Wednesday, 10/9, Market WrapUp (Derivative model breakdown?)

DJ Utilities took another hit today, down about 10%. Lowest level since '88.

I think the DJUA is telling us something:

Dow Jones Utility Average 1974 - present

Things ARE bleak. Ask anyone who has been out of work and had to look for a decent paying job. Jobs are scarce and you WILL be making less than you had before. My income has dropped back to 1996 levels. Kind of like the equities markets! Incredibly, real estate is booming. How is it that people think that buying over-priced houses is a good idea when the futures of their job and their neighbor's job are so uncertain? I guess its denial. Maybe insanity. Maybe just the Greater Fool Theory in action.

He means a crash (i.e., a return that is 10 standard deviations below the mean -- a rare event).

When the economic consequences of his inflationary, fiat money policies were pointed out to Keynes, his reply was similar to yours: "In the end, we'll all be dead."

Seems we have the same sorts of "statesmen" governing our affairs today.

Haven't checked the numbers, but I suspect that central banksters all over the world are selling gold out of their remaining reserves with both hands to keep the $ from going through the roof, displaying for anyone who cares to look that their fiat-money house of cards is tumbling down.

(I wrote this a number of years ago when things were NOT going well with the economy. Trust me: They WILL get ugly once again as man -- or certain men -- cannot resist playing God. We continue to violate the universal, immutable laws of economics at our great peril.)

Despite the apparent economic strength of the American economy, history proves that EVERY house of cards eventually comes down. And the higher the card house, the harder the fall when it finally comes. And when it does, the more freedoms we will voluntarily surrender to "restore order." It was the Founders' concern about this historically valid problem which prompted their attempt -- now ignored -- to keep American "money" sound and honest.) Dick Bachert 1998

* * * * * * * *

The Forgotten History of Money
This is the fascinating story of the efforts by certain of the Founding Fathers to prevent the economic distress we find all about us today. It is also a sad story on the basis that modern, "sophisticated" Americans have abandoned the corrective institutional mechanism that remains in place to this day. As you read it, think about a world with many fewer S&L, banking and political scandals and economic problems now considered the norm.
"Blood running in the streets. Mobs of rioters and demonstrators threatening banks and legislatures. Looting of shop and home. Strikes and unemployment. Trade and distribution paralyzed. Shortages of food. Bankruptcies everywhere. Court dockets overloaded. Kidnappings for heavy ransom. Sexual perversion, drunkenness, lawlessness rampant. The wheels of government are clogged, and we are descending into the vale of confusion and darkness. No day was ever more clouded than the present. We are fast verging on anarchy and confusion. (George Washington in a 1786 letter to James Madison, describing the effects of fiat paper money inflation then ravaging America in the pre-Constitutional period.)

"The annihilation (of the paper money) was so complete that barber-shops were papered in jest with the bills; and sailors, on returning from cruises, being paid off in bundles of this worthless money, had suits made of it, and with characteristic lightheartedness, turned their loss into frolic by parading through the streets in decayed finery which in its better days had passed for thousands of dollars." (Contemporary writer, Breck, 1786)

"Paper money polluted the equity of our laws, turned them into engines of oppression, corrupted the justice of our public administration, destroyed the fortunes of thousands who had confidence in it, enervated the trade and husbandry, and the manufactures of our country, and went far to destroy the morality of out people." (Peletiah Webster, 1786)

At the drafting of the U.S.Constitution, there were many "Friends of Paper Money" present. On August 16, 1787, when the discussion arose on Article 1, Section 8, the proposed wording was this: "The Legislature of the United States shall have the power to...coin money...and emit bills of credit of the United States."

A hot argument ensued on the power to emit bills of credit, which is another way of saying "printing paper money".

Here are the actual words James Madison wrote describing the debate in his diary: "Mr.G.Morris moved to strike out *and emit bills of credit.* If the United States had credit, such bills would be unnecessary; if they had not, unjust and useless.

MADISON: Will it not be sufficient to prohibit the making them a tender? This will remove the temptation to emit them with unjust views. And promissory notes in that shape may in some emergencies be best.
MORRIS: Striking out the words will leave room still for notes of a responsible minister which will do the good without the mischief. The monied interest will oppose the plan of the Government, if paper emissions be not prohibited.
COL.MASON: Though he had a mortal hatred to paper money, yet as he could not foresee all emergencies, we was unwilling to tie the hands of the Legislature [Legislature = Congress].
MR.MERCER:(A friend to paper money) It was impolitic...to excite the opposition of all those who were friends to paper money.
MR. ELSEWORTH thought this was a favorable moment to shut and bar the door against paper money. The mischiefs of the various experiments which had been made, were now fresh in the public mind and had excited the disgust of all the respectable part of America. By withholding the power from the new Government, more friends of influence would be gained to it than by almost anything else...Give the Government credit, and other will offer. The power may do harm, never good.
MR.WILSON: It will have a most salutary influence on the credit of the United States to remove the possibility of paper money. This expedient can never succeed whilst its mischiefs are remembered, and as long as it can be resorted to, it will be a bar to other resources.
MR.READ thought the words, if not struck out, would be as alarming as the mark of the Beast in Revelation.
MR.LANGDON had rather reject the whole plan than retain the three words *and emit bills*".

The motion for striking out carried.

Historian George Bancroft later wrote: "James Madison left his testimony that *the pretext for a paper currency, and particularly for making the bills a tender, either for public or private debts, was cut
off.* This is the interpretation of the clause, made at the time of its adoption by all the statesmen of that age, not open to dispute because too clear for argument, and never disputed so long as any one man who took part in framing the constitution remained alive."

ROGER SHERMAN(1721-1793)should be a name familiar to every American. As familiar as Washington, Madison, Jefferson and Adams. He is the only man to have signed all 4 documents surrounding the formation of the United States of America: The Continental Association of 1772, The Declaration of Independence, The Articles of Confederation and The United States Constitution. He was a Judge of the Superior Court in New Haven, Connecticut, serving that office with distinction from 1766 until 1788. He served as Treasurer of Yale University from 1765 to 1776. He was renouned for his high intelligence and unswerving honesty and was described by John Adams "as honest as an angel and as
firm in the cause of American independence as Mount Atlas." He served in the U.S.Senate from 1791 until his death in 1793.

Why is Roger Sherman*s name unfamiliar? HE WAS AN ENEMY OF PAPER MONEY!! In 1751, Roger Sherman and his brother William sued James Battle for paying a debt to their shop in New Milford, Connecticut, in depreciating paper currency. Over a period of 15 months, Battle had charged "divers wares and merchandizes" amounting to 129 pounds of what
Sherman assumed were pounds of Connecticut "Old Tenor", a stable currency whose value were well-preserved by taxation taking it out of circulation. But Battle assumed the debt was denominated in pounds of ever-depreciating Rhode Island currency, tendered in same, and the Shermans took a beating in the payment and sued for recovery of loss by depreciation. The Shermans lost when Battle argued that he was merely following the accepted custom of the day. In 1752, Sherman wrote his book "A Caveat Against Injustice or An Inquiry into the Evils of a Fluctuating Medium of Exchange" indicting UNBACKED PAPER MONEY.

It was this experience that Sherman brought to the Constitutional Convention and prompted him to rise on August 28,1787 and propose new, more restrictive wording to Article 1,Section 10. The standing version under consideration was worded this way: "No state shall coin money; nor grant letters of marque and reprisal; nor enter into any Treaty, alliance, or confederation; nor grant any title of Nobility." (From Madison’s Notes of the Convention) "Judge Sherman and Mr. Wilson moved to insert the words *coin money* the words *nor emit bills of credit, nor make any thing but gold and silver coin a tender in payment of debts* making these prohibitions absolute, instead of making the measures allowable with the consent of the Legislature of the U.S. Mr. Sherman thought this a FAVORABLE CRISIS FOR CRUSHING PAPER MONEY. If the consent of the Legislature could authorize emissions of it, the friends of paper money would make every exertion to get into the Legislature in order to license it." Mr. Sherman*s and Mr. Wilson*s motion was quickly agreed to and became the supreme law of the land.

Some additional quotations to ponder:

"All the perplexities, confusion and distress in America arise not from defects in the constitution or confederation, nor from a want of honor or virtue so much as from downright ignorance of the nature of coin, credit and circulation" (John Adams in a letter to Thomas Jefferson, 1787)

"I deny the power of the general government to making paper money, or anything else, a legal tender." (Thomas Jefferson)

"You have been doubtless been informed, from time to time, of the happy progress of our affairs. The principal difficulties seem in great measure to have been surmounted. Our revenues have been considerably
more productive than it was imagined they would be. I mention this to show the spirit of enterprise that prevails." (George Washington in a letter to the Marquis de LaFayette, June 3, 1790 AFTER the United States Constitution prohibited unbacked paper money at Article 1, Section 10)

"Since the federal constitution has removed all danger of our having a paper tender, our trade is advanced fifty percent. Our monied people can trust their cash abroad, and have brought their coin into circulation." (December 16, 1789 edition of The Pennsylvania
Gazette)

"Our country, my dear sir, is fast progressing in its political importance and social happiness." (George Washington in a letter to the Marquis de LaFayette, March 19, 1791)

"The United States enjoys a sense of prosperity and tranquility under the new government that could hardly have been hoped for." (George Washington in a letter to Catherine Macaulay Graham, July 19,1791)

"Tranquility reigns among the people with that disposition towards the general government which is likely to preserve it. Our public credit stands on that high ground which three years ago would have been
considered as a species of madness to have foretold." (George Washington in a letter to David Humphreys, July 20, 1791)

"It is apparent from the whole context of the Constitution as well as the times which gave birth to it, that it was the purpose of the Convention to establish a currency consisting of the precious metals.
These were adopted by a permanent rule excluding the use of a perishable medium of exchange, such as certain agricultural commodities recognized by the statutes of some States as tender for debts, or the still more pernicious expedient of PAPER CURRENCY." (Andrew Jackson, 8th Annual Message to Congress, December 5, 1836)

DESPITE WHAT YOU WERE TAUGHT IN SCHOOL, THE HISTORICAL RECORD IS CRYSTAL CLEAR: AMERICA WAS TO HAVE BEEN SPARED THE DESTRUCTIVE EFFECTS OF AN UNBACKED PAPER MONEY SYSTEM. MOST OF THE PROBLEMS WE FACE TODAY CAN BE TRACED TO WHAT ANDREW JACKSON CALLED "THE PERNICIOUS EXPEDIENT OF PAPER MONEY".

HISTORY TEACHES THAT AN "ARTIFICIAL" MONEY CREATES AN "ARTIFICIAL" WORLD WHERE THE PRICE FOR SOME ITEM...EVEN OUR MOST POPULAR WELFARE "PROGRAM"...CAN BE DEFERRED TO FUTURE GENERATIONS (OUR $11 TRILLION
NATIONAL DEBT) OR PAID WITH A "MONEY" CREATED OUT OF THIN AIR WHICH ROBS THE VALUE FROM THE MONEY WE MIGHT BE UNFORTUNATE ENOUGH TO HAVE IN OUR POCKETS AT THAT MOMENT (INFLATION). AND ONE THING YOU MUST REMEMBER
ABOUT INFLATION IS THAT IT IS NOT AN "EQUAL OPPORTUNITY" DESTROYER: THOSE FIRST IN LINE TO GET THEIR HANDS ON THE NEW MONEY ROLLING OFF THE PRESSES (THE MODERN FRIENDS OF PAPER MONEY) HAVE A CHANCE TO SPEND IT BEFORE IT LOSES ITS VALUE. THE LITTLE PEOPLE (THAT’S US, FOLKS!) FARTHEST DOWN THE LINE ARE THE ONES WHO FEEL THE FULLEST EFFECTS OF THIS DESTRUCTIVE PROCESS.
filename:$history

Dick Bachert
Norcross, GA

C'mon Laz., give us the big one.
tbird1

'Tis scary when the big, bold, centered WAGD is a featured request :-)

Sure looks like this thread is one of the few businesses that has picked up as of late.

"These market wrapups don't get the hits they did a couple months ago."
I get FreepMail from many people that say they read the Market WrapUp but do not post. It's true that the Bulls have gone into hiding but I ping over 70 people every night for this post. I think most of them read it...

Some don't post because they think that they don't "have enough knowledge."

I'll give the reason I don't read this. All I read is DOWN DOWN DOWN and I get so tired of DOWN, I ignore this thing. So if you want to pull me off your list go right ahead. They don't know that we are all hacks...(laughing)

"Sure looks like this thread is one of the few businesses that has picked up as of late."

At least it is interesting. ;0)

I can't remember seeing such a divergence between the DJUA and the long bond as there has been over the last few months.

"All I read is DOWN DOWN DOWN and I get so tired of DOWN, I ignore this thing."

I'm about ready to agree with you. I can tolerate the "DOWN DOWN DOWN," to some extent. I wonder how some few can even type with all the foam and drool falling DOWN on their "bleepin" keyboards!!!

The self-righteous certitude blaring in UPPERCASE in endless replies from the "Keepers Of Odd Knowledge" Society are way over the top and more than I can stomach. It's enough of a "Malox Moment" without some few being almost gleeful in shrilly shreiking like chicken little!

Are some of the people here so thrilled over their dire SWAG's that they would be happy to see this nation pulled down in a (what the hell was that eupheumism for a crash), followed by a depression? If so... that's the same prayer that's on the terrorists lips!!! (or the UC Berkeley protestor, yellin... "Bring it all DOWN, maaaaaaaannnn!!!"

Probably needs to be trashed and started from scratch.

Thanks for the wrap-up. Things are looking up a bit. This could be the bottom of the market.

Re #73

This crisis has been exacerbated by the idea that pulling out of overvalued market will ruin economy and the society in general. The more ominous the situation becomes, the more louder call for staying in market and stick to it no matter what. If many retreated 4-5 years ago, the damage can be serious but still much less than what we could have now. Each delay make things worse and make any thought of retreat painful to contemplate for some people.

The long stretch of denial brought us where we are now. Many here were simply speaking up because finally there is a visible vindication of their view that we have a huge bubble which could pop and do a lot of damage. Many of them have watched this market development with dismay as more and more people lose their mind and make things worse.

A lot of them got torrents of abuses heaped on for speaking up their mind. Some were booted out of this forum after nasty flame wars.

So called doom-sayers did not create this crisis. If they were heeded earlier, the crisis would have been more manageable. But they got shafted big time instead from all directions.

It is like calling mean-spirited those who predicted the doom of Soviet Union because such doom will bring about miseries to the Soviet people. According to your logic, we should not have been happy with the vindication of our views on Soviet Union which were constantly subject to unwarranted insults from the political left.

C'mon Laz., give us the big one.

We're all gonna die!!!

Once upon a time - in October of 1974, actually - the DJIA was at 640. Lurid advertisements warned that Dow 200 was likely. Sadness and misery were widespread, and everyone knew that stocks were doomed.

That was the low point for the markets, and even today the DJIA is more than 10 times what it was a mere 28 years ago.

Might I add that October and November have, over the past century, been the best months to buy stocks? But a good month to buy stocks implies an intermediate term bottom.

Are there bumps in the road ahead? Sure. But from a decade long perspective, I have great confidence in the American economy. Pick up some shares of a quality, no-load mutual fund and put them back for the long term. Ten years from now, you'll be glad you did.

"So called doom-sayers did not create this crisis. If they were heeded earlier, the crisis would have been more manageable."

Well said...