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Longboat Key Wednesday, Dec. 2, 2009 8 years ago

Market watch: Common sense says 'no' to a new bull market

by: George Rauch

There have been some important technical developments in the stock market since the last Market Watch article. On Nov. 16, the Dow Jones industrial average set a new “post recovery” high, and the Dow transportation average confirmed that high with a new high of its own on the same day. Under the Dow “50% rule,” if the Dow industrial gains more than 50% of the losses back from its high, and if that gain is confirmed by a similar gain in the Dow transports, the primary trend of the market is up. The idea, however, of this really being a new bull market should be accepted with great caution. 

“Caution stocks” are as follows: Abbot Labs (ABT); Bank of Hawaii (BOH); Clorox (CLX); Community Trust Bankcorp (CTBI); Johnson & Johnson (JNJ); Phillip Morris International (PM); Proctor and Gamble (PG); and Sysco (SYY). They are all A+ or A stocks (A- and below graded stocks should be avoided because of their increased risk in this market), they all yield 3% or more and they all sell at 15 times earnings or less.

Finally, they have an astounding 12-year record of increasing their dividends at a 10% compounded annual rate. These companies have an international presence, and they will prosper from overseas earnings.

In general, however, the skeptical investor should look with a wary eye at the stock market. It has the appearance of another bubble. Remember that Wall Street was “wiped out” several months ago. And keep in mind that Congress, Bloomberg and others have put pressure upon the Fed to produce evidence concerning where $2.1 trillion in Fed bailout funds went. The Fed is resisting that with all of its might, as it is resisting with all its might a bill in Congress requesting an audit of the Fed. If it is our “central bank,” why can’t we know where the money went? 

The answer is pretty simple if one strings a few facts together. Lehman Brothers and Bear Stearns have both gone out of business, leaving a huge number of clients to be divided up among Wall Street banks that are left; the Wall Street banks that are left are reporting huge profits (and that could not happen if one’s capital were “wiped out” and not replaced); the largest amount of contributed money for presidential, senatorial and congressional races comes from Wall Street (and it makes a lot of sense for our high ranking politicians to bail out the people who are responsible for putting them in office); the public has always proven so uninformed concerning these complex government financial maneuvers that if the government simply ignores and fights all requests for awhile, it will go away; and, mostly, the people in control of the Fed don’t want us to see what they’re up to because there, literally, could be a revolt.

Economic disconnects
The long-term outlook for our economy will remain cloudy until some of our economic disconnects are rectified: 

1. U.S. public debt of almost $12 trillion cannot continue to increase. Congress must stop deficit spending.

Much of that money is owed to other countries who purchased our bonds, and that represents a transfer of wealth from the U.S. to other nations. All this debt has been created to buy votes for politicians through promises of welfare, which is where all of the money has been spent. There are no bricks and mortar from this debt, no machinery, nothing to enhance future economic value. There is nothing to give us a future economic return — only a further future drain. We cannot borrow money in our own families for relatives and friends, give that money to them for nothing in return and expect to remain prosperous. That is exactly what our federal government has done to us.

2. Follow the Constitution’s mandate requiring our money to be gold or silver “specie” (Article I, Section 8). The phrase “not worth a Continental” was coined, because of all the paper money issued to fight the War of Independence and the attendant inflation which reduced the value of the Continental dollar to nothing. We have the same thing here today. The depreciation in the purchasing power of our dollar is not a result of anything other than a lack of spending discipline by our government, the very entity that is entrusted to protect our currency.

When the Brenton Woods Agreement on currency was reached in the 1940s, every single dollar issued could be redeemed for gold or silver because we had that much in our vaults. That’s where the expression the dollar is as “good as gold” came from, because it was. But no longer. At Brenton Woods we agreed to peg the dollar at $35 an ounce, and if we priced our gold today, based upon fully backing all of our dollars in circulation, gold would be $7,648 an ounce! (From Dylan Grice, analyst at Societe Generale, based upon U.S. government holdings of $261.5 million ounces of gold.)

3. Do away with the Federal Reserve System. The Federal Reserve System was promoted to the public in 1913 as being necessary to protect the nation’s small banks from greedy Wall Street operators. Those who fought the creation of the Fed before it was founded in 1913 did so because they felt it would result in a consolidation of power among a few people. That is precisely what has happened. Money control is people control, and we have a small number of people making decisions that millions of us will pay for forever. And they’re doing it in secret, with the power to create money. The Constitution requires that only Congress can create and coin money.
The solution
The real long-term solution to these problems is to return to the “dictates” of our Constitution. Too much power is invested in government, which has resulted in a huge loss over individual liberty. One has to love President Woodrow Wilson’s quote a few years after he signed into legislation the Federal Reserve Act of 1913: “I am a most unhappy man. I have most unwittingly ruined my country. A great industrial nation is controlled by its system of credit. Our system of credit is concentrated. The growth of the nation, therefore, and all of our activities are in the hands of a few men. We have come to be one of the worst ruled, one of the most completely controlled and dominated governments in the civilized world, no longer a government by free opinion, no longer a government by conviction and the vote of the majority, but a government by the opinion and duress of a small group of dominant men.”

The Fed is a private banking cartel. It was created by bankers, and it is run by bankers, for the benefit of bankers. It is a secret organization, funded by the public and supported by the public, and it refuses to allow the public to audit it.

Until we make our government return to “sound money,” and until we get rid of the Fed, a small group of people will remain in control of the money supply. They will have the power to influence the stock and bond markets as they have in the last 40 years. And they’ll continue to get bailed out by the taxpayers for their stupidity when they get things messed up.

The rest of us will be left with the crumbs for profits — and all of the risk. Don’t expect any drastic changes in the opportunity to make money in the stock markets until these disconnects are addressed.

Caveat Emptor.
George Rauch, Longboat Key, is chief executive officer of Bradenton-based General Propeller and a former Wall Street investment banker.

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