How 2006 is Like 1968

The Daily Reckoning PRESENTS: In American politics, financial markets, and polarization, it feels more like 1968 than 2006. Susan Walker explores the financial markets to see what kinds of rifts have developed, and how they mirror the rifts in the political world. Read on…

HOW 2006 IS LIKE 1968

Here’s one thing that is not an October surprise for these midterm elections: U.S. voters are still polarized, just as they were back in 2000 (Bush vs. Gore) and 2004 (Bush vs. Kerry). Split down the middle into Republicans and Democrats with very few swing voters left in the middle. But let’s not blame this polarization on political slogans (“stay the course” vs. “cut and run”) or October surprises. Instead, let’s take a look at the financial markets to see the kinds of rifts that have developed, mirroring the rifts in the body politic.

Generally speaking, the stock market goes up and the economy is strong when Americans are happy. Their positive social mood creates harmony even though political, social, and religious views vary widely. Today, though, even with auspicious financial news, people are upset about the war in Iraq, they’re mad about illegal immigration, they can’t stand what’s going on in Congress, and more than 60% don’t like the way the president is handling his job.

One reflection of this negative mood might be the Dow itself. How can that be if it’s been going up, which should reflect a positive mood, you ask? Here’s how: Although the nominal Dow (the one priced in terms of the U.S. dollar) has pushed to a new all-time high above 12,000, the Dow priced in terms of ounces of gold is actually down significantly from its top in the year 2000. The same is true if you view the Dow priced in terms of commodities. What that means is that an inflated dollar is carrying the Dow higher than it would be if it were measured in real, non-inflated terms.

So polarized voters are examples of a split social mood, which can also account for the rift between what the stock market seems to be and what it really is. Voters are split between those who believe in the good news (portfolios doing well) and those who are uneasy about the markets and the economy even in the face of good news (portfolios doing poorly).

Usually, when social mood is positive, the stock market is up, the economy looks good, and incumbents win. That would bode well for the Republican party come November 7. However, an incumbent president’s popularity usually predicts his party’s victory or defeat. Positive social mood makes a president popular while negative social mood makes a president unpopular. Since the President’s popularity rating is less than 40%, that would seem to bode poorly for the Republicans.

So which is it? Actually, the markets and presidential popularity polls mirror another time in our nation’s history when people were polarized over a war and huge changes in society. The year was 1968, when Lyndon B. Johnson’s vice president, Hubert Humphrey, ran for the presidency against the Republican nominee, Richard M. Nixon. It was the year that students protested on college campuses against the Vietnam War; the year that Robert Kennedy was assassinated after winning the California Democratic primary; and the year that police beat up anti-war protestors at the Democratic convention in Chicago.

As the Elliott Wave Financial Forecast pointed out in the June 2006 issue: “Today’s interplay of markets against a backdrop of diverging social phenomena-from plunging presidential approval ratings to attacks against the most successful corporations to an increasingly unpopular war-duplicates the collective social experience of 1968.”

The markets had been rallying since 1966, but LBJ was hugely unpopular because of the Vietnam War. He stepped up the draft, because he refused to use reserves from the National Guard to augment the standing armed forces. Eventually, more than 500,000 U.S. soldiers were fighting in Vietnam. (Compare that with the approximately 140,000 U.S. soldiers in the volunteer Army and National Guardsmen in Iraq and Afghanistan now.)

As the Dow rose about 35% – going from a low of 735 in 1966 to a high near 1,000 two years later in 1968 – Johnson’s popularity fell from about 50% to below 35% and then went back up to around 45%. In comparison, as the Dow rose about 66% – going from a low near 7,200 in 2002 to the recent all-time high above 12,000 – Bush’s popularity fell from near 70% to around 37%. In each case, although the Dow rallied in the late 1960s and in the mid 2000s, these presidents grew more unpopular as people focused instead on their protracted wars, troop deaths and profligate spending.

The outcome in 1968: Nixon beat Humphrey with a popular vote that was nearly evenly split with 43.4% for Nixon; 42.7% for Humphrey, and 13.5% to George Wallace of the American Independent Party. That result begs the question: Who is going to be our third-party candidate in 2008?

Looking at the markets and the social mood behind the poll numbers, analysts at Elliott Wave International (www.elliottwave.com) say that the “big difference between Bush’s readings vs. the stock market and those of Johnson is that this time the discrepancy has been building for roughly twice as long” – two years vs. four years. They interpret this divergence between a high-flying Dow and low-tumbling popularity numbers as the precursor to a turn in the stock market. In fact, since the Bush build-up has been longer, they expect that the turn in the markets will be bigger than during 1968-69 when the Dow dropped about 20% from its high.

This polarized atmosphere also suggests that the social unrest that the United States has been experiencing should grow larger. More people in the streets protesting over immigration reforms. More oil company executives testifying before Congress. More innocent kids getting shot in schools. More hateful political campaign ads questioning the morals of the other party’s candidate. More negative and confrontational behavior that we haven’t even thought of yet.

Regards,

Susan Walker
for The Daily Reckoning
November 7, 2006

Editor’s Note: Susan C. Walker writes for Elliott Wave International, a market forecasting and technical analysis company. A graduate of Stanford University, she has been an associate editor with Inc. magazine, a newspaper writer and editor, an investor relations executive and a speechwriter at the Federal Reserve Bank of Atlanta.

For more on Elliott Wave International, see here:

Elliott Wave

$30 million and $80 million.

Two big numbers…and they signify end of the world as we know it:

The first number is the rate at which China is adding to its reserves of foreign currencies – mostly dollars – every hour.

The second number is the rate at which America’s capital – as measured by the current account – is being depleted, also by the hour.

Last week, China’s pool of reserves passed the $1 trillion mark, making it the largest lake of money in the world.

The United States has a chain of great lakes too. But they are a different kind – vast sinkholes of debt that get bigger every day. The cost of the war in Iraq alone is $8 million per hour.

And another point of comparison – the third quarter showed China’s GDP still going up at more than 10% per year. The same quarter in the United States revealed a slowing economy – growing at only 1.6% per year.

The Economist describes China’s growing pile:

“By the end of October China’s foreign-exchange reserves are likely to top $1 trillion, twice their level two years ago and more than one-fifth of global reserves. This handsome sum would be enough to buy all the gold sitting in central banks’ vaults (indeed, twice over) or almost all of London’s residential property.

China’s massive hoard is the result of its large current-account surplus, significant inward foreign direct investment, and big inflows of speculative capital over the past couple of years. In theory, flows of foreign money into China should push up the yuan, but China has resisted this, forcing the central bank to buy up the surplus foreign currency. The growth in reserves has slowed in recent months, but it is still averaging a hefty $16 billion a month.

China’s official reserves already far exceed what is required to ensure financial stability. As a rule of thumb, a country needs enough foreign exchange to cover three months’ imports or to settle its short-term foreign debt. China’s reserves are equivalent to 15 months of imports and are six times bigger than its short-term debt. The explosion in reserves is also a headache for the central bank. It creates excess liquidity, which risks fuelling higher inflation, asset-price bubbles and imprudent bank lending.”

What’s more, experts guess that China might have $2 trillion in reserves before she figures out what to do with it.

Poor China. All that money sitting around. What can it do?

Money is a curse, of course. Just look at Paris Hilton. When too much of it piles up in one place, it begins to stink like old manure. Now, China will have to get out the excavating equipment and begin spreading the stuff around. Maybe it could buy a house from Donald Trump or a Picasso from Steve Wynn? No, that is for later in the cycle…when the Chinese become rich and degenerate. For now, China will just go on buying the things she needs to continue her expansion – mining companies, oil fields, farm products…maybe even farms themselves.

Hmmm…let’s see. An acre of farmland in Kansas sells from $550 to $1,265. We’ll say $1,000, so we can do the math in our heads. With a trillion dollars in your pocket, you could buy a pretty big spread in the heartland – say, one billion acres, right? Kansas only has 52.36 million acres. So, the Chinese could buy the entire state…and still have $947.64 billion left over – enough to buy all the farmland in Nebraska, Iowa, South Dakota, North Dakota, Missouri, Arkansas, Louisiana, Colorado, New Mexico, Montana, Wyoming, Oklahoma and probably Texas too.

‘Well, isn’t that special,’ economists could say. ‘The foreigners know America has the most dynamic, most successful economy in the whole dang world. Yes, we spend more than we make. But the money comes back to us finally. It just shows what a great economy we have. The foreigners want a piece of it.’

And day-by-day, at the rate of $80 million per hour, the foreigners get a few more pieces of it. And now China, if she chose, could trade her pieces of U.S. paper for a piece of land the size of the Louisiana Purchase. Or she could buy stocks…or Treasury bonds. The total capitalization of the entire 30 Dow stocks is only about $3 trillion. So, she could buy a third of the Dow…or a controlling interest in every one of them.

Won’t that be nice? Eventually, we’ll all be able to go to work in Chinese-owned factories…or sell our internal organs to Chinese doctors. What a great economy!

But here we would like to pause…draw breath…and vent our admiration for this great flim-flam. There is no doubt that Americans have a model of democratic capitalism that is the envy of the entire world. It functions beautifully – in theory. But in practice, it has reached a stage in its cycle where only the rich seem to make money, while the poor and middle classes actually lose it. Today, as Americans go to the polls, the money supply is soaring…Saddam has been condemned to death…and the Dow rallied more than 100 points. Still, “Average Joe’s cash woes cause election angst,” reads the Houston Chronicle.

Acting on their inclinations, but not in their interests, America’s lumpen householders loaded themselves up with debt. They were all just trying to keep up with the Joneses – who were just trying to keep up with them! Besides, they were confident that democratic capitalism and republican politicians wouldn’t fail them.

Meanwhile, China is still a communist country whose leaders…and people…remember a very different time – when the Gang of Four ruled…and when people starved…and when they tried to make steel in backyard furnaces. Then, the country seemed ready to implement any crackpot idea the party bosses came up with. And even now, it is still an economy that is partially centrally planned by people whose ideas were partially formed by Mao’s loopy Little Red Book. In theory, it should be a basket case. Instead, both the numbers and eyewitnesses tell us that it is booming.

What to make of it?

We don’t know. But here at the Daily Reckoning we have neither leaders to chivvy us nor followers to goad us onward. We march neither under the banner of U.S. capitalism nor international communism. We salute neither the captains of Wall Street nor the mandarins of Shanghai. And we take each step forward not knowing where it will lead…or whether it will be our last.

More news:

————–

Byron King, reporting from Pittsburgh…

“Why global warming? Because it is what you get when you burn up lots of fossil, carbon-based fuels and load the atmosphere with excess levels of carbon dioxide.”

For the rest of this story, and for more market insights, see today’s issue of The Rude Awakening.

————–

And more flotsam and jetsam:

*** Some additional thoughts on China from Outstanding Investment’s Justice Litle:

“The conventional view has long been that China labors under a Damoclean sword of overcapacity. If this is incorrect – if China’s business are trending profitably on the whole – that could warrant a dramatic shift of perception.

“In my mind at least, China’s near-inevitable implosion was tightly linked to ugly geopolitical ramifications. Dominoes falling in the Middle East, global tensions rising, and so on. Big crunch, here we come. If, however, China powers ahead on sustained profit trends, we go in a different direction.

“So…anyone want to play the ‘what if’ game? i.e. What if China doesn’t slow down, America keeps the sputtering engine alive, and the transition to Asian domestic demand continues to unfold?

“Here are some of my ‘what if’ thoughts – a grab bag of possibilities / implications.

“Energy continues to be a good bet in this scenario. No slowdown means energy comes roaring back, as long-term fundamentals suggest it would eventually do regardless.

“An uncomfortable detente is established with the petro-dictators – like peace between rival gangs for the sake of making money. Continued cash flow means things get worked out for now.

“Precious metals continue to be a good bet. If Asia prospers as the US labors under a growing debt load, the Bernanke policy of surreptitious inflation-creep continues. Back room bargains are struck, the dollar continues to deteriorate in managed fashion, and gold resumes its role as slow motion canary in the coal mine. This is the Marc Faber scenario in which the Dow doubles and gold triples under a successfully managed inflation regime. Gold is kept on a leash, but the pressure has to release somewhere. The increasing prosperity of Indian and Chinese consumers also factors into gold’s continued positive trend.

“Warren Buffett’s ‘sharecropper society’ becomes a more compelling angle than ever, as U.S. indebtedness contrasts with growing Asian profitability and the hard reality for middle Americans is shoved under the carpet.”

*** Our old friend, James Passin, is in the news today. James used to be an analyst for us in Baltimore. Then he went to Wall Street where he took the job of managing the Firebird Global Fund.

We should have sold our business and put all the money in James’s fund. It has gone up 46% per year for the last five years. And now James is betting heavily that nuclear power is making a big comeback.

“We’re in an historic uranium shortage,” said Passin to Bloomberg News. Uranium rose $7 last week – to a record $60 a pound.

*** Where’s the best place to live? The Economist Intelligence Unit says the world’s most livable city is Vancouver. We can believe it; Vancouver is one of our favorites.

The number two place was Melbourne, Australia – home of our own satellite office…and star reporter Dan Denning. Other Australian cities – Perth, Adelaide, and Sydney – also made the top ten.

Meanwhile, Mercer Consulting rates Geneva and Zurich as the cities with the highest quality of life…and puts Vancouver in the third spot.

All those cities are nice places to live, but the values seem fully priced. Where are the bargains? According to the Economist, the world’s cheapest major city is Asuncion in Paraguay. We don’t know anything about Asuncion; we’ve never been there. But we’ll try to have a look, sometime soon, and report back.

*** The news comes this morning that Danny Ortega has won in Nicaragua. Good. Maybe it will discourage people from going down there.

When we first discovered the Pacific coast of Nicaragua, it seemed like paradise to us. Everything was cheap…and beautiful; it was like an Eden in Latin America.

But lately, things have gotten hot down there. Refugees from the cold North have been coming down in the thousands…buying lots and building houses. There’s been a real boom! Now, when you go out on the beach, you’re likely to see U.S. retirees…and surfers. You can hardly stroll for an hour in either direction anymore without running into a gringo. And at night, instead of the dark shore…you’ll see lights from houses – and even condominiums.

We are looking on the bright side. Ortega is a knee-jerk leftist who will do stupid things. But at least he’ll discourage norteamericanoes investors like us. Maybe things will have a chance to settle down…and the place will seem a little bit more like paradise.