Oregon Trail

I am sure that you collectively have been on the edge of your seats awaiting my next intellectual emesis. Certainly, driving 3250 miles with two dogs, including an hysterical young female,(an oxymoron) gives one time for contemplation. There are some striking characteristics throughout the USA. Two of the deadly sins, slough and gluttony are alive and well, particularly in the Southeast. The women compress two people into one body. I'm sure Our First Lady will shape 'em up. The women in Wyoming have no teeth; consequently, they tend not to be morbidly obese. If you were in, say, the spa of Rock Springs, and were trying to score with a local chick, you might say,"Nice tooth!" But I digress.

There are two bullish arguments put forth by the cheerleaders on Wall Street: a fundamental one stressing a V-shaped recovery and a technical one using the 2004 consolidation pattern to suggest that 2011 will be much like 2005. Let's consider these premises. The argument for a viorous and self-sustaining economic recovery is based on the premise that a severe downturn is followed by a vigorous rebound; the more you depress the beachball below the surface of the water, the higher it jumps when released.

The 1982-3 recovery is most used as an example of this premise. Consider the differences between the two eras. The recession of 1981 was caused by extremely high interest rates created by Volker to combat the inflation of 70's. He won the battle and interest rates and inflation began a 30 year decline.In 1982, we elected a president who liked business and disliked government; he lowered tax rates and decreased regulation.

Finally, and most importantly, the US, both in public and private sectors was not the greatest debtor in the entire cosmos. (If there is intelligent life elsewhere in the universe, they are too wise to believe in Keynsian bullshit.) Quite the opposite today. Anyless inflation and we will be faced with outright deflation. Remember that deflation is the result of too much debt chasing too little cash flow.....like now. Interest rates are ZERO and cann't be lowered.

As for the current administration......... Now consider the technical issues. Let me say that I have been skeptical from March 2009 on that in a technical sense we were in a bull market. There was no basing pattern in a traditional sense; no saucer bottom, no double bottom, etc. Remember that the end of the 2000-2003 bear was defined as a one year event with matching bottoms in 2002 and 2003. I wouldn't be surprised if we look back at 3/2009-4/2010 as the mother of all bear market rallies. We can all remember 2004; the liftoff of the housing bubble. All in on the comeline on housing prices which never go down but constantly levitate skyward. Anyone putting 20% down was an imbecile; leverage was the name of the game. 110% loan to equity, opt. arms, NINJA,(no income, no job, no assets)loans prevailed and as house prices rose, everybody won. The home became an ATM and "equity" was extracted to purchase, on credit, SUV's, flatscreens, Jacuzzis and all the other necessities of life. We got rich without ever producing anything. This "miracle" translated into robust consumer- lead growth throughout 2005-6. and a pretty good market during that period.

Today, housing prices are not only not levitating but plunging and equity is negative,like Guga's. Since 70% of GDP is creditdependent consumption and since cash and credit are evaporating, I think it will be a costly mistake to draw a parallel between 2004 and 2010. Ironically, the existence of any consumer activity at all seems dependant of govt. transfer payments, credit defaults and nonpayment of mortgages. Hardly the stuff of a sustainable recovery; at some point the bums will be evicted from the foreclosed homes and have to pay rent.. Quelle domage!

Therefore, I believe that history suggests that we will not have a selfsustaining recovery and at best, limp along. At worst, BAD. Consequently, I would be wary of equities. I'll look at other themes in future communications. Bet you can hardly wait.

-Gugag