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Delving Down Into A Gaping Black Hole

The gaping black hole that's been this market since November continues, and today's big sell-off is no exception. In fact, we've been delving down into this black hole since June, and despite the best efforts of central banks around the globe to stem the decline, the deluge isn't over yet.

Right now, we are staring down the barrel of 800 on the S&P 500, and if we fall below that psychologically and technically significant barrier -- look out below. (Continued Below)

Hey, I realize that it's tough to stay on the sidelines when the market is lower than it has been in many years, but what you have to realize is that the carnage is not likely over yet. We still have to grapple with what almost certainly will be the weakest holiday shopping season in decades, and there is no telling just how pernicious an effect this will have on corporate earnings.

I've said this all year, and I am going to say it again today: When the market is in turmoil, your best strategy for keeping your serious money safe is a healthy dose of the forgotten asset class -- cash.

If you'd like to find out how you can protect your assets from the ravages of this bear market, then you need to try my Successful Investing advisory service.

Isn't it time you sought shelter from this market storm?

To find out more, click here.

Consumer Price Deflation: Is It Really Bad?

Today, we got the news that consumer prices had plunged by the largest amount in the past 61 years during October, led by a record-drop in gasoline prices.

The Labor Department announced Wednesday that consumer prices fell by 1% in October, which may not seem like a lot, but that is the biggest one-month decline on record.

In other deflationary news, the Commerce Department reported that construction of new homes and apartments fell by 4.5% in October to an annual rate of 791,000 units. That was the slowest construction pace on record going back to 1959.

The big drop in inflation was nearly across the board, and included consumer prices, food and energy prices. The retreat in consumer prices is a huge turnaround from just a few months ago, when oil and gasoline prices were sounding the alarm bells of runaway inflation.

The debate now is -- what's next? Will we see more asset and price deflation, or will the government's efforts to stimulate the economy create a spending surge likely to bring inflation back?

The economic jury is still out on this one, but here's a little food for thought. First, if we do see deflation, which properly defined is the reduction in the quantity of base money, is this really a bad thing, as so many mainstream economists argue?

According to Austrian economist Jörg Guido Hülsmann, in his just-published work, Deflation & Liberty, deflation "...fulfills the very important social function of cleansing the economy and the body politic from all sorts of parasites that have thrived on the previous inflation."

The argument against deflation is that it causes consumers to hold back on purchases, spurring them to save money and to pay down debt. But in the Keynesian world view, this is bad, because spending -- and if necessary, big government spending -- is the only way to extricate a slumping economy from the doldrums.

Whatever view you take of this situation, you can bet that the proposed solutions and their concomitant effect on the world economy and world financial markets are going to be with us for a long, long time.

What this means is that in order to survive as investors, you simply have to know at least the basics of the issue of inflation vs. deflation.

Big Three Bailout Bulls**t

By Jim Woods

Talk of a bailout for the Big Three U.S. automakers has dominated the headlines of late, and with most of the prominent politicos in favor of a bailout -- including President Bush, President-elect Obama, and the Democratic leaders in Congress -- you can bet that Detroit is going to get the handout they're begging for from Washington.

I know there is a lot of talk about jobs and the "essential" nature of the U.S. auto industry, but if it's so essential, then why is there so much bulls**t surrounding the issue?

First, there's the green lobby and its infestation of the Big Three bailout process. According to an editorial in today's Wall Street Journal titled, "The Environmental Motor Company," what is really going on here is an attempt to use taxpayer money to remake Detroit, "in the image of the modern environmental movement."

The editorial goes on to point out that earlier this year Congress had approved $25 billion in loans to the car companies for "green retooling," which the White House has suggested Detroit could use for more general purposes right now, such as keeping their companies afloat. But wouldn't you know it, Democratic leaders refused. They're insisting that the $25 billion the automakers want should come from the Treasury's Troubled Asset Relief Program.

What this suggests, as the editorial points out, is that what Congress wants is an American auto industry that serves goals other than selling cars to consumers. Led by the green lobby -- which has despised Detroit for decades for making SUVs, trucks and other vehicles that don't fit their notions of eco-friendliness -- this bailout plan, and the green strings that likely will be tied to it, is the environmental lobby's big opportunity to remake Detroit.

But the green movement bulls**t isn't the only bulls**t involved here. How about the union issue?

According to an editorial in the Friday, Nov. 14, issue of Investor's Business Daily, titled, "No UAW Bailout," perhaps the best way to deal with the financial distress of the Big Three is to allow them to go bankrupt.

"Filing for Chapter 11 protection under bankruptcy law is the normal way a company stays in business when facing an unmanageable financial situation. It keeps creditors at bay while the company reorganizes under court supervision and settles its debts. In recent years it has served as a refuge for major airlines (Delta and United) which, you may notice, continued to fly while in Chapter 11 and, post-bankruptcy, fly today."

The editorial goes on to explain what is perhaps the most crucial component of bulls**t involved in this whole issue, and that is that if the Big Three filed for Chapter 11, they would be freed from their existing union contracts.

"Could this be why it seems to have been taken off the table as an option, at least among Democrats? We can only surmise, but it's clear that a bankruptcy process would be rough going for the United Auto Workers," argued the editorial.

Rough going, indeed, considering that the average hourly labor cost for the Big Three is about $70, while Toyota's hourly labor costs are under $50. Gee, could this be a chief reason why Toyota is making big profits while the Big Three flounders?

If U.S. automakers were allowed to go bankrupt, the UAW's membership, which has already fallen from a high of about 1.5 million in 1979 to 465,000 as of 2007, would likely fall even further.

Of course, politically, that is unacceptable, especially with Democrat legislators who get quite a lot of support from the still-powerful labor lobby. As Investor's Business Daily points out, "Saving a shrinking union is the worst reason to bail out Detroit with taxpayer money. Unfortunately, it may be one of the strongest, politically. That's why the public needs to be enormously skeptical when it hears that bankruptcy for the Big Three would be a catastrophe for much of the U.S. economy."

I couldn't agree more.

Jim Woods is a freelance journalist specializing in the economy, the markets and politics. He is a frequent contributor to Doug Fabian's Alert, as well as many other publications. He welcomes your comments, and can be contacted by clicking here.