Planes, Trains And Stock Markets
September 21, 2011 by John Myers
Autumn is nearly here, and I am reminded of stock market crashes and one near plane crash.
The September equinox marks the anniversary of when my Uncle Richard and I took off from the homestead runway in his Cessna 172. No sooner were we airborne than we heard the stall horn howl inside the cockpit. The ear-piercing squeal told me something I already knew: Our airplane was falling from the sky. In scant seconds the plane’s landing gear slammed onto the wheat field.
No sooner were we down than the airplane bounced skyward. A lucky gust of wind grabbed at the wings; and, almost as quickly as we fell, the plane began to climb.
Later, I realized how fortunate we were. It wouldn’t have taken much to turn that propeller into a plow.
I haven’t had such a close call since, yet I have a lot of anxiety these days — not about flying, but about the stock market.
The first thing I do each morning is turn on the business channel to see if the Dow Jones industrial average is having another bad day.
You don’t have to have an MBA to know that the air keeping the stock market aloft is growing frightfully thin. Worse yet, the people flying “our” plane are acting reckless. So, each morning, I brace myself for the bad news that Wall Street’s stall horn is blaring. There won’t be a damn thing the President, Congress or corporate leaders can do about it.
Brace! Brace! Brace!
The one good thing about the terror I felt that day in the plane is that it was over quickly. The worries I pack around with me nowadays are different because I can’t shake them.
I suspect that some of you feel like I do: that with President Barack Obama at the controls, the country is spiralling out of control.
But our problems are deeper than having Obama as President. The economy is providing no lift to the stock market, and the nation is carrying so much debt that I don’t believe changing pilots will help much. I don’t think that a true Conservative or a Tea Party candidate in the White House in 2012 will save us. So hold on tight; we are going down.
The Fear of Flying
While I am no engineer, I understand a few things about airplanes. They have to be flying fast enough or else they stall. Right now, the stock market — a leading indicator — is telling us that the economy is stalling.
The past summer has been filled with bad news, the current economic slowdown, financial stress and political tensions in Europe and the U.S. are in fact the logical extension of the first leg of the crisis that hit in 2008-2009. There is one major difference, though: the policy tool box to deal with financial and economic shocks is now significantly smaller than it was in 2008. Interest rates are at 1.5% in Europe, 0.5% in the UK, and 0.25% in the U.S.
In Europe, banks own large amounts of sovereign debt, which creates the possibility of a self-fulfilling crisis of bank runs and bankruptcies if fears of default on sovereign debt leads the interest rate on this debt to increase, causing a default and bank runs.
As you can see, interest rates have been cut to almost zero, and central banks can’t make money any more affordable than it is. That leaves governments with one option, injecting even more money.
Money Needs Velocity
Let me use the airplane analogy one last time. A plane needs to be going fast enough for the wings to provide lift. The economy needs velocity, which is money moving throughout the economy. If Washington pumps a lot of money into the economy but nobody spends it, it won’t provide any lift to the economy.
The United States has lots of money sloshing around. The Federal government has injected well over $1 trillion into the economy in the past three years. But the government cannot get people to spend or lend money. If these huge injections of capital get stashed in mattresses, the economy stalls. That is what is happening.
This is reflected by the consumer confidence graph below. It shows that only once in over a decade has consumer confidence been lower than it is now. Obama’s pledge to uplift America and bring new confidence to the country is nothing more than an empty promise.
Given the multitude of economic problems facing the United States, plus a real lack of leadership in the White House and Congress, I believe we are headed for tough times. September and October historically have been bad for stock investors as far back as 1929. As an investment writer, I have experienced market crashes three times: in 1987, 1989 and 2008. I think there is a good chance the stock market may crash again in the weeks ahead.
Action to take: Continue to hold precious metals and, in some cases, stocks that are leveraged to rising prices for real assets (petroleum, gold and other hard asset companies). Liquidate all other U.S. paper instruments. U.S. interest rates may soon spike, so I urge you to sell bonds other than cash you have tucked away in three- to six-month U.S. Treasury bills.
Next year is shaping up to be a bad year for U.S. paper instruments. Anxious investors are already disrupting the markets. I would not be surprised to see U.S. stock indexes fall below their March 2009 lows (the Dow industrials hit 6440). Don’t be surprised by a 50 percent correction in blue chip stocks. Long-term bonds — with maturities of more than 10 years — may fall in equal measure.
Yours in good times and bad,
Editor, Myers’ Energy & Gold Report