Gary North speaks....

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Gary North's REALITY CHECK No. 49 April 5, 2000 E-Mail: icetyler@juno.com

AT THE EDGE OF THE ABYSS The collapse of both the Nasdaq and the Dow Jones Industrial Averages on April 4 indicates how fast equities can be wiped out.

The three-hour recovery also indicates how the futures market -- low, low, low down payment! -- can be used to reverse a market plunge.

An article by John Crudele of the NEW YORK POST (April 5) indicates that at 1 p.m., EDT, there appeared out of nowhere sustained buying activity in the futures market.

One minute the Nasdaq was down 11 percent -- say it out loud, "Eleven percent in one day" -- and then it suddenly rallied several hundred points in the matter of an hour. . . .

Then, traders said, someone started buying large amounts of stock index futures contracts through two major brokerage firms -- Goldman Sachs and Merrill Lynch. . . . Goldman wouldn't comment on this and Merrill did not return a call for comment. . . .

"I think some one or more persons saved the market today. There was a suspicious urge to buy stocks at an opportune time," says one trader. "Why drive the Dow up 350 points in a half hour? That's never serious buying. That's someone trying to establish prices," he adds.

I'm especially suspicious when the market suddenly rebounds at nearly the very same moment that a member of the Clinton administration -- economic advisor Gene Sperling -- is on TV telling investors not to worry.

http://www.nypostonline.com/business/2250.htm

The futures market is where you get the most bang for your buck if your timing is perfect. If you had unlimited funds to stabilize a falling stock market, you could achieve this result cheapest by using financial futures. You would have to put so little money down as a deposit. This is vastly cheaper than buying the actual stocks.

The risk seems great. The market may keep falling. But, as I said, if you had unlimited funds, you could keep pumping up the market with sustained purchases in the futures market. This is what the anonymous trader said. It was sustained buying. It was not someone who was buying on the dip. Someone was buying to reverse the dip. This was not bottom-fishing. This was establishing a bottom and raising it.

The investors who failed to meet their margin calls on April 4 lost a lot of money. They lost their positions, which were sold out from under them. Margin giveth and margin taketh away. To sell out in the wave of panic margin calls, only to see the market reverse itself at 1.p.m., would be a devastating experience. The victims will not soon re- enter the market.

The intervention provided confidence. It was one more example of the seeming inability of people to lose money in stocks if they buy and hold. There is always someone who comes to the rescue through the financial futures market -- someone who simply does not fear massive losses in case he bets wrong.

It is as if someone were not investing his own money, as if he could create all the money he needs to sustain his position in the futures market, someone too big for the shorts to challenge.

This sense of confidence is what has raised the price/earnings ratios on the Dow to 40, and in the Internet stocks to 200. Investors are willing to take low earnings and no dividends on the assumption that increases in stock prices will compensate them. The investors believe that the stock market giveth but never taketh away.

The man on the green horse will always ride up, buy futures contracts, and then disappear into the night without selling his contracts, despite massive profits.

It's nice to have a buyer of last resort whenever the stock market tanks.

It's especially nice in a Presidential election year.

WHO WILL TAKE THE HIT?

Recessions eventually arrive. They are preceded by stock market reversals. These reversals take place about six months before the recession hits. The election is seven months away.

I keep wondering if Bush will win, only to head into recession. That would not be good for the Republican Congress in 2002. It might be a replay of 1930. Then came 1932.

The night before the half-a-day crash, I read a new novel by my friend Jim Cook, FULL FAITH AND CREDIT. It's a novel about a financial collapse that begins in the U.S. stock market and spreads. I couldn't put it down. It spells out in detail what events could trigger such a collapse. It's a creative scenario.

The heart of the collapse is debt. It's universal. People are no longer saving. They rely on stock price increases to do their saving for them. If the market reverses, private investors who got in late and who bought on margin will not have sufficient reserves to meet margin calls. We say that on April 4.

The Fed is the surely lender of last resort. The question is, is it the buyer of last resort?

For a brief report on how the FED uses money creation to sustain the banking system, read Murray Rothbard's essay, "The Mysterious Fed." It is not favorable to Greenspan.

http://mises.org/freemarket_detail.asp?control=268&sortorder= authorlast

Dancing at the edge of the abyss doesn't bother investors these days. They assume that there will always be last-minute intervention by some unknown benefactor, whose only goal is to reduce investors' uncertainty.

This confidence is rewarded by institutional buying, which then enables the charitable benefactor to sell his futures contracts quietly and piecemeal into a rising market at a terrific profit. Nice work if you can get it.

But the public benefactor had better have deep pockets and a perfect sense of timing . . . or else the legal authority to create money.

END

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-- ... (...@...com), April 05, 2000

Answers

Can somebody PLEASE put a gag in North's mouth. (...@...com, as well?)

-- (I know@I .saw), April 05, 2000.

Gary has his First Amendment freedom of speech rights, just like every one else. If you don't like it, MOVE TO RUSSIA!!!

-- ... (...@..com), April 05, 2000.

-- ... (...@..com), you COULD HAVE said,

"Gary has his Second Amendment rights, just like every one else. If you don't like it, MOVE TO CALIFORNIA!!! "

Frank

-- Someone (ChimingIn@twocents.cam), April 06, 2000.


Frank:

*Snort* California, as in "The People's Republic of...."?

So, my understanding is that Gary North has a PhD in History. This education didn't help him understand the technology of Y2K and he got it terribly wrong. Is there some reason we should now suspect that he understands economics any better?

-- Jim Cooke (JJCooke@yahoo.com), April 06, 2000.


Jim-

Actually, I believe that Gary North's doctoral thesis related to economic conditions in colonial America. As a close proponent of the school of Austrian Economics (Ludwig Von Mises, Murry Rothbard, Hans Sennholz et al), he has written extensively about the impact of government policies on economic life throughout a long career. My observation, based on following and reading Dr. North's works for the last 25 years, is that his analyses and conclusions are quite well thought out, if leaving him an imperfect predictor of future events.

Describing a poorly maintained vehicle with bald tires and a drunk adolescent who believes he is immortal at the wheel as an accident waiting to happen is not unreasonable. With all the ingredients for an economic catastrophe at hand currently in the stock market, the lack of such a catastrophe to date does not encourage me to believe that the patient is healthy. The key issue is not deciding when the patient will take a serious turn for the worse, but when.

-- Paul Urquhart (paulurquhart@worldnet.att.net), April 06, 2000.



My error. The last line should have read "not IF the patient will take a serious turn for the worse, but WHEN."

History is not a perfect predictor of future events, but it does give some insight into the all too limited range of responses which governments have devised to address various crises (generally of their own creation, either inadvertently or intentionally). For example, weapons restrictions historically have come much more out of a government's desire to limit the ability of citizens to resist government control, than as a genuine effort to reduce domestic crime. Specifically, firearms registration is ALWAYS followed, in some time frame, by confiscation. All too often, confiscation is followed by government sponsored murder of civilians (e.g Nazi Germany, Cuba- all votes aren't yet in beyond normal street crime from England, Australia, New York City and California).

-- Paul Urquhart (paulurquhart@worldnet.att.net), April 06, 2000.


Paul,

Nobody cares.

-- (I know@I .saw), April 06, 2000.


Frank / Jim,

Make that the "People's Republic of KALIFORNIA. Now that the liberal Democrats virtually control the entire political process there, it is rapidly becoming a Third World state. I recently (with regrets) decided to "escape" to a nearby state that still had some hope of preserving citizen's rights. I chose Arizona (at least for the because I used to live there a long time ago and know something about it's inner workings. Alas, I am suddenly forced, even here, to man the battlements to fight encroachment on my rights, in this case my Second Amendment ones, brought about by the large influx of liberal, affluent Kalifornia retirees who also like the place, and are concentrated in the larger cities. But, at least here, there is still a chance to hold the line, for awhile.

With regard to Jim's comment about Gary North:

"So, my understanding is that Gary North has a PhD in History. This education didn't help him understand the technology of Y2K and he got it terribly wrong. Is there some reason we should now suspect that he understands economics any better?"

Jim, I usually end up agreeing with you, but not on this. It's obvious that GN misunderstood certain critical issues (e.g. power generation) that affected his Y2K views. But I don't see how this automatically invalidates his views on history or economics. Isn't this a logical fallacy? I forget which one, but it stirs memories from my Logic class long ago.

-- Flash (Flash@flash.hq), April 06, 2000.


Here's some logic for ya.

Gary North + Reality Check = Oxymoron

-- Buddy (buddydc@go.com), April 06, 2000.


Hey flash, it should be "the people's republik of Calipornia" ! :)

-- Crono (CronO@timesend.com), April 06, 2000.


Flash,

Yeah, I know. As much as I hate to see what's happening in Calif. I can't bring myself to write off a state completely. The day I start writing Kalifornia will for me be the day I've given up.

President Klinton on the other hand...

Frank

-- Someone (ChimingIn@twocents.cam), April 06, 2000.


Frank,

I know what you mean. California is a beautiful place, and there are many wonderful people there. I still have a lot of family and friends in the SF Bay Area, as well as San Diego. Lived over there for 29 years! I also enjoy the ethnic diversity. I guess what I really mean by Kalifornia is the government and political atmosphere over there, along with the high taxes, welfare, etc. I used to pay $5000/year in property taxes alone, while pre-Proposition neighbors probably were paying $500/year. No equal protection before the law over there!

-- Flash (flash@flash.hq), April 06, 2000.


Frank,

Make that Proposition 15. And, I forgot to add that I am still aiding friends who are working against tremendous odds to try and reform/improve the political environment in CA. Unfortunately the masses don't realize what is really happening and so aren't interested or motivated.

-- Flash (flash@flash.hq), April 06, 2000.


I think Gary North influenced a lot of people whomade wrong and expensive decisions as a result of his fear and doom mongering. I imagine many are a lot poorer as a result of his wrong-headedness. He has never, as far as I've heard, made a right prediction yet.

But who the hell am I to expound on Gary North?? After all, I followed the great IT guru Ed Yourdon and economist DeJaeger and I lost a lot of money. North is a religious nut, but that doesn't make him one bit more wrong than Yourdon, Hamasaki, Milne, DeJaeger, Lord, ad nauseam.

But it's the last time I pay attention to high-flying, FUD promoting nuts.

-- gilda (jess@listbot.com), April 06, 2000.


Paul,

Nobody cares. Really.

-- (retard@but.happy), April 06, 2000.



Gary's Phd is from The University of Holy Reconstruction, PO Box 423 Las Vegas, Nevada.

Your kid's elementary school diploma has more credibility.

-- (retard@but.happy), April 06, 2000.


Gilda:

Paul Milne wasn't wrong; just different. Are you going to the Milne pig roast and Paul dunking in July? Should be fun!

Best wishes,,,,

Z

-- Z1X4Y7 (Z1X4Y7@aol.com), April 06, 2000.


"Jim, I usually end up agreeing with you, but not on this. It's obvious that GN misunderstood certain critical issues (e.g. power generation) that affected his Y2K views. But I don't see how this automatically invalidates his views on history or economics. Isn't this a logical fallacy? I forget which one, but it stirs memories from my Logic class long ago."

It is not a logical falacy if you believe the man is missing a few screws. As I do. Flash, there ARE mentally ill people who have Ph.D's., and I suspect an awful lot of them take advantage of the net to express themselves.

I had a neighbor once, who was an ophtalmologist, he was into research and wrote many extremely interesting papers. He was also a diagnosed paranoid-schitzophrenic and manic/depressive. He came in and out of reality depending on how close he followed his medication regimen. (His wife with whom I was friendly with and not mentally ill herself, once showed me an exerpt of his diary where he kept notes on my husband. My husband was an evil, impenetrable "agent" of some wierd organization or other , and he had somehow been succesful in implanting a bug in his tooth to monitor all of his thoughts and activities.) But, with all this, he was still able to hold a job and appear quite normal to the casual acquaintances, and he even had me impressed with his reseach papers. It looked well thought out and researched to me, but I don't understand didle about ophtalmology.

I'm not saying that GN is schitzophrenic, but I want to point out a similarity between this neighbor and GN; they both were "on a mission" to save the world.

-- Chris (!@#$@pond.com), April 06, 2000.


Paul Milne wasn't wrong; just different.

Actually, Paul Milne himself said he was wrong. In fact, in his own words, he was "dead wrong."

-- (hmm@hmm.hmm), April 06, 2000.


In defense of Gary North, he actually has a real PhD in History obtained at the University of Riverside in 1972.

I don't know if it's a logical fallacy to say if GN was wrong about Y2K he may be just as wrong about economic predictions. Most of his Y2K predictions were, in reality, economic predictions. Here's an example of what GN said would happen even if the power stayed on at the rollover:

1. World-Wide Banks will begin to have runs on them in the second half of 1999. 2. We will have an all cash economy before the end of year 2000. 3. As of 15 Apr 2000, the IRS will disappear due to a total crippling.

4. There will be no more Government Checks.

5. There will be a complete shut-down of Medicare, Medicaid, Social Security, and other Government payments; despite Government claims to the contrary.

6. There will be little or no airline service because the FAA won't meet the deadline.

7. There will be Martial Law in our cities, because the government is not properly prepairing the U.S. citizens.

8. There will be no elections in most largely populated districts. Smaller communities will vote "the old fashioned way" - by hand.

His predictions if the power stayed off for 60 days were way worse :^)

Given this type of track record, why should anyone believe any prediction fron GN?

-- Jim Cooke (JJCooke@yahoo.com), April 06, 2000.


Z1X, how different? And who's being roasted Milne or the pig?

-- gilda (jess@listbot.com), April 06, 2000.

I'm not saying that GN is schitzophrenic, but I want to point out a similarity between this neighbor and GN; they both were "on a mission" to save the world.

Thanks chris -- that made my day. The guy is off his rocker :-)

-- (doomerstomper@usa.net), April 06, 2000.


THE SKY IS FALLING

THE SKY IS FALLING

THE SKY IS FALLING

WOLFWOLFWOLFWOLFWOLFWOLF

Sorry, just wne a bit epilieptic at the mention of this charlatan's name again.

-- FutureShock (gray@matter.chickenlittle.think), April 06, 2000.


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