A Bear Market Rally?

The Dow roared back yesterday. It ended the day up 379 points. Gold fell $22 – to end the day below $900.

We’re going to take our “Crash Alert” flag down for a while. Finally, the Dow shows signs of life. We won’t know for a few days…but we’ll take a guess: the rally will continue.

Stocks in the United States have lost $11 trillion in value – more than cut in half – without a single major bounce. We expected one after Obama was elected. All we got was a 15% ricochet. Then, after he announced his major stimulus/bailout/boondoggle program…we thought, surely, stocks would rally then. Nope. Instead, globally, stocks are down 20% since Obama office.

But a rally in a bear market is one of the surest phenomena investors can count on. After so many years of rising prices – the bull market began in August 1982 – investors have learned to ‘buy the dips.’ Now, they’re looking at a Grand Canyon of a dip; many can’t help themselves. All they need is a little encouragement.

Yesterday, the encouragement came from Citigroup – which said it had made money in the first two months of ’09 – and from Ben Bernanke, who said we needed to regulate the financial sector better.

The rest of the news is terrible, awful…revolting.

Unemployment in the United States is up over 8%. A Bloomberg survey says it will go to 9.4% before the end of the year. Our own guess is that it will top 10%. By summer, one out of every ten people in the ‘workforce’ will be out of a job.

There are always some people living on the margins…hand to mouth…paycheck to paycheck. The trouble is that the margins are getting wider. “24 Million Go from Thriving to Struggling,” says a headline at USA Today. Not hard to see why. When you live from paycheck to paycheck, losing a job is a disaster. And in February alone, 651,000 jobs were lost.

Obama says he’s going to put millions to work with his spending proposals. He pointed to 60 new jobs in Maryland, on a highway-paving project:

“That’s how we’re going to get this country back on its feet,” he said.

When we lived in Maryland, the only people who worked on paving crews were immigrants from Latin America. No one else wanted the job. But maybe things have changed.

Meanwhile, Congress has gotten into the spirit of the Boondoggle Age. It sent a $410 billion spending bill to Obama for his signature. Included in the bill were 7,991 “earmarks,” or pet projects that didn’t make it into previous bailout, stimulus and boondoggles programs. Included in the spending bill, for example, is a program to pay for eyeglasses for people who are supposed to be blind…and to increase funding for Amtrak. The passenger train system has been losing money for as long as it has existed. According to classical economics (and plain good sense) Amtrak makes us all poorer. It takes valuable resources – labor, steel, electricity and so forth – and turns it into a service – transportation – which consumers judge to be worth less than the resources that went to provide it. Yet, that is the whole theory of the Obama stimulus program! Spend money on things that are unprofitable. (If they were profitable, they wouldn’t need public funding.) Somehow, wasting wealth is supposed to make us all better off.

As we think we reported yesterday, the bill for all these crisis-related boondoggles (including financial guarantees) is headed towards $12 trillion. And Paul Krugman, Nobel Prize-winning economist at the New York Times, believes even that is not enough!

“Many economists, myself included, actually argued that the plan was too small and too cautious. The latest data confirm those worries – and suggest that the Obama administration’s economic policies are already falling behind the curve.

“To see how bad the numbers are, consider this: The administration’s budget proposals, released less than two weeks ago, assumed an average unemployment rate of 8.1 percent for the whole of this year. In reality, unemployment hit that level in February – and it’s rising fast.

“Employment has already fallen more in this recession than in the 1981-82 slump, considered the worst since the Great Depression. As a result, Mr. Obama’s promise that his plan will create or save 3.5 million jobs by the end of 2010 looks underwhelming, to say the least. It’s a credible promise – his economists used solidly mainstream estimates of the impacts of tax and spending policies. But 3.5 million jobs almost two years from now isn’t enough in the face of an economy that has already lost 4.4 million jobs, and is losing 600,000 more each month.”

Yes, dear reader, looked at individually, each spending project may make us poorer – but we’ll make it up in volume!

But here at The Daily Reckoning, we always look on the bright side. Yes…you know what we think of bailouts, rescues, and stimulus packages – they’re all claptrap, eyewash and bamboozle. And they’ll delay the restructuring that the economy desperately needs. But looking at the part of the glass that is half full – at least they make it easy for us to carp and criticize.

*** Poor Bernie Madoff is going “up the river.” The expression “up the river” refers to Sing Sing Prison, 30 miles up the Hudson River from New York City.

How much time will Bernie do? “Life,” said one report. “For up to 150 years,” said another – perhaps over-optimistically.

Bernie has copped a plea. When his attorney is asked the question, he is expected to reply: “Guilty as charged.”

Meanwhile, poor Martin Armstrong rots away in a New Prison. We will tell Armstrong’s story when we have more time. It has all the ingredients for a great conspiracy story – the CIA…an omniscient computer program…money…power… you name it.

Martin Armstrong was once the highest paid economist in the United States, as head of the Princeton Economics. At least, that’s what the papers said. He developed an elaborate cycle theory, which was said to predict major market turns. Now, poor Martin is a convict…serving out a five-year sentence, after having spent eight years in jail for contempt of court, on charges related to an alleged Ponzi scheme. “Alleged” is an important word, because Armstrong was never tried or convicted on the original charges. But we’ll leave that for another time….

Even from his jail cell, Armstrong still keeps up with the economy. His 8.7-year cycle theory predicted a downturn would begin in the summer of ’07 – which it did. But now…get this…he says the recession will last for 23-26 years! Why so long? Because the feds won’t allow the economy to heal itself, he says.

We don’t know if he’ll be right or wrong. But it is a shame to keep people like Armstrong and Madoff in prison – at taxpayer expense. Both could make valuable contributions to society in order to compensate for their alleged crimes.

We have previous suggested that Madoff be tapped for Secretary of the Treasury. The United States is running the biggest Ponzi scheme of all time, paying off old loans by taking out new ones. Why not let a real pro run the program?

And surely some under-secretary post could be found for Armstrong. In the news over the weekend came word that Geithner was working ‘night and day’…and alone. He is supposed to have a full complement of hacks and functionaries to help him; but they haven’t been appointed or approved yet. So Geithner sits at his desk and talks to himself. What a pity! Destroying a major economy is not a job for a single man. Even Alan Greenspan had a crew of apparatchiks to help.

Free Madoff! Free Armstrong! Let the pros do the job!

The Daily Reckoning