Market Watch

There is little positive to say about the market, or the future of the market, at this time. The market remains overpriced; the outlook for balancing federal (and state) budgets is gloomy; there remains no action taken to close the gap between spending and taxes taken in because politicians are now scared to death; and unemployment remains untenably high. The market “top” has been formed, and the next move for the Dow is to see whether it will recede to its March 9, 2009, closing low of 6,547. If the Dow breaches 6,547, it is impossible to predict where it may end; however, bear markets end with values that are about half of where the market is today. 

You mentioned that this market is still overpriced, and, in fact, that the Dow is almost double what historically low bear-market values reach. Did I misunderstand?
No. Look at the chart below.

Dow Jones Industrial Average
Year of DJIA Low       Yield on DJIA
1931                          10.9%
1940                           6%
1974                           6.1%
1981                           6.4%
2010                           2.7%

Discounting the 1931 yield of 10.9%, and assuming the yield in this bear market could reach 6% as in 1940, 1974 and 1981, this current market would be selling at 4,550 points. That is considerably below the low posted last year of 6,547. 
 
That is a huge drop from the current market of around 10,000 points. Why isn’t the market considerably lower now?
Among Wall Street, the federal government’s stimulus funds and the Federal Reserve’s policy of flooding the economy with freshly made dollars, the market has been prevented from acting “freely.” Over a period of time, however, phony Wall Street projections, continuous manufacturing of money by the Fed and excessive government expenditures will catch up with any manipulation in the market, and true values will be attained. At that time, a great buying opportunity for stocks will exist.
 
We have been advised by the media that recovery is on the way. Market Watch seems to question that. Is the market going down or up?
There is no crystal ball in the world that can answer the question. With continuous deficit spending, the federal government’s continuous borrowing of money from the Fed (which creates money out of nowhere), with continuous unemployment and with lower tax income for local, state and federal governments, there are more reasons for the market to go down than up. What causes the market to shrink is the view by the investing public that corporate earnings will go down or remain where they are. Investors know that the government will attack corporate and individual earnings to close the deficit.
 
Can we at least put an amount of time on this bear market and estimate intelligently when it will be over?
The duration and extent of a bear market can never be predicted. As government interference in the economy increases, bear markets run further in duration than in times with less government interference.
The reason for this is simple: It was never the intention of the Founding Fathers to have the government manage the economy. They knew it never had worked before. Furthermore, since the government has become involved in “managing our economy,” bull markets and bear markets are unnecessarily extended.
 
Is there really a solution from the mess our government has got us into? 
Go back to the Constitution and use it as the law of the land. Get rid of the Federal Reserve System that was signed into law by President Wilson late the day before Christmas in 1913, when nobody else was in Washington. Reduce the size of government substantially. Do away with the income tax, and make government live within its means with no borrowing, except in a state of emergency, as in the Constitution. 
 
It seems unfair for 50% of taxpayers to pay no income taxes at all and others to be paying income taxes at a rate of 30% or 40%. How did income taxes get that high when the Bible suggests that we tithe to God “only” 10% of what we produce?
Good question. The Founding Fathers used the Bible (in particular, parts of the Old Testament) to guide them in creating the Constitution. Hence the phrase “Under God” in our founding documents. All but one of the signers of the Constitution were known to believe in God. They wanted limited government, and they were heavily influenced by three things.

1. In Chapter 17 of Deuteronomy, God tried to tell his people (the Jews) that a king was not necessary. All that was necessary was to follow God’s laws. God decided he would only need judges to adjudicate insignificant disputes. He goes on to say in verse 16 that if the people insist upon a king: “The king must not acquire great numbers of horses (wealth) … he must not take many wives, or his heart will be led astray. He must not accumulate great amounts of silver and gold … he is to write for himself, on a scroll, a copy of this law … It is to be with him and he is to read it all the days of his life so that he may learn to revere the Lord God and follow carefully all the words of this law and these decrees; and not to consider himself better than his brothers … ”

2. In 1 Samuel, God said, in response to his people insisting upon a king: “This is what the king who will reign over you will do: He will take your sons and make them serve with his chariots and horses, and they will run in front of his chariots. Some he will assign to be commanders of thousands and commanders of 50s, and others to plow his ground and reap his harvest, and still others to make weapons of war and equipment for his chariots. He will take your daughters to birth healers, cooks and bakers. He will take the best of your fields and vineyards and olive groves and give them to his attendants. He will take a tenth of your grain and of your vintage and give it to his officials and attendants. Your menservants and maidservants and the best of your cattle and donkeys he will take for his own use. He will take a tenth of your flocks and you yourselves will become his slaves. When that day comes, you will cry out for relief from the king you have chosen.”

3. In 1 Kings 10, there is a summary of the story of Solomon. As a youth, Solomon was devout, and he minded the Lord. He was the author of Proverbs, the Book of Wisdom. In accumulating chariots and horses, a large harem and incredible wealth, Solomon was parroting God’s warnings about a king. The bigger Solomon’s court became, the more the people were taxed. Excessive taxation created unrest.
During his reign, Solomon forgot about God and allowed pagan influence to enter his court through his many wives, thus accelerating the disintegration of his rule. 

The above helped influence the Framers to specifically forbid a tax on income. Income taxes lead to large government and war. When the amendment creating the income tax to the Constitution was passed in 1913, it was supposed to be a tax of 1% to 7% on income of $20,000 and up (more than $200,000 today). Congress used a top end of a 7% tax in speeches to ensure that nobody would pay as much as the traditional 10% tithe to God annually.

Conclusion
Lessons from Old Testament stories influenced the restrictions on government written into the Constitution. The restrictions in our Constitution violated by the federal government have all caused government to get bigger and more invasive. The original plan was to keep government small so it could not be invasive.

As long as our economy is influenced by the federal government and the Federal Reserve, the market will under perform because so much of the country’s resources are consumed by government. Government doesn’t produce anything but taxes, and every tax dollar spent is money that otherwise would be spent by the private sector. We’re becoming more like Europe every decade. Spain, Portugal, Greece, Italy, France and England are broke. So is the U.S., but few people will sit down, do the math and figure it out. 
It looks as if the stock markets are starting to do the math for us!

Caveat Emptor.

George Rauch, Longboat Key, is chief executive officer of Bradenton-based General Propeller and a former Wall Street investment banker. E-mail George Rauch at [email protected].