Professor Elam

I write a weekly newspaper column, this one appeared last friday before the monday meltdown.

Change You Can Believe In The Times they are a changin’ – Bob Dylan We are Change! – Obama / Biden and McCain/Palin I

ndeed, each set of candidates is trying to outdo the other in claiming to be the genuine change agent. We suspect that either way, the public and the elected team are going to get more change than they bargained for or expected. Here is why. We predicted a few weeks back that oil, rather than going to $200 from $145, was more liable to go to $100. Indeed that has occurred. We reached that conclusion by letting the market rather than talking heads on television reveal its hand. While everyone was all agog over the Biden – Palin debate, the real news was overlooked yesterday.

The Dow Transports tanked 400 points, confirming the move down in the Dow Industrials. Put another way, the weekly and monthly Exponential Moving Averages have crossed to the downside. This is the first weekly change since 2003, so it must be respected In addition the Baltic Shipping Index has crashed back to previous lows. Those indices are telling us to expect a severe slowdown in shipping, which is to say commerce, which is to say, the economy. Corporate and municipal bond prices are already breaking long term uptrends. This will be a substantial change in the very fabric of our lives. I am talking about a period akin to 1972/4-1982 or perhaps 1929-1939. Each period was characterized by a peak in stock prices, then a drastic decline, followed by a decade of sideways movement.

The decline from Dow 390 to Dow 41, 1929-1932 was particularly severe. The lack of FDIC bank insurance literally wiped one third of the money supply out. The decline from Dow 1,000 to 577 from 1972-1974 was a 50% decline, less severe given the financial safety nets in place. The Dow has already dropped 25% and no one seems really worried about it, would another 3500 points do the trick? Don’t laugh, that is where the DOW was in 2003! Indeed the social and financial safety net is so complete it is possible to ignore the obvious. What would be the better announcement of a Wall Street collapse than for the exponents of investing, Merrill and Lehman, to go bust? They have. What would be more prescient than to see the promoters of ‘home ownership,’ Fannie and Freddie, to go completely out of business? They have. The parallels abound.

The White House changed hands in 1932 as it did in 1968. Since FDR no party had been elected three times in a row to the White House, so look for George and his Republican Company to exit. What am I saying, the bailout bill and all sorts of promises from the candidates will not save the economy? Yes that is what I am saying, just ask GM or Ford or Toyota, sales down all round 30% last month. The party is over. As Bernard Goldberg remarked today, ‘no matter how well we are doing in Iraq, the public is tired of the war.’ Or wars for that matter, both candidates are promising to carry war on in Afghanistan after Iraq, and perhaps Pakistan, and then hey, let’s defend Georgia from our old nemesis, Russia! Where will the money, much less the will, come from? In 1974 America was tired of Viet Nam.

The commodity inflation made temporary players of strictly third party back benchers like Russia and Venezuela, who have no real economy other than oil. Indeed the price of oil is down simply because the world can no longer afford it. The price of oil is derived from the weakness, or strength, of the US Dollar. The dollar has rallied as the world scrambles for dollars. But all this spending will weaken the buck again, and then expect oil to rally. But it will be dollar, not economic driven.

Today the Dow Industrials closed below their 50% level of the entire move from the 2003 low to the 2007 high. This suggests lower prices ahead as support has failed. The Transports joined in a new weekly low for this move. That constitutes a Dow Theory sell signal. Expect a brief rally in stocks and the general mood between now and the election. As I write the markets are terribly oversold after crushing volatility of hundreds of points in each direction per day. That rally will be enough to convince everyone that the ‘fixes’ are working, the bailouts, the bank rescues, the income re-distribution schemes. But after the election, look out for more reality checks.