Waiting for the other shoe to drop.
What is the other shoe, or is it other shoes? The other shoes are the states which have enormous financial problems. Some problems which may have not been exposed yet. In Maryland, the state in which INO.com calls home, we have a $20 billion shortfall in the state's entitlement program. We also have property values dropping and more and more people becoming unemployed. Revenues to the state in property and sales taxes are diminishing rapidly, making it harder and harder for the state to stay in the black.
In California, the problem is even greater and we are not talking about entitlements, we're talking about just running the state. Governor Schwarzenegger was on TV today saying that the shortfall in California is going to be somewhere between 11 and 38 billion dollars in the coming year. This is a huge shortfall for California to make up given the economy and it illustrates just how fast things are going south.
We have to remember that the states are run by politicians, most of whom have never had to make a payroll. For them cutting back and laying off state employees is almost unheard of. But that's what's going to happen to a fair number of states. That situation will only exacerbate the problem we are now facing. Clearly the states cannot continue to raise property tax, or even sales tax as it will push the economy even further down the drain.
So what's going to happen?
For the past 20 years, the majority of U.S. tax payers have been gorging on easy money. As long as everybody could keep borrowing, it did not seem to be a problem. But then... the bubble burst.
Since the early '80s, the savings rate in the US has continued slipped every year. Fewer and fewer Americans are willing (or able) to save money making the American Dream only possible through credit cards which created a housing market gone wild.
With no savings and a national debt of over $170,000 for every man, woman and child living in the United States, it's now time to pay the piper, or in this case China. I am afraid that we're all going to be learning some very difficult and hard lessons about money in the future. When people say, "oh this is like the '87 crash," don't believe it. This is very serious, you've got a collapsing housing market, you've got unemployment rising you have the Government clueless in what to do or who to point the blame at.
The states who spent themselves silly in the last few years are seeing their revenue and paycheck from the people getting cut dramatically. All in all, I see rough seas ahead. It doesn't quite matter if the big three get funding or not, because the die has been cast for a very slow economy in 2009. I do not see the world economy jumping out and starting up again anytime soon.
Now, I know all of this sounds very ominous, but we are waiting for the other shoe to drop. Once the states with budget shortfalls cry for help, I'm sure that the news will be saturated with this new problem.
There will be some fantastic opportunities in the future to trade these markets and some incredible opportunities both in foreign exchange and in the futures markets. Readers of this blog know that we cover all of these markets and we will be detailing some trades in the near future that we believe warrant your attention.
Now here's the question, do you trade on emotion, or do you trade with a solid game plan?
If you trade on emotion then you are probably exhausted as the market for the last several weeks has been like Vegomatic. It has cut a lot of traders and their portfolios to pieces. On the other hand if you are trading with a solid game plan, you must be relaxed and loving life right about now as the markets have provided some wonderful trading opportunities this past year.
I have had a steadfast negative view on the economy, and I see little reason for that viewpoint to change. I do not expect to see a "Santa Claus" rally, as I think there will be further erosion for the balance of December. The run up in the last five days of November was both short covering and fund managers pushing stocks up so that their portfolios wouldn't look so bad at the end of the month.
If you haven't watched my latest video on the DOW, I strongly recommend you take a few minutes to watch 
and see how this trend has developed and what we expect to see in the future.
Lastly, picking bottoms is just as foolish as trying to pick a top in a market, not to mention that it is almost impossible to do. I am amazed at all of the TV infomercial talking heads that are calling for a market bottom. Many of these same talking heads missed the downturn, so why listen to them now? Mark my words, there will be plenty of time to get long this market. The one thing you can count on is the market which will tell you what it wants to do. Right now it's telling you that it has not finished going down.
The light at the end of the tunnel is in fact a brighter future for all of us, but not in the manner we have been used to. The light may be faint for now... but it's there.
I am looking forward to 2009 and all the opportunities that I know will be coming in the New Year.
Stay tuned,
Adam Hewison
President, INO.com
Co-creator, MarketClub
There is an eerie sense of calm and order even as blue chips morph to cow chips, lending flow congeal to slug flow, M1/M2/M3 are allowed to grow without oversight and no plan for re-containment. Of course, you cannot simulate containment in the midst of chaos. The lion tamer has used the chair and the whip. What is left but his composure as not to trigger a *(&)#*(#U!*%@. With a DJIA now above 7500 while we continue to have failing business industries, unresponsive lending of commercial credit, no reserves, predatory lending on consumer credit, I would have to agree, there is still one shoe in the air. All we know is this non-linear reaction running through the system continues. If on Dec. 26 we are still above our recent lows, I think we can take that as our "special" version of a Christmas rally this year. Adam's insight seens quite keen indeed.
Enev though I agree the markets are heading lower, we are long overdue a bear market rally - I think we will get that in the shape of a 'Santa Claus' rally after all...
Then again, may be not?!
Havibng a solid game plan and being flexible if it doesn't play out well is indeed the best thing one can do these days!
We have to live in the world we are in. That should still not prevent us from thinking and trying to change things.
The US has outlived it's century of fame and power and is going downhill. I put the blame on the puritans like my father did 50 years ago and I did not understand him until recently. The mindset that "making" (not earning) money has created a lifestyle that worked for many years but does not anymore. The brutal capitalism in the US is taking it's toll.
The culprits in Wall Street did what the prevailing philosophy asked them to do: Be greedy and get rich. Collateral damage does not matter. Socialism is the enemy though nobody bothers to explain why.
Some 40 years ago I read Lenin. Though he was a terrorist who failed in the end he had some thoughts that are still valid. Like: "The Americans will sell us the rope which we will use to hang them". It is still true, for money the "Americans" will do everything.
The game has changed. Nobody wants US products anymore. I learned that lesson when I bought my first hand-held circular saw (cheap but no ball bearings) and it was confirmed 25 years later when I bought a Buick Electra which my friends called an APOJ. Short for American Piece Of Junk. Why is it that the US car manufacturers are not able to compete? You know the answer!
World War II got the US out of the depression and since then several presidents tried to use that as a recipe. Did not work. The US lost most of it's admirers and friends and the remaining ones are very careful.
At the same time the once seemingly endless resources were raped. Standard Oil bought "Public Transportation" in order to shut it down. That worked fine when oil was cheap. Now people pay with a stretched infrastructure and rising costs to maintain it. Besides there is no cheap transportation anymore! That leaves the individual with a smaller share of the GDP. The permanently increasing taxes are wasted by spending-happy politicians. They are among the most responsible though they never really take responsibility. I still have to see the politician who takes a cut in his income.
This "money making" philosophy and "industry" is by far not as rampant in the rest of the world. But the rest of the world is happier and has a better place to live.
Jo (in search of true life)
A comment from another Briton who has lived in the US for about 25 years. I really don't think Americans have much to worry about in the long term. In the short term things are going to get very ugly, and I'd like to thank AH for telling it like it is and avoiding the happy-talk. But if you look five years out, the US has a very flexible job market, it has a good higher education system, it still attracts very good quality foreign graduate student, and its economy will recover.
I wouldn't make any recommendations about selling or buying this or that currency, or this or that stock at the moment, but we will look back on 2008 as a turning point, when the US began to invest more seriously, when consumers began to pay off debt, when Americans with inadequate credit lost their "assets" and went back to renting, when the worst run American companies went bust, and good riddance, and when the US got serious about energy independence.
This won't happen in a year, or even five, but it will happen, because the US does not suffer from the concealed ills of some other countries. Americans still resist excessive regulation, they still understand that Government has no money of its own, and they don't imagine that the State can carry them for ever.
Nice post Adam, here's my take (genuine point of view with no malice intent from a Brit) America has sold itself cheap to the rest of the world. Worked service sector jobs to pay for foreign goods. It has mortgaged itself to the hilt to do it and it simply can't afford it anymore. Lack of confidence has set in and now panic. Now is the time for readjustment. Everyone realises that America is not exporting anything anymore and th edollar will start to lose value because i) No one needs American goods (which aren't being made anyway) and ii) Americans can't afford foreign goods - exacerbating the problem. The time to sell those dollars is coming guys, buy the Euro, Yen and the Pound. If you doubt it look at the blog above again - if your states can't afford to pay their workers what happens when they have to find benefits for them and get no return in labour (labor for you yanks) for the outlay? The writing is on the wall.
The real economy has nothing to do with technical indicators.
The more people talk about how bad things are and how they are going to get worse, the more you realize they are Victims who haven't the slightest idea how to manage their money. But they are excellent critics with amazing hindsight. You may as well be at a Hen Party with all the ladies complaining about husbands, their hired help, and the out-of-control kids. Believe it or not- nothing can be done about the excesses of the past.
Are the bankers and Republicrats responsible for this mess really that stupid or is some demonic secret society pulling their strings to set up a new world order on the financial ashes?
The difficulty with some conspiracy theories is they are not theories...
Obviously everything, including Gold, is deflating but don't think this will last forever. The brilliant minds in Washington have created a situation that the coming inflation will rip our heads off. Until the government sits on the sideline and allows some failure to take place, the trend is down.
Great post Adam!
Every time I hear something like this:
"For the past 20 years, the majority of U.S. tax payers have been gorging on easy money. As long as everybody could keep borrowing, it did not seem to be a problem. But then… the bubble burst."
It is an attempt to shift blame.
Oh no! It could not possibly be that our entire ability to sustain ourselves has been deliberately shipped outta here. It had to be our greed! How dare we try to feed ourselves on the only sustenance the criminal banking cabal was handing out. Remember "Money is Debt"! A debt based monetary system is designed specifically to enslave us. You are blaming the slaves for their enslavement.
What has me worried is looking at the 10 yr. note, and it's continued falling yield. These yields havn't been seen since Elvis. Then the ISM # came out, for Nov. manufacturing and non- manufaturing, and they're a total disaster, but again has me worried is the pricing component, which shows steep drop offs. All this points to deflation, and falling liquidity, simialr to the 30's, when yield on short term treasuries, went to ZERO, but the price continued to rise. As the feds continue to drop rates, more money flows into the treasury marekt, forcing prices higher.This creates the 30's cycle, and dropping rates accelerates the probem not what Big Ben and Uncle Hank expect.
Howdy!! Get rid of the emotions of FEAR and GREED
and rent a Marx Brothers movie. This too shall pass! Let's buy a bank so we can get bailed out or bought out. As i said, no greed. I'll be satisfied with 'just' $1 Billion.
Gotta Giggle!!
--- D ---
Adam... Great comentary!!!
I've been around for a long time and it seems that i have seen so much go wrong with the economy and this Country that even the most out of touch politicans could have made so many mis judgments without a central plan to bankrupt the US and break the Constituation. WEW