Special Report: 7.23.2009

Posted by Web Master on Thursday, July 23, 2009

Inspired by Rod Serling

By Joe Salimando

Welcome to the Twilight Zone. Strange things happen here with a frightening amount of regularity. Consider:

1. Forever, we’ve been told that “buy and hold” was the right stock-market investing strategy. Except for this little thing: See the chart of the past 10 years. So: You heard that stocks return 7% to 10% over the long run and beat inflation. Instead, you got beat.

2. We’ve been told by politicians (of every stripe), as well as other geniuses, that they could manipulate government policies and create jobs. Some names you might remember include Clinton, Rubin, Summers (yes, him), Greenspan, Bush. Yet (see chart below) all the private-sector jobs created in the past 10 years have been lost.
   

Fewer than 10 years ago, Alan Greenspan made a speech about what the Federal Reserve Board would have to do when there were no longer any U.S. government bonds. Really (think for just a minute about that!). At the time, it appeared that budget surpluses would go on forever. As the Fed manipulates supposedly free markets by buying and selling T-bills (and T-bonds), the elimination of government debt—perhaps as soon as 2011-15. Yes, the supposedly smartest man in the country, The Maestro, thought we’d run out of U.S. government debt!

4. Homes were the safest and best investment a prudent family could make. You owned a little piece of America (the land) and you owned the place that you lived. That concept has been marketed at people for decade—by the real estate business, by society in general, by consumer advisors, and (heck) by members of your family. How, precisely, does that feel right about now? [Note also that housing’s problems include stupidity in media reporting.] For perspective, see the graphic below.

 

5. As citizens of a free country, we once mocked “show trials” and the general abuse of justice in other countries. We had reason to, actually. But now, we’ve been through scandal after scandal, with few (if any) paying. As an avid consumer of information, I’ve been waiting to find out precisely what information was on the hundreds of pieces of paper that the Arthur Anderson people shredded on behalf of Enron. Now, I’m also waiting to hear where the tens of billions that Madoff stole ended up (no one has said, have they?). No wealthy person has been ruined in the latest mess; few executives have lost their jobs.

6. For what seemed like forever (across the industry’s generations, literally!), price fluctuations in copper were unimportant in electrical distribution. Then, all of a sudden…they were. Even today, with copper hovering above $2/pound—down 50% from the high hit twice in the past few years—the thing is selling for 300% of its 2001 average. Hey, 2001 (a peak year in electrical construction employment, by the way) wasn’t all that long ago!

7. Government support was said to be very bad for poor people. Grouped under the heading of “welfare,” government support programs (costing, in the aggregate, billions and billions) were, we heard, ruining the country. Finally, a Democrat (Bill Clinton) promised to “end welfare as we know it.” More recently, the federal government came up with $12.8 TRILLION to back up businesses. Our constitutional republic has ended up owning GM, backing Chrysler, owning AIG, backing Citibank, and providing deep financial aid to numerous financial institutions, money market funds, and more. One can only conclude that welfare is very bad for poor people but very good for well-to-do people.

It’s NOT unreasonable if you sometimes sit back and think: What the heck is happening? Is everything I ever knew totally wrong?

Reversion to the Mean

A lot of what appears to be mysterious results from the simple fact that most of us don’t know anything about mathematics, economics, or history (recent or deeper into the past). For example:

• During my lifetime, the stock market was flat from 1966 to 1982. I realize that I am older than dirt, but there are others who remember this. Why has the Baby Boom generation forgotten? People were too busy protesting Vietnam, living through the “We” decade, and being unemployed (in the early 1980s) to think about investing.
  
  

• What goes up actually does go down. When housing prices went bananas in the first half of the 2000s, it was a sure sign that—eventually—they would revert to the mean (which means they would come back to reality). It wasn’t clear how that would happen; possibilities included a steep, rapid dive, or a slow and long decline, or stagnation for decades (with prices eventually “catching up” with the mean by staying flat for maybe 20 years). In other words: The what was a certainty; the how and when were uncertain. Everyone in the housing market (real estate brokers, home builders, etc.) knew this.

Economic History as Seen With Clear Ears

Booms and busts are common in capitalism. There’s an excellent book (which you should read) called Extraordinary Delusions and the Madness of Crowds. Boom/bust cycles go way, way back in history. Let’s forget ancient history, or the South Sea Bubble, or the Tulip Mania, and just focus on the United States.

There were numerous booms and busts in the 1800s and a doozy in 1907. Here’s the history since then:

1913—the Federal Reserve Board is created, with the specific assignments of eliminating the boom/bust cycle and maintaining the U.S. dollar’s value. In the past 96 years, the dollar has lost 95%-plus of its value.

1929—16 years later, the worst bust anyone wants to think about, The Great Depression, take place.

1941—Adolph Hitler and a bunch of crazy Japanese bail the world out of the Depression. Review what happened in the U.S. in that period, and you’ll find that the U.S. government seized an enormous amount of control over the U.S. economy. Sound familiar?

1945—the U.S. and its Allies are victorious. Industrial plants of every country on our side, except for Canada and Australia, have been destroyed; the enemy’s industrial base is nonexistent. The male populations of many countries is devastated. Our plants survive unharmed.

1946-1965—the Golden Age for the United States; the days the Baby Boomers remember with such fondness. The county was NOT like this before, and hasn’t been like it since. We loan money to Western Europe and made things the Europeans had to buy (for immediate consumption and for factory and infrastructure reconstruction).

1966-1982—inflation, stagnation, and worse. I’m not sure a reliable economic history of this period has yet been written. Does this have something to do with “guns and butter,” peak oil (for the United States), and abandoning the permanent link between an ounce of gold and a set U.S. dollar value? Perhaps.

1983-1994—except for a huge hiccup in 1987, the stock market is fairly moderate in this period. The economy grows. I give Paul Volcker the credit, but others give it to Ronald Reagan. It doesn’t matter; times are good!

1995-1999—things get progressively crazier in this period (I blame Greenspan), with the NASDAQ market up 86% in 1999. Once again, savvy folks knew (and some said) that there would have to be a reversion to the mean (NASDAQ would fall into a big, bad hole). Before it did, though, it first went up more than 20% in the first two months of 2000, “proving” people like me wrong. Of course, the NASDAQ, once over 5030 (March 2000), hasn’t topped 3000 since.

2000—the dot-com, telecom, and NASDAQ bubbles blew up.

2001—9/11 scrambled the economic picture.

2002—blame it on the bubbles blowing up or the aftermath of an attack that stunned the country, but the Dow Jones Industrial Average hit a low of 7,200 late this year (down from 11,700 at its peak)

2003-2007—incredibly, Greenspan (and then Bernanke) create a new bubble, with ultra-low interest rates and easy money. We have a boom. The Dow hurdles 14,000. The answer to “how do you dig out of the bust after a bubble?” is, apparently, “blow another, much-bigger bubble!”

2008—a startling, enormous bust. If you’re keeping score, that’s two destructive busts in less than one decade. This didn’t happen even in the 1800s!

2009 –the solution to the enormous second bust of the 2000s is, as implemented by the Powers That Be, to inflate yet another, even-bigger bubble.

While you keep an eye on your local market, the price of copper, the economy, your investments, and everything else, dedicate some time and thinking to something completely different.

What are you missing? What are you taking for granted? Examine and re-examine your basic assumptions.

If they’re not yet wrong, there’s a good chance they might soon be.

	Joe Salimando of EFJ Enterprises is a consultant, web content provider, and wordsmith based in Oakton, Va. To contact him, call 703-255-1428. See also The EleBlog.
Personal Disclaimer: The appearance of the ambling pachyderm is indicative of the writer’s obsession with elephants, not his political leanings.
IMPORTANT NOTE: THIS COLUMN REFLECTS ONLY THE OPINIONS OF ITS AUTHOR AND DOES NOT REFLECT THE OPINIONS OR POLICIES OF NAED, TED MAGAZINE, OR THE ADVERTISERS ON THE TEDMAG WEB SITE.

Inspired by Rod Serling

By Joe Salimando

Welcome to the Twilight Zone. Strange things happen here with a frightening amount of regularity. Consider:

1. Forever, we’ve been told that “buy and hold” was the right stock-market investing strategy. Except for this little thing: See the chart of the past 10 years. So: You heard that stocks return 7% to 10% over the long run and beat inflation. Instead, you got beat.

2. We’ve been told by politicians (of every stripe), as well as other geniuses, that they could manipulate government policies and create jobs. Some names you might remember include Clinton, Rubin, Summers (yes, him), Greenspan, Bush. Yet (see chart below) all the private-sector jobs created in the past 10 years have been lost.
   

Fewer than 10 years ago, Alan Greenspan made a speech about what the Federal Reserve Board would have to do when there were no longer any U.S. government bonds. Really (think for just a minute about that!). At the time, it appeared that budget surpluses would go on forever. As the Fed manipulates supposedly free markets by buying and selling T-bills (and T-bonds), the elimination of government debt—perhaps as soon as 2011-15. Yes, the supposedly smartest man in the country, The Maestro, thought we’d run out of U.S. government debt!

4. Homes were the safest and best investment a prudent family could make. You owned a little piece of America (the land) and you owned the place that you lived. That concept has been marketed at people for decade—by the real estate business, by society in general, by consumer advisors, and (heck) by members of your family. How, precisely, does that feel right about now? [Note also that housing’s problems include stupidity in media reporting.] For perspective, see the graphic below.

 

5. As citizens of a free country, we once mocked “show trials” and the general abuse of justice in other countries. We had reason to, actually. But now, we’ve been through scandal after scandal, with few (if any) paying. As an avid consumer of information, I’ve been waiting to find out precisely what information was on the hundreds of pieces of paper that the Arthur Anderson people shredded on behalf of Enron. Now, I’m also waiting to hear where the tens of billions that Madoff stole ended up (no one has said, have they?). No wealthy person has been ruined in the latest mess; few executives have lost their jobs.

6. For what seemed like forever (across the industry’s generations, literally!), price fluctuations in copper were unimportant in electrical distribution. Then, all of a sudden…they were. Even today, with copper hovering above $2/pound—down 50% from the high hit twice in the past few years—the thing is selling for 300% of its 2001 average. Hey, 2001 (a peak year in electrical construction employment, by the way) wasn’t all that long ago!

7. Government support was said to be very bad for poor people. Grouped under the heading of “welfare,” government support programs (costing, in the aggregate, billions and billions) were, we heard, ruining the country. Finally, a Democrat (Bill Clinton) promised to “end welfare as we know it.” More recently, the federal government came up with $12.8 TRILLION to back up businesses. Our constitutional republic has ended up owning GM, backing Chrysler, owning AIG, backing Citibank, and providing deep financial aid to numerous financial institutions, money market funds, and more. One can only conclude that welfare is very bad for poor people but very good for well-to-do people.

It’s NOT unreasonable if you sometimes sit back and think: What the heck is happening? Is everything I ever knew totally wrong?

Reversion to the Mean

A lot of what appears to be mysterious results from the simple fact that most of us don’t know anything about mathematics, economics, or history (recent or deeper into the past). For example:

• During my lifetime, the stock market was flat from 1966 to 1982. I realize that I am older than dirt, but there are others who remember this. Why has the Baby Boom generation forgotten? People were too busy protesting Vietnam, living through the “We” decade, and being unemployed (in the early 1980s) to think about investing.
  
  

• What goes up actually does go down. When housing prices went bananas in the first half of the 2000s, it was a sure sign that—eventually—they would revert to the mean (which means they would come back to reality). It wasn’t clear how that would happen; possibilities included a steep, rapid dive, or a slow and long decline, or stagnation for decades (with prices eventually “catching up” with the mean by staying flat for maybe 20 years). In other words: The what was a certainty; the how and when were uncertain. Everyone in the housing market (real estate brokers, home builders, etc.) knew this.

Economic History as Seen With Clear Ears

Booms and busts are common in capitalism. There’s an excellent book (which you should read) called Extraordinary Delusions and the Madness of Crowds. Boom/bust cycles go way, way back in history. Let’s forget ancient history, or the South Sea Bubble, or the Tulip Mania, and just focus on the United States.

There were numerous booms and busts in the 1800s and a doozy in 1907. Here’s the history since then:

1913—the Federal Reserve Board is created, with the specific assignments of eliminating the boom/bust cycle and maintaining the U.S. dollar’s value. In the past 96 years, the dollar has lost 95%-plus of its value.

1929—16 years later, the worst bust anyone wants to think about, The Great Depression, take place.

1941—Adolph Hitler and a bunch of crazy Japanese bail the world out of the Depression. Review what happened in the U.S. in that period, and you’ll find that the U.S. government seized an enormous amount of control over the U.S. economy. Sound familiar?

1945—the U.S. and its Allies are victorious. Industrial plants of every country on our side, except for Canada and Australia, have been destroyed; the enemy’s industrial base is nonexistent. The male populations of many countries is devastated. Our plants survive unharmed.

1946-1965—the Golden Age for the United States; the days the Baby Boomers remember with such fondness. The county was NOT like this before, and hasn’t been like it since. We loan money to Western Europe and made things the Europeans had to buy (for immediate consumption and for factory and infrastructure reconstruction).

1966-1982—inflation, stagnation, and worse. I’m not sure a reliable economic history of this period has yet been written. Does this have something to do with “guns and butter,” peak oil (for the United States), and abandoning the permanent link between an ounce of gold and a set U.S. dollar value? Perhaps.

1983-1994—except for a huge hiccup in 1987, the stock market is fairly moderate in this period. The economy grows. I give Paul Volcker the credit, but others give it to Ronald Reagan. It doesn’t matter; times are good!

1995-1999—things get progressively crazier in this period (I blame Greenspan), with the NASDAQ market up 86% in 1999. Once again, savvy folks knew (and some said) that there would have to be a reversion to the mean (NASDAQ would fall into a big, bad hole). Before it did, though, it first went up more than 20% in the first two months of 2000, “proving” people like me wrong. Of course, the NASDAQ, once over 5030 (March 2000), hasn’t topped 3000 since.

2000—the dot-com, telecom, and NASDAQ bubbles blew up.

2001—9/11 scrambled the economic picture.

2002—blame it on the bubbles blowing up or the aftermath of an attack that stunned the country, but the Dow Jones Industrial Average hit a low of 7,200 late this year (down from 11,700 at its peak)

2003-2007—incredibly, Greenspan (and then Bernanke) create a new bubble, with ultra-low interest rates and easy money. We have a boom. The Dow hurdles 14,000. The answer to “how do you dig out of the bust after a bubble?” is, apparently, “blow another, much-bigger bubble!”

2008—a startling, enormous bust. If you’re keeping score, that’s two destructive busts in less than one decade. This didn’t happen even in the 1800s!

2009 –the solution to the enormous second bust of the 2000s is, as implemented by the Powers That Be, to inflate yet another, even-bigger bubble.

While you keep an eye on your local market, the price of copper, the economy, your investments, and everything else, dedicate some time and thinking to something completely different.

What are you missing? What are you taking for granted? Examine and re-examine your basic assumptions.

If they’re not yet wrong, there’s a good chance they might soon be.

	Joe Salimando of EFJ Enterprises is a consultant, web content provider, and wordsmith based in Oakton, Va. To contact him, call 703-255-1428. See also The EleBlog.
Personal Disclaimer: The appearance of the ambling pachyderm is indicative of the writer’s obsession with elephants, not his political leanings.
IMPORTANT NOTE: THIS COLUMN REFLECTS ONLY THE OPINIONS OF ITS AUTHOR AND DOES NOT REFLECT THE OPINIONS OR POLICIES OF NAED, TED MAGAZINE, OR THE ADVERTISERS ON THE TEDMAG WEB SITE.

Inspired by Rod Serling

 

By Joe Salimando

Welcome to the Twilight Zone. Strange things happen here with a frightening amount of regularity. Consider:

 

1. Forever, we’ve been told that “buy and hold” was the right stock-market investing strategy. Except for this little thing: See the chart of the past 10 years. So: You heard that stocks return 7% to 10% over the long run and beat inflation. Instead, you got beat.

 

2. We’ve been told by politicians (of every stripe), as well as other geniuses, that they could manipulate government policies and create jobs. Some names you might remember include Clinton, Rubin, Summers (yes, him), Greenspan, Bush. Yet (see chart below) all the private-sector jobs created in the past 10 years have been lost.
   

 

Fewer than 10 years ago, Alan Greenspan made a speech about what the Federal Reserve Board would have to do when there were no longer any U.S. government bonds. Really (think for just a minute about that!). At the time, it appeared that budget surpluses would go on forever. As the Fed manipulates supposedly free markets by buying and selling T-bills (and T-bonds), the elimination of government debt—perhaps as soon as 2011-15. Yes, the supposedly smartest man in the country, The Maestro, thought we’d run out of U.S. government debt!

 

4. Homes were the safest and best investment a prudent family could make. You owned a little piece of America (the land) and you owned the place that you lived. That concept has been marketed at people for decade—by the real estate business, by society in general, by consumer advisors, and (heck) by members of your family. How, precisely, does that feel right about now? [Note also that housing’s problems include stupidity in media reporting.] For perspective, see the graphic below.

 

 

5. As citizens of a free country, we once mocked “show trials” and the general abuse of justice in other countries. We had reason to, actually. But now, we’ve been through scandal after scandal, with few (if any) paying. As an avid consumer of information, I’ve been waiting to find out precisely what information was on the hundreds of pieces of paper that the Arthur Anderson people shredded on behalf of Enron. Now, I’m also waiting to hear where the tens of billions that Madoff stole ended up (no one has said, have they?). No wealthy person has been ruined in the latest mess; few executives have lost their jobs.

 

6. For what seemed like forever (across the industry’s generations, literally!), price fluctuations in copper were unimportant in electrical distribution. Then, all of a sudden…they were. Even today, with copper hovering above $2/pound—down 50% from the high hit twice in the past few years—the thing is selling for 300% of its 2001 average. Hey, 2001 (a peak year in electrical construction employment, by the way) wasn’t all that long ago!

 

7. Government support was said to be very bad for poor people. Grouped under the heading of “welfare,” government support programs (costing, in the aggregate, billions and billions) were, we heard, ruining the country. Finally, a Democrat (Bill Clinton) promised to “end welfare as we know it.” More recently, the federal government came up with $12.8 TRILLION to back up businesses. Our constitutional republic has ended up owning GM, backing Chrysler, owning AIG, backing Citibank, and providing deep financial aid to numerous financial institutions, money market funds, and more. One can only conclude that welfare is very bad for poor people but very good for well-to-do people.

 

It’s NOT unreasonable if you sometimes sit back and think: What the heck is happening? Is everything I ever knew totally wrong?

 

Reversion to the Mean

 

A lot of what appears to be mysterious results from the simple fact that most of us don’t know anything about mathematics, economics, or history (recent or deeper into the past). For example:

 

• During my lifetime, the stock market was flat from 1966 to 1982. I realize that I am older than dirt, but there are others who remember this. Why has the Baby Boom generation forgotten? People were too busy protesting Vietnam, living through the “We” decade, and being unemployed (in the early 1980s) to think about investing.
  
  

 

• What goes up actually does go down. When housing prices went bananas in the first half of the 2000s, it was a sure sign that—eventually—they would revert to the mean (which means they would come back to reality). It wasn’t clear how that would happen; possibilities included a steep, rapid dive, or a slow and long decline, or stagnation for decades (with prices eventually “catching up” with the mean by staying flat for maybe 20 years). In other words: The what was a certainty; the how and when were uncertain. Everyone in the housing market (real estate brokers, home builders, etc.) knew this.

 

 

 

Economic History as Seen With Clear Ears

 

Booms and busts are common in capitalism. There’s an excellent book (which you should read) called Extraordinary Delusions and the Madness of Crowds. Boom/bust cycles go way, way back in history. Let’s forget ancient history, or the South Sea Bubble, or the Tulip Mania, and just focus on the United States.

 

There were numerous booms and busts in the 1800s and a doozy in 1907. Here’s the history since then:

 

1913—the Federal Reserve Board is created, with the specific assignments of eliminating the boom/bust cycle and maintaining the U.S. dollar’s value. In the past 96 years, the dollar has lost 95%-plus of its value.

1929—16 years later, the worst bust anyone wants to think about, The Great Depression, take place.

1941—Adolph Hitler and a bunch of crazy Japanese bail the world out of the Depression. Review what happened in the U.S. in that period, and you’ll find that the U.S. government seized an enormous amount of control over the U.S. economy. Sound familiar?

1945—the U.S. and its Allies are victorious. Industrial plants of every country on our side, except for Canada and Australia, have been destroyed; the enemy’s industrial base is nonexistent. The male populations of many countries is devastated. Our plants survive unharmed.

1946-1965—the Golden Age for the United States; the days the Baby Boomers remember with such fondness. The county was NOT like this before, and hasn’t been like it since. We loan money to Western Europe and made things the Europeans had to buy (for immediate consumption and for factory and infrastructure reconstruction).

1966-1982—inflation, stagnation, and worse. I’m not sure a reliable economic history of this period has yet been written. Does this have something to do with “guns and butter,” peak oil (for the United States), and abandoning the permanent link between an ounce of gold and a set U.S. dollar value? Perhaps.

1983-1994—except for a huge hiccup in 1987, the stock market is fairly moderate in this period. The economy grows. I give Paul Volcker the credit, but others give it to Ronald Reagan. It doesn’t matter; times are good!

1995-1999—things get progressively crazier in this period (I blame Greenspan), with the NASDAQ market up 86% in 1999. Once again, savvy folks knew (and some said) that there would have to be a reversion to the mean (NASDAQ would fall into a big, bad hole). Before it did, though, it first went up more than 20% in the first two months of 2000, “proving” people like me wrong. Of course, the NASDAQ, once over 5030 (March 2000), hasn’t topped 3000 since.

2000—the dot-com, telecom, and NASDAQ bubbles blew up.

2001—9/11 scrambled the economic picture.

2002—blame it on the bubbles blowing up or the aftermath of an attack that stunned the country, but the Dow Jones Industrial Average hit a low of 7,200 late this year (down from 11,700 at its peak)

2003-2007—incredibly, Greenspan (and then Bernanke) create a new bubble, with ultra-low interest rates and easy money. We have a boom. The Dow hurdles 14,000. The answer to “how do you dig out of the bust after a bubble?” is, apparently, “blow another, much-bigger bubble!”

2008—a startling, enormous bust. If you’re keeping score, that’s two destructive busts in less than one decade. This didn’t happen even in the 1800s!

2009 –the solution to the enormous second bust of the 2000s is, as implemented by the Powers That Be, to inflate yet another, even-bigger bubble.

 

While you keep an eye on your local market, the price of copper, the economy, your investments, and everything else, dedicate some time and thinking to something completely different.

 

What are you missing? What are you taking for granted? Examine and re-examine your basic assumptions.

 

If they’re not yet wrong, there’s a good chance they might soon be.

 

 

	Joe Salimando of EFJ Enterprises is a consultant, web content provider, and wordsmith based in Oakton, Va. To contact him, call 703-255-1428. See also The EleBlog.
Personal Disclaimer: The appearance of the ambling pachyderm is indicative of the writer’s obsession with elephants, not his political leanings.
IMPORTANT NOTE: THIS COLUMN REFLECTS ONLY THE OPINIONS OF ITS AUTHOR AND DOES NOT REFLECT THE OPINIONS OR POLICIES OF NAED, TED MAGAZINE, OR THE ADVERTISERS ON THE TEDMAG WEB SITE.