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Creating Real Value Will Put US Back on the Right Path

Friday, 17 Sep 2010 08:59 AM

By Barry Elias

On May 6, 2010, this website published an article of mine in which I described my rationale to divest from equities several days prior (when the Dow Jones Industrial Average was roughly 11,000). That day, we experienced what has been termed, "the Flash Crash," and stocks declined nearly 1,000 points in the early afternoon.

It has remained in that 1,000 point range for several months (recently near 10,600).
None of this should be a surprise to the financial cognoscente.
According to the Federal Reserve Bank, total debt (private and public) equaled total income 35 years ago.  Today, the total debt is roughly four times income.

This increase in debt occurred over several decades.  Delevering the system to clear the market appropriately may take a decade or more.
Real estate and the associated purchases are key economic drivers.  The current supply of real estate exceeds current demand; this suggests more downward pressure on prices before the market can experience a stable equilibrium.
For those concerned about the negative impact of deflation, consider the technology industry.
The significant decline in the unit price of memory has functioned as a springboard to opportunity and growth in that sector.
A pre-eminent focus on accommodative monetary policy may, ironically, discourage productive resource allocation.  When money is essentially free, there is less incentive to invest prudently, with a premium on creative innovation and an eye toward the future.
I anticipate the market to move sideways through the election.
This may be driven more by the political calculus rather than underlying economic parameters.  Asset price stability will most likely be achieved through government intervention:  an increase in financial liquidity via monetary aggregate creation, also known as debt monetization [roughly a year ago, the Federal Reserve Bank abandoned its sterilization policy (stable money supply) in favor of monetization].
If Republicans make significant gains this November, the market may experience a brief increase based on anticipated tax policy more favorable to business (extension of the tax-rate reductions signed into law by President Bush).
Following this, I would expect further declines in the market.

Moreover, I suspect an unemployment rate near, or above, 10 percent for some time, possibly through 2012, with electoral implications.
The socioeconomic construct and the implicit value system of America need to be re-evaluated and rebuilt.

Only after this path is defined can we expect a return to real productivity based on value creation, not wealth transfer: a richer quality of life for society. 

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