The largest one-day stock market fall in all of U.S. history took place Thursday, but it did not come as a surprise to readers of Financial Intelligence Report (FIR).
FIR has been warning for months that an “automatic” correction was in the works due to two factors: 1) the high number of stop orders placed on auto-trade with brokers and 2) the automatic expiration of the Bush tax cuts at the end of this year.
Back in October 2009, our monthly advisory — published by Newsmax — warned that many investors were nervous about their equity investments and had been placing automatic stop orders on their holdings.
My analysis for Financial Intelligence Report that month was headlined: "An 'Automatic' Stock Market Crash in the Cards?"
We shared with our readers information we had learned from one of the top private banks in the country. In past years, we were told, investors generally did not place such standing orders, believing as they did in the great American bull market.
But such optimism ended with the market crash of 2008 and 2009.
Wary investors have slowly been coming back into equities, but ever so carefully — and many times with those conservative stops in place to lock in their gains “just in case.”
On Thursday, when the stock market began to tumble and fell more than 200 points, stops obviously began to kick in. Selling pressure became enormous.
Media reports now say an “error” worsened the problem, with a trader accidentally placing a broad-market sell order in the billions instead of millions. So far, the exchanges say no evidence of this has been found.
This further pressed the market down and even more stop orders kicked in.
But the shaky nature of the overall stock market is not caused by stops. They are just one problem the market faces.
The bigger problems are the state of the economy and President Barack Obama’s policies.
Once again, the press is blaming the stock market tumble on Greece and avoiding the “O” word.
How do they know Greece caused the tumble?
They don’t. I think the economy here in the United States and Obama’s policies are having a far greater effect on investors.
At Financial Intelligence Report, we have been warning of a major market correction all this year. We predicted that, one day, investors would wake up and realize that the Bush tax cuts are expiring en masse at the end of this year.
This means that without lifting a finger Obama will get a massive, almost across-the-board tax increase.
Those in the highest brackets — people who Obama sees as “rich” and who I see as critical for economic recovery — will see an automatic tax increase of about 10 percent.
It has been a long-held view that the stock market is a leading indicator of the economy by about six months.
In just over a half of a year, then, we foresee that the consumer economy will take a huge hit as the cash flow of high-income producers diminishes.
As the Bush income tax cuts expire, so do dividend and capital-gains cuts. Many investors will also realize it’s better to sell this year and pay less tax — another factor that will put downward pressure on the markets.
Obama thinks he will take from the rich to give to the poor by letting tax cuts expire, but he will most hurt the poor.
What Obama forgets is that those who make high incomes are not necessarily rich, at least as far as their balance sheets go.
Warren Buffett takes a very small income but is very rich, the richest man in America. Interestingly, his income will be little affected by the end of the Bush tax breaks.
I suggest the president and others read Dr. Thomas Stanley’s new book, “Stop Acting Rich.”
As Stanley explains, those who have high incomes, such as doctors and lawyers, are typically not wealthy.
Instead, he finds, they are hyper-consumers. They like to spend what they earn. Cars, watches, travel, restaurants, fashionable clothes, boats, you name it.
There is no question that such spenders drive the whole U.S. economy. Think of the thousands of workers who find employment due to such hyper-spending.
Financial Intelligence Report has warned that if the Bush tax cuts expire, it will reduce cash available to such spenders, who will further tighten spending.
Investors should begin tightening their seat belt as we careen toward a double-dip recession.
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