Tuesday, March 8, 2011

Is the Next Big Market Crash Just Around the Corner?

Two years ago this week, America was tightly held in the grip of the worst financial crisis in recent memory. On March 9, 2009 the S&P 500 stood at 676.53, while the Dow Jones Industrial Average had dropped to 6547. The CBOE Volatility Index, usually referred to as the "fear index," had reached 49, indicating that investor panic was at its heights.

ipad stocks touch

Many individual investors rode the markets down in sheer terror and made for a quick exit at the bottom, thus missing the biggest comeback in the equities markets since the days of the Eisenhower administration. Last week, the S&P 500 Index closed at 1321, nearly doubling its levels from two years ago. The Dow is up 86% over the last two years, recently closing at 12,169.

In addition, U.S. companies have been reporting record profits and are sitting on mountains of cash... $1.4 trillion as of last September.

Now, over the last several weeks, individual investors have come pouring back into stocks and mutual funds. But this time, it is different. Investors lack conviction about this historic market rally. Many are highly skeptical as surging oil prices, global unrest, and inflation fears mount. Adding to their concerns, the Federal Reserve's plan to officially end their second round of quantitative easing at the end of June.

Our forecast: The Federal Reserve will move into QE3 before the end of 2011. Political resistance to a new round of quantitative easing could be overcome by allowing a market correction to spook investors. Expect theatrics from the Fed in the name of "asset price stabilization" as the year unfolds. Individual investors will remain skiddish into the summer. Any announcement of QE3 will propel the markets higher and improve confidence. Any correction in between the two programs could present a buying opportunity.

China's #1 Short-Term Goal: Avoid Mideast Style Turmoil

This weekend, China announced new plans to increase incomes for the nations' poor and to reign in growing inflation. The ambitious economic plans are set to begin this year and will extend through 2015. Over the last five years, wages in China have failed to keep up with gains in productivity and economic growth. In addition, China has announced a goal of eradicating poverty by 2020.

These new and sudden lofty goals all make sense given the turmoil currently rocking the Middle East. The Chinese know that unrest begins at the bottom, and are therefore seeking to appease the poorest of its citizens with economic hope. And while new plans for the poor are being publicized, China is also beefing up its internal security forces and clamping down on foreign media outlets.

An Egypt-style mass revolt currently appears unlikely to break out in China. However, this has been a year full of the "impossible" happening. Investors, keep your eyes open.

Also in the news

1) OIL SPIKE: Oil jumps to near $107 in Europe to fresh 2-year highs as Libya conflict intensifies.

2) RECORD U.S. DEFICIT : The federal government posted its largest monthly deficit in history in February at $223 billion.

3) DUSTBOWL II?: U.S. farmers fear a return of the Dust Bowl...

4) SHORTING THE DOLLAR: More FX traders are shorting the dollar as the currency continues to fall out of favor.

5) METAL MANIA: Gold and silver will just not stop... as gold is now nearing an all-time record of $1,445, while silver hits 31 year high, crossing well past the $36 mark.

Finally... Gasoline prices have staged their second biggest two week price increase in history, jumping 33 cents in the last two weeks... The current national average price of $3.51 is 61 cents below the all-time high price recorded in July 2008.

Rising Oil - Rogers Forecasts $2,000 Gold

The yellow metal was slightly higher today. All eyes are on oil.

Oil prices went above $105 and could rally further on:

  • Intensified fighting in Libya
  • Investors worried about a protracted export suspension in Libya
  • Political contagion in the Middle East, a region with more than 60% of the world’s proven oil reserves
  • Morgan Stanley (MS) ceases oil trading with Libya. Exxon, Marathon Oil and Conoco have either cut off or greatly reduced dealings in order to comply with U.S. sanctions.

Jim Rogers reiterated his bullishness in the precious metals raised question regarding Saudi’s oil reserves.

“Gold will go to $2000 in this decade. It’s pretty simple as far as I’m concerned. Silver will certainly go over $50. The old high on silver was $50. Silver will go to new highs again. All these prices are going to go to absurd levels by the end of the decade, by the end of the bull market.”

"Saudi Arabia has been lying about their (oil) reserves for decades. The reason oil is going up is the world is running out of known reserves of oil.”

We had an article on Saudi Arabia last week and also mentioned in gold price forecast page. To follow up, the country is drafting up to 10,000 security personnel into its north-eastern Shia Muslim provinces, clogging the highways into Dammam and other cities with busloads of troops in fear of March 12 "day of rage" by what is now called the "Hunayn Revolution".

While Libya and the social unrest in the Middle East can raise prices of gold and oil much further, a US dollar comeback will put both PM’s and stocks under pressure.

dollar trend

97% of All U.S. Mortgages are Backed by the Government

I heard a recent talk by Richard Wolff - Professor of Economics Emeritus at the University of Massachusetts in Amherst (PhD in Economics from Yale) - where Wolff said that 97% of all U.S. mortgages are either written or guaranteed by the government.

As Bloomberg explained last August:

Fannie Mae and Freddie Mac, the government-controlled companies that issued and guaranteed more than 71 percent of mortgage-backed bonds last year. Between those companies and Ginnie Mae, which guarantees loans insured by the Federal Housing Administration, the government backed nearly 97 percent of U.S. mortgages in 2009.
And Dwight M. Jaffee, Lawrence J. White, Peter Wallison, Arnold Kling, Anthony B. Sanders, Michael Lea note:
During 2009 and 2010, GSEs guaranteed as much as 70 percent of mortgage market activity. Other government programs guaranteed an additional 25 percent.
There are supposedly plans in Washington to wind down Fannie and Freddie. Critics say that would destroy the "recovery" in housing.

If continuing to throw money at Fannie and Freddie would stabilize the economy, I might be for it - even though it is not free market capitalism. I am not wed to either liberal or conservative ideologies, and am instead simply motivated to do whatever will work to stabilize the economy and help the most people.

But as I noted in January:

Most independent experts say that the government's housing programs have been a failure. That's too bad, given that the housing slump is now - according to Zillow's - worse than during the Great Depression.

Indeed, PhD economists John Hussman and Dean Baker, fund manager and financial writer Barry Ritholtz and New York Times' writer Gretchen Morgenson say that the only reason the government keeps giving billions to Fannie and Freddie is that it is really a huge, ongoing, back-door bailout of the big banks.

Many also accuse Obama's foreclosure relief programs as being backdoor bailouts for the banks. (See this, this, this and this). (more)

Thinking About Municipal Bonds?

Technical analyst Chris Kimble shares his views on Munis with a look at the iShares S&P National AMT-Free Municipal Bond Fund (MUB).

As Silver Continues to Soar, This Miner Is Just Beginning Its Monumental Move: CDE

By John Townsend, The TSI Trader

Coeur D’alene Mines Corp (CDE:NYSE $34.70) is just beginning its monumental move. I believe we may see its share price double in the next 8 – 12 weeks.

This article will provide you with an update of silver’s current parabolic move; detail the underpinnings of Coeur D’alene’s incredibly strong fundamentals going forward into 2011, and expose the powerfully bullish technical outlook for its stock.

Click on the chart to ENLARGE

Silver is presently making its fifth parabolic appearance of this secular bull market for precious metals. Our first chart is a weekly look at the World Silver Index (XSLV) dating back to 2004 and including the three previous silver parabolic moves of 2004, 2006 and 2008. The 40 week moving average is shown as a proxy for the 200 day moving average.

One of the metrics to observe is the degree to which a silver parabolic ultimately rises above its underlying 200 dma. Another consideration is the length of consolidation time that precedes the parabolic move. When I combine these two metric considerations and apply them to our current silver parabolic, it is apparent that silver’s price rise above its 200 dma could match or exceed 65%. This projects a silver peak in excess of $50. In fact, as the consolidation preceding our current parabolic has been massive, $50, in retrospect, may turn out to have been too conservative.

This second weekly chart of XSLV considers our current parabolic using a different metric – the midpoint consolidation. There is a tendency for parabolic moves to exhibit a resting point that divides the move into two equal legs. And we observe that silver has now cleared its consolidation phase at the $32 level and is headed towards a completion of this pattern at $48.

Click on the chart to ENLARGE

The takeaway from these observations is not to argue just how high silver will soar, but to simply note that silver is going much higher, quickly and now.

Coeur D’alene (CDE) is poised fundamentally to skyrocket right along with silver. The company has three mines that are now in full production and the 2010 Q4 results announced last week revealed that analysts were significantly underestimating the company’s new earnings power. Analysts expected the company to earn 33 cents per share and instead the company reported quarterly earnings of 56 cents per share.

Some highlights of Coeur D’alene’s key fundamental data include: $3 Billion market capitalization, shares outstanding 89 Million and holding flat, selling at 1.5X book value, 2011E Price to Earnings ratio of 12 (which is about half the average PE of other large silver miners), and 2011E Price to Cash Flow ratio of 7 (also about half the average of comparables).

Consensus estimated earnings for 2011 are $2.28 per share vs. 2010 $0.39 actual earnings per share. Cash flow from operations (chart below from the Coeur D’alene website) is expected to more than double in 2011 from 2010.

Click on the chart to ENLARGE

Debt levels are trending downward quarter after quarter while cash levels are trending strongly upwards. For 2011 the company projects that capital expenditures will decline, while production of both silver and gold will increase, as will sales.

Regarding the issue of hedging the CEO, Dennis Wheeler, commented during last week’s conference call, “I just want to make it clear that Coeur has the policy of non-hedging in silver production. We know that our investors like you are believers in the continued price appreciation of silver and gold and we want our investors to be able to maximize their investment and leverage to the metal so we will not be hedging any of our silver”.

To summarize current and projected CDE fundamentals, it is somewhat difficult for me to imagine a more ideal setup. Projected earnings and cash flow growth are explosive, current market valuations in terms of book value, price to earnings and price to cash flow are in the silly cheap category, and last quarter’s performance puts the sting to any who may have doubted Coeur D’alene’s ability to deliver. I should add that ownership of CDE shares is literally a list of the ‘who’s who’ of investment heavyweights – ETFs GDX and GDXJ, as well as Van Eck, Dimensional, Vanguard, State Street, JP Morgan Chase and Blackrock.

The following weekly chart of CDE reveals that several months ago stock price broke above a 5 year long down trend resistance line, has since consolidated above this line after a successful retest, and is now continuing higher.

Click on the chart to ENLARGE

The chart also details the significance of the $28 price level which was a support level for CDE price from 2004-2008 and has since 2008 been a resistance level. Until last week that is, when CDE took on that $28.00 price level and blasted right through it, closing the week at $34.70. Technically speaking, this is the recipe for beginning a monumental move.

The 2004 and 2006 silver parabolic moves took CDE from being a $28 stock to the $75 neighborhood and quickly. As I believe the current silver parabolic is likely to surpass the magnitude of each of the four preceding silver parabolics, the fundamental underpinnings of the CDE stock are nothing short of both impressive and ideal, and the technical setup is exactly as one would hope, I consider it a realistic possibility that CDE could again achieve a $75 price target before the current silver parabolic expires.

One final thought with a chart. The overhead resistance (selling pressure) should be reasonably mild as CDE has not traded any shares above $28 for three years or so. Not all, of course, but most sellers of the shares now are sitting with a profit and are not particularly motivated to sell provided price continues higher. And for that matter, this chart shows us that shareholders who bought 4 and 5 years ago are not holding a lot of shares anyway.

Click on the chart to ENLARGE

Disclosure: I own CDE and look forward to participating with CDE throughout the concluding leg of this silver parabolic.

I wish you a great week of trading and invite you to peruse my website, The TSI Trader, where you will find a focus on both the techniques of using the True Strength Index (TSI) indicator for accurate trading signals and the secular bull market for precious metals.

John Townsend


Dollar May Weaken as Euro Draws Buyers

The U.S. dollar is likely to fall in the week ahead as investors continue to bet that interest rates in the euro zone will rise ahead of those in the world's largest economy.

U.S. February jobs data came in a touch better than expected on Friday but disappointed investors who had hoped for an even stronger report.

Investors see strong U.S. jobs growth as necessary for the Federal Reserve to end its second round of quantitative easing and instead tighten monetary policy by raising rates.

The U.S. situation is in sharp contrast with that of the euro zone, where the zone's common currency is likely to remain supported after European Central Bank President Jean-Claude Trichet strongly hinted at an interest rate rise in April, bolstering the view the ECB will tighten monetary policy before the Fed.

"We had Mr. Trichet warning Thursday that the ECB is considering a rate hike and perhaps the start of a rate hike cycle," said Joseph Trevisani, chief market analyst at FX Solutions in Saddle River, New Jersey. "The U.S. job number came in as expected and provided little direction to the market other than it did not disappoint and that will support risk appetite."

For the week, the euro gained 1.7 percent against the dollar on electronic trading platform EBS, the third straight weekly gain, while the dollar gained 0.8 percent against the yen.

A slew of technical factors also indicate investor caution on the dollar, particularly against the euro.

One-month euro/dollar risk reversals last traded at -1.175 on Friday, according to Reuters data, with a bias toward euro puts and dollar calls, suggesting more investors are betting the euro will fall than will rise.

But that compares with late November when one-month risk reversals posted at -2.83, suggesting negative sentiment on the euro has eased substantially. The euro has already gained more than 6 percent against the dollar since that time.

Those gains pushed the euro/dollar above its 200-week moving average this week for the first time since mid November, piercing a strong long-term resistance level.

There is now little to prevent the euro's rise to $1.4283 on EBS, the November high from which it slid to $1.2860 in January but from which low it has steadily retraced higher. Stamford, Connecticut-based Faros Trading sees the euro making a move to the $1.50 level within the next three months.

Nearer term, the buy signal triggered on Feb. 23 when the 12-day and 26-day moving average convergence divergence line rose above the 9-day signal line is also holding. The MACD is an indicator of short-term momentum by focusing on exponential moving averages and closing prices.

Investors were betting heavily against the dollar ahead of the jobs data and Trichet's comments.

The value of the dollar's net short position rose to $34.9 billion in the week ended March 1 from $22.36 billion a week earlier, according to Commodity Futures Trading Commission data on Friday and Reuters calculations. It was the largest net short dollar position for which Reuters has data, dating back to June 2008.

Net long positions in the euro rose to 51,308 contracts, the highest since January 2008, from 45,598 contracts in the prior week.

The dollar is also seen struggling against the yen as it failed to hold onto its initial gains after the jobs data.

"Bernanke may be relieved to see another month of improvement in the unemployment rate, but given the underlying weakness of the report, the central bank will still argue that unemployment remains extremely high and therefore continued stimulus could be warranted," said Kathy Lien, director of currency research at GFT in New York.

Bets on the yen also jumped to 41,274 contracts, only the largest since November but a big change from the 27,746 short bets last week.

With talk that the Fed may even go for a third round of quantitative easing after the current phase ends in June, strong jobs growth for at least the next three months is consequently key to any dollar revival.

Even ongoing political instability in the Middle East and North Africa and the threat that it may spread to Saudi Arabia, a key U.S. ally in the region and a global oil supplier, could weaken the dollar.

While the dollar has been regarded as a safe haven in times of turmoil, some investors suggest higher oil prices would push other central banks to raise interest rates to counter inflation even as the Fed maintains its stimulative monetary policy, which would again leave investors chasing yield with little choice but to sell the dollar.

CIBC:A Huge Guide To Every Single Rare Earth Deposit In The World

CIBC World Markets have released a complete sector overview of the rare earths space, noting what elements will perform, and what companies are position to take advantage of it.

The crux of the report is that demand for the products that utilize rare earths is increasing. The supply of those elements is now being pinched, by a China willing to export less. Companies are stepping in to provide supply to the market, notably Avalon Rare Metals, Frontier Rare Earths, and Molycorp.

What's important when investing in the space is not just that the company focuses on rare earths, but that it focuses on key, high demand elements. Those elements include neodymium, praseodymium, yttirium, terbium, and dysprosium, according to CIBC, and the aforementioned companies are there to take advantage.

For a walk-through of where demand is, how supply is being pinched, and what companies you should be watching, take a look at these charts.

Click here for the charts >


Kenny Rogers may not be widely known as a great philosopher, but one of his legendary songs carried a message well worth knowing. It goes, “Know when to hold them, and know when to fold them.” Last week in the game of world monetary poker, the ECB raised the limit. Now the Federal Reserve will have to demonstrate it has what it takes to play poker with the big boys. Question is not if it will fold, but when it will fold. June or sooner?

Reuters reported on the statement by ECB president Jean-Claude Trichet concerning the likelihood of the ECB raising rates at the April meeting(reuters.com,3 Mar 2011),
"I would also say that we are mentioning that we are in a posture of strong vigilance and my understanding is that the position of the governing council is that an increase in interest rates at the next meeting is possible”

Consequence of that statement has been a massive bear raid on the dollar, as market participants call the ECB’s bet and wait for Federal Reserve to reflect on its hand.

ECB, in anticipating the raising of rates, is not advocating anything particularly radical. Driving the car while looking through the front windshield has always been considered both appropriate and standard. Same is true for the “driving” of monetary policy. Central banks are charged with managing the future, not to be constantly in the process of correcting their previous mistakes.

U.S. Federal Reserve has rarely, if ever, understood that the task is the future, not the mistakes of the past. For nearly two decades, the primary mission of the Federal Reserve has been to provide low cost money to Wall Street. Beranke and his Lap Dogs, one, continue to deny that the massive financial problems of the past decade were a direct consequence of free money, and, two, continue to pursue their policy of free money for speculators.

Free money may benefit speculators, but it does little directly for those seeking to make an honest living. U.S. equity market, as measured by the S&P 500, has risen at a compound rate of about 39% over the past two years. Is that consequence of U.S. economic conditions improving at that speed? No, it, and other speculative markets, have risen because of the Federal Reserve’s policy of providing unlimited free money to speculators.

In each of the Federal Reserves speculative bubbles, some individual markets standout as the epicenters of the money binge. Internet stocks were once one. Junk mortgages were another. Today, Silver market is perhaps the center of today’s speculative binge. In the chart that follows, historical price history of $Silver is portrayed. That red arrow indicates the outline of the parabolic formation in which it has been moved.

Silver is quite clearly in a speculative bubble. Bubbles are manias that become financed with debt. As most of the trading in Silver is of the paper variety in the form of derivatives, it qualifies as a bubble. Fantasies can indeed be created and imaginary conspiracies can be concocted, but the test of reality can not be permanently denied. If it walks like a duck, quacks line a duck, and looks like a duck, then odds favor it being a duck.

Parabolic moves, such as in Silver above, are dangerous formations as they defy financial gravity. The slope of that curve increases as it rises. It is as if we threw a ball into the air, and the higher the ball goes the faster it rises, in denial of physical gravity. Reality is that in the case of both physical gravity and financial gravity, ultimately down becomes the path of least resistance.

We know several things about parabolic curves.

One, they always end. Da moon is never a reasonable price target.

Two, we never know in advance when they will end. Better to unload the truck before it is repossessed along with what it carries.

Third, the pain created when they fail is excruciating. Breakfast is more pleasant for the chicken than the hog.

Fourth, they create great opportunities after failure. Auctions of repossessed merchandise are often good times to buy.

For more than a decade we have been doing valuation work on Gold and Silver. While certainly not perfect, that effort has served well as a guide to investing in that period. And yes, any method that also always said buy Gold and Silver would have worked well also.

Valuation, either under or over, never makes a market go up or down. It is, however, most often a precursor of the future direction of a market. And yes, we prefer the role of the chicken at breakfast. Results of that valuation are in the table that follows.

Source: www.valueviewgoldreport.com





























Gold preferred

Sell Silver
Reinvest in Gold

Gold is today the preferred precious metal when compared to Silver. That might not, and likely will not, prevent it from going down when the Federal Reserve folds in June. That June time period is becoming of increasing importance. The current era of free money, quantitative easing, by the Federal Reserve is scheduled to end in June. Should the ECB raise rates in April, Federal Reserve will come under increasing pressure to abandon free money policy.

Free money has been driving financial markets. Should that era of free money begin to end in June, considerable realignment of investment market values seems likely. Silver is simply the most obvious one. Deferring the investment of idle funds, and perhaps taking some profits, might be wise until the June poker hand has been played. The chicken will still be around in July.

Ned W. Schmidt

Global Corn, Wheat Harvests to Keep Trailing Demand on La Nina, DTN Says

Global harvests of corn and wheat may trail demand again if the La Nina weather event persists through July, tightening global supplies, according to forecaster Telvent DTN Inc.

La Nina is forecast to cause heavier rainfall in the northern U.S. plains and the Canadian prairies, potentially causing a repeat of last year’s flooding that slashed Canada’s milling-wheat output and delaying corn planting in parts of the U.S., Bryce Anderson, an agricultural meteorologist, said in a phone interview today. That may contribute to a second straight annual shortfall for wheat and a third yearly deficit for corn.

“There is reason to be concerned about how our grain supply is going to be,” said Anderson, who last year correctly predicted dry weather would hurt U.S. and Argentina soy crops.

Tighter supplies of corn and wheat may sustain gains in food prices, which are already at a record according to an index tracked by the United Nations Food & Agriculture Organization. That may push governments in countries facing supply deficits to boost imports and increase food subsidies to prevent unrest seen in the Middle East and North Africa.

Corn futures in Chicago surged 95 percent in the past year as rising demand for livestock and ethanol in the U.S. pushes the global stocks-to-use ratio to the lowest in 37 years. Wheat jumped 68 percent in the same period after drought last year in Russia and Eastern Europe prompted countries to restrict exports, while flooding in Canada and Australia curbed supply of milling- grade grains used for human consumption.

Declining Yields

The food price index may increase further, the FAO said March 3, and consumers need to get used to paying more for food, the International Monetary Fund said the same day.

Corn yields in the U.S. may be as much as 10 bushels-an- acre lower than the Department of Agriculture’s forecast of 162 bushels an acre next season if La Nina persists through July, delaying planting in the northern corn belt, Anderson said.

The delay may mean the U.S. crop will go through its pollination and reproductive phases during the hottest times of summer, putting them at risk of yield losses, he said.

“The biggest risk as far as losses go, I would have to say at this point, is corn,” Anderson said. “Much of the corn supply is dependent on how the U.S. performs, and there is concern about how the U.S. situation is going to be for this season,” he said, referring to the next planting. Corn for May delivery increased 0.2 percent to $7.2975 a bushel today, erasing an earlier loss of 0.6 percent.

Drought Easing

The U.S. harvest represents about 39 percent of the global corn output in the 2010-2011 season, and 55 percent of world exports, according to USDA data.

The worst may be over for the drought-affected areas in China’s wheat-growing region and there’s a “better chance of rainfall” over the next month, improving soil moisture and preventing losses to the crop, Anderson said.

Still, La Nina may hurt the wheat crop in the U.S., the world’s largest shipper, he said. That, and the potential for flooding in Canada, may further curb supply of milling-wheat as Canadian farmers cut acreage, he said.

“We’re not guaranteed that the world wheat crop is going to approach the volume that it needs to be at, in order to start curbing some of the supply issues,” Anderson, 57, said by phone from Nebraska. “That’s the big issue right now.”

The Southern Oscillation Index, which tracks fluctuations in air pressure between Darwin and Tahiti, was at 22.3 in February, rising from 19.9 a month earlier, according to the Australia Bureau of Meteorology. The gauge was at 27.1 in December, the highest since 1973, according to the bureau’s data. A reading of 7 or more indicates La Nina is present.

“The peak is over, but the event does not seem to be really backing off,” Anderson said. “It’s still strong.”

U.S. Household Incomes: A 42-Year Perspective

In preparation for a presentation at the Retirement Income Industry Association (RIIA) later this month, I've been researching household incomes in the United States. My data source is the Census Bureau, which has a quintile breakdown of data from 1967 through 2009 (see Table H.3).

The pie chart here shows that the top fifth of households in 2009 took home 50% of the nation's income. The middle fifth received 15% and bottom fifth a mere 3%.

The charts below show income growth over the complete data series. In addition to the quintiles, the Census Bureau includes the mean income for the top five percent of households.

Most people think in nominal terms, so the first chart below illustrates the current dollar values across the 42-year period. (The phrase "current dollar" is econospeak for the value of a dollar at the time received.)

The next chart adjusts for inflation in chained 2009 dollars based on the Consumer Price Index. In other words, the incomes in earlier years have been adjusted upward to the purchasing power of the most recent year in the series.

Two things are particularly striking (but not surprising) in the inflation-adjusted chart:

  1. Income growth has been much higher for the top quintile and particularly the top 5% (the two lowest quintiles are essentially flat).

  2. The purchasing power of 2009 incomes had shrunk to about the same levels they were a decade or more before, depending on the segment.
The lack of sustained growth in household incomes is no doubt a major factor in the general decline in consumer confidence over the past decade.

For a closer inspection of the household income data, I've also prepared charts of the nominal and real percentage growth since 1967. Here is the real version.

Among the many subtle details evident in these charts, one that especially caught my attention was the fact that the bottom quintile has grown faster than the third and fourth quintiles. This curious fact is not apparent in the dollar charts above.

Also not evident in the dollar charts is the grim reality that (in real terms) households in the bottom quintile earned less in 2009 than they did in 1989 — twenty years earlier.


Immanuel Wallerstein

Virtually everyone everywhere-economists, politicians, pundits -- agrees that the world has been in some kind of economic trouble since at least 2008. And virtually everyone seems to believe that in the next few years the world will somehow "recover" from these difficulties. After all, upturns always occur after downturns. The remedies recommended vary considerably, but the idea that the system shall continue in its essential features is a deeply rooted faith.

But it is wrong. All systems have lives. When their processes move too far from equilibrium, they fluctuate chaotically and bifurcate. Our existing system, what I call a capitalist world-economy, has been in existence for some 500 years and has for at least a century encompassed the entire globe. It has functioned remarkably well. But like all systems, it has moved steadily further and further from equilibrium. For a while now, it has moved too far from equilibrium, such that it is today in structural crisis.

The problem is that the basic costs of all production have risen remarkably. There are the personnel expenses of all kinds -- for unskilled workers, for cadres, for top-level management. There are the costs incurred as producers pass on the costs of their production to the rest of us -- for detoxification, for renewal of resources, for infrastructure. And the democratization of the world has led to demands for more and more education, more and more health provisions, and more and more guarantees of lifetime income. To meet these demands, there has been a significant increase in taxation of all kinds. Together, these costs have risen beyond the point that permits serious capital accumulation. Why not then simply raise prices? Because there are limits beyond which one cannot push their level. It is called the elasticity of demand. The result is a growing profit squeeze, which is reaching a point where the game is not worth the candle.

What we are witnessing as a result is chaotic fluctuations of all kinds -- economic, political, sociocultural. These fluctuations cannot easily be controlled by public policy. The result is ever greater uncertainty about all kinds of short-term decision-making, as well as frantic realignments of every variety. Doubt feeds on itself as we search for ways out of the menacing uncertainty posed by terrorism, climate change, pandemics, and nuclear proliferation.

The only sure thing is that the present system cannot continue. The fundamental political struggle is over what kind of system will replace capitalism, not whether it should survive. The choice is between a new system that replicates some of the present system's essential features of hierarchy and polarization and one that is relatively democratic and egalitarian.

The extraordinary expansion of the world-economy in the postwar years (more or less 1945 to 1970) has been followed by a long period of economic stagnation in which the basic source of gain has been rank speculation sustained by successive indebtednesses. The latest financial crisis didn't bring down this system; it merely exposed it as hollow. Our recent "difficulties" are merely the next-to-last bubble in a process of boom and bust the world-system has been undergoing since around 1970. The last bubble will be state indebtednesses, including in the so-called emerging economies, leading to bankruptcies.

Most people do not recognize -- or refuse to recognize -- these realities. It is wrenching to accept that the historical system in which we are living is in structural crisis and will not survive.

Meanwhile, the system proceeds by its accepted rules. We meet at G-20 sessions and seek a futile consensus. We speculate on the markets. We "develop" our economies in whatever way we can. All this activity simply accentuates the structural crisis. The real action, the struggle over what new system will be created, is elsewhere.

Immanuel Wallerstein is a senior research scholar at Yale University.

Stocks close lower as tech lags, oil surges

(MarketWatch) — U.S. stocks closed lower Monday with an analyst downgrade weighing on the technology sector and concerns over supply disruptions keeping oil prices elevated.

The Dow Jones Industrial Average (DOW:DJIA) sank 79.85 points, or 0.7%, to finish at 12,090.03. Weighing on the measure, Intel Corp. (NASDAQ:INTC) shares shed 1.6% after Wells Fargo & Co. cut its view of the semiconductor sector to “market weight” from “overweight” for the first time in more than two years, though the firm said it was “a more moderate though still optimistic view of the sector.”

Also, Cisco Systems Inc. (NASDAQ:CSCO) shares closed 1.1% lower.

Boeing Co. (NYSE:BA) shares slid 1.3% after the company’s rival, European aircraft manufacturer Airbus, said Monday it is confident of maintaining global market share of commercial aircraft sales and expects continued expansion in air traffic demand in the Asia-Pacific region.

The Nasdaq Composite Index (NASDAQ:COMP) tumbled 1.4% to end at 2,745.63 as technology stocks lagged. The Standard & Poor’s 500 Index (CME:INDEX:SPX) shed 0.8% to 1,310.13.

Within the S&P 500, technology stocks led declines, while utilities stocks clung to slim gains.

Among the technology sector’s decliners, JDS Uniphase Corp. (NASDAQ:JDSU) dropped 6.9%, Applied Materials Inc. (NASDAQ:AMAT) shed 4.6% and Advanced Micro Devices Inc. (NYSE:AMD) lost 4.2%.

The sector was hurt not only by the analyst downgrade but also by concerns over the impact on the sector from rising energy prices.

“If you’re paying more for the transportation of your goods, you’re probably going to pay less for the technology that goes into moving your goods,” said John Canally, economist and investment strategist at LPL Financial.

Crude-oil prices continued to climb, adding $1.02 to close at $105.44 a barrel on the New York Mercantile Exchange.

Concerns remained over supply as opposition forces and soldiers loyal to Libyan leader Col. Moammar Gadhafi clashed near some of the country’s key energy installations. With no end in sight for the conflict, the oil market began to price in a much longer interruption to Libya’s production of 1.6 million barrels a day.

“What people are beginning to focus on with oil is the economic weakness that could come from a sustained rise in oil prices,” said Brian Lazorishak, portfolio manager and quantitative analyst at Chase Investment Counsel. “It’s obviously a drag on consumer spending, it can be a drag on economic growth, and everybody feels like, while the economy is showing some good signs of a recovery, it’s kind of a fragile recovery.”

Traders are particularly concerned about the situation in Saudi Arabia, where some have called for demonstrations later in the week. Societe Generale said in a research note that oil could reach $200 per barrel if supplies from Saudi Arabia were disrupted.

“Saudi Arabia’s a much bigger deal on the price of crude than Libya,” said Russell Croft, co-manager of the Croft Value Fund.

In Monday’s deal activity, Western Digital Corp. (NYSE:WDC) shares rose 16% after the company agreed to acquire Hitachi’s (NYSE:HIT) hard-disk-drive business for about $4.3 billion in cash and stock, the two companies said Monday.

Shares of radiation treatment firm TomoTherapy (NASDAQ:TOMO) soared 25% after Accuray (NASDAQ:ARAY) , the maker of a robotic system designed to treat solid tumors, said it will buy TomoTherapy for $4.80 a share in cash and stock, or a total of around $277 million. Accuray fell 10%.

Among other stocks in focus, Ciena Corp. (NASDAQ:CIEN) shares fell 10% after the network systems company’s fiscal first-quarter loss widened as a surge in operating expenses masked a bigger-than-expected jump in revenue. Ciena also forecast current-quarter revenue below estimates.

The U.S. dollar (U.S.:USDYEN) weakened against the yen but traded slightly higher against the euro (U.S.:EURUSD) . The euro was trading recently at $1.3970, down from $1.3990 late Friday in New York.

Demand for U.S. Treasurys fell, lifting yields on the 10-year note (U.S.:UST10Y) up to 3.50%.

Gold futures gained, with the April contract (COMMODITIES:GCJ11) closing at $1,434.50 an ounce.

Data on January consumer credit released Monday from the Federal Reserve showed that consumers increased their debt in January, the fourth straight month of gains.