It has been interesting to watch the financial tv shows over the last few days as the Dow has suffered its largest two day loss in a long time. The pundits I've seen, namely CNBC's Jim Cramer and Fox News's/Forbes's Ben Stein have been acting like cheerleaders for a losing team, trying to bolster the crowd because even though it's 4th a ten with under a minute remaining, there's still hope and you should buy, buy, buy. These are two individuals that I have a lot of respect for too. Based on what I've read about them, I would say they are fairly lucid, intelligent people. Ben Stein, who everyone knows as the teacher in Ferris Bueler's Day Off is actually an economist with a conservative bent. Recently he has been advocating that people save money (a novel concept) in order to have some money for retirement. I consider this pretty damn good advice. So why would he then advocate to "buy on the dip" of the recent decline in the stock market? He feels there is a sale going on. I don't think he could be more incorrect.

Jim Cramer knows how to take a beating. According to him, there were some days when he would walk into work when he used to manage a hedge fund and he'd be down a few million dollars. He learned that if you make small changes then you can usually turn things around. Jim understands that the hedge funds are short the S&P 500 but to him this is a rallying cry and we should prove them wrong by keeping cool heads. Instead of throwing up our hands in panic, we should buy, but buy the correct things. Let's look at what he is advocating we should buy. He says we should diversify and buy grocery store names like Proctor and Gamble and maybe some tech with Microsoft, get into the oil drilling biz with some Schlumberger or Halliburton plus of a host of other sectors which he thinks are worth while. I actually like his advice of taking a really down day and noticing which stocks do well under the conditions. He says those are the stocks to buy because when the money comes back, those are the ones which will do the best. Sounds pretty logical, except what happens if the money doesn't come back?

Here's why I think these two men are fundamentally incorrect but before I spell out my rationale I will turn first to the Oracle of Omaha, Warren Buffett, who is betting big that commodities are going to go up and that, more importantly, the dollar is going to go down. Mr. Buffett makes money by thinking very long term and he sees the writing on the wall. That writing is $7,773,570,880,558.82 in US debt ($7.7 trillion). The more in debt we go, the more we have to take a percentage of our GDP and pay it off. The less productive we are (in GDP) the less the dollar is worth and Mr. Buffett will be correct. For him it's a hedge however because most of his assets are in dollars to begin with, so he'll be lucky to break even, my guess is it won't be enough and he'll suffer too.

So we have the deficit, we have a huge trade imbalance which adds to our debt, we have irrational war spending with no exit strategy and we have high speculation, of which I think Mr. Crammer and Mr. Stein are victim to. The Dow is high, really high. Notice this chart of the Dow since the 80's.

Before the 80's the Dow didn't ride above 1,000. A 290 point decline in two days (like we just had) would have been a major crash back then. Now the Dow is above 10,000, it was riding high just before 2000 and then we had that little dot com crash and it's all but come back. Attention: we are in a bubble. Bubbles burst. The irrational exuberance went from tech stocks to blue chips, hedge funds and real estate but it's still a bubble. The dot com crash will look like a walk in the park compared to what's coming. How can someone get on national tv and advocate buying when we are in the last throws of the greatest bubble that mankind has ever seen?

One key difference between me and Mr. Stein and Mr. Crammer is that I pay attention to past market performance as an indicator of future performance. I think that if one does not do so, they are foolish. The Random Walk Theory refutes my notion that past performance equals predictable future results but all one needs to do is look at a chart like the Dow one above and it becomes pretty clear that we're on top of something that is very tenuous. Whether you believe the Random Walk Theory or buy into technical charting and Elliott Wave Theory (like I do) is your choice but I think it behooves you to know both sides, especially if you are investing in the market. You gotta look at those p/e ratios too, they are not dot com high but they are still high historically. We shouldn't use the dot com era as any kind of measuring stick to figure relative value.

One last word on the economy. The "R" word stands for recession. TV pundits and politicians hate to utter the "R" word. It scares people and hurts their chances of getting reelected. The definition of recession is actually pretty straight forward and we should have no problems uttering it if it appears. A recession is occurring if we have three straight quarters of declining GDP. Recessions happen all the time, what we don't have all the time is a depression, which is an extended, long recession and declining GDP.

According to the Bureau of Economic Analysis (the guys who figure out GDP), we just had down quarter #2 and if Q2 of 2004 hadn't been so much lower than Q1, then we'd officially be one quarter into a recession. Either way, I say we're already there and I believe that this one is not going to be a short lived blip. It's going to approach the "D" word.

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