Reality Check (November 14, 2008)
I write this for two groups: slow learners and suicidally slow learners.
This is the story of a very famous slow learner: Arthur Laffer, the inventor of the Laffer curve. He has learned, but not in time to warn people to avoid the recent stock market collapse.
It took him eight years to figure out America is suffering from a bear market.
[Note: I told my "Remnant Review" subscribers to get out of stocks in February and March of 2000. The Dow was over 11,500, the NASDAQ was at 5040, and the S&P 500 was over 1500. The dollar was worth 22% more.]It took him a year -- 2006 to 2007 -- to figure out that we are at the end of an era. He recently co-authored a book, "The End of Prosperity." He started writing it in 2007. He needed to write it in 2006.
In 2006, he was still a believer in the economic wisdom of Mr. Bush and Dr. Bernanke. He went on national television and said so. That show is now on YouTube. You really need to see it. If you are a slow learner, your financial survival may depend on it.
If you still have a dime in this stock market, you are a very slow learner.
FAST LEARNERS AND SLOW LEARNERS
Fast learners are those members of my website, www.GaryNorth.com, who took my advice on November 5, 2007, when I told them to sell their stocks, short the S&P 500, and move to cash, including 30-year Treasuries. I told them why: the Austrian theory of the business cycle.
I had been softening up my readers since November of 2005, when I told them the real estate bubble would soon pop.
I warned readers in 2006 that a recession would begin in 2007. I may have been wrong. The National Bureau of Economic Research, which makes this judgment retroactively, has not yet assessed the starting date. Some economists are now saying that we may have entered a recession in the 4th quarter of 2007. Some say later. These are the same experts who categorically denied in 2007 or in the first half of 2008 that the economy was in recession or faced a recession.
Joining me in the camp of the doomsters in 2006 was Peter Schiff. He used to be my stock broker. I don't need a stock broker any more. I own no stocks. He was the only stock broker I knew who understood the Austrian theory of the business cycle. We had a difference of opinion, however. He liked Asian stocks. I liked no stocks.
He had a larger audience than I did. As a full-time stock broker and commentator, he was able to go on television shows and tell people that a long, grinding recession was coming. The talking heads thought he was a crank. They thought he was as far off the wall as Nouriel Roubini, except he had no Ph.D. But for the sake of lively controversy, they brought him on.
One talking-head lady invited him to present his case. But the show's producer felt compelled to invite an internationally known expert to appear on the show, in order to pooh-pooh this obvious crackpot. Arthur Laffer consented to appear.
It was one the poorer decisions of his life, given the reality of YouTube. But who knew about YouTube in 2006?
LAFFER VS. SCHIFF
Schiff said that America would enter a major recession in 2007 or 2008, and that it would be long and deep.
Laffer was contemptuous of Schiff's forecast. "I don't know where he is getting this," he said.
He was getting it from Ludwig von Mises. He was getting it from Murray Rothbard. In short, he was getting it from Austrian School economics.
Dr. Laffer has little use for Austrian economics. He shares this opinion with 99% of academic economists and stock brokers.
He insisted that American tax policy was great, monetary policy was great, and there was no crisis facing the American economy.
If you want to view the video, click the link. It is an example of "Bambi meets Godzilla."
[To view the 90-second classic cartoon of that name, click here: //www.youtube.com/watch?v=n-wUdetAAlY]
Back in 2006, viewers thought Dr. Laffer was Godzilla. It is clear in retrospect that he was Bambi.
Everything was just fine, Dr. Laffer insisted. That was then. This is now. Now he says we are facing the end of prosperity.
To mark the one-year anniversary of my recommendation to sell all stocks and short the S&P 500, I wrote an article, "A Debt Beyond Redemption." I quoted Dr. Laffer's article in the "Wall Street Journal," titled provocatively, "The Age of Prosperity Is Over." He had written this:
Financial panics, if left alone, rarely cause much damage to the real economy, output, employment or production. Asset values fall sharply and wipe out those who borrowed and lent too much, thereby redistributing wealth from the foolish to the prudent.Quite correct. This is exactly what financial panics do. Peter Schiff had predicted this financial panic. Dr. Laffer had denied it.
Good decisions should be rewarded and bad decisions should be punished. The market does just that with its profits and losses.He can say that again! That is why I am pointing attention to a very good decision: Peter Schiff's decision in 2006 to go on national television and warn viewers about the financial panic that has now hit with devastating force. Dr. Laffer made a bad decision: to tell viewers everything was A-OK. Now, he says this:
Twenty-five years down the line, what this administration and Congress have done will be viewed in much the same light as what Herbert Hoover did in the years 1929 through 1932. Whenever people make decisions when they are panicked, the consequences are rarely pretty. We are now witnessing the end of prosperity.
That is exactly what Peter Schiff was saying in 2006. He has not changed his views. Dr. Laffer has changed his.
He is not a fast learner, but he is not a suicidally slow learner, either. He changed horses mid-stream -- not in terms of economic theory but in terms of the terrible reality of the effects of the economic policies of Mr. Bush, Mr. Greenspan, and now Dr. Bernanke.
Dr. Laffer remains a non-learner with respect to Austrian School economic theory, but at least he can see what is in front of his nose: a major recession, a collapsing stock market, and a catastrophic economic policy. He is therefore a lot faster learner than the non-learners on Tout TV who keep telling viewers that "the bottom is near: so here's a stock to buy today to make money."
Incredibly, a majority of stock market forecasters remain bullish today. This is another traditional bear market technical indicator. On November 10, Bloomberg reported this regarding opinions regarding the S&P 500:
Kostin, Trennert and Lee are among the most pessimistic of Wall Street strategists with year-end estimates tracked by Bloomberg. The three expect the benchmark for American equities to end 2008 at an average of 1,075, up 15 percent from its closing level last week."I wouldn't call it extremely bullish," said New York- based Lee, who says the S&P 500 may rise to 1,125. "The high level of volatility means you're going to have a pretty wide range of possible outcomes."
The average Wall Street forecast calls for the S&P 500 to break out of a bear market and surge 20 percent to 1,118 by Dec. 31 -- more than twice as much as the biggest-ever advance to close out a year, according to data compiled by Bloomberg. Strategists were even more bullish at the beginning of the year, predicting that the S&P 500 would end 2008 at a record 1,632.
Slow learners? Suicidally slow learners!
How about you?
THE END OF RETIREMENT
I don't think it's the end of prosperity. I do think it's the end of retirement.
Years ago, I told a friend to register a Web domain name for future use: www.NeverSayRetire.com. I was convinced that there will be millions of retired or about-to-retire people who will be desperate to stay in the work force or get back into it. He was kind enough to return it to me. I have now put it to good use.
What about your retirement? Have you checked the market value of your 401(k) lately?
How solvent is the company that has enrolled you in its secure pension program? Is the company as rock solid as General Motors and Ford?
How reliable is the United States dollar, given the size of the Federal deficit?
Have you seen the 2008 "60 Minutes" show on the state of Social Security and Medicare? If not, click here:
In short, are you a slow learner or a fast learner?
The vast majority of Americans who have a pension -- about half of American workers -- still cling to the hope that they will retire in comfort, living on passive income until they die.
Half of Americans also believe that their homes are worth more this year than last year. Yet three-quarters of these homes are worth less.
Among those surveyed, 40% think their homes will not decrease in price in the next six months. Yet 57% think houses in their neighborhoods will decrease.
This is a mental disconnect. Why would anyone expect his neighbors' homes to decrease in price, but not his own?
People believe that something is valuable just because they own it. This fact of human nature has been revealed in sophisticated experiments over the last 25 years. Without exception, a majority of participants place higher value on what they own than others place on it. This phenomenon exists even when the person has owned the item for less than five minutes.
Half of Americans own pension assets. They think they will someday own a comfortable retirement without working. The vast majority of them are wrong. They are slow learners. Millions of them are non-learners. They will learn only after they retire. I call this off-the-job training.
They will dream of a Wal-Mart greeter's job as financial deliverance. That job will already be taken.
CONCLUSION
If you want to know where we are headed, you need to understand the Austrian theory of the business cycle. I have summarized it here:
But it is not enough to understand it. You must act in terms of it. As the Apostle James wrote almost two millennia ago:
But be ye doers of the word, and not hearers only, deceiving your own selves. For if any be a hearer of the word, and not a doer, he is like unto a man beholding his natural face in a glass: For he beholdeth himself, and goeth his way, and straightway forgetteth what manner of man he was (James 1:22-24).
If you are a slow learner, you must speed up. The stock market has destroyed the basis of your dream of retirement. It will not give back that dream. It began destroying it in the first quarter of 2000. You did not see the sign. You were not warned. The talking heads still will not admit it. The TV talking heads are non-learners. They are like party animals in the main ballroom of the Titanic an hour after impact.
Start moving toward a lifeboat. Fast.
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