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Bert Dohmens Wellington Letter, P.O. Box 49-2433, Los Angeles, CA 90049Phone: (310) 476-6933 Fax (310) 440-2919 Website: www.dohmencapital.com E-mail: [email protected]

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October 19, 2009 Volume 32: No. 18

SMOKE AND MIRRORS EVERYWHERE

Abraham Lincoln once said:

You cannot help the poor by destroying the rich.You cannot strengthen the weak by weakening the strong.You cannot bring about prosperity by discouraging thrift.You cannot lift the wage earner up by pulling the wage payer down.You cannot further the brotherhood of man by inciting class hatred.You cannot build character and courage by taking away men's initiative and independence.You cannot help men permanently by doing for them, what they could and should do for themselves.

(courtesy of www.traderview.com)

Read the Abraham Lincoln quotes again: how many members of Congress today would agree with

those? How many have ever read even one speech of Lincoln, or the U.S. Constitution?

THE STOCK MARKET

SMOKE, MIRRORS, AND LOTS OF HOPE

The stock market rally since March 6 is widely proclaimed to be the best of several decades, some saysince the Great Depression. Let's see what it has done.

There were two phases: March 6 to June 11, and the rally from the correction bottom on July 13 to now,with the DJI hitting 10,000.

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The S&P 500 Index rose 43.5% in phase 1. In phase 2 it gained another 15.8% from the June 12 peak.

The NASDAQ COMPOSITE gained 48.5% in phase 1, and the same 15.8% as the S&P in phase 2 fromthe June 11 peak.

Obviously, the first phase was much more powerful. We participated in that nicely right from thebottom. However, the second phase didn't meet our requirements for a positive risk/reward ratio. Whenthe risk is too high vs. potential reward, we would rather not take the risk.

Our view is that the second phase was and is a highly promoted affair without broad participation.

Our colleague Rob Arnott of Research Affiliates calculated the performance difference between thesmall cap stocks and the big caps, using components of the Russell 1000. For the five months starting inApril, stock selling below $5 gained an impressive 116.9%. Yet stocks selling at over $50 gained amuch smaller 22%. Yes, the "cat and dog" stocks soared the most.

In the financial media, you always hear the phrase that so many companies are reporting earnings "betterthan expectations or estimates." But you seldom hear how much down they were from the earnings ayear ago. That is very deceptive.

The "estimated earnings" come from Wall Street. It behooves them to keep them low so that companiescan easily beat them. That's what stimulates buying enthusiasm. It's a charade. So, let's see what the realearnings comparisons were. Second quarter earnings for the S&P 500 stocks were down a hefty 27%over the year ago numbers. For the third quarter, they are expected to show declines of 25%. Andthat's with all the easy cost cutting. What will the companies do next year, when they really haveto cut into the muscles to get some cost reductions?

On a valuation basis, this is now a very expensive stock market. Valuations are at levels as high as orhigher than what's normally seen at bull market tops. Another mini-bubble has been created by theFed. They think that piling trillions of debt on top of the trillions existing in 2007 will resolve thecrisis. That can only happen in fairy tales.

Statistics show that corporate "insiders", i.e., the top executives, are very busy selling the stocks in theirown firms. The ratio is now at a very high 18:1 sell to buy, the highest ration since the 2007 bullmarket top. Obviously, they don't think today's stock prices represent values.

Sentiment has been and is still very bullish. That is a contrarian indicator and shows that too many areon the bullish side of the fence. The sentiment amongst S&P futures traders is still over 90%, whichequates to important bull market tops. The difference between bulls and bears amongst investmentadvisory services is at a high last seen at the 2007 bull market top (from Investorsintelligence.com).

The public, however, hasn't been buying stocks in large quantities. Normally that would be a bullishsignal. In fact, they are still liquidating equity mutual funds in large amounts. The average investor isstrapped for cash. Americans find that selling stocks is the only source of ready cash they have left. Thepublic lost 50% or more of their lifetime savings in the 2008 bear market. They have nothing left to

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gamble with. That's why Las Vegas is dead. The average person is having trouble paying the monthlybills.

There are so many distortions in the markets today that traditional technical indicators are no longer as

reliable as in the past. Trading volume in the markets used to be a most reliable indicator. But today,about 50-70% of daily trading volume is from the "high frequency" trading computers. Imagine! Ifit weren't for these, the stock market might have to shorten hours for lack of interest. But trading volumein the dollar term is at a record high. What's going on? Here is a great chart from our colleague, AlanNeuman's Crosscurrents (www.cross-currents.net):

It shows that although the total worth of listed stocks is now lower than in 1998, the dollar value oftrading is about 3 times greater. That's the "high frequency" trading operations. They are in a tradeonly for minutes or a few hours. That's keeping the exchanges alive. They need that business.

Additionally, big volume has come from just four stocks: Fannie Mae, Freddie Mac, AIG, andCitigroup. On some days, these four stocks accounted for 40% of total volume. The first two firms areconsidered to be totally worthless by some analysts. To us that confirm that this rally has nothing to dowith "investing," but more with computerized speculation.

A FLURRY OF OFFERINGS: Have you noticed the number of IPO's and secondary offerings? Theprivate equity firms are taking a bunch of their companys public. These are firms they acquired duringthe boom, loaded them up with debt to pay themselves multi-billion dollar fees, and now they arescrambling to shed the over-indebted carcasses.

Other firms are going public as well. They can't get credit, so they sell stock. Is all this bullish orbearish? The media tells you its bullish. It shows that the markets are functioning again. That's true.However, we notice that many of this IPO's aren't working: the stocks quickly drop below the offeringprice within a few days. That means that the syndicate offering the stock couldn't or wouldn't support it.They didn't want to risk their own money.


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The "fingers of instability" in the global markets started growing rapidly from 2005 until 2007. Then the"crisis state" was reached and the mountain of debt started collapsing. Is it possible that such "fingers ofinstability" are once again growing silently?

We identified the stock market top in July 2007 to the exact day. The markets tumbled into August.However, then there was another rally going into October. We wrote in these pages that the last rallywas manipulated. We showed that the majority of stocks were being sold in big numbers, while the largecap stocks that control the major indices were being promoted upward to disguise that selling. Whilesome subscribers were just itching to plunge into the market and questioned our sanity during the rally,the October 2007 top preceded the worst financial crisis in history. In the WELLINGTON LETTER ofOctober 17, 2007, we said it was a top. And it was.

The point here is that just because a rally continues while the dark clouds are forming, doesn'tmean the rally is genuine. Eventually, the fingers of instability reach the crisis state, andeverything comes tumbling down.

The S&P 500 Index is now selling at 26 times operating earnings. That's more expensive than at the bullmarket top in 2007. Are things really better than at the five-year bull market top in 2007? What aboutthe trillions of dollars of bad assets still on the books of financial institutions around the world? Mostanalysts agree that the market is over valued. Yet they have to participate because the market is goingup. They hope to be the first ones out of the exit when the plug is pulled. Do you think you can do that?

Although we participated nicely in the first part of this rally from the March bottom, we becamecautious in the summer and therefore have missed part of the rally since that time, depending on whichof our services you receive. However, experience shows that unless you have a crystal ball that works,the way to successful investing over the long term is to pull back or go to the sidelines when therisk/reward ratio is unfavorable. That doesn't keep the market from climbing; it does prevent you frombeing invested in a massacre later on.

Do you remember the 1987 crash? We got warning signals in early September. We had an investmentmanagement subsidiary at the time. We raised cash positions in the portfolios to about 77%, (23%invested). We got complaints over the next six weeks from some clients for being too cautious. Iremember two of these people using extreme profanity to one of my people. Then came the mid-Octobercrash. Clients were very happy. Several days after the crash, we bought back some of the investmentswe had sold earlier at half the price. Then we got angry phone calls for getting back in. They screamed,"don't you know that the collapse of the financial system is ahead."

The fact is that no one "knows" what the market will do. We just go by the "weight of the evidence."Sometimes the evidence is not all-encompassing. If you are totally convinced that we are missing animportant move, then jump in and take responsibility. Nothing keeps you from doing that.Our first target for the S&P 500 is the 1100-1120 area. We are just about there. If it can get through that,then we have to look at the 1180-1200 area. When so many traders and money managers are in themarket only because it's going up, they will also be very quick to sell when the uptrend breaks. Thatmeans the downside move could be sharp, not giving slow investors a chance to get out.

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8. Stimulus programs, as designed in Washington, have done nothing to stimulate. If you would removeall these programs, the financial system would come to a standstill again.

9. Credit, credit, credit. Yes, credit growth is needed for any recovery, yet all the credit numbers still

show a huge credit contraction. Instead of lending, banks are happy to speculate in bonds, with the ultra-cheap money from the government. They borrow at 0.25% and invest it in Treasuries at 3.5%. No risk,no loan applications. The profits of banks will grow even as the economy crumbles. However, no creditgrowth, no economic growth.

WALL STREET TALK: The two guys who ran the Bear Stearns hedge funds, which in 2007 were theproverbial "canaries in the mine" for us in regard to the coming implosion of the financial sector, said toclients in April 2007 that redemptions "are in only a couple million." Actually, at the time they hadredemptions of around $50 million. If I remember correctly, they had leverage of over 6 to 1. Thatmeans that for every dollar of redemption, they would have to liquidate at least $6 of assets.

One of them had said in an internal memo "we should close the funds down." At the same time, theywere telling clients "we are comfortable where we are." The two have been arrested and are chargedwith fraud.

One of these two managers reportedly (www.dealmaker.com) had amassed a collection "of threeFerraris, and real estate and assets that include a $12 million property in Southampton, New York, a$3.5 million home in New Jersey, a $3.25 million home in Vermont, and two Florida properties worth$7.1 million and $1.25 million." One could ask, "Where are the customers' mansions and Ferraris?

THE CHARTIST'S VIEW

The S&P 500 INDEX(weekly) is the same chartwe showed last time, withthe still unfulfilled upsidetarget of 1100-1120.Actually, the target rangewas entered today(Monday). This is the 50%retracement of the entire

bear market. Such 50%retracements are normal ina bear market, and caneven extend to a 61.8%retracement.


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The DJ TRANSPORTS (monthly) is a very long term chart. It shows that the 50% retracement has beenexceeded. That sets up the 61.8% area as the next target. That also coincides with big chart resistance.It's close.

The DJ TRANSPORTS (monthly)


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The NASDAQ

COMPOSITE(weekly) hasreached ourfirst targetgiven lasttime. This ischartresistancefrom the crashof last year. Itcould still go

to the 61.8%retracementlevel, in the2250 area,which is notfar away.

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The DJ US TECHNOLOGY INDEX (weekly) is now at resistance. It could still go slightly higher, tothe 590 area. Then it will face extremely strong resistance.

The DJ US TECHNOLOGY INDEX (weekly)

The DJ US

REALESTATEINDEX(weekly) ishaving ananemic rally. Ithasn't evenrallied to thefirstretracementlevel around

38.2%. Thisrepresents theREITs. Itsuggests bigtrouble for thissector nextyear.


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The US DOLLAR INDEX (daily)

The US DOLLAR

INDEX (daily) is abasket of currenciesvs. the dollar. Thechart shows a"declining wedge"which is apotentially positiveformation. Usually,when the graphreaches the apex ofthe wedge, there isa strong rally. Itseems to be therenow. That meansyou have to be verycautious in allinvestments rightnow.

The chart of GOLD (monthly) shows the bottom in 2001, and the big rally. A 400% rise is better than adividend. Thestrongcorrection in2008 appears tohave been atypical mid-coursecorrection. Thatsuggests a longterm target inthe $2000 area.Another way toget anapproximateupside target isto look at a 10fold gain,which is whatmajor bullmarkets in

sectors accomplish. Starting with $265 in 2001, that would give us a $2650 target.


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A shorter term technical measurement, valid for next year, would be the $1300-1350 area.

CONCLUSION:

The different markets appear to be ready for trend reversals. Whether gold will follow cannot be known.We believe it will, at least initially. It would be the shakeout to test the resolve of the bulls.

GOLD: BREAKOUT, but be cautious now!

We turned bullish again on gold in September, after taking a break during the summer. In our September14 issue, we discussed the bullish picture going into February next year at least, after which gold couldhave a sharp correction. But the long term remains very bullish as well.

Those who argue against gold talk about gold not having a dividend. Well, when something rises 400%over 10 years as gold has, you don't need the dividend. We have never accepted this argument.

Then they say that gold is an inflation hedge, and with today's dismal economic numbers, we don't needto fear inflation. That's a better argument. It is our view that gold will not necessarily rise because ofrising inflation, but because of a lack of confidence in paper currencies around the world. Everyone iswell aware of the unrestrained money creation in the U.S. and Europe. These deficits cannot be financedthrough borrowing or raising taxes. It must be through the printing press.

All currencies are declining in value, just at different rates. This means that diversification into gold isonly prudent and its global. Slow economic growth will not enable many of the industrialized nations togrow out of their predicament. The interest on the debt alone will assure that the debt can never bereduced.

Income tax receipts are plunging. In the U.S., corporate tax receipts by Washington are down 56%from the prior year. Soaring expenditures, while tax receipts are plunging, is a prescription for disaster.And that's why the prudent money of the world is diversifying into gold.

Additionally, we believe that gold will be a part of a basket of currencies which some major creditors ofthe U.S. are discussing now. These creditors are the Middle Eastern central banks, Russia, and China.

There are huge, virtual short positions in gold because of the "gold leasing" programs. (Look it up onwww.google.com). These must be closed out as gold soars and the lessees of the gold cannot put upmore margin for those losing positions.

The near-term view: We see signs that all the markets may be getting ready for trend reversals. Weconsider the trend of the dollar the leader. If the dollar turns up, the dollar rally could be sharp becauseof the huge short positions. This will cause a sell-off in the commodity markets. The big question:will gold follow? We believe it will, initially. But then it could stage a turn to the upside again.

A dollar rally will also be the trigger a stock market correction. Hedge funds don't want to give back theprofits of the last 6 months. Other money managers have similar incentives. Everyone has stayed in the
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market just because it was going up. And they all think they can be the first one to the exit. It could getcrowded.

Gold investors have to decide now whether they want to stay with their positions through a

correction in gold, or not. Selling is always the toughest decision. So much depends on a person'spsychological profile, and, of course, the financial situation. Less active investors don't mind. Theyrecognize that gold is probably the best investment for the next 5-10 years. It's your decision.

THE PLUNGING DOLLAR

The dollar had a big, volatile rally in 2008 while the financial crisis accelerated. That's contrary to whatthe average analyst assumed. Why did it rally while the financial system was on the brink of ameltdown? It was a flight to safety, primarily into U.S. Treasuries. Remember, the yield on short term T-bills actually went below zero, which means that investors were willing to pay interest just to have thesafety of T-bills.

However, the dollar rally came to an end when the stock market started the current rally in early March.The dollar started weakening and the decline has continued. Now there seems to be a global rush out ofthe dollar. Stocks are still rallying because a weak dollar is bullish for U.S. firms doing business abroad.It gives their products a price advantage. For now, Washington loves the weak dollar. However, ourlarge trading partners, especially those who have been financing the U.S. budget deficit, are meetingquietly to discuss reducing their exposure to the dollar.

What can we make out of the pattern of the dollar, and its future? It seems logical that the dollars boughtlast year during the financial crisis have already been sold. That was the first phase of the decline thisyear. So why is the dollar still weak? Our view is that the reasons for a declining dollar have shiftedquietly. The confidence in a country's government, not interest rates, are the primary determinantof the currency value of that country. That's why boosting interest rates, the normal governmentalreaction to supporting its currency, never work.

So, we must ask, how does the world consider the policies of the leadership of the U.S. at this time? Isthere reason for great confidence? After all, the leader has just received a Nobel Peace Prize and he is agreat talker, i.e., speaker. Or is there reason for the capital of the world to flow out of the U.S., fearingever higher taxes, ever more governmental control of the private sector, and ever more stiflingregulations? If the latter is the case, than there is no bottom to the dollar over the long term.

He is about to sign a treaty in Copenhagen which will make the U.S. subject to heavy fines and penaltiesfor polluting. The U.S. will pay billions to less developed countries as restitution. (Will China andothers' pay us anything/). The treaty will be heralded as a gigantic step to "save the world" from carbon."Global Warming" is a hoax, as more recent scientific studies have shown. The treaty will be the successof a long term socialist agenda, from people now Czars in Washington, to "redistribute" the wealth ofthe U.S. Read some of their writings from years ago (go to googlecom.) And who do you think will beon the receiving end of all these billions? The people now flying around the world in their private jets,warning about "climate change." It's amazing that so many people can fall for such pseudo science.

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Let's get back to the dollar. Who will want it if all these financial burdens in the U.S. can only beserviced with freshly printed money? We know that Middle Eastern countries, Russia, and China havebeen discussing a change away from the dollar. They are working on a basket of currencies, includinggold, to replace the dollar. That certainly would produce a sharp rise in the price of gold. Yet it takes a

long time to agree on such a new payment mechanism.

A rally in the dollar now will coincide with a downward correction in stock market. That could occursoon. Improving economic statistics going into year end could be the background excuse. But we don'tsee a meaningful, long-term rebound in the dollar.

Looking out over the next 5-10 years, here is why the US dollar is "toast." Just click on this link of the"debt clock." http://www.usdebtclock.org/

THE ECONOMY

INFLATION IS BREWING

Our view still stands that inflation would be seen in all the things you need, and not in the things youdon't need. We are seeing that already. Just look at supermarket prices.

Will we eventually see an upside breakout in general inflation levels? For the past two years, we havebeen in the minority, saying that inflation would not be a problem yet. That was the correct view.Eventually that will change.

Prices rise for these reasons: 1. Excess liquidity, 2. Cost push, and 3. Depreciating currency.

It appears that the majority of analysts are concerned about #1. Yes, there is a lot of liquidity in thebanks, but it's not going anywhere. It is not used for lending and won't be for a long time. As wementioned, for a bank it's easier to borrow from the Fed at less than 1% and put it into Treasuries bondsat 3.5%. No work, no credit risk, and no tedious loan documents to process. The broad money supply isbarely growing. Therefore, we don't think that the bailout liquidity will cause inflation for some time.

The "cost push" is a different story. All the tax increases being pushed through in Congress will raise thecost of doing business. A study says that the most recent version of the health care plan will cause taxes

of people making between $100,000-200,000 to rise by 29%. That's huge. Anyone having a secure jobwill ask for a commensurate increase in pay. And that increases the cost of doing business, which resultsin higher costs to the consumer.

All the taxes that will be imposed on companies in the health sector will be passed on to the consumer inthe form of higher prices. Such "cost push" prices rises will be contagious. When other firms see theseprices rising, they will want to raise their prices. And that causes more and more industries to follow.


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Obviously, when unemployment is double-digit and rising, people can't afford the higher prices.Recessionary pressures will increase. That requires further bailouts and "stimuli" from the government.Because the government doesn't have the money, they will have to create it out of thin air. And this iswhat the nations who are buying our debt are worried about. That gets us to #3. The dollar will decline.

What's worse, Washington will encourage a cheaper dollar as it tends to produce more exports.

The typical governmental remedy to support a currency is to hike interest rates. That never works, butthey think it does. In government, the rule is: "If something doesn't work, do more of it."

Soon you get to the point that people around the world won't want dollars. We saw that in 1987. Andthat's when a plunging dollar will create rapidly rising inflation in a recessionary environment becauseof a worthless currency.

Gold will become king. Washington may try to prohibit gold ownership by U.S. citizens again, as wasdone under Roosevelt. But this is not the 1930s anymore. The flight away from the dollar into gold willbe worldwide as all paper currencies become suspect.

High inflation causes high interest rates. And that will depress the economy even more. Under thecurrent leadership in Washington, there is just no way out. Tax cuts are an anathema to these people,especially when the cuts are for people who actually pay taxes and create jobs.

BOTTOMLINE: We don't expect the inflation statistics to rise substantially over the next year.However, inflation will be simmering below the surface. The dollar will be the key to the markets.

ECONOMIC RECOVERY OR AN INTERLUDE

The big announcement on October 12 came from the NABE (National Association of BusinessEconomists): "The Recession is Over."

On the surface, that sounds great. But then you think, what does it mean? Unemployment is expected torise above 10%, mortgage defaults are rising sharply and now spreading to high-priced homes, creditcard defaults are soaring and expected to go above 10%, commercial real estate loans are in big trouble(about $750 billion). So, how do they define the "end of recession?"

Is it two consecutive quarters of positive GDP growth? Is the "growth" a comparison with year-agolevels, or the last quarter? You see, you can have the so-called "end of recession" without anymeaningful effects for the average person. And don't forget, this proclamation came from a large groupof economists, the same people who were so optimistic in 2007, just before the financial and economiccrisis started accelerating.

My rule is "don't believe economists," even when it's the Fed Chairman. On January 10, 2008, when thecountry was already in recession, the Fed Chairman said, Thus, notwithstanding the effects of multi-billion dollar write-downs on the earnings and share prices of some large institutions, the banking sys-tem remains sound The Federal Reserve is not currently forecasting a recession.

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Three months later, he testified before Congress. As we know now, this was four months after therecession had started. He said: Recession is possible, but recession is a technical term Im notready to say whether or not the US economy will face such a situation.

Yes, and these are the people allegedly "steering the economy." Heaven help us.

Currently, the consensus view of economists, Wall Street analysts, and even Nobel Prize recipients ineconomics is that the economy is recovering and that now is the time to go bargain hunting for the goodtimes ahead. The Economist writes: After the storm: How to make the best of the recovery.

Well, the world's most devastating financial crisis in a century or more isn't over in two years, especiallywith the current disastrous policies coming out Washington. Even enlightened political leadership wouldhave its work cut out for them. But when the leadership wants to replace capitalism with socialism, therewill be a lot of broken eggs,

The default rate on Commercial Mortgage Backed Securities (CMBS) is skyrocketing. The Fed still hashundreds of billions of dollars to buy up some of this paper in order to avert another crisis. As you cansee, the government is now the whole ball game. They are spending money created out of thin air. Thatis not the way to resolve a problem produced by an imploding credit bubble. A better way it to let thedefaults occur and let the marketplace take care of the shakeout.

Unemployment now officially stands at 9.8%. The Employment Report today for September wasdismal. Officially, the payroll survey showed a decline in payrolls of 263,000. However, the householdsurvey shows 785,000 people losing jobs. You don't hear that in the financial media!

Because of an accounting gimmick, the unemployment rate rose only 0.1%. You see, the civilian laborforce shrunk by 571,000 in September, compared to an increase in the labor force of 73,000 in August.If the labor force had held steady in September, the unemployment rate would have increased to10.2%!


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less-developed countries, and now believe that Asia and related regions will do very well becauseentrepreneurship can still flourish there. China has huge foreign reserves which it deploys much betterthan the western world to stimulate the economy. U.S. influence in Asia will vanish over the years, andChina will rule that part of the globe. Europe and the U.S. are committing economic Hara-kiri, with their

excessive taxations and regulations. The future lies in Asia.

AUSTRIAN ECONOMICS: This is the "free market" school of economics, unfortunately not usuallytaught at our universities. The liberal institutions prefer Keynesianism, which preaches that thegovernment should control the economy. Dr. Murray Rothbard, a great scholar of Austrian economics,wrote this about the writings of Ludwig von Mises years ago. Von Mises wrote about what governmentshould do when its prior policies cause a depression. The advice is so appropriate for the current times,yet is totally opposite of what government is doing:

What does Mises say should be done, say by government, once the depression arrives? What is the

governmental role in the cure of depression? In the first place, government must cease inflating as soon

as possible. It is true that this will, inevitably, bring the inflationary boom abruptly to an end, and

commence the inevitable recession or depression.

But the longer the government waits for this, the worse the necessary readjustments will have to be. The

sooner the depression-readjustment is gotten over with, the better. This means, also, that the government

must never try to prop up unsound business situations; it must never bail out or lend money to business

firms in trouble. Doing this will simply prolong the agony and convert a sharp and quick depression

phase into a lingering and chronic disease.

The government must never try to prop up wage rates or prices of producers' goods; doing so will

prolong and delay indefinitely the completion of the depression-adjustment process; it will cause

indefinite and prolonged depression and mass unemployment in the vital capital goods industries. The

government must not try to inflate again, in order to get out of the depression. For even if this

reinflation succeeds, it will only sow greater trouble later on.

The government must do nothing to encourage consumption, and it must not increase its own

expenditures, for this will further increase the social consumption/investment ratio. In fact, cutting

the government budget will improve the ratio. What the economy needs is not more consumption

spending but more saving, in order to validate some of the excessive investments of the boom.

Thus, what the government should do, according to the Misesian analysis of the depression, is

absolutely nothing. It should, from the point of view of economic health and ending the depression as

quickly as possible, maintain a strict hands-off, "laissez-faire" policy. Anything it does will delay and

obstruct the adjustment process of the market; the less it does, the more rapidly will the market

adjustment process do its work, and sound economic recovery ensue.

The Misesian prescription is thus the exact opposite of the Keynesian: It is for the government to keep

absolute hands off the economy and to confine itself to stopping its own inflation and to cutting its own

budget."

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The 1930s Depression was a result of government intervening in the free market with full coercion.What could have been a sharp, but brief, two-year shock, became a 10-year depression. It resulted in aWorld War, costing millions of lives. The government is once again making the same mistakes, becausethey worship Roosevelt.

HOUSING: ANOTHER FAILED PROGRAM FROM WASHINGTON

Almost 53 percent of loans modified in the first quarter of 2008 went bad again within six months.

The administration's plan requires participating loan servicers to reduce monthly payments to no morethan 38 percent of the borrower's gross monthly income. The government would then chip in to bringpayments down further, to no more than 31 percent of the borrower's monthly income. In lowering thepayment, the servicer would first reduce the interest rate to as low as 2 percent. If that's not enough to hitthe 31 percent threshold, they would then extend the terms of the loan to up to 40 years. If that's still notenough, the servicer would forebear loan principal at no interest. How many homeowners in trouble willunderstand all this?

The plan does not, however, require servicers to reduce mortgage principal, which Richard Green, thedirector of the Lusk Center for Real Estate at USC, considers a shortcoming. "For underwater loans, ifyou don't write down the balance to be less than the value of the house, people still have an incentive todefault," Green says. "Writing down the principal first instead of lastwhich is what [the Obamaadministration is] proposingmakes sense to me."

The first two years of the mortgage crisis came from people defaulting on subprime mortgages. That'sbasically done now, with the majority of these mortgages in default. The current foreclosure wavecomes from people with regular mortgages who have lost their jobs. How does the government intend tomodify a mortgage for someone who has no income?

The Congressional oversight panel monitoring admits that the current program doesn't address thissituation. They wrote in a recent report: The foreclosure crisis has moved beyond subprime mortgagesand into the prime mortgage market. It increasingly appears that [the program] is targeted at the housingcrisis as it existed six months ago, rather than as it exists right now."

As always, the government is fighting the last war. How do they intend to administer the health caresystem, which is 17% of the economy?\

MORE PROTECTIONISM FROM WASHINGTON

First it was the tariffs on Chinese tire imports into the U.S. for types of tires which aren't even made inthe U.S. Now Washington is imposing duties on Chinese steel pipe imports. China is one of the bankersfor U.S. debt. Is it smart to poke a stick into your banker's eye? What is the real purpose of this? Why dothey want U.S. companies and consumers to pay more for products we import and consume? Where isthe logic?

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Bert Dohmens

TMWellington Letter

If China wanted to give away for free some of their excess inventories of copper, zinc, aluminum, etc.,would Washington prohibit U.S. companies from accepting such gifts? If so, why should we refusebargains? Are the politicians really smarter than the rest of us lowly servants?

Greetings,

Bert Dohmen

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Bert Dohmens

Wellington LetterTM

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