Migliore: Time to wake up, America

By: R. Henry Migliore Guest Columnist September 1, 2015

There is a good chance that our United States of America will not exist as we know it today. With the United States in its 239th year and Canada at its 188th year, we are very low on the learning curve. China and Russia, for example, have existed for thousands of years. These societies and others have adapted to change. China has adapted to change and continues to be a world power. The Soviet Union collapsed, and now Russia is emerging again as an economic and military world power. I have worked as a consultant and visiting professor in China and Russia. They are bright, shrewd, calculating, and have a mind-set to look at the future. Our North American mind-set is short term with the thought to only what’s just around the corner; we seem to have little apparent interest in the long-term future. Russian President Vladimir Putin was quoted: “Russians do not have to worry about the USA. They will self-destruct.”

The federal debt since January 2009 has gone from $10.6 trillion to more than $17 trillion. More debt and no relief in sight mean it’s only going to get worse. Our form of government will have to change to combat decades of moral decline, economic downturns, weak international position, and decades of failed foreign policy.

My spirit is telling me that dramatic events are on the horizon. We can see that Iraq is back in civil war. The Russians are asserting dominance in the Ukraine. We did not learn a lesson from Korea, Vietnam, Iraq or Afghanistan. There is no clearly divine foreign policy and for sure we have no clue about the cultures of the entire world. Getting out of Iraq left a vacuum for ISIS. What a blunder. We still have troops in Europe, Korea and Japan. A basic understanding of culture would have shaped a better strategy to deal with world events. We can expect more turmoil in the next few years. The Department of Homeland Security is successful to some extent but handcuffed. One thing you can count on is more lone-wolf and ISIS attacks here in America. As events unfold, our inability to adjust will lead to our sense of isolation.

The Obama administration is sleeping at the wheel and, in general, educated beyond their intelligence. I clearly saw this as the following articles I wrote will attest: the March 1997 Tulsa World, right before the 2001 downturn, “History Suggests Severe Economic Trouble Looming,” the Jan. 20, 2001, Tulsa World, “Economic Change on the Horizon; and my June 5 Jenks Journal and July 10, 2008, Tulsa World, “All Economic Signs Point to Recession.” There is nothing complicated here if you wake up and think. The facts are there. The American people are like sheep. In the last presidential election, 35 million people did not vote, according to the Berna Foundation. The media and the politicians just herd us along; we stop and graze and water, and no one wants to just plain think about what is going on.

If our political system will not correct national debt, a propped-up economy, moral decline, then I have to agree with Allan Sloan, “What this country needs to get its act together is a good five-alarm financial crisis.” The federal government is like a runaway freight train with no brakes taking over among things education, marriage, and the list goes on and on – and with no breaks – all we can hope for is a “crash.” And I can see a crash coming … world events and massive debt. This is out of control – crash hurts, you bet – but in the long turn we need a derailment so we can start over and get back on the right track. The stock market will respond with a big decline.

After the upcoming recession, you can count on it in 50 to 60 years from today; there will be another severe economic downturn. The key index of raw materials prices is at its lowest level in more than a decade. The cycle has repeated itself since the 12th century, and there is reason to believe it will come as scheduled and on time. Note: Kondratieff’s curve business cycles. We are in the fourth quadrant and poised for major decline. The stock market has started its decline into major recession and possible deep depression.

So, what factors are driving the sharp and swift, worldwide sell-off? For starters, the bull market that began March 9, 2009, is the third longest and fourth most profitable in U.S. history; it is overdue for a correction. In retrospect, that bull market was the result of the Federal Reserve’s financial engineering, spurred by the unprecedented action of reducing interest rates to near zero and holding them there for almost seven years. Several rounds of quantitative easing (the Fed buying Treasury securities) put money in the economy that inflated stock prices. One of our favorite and respected financial writers, James Grant, has coined the term “Ph.D. Standard” to describe the actions of the Federal Reserve as “the conduct of policy by neo-Keynesian, neo-monetarist academics with Ph.D.’s granted by a small number of elite schools.”

Americans should be concerned about today’s level of national debt. Since January 2009, federal debt has grown from $10.6 trillion to more than $17 trillion. Despite some rather glowing reports about the U.S. economy in recent months, federal student loans are out of control. These loans have exploded to $1.2 trillion over the last decade. In addition to that large figure, nearly 7 million student borrowers have gone at least a year without making a payment – either because they are unable or unwilling to do so.

In historical terms, how expensive are U.S. stock prices this summer? The answer according to research by Nobel laureate Robert Shiller: the third-highest valuation since World War I, trailing only the late 1990s and 1929; 2007 ranks fourth. The 1990s, 1929 and 2007 had stock declines of 49 percent in 30 months, 86 percent in 33 months and 57 percent in 17 months, respectively. Such times are not for the faint of heart!

In recent weeks, it has become apparent that China’s lauded economy is experiencing a dramatic showdown and its intermediate-term prospects have dimmed. In response, China devalued its currency, the yen, on Aug. 11. All other things being equal, that devaluation makes China’s exports cheaper. Another recent currency devaluation was done by Kazakhstan on Aug. 20.

In the last year, there have been huge collapses in commodities including oil, copper, agricultural products and gold. Here are declines for five commodities from 2012 through 2015: oil, down 48 percent; iron ore, 60 percent; copper, 31 percent; palm oil, 39 percent; and wheat, 37 percent. This development, along with the Fed’s policy moves, has resulted in the biggest threat of all for the world economy: deflation. The world experienced some deflation in the 1930s, but none of significance since then. For the last few years, the inflation rate has been nearly 0 percent, far below the Fed’s target of 2 percent.

My friend and University of Tulsa professor emeritus John K. Harris has developed a brand-new proprietary investment tool called the Good and Bad Times (GBT) model. The purpose of the GBT model is to enable individuals and institutions to be invested in the S&P 500 Index – a broad measure of the U.S. stock market – (1) during much of its good times and (2) avoiding much of its bad times. In the last 88 years, there have been only 22 Sell signals. No. 23 occurred on Monday of last week. It is noteworthy that six of the 23 Sell signals occurred during the periods of highest stock valuations of all time (mentioned above). Moreover, nine of the 23 Sell signals occurred during Shemitah years including 1931, 1937, 1973, 2000 and 2008.

To receive a short write-up describing the GBT model, request it by emailing harrisjohnk@hotmail.com.

Conclusion

It is time to wake up, America, and take control of our own destiny. History shows us what happens if we stay on the current path. What we need now is an earth-shaking recession and I think this is it. No one has courage to make the changes needed. From last week’s Time Magazine: “A market rout carries echoes of the 2008 crash. What hasn’t been fixed.” Looking at their points, a whole lot (is) not fixed. A repeat of 2008 would force us to get our house in order. We do not have time to wait for the coming election. This recession/depression is going to force dramatic action. The current administration does not have the mental or moral courage to face the challenge. The Senate and Congress are going to have to “cross the aisle” and take dramatic steps. Right now 71 percent of the federal budget is entitlements and interest on debt. Dramatic cuts have to be made. Example: Thanks to our own retired senator Tom Coburn, aka Dr. No, he was able to stop the infamous “bridge to nowhere.” I question the value of the federal Department of Education. They should be cut to the bone and turn education back to the states where it belongs in the first place. Dramatic cuts can be made in the federal budget by going to a modified flat tax and get rid of a big part of the Internal Revenue Service bureaucracy. Iran Deal … no-brainer … reject it. Dodd Frank … time has passed … repeal it. Dodd Frank is slowing growth of small business Social Security; just cannot last like this … for now say move ages to 63 and 66 to collect benefits … slow down the tide coming in. Remember Putin is just watching all this and licking his chops waiting for the U.S. to fail. He has been quoted as saying, “No need to worry about the USA, they will self-destruct.” In his mind … “great, cut your troop strength.” For goodness sake, don’t cut 40,000 troops from our armed forces. America needs strong decisive leadership.

R. Henry Migliore is professor emeritus at Northeastern State University and president of Managing For Success, an international consulting company.