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  • dlhild Aug 15, 2012 7:04 PM Flag

    Catch 22:

    Buckeye, if you are optimistic over a Romney-Ryan ticket, it has to be based upon a world view, not analysis.

    The cake is baked. Neither party can turn this thing around. If both parties came together and looked at real problems and solutions, then there is a slight chance but slight never the less. They aren't going to come together, so it won't.

    I suggest you spend 70 minutes watching this video. It is not political. It is pure analysis, and explains the current situation quite well.

    Europe, England, Japan, and the USA are all screwed by excessive debt. It is going to be a slow deleveraging process, and all assets classes are going to be affected I think. If not for the 'Bernanke Put" the world would be in deflation and it would be 1935. We may circle back to that point yet. Please watch the video and give me your thoughts.

    Before we bottom we will likely see gold over $2,500, the Dow under 8,000, and bonds get killed at some point as well. My bet would be some level of deflation first followed by quite high inflation. Either way, P/E's are coming down. Also, I would bet that we are near the peak of the earnings cycle (may have 12-18 months left) then we will likely see earnings come down. S&P earnings are around $85 now, projected to go to around $100. I'm betting that 18 to 36 months out, S&P earnings will be ball park $80. Put a 12x P/E on it and it is easy to seee the S&P at 960...or lower. This is the macro force pushing CRY down. What is pushing CRY up I think may be an improving earnings cycle. My simple pencil pushing comes up with EPS numbers higher that the high numbers the analysts are currently showing.

    Also, the USA has to stop fighting wars. If we destroy the economy, we will not be able to field a military capable of invading Granada. Read "The Rise and Fall of the Great Powers", by Paul Kennedy, a Harvard Business school mandatory read. What this showed is the wars, and other commitments and promises, destoy great powers. Happened to every single one from 1450 to the present. The USA will be no exception.

    Another suggested book is the "End Game" by John Mauldin. It shows the debt problem too.

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    • Mr. Kennedy's book covers a period largely before there were democracy created welfare-nations. It's not surprising his book is so popular with academics since the majority of them hover between liberalism and socialism. He also wants to declare the fall of the Soviet Union was due to the "Cold War" and have that as another example of an empire destroyed by war. I consider both of these claims debatable.

      The U.S. is indeed headed for insolvency but little of it is due to actually fighting in wars. Right now the spending problems are Medicaid and Medicare. I'm not including Social Security and Defense because I believe they can be fixed. For example, from the mid-eighties to about 2000, we lowered the defense spending's percentage of the GNP every year until it was cut by more than 50%.

      Wars like those in Afghanistan and Iraq are not expensive enough to destroy the U.S. economy. Also, what was the correct response after 9/11 other than to invade Afghanistan since al-Qaeda was based in that country? (Iraq is a different story and I'm of the opinion that even Bush would not invade now). We didn't start having colossal deficits until 2008 which is over 5 years after the Iraq invasion. Those two wars have cost a total of about $1.3 trillion which is enormous but still slightly less than the average yearly deficit under Obama. Neither the wars or the recession are what has caused these unprecedented peace time deficits. The major cause is runaway Federal Government spending since fiscal year 2007 (Ended 9/30/07). For 2007, total federal spending was $2.7 trillion. It grew to $3.0 trillion in '08 and then for 2009, it moved to $3.5 trillion. This past year, 2011, it was $3.6 trillion. In 4 years, we went from $2.7 to $3.6 trillion, a 33% increase in Federal spending. The biggest drivers of the increase were pensions and health care.

      • 2 Replies to rroach76
      • dlhild Aug 18, 2012 2:37 PM Flag

        Rroach76: You covered several subjects. I will respond in part.

        Bush FY 2001 - $133 billion deficit
        Bush FY 2002 - $420 billion deficit
        Bush FY 2003 - $555 billion deficit
        Bush FY 2004 - $595 billion deficit
        Bush FY 2005 - $553 billion deficit
        Bush FY 2006 - $574 billion deficit
        Bush FY 2007 - $501 billion deficit (financial crisis starts)
        Bush FY 2008 - $1.017 trillion deficit (financial crisis)

        Bush Legacy: Two wars, Bin Laden still alive, slow growth economy, no job creation over 8 years, a financial crisis, ballooning deficits which he handed off to Obama, massive transfers of private debt to the public balance sheet (Secretary of Treasury Paulson), and a continuing of the income/wealth distribution to the exceedingly wealthy such as Romney (who presumably paid 13% federal taxes over each of the past several years…if you can believe a politician). I suspect he did pay 13% but does not want the public to see the legal tax breaks (carried interest, off shore, etc.) accorded the super wealthy who lobby for tax breaks.

        Obama FY 2009 – $1.885 billion deficit (4 months belongs to Bush)
        Obama FY 2010 – $1.652 billion deficit (Things don’t turn on a dime)
        Obama FY 2009 – $1.228 billion deficit
        Obama FY 2009 – $1.300 billion deficit

        Obama Legacy: Given the magnitude of the problem, and because the modern day republican party has become extreme, I think he did as well as one could expected. When GWB handed the U.S. baton to Obama, the economy was shedding 700,000 jobs each month. The stimulus at least contained this situation over time. It wasn’t pretty, but Obama more or less did what was necessary in an emergency.



        Actually the above deficits understate the deficit problem. They are distorted by the “unified budget” concept (thank you LBJ, sarcasm) and do not reflect accrual accounting. I would argue that the deficit problem is about 5 times worse in reality. I agree wholeheartedly that we collectively need to get control of this debt thing. This will ultimately require everyone coming together and working on these common problems. I don’t see that happening any time soon. I suspect that in a few years, when things are much worse than today, the marketplace will do something about it. No doubt the U.S. needs to do a lot of things: revamp the entire tax code (but the plutocracy will corrupt this process too), revamp the entire medical system so it delivers “pretty good care” to almost everyone (not going to happen because of vested interests), revamp the entire financial structure so that it does what it is supposed to do instead of gambling on CDS’s and other derivatives (not going to happen because the plutocracy likes it this way), and get money out of politics (again not going to happen). SJSRHS is correct in what he said. Computers represent 75% of stock trades. Management is overpaid. Elections are auctions (Citizens United just being the tip of the iceberg).

        Conclusion: Neither Romney nor Obama, is going to turn this around. They are both screwed for the same reasons. This means that the U.S. economy is going to grow slowly. This translates into lower P/E’s generally. This will affect CRY too. Note that this is still an expensive market generally and it is likely to get cheaper before we reach the inflection point that starts the next bull market (few/several/many years away yet). In the meantime, CRY seems to be mainly a trading stock for some people. Oh yes, let’s cut taxes for the wealthy and all will be fine. Also, I contend that today’s problems started back at least as far as LBJ (1963), and every president and both parties since have contributed greatly to the present problem.

      • dlhild Aug 19, 2012 11:43 PM Flag

        rroach76, you provided a number of interesting response points. Let me say that if everyone in the country studied history and economics as much as you, I would not be worried about the country, even if their views were different from my own. Such is not the case though, so I worry, and I suspect you do as well.

        You: Mr. Kennedy's book covers a period largely before democracy created welfare-nations. It's not surprising his book is so popular with academics since the majority of them hover between liberalism and socialism.

        Me: I concede this is an interesting observation. However, the democracy created welfare nations are all recent creations. I think that in spite of this, there are lessons that can still be learned from earlier history. Accordingly, I think there is certainly some merit to the wars destroy great powers premise. A welfare state may accelerate the destruction process. I think it would be a mistake to ignore this lesson of history. I concede that we could debate this point, and not necessarily resolve our differences, but over a beer we could have fun with it.

        You: He also wants to declare the fall of the Soviet Union was due to the "Cold War" and have that as another example of an empire destroyed by war.

        Me: I think it was the “Cold War” that in large measure did contribute greatly to the fall of the Soviet Union. My reasoning is that the “Cold War” required the Soviet Union to divert a large part of their economy for military purposes. The Soviet Union was largely dependent then, as now, on the sale of oil, natural gas, and other natural resources. As a result their economy was not diverse and not able to easily withstand collapsing energy prices which happened in the early 1980’s. The Soviet Union collapsed then when energy prices collapsed and they could no longer play their Ponzi scheme. Reagan didn’t have all that much to do with it. Actually Carter deserves more credit, because he degregulated energy. The lead time for oil production was 5 years plus. Reagan got the benefit. Rather it was 40+ years of bleeding their economy so that it was fragile and not able to withstand collapsing energy prices. While our views may, or may not, differ here at least we are having an interesting discussion on this point.

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