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August 23, 2009
Issue 59  -  Cognitive Dissonance
All people live their lives with a belief system that either grounds them or governs their actions.  I call these "pillars".  Kind of like the logs that hold up piers.  
These piers help people live life in a "smoother" way.  since the world is so complex, nothing is as simple as it may sound or work so there invariably will be contradictions to their world view.  Most people will try to fit these data points to their views.  Almost anything can be construed or explained away to support a point, that in fact, contradicts it.  Holding two vies or points of data that are contradictory is called cognitive dissonance.  The higher the level of dissonance in an individual, the more problems that person will have.  If someone believed that the sky was red because they had worn red tinted glasses since childhood, had their glasses fall off, they would possibly explain it away as a weird weather pattern or that they weren't feeling well.
This works in a similar basis in regards to investments.  If I have the view that gold is going much higher (I do) and the price starts to go down, than I might explain it away as the gold cartel stomping on gold.  The true cause may be some rich guy selling his gold to buy an island, but I don't have this information so I construct my own.  This is VERY dangerous while investing.  This causes people to fall in love with a stock no matter how bad the news.  If they find out that the company is not paying their bills they will say, "Oh every company does that", or some other such nonsense.  
As an investor, it is very critical to NOT become married to an investment.  You should rent stocks, not marry them.  If you've had an investment for more than 6 months, it is very easy to start treating them as a part of the family.  
Cognitive dissonance also can happen for a group of people or even whole countries.  Today, I believe that the elite are trying to form an outlook (green shoots) and then discount all contradictory data through their media stooges.  Here is a great example from GATA:

"Dave from Denver…

Tuesday, August 18, 2009

Are Home Owners Being Realistic?

A new survey by, an online real estate services company, shows that 81% of those polled believe that their house will not decline in value over the next 6 months:

"homeowners are more optimistic than ever about the future values of their homes, with 81 percent of homeowners believing their own homes' values will not decline in the next six months - the highest percentage on record since the first quarterly Homeowner Confidence Survey, which was fielded in the second quarter of 2008."

Things That Make You Go "hmmmm"

Clearly homeowners still have their heads in the sand and are either unwilling to look at the facts of the marketplace or they are being misled by the flurry of positive data-spin and perception management being proliferated by the National Association of Homebuilders, the National Association of Realtors and the Government ("trust me, jump on in - the water is perfect"). "
So a thought has been placed in the main stream that the housing market is "coming back".  You have probably seen the reports on television that the bottom is in and things are going to improve from here.  "It's a great time to buy a house."  Of course, this is all in direct contradiction to the facts.  A cognitive dissonance is set up and people, even though they logically know things can't be that good, accept what the announcer is saying.
I heard a mutual fund show on the radio on Saturday and he was crowing about how great the stock market was doing and that now was a great time to invest.  This, even though consumers aren't buying, is being sold as the "Way things are."  That coupled with the real earnings that are expected from stocks is quite the dissonance.  See this from

"If you talk to a Bull in this kind of a market (and you can get past the frothing around the the mouth) you'll heard justifications like "Stocks are being priced like an apartment house would be priced in a period of inflation:  The price is going up because the income and earnings potential of stocks is high and isn't the USA the biggest market in the world?

Well, yes, the potential is high, but have youi looked at the forward Price/Earnings ratio of the Dow or the S&P lately?  One analysis (up at Gluskin/Sheff) figures it's in the area of 700.  Who's ever heard of a market PE of 700 without a disaster on the back end?"
Do you remember the stock market bubble of 2000?  Crazy stock PEs of 300 were being purchased.  Well now the whole stock market has a PE of 700 and things are great?  I don't think so.  Here is a graphic showing how dramatic the fall in earnings has been:
Wow, it takes a big magnifying glass to see that green shoot.  Actually that's great when compared to the Dow transportation PE.  This little "dialogue" from

"A guy comes into the bar, and I figure he is a trucker because he looks like a trucker and he is wearing a greasy Peterbilt hat. So I say, “Are you a trucker?” and he answers “Yeah. What’s it to you, old man?”

So I say, “I was just wondering, because it looks like the economic slowdown has shown up in the Dow Jones Transportation Average, which has made so little money in shuffling goods hither and thither that a share of all the companies in the index earned a total of 82 cents, which is down from the $170.63 they earned at this time last year.”

He looks at me and asks, “Who cares? And what in the hell is a hither and thither?”

So I grab him by the arm and say, “Well, as a self-employed person yourself, and as any self-employed person can tell you, there have always been times when earnings drop to 82 cents! Sometimes less! Like that time when ‘word of mouth’ got around about me and nobody would engage my professional services because everybody had heard that I was incompetent and pretty stupid, and there were long, long stretches where I did not make even 82 cents because I was, like they said, incompetent and stupid.”

Then he says, “You saying I’m stupid? You looking for trouble?”

Suddenly, being the professional that I am, I could see that we were not going anywhere with this conversation, probably because he was prejudiced against smelly, drunken old men coming up out of the smoky darkness of a low-class strip club and grabbing his arm, yammering about economics.

Thus forewarned, I cleverly I reply, “Do I think you are stupid? Is that what you are asking me? Well, answer me this… Do you think that it is Beyond Freaking Insane (BFI) that the Federal Reserve is creating so much money and credit so that the federal government can borrow and spend the money, plunging us even farther into debt so that the total national debt, now at a terrifying 80% of GDP, will rise to 100% of GDP and then so horribly, terribly much more? Is this, in your trucking opinion, the Totally Wrong Thing (TWT) to do, and that the only Smart Thing To Do (STTD) would be to buy gold, silver and oil as protection against the complete ruination of the buying power of the dollar thanks to such oversupply of dollars and crushing debt?”

I figured he was going to say “Huh?” so when he looks at me quizzically and says “Huh?” I shout, “Exactly! And normally I would not even remark upon it except to seize the opportunity to ridicule the morons who own the stocks in the transportation index because, as I write this, they have bid the index up to a closing price of $3,705.92, making the price-to-earnings ratio soar to an unheard-of, laughable, impossible, ludicrous 4,493! Hahahaha! A P/E of 4,493! Hahaha! The normal range of P/E ratios is from about 4 or 5 up to 21, with the average being about 12 to 14! But the Transports are at 4,493! "

So the price to earnings ratio in the transportation business is over 4000!  How is that we are pulling out of this quickly again?  Not happening.  We are just starting to slow our decent, and that's all.  The next fall could be huge.  Hyperinflation could stop the fall of the stock market, but I wouldn't bet on it.  Were that to happen, things will be even worse.  Oh, and by the way, more and more people are figuring out the obvious, we're broke:

"We broke the bank!

We need to rein in our overspending   By Mike Whalen | Tuesday, August 11, 2009

The United States is functionally bankrupt. Our collective capacity to deal with this astonishing fact is seemingly nonexistent. Our national politics have become show business, exhibiting a complete refusal to strategically respond to this reality.

Let's look at the simple numbers of our national debt. Our on-the-books national debt is $11.6 trillion. But off-the-books federal debt, including Medicare and Social Security, is $107 trillion. This is not a made-up number; this is the money we should have in the bank, according to the federal government's own accountants, to pay for our current promises to our retirees and future retirees, and this doesn't include unfunded obligations that we have to the pensions and benefits promised to federal workers and veterans. Nor does it include huge unfunded pension and benefit obligations for other public employees at levels below the federal government.

But let's just add the $11 trillion to the $107 trillion, and we get $118 trillion. These are big numbers but still just fifth-grade math. Now our total annual national output, or gross domestic product (GDP), is about $14.3 trillion. Total federal receipts, or income if stated in business terms, are about $2.5 trillion. This means that our debt to federal income ratio is about 47, and that ratio assumes that the federal revenues are free to retire the obligations, which they are not. We must pay for defense and a myriad of other programs. Again, in business terms, there is no free cash flow to pay these massive obligations.

Our total national private net worth, according to the Federal Reserve Board, is about $51.5 trillion. That means our federal unfunded liabilities represent 2.3 times our collective net worth. That's pretty darn broke.

Ask any accountant, banker, or anyone remotely familiar with simple accounting knowledge if we can service this debt, and the collective answer is a resounding "no." Any business with these ratios would be a complete basket case, hopelessly bankrupt. Unlike General Motors Corp., there is no one with the wherewithal to bail out the U.S.A.

If anyone can write an intelligent response to how we can handle this massive problem, please respond. I would love to see the plan. I once asked one of my federal senators, Sen. Tom Harkin, Iowa Democrat, how we would handle this nightmare, and he simply replied, "We'll grow our way out of this."

Senator, I challenge you to lay out this cheery scenario. We are not politically set up to grow at 8 percent or 9 percent like China. We would have to adopt extremely aggressive pro-growth policies, and those are not politically acceptable at this time.

Even if we significantly slash the federal entitlements by half, we cannot fix this problem. Even if we increase federal receipts from the 50 year average of 18 1/2 percent of GDP to say 27 percent, killing private-sector growth, we cannot fix the problem.

We are collectively broke. It is a horrible legacy we are leaving to our children.

Can common sense be restored?"
So cutting the federal budget by half wouldn't help to fix the problem?  Hmmm..  we are INCREASING the budget, so I'll just take a wild guess and say THAT isn't going to fix anything.  The whole scheme is imploding, perhaps on purpose, but I don't think so.  What is increasing is the nonsense going on at the Federal Reserve.  Remember the Fed is neither federal or a reserve.  It is a banking cartel.  They run things.  Don't believe it?  How about this very simplistic explanation of what is going on right now: (from GATA)


The Federal Reserve recently announced that it will purchase $300 billion in Treasuries by the end of October, 2009. Recently 10 year bonds have been paying 3.65% interest. At that rate, the Fed will "earn" $10,950,000,000 ($10.95 billion) interest per year on these securities. That’s a pretty huge number to get a grip on it so let’s look at it in simpler terms.

We’ll be paying the Fed $600,000 interest per day on the $300 billion the Fed will create out of thin air! 

This is in addition to interest on $1,372,692B in U.S. securities already purchased by the Fed1.  Estimating interest on these at the same 3.65% rate, we’re paying the Fed $50,103,258,000 interest every year on these securities. Again, in simpler terms

we’re already paying the Fed $137,269,200 every day on money it has created out of thin air!

We’re also paying interest on billions worth of U.S. securities purchased by other governments, including $2,032,395,000,000 the Fed holds in "custody for foreign official and international accounts." If the average interest on these securities is calculated at 3.65%, we’re  paying $74,182,417,500 interest each year on them. To simplify once again

we’re paying these foreign governments $203,239,500 interest every day on securities most of them purchased with money they too created out of thin air.


we’re paying $341,108,700 interest per day on these securities.

As staggering as these amounts are they do not include interest on securities the Fed does not hold for foreign governments or interest we’re paying banks, pension plans, mutual funds or other investors.

Eventually, we’ll have to redeem all these debt based securities with dollars we cannot create out of thin air. 

Caleb S. Atwood


Source: "Factors affecting Reserve Balances" in the August 13, 2009 Federal Reserve Statistical Release.
Does that make sense?  They "create" dollars and then buy our debt.  THEN, we pay them interest on the "created" "money"!  Can't make this stuff up.  It's so bizarre that most people just think that it can't be.  Unfortunately it is the reality. 
There is also a bill being proposed by Ron Paul to audit the Federal Reserve.  It currently has over 280 sponsors in the house and is up to 23 in the Senate.  While that is a good thing, don't get your hopes up to much for it's passage.  I was listening to Cspan and it was live at a conference of some type where they were having a special guest speaker for Q&A.  Her name was Valerie Jarrett.  Before she spoke, the host read off her biography.  It seems she is Obama's "Karl Rove".  A deep insider that is in on virtually all decisions in the administration.  So what's the problem you ask?  Well toward the end of her biography it was stated that, and I checked for confirmation on the White House web site, a former Fed insider.  A snippet:
"She was a Director of the Federal Reserve Bank of Chicago from January 2006 through April 2007."
If you think a former director of the Fed is going to recommend that an audit of the Fed is a good thing, than you are a little delusional.  Obama was NEVER about change.  He is the status quo on all things that matter to the money brokers.  He may differ on social issues but the truly elite could care less about health care.  They can afford the best in the world.  Why would they care if the government takes over health care?  They only care about money, power and control.  
The cognitive dissonance that is being foisted on the populace must be resisted to succeed.  As an investor, you must stay nimble, not fall for false ideas, and be willing to change your pier supports, if, the data contradicts your beliefs.  Most people are never able to do this.  The top traders can.  Admit you're wrong and sell.  Move on to the next opportunity.  If you've owned a stock for 5 years, I'm willing to bet you would not buy it today if you had an equivalent money amount sitting in an account.  Am I right?  Fight through the B.S. and think for yourself.  Stay flexible in your ideas and you've taken a big first step.  Have a great week!