Wall Street Slips toward the Edge

By Joel Skousen

The Dow is shaken after its 3rd straight day of triple digit losses, and has dropped below 10,000. Technology stocks have especially taken a beating, devaluating even companies making a healthy profit. This is one of the reasons I’ve never felt comfortable in the stock market. Even when all the fundamentals of a company are sound, a wave of panic can cause stock values to plummet despite positive earnings. Everyone wants to extract their money while there are still a few buyers in the market. For this reason, there is a large element of gambling involved in investing in the stock markets--especially in buying stock in companies that have no residual value in capital assets should they fail. The only way to get your money out once invested in a public company is to find another buyer--and in a falling market, buyers dry up very rapidly. Is the market near bottom? or will it go over the edge into depression? Here is my analysis.

On the positive side, so far, we are only in a mild recession. We still see a lot of people with a lot of excess cash to spend. There also still exists a very dynamic economy in the US--fueled by an upscale middle class that is accustomed to lots of conveniences and high tech cars and equipment. Realistically, however, the consumer economy is weak because we Americans already possess almost everything we need to live quite comfortably. What people are mostly buying are non-essential and "nice to have" things. This country is so saturated with useful consumer products that most people could stop buying new cars and appliances today and not suffer much inconvenience for a couple of years. That’s what would happen quickly if everyone really began to fear that a deep recession was on the way and that they needed to start saving. Hardly anyone is saving now, so there is a tremendous potential for a retraction in consumer spending, simply with a cessation in current excess spending habits. At present, people are mildly cautious, so consumer sales are weak--but it’s nothing like what would happen to sales if a solid fear of depression were to break out. The media can successfully staunch this kind of panic as long as the government can halt a stock market plunge within 3 or 4 days. As of today, Friday, the market is beginning to turn upward again--so, once again, a crash is postponed.

Much of the market’s ability to stay overvalued (despite last year’s correction) is based upon the fact that those investors who have lost big in the tech stocks, haven’t yet sold their stocks--so the loss isn’t "permanent" in their mind. They are still hoping for a rebound, hoping to recoup those paper losses and turn them into gains. If the market really crashes, those investors will join in the panic and start to dump their stocks hoping to salvage at least a portion of the original value. But for now, they are holding on--otherwise the markets would be much lower than they are today. Stocks are still way overvalued and could fall much further. Price to earning ratios are still way too high, even after coming down almost 50%.

As to the fundamentals, most trends are negative. Worse yet, the positive growth side of this economy is fueled by debt--way too much debt--and multiple new forms of credit. Our economy has created a huge credit bubble as a result of a dozen years of fiat monetary inflation and paper credit creation. Some fundamentals are more important than others, and a high debt structure that reaches a critical mass can sink an economy even when there is strong consumer demand--especially when that demand is also debt financed. Money has been created not only by direct intervention by the Federal Reserve, but by private corporations, banks, and holding companies--all by indirect means: increased margin buying, an explosive derivatives market, high risk hedging schemes, and increased central bank borrowing via lowered reserve requirements. All these highly leveraged moves create massive instability in a market during a downturn.

Inflation is rising rapidly in many sectors of the economy, although most of key elements of inflation (housing, cars, oil, restaurant meals, etc.) are purposefully excluded from the government’s CPI index for political reasons. The government keeps using a "poor man’s" basket of goods for comparison and regularly throws out any item that begins a steep price rise. Non-governmental sources estimate that actual inflation is running in the 10%-12% range, and has been rising at 8-10% for over a decade. Inflation would be in the "Banana Republic" range if it were not for the unique position the dollar holds as an international currency of exchange. The US has successfully masked its huge dollar creation monster by exporting those dollars around the world--thus making it appear as if inflation is low here.

Because of the huge governmental and private debt structure, I do not believe we are near bottom. I do think that the current sell-off will stop and another rebound will begin next week, as has happened before. Such rebounds are accomplished by government’s insider-connected firms, like Solomon Brothers or Goldman-Sachs, shifting huge sums of money from low-profile sectors of the market to the Dow or the Nasdaq. They only need to create the impression of a comeback and millions of other buyers will join them, hoping to recoup this week’s losses. However, as the collapse of the bubble is postponed, intervention has less and less direct power to affect the market’s direction. The Powers That Be (PTB) will not be able to hold the markets up forever. I do believe they need to hold things together for another year in order to blame George W. Bush for the catastrophe that is coming. It’s still too soon for the media to cast aspersions at the tax cut. But if the crash comes in the fall of 2002, tax cuts will be fully discredited as a means of fighting a depression, and George Bush will become the next Herbert Hoover, paving the way for a huge Democratic victory in both the midterm election of 2002 and the main election of 2004.

The IMF has rescued, temporarily, both Turkey and Argentina from default on their respective international debts. Last month Turkey received US$15.7 billion and this week Argentina received US$8 billion. Both countries are way too deep in debt to recover or pay their way out, so this short-term default avoidance loan adds credence to my hypothesis that the financial powers are simply trying to postpone default till a later date--which may well correspond with the coming world financial crisis which will likely occur next year. Argentina’s emergency funding was less than Turkey’s, but included US$3 billion labeled euphemistically as a "voluntary and market-based operation to increase the viability of Argentina's debt profile." In plain language, this probably means that Argentina can use this money to buy out other foreign bank indebtedness on a less-than-par-value basis. Private banks may well be interested in allowing Argentina to pay off its loans at less than par value--better than getting nothing when the inevitable default occurs. Of course, the large international banks will be able to lean on Uncle Sam. That is why the latest round of IMF-Argentina negotiations were preceded by intense meetings between the IMF and US Treasury Sec. O’Neal--an indication of US control over the IMF and US willingness to make sure the big bankers are protected. Naturally, US taxpayers are going to have to replenish the IMF’s dwindling loan pool when the IMF comes whining for more money. You can count on the Bush administration to support continued IMF and World Bank funding.

Several small units of NLA guerrillas lined up (all too willingly) in front of NATO peacekeepers this week to turn in their rifles. News stories and photos flooded US and other Western newspapers about how smoothly NLA disarmament was going. Why shouldn’t it go smoothly? The whole setup is a staged performance to make it appear as if the one-sided "peace process" in Macedonia is going well. Indeed, it is going well for the guerrillas, but not for the poor Macedonians who continue to have both arms twisted, militarily and politically.

Scott Taylor, a retired Canadian military officer and editor of Esprit De Corps, filed this report from Tetovo: "For the battered Macedonian security forces that have fought the guerrillas over the past six months, the arrival of the NATO force will be a bitter pill to swallow. ‘If NATO hadn't been arming and equipping the (guerrillas) in Kosovo there would be no need for them to disarm these guerrillas now in Macedonia,’ said Goran Stevanovic, a sergeant with the elite Macedonian police Wolves. At the diplomatic level, the provision of military aid to the guerrillas is vehemently denounced, but on the ground in Macedonia, there is no denying the massive amount of materiel and expertise supplied by NATO to the guerrillas. Their commanders welcomed me with a shout of ‘God bless America, and Canada, too, for all that they have provided to us!’ In the well-built guerrilla bunkers overlooking the besieged city of Tetovo, there is ample evidence of US military hardware. Everything from sidearms and sniper rifles to menacing-looking grenade launchers is emblazoned Made in the USA. An abundant stock of sophisticated night-vision goggles provide the guerrillas with a tremendous tactical advantage over the Macedonian security forces. By nightfall, the Macedonians are compelled to hole up in their bunkers while the guerrillas roam with impunity throughout the Tetovo streets. Snake Arifaj, a 22-year-old guerrilla platoon commander, proudly displayed his unit's impressive arsenal and said, ‘Thanks to Uncle Sam, the Macedonians are no match for us.’

"Two weeks ago, there was a flurry of diplomatic protests filed by the Macedonian government when two US helicopters were observed delivering supplies to an Albanian village in the mountains above Tetovo. Officially, the US claimed their aircraft were only transporting humanitarian aid. However, the local guerrilla commander, Commander ‘Mouse,’ a 47-year-old UCK officer in the Tetovo sector contradicted this statement and confirmed that two US Chinook Heavy Transport Helicopters had in fact delivered ‘heavy mortars and ammunition’ to the guerrillas. As proof of Mouse's claim, on Thursday the guerrillas began bombarding Tetovo with 120-mm and 82-mm mortars. Judging from the duration and intensity of the bombardment that I witnessed, ammunition supply is not a problem for the guerrillas. ‘We have all the equipment and men we need to capture Skopje in 24 hours,’ said Commander "Jimmy", a 22-year-old Albanian guerrilla who is already a veteran of Chechnya, Kosovo, and south Serbia. ‘Militarily, the Macedonians are no match for our soldiers.’ The US also frequently used their tactical helicopters to gather intelligence inside Macedonia, without authorization from the Macedonian government. The sight of the US choppers prompted the ethnic Albanian villagers to cheer wildly, waving their arms to encourage ‘their’ air force." (End of Taylor quote)

Let me assure my readers that these American-supplied weapons are NOT being turned in. From the pictures I’ve seen, the weapons turned over to NATO are a mix of Soviet and Chinese AK-47s--the most abundant and easy-to-replace rifles in the world--along with many older WWII vintage rifles. NATO claims that what is being turned in is slated for destruction, but I’m skeptical. NATO may publicly crush some of the old WWII weapons in front of believing journalists, but most of the good stuff will be saved and returned via the huge black market in weapons that exists in the Balkans. NATO’s original announcement that they were going to collect a token 3,000 light arms struck me as too pat an answer. 3,000 weapons doesn’t even represent half of what the NLA has on the ground, so the operation couldn’t have been intended to actually disarm the rebels anyway. Few of the NLA’s heavy weapons are being turned in, although there were reportedly two shoulder-fired anti-aircraft missiles relinquished (probably a couple of missiles so old the propellant was deemed unreliable).

The peace agreement signed by Macedonia, under pressure from NATO, allows greater autonomy for the Albanian separatist movement in the western regions of Macedonia where the guerrillas are strongest. Thus, the NLA will have greater freedom of movement in these areas which are now controlled politically by their allies, and Macedonian military and police forces will have only restricted access. The agreement was not signed by the NLA themselves, so they are still free to continue the fight--a virtual certainty. Naturally, continued fighting will eventually justify more UN intervention, until NATO forces themselves outnumber the Macedonians. It certainly didn’t take 4,500 NATO troops to handle this token collection of arms; there is a bigger agenda going on. Originally NATO claimed that the disarmament would take a force of 3,000 troops, but somehow the numbers continue to increase. The US originally said US troops would not be involved, and now they are! Who believes anything government says anymore? NATO spokespersons continue to assure everyone that most of the 4,500 troops are logistics and administrative people. This may be true, but it shouldn’t make the Macedonians rest easy--obviously a military control bureaucracy is being put into place to support a Kosovo-style occupation.

On the heels of dumping the US two-ocean war defense posture, Sec. of Def. Donald Rumsfeld has issued a flurry of orders ostensibly switching US strategic forces to prepare for a conflict in Asia (to counter China) rather than in Europe (to counter Russia). This past week, the US announced it is shifting targeting data on some of our ICBMs from Russia to China. This is a strange admission since defense officials announced a few years ago that the US was no longer even targeting Russia or China. No savvy person really believed those self-serving announcements, especially since no government ever tells the world where their missiles are targeting unless it’s for propaganda purposes. But it is interesting that none of the news stories picked up on the obvious contradiction with former US policy. The media seem to have an interest in maintaining this lie.

In related news, the US announced it is pulling out major war stockpiles of ammunition and equipment from Europe and moving it to Diego Garcia--a huge strategic island base in the Indian Ocean. The European bases were developed to counter the Cold War Soviet threat, while Diego Garcia is better positioned for an Asian threat. So, why the shift to a China emphasis now--or is it even real?

I think the shift of physical assets is real--but for different strategic purposes that the US defense leaders are hiding. If the shift were truly in response to a recognized China threat, we would see a cut-off in US-Chinese military exchanges. On the contrary, they are being increased. We would also see a dramatic shift in language emphasis at the military’s language training facility in Monterey, Calif. So far, most students are still being trained in Russian--not Chinese. While China truly is a regional threat in the western Pacific (Japan, Korea, Philippines, Indonesia, Australia and New Zealand), it is still 10 years away from being able to take on the US directly, while Russia has the capability right now. I think the top US leaders know that Russia is planning a strike on the US and other regions of NATO in this decade, and they are beginning to reposition stockpiles to bases outside the European and American targeted areas--to safeguard them from the anticipated Russian pre-emptive strike.

WORLD AFFAIRS BRIEF (excerpt) September 1, 2001 Copyright Joel Skousen. Quotations with attribution permitted. Cite source as Joel Skousen’s World Affairs Brief. Website: http://www.joelskousen.com

(Ed. Note: We thank Joel Skousen for allowing his insights to be reprinted in part at Web Today. For access to his complete weekly columns, available by subscription, we refer you to his homepage http://www.joelskousen.com)

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