Obama and the Moon

by JDH on November 8, 2008

Finally, after 21 months of campaigning, the U.S. election is finally over. Has the world changed? Did the election make any difference?

I am a cynic. I am of the view that the economy is imploding. A trillion dollars of bailout money has not stopped the stock market decline, and I think it is entirely possible that we will see 6,000 on the Dow before the end of November, 2008. The chart simply doesn’t look good.

I think it is entirely possible that one of General Motors, Chrysler or Ford will not exist a year from now. That means that every town in America that has three North American car dealerships will, a year from now, only have two. Manufacturing plants will be closed, and the resulting job loss will be enormous.

Our society lived on credit for far too long, and now we have to pay the piper. I am a cynic, and I just don’t see what a President, or a government, can do to reverse the laws of nature.

Governments do not create wealth. To paraphrase Seth Godin, “wealth is created by productivity, and productivity is the result of innovation, and innovation comes from hard work, investment, and progress.” Governments do not create wealth. People, working hard, create wealth. I’m not convinced that any government can positively motivate people to create wealth. Believing that government can solve your problems leads to a sad day for America.

Of course, I could be completely wrong.

I’m not wrong about government being able to create wealth; they can’t. But, perhaps I am wrong about the influence of President Obama.

I think back to the dying days of the Jimmy Carter presidency. Americans were being held hostage in Iran, and the economy was in the dumper. Along came Ronald Reagan, who won a landslide victory (twice), and made everyone feel good. He probably wasn’t the smartest president (although Saturday Night Live had a brilliant take on that subject, although I thought the Grumpy Old Man routine was even funnier), but he inspired people. I remember watching him give a speech to the troops in an aircraft hanger somewhere; he ended the speech by thanking the troops and saluting them, and there wasn’t a dry eye in the place.

He was respected, he made people feel good, and therefore people were less likely to spend their time demanding stuff from government; they got to work and did it themselves, and the result was the 80’s and 90’s, one of the biggest boom periods in history.

I suppose Kennedy was the same, but he was before my time, and it’s very possible that Obama will be similarly inspirational. Read the blogs that are out there, and you will find many that admit that they are inspired by Obama. It is entirely possible that it will be self-fulfilling prophecy. If we all believe Obama will save us, we may all end up working harder and saving ourselves, which then saves the world.

I hope that happens.

I just worry that after the initial euphoria wears off, reality will set in. And the reality is that the markets are down, the consumer is down, the auto makers are down, and all of that down doesn’t make an up.

I’m giving you the reasoned approach to why the markets will not recover any time soon. There are many really wild reasons on the net to explain why the market will crash even further. Here are my favourites:

First, the moon. Yes, the moon. Apparently the full moon on November 13 is a “supermoon”, which occurs when the moon is very close to earth. (The moon orbits the earth in a somewhat elliptical orbit, so during its orbit it moves closer to, and then farther away from , the earth. On November 13 it will be very close to the earth). Apparently that will make the moon’s gravitational pull even greater, which increases the chances of tidal waves, earthquakes, and other bad stuff.

Yeah, really: the moon will be the cause of our downfall.

Second, Elliott Wave theory. Apparently everything moves in five waves up, and then three waves down. In a bear market, there is an “A” down wave off the peak, then a rebound, than a “B” wave down, then a recovery, then a final “C” wave down. Wave “C” is typically at least as large as wave “A” and often extends to 1.618 times wave “A” or beyond. (Of course 1.618 is the Golden Ratio).

Personally, I think Elliot Wave Theory is a bunch of hooey. Once the chart is drawn you can fit the waves to make it work, but it has less power as a predictive tool. However, if you draw the lines a certain way, the case can be made for 4,000 or so as the bottom of the final wave.

Alas, I don’t think we need to look to astrology for reasons why we are in trouble. There are some obvious business reasons why we could go down substantially from here, such as:

1 Tax loss selling. If you sell your losers before the end of the year, you can apply those loses against gains. Although I do have an accounting background, I’m not here to talk about taxes, and the rules differ depending on where you live (Canada vs. the U.S., for example). However, I do know that in Canada, if you had capital gains in prior years, you could sell your losers this year and apply those loses to prior years. That means you can recover some of the taxes you paid during the good years. Since everything is lower this year, I would assume many investors will be selling to recover some cash, and that will depress the markets. It makes no sense to wait until the last minute, so tax loss selling should be starting any time now.

2 The economy is in really bad shape. Really bad. It would appear that General Motors and the other North American car companies are only a few months of poor cash flow away from bankruptcy. In the last three months GM lost $2.5 billion, which is the fifth quarter in a row they lost money, and their sales dropped by 13% from already dismal levels. They are bleeding cash, and will require government help to survive. I know there are some who believe that the stock market is a leading indicator, and therefore the October bottom and subsequent uptick predicts a rise in the economy, but I don’t see a turn around at GM. President Obama may, as his first action in office, nationalize the auto industry, which is not a good sign.

(As an aside, I have heard no talk of bailouts for Honda or Toyota, both of which have significant auto manufacturing plants in North America. I wonder if it’s because they are better managed? If so, would it not be better to let the big three fail, and let someone competent take over their operations?)

3 A short squeeze on gold is in progress. The first day to give notice that you want to take physical delivery of the December gold contracts is November 28. That may very well start the force majeure in gold process we discussed two weeks ago. Gold lease rates are off of their highs, but they are still very high compared to historical levels. (In fact we are closing in on backwardation as short rates turn negative, which is extremely disruptive, and very bullish). If traders start taking physical delivery of gold, the Comex is done. It appears the open interest on the December contract is around 18 million ounces of gold, and there are only around 5 million ounces in the warehouse. Normally that’s not a problem, because most traders don’t take physical delivery. But, if they do, the down tick in gold may be over.

Again, I hope I’m wrong. I hope we have turned the corner, and the bottom is in, but I just don’t see it, yet (which may of course be a sign of the bottom).

My plan continues to be to hold some physical gold, hold some gold and silver stocks, maintain some short positions (such as RSW – Rydex Inverse 2X S&P ETF), and to continue holding cash while the market sorts itself out.

Let’s see if the moon destroys us all next week.

All comments welcome on the Forum; tell me why I’m wrong to be a cynic. Thanks for reading, and see you next week.

{ 0 comments… add one now }