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Larry Kudlow Says Don’t Panic – Dan Mangru Market Commentary August 28, 2011

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Larry Kudlow says don’t panic

Posted: August 10, 2011
8:19 pm Eastern

© 2011 WND

Wow! I can’t believe this guy.

People are losing their retirements, their savings, their nest egg. Investors are now starting to realize that the U.S. is built on a deck of debt cards and they are starting to fall.

The United States has a current debt-to-GDP ratio of 100 percent just like the other Third World nations out there. It also has future liabilities in excess of $110 trillion (an amount that no other country can even fathom).

All the while, the U.S. dollar is losing strength and the cost of living and feeding a family continues to go up.

But Larry Kudlow says don’t worry.

See his article here:

While Kudlow points out that lower commodity prices should spur economic development, he misses out on several key factors that are needed to properly evaluate the market.

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First, this isn’t a short-term pullback, this is a market correction. When the Dow Jones Industrial Average (Dow) went down to 6547.05 on March 9, 2009, we were supposed to retrace the low to roughly 50 percent. What this means is that our stock market should have faced some major resistance to move beyond the 9750 mark on the Dow. Instead by 2010 we had blown by it, and with the slight exception of the May 2010 flash crash, we never looked back. 

Make no mistake, speculation fueled the market. Case in point, look where we are now. When QE2 (Quantitative Easing 2) was implemented by the Fed last December, the Dow was hovering around 11,000. During April the Dow surged to 12,928. Everything seemed great.

Except it wasn’t.

With continual Federal Reserve (Fed) stimulus (low interest rates, and QE2), traders, black box traders in particular, were given cart-blanche to trade financial markets knowing that they would be flush with cheap Fed cash.

Since the cash was always there, traders didn’t care what the economic news was for the day. They were concerned with liquidity and how they could exploit liquidity to make a profit.

That’s why things such as a high debt to GDP ratio, poor housing numbers, and high deficit spending didn’t seem to register on Wall Street’s radar.

However, once the Fed pulled out their cash and ended QE2, traders started to run for the hills. They began to start dumping stocks. In fact, even sophisticated hedge fund managers such as Carl Icahn and George Soros proclaimed that they were disbanding their hedge funds, returning money to investors, and leaving the market at professional managers.

That should tell you something.

Between the top money guys leaving and the Fed pulling out cash, the fix was in. We were all fed the line that once we did the debt deal that financial markets would rally. And they did … for about an hour.

But that’s when reality hit.

Since then financial markets are starting to realize that the United States has no real end in sight to its flagrant spending ways, and astronomical long-term debt. Without Fed easy money to spur buying, investors are treating the U.S. economy for what it currently is … a sell.

Second, Kudlow points to rising corporate profits as being an indicator that the U.S. economy is still healthy. What Kudlow fails to recognize is that corporate profit guidance is being lowered for the second half of this year. Even Goldman Sachs lowered their guidance for the second half of this year.

Large corporations will see that margins are going down and that after enduring a major stock market correction, consumers are not running around the store waving their credit cards dying to spend. Consumers will not consume as much.

Savings rates are going up. The most recent data from the St. Louis Fed shows the U.S. personal savings rate is at 5.4 percent. Compare that with our April 2005 rate of 1 percent, and you can see that Americans are worried that the economy will fall and they will need their money.

That translates to economic slowdown. When individuals do not spend and start to save more, that slows down production and consumption, which in turn slows down the entire economy.

Third, Kudlow believes that there is a big overreaction going on to the problems in Europe. Keep in mind, Kudlow, along with fellow CNBCer Jim Cramer, thought Lehman Brothers was a good buy before it went bankrupt and wiped out investors.

The easiest way to understand the Europe problem is to think of economies of scale. Greece, which in relative terms is very small country, cost over $1 trillion to bail out.

One small country took all of the financial might and muscle of Europe’s top banks and governments to bail out.

Now think of Italy, the newest country on the brink. Italy’s debt crisis is 10 times the size of Greece. I’ll put it to you this way, the European Union cannot afford $10 trillion.

The entire GDP of the European Union is $16 trillion, so $10 trillion is too big to bail out. An additional problem with Italy is that a huge chunk of its debt is due within the next two years. So this isn’t a problem that can be shoved under the rug.

Combine this with a sluggish Euro and a European Union that is dealing with a global economic slowdown and the recipe is not good. With all of the weakness in Europe, the EU’s stronger countries (Germany and France) should start to see some of their strength erode as they are continually forced to bail out smaller players. By the EU charter, the EU guarantees all of the debt of its member nations. Hence, Germany and France will end up paying the bill for Greece, Italy, Spain, and all of the other countries who have overspent and are nearing bankruptcy.

Finally, Kudlow fails to point out several key ticking time bombs in the United States. First is the real estate market. With shadow inventories and foreclosures, home inventories should skyrocket to all-time high levels in the United States.

Second, student debt in America is at an all-time high. Fueled by government loans, universities have been charging students higher rates every year, regardless of what the stock market or the economy is doing. Current student debt in this country is estimated at $1 trillion. Just so you know, that was the amount of money that was needed to bail out our banks.

Third, municipal debt is a major issue. If cities and states start to go bankrupt, all hell could break loose. Remember, less than a year ago, California (the world’s 9th largest economy) could have gone under. The effects of a default of that size would cripple the domestic and global financial economy.

So Mr. Kudlow, in times like these, while panic may not be the right feeling, all is not well. Investors should be very concerned. They should be safeguarding their assets against a major stock market drop and planning for the future.

But then again, maybe that message isn’t one that the talking heads want to hear or give.

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Dr. Larry Kotlikoff Interview with Dan Mangru – The Mangru Report on Fox Business October 9, 2010

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As the debate goes on as to whether the U.S. banking system is stable and secure, Boston University Professor of Economics Dr. Larry Kotiikoff is proposing new solutions to change the way that we bank in his new book, “Jimmy Stewart is Dead”.  Watch Kotlikoff and Dan Mangru discuss limited purpose banking, how it can be implemented in our current system, how the government is exacerbating the problem, and how much money we really owe in debt and obligations.

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Bert Dohmen Freedom Fest 2010 Interview – The Mangru Report on Fox Business September 22, 2010

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After a long wait, it’s finally here online, Bert Dohmen’s exclusive interview with Dan Mangru from Freedom Fest 2010 in Las Vegas.  In this interview, Dohmen discusses the prospects of a V-shaped recovery or whether the United States is headed for what George Soros calls “Act II of the Crisis”.  He also shares his views on the financial reform bill, a Chinese bubble, and whether the U.S. can save China if it goes under.  Bert Dohmen is the founder of the Dohmen Capital Research Institute and the author of the award winning Wellington Letter.

Regulation Nation – Episode 11 – The Mangru Report July 15, 2010

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Does it ever seem to you that the government’s answer to every problem is more regulation.  Well then my friend, you must live in a Regulation Nation.  In the Regulation Nation segment from Episode 11, the Mangru Report Panel of Experts composed of Armand Grossman (Florida Atlantic University), Lexye Aversa (Professional Touch International), Anthony Pulieri (United Bullion Group), and John Browne (Euro-Pacific Capital) discuss the prevalence of new IPOs in the stock market (Tesla Motors, Primerica, Vera Bradley, Toys R Us)  in spite of the financial reform bill. While some look at it as a positive sign for the market, other experts say it might be companies trying to cash out before the next crash comes.  Find out this and more on Episode 11’s Regulation Nation segment which was brought to you by The James R. Whelan Agency, “The Most Powerful Name in Advertising”.

Breaking News: Pulieri Calls Market Sell-Off & Gives Dow Forecast May 7, 2010

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Below is market commentary from Anthony Pulieri of Joseph Glenn Commodities (www.jgcommodities.com)  and Expert Panelist for The Mangru Report:

The stock market has come too far way too fast as I discussed on The Mangru Report this past Saturday. The retail investor needs to get out and if you look at what happened this week, it is a fundamental break down in the market.  I have been looking for heavy volume as confirmation and with almost 460 million shares trading on the Dow, this is it.  Technically speaking a 15-20% correction to the downside in the stock market is exactly what this market needs and it could be much more aggressive.   I see support at around 9800 on the Dow, which we last hit on February 5 of this year and which we touched briefly today.  In addition, over the last several days we broke the trendline that we established off the March 6 lows of 2009 (see DOW chart below).

Most likely, I do think 9000 will be hit quickly on the Dow admist a global selloff.  Fear and uncertainty have permeated the markets.  The VIX (aka The Fear Index)  has literally doubled  in the last 3 days.

This is a dramatic move and it seems retail investors are getting shook out very fast. The Eurozone is falling to its knees right before our eyes. This is a major factor along with the wild currency moves we have seen daily. The situation in Greece, Portugal, Spain and now Italy is part of a deleveraging process that is spreading fast into global markets.  This is just the beginning.  I am looking for this trend to continue and the fall of the Eurozone as we know it is here.  The sense of panic we saw in the American stock market has crushed confidence and I think it showed a lot of people just how vulnerable the current situation is.  Without confidence in a system that is already damaged I will tell you to just sit on the sidelines and take your profits. The correction has started.  Don’t get caught!

Now GOLD is a different story because it is the only true safe haven asset.  The stock market rally, which you can see in the DOW chart I posted earlier was built off of relatively weak volume (the last time the DOW had significant volume was back in April of 2009.  Gold on the other hand has had a strong rise built on strong volume, a classic trend confirmation (see chart below).

It is true currency as we have seen this week, and for the last 5000 years people forget it is the only asset that does not rely on other people’s ability to pay. It continues to hit new highs in all currencies and with the printing press running wild globally, inflation is inevitable. The general level of the price of goods will continue to rise and the purchasing power of your dollar will continue to erode.

Its not just companies going under.  Now we have actual countries coming apart at the seams. Greece is the birth place of democracy. With all these issues going on, what we saw was the 1200/oz level in gold get breached with relative ease in the face of a strong dollar. Gold’s high will be broken very quickly and my target is 1500/oz by years end . Long term gold is poised for much higher moves 2500/oz at the minimum. Technically we have short term support at 1160 and at 1080 lies the all important 200 day moving average. The 1000 dollar level has a mountain of support and I fully expect we wont see for a long time. With the Central Banks being net buyers of gold and the geopolitical and economic instability Gold is your safe haven.  There is just too many question marks. Gold has the support technically and fundamentally. You throw in record level investment flows globally it is a must in everyone’s portfolio!