered the Great Depression.  Fortunately, 401k plans didn’t exist then. Unfortunately, a lot of people who thought they might be able to make it in retirement from company pensions or other funding were rudely awakened when their company pensions vaporized as well as their life savings because a lot of the banks failed.  Many retirement-aged people in the Great Depression were destitute and it was for this reason that FDR created the Social Security system. (Imagine where we would be today if George Bush had gotten his way and converted Social Security into a plan where each individual invested their Social Security contributions in the stock market – just like the their current 401k plans).

The Dow Jones chart shows that time and again the stock market drops as drastically as it rises. Over all it can be expected that the value of the Dow will drop dramatically between 20% and 50% every four or five years, with a few exceptions where it may not drop quite so much and others where it drops a lot more. Overall, it doesn’t seem to be the sort of thing you would want to bet your retirement on, does it? And that’s just the Dow, the biggest companies in America. That is not taking into account all the little companies that just vaporize when things get tough. Even more disconcerting to note is that of the original companies that made up the Dow, there is only one left! The others are gone or morphed into something else or downsized into insignificance.  The one original company that is left is GE.  GE’s stock traded at $6.66 today, only about a tenth of its value in 2000. So much for safety in the Dow.

Look again at the historical chart of the Dow Jones average.  Notice that from about 1960 until 1980 it just oscillated with no upward momentum. But in 1982 it took off! Of course it took off.  Everyone began plowing all their retirement money into the stock market – just what American business and our Republican Party dominated government wanted. The market skyrocketed from about 800 in 1982 to almost 14,000 in 2007, a gain of almost 1650%!!! Compare that with the period 1960 to 1980. The Dow went from about 700 to about 800 in twenty years, a gain of only 14%.  Could it be that our economy magically took off in 1982 and never looked back because our business community suddenly figured out some new business plan?  Hardly.  It was because of all the money that people innocently put into their 401k plans.  The American working man was the victim of a monumental Ponzi scheme cooked up by a business/government coalition that didn’t give a hoot about the welfare of the American citizen. The 401k scheme was just a clever idea to get the ordinary American citizen to plow his earnings right back into the business world so the wealthy could get even wealthier.  And it worked.

Now, as the world of banks, finance, and insurance has been shown to be a community of cheats and liars who gleefully defrauded each other as well as their investors and the American public, the typical American is looking at the smoldering ruin of his 401k plan and wondering how he can ever retire – or worse – if he is already retired, what will he do now?  Will he be able to afford a house or food?

There is only one good solution for retirement money: Social Security.  FDR had it right.  If people are going to contribute to a retirement account it should be a Social Security account, backed by the full faith and credit of the United States government.  401k plans should be eliminated.  Investing in the stock market is for people who can afford the risk.  The average American can’t. The American people have been robbed by the largest Ponzi scheme imaginable, and as the stock market continues to tank we are headed for a crisis of truly vast proportions.  Many, many millions of American’s have lost their only hope for a viable retirement because of the 401k Ponzi scheme.

I can only wonder, when will our government take serious note of this human disaster, and what in the world will happen to all these people now?

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John McCain is fond of saying that Barack Obama wants to “share the wealth”. By this he means that Barack’s tax plan is unfair and that it will result in taking money from the wealthiest people in America (like John McCain) and giving it to the less wealthy (like you and me).  He and Sarah Hockey Puck then go on to rant about Socialism and Europeans, etc.  There is little doubt that one of the fundamental causes of the current economic meltdown is “no rules” Capitalism – the sort that John McCain, George Bush, Ronald Reagan, and Alan Greenspan have advocated over the past thirty years.  There is, however, a deeper underlying factor that has led to the financial horrors that many Americans are now facing: it is the 401(k) plans that so many of us have come to depend upon.

The term 401 (k) refers to a particular section of the U.S. Internal Revenue Service code.  The groundwork for our present 401 (k) system was initiated in 1978 when the IRS allowed employees to not pay tax on deferred income.  However, it was not until 1981 when Ronald Reagan was President, that the IRS allowed salary deductions to go directly into a 401(k) account without any tax being paid on the contribution. This was the beginning of a massive injection of new funds into the U.S. stock market – investments that were being made by ordinary U.S. citizens, i.e. amateur investors. If you look at a chart of the Dow Jones average for the past hundred years you will see many interesting features. One of these is the spectacular climb in the Dow between 1925 and 1929 – probably something Alan Greenspan would call irrational exuberance. You might also notice that after the stock market crash in 1929 that the Dow did not return to its peak of 380.330 until 1954, twenty five years after the crash.  A strong period of growth begins in the middle of World War II as U.S. factories supply arms to most of the world. This growth continues throughout the recovery period after the war until about 1966.  We then enter an ocillatory period of about fifteen years of essentially no growth in the Dow. Then we come to 1982 and some companies begin providing 401 (k) options to their employees instead of defined benefit pension plans (in defined benefit plans the company guarantees you a specific retirement income, and the company assumes all the risk of providing your pension).  By 1984 there was almost $94 billion in 401(k) funds invested in the stock market. By 1990 there is almost $385 billion of 401 (k) money in the stock market. By 1996 there is about $1.06 trillion of 401 (k) money in the market. In 1998 there is $1.54 trillion. By 2002 there is $1.8 trillion. By 2003 there is $1.9 trillion.  Based upon these numbers we might expect the total value of 401 (k) contributions invested in the stock market today to be about $4 trillion dollars. If we look at the total loss in the U.S. stock market capitalization since the market peaked almost exactly a year ago we see that the market has lost about $7 trillion dollars in value.

This is another way of saying that your 401 (k) wealth has been shared – probably in a way that John McCain approves of.  A lot of the experienced investors bailed a year ago when they saw the meltdown coming. These experienced investors are mostly the wealthy or the analysts who work for the wealthy. They have sold at the top, or near the top, and have pocketed an amount equal to a bit more than the total amount of 401 (k) investments in the market.

Wanna play “share the wealth again”? John McCain has another great idea for you: how about instead of the government providing you a “defined benefit pension plan” i.e. Social Security, you just invest all your Social Security contributions in the stock market – just like a 401 (k)? Pretty good idea, huh?

If you look back at the chart that shows the performance of the Dow for the past hundred years you can see that beginning about 1998 the growth in the market – probably due largely to the injection of funds from 401(k) accounts – has slowed down and we get into a “double bubble” economy. First we have the tech bubble, then the housing bubble as people chase temporary increases in stock value. It looks like the 401 (k) accounts are no longer a big enough annual contribution to continue to automatically propel the economy upward – which of course explains why John McCain wants to put your Social Security money in the stock market and provide another great injection of funds into an otherwise tired stock market. It’s all part of Johnny’s plan for sharing the wealth.

The thing is that neither Johnny nor George Bush give a hoot about why Social Security exists in the first place.  It was created during the Great Depression after people got wiped out in the stock market crash of 1929 and then found that when they reached retirement age they had absolutely no income.  Social Security is there to protect the average person from the avariciousness of the wealthy who would try to entice the innocent worker to gamble their life savings on the stock market. These scrooges have already been successful in doing this with the creation of the 401 (k) plans and now they want to do more of this by privatizing Social Security. John McCain and the rest of his wealthy cronies are not against wealth redistribution, in fact he and they have always been very active proponents of it -it’s just that it is your wealth that they want to share, not theirs.

Come to think of it, they’ve been pretty successful at it too, haven’t they?

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