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These days I have seen it as low as 8 minutes and regularly under 20 minutes.  Instead of bumping along at 5-15 MPH, I am hitting 70 and rarely under 20.  This has been going on now for some months.  Which indicates to me that there are very many fewer cars and trucks on the road into Downtown Chicago.  This further implies then that there is less shipping being done and fewer people going to or going home from work.  So when I see blow hards talking about a V-shaped recovery in the economy and how we will see 1300 in the S&P 500 this year, I have to scratch my head.  I told my father in November 2007 he should go to cash.  I also told him in November 2009 that he should go to cash because the S&P would stall somewhere between 1150 and 1200.  It barely hit 1150, but it was around 1150 for about a week, ample opportunity to lighten a portfolio.  I wrote him on Feb 18th to say that the recent bounce up from near 1040 to 1110 was another opportunity to get out.  I expect that this year we will be testing lows from last year as there is a new wave of Mortgage resets and foreclosures to come over the next 2 years.

Look at the chart below from T2 Partners via Amherst Securities.  Note how the market climbed as we were in the trough.  We are now climbing the hill.  The market is not going higher.

As is became clear in the spring of 2009 that things had stabilized somewhat, the implications of extraordinary money creation by the Fed, along with a ridiculously wasteful US stimulus spending bill and a less wasteful Chinese stimulus plan started to become clear and markets reacted.  Ten year treasury yields have just about doubled in 6 months.  Crude oil prices have more than doubled.   Even Corn prices have risen 55%  despite the decimation of the chimerical ethanol industry.  Such price moves have happened in most commodities as it has become clear that there is a rising long term risk of inflation.

The Fed’s position has been made more difficult by an $800 Billion “stimulus plan” that will be mostly wasted and pending Demunist legislation that promises wartime deficits as far as the eye can see.  But an independent Fed has to be the entity that backstops the system by defending the dollar.  And the only way it can do this is by convincing markets that it will not let the situation get out of hand.  Unfortunately, a guy with the nickname “Helicopter Ben” is most unlikely to be counted on to do so.  As a result we will likely face a dollar crisis, with the result that debt yields will rise massively, as will the cost of all commodities.  As a matter of policy, should the cost be bourne by those who use commodities, notably oil and gas?  This would probably suit the Demunists and Commocrats as it helps their drive to go green.  It is a steep price to pay though and could lead to world unrest.  It also shifts massive amounts of wealth to really bad people all over the world; the Saudis, Putin’s Russia, Chavez in Venezuela, Iran and so forth.  It would be better if the Fed showed some mettle and kept a lid on commodity prices by raising rates, even if only a little.  They may even find that it helps keep long rates in line to help the housing market, even if it costs banks a little as it flattens the Yield Curve a bit.  The bottom line is that authorities cannot create a painless economy, no matter what democratic keynesians say.  The sooner the pain is felt, the better off the world will be in the long run.

If the Fed would only get some balls, we could silence the noise coming from the worlds leading autocracies about dropping the dollar as the world’s reserve currency.  Sadly I would bet that this will not happen.  The world will lose the dollar on Obama’s and the Demunist’s watch.

At that time, one started to hear that FASB was going to reconsider the application of the Mark-To-Market accounting rules for banks which would relax the requirements to mark their balance sheet assets to a market which did not exist.  The whole Mark-To-Market issue does present a dilemma.  On the one horn, as we have seen, the idea presupposes a market where price discovery is actually happening.  If this price discovery function is impaired, how is one to mark to market?  On the other horn of the dilemma, if you allow the quants to mark the assets to their models, the pressure to tweak the model is too strong to resist so you wind up marking the assets to fantasy levels.

Recall that the stringent Mark-To-Market accounting rules only became active in November 2007.  This marked the top in equities.  Conincidence?  I think not.  Also, according to the timeline published here,  on Monday, March 9th, markets started moving higher.  On Tuesday, March 10th Fed Chairman Bernanke weighed in on the issue of Mark-To-Market Accounting by suggesting that the rules be loosened.  This must have made Steve Forbes happy, as he had been harping on this issue.  According to the Wikipedia article linked above, the FASB made their announcement that the rules would be relaxed on March 16th.  The markets have been rallying since it first caught wind of the change.

Think about this for a minute.  In response to the hiding of problems banks have; by making their financial situation more opaque, markets have rallied 25%?  Moral of story is that people like to live in a fantasy world and damn you if you intrude on their reverie with sordid tales of reality.  Lesson for traders?  Do not be too worried about what reality would dictate, the markets and indeed the world turns on perceptions of reality washed through human minds which crave fantastical stories.

This week, the lying president’s lying press secretary, Robert Gibbs, attacked CNBC’s Cramer (a democrat no less) for pointing out what should be obvious to anyone.  Democrats are destroyers.  This is what I have been telling my democratic friends all along.  We are all going to watch it happen to our country.  Why is it that at precisely the moment in history when she needs a true libertarian leaning government (not Bush mind you) that will let loose the energies of her people to rebuild after the huge mistakes made by regulators and bankers that led to this enormous credit crisis, instead she should shoot herself in the foot by electing statists to run Congress and then also the Executive?  It may be a function of the same mania that led to these problems in the first place.  Or maybe it is just dumb bad luck.

Note the first two great inflection points in the chart below.  The first occurs when Paul Volcker, the same Volcker who is advising Obama now, is hired by Reagan to break the back of the inflation.  It is hard to see because the levels at that time are dwarfed by the levels (of wealth) that occurred in the last 20 years, but in a suitable scale, it is clear.  The second great inflection occurs when Newt Gingrich leads the Republican takeover of the House in 1994.  The change in slope is just amazing.

Now, we come to 2007 when the Democrats have taken the House back.  They are seated in January.  The market continues to rise for most of the year.  But late in 2007, it was starting to become obvious that there was a real likelihood that the Democrats were going to take the executive and bolster their grip on Congress.  The result?  The S&P 500 has dropped back to 1996 levels.  Just a bit more and ALL of the gain from 1994 on will be gone.

Coincidence?  Not likely.  But this is somewhat misleading.  The 90’s of course saw the rise of the internet and technological and automation enhancements that dramatically improved output per hour worked, or productivity.  The gains of the 00’s were clearly and improperly augmented by lending gone mad.  Bankers Gone Wild!  Who will make the videotapes?

But just as I believe that the dawning of realization that Clinton was no longer going to be President broke the cult-of-personality spell that had levitated stocks (a Republican Congress to divide government also helped) and caused a decline prior to Bush actually entering office, merely on the anticipation of it, I also believe that the current massive destruction of wealth started happening as soon as people started to realize that the destroyers would take control.

I also believe that we would have had a fairly massive downturn anyway, but I also believe that we will have come out of the tailspin alot sooner if we did not have Demunists and Commocrats in charge of the whole shebang.

I had intended to write an email to McCain’s campaign to proffer the following analogy for use in the campaign.  In the end I did not because I realized the cause was lost.  But it went like this.  McCain should have communicated to the people the question:  If you are driving a car and you are distracted by something and you start driving toward the ditch and a large tree on the other side what do you do?  The prudent thing to do is to gently steer the car back onto the road and continue on your way.  What you do not want to do is to throw the wheel hard over to the left.  What will happen if you do?  The car will either catch pavement and flip over, or if the angle is a bit more shallow, it will cross over the median and into oncoming traffic.  In either case, if you throw the wheel over hard left, you will be hurt or killed, both your body and your car destroyed to one degree or another.

America must be a bad driver because she just threw the wheel over hard left.  We may just find the S&P 500 back down at 450, where it was the last time the Destroyers controlled both branches of government.

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Today, the S&P500 traded through the low established on the 10th of October.  That low, which I thought would be a durable low, lasted only 17 days.  Stocks are behaving like a ball bouncing on a table.  It bounces, bounces and bounces off of the table, and each time the bounce is lower.  Eventually it falls off the table.  This is what is happening with stocks.

This is happening as the election approaches on Tuesday of next week which is going to set the stage for the American system to come under prolonged attack by the forces of statism and collectivism.  If Obama’s lead remains secure, expect stocks to fall off the table this week.  But I would expect a bounce once the result of the election is known.  Buy the rumor, sell the fact as they say.  The mere removal of the uncertainty will give markets a lift, even if the result is unfavorable for economic freedom.  Between now (Monday afternoon) and next Tuesday however, who knows how low things can go.  See below.

What does tomorrow bring?  The friday before a holiday weekend?  My guess is the real crash is going to happen tomorrow.  How low can it go.  See the following table and take your pick. The bottom line is though that those who have had the foresight to have some cash lying around should be putting it to work right now. This is likely to be the bottom. If not the bottom is likely to happen within the month.

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