Posted on 01/21/2010 12:32:55 PM PST by rabscuttle385
I have a friend that tends to express his ideas about everything in the jargon of a securities trader. Of course, this is probably because he has been a very successful trader, both in bull and bear markets, for many years. "Every trend in history, even liberty, can be charted like a stock," he has often observed. I tend to agree.
As any trader will tell you, bull markets do not go straight up and bear markets do not go straight down. Rather, they tend to meander in the direction that they are headed. During a long-term bull market, a trend will have major pull-backs and long periods of consolidation. It is the experienced trader that knows how to "buy low and sell high," taking advantage of the back and forth action of a stock or a sector on its journey. However, even wiser is the investor that can spot the trend at the beginning and keep buying lows without having to attempt to time the market and sell at all. The legendary Jim Rogers has often said that he is "the world's worst short-term trader." He would rather buy something that he can own forever than buy with the intention of having to sell.
Gold has been the most spectacular bull market over the past decade. Like all trends, it had periods of dramatic rise, followed by sharp pullbacks that gave back a portion of the gains, and then long periods of consolidation. Once a consolidation was over, another dramatic rise in price followed. The first run began at the beginning of the decade, with gold selling under $300 per ounce. It ran up to over $700 per ounce in 2006 before pulling back sharply under $600. The price then consolidated there for an entire year before the next leg up began. That second leg ran all of the way over $1,000 per ounce before pulling back to the low $700's. Again, there was a long consolidation before this latest run, which will take gold we know not where.
All of the movements in the price have explainable reasons. When the fundamentals are stronger than the actual price of the security or commodity, investors begin buying. Once the price starts to move up, traders begin wading in to make profits on the movement of the price, both up and down. At any given time, there are those who are long and those who are short. Contrary to the nonsense you hear from government officials and their kept economists, short sellers play a vital role in keeping the market healthy. When a stock, commodity, or sector beings to fall in price, short sellers help stabilize that price because they have to buy the stock that they sold short to cover their short sales.
You will often hear the wisest of investors say that a trend is about to reverse when there is no longer any disagreement about it. When everyone is positive on a stock or a bull market, it is about to do down. When everyone is negative, it is about to make a run up. When all of society agreed that the NASDAQ would never go down -- when every conversation in every coffee shop, supermarket, or dinner party revolved around the wonderful opportunities in technology stocks, wise investors knew it was time to get out.
Of course, this is not some sort of market magic or voodoo. It is simple cause and effect. When there are few sellers in a market and many buyers, the price is going to be inflated far beyond its value. From an opposite standpoint, when short sellers are forced out of the market in a "short squeeze," there is now nothing to stop the price from falling precipitously once it starts to fall. With no short sellers covering their shorts, the price falls like a stone. Thus, at the end of long bull market, a bubble usually develops, characterized out by a final, parabolic "blow off top," followed by an equally dramatic drop in price.
The past 100 years has been a bull market for government. While the seeds of the run were sown in the mid-19th century, the bull market in government really began at the turn of the 20th century. The first signs of the bull could be spotted as early as the (Teddy) Roosevelt administration, but the real advances came under Woodrow Wilson. The income tax, the Federal Reserve, and the 17th Amendment were advances in government that made gold's move from $275 to $700 look tame.
There was then a period of consolidation during the so-called Roaring Twenties. It was not so much a pull-back of government as a slow-down in the pace of its growth. Under three Republican presidents, the government bull market consolidated as Americans convinced themselves that they had restored a free market (because the Republicans said they did, despite their actual support of big government fundamentals).
The next big move came during the Great Depression. While the stock market and the real economy went south, government went on another tear as FDR fully instituted the modern welfare state, the fascist regulatory structure, and took America to war. After 16 years of absolute misery, even the most enthusiastic government bull must have thought it was time for a pullback. It was brief, but it came.
Americans again elected a Republican president in the 1950's and convinced themselves that they had restored the American system and rejected the big government philosophy of FDR and his liberals. However, this, too, was only another consolidation. In actuality, it was Eisenhower that paved the way for LBJ's Great Society by creating the Department of Health, Education, and Welfare (now the Department of Health and Human Services). The 1950's are fondly remembered as a period of (mostly) peace and prosperity for America. It was only another consolidation period for government's century-long bull run.
The next great move came during the 1960's, when LBJ again lead a tremendous run up for government. Medicare and Medicaid, the other two entitlement monsters that will eventually combine with Social Security to bankrupt the United States, were born during this fabulous period for big government. The move ran right through a two-term Republican presidency (counting Ford's mop-up after Nixon's impeachment) and into the Carter administration.
Most bull markets have two legs. Some have three, but usually no more than that. It seemed like that axiom would hold true for government as Ronald Reagan gave his first inaugural address. "In this crisis," he told us, "government is not the solution to our problems -- government is the problem. It was the greatest inaugural speech of the 20th century. The government bull market was over." Or so we thought.
We now know that government didn't get smaller during the Reagan years, but much bigger. However, there was at least a feeling of negativity about government during the Reagan-Bush years that even forced Bill Clinton to pass himself off as a free-market friendly centrist. It was another consolidation period, with a seemingly impossible fourth leg to follow.
We are in the midst of that fourth leg now, as government makes a more precipitous run up than at any time in history. In a few short years, the government will have nationalized the banking, auto, and health care industries. There are no more government bears to be found anywhere, either among Republican or Democratic politicians or (let's face it) among 99% of the citizenry. Outside of a tiny constituency of libertarians, paleo-conservatives, and anarchists, there are absolutely no non-believers in government left. The rise is accelerating too fast for any protest or community organizing to stop. It's a short squeeze as the government bull stampedes.
While this might be a terrifying period for anyone remotely interested in living their own life, there is much reason to be hopeful. Like any bull market, government is experiencing a blow-off top. The curve has bent straight up, with nary a short to be found in any political party or in any bowling alley or church social. Americans have convinced themselves that government either "should" or "must" do something about absolutely everything. We should expect the run to pick up speed, as government invades every aspect of our lives. Never before -- not even in the most barbarous ages -- has government made such enormous claims upon the life, liberty, or property of its subjects. Medieval serfs were taxed less. Ancient slaves were freer. Not even the brutal Romans killed with such efficiency and on such a scale.
For all of these reasons, it is about to end. With almost uncontested faith in government, its role has expanded so far beyond what it is actually able to deliver that soon we will see a fall that will make the real estate meltdown look like a mild pullback. Having road the last leg of the move and squeezed out the last of the shorts, government is about to remind everyone that it not only should not be providing what it is attempting to provide, but that it cannot provide it.
At the moment that the whole world has accepted that government will centrally plan all of the economy, take care of its citizens from cradle to grave, and rule a worldwide military empire --all with money that comes from nowhere -- at that very moment the age of government will end. The end is going to come fast, too, just as the end of the bull markets in technology stocks and real estate. Ben Bernanke will be telling government bulls that there is nothing to worry about long past the moment when his time is up. That's how fast it's going to be. Like any market, the moment when every bear is gone is the moment that the bull run ends.
This will not be a pleasant experience. No correction ever is. Fortunes will be lost (albeit mostly fortunes dishonestly made), but innocent people will be hurt, too. All of society will come to the realization that government really can't provide anything, beyond the brute force that is only justified in self defense. It may take a generation to repair the damage. It's going to be rough.
However, we should remember one thing. When a bubble deflates, the capital that is not destroyed seeks another refuge. When the NASDAQ melted down and the U.S. dollar began to implode, the smart money fled to gold. It will be no different during the bursting of the government bubble. With a precipitous fall in government, there is an equally dramatic rise in its opposite -- liberty.
Americans will have to forego the ill-gotten gains provided by government and do with less while they rebuild. That is unavoidable. While the NASDAQ bubble actually started on a real foundation the fundamentals of the government bubble were never real. It was all an illusion and it is five minutes from ending.
It's going to be great.
Copyright © 2010 Tom Mullen
tearing this edifice down will be fun...
Like pickin' a scab!
yeah or squeezing a pimple..
That’s always fun!
good one.....
The true sign the gubbermint bubble has burst is when you see pension contracts (unfunded liabilities) opened up and renegotiated. It might take bankruptcy to do it. Yes your county or state might have to declare bankruptcy.
With the Imperial Federal government it will take something more powerful
Ah but what is "soon"? Look at a graph of NASDAQ from let's say early 1994 to mid-1998 -- it nearly tripled in that period, exponentially, showing every feature of a bubble that absolutely couldn't last one day longer. But from there it more than doubled again in half the time.
I fear it's way too early for us to start thinking that government overreach is peaking. I do believe that we are at a tipping point, but it's a tipping point of whether we believe government is working for us or working against us, and whether exercising our free-speech and voting rights is the best way to deal with the crooks in DC and state governments, or if people are going to start exercising other Constitutional rights instead.
The government bubble burst in Eastern Europe in 1989. What’s the American equivalent of the Berlin Wall falling?
This article is gibberish.
It fails to notice that scalebacks in scope of government - no matter how desired - usually require force of arms on one scale or another.
I, for one, can and will resist the sort of takeover of my life that the author presumes is inevitable. By force of arms if necessary. I'm not alone.
III
You can see what’s coming.
Ben Bernanke-—
No audit, no confirmation.
The Fed is a private bank with public powers
The NY Fed has made the case they answer to no one in Government. Only their member banks. And some of their member banks are the ones who crashed our markets with derivatives
I believe no one at the NY Federal Reserve is appointed by the Federal Government, the President and Congress. Bernanke as head of the Fed is
Largest regional Federal Reserve Bank
Since the founding of the Federal Reserve banking system, the Federal Reserve Bank of New York in Manhattan’s Financial District has been the place where monetary policy in the United States is implemented, although policy is decided in Washington, D.C. by the Board of Governors of the Federal Reserve System.
The New York Federal reserve is a private bank, the largest, in terms of assets, and the most important of the twelve regional banks.
Operating in the financial capital of the U.S., the New York Fed is responsible for conducting open market operations, the buying and selling of outstanding U.S. Treasury securities. Note that the responsibility for issuing new U.S. Treasury securities lies with the Bureau of the Public Debt.
In 2003, Fedwire, the Federal Reserve’s system for transferring balances between it and other banks, transferred $1.8 trillion a day in funds, of which about $1.1 trillion originated in the Second District. It transferred an additional $1.3 trillion a day in securities, of which $1.2 trillion originated in the Second District.
The New York Fed is also responsible for carrying out exchange rate policy by buying and selling dollars at the direction of the United States Treasury Department. The New York Federal Reserve is the only regional bank with a permanent vote on the Federal Open Market Committee and its president is traditionally selected as the Committee’s vice chairman. The current president is William C. Dudley.
The New York Fed opened for business on November 16, 1914 under the leadership of Benjamin Strong Jr., who was previously president of the Bankers Trust Company. He led the Bank until his death in 1928. The Bank grew rapidly during the early years, bringing about the need for a new home.
I don’t know I agree with this article and the our representatives gave them the power and CAN take it away.
http://thedailybell.com/681/Nelson-Hultberg-The-Fed-is-a-Fascist-Cartel.html
California has overdosed on pensions....
” And some of their member banks are the ones who crashed our markets with derivatives”
I don’t believe that’s accurate. The derivatives market was created by non-member financial firms, in what was called “the shadow banking system”. This financial sphere was not subject to Federal Reserve regulation, and some of their innovations were the ones that destabilized the world financial system.
I believe it is accurate to say that the snake oil product of derivatives was a product demand that was created by banks lending under stupid government pressure they did not have the will power to avoid. They wanted to buy pretend insurance and that is what they got.
The banks that didn’t want a pat on the head and praises from Dodd and Franks looked bad to the leftist media but survived with less damage.
“I believe it is accurate to say that the snake oil product of derivatives was a product demand that was created by banks lending under stupid government pressure they did not have the will power to avoid. “
Mortgage derivatives were invented in 1994 by the London office of JP Morgan. They were developed there precisely because American regulations had exactly zero influence. This is all described by Gillian Tett in her excellent book Fool’s Gold. Tett was one of the very few outsiders on the scene to witness the birth of the derivatives market.
JP Morgan London was not a retail bank. It was strictly an investment bank. It was not subject to American law or regulation. American government pressure had absolutely nothing to do with the development of the mortgage derivatives industry. It was entirely the result of financial innovation in the pursuit of a new profit center. And moreover this occurred in 1994, five years before Clinton signed Gramm Leach Bliley which expanded CRA to cover some American bank holding companies.
The government’s meddling in the lending industry through the CRA isn’t a good thing. But the current attempt by some pundits to blame the CRA for the global credit bubble is ignorance on a grand scale. If every CRA loan ever made had failed no one would have paid much attention because the numbers were too small. The huge volume of risky lending came from Wall Street financial innovators who were seeking to develop high yield paper in the mortgage market. That is where the numbers were in the trillions of dollars. That is where regulation didn’t exist and it is where high risk innovation came back to bite the world financial markets.
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