Great Depression 2.0 to be Released Soon

Paul Farrell, writing for Marketwatch, has been stirring around that festering brew that is our financial system and with every ladle he picks up more toil and more trouble. But as so many financial news outlets seem unable to deprogramme themselves from their bullish delusion, it is good to see the occasional doom-monger express the same views as so many of the general public, or at least those that post on news forums. The really depressing thing is that stacking all the problems up in one big pile shows how completely rudderless this current financial ship is - it could be argued that a sinking ship has no need of a rudder, just lots and lots of life-boats. Anybody who is still naive enough to think that the big boys at the top know what they are doing is likely to be sold a cut price life jacket that has been slipped through quality control and which won't work when you need it.

With two major crashes in quick succession there is little to be hopeful about. Farrell lays the blame fairly and squarely at the doors of those free-market ideologues who publicly pushed their "liberal" laissez faire propaganda whilst in private being fully aware of what could go wrong... and of how horrific it could be. The big shocker came from the new Treasury secretary two years before the meltdown: Bloomberg News reports that shortly after leaving Wall Street as Goldman Sachs' CEO, Henry Paulson was at Camp David warning the president and his staff of "over-the-counter derivatives as an example of financial innovation that could, under certain circumstances, blow up in Wall Street's face and affect the whole economy." Not surprisingly Paulson wants to quit before he can be prosecuted.

But as these people have no regard whatsoever for the wider population, why are people so feeble in their response, so powerless to somehow return the disdain. These free market magicians are of a very black hue, and as we can witness every day they will do whatever it takes to keep your money flowing in their direction. Even if it isn't your money, it will be soon as taxes will go up and jobs will be lost.

The doomsday list has 30 items on it - and probably rising. You can read the full article at Marketwatch, I just wanted to highlight a few of the more nefarious deeds.

America's credit rating may soon be downgraded below AAA. I have been waiting for this but the huge political threats emanating from the USA have, for the time being, saved it from the ignominy of being downgraded. The idea that Treasuries are a "flight to safety" seems laughable given the pathetic interest rates on offer. Indeed the Japanese Yen has continued to climb with respect to the US Dollar at a time when Sterling and Euro are getting clattered. The theory that this recent Dollar rise is due to repatriation of wealth by American companies sounds far more plausible. At some point, the family silver will all have been sold off and the dreaded thought of having to sell all the land and homes comes starkly into view. Also, as unemployment rises so tax returns to government fall off. At some point, the mechanism of paying off credit with more credit will fail at the government level, just as it is failing at the corporate and personal one.

Fed refusal to disclose $2 trillion loans, now the new "shadow banking system". Although listed as a separate item, this actually goes hand in hand with Congress has no oversight of $700 billion, and Paulson's Wall Street Trojan Horse. Taken together, they are further proof that the Federal Reserve is following its own agenda that may, or may not, have anything to do with the public interest, not even for Americans. To see who really benefits from government one just has to look at how Government policy is dictated by 42,000 myopic, highly paid, greedy lobbyists. Elections are just inconvenient exercises to preserve the facade of democracy. The media enjoys whipping up partisan feelings so as to avoid real debate. It is quite astonishing how little informed debate has been taking place within the corporate media. The internet has played an important role in this last US election but the power it can wield is still in the testing phase. Many forum discussions are actually led by the corporate media agenda, rather than leading it.

The article ends on an even gloomier note, "At a recent Reuters Global Finance Summit former Goldman Sachs chairman John Whitehead was interviewed. He was also Ronald Reagan's Deputy Secretary of State and a former chairman of the N.Y. Fed. He says America's problems will take years and will burn trillions.

He sees "nothing but large increases in the deficit ... I think it would be worse than the depression. ... Before I go to sleep at night, I wonder if tomorrow is the day Moody's and S&P will announce a downgrade of U.S. government bonds." It'll get worse because "the public is not prepared to increase taxes. Both parties were for reducing taxes, reducing income to government, and both parties favored a number of new programs, all very costly and all done by the government.""

So what can the individual do? This blog is not really about political activism or lifestyle management, but it is about trying to take responsibility for one's own finances, and especially one's investments. If there is one lesson from these two recent bubbles, is that there is absolutely nobody you can trust to tell you what to do. Learning to look at the numbers and ignore the media is a valuable step forward.

Are we in the middle of a 20-year flat market?

We all love to have our opinions - or prejudices - confirmed by others. The latest Mark Hulbert commentary on Marketwatch does just that. Irrational exuberance redux, or how stocks now lag Treasury bills for the past dozen years, puts some flesh on what I have been saying that stocks have seriously underperformed. Of course, we can all see the disasters that are global stock markets. The important question is whether the pundit mantra that stocks are better in the long run still holds true, and what does "in the long run" actually mean?

"Consider data compiled by Jeremy Siegel, a finance professor at the Wharton School of the University of Pennsylvania. In his famous book "Stocks For The Long Run," Siegel reports the percentage of time from 1802 through 2001 in which stocks failed to beat T-Bills. Not surprisingly, this percentage falls as holding period increases.

But what is perhaps even more surprising: This holding period has to grow to well more than a decade in order for the percentage to drop to below 10%."

After 10 years there is still about a 20% chance that treasuries will beat stocks, whereas at 20 years this drops to just 5.5%. So only after 20 years does the buy stocks mantra come true with any certainty - that's a long time to be chanting.

Actually, if you look at a long term chart of, say, the Dow back to 1920 you can clearly see what appear to be 20-year cycles. There are 20 years of rapid growth followed by 20 years of going nowhere. The periods from about 1940 to 1960 and then 1980 to 2000 saw huge stock bull markets. What we are seeing now, scaled in percentage levels, looks horribly similar to the market of the 1970's which saw its 1975 value being lower than its 1965 one. Good to see that someone has done the number crunching to back up this purely visual feel.

What this means is that we could well be in the middle of the current 20-year flat cycle. In such a market the buy-and-hold investor is going to be treated very poorly. The only options are either to adopt a market timing strategy, or to change the stocks to bonds weighting dramatically, or both. This also means that in spite of all the bullish media talk, investors may have to keep chanting for a long time to come.