Sour Grapes Or Grapes Of Wrath?
November 14, 2012 by John Myers
The day after the re-election of President Barack Obama, the stock market tanked with the Dow Jones industrial average falling more than 300 points in the first two hours of trading and closing the day below 13,000 for the first time since Aug. 2. Oil prices also fell, losing almost $4 per barrel to less than $85 per barrel. Prices of every asset other than gold (which rose by $5 per ounce) also declined when the markets woke up to Obama’s second term. It is called deflation, and it is only going to get worse.
The markets are pure. They don’t have prejudices or preferences other than to make money in bull markets and retain money in bear markets. The day after the election, the markets voted — or, more to the point, stampeded — in a massive sale that saw every single stock in the Dow fall sharply in the first couple of hours of trading.
Democrats were quick to point out how the Dow almost doubled during Obama’s first term. The reason for that was an unprecedented amount of money injected into the capital markets and the policies of the Federal Reserve, which has effectively lowered interest rates to less than zero (yield on short-term Treasury bills pays less than the rate of inflation).
I expect more funds moving into Treasury bills despite their paltry rates of return. Investors, especially large mutual funds and even sovereign nations, are more worried about a return of their capital than the return on their capital.
For four years and with the Federal government now holding $16 trillion in debts, Obama has been playing for time with spending sprees that the Roman Emperor Nero could not have imagined.
In comparison to Obama, this information on Nero is interesting:
On July 18, 64 A.D. disaster struck, Rome was ravaged by a great fire that burned over three fourths of the city. Amid this disaster however Nero saw the opportunity to rebuild Rome greater than it had been before. His first task was the construction of a huge elegant palace. Some people believed that Nero started the fire so that he would have a place for his palace to be built. Nero saw himself losing favor with the public so he decided to blame the fire on the Christians.
Substitute Republicans for Christians and Obama’s insistence on blaming them for all of America’s ills, and you can see the parallel.
Yet while Nero’s taxes rebuilt Rome (until it was overrun by barbarians), the upcoming taxes from Obama — set to kick in Jan. 1 — will dismantle today’s modern empire, the United States.
There is growing pessimism over the prospects of Congress finding any common ground in order to stop a string of tax hikes and spending cuts from taking effect at the end of the year. Investors worry the so-called fiscal cliff scenario would send the economy back into a deep recession.
I don’t think that is going to happen. I believe the pyramid of money created during Obama’s first term plus the onslaught of taxes (his redistribution of wealth) and finally his insistence on green energy that is neither affordable nor practical are going to precipitate another depression.
Renowned 20th Century economist John Kenneth Galbraith warned that economic meltdowns inevitably reoccur after the collective living memory of the society has forgotten the errors of greed and avarice that lead to every panic and crash. It has been 80 years since the last financial implosion. The people who are directing the wealth of the Nation see the Great Depression just as they see the Roman Empire — something that had to be studied in order to pass history.
Even worse is the likelihood that Obama will victimize the United States because of his own personal ambitions and successes that have translated into giving him the Presidency for another four years. The difference between being a bad President, like Jimmy Carter, and a disastrous President will come down to those additional 48 months.
In the bestseller Suicide of a Superpower: Will America Survive to 2025?, Patrick J. Buchanan writes:
Obama is caught is a dilemma from which there appears no escape. Democrats are the Party of Government. They feed it and it feeds them. The larger government becomes, the more agencies established, the more bureaucrats hired, the more citizens receiving benefits or checks, the more deeply entrench the Party of Government.
For 80 years, this has been the Democratic formula for success. “Tax and tax, spend and spend, elect and elect,” was the pithy depiction of that policy attributed to FDR aide Harry Hopkins. And herein lies Obama’s dilemma. How does the leader of the Party of Government preside over an era of austerity, in which federal employees and federal benefits are radically reduced, to avert a default on the national debt?
The answer is Obama cannot do this. More to the point, he won’t even try. We have plenty of evidence of that from his first term which was terrible for the middle class that the President says he so strongly supports. The real winner is the government itself.
USA Today reported:
Federal employees making salaries of $100,000 or more jumped from 14% to 19% of civil servants during the recession’s first 18 months — and that’s before overtime pay and bonuses are counted.
Federal workers are enjoying an extraordinary boom time — in pay and hiring — during a recession that has cost 7.3 million jobs in the private sector.
The United States used to be the economic dynamo that powered the world. Over the past decade, America could not even power itself. More and more, we rely on borrowing ever greater sums from nations like China and Germany. Yet the strength for those two economic powers is also in decline. Last week, Bloomberg reported that the European Commission is predicting the eurozone economy will virtually grind to a halt next year as the debt crisis ravages southern Europe and gnaws at the economic performance of export-driven Germany.
The commission estimates that “the 17-nation euro economy will expand 0.1 percent in 2013, down from a May forecast of 1 percent. It cut the estimate for Germany, Europe’s largest economy, to 0.8 percent from 1.7 percent.” Meanwhile, China, whose economy has grown at double-digit rates for the past 25 years, has seen economic growth slow to just more than 7 percent.
This plus non-existent job growth in the United States, the onset of higher taxes, soaring debts and a severely devalued dollar tell me that the Obama Depression is fait accompli.
In high school, I had to read The Grapes of Wrath, a novel by John Steinbeck. I found it depressing, but I was affected more when I reread it a decade ago. Steinbeck’s plot could play out today. With the re-election of Obama, I believe it will play out over the next few years.
Action to take: Sell all stocks and bonds, including resource stocks such as petroleum and coal. (I wouldn’t be surprised to see oil below $60 per barrel in the next 18 months and the Dow at less than 8,000.) Convert small amounts of money into cold, hard cash stored in a safe place. I wouldn’t trust large amounts of money to banks, so consider putting anything over $10,000 into three- or six-month Treasury bills. You won’t make money, but you won’t lose your principal. Keep some physical gold on hand if you can afford it. I think bullion might retreat over the short-term, but some gold tucked away is always an insurance policy. If things get extremely bad, only gold prices will rise. As for silver and platinum, I would be an outright seller of both.
Yours in good times and bad,
Editor, Myers’ Energy & Gold Report