January 5, 2009               

The following is from the first article that I wrote in 2008.

"I am no longer unique in warning of a recession. Although others are placing probabilities on the likelihood, I am saying, as I have for about three years, a recession is not avoidable. Three years is a long time. I am not proud of being early. I do believe that the eventual severity of the economic downturn will make the three year time span of being early look a lot shorter than it does today."

January 14, 2008

                                    High School Economics

The United States economy began as a free market system. The allocation of resources through out our history has mostly been accomplished by prices which are determined in the free market. The minds of our citizens have been conditioned to think that it works that way. The economic policies that our leaders come up with are built on the assumption that the free market system is in place and working.

From the outset the different players in the economy have used the democratic process as a means of gaining an advantage in the market place. Efforts to do this have always had a degree of success, but when the government was small the effect was not that noticeable. Today, success or failure of large sectors of the economy are dependent upon efforts to influence government policy as they are upon participating in normal business practices. A necessary role for government in a free market economy has always been recognized. But, government never plays a large role in allocating resources. That has all changed over the last several decades.

The late Milton Freidman always argued in favor of small government. When his detractors warned of industrialists gaining too much power in a capitalist system, he would warn that when government grew in size that industrialists would take control of government. That very thing has happened.

The policies that are currently being implemented are designed to save a free market system, but given the system that we actually have, the result will be much different than what we hope for. It is unwittingly believe by most that it is through public welfare and entitlements that government affects resource allocation. The ordinary practice of influencing public policy has proved to be highly profitable to powerful  sectors of the economy that seek to gain an advantage in the market place.   

Government actions do have the potential to cause an economic recovery. Because nothing of any structural substance is being done, the coming recovery will just be a predecessor to the next decline. Recessions are a necessary ingredient for the efficient functioning of a free market. A government that is committed to preventing all recessions is in fact insuring the eventual failure of the entire system.
The sheer volume of money being poured into the financial markets is likely to spark an intermediate term uptrend, which may be mistaken by many for the beginning of a new bull market.  The practice of eliminating recessions creates a certainty that the country will fall into an actual depression.

Many causes will be given for the coming depression. It will be said that capitalism has failed. Actually capitalism has been perverted to the point where it is no longer self-regulating. The economic system's failure will be caused by the corruption of the free market system. Errors in reasoning are the root cause of an economic failure of this kind. When the solutions being presented are based on the same faulty reasoning that has caused the present problems, a larger failure down the line is imminent. When there is a clear understanding that the system has failed due to a lack of free market incentives, that will be the light at the end of the tunnel.

The economic theories that are the driving force behind current efforts to save the economy are full of holes. America's faith is misplaced. The Bernanke/Paulson approach will fail for the same reason a chain letter fails to make everyone rich. Erroneous assumptions are made as to how people will behave. For an economic intervention to work the implementers must accurately forecast the behavior of those on which the plan is being implemented. What is actually happening is that the rank and file are studying the behavior of the Federal Reserve and the Treasury Department then adjusting their actions accordingly. 

The after effects of the last decade's experiment with planned, hybrid free market economics and financial market manicuring will have a negative effect on the stock market for years to come.

Again the short term plan at Quillian & Taylor is to enter 2009, on balance long, close long positions into enough strength and be on balance short again before the year is up.

James Quillian