From the Easy Chair

Christian Economics

Professor: Dr. R.J. Rushdoony

Subject: Conversations, Panels and Sermons

Lesson: 201-214

Genre: Speech

Track:

Dictation Name: RR161T35

Year: 1980s and 1990s

Dr. R. J. Rushdoony, RR161T35, Christian Economics, from the Easy Chair, excellent colloquies on various subjects.

[ Rushdoony ] This is R. J. Rushdoony, Easy Chair number 127, July the 26th, 1986.

I have with me today both good friends, both involved in the economic sphere, Dan Harris and James Flannigan. And we are going to discuss certain aspects of the economy.

I am going to begin by referring to the U S News and World Report for July 28, 1986 quoting just a small part of this article, “Latest Boom: Suing your Banker.” It refers to the case, one case among a great many, in which the six hunts sue 23 banks billion dollars. Quoting now from the article:

“The Hunts case is probably the largest to date. The brothers have sued 23 banks to the tune of 3.6 billion dollars charging them with fraud and collusion in trying to force their troubled {?} oil and {?} drilling companies out of business. Critics claim the brothers are simply trying to win time until oil prices recover, something the Hunt camp denies. First National Bank of Chicago has fired back with a 440 million dollar counter claim, but one banker echoed the Hunt’s charges saying, ‘The perception in the banking community is that the lenders said they are good for it and will get the money.’ The bankers contend that some of the same banks are making loan collection concessions with other less well financed companies. Conspiracy has emerged as one of the most frequent charges cited in lender liability cases.

“In April, for example, California canners and growers sued the Bank of America and a group of other banks for getting together to determine which member firms were likely to survive and for pulling the plug on those deemed to be the weakest. Other charges have been that banks reneged on oral or written promises or that they interfere in management. In the {?} case, State National Bank of El Paso was threatened to... had threatened to cut off credit when William Farrell who was in semi retirement tried to regain control of his clothing company from bank supported management.

“In another ground breaking case a jury awarded K N C Company, a Knoxville grocery firm 7.5 million dollars because Irving Trust cut off its credit without prior notice. A case filed by the Jewel Company, a California apple grower, accused Bank of America of a wide range of missteps. The Jewel family charged that the bank interfered with management by encouraging it to invest borrowed money in am ailing company it did business with, one that was also a Bank of America borrower. In addition, the Jewels said the bank which also lent to Jewel’s competitors cut off funds without adequate notice. the Jewels went bankrupt losing even their family home until friends and neighbors loaned them 50,000 dollars to buy it back.

“The family won a 22.2 million dollar award now under appeal. ‘We are hanging on by our fingernails,’ says George Jewel, grandson of the founder,” end of quote.

Now the picture that emerges from this is that many banks apparently are calling in the loans not only companies that cannot pay or are having trouble paying, but on those that can pay to penalize them because they have the cash. In other words, they are cannibalizing the economy. the other companies are going to go under, but they are going to destroy the ones that are strong by calling in their loans. And I believe this something that is happening quite extensively and the number one cannibal is probably they federal government.

Any comment, Dan?

[ Harris ] Well, yes, Rush. For many years now you have spoken out against the problems of incurring debt and although it wasn’t the Bible who said, “Neither a lender nor a borrower be,” yet that is in many cases the best advice.

I am also reminded of a popular saying, peoples... the new golden rule, which is: He who has the gold, makes the rules. Unfortunately it appears that when a bank lends you the money it is not your money. They still think of it as their money and are perfectly willing, apparently, to interfere in what you are doing with their money.

[ Rushdoony ] What has happened in the area of the economy and the bond market that is related to this whole business of cannibalizing the economy?

[ Harris ] Well, that is a good question, Rush. Otto Scott made a very good point a couple of days ago that the bond market, the U S government bond market is about 15 times as large at the stock market, which, as we all know, is billions of dollars. And many people today are thinking long and hard about taking all the risks and setting up a business, for instance, a manufacturer who would need to get the loans and get the environmental approvals and all the regulatory approvals for a factory in a labor dispute and the legal fees, et cetera, to make two, three, four percent net return on his money when he can put a similar amount of money into a government bond and make six percent and have the full faith of the government backing him up. So that seems to be a major trend today, which is resulting also in the cannibalizing of capital which should be going into more manufacturing.

[ Rushdoony ] James, do you have any comment on this?

[ Flannigan ] Well, I would say in the particular case of the Hunt brothers it is particularly fascinating that here is the most... the wealthiest family in the world in 1980 and, of course, had a vested interest in all of the inflationary hedges whether sugar, silver, oil, oil drilling and really the... it came to focus with these banks when the price of crude dropped from 20 to 10 dollars a barrel in virtually two months period of time. All of the sudden the creditors which had loaned out this money assuming that they would be getting 20 dollars a barrel are in an uncomfortable position of wondering whether they are going to get paid.

So specific to that case is difficult, but the ramifications are for someone, of course, who is committed to a runaway inflationary scenario which the Hunts were and really trying to manipulate markets as has happened all through history as what resulted in a crackup, washout of that, say, financial wealth in that family and, of course one sector history. It was very much in vogue in the early part of the century to run a corner on a market or to try to manipulate a market in each of... history has to tell us that someone who tries to accumulate that kind of wealth, particularly in a non productive asset such as silver, winds up in ... in all kinds of trouble and certain of them, were, of course, were the... the Joseph Lighter in 1897 tried to corner the wheat market and wound up going through millions upon millions of market... of dollars and, of course, the Hunts just haven’t learned from that lesson and they are in a very tenuous spot right now. And certainly as this deflationary scenario continues to play on out, these banks do have a danger of not getting their money out of these... out of these people.

[ Rushdoony ] Dan?

[ Harris ] I think that what James has said is accurate in some areas, but in a couple of areas I would take some exception. From reports that I read the Hunt family during the height of the silver market only had 13 percent of the futures contracts in silver, though they did have a large amount of actual physical silver in possession, yet that is estimated many of the countries around the world totaling up all their silver dwarfed the amount that the Hunts had. So they were actually made a fall guy for these other people. And what isn’t also generally known is that Armand Hammer made approximately 100 million dollars on the short side of silver starting two days after a private meeting with Paul Volker.

This has been around for a few years here. I would have to feel that the Hunts, like you said, are still banking on inflation, on having problems there like many others are. But I think they have gotten an unfair black mark for trying to corner a market when they really... it doesn't appear that they were actually anywhere near a corner.

[ Rushdoony ] What do you see as the future of the economy, say, in the next year and a half or two years? Let’s hear from both of you on this. Who wants to lead?

[ Flannigan ] Well, first of all....

[ Rushdoony ] James.

[ Flannigan ] I would be happy to. It is difficult to say from a standpoint of looking at statistics and what is going to happen to the GNP and what is going to happen to employment figures and things of that nature. I am not interested essentially in what those figures are going to do. I am interested in how they are going to relate and what the market is going to do. And I do look at the market as an anticipater, a discounter of future economic activity. And a good example of that is right now you are seeing an awful lot of bearish statistics come out, a lot of gloom about the economy and yet the stock market on its most recent decline has had about an eight percent correction off the high which is a very shallow correction in what has been a four year bull market. So I think the stock market at this point is saying that things are not nearly as bad as they are being painted in the media and, of course, when you have a, say, a violent correction like we have these last two weeks, it gives people the jitters and it gives... it enables, of course, people to purchase stock at very cheap prices and position on the market and say an average correction on the course at that point in time that is when the public is the most bearish in anticipating lower prices.

So the ... as far as the bond market and the stock market are concerned, it is really the... the economy is on a fairly steady course and, at least for the near term and if the forecasting I have in stocks and bonds says anything then we should see some of these statistics like GNP and what have you should fall in line with market prices and the stock prices which is to say that ... that the economy is not in the disastrous shape that it is being painted or potentially as and moving into recession.

Now, that scenario can change by next year, but I am looking for, say, higher prices. Some of my forecasting work points to higher, say, through January to March of next year, of 87. That would be both in stocks and in bonds meaning higher prices and equities and lower interest rates for another six months.

[ Rushdoony ] Might it not be fair to say that the media is telling us what the economy is right now and the markets what it is going to be tomorrow?

[ Flannigan ] Yes. Absolutely. The market really does anticipate what is going to happen in the underlying statistics anywhere from six to 12 months in advance. So what you are seeing is second quarter GNP coming out at... at two percent higher is... is really looking at past history and the market is forward looking and it is anticipating that... that things will ... there will be some kind of a resurgence and things are not so bad. So the people ... one thing that is... Dan and I both do is that we are great believers in looking at the market and market prices as the true test of the underlying strength in a market. And look at fundamentals which is underlying statistics that most economists look after strengths in the economy really as telegraphing past history, things that different economic statistics are in the hopper maybe for six months and, you know, certainly monetary policy, you look at it right now. Well, it doesn’t turn into inflation, monetary inflation for six or 12 moths. This is the statistics if you have, say, an economy that is picking up. It won’t... it won’t show up on statistics for, perhaps, six months to a year. So we look at prices as the true test of a market and as a genuine reflection of what is happening in the economy as opposed to looking at the statistics.

[ Rushdoony ] Dan, what is your reaction?

[ Harris ] I would say that James said it quite well and I would just add to it that a pretty basic way to ... to trade a market, whether it is the stock market or housing market or anything else a person is in, one approach is called a fundamental, one approach is called technical or from grass and another approach is psychological and everything else that includes. And most people when they see things happen they want to know why. We are curious as individuals. And yet they don't recognize that so many events of history that have been years and years past we still don’t know exactly why. For instance, we don’t know exactly why President Kennedy was shot. Many different theories around there. And it has been 24 years. And so And so when someone asks why the market went up today it is very difficult to know why? I think that we have incomplete information and we also have misinformation, some of that very deliberate by various vested interests.

This is not to say that everything that happens is the result of some conspiracy, because the best laid plans of mice and men often go astray. But James and I found... this is the first time we have actually met, although we have talked on the phone several times over the past few months. We were, in fact, introduced by you reverend Rushdoony. James and I have found we have a similar approach to understanding future trends of a market. And this is although I am a member at the mercantile exchange, trading non the floor in the middle of the bedlam and James is so removed and in an office and trading just from a little more peace and quiet than I have. Yet we both have found the same thing which is that the charts don't lie, just like a ship captain going through an unfamiliar part of the ocean trusts in his nautical charts, his nautical maps looking for shoals and rocks and islands and things. We also look very closely at graphs of prices. We let those ... the exact prices that have traded today are well known by everyone and they don’t lie, whereas how many acres of corn there are out there and what the Senate is going to do with inflation or whatever, nobody seems to know until quite some time later.

[ Rushdoony ] Charts don’t like about the past, but when you go in the market you are dealing with the present and the future.

[ Harris ] Yes. James has done some outstanding work on this on some long term things and, you know, that old story that history repeats itself and what does that mean? I would say there are some similarities and some differences, but there are some amazing things that seem to come up again and again and you would have to say that the charts, in a way, reflect human nature.

Why don’t you tell them what you have done with silver cycles, James?

[ Flannigan ] Well, one of the most fascinating cycles that I have seen in ... and a lot of it goes back to doing a lot of longer time research and having prices going back a long period of time and seeing different periods of history reflected through prices in silver, both inflationary and deflationary and then, of course, the 1929 bull market in stocks and see how that reacts and interacts with the silver market. And one cycle that really predominates in that market is the 60 year cycle. And you look at it and you see the 1980 highs, of course. You go back to 1920 and that was the previous high. In fact, it was one month off 60 years ago. And then you go to 60 years prior to that and you have your third major high in the last two centuries. So each of them are periodic and 60 years apart. And we were just speculating, of course, that we are going to have stick around a long time before I... 2040 rolls around. But it ... the tendency of the markets, whether it its the bonds or the stock market or the silver is that these things come along and two particular market that have really been in vogue have been the glamour markets for the last three years have been the stock and the bond market. And in order to trade those markets with... if you ... I have found if you didn’t have historic precedents you were at a serious liability for forecasting these markets. In the stock market you have to go back to the 1930s to see a market that is any where near comparable. And in the bond market you have to go back to the 30s also. So if you had been weaned on the markets, maybe you are an old timer. You have been around since 1945. Well, that is 40 years. You are, you know, you have been around the industry. You have not seen markets as we are experiencing today. And so much of the longer term work is going back to the 30s, see what happens, that these longer term cycles occur. We are in the biggest bull market ever in bonds and in order to trade it you have to have some blue prints in order to play it. And ... and I have found that not only are there the parameters in general, the same for the 30s and 20s, but they are almost identical. The market progresses in the same number of months, moves up the same number of points, corrections seem to occur in the same number of days down from any high and it really is astounding. And the more that we... that we dig into it the more the similarities really can be looked to to be profitable.

[ Harris ] One thing that is interesting in a very long term cycle and that looking at one of James’ charts, monthly prices of government bonds, and the all time high as far as we can go back was just under one 10th in February of 1936, about 50 years ago. And it dropped down to a low of just around 55, which was exactly half of that. You know, if you subtract it in half. And markets, this is one of the most, oh, reliable indicators of a market when the market will drop to half price. Things come back. So we think it may to the drop of the half way point it has come back up to about 105. It is selling off a bit here. We may after a few more months have substantial run up to above that 110 area. We may be seeing the all time highs for government bonds for this century.

Now how could this be when there are so many loans outstanding to third world that may default which is supposedly making interest rates go worse and other things? I think that may have something to do with some very serious societal problems that may be around the corner here. After all, it is the combination of supply and demand that you don’t have people who want to borrow money interest rates drop. And I think we may be seeing some problems there in the future.

[ Rushdoony ] Well, I don’t know enough to challenge what either of you say.

[ Harris ] Thank goodness.

[ Rushdoony ] Or to agree with you or to disagree with you. But what always comes to mind whenever I hear anybody talk about the charts and the statistics and what they reveal is this, to cite one of a number of things. And it is this. Since the markets have been created in the western world, we have had in varying degrees freedom of the market place. As a result the market has been able to function with a relative freedom and been able to establish patterns that are indications of a free market economy. But that free market is beginning to disappear, here as elsewhere. And we are seeing controls of various sorts wipe out one area of industry after another.

And if half of what the Republicans and especially Democrats have planned for us in the next few years occurs I don't see how the past is going to be any indication because now you are going to have a dramatic and a growing interference with the marketplace.

Of course, it could be that it will be like the gambler who was gambling at this one illegal gambling place and somebody told him who walked in just looking around and said, “What are you gambling here for? Don’t you know that every game in this house is crooked?”

And the man said, “I know it, but it is the only game in town.”

[ Harris ] Well, Rush, that is a very, very interesting that you have brought those things up. Being the... the knowledgeable person of history that you are, you probably remember that in the past there have been times when markets have been outright closed or changed. For instance, World War I the stock market was closed for a few years with no speculation whatsoever. Commodity markets at various times have been closed or had certain contracts removed from speculation. During the Korean War soybeans had a limit put on their price with the highs that they were allowed to trade. And so I wouldn’t be surprised if what you said comes true, that there will be more interference in the future.

We have had an interesting decade or 14 years since 1971 when Nixon, President Nixon took us off the gold standard. All foreign currencies at that time were allowed to float freely and the mercantile exchange where I trade in Chicago started foreign currency futures in May of 72. That this been a tremendous success. It has allowed companies that are involved in import and export to protect their profit margins and not be wiped out by a sudden flurry of the currency.

Well now if you look in the news there is quite a bit of talk about going back to fixed exchange rates even though there is many, many years of failure of that. They don’t like what the free market has told them which is that governments cannot seem to keep their currencies under control.

[ Rushdoony ] No, they can’t.

[ Flannigan ] Well, the thing that I... I come across with most people I say that they feel we are in a new day and age and that the markets aren’t the same as the 20s and therefore how can you, you know, look for those kind of precdences in the past, but the way I found it is that, of course, every time the government gets involved they increase the volatility of a price, whether it is the price support programs in agricultural products or whether it is, you know, monkeying with the money supply, things like that. So they do have a direct control over the amplitude of prices and the volatility of prices. But there is an underling... much of the work we do is that there is an underlying cyclical pattern to things that while they may aggravate the situation one way or another, indeed they do, and we are in the most volatile times. This past decade, inflationary decade through the 70s and now this deflationary period from 1980 is... is monumental as far as history is concerned.

But we have found that cyclically speaking in time wise that you can depend on lows and highs coming at certain periods. You may have a difficulty in determining how far out they may go in sheer price, but you can depend on those cyclical patterns reoccurring and, in fact, the news in government action tends to occur in favor of the prevailing trend. So you may have the trend is up and sure enough what did the government come in, but they aggravate the situation so that market moves up even further? So in a market and then, in fact, a market that is a bull market will tend to ignore bearish news or bad news. So it is that underlying form or pattern in the market that we look for and then we do have to come to grips, our next thing to come to grips with is how high are prices going to go and some of the work that Dan and I do is fairly unique in that .... in that way, because when you do go into all time new highs, how do you decide where the market is going to stop and how do you know where to get out of the market?

[ Harris ] I would agree with what James said and add one other counter point to it. There is a foundation in Pittsburgh called the Foundation of the Study of Cycles.

[ Rushdoony ] Yes, I am familiar with it.

[ Harris ] And they have... they have done one particular area of research that is not talked about very much, but it is extremely important. They have been able to take any set of numbers, whether it is actual crop figures, a price of a stock and they have ever done it with a set of random numbers and they have been able to apply four year analysis with some of these other computer programs and they have been able to determine cycles even in a group of random numbers. But the catch is this. When you go beyond that period of data that they researched, whether it is a period of numbers or a period of time, the cycles don't repeat themselves. So you can have all sorts of charlatans now going around and saying they have discovered this hidden five, 10 and 13 day cycles and some various item and they can prove it and show it and it exactly works. The problem is as soon as you buy their course and take it home and start trading you lose money.

So cycle research is a double edged sword. And the thing to look for is for the broad trend, the timing trends, but not become too mathematically oriented.

[ Rushdoony ] Let me add this just as a footnote to what I said earlier. Most of your statistics on the market and its patterns have been based on English and American data. The points of the greatest stability in recent centuries and even when there have been shutdowns in the markets or one branch or another of a market, it has been a temporary thing and everyone has known it is just for the duration of a war or a particular crisis.

I think the data from those records is very valuable and that it tells us something about the operation of the free market. The question in my mind was: Will we have the same stability in the years just ahead and will we have figures that are as valid?

I don’t know the answer. I think we will know by the end of this century what the answer to that problem is.

[ Harris ] That is a very good point, Rush.

[ Rushdoony ] Now was there something on your mind, James, about some other direction we should take in this discussion?

[ Flannigan ] Well, I ... I just have this. As far as... as... as news related from a standpoint of the investor, he has to reach some kind of a level of sophistication as far as there is reading the market or getting the right kind of people to read the market. And, you know, we touched on the fundamentals and really there... the... the media puts up smoke signals really that... that causes a herd instinct in the markets and people start, you know, reading the writing on the wall as the media paints it. And it is misleading. On chart that... that we were looking, I would say this from a narrower focus. We were looking at bond chart, Dan and myself last night. And in the... the most historic move ever in bonds, as far as prices coming down, which was just four months ago, was the biggest single move over a period of successive weeks, three or four weeks. Sure enough, the Graham Rudman was ruled unconstitutional on the low day in bond prices, which is the high day in interest rates. So what you would interpret as a very bearish potential scenario there you would say, “Well, if the Graham Rudman is illegal, then they can’t, you know, put a cap on the government deficit.” Well, sure enough, that came out on a low day and if you look at charts over history invariably the most bullish news comes out on the top. The most bearish news comes out on the bottom and the public is buying it. They are buying the highs and selling the lows. So there is a certainly amount of sophistication which has to be gained for the trader as far as dealing with these markets and not believing what is out there for mass human consumption. And that is what it is there for. The Wall Street Journal, Los Angeles Times tends to cause a herd instinct and, you know, one of the particular things that I do every day I read the Wall Street Journal just to see if it is overwhelmingly one way or the other. If it is overwhelmingly bullish, I know I can sell. If it is overwhelming bearish, I know it is time buy. And Dan might add a little something about, you know, buying blood and then... when the blood is in the street. And it really does go back to that.

[ Harris ] That is supposedly attributed to Baron Rothschild back in the mid 1800s when he was buying government securities and someone said to him, “Baron, why are you buying when there is blood running in the streets?” And just simply replied, “That is the time to buy.”

Of course, and how do you know if it is only going to be someone else’s blood or your own? Many people have bought things low only to sell lower.

Started up also with Chicago. And each of these five or six groups are the main financial centers in the U S. They tend to have specialties. They have interesting histories on how they began. Some of them ethic and some of them religious. Right now there has been a little more of a crossing the lines between the two. But the main difference people need to keep in mind is between what is a stock and what is a commodity. A stock is not cattle or a horse. It is the old term for them, but it is considered a share of ownership in a registered corporation in this country. It would be like owning a piece of Prudential or a piece of IBM. You have a share and it is ownership and a dividend and a voting right if you have common stock. And what you are hoping for is income through dividends and appreciation through the company doing well, paying out more dividends, being generally prosperous and therefore being more desirable in the public’s eye, therefore having the price of your stock go up making a capital gain.

On the other hand, a commodity is an actual real agricultural product in its original definition. For instance, orange juice, cotton, wheat, corn, oats, those sorts of things. Now in this century there has been a move towards expanding the definition of commodities and expanding the ways that you can speculate on the prices of stocks and commodities. First of all, as far as expanding the definition, now gold and silver are considered commodities. Well you could see that might be all right, but lumber came on board, sugar came on board. Onions were on for a while and then they were taken off. But then in the 1970s with the Nixon closing the gold window and foreign currency being allowed to float and then 1975 gold being allowed to be owned by the public for the first time in almost 40 years, you have this. And then in the late 1970s people started to trade government securities. Those also became called commodities, although it doesn't seem like there is too much in common between a bank t-bill or a CD and a bushel of wheat, yet they are both considered commodities and traded as such, because they are real products.

Now what has happened is that in the 19... early part of this century, especially in the 1920s people were allowed to trade the stock market on speculation when all you had to do was put down 10 percent in order to buy stock. And this is part of what fueled the speculative boom and then late on the bust.

Well today there is a similar type of speculation in that you can buy options on stocks and options on commodities. So, for instance, right now IBM is around 133 dollars per share. If you were to go and buy 100 shares which is the normal amount that you guy you would have to put up 13,300 dollars. And if you think it is only going to go up five dollars per share you would make a total of 500 dollars for you 13,000 dollar investment.

Well, brokerage firms are allowed by law to loan you up to 50 percent of that. But still even putting up six or 7000 dollars you would only make 500 on that with risking so much at stake. On the other hand, you can buy an option on IBM stock and maybe only put up 200 dollars and hope to double your money or triple your money. There has been a huge move of capital out of the actual securities into what seems to be almost a purely speculative industry. It is somewhat comparable to a side bet in Las Vegas although there is all the difference in the world between a commodity and black jack hand.

What has also happened is there are options on commodities, too. So you have a huge amount of money moving into the fringes and the tail starts to wag the dog after a while. But I think it is important that people recognized that speculation is very different from gambling. For instance, if all of the slot machines were to overnight disappear, there would be no economic hardship to the way we conduct our society. A number of questionable individuals may be out of work, but still there would be no impact on whether there is food in the stores or whether there is gasoline for your car. Whereas if all of the sudden all of the wheat in this country were to disappear or the Chicago Board of Trade to not allow speculation in wheat, it would be very severe hardships for numbers of people and a very vital part of this country.

Now the area of ... of trading futures and commodities is as old as the Chinese going back several thousand years where they... the actual rice farmers wanted to have a guarantee for their price of their rice, but the millers who would process it and the middle men didn’t want to pay for it until harvest time, because then there is all sorts of rice around and they can bid a very low price. So individuals came along in the meantime willing to guarantee a price and there they were hoping it would go up. And this would give some of the rice farmers working capital.

Now those speculators were sure hoping to make something by doing neither the planting nor the distributing, but they perform a very vital need. And without that the price would have fluctuated much more. And that has actually been the case right in this country of ours. Onions used to be traded on the commodity market and they fluctuated as much as 100 percent in one year. Well, there were some complaints by onion growers that the prices were manipulated. So by federal law it is one commodity that is not allowed to be traded in the commodity markets.

In the 10 years since right after trading in onion futures was banned the price has fluctuated an average of 300 percent per year. So although speculators are called greedy and grasping and ignorant and trying to cap other things and get history does show...

[ Flannigan ] They don't call me that, Dan.

[ Harris ] It does tend to keep prices in a narrower band, so this is a vital function. Now many people have saved up funds from working hard all their lives and they just don't feel right about putting their money into a bank account and just getting a CD. And they wonder: What can I do to make my money work for me? And that is what comes... what is thought about the interest and having so many financial advisors today with so many different ways that you can earn money. Some of these are more speculative than others. What is important is to have an individual who has a track record for trading and has a particular method of trading. Otherwise they are just an order taker for you. Some of the work that Jim does is unique in that unlike many traders he does his long term homework and if some one wants to know where is the market going he will say, “Well, maybe up this week, down for the month, up for the year and maybe down by next year.” So you have to give him a time scale there.

But one of the big questions does come is, you know, if you have a profit where do I take my profit? When is enough enough?

[ Rushdoony ] Incidentally, any of you listening who are in the Los Angeles area can hear and see James Flannigan on television, channel 22, isn’t it?

[ Flannigan ] Channel 22, the financial station, yes.

[ Rushdoony ] Yes. At what time of the day?

[ Flannigan ] It is on Tuesdays and Thursdays either at 8:55 in the morning or 1:20 in the afternoon.

[ Rushdoony ] Now would you like to comment on what Dan had to say?

[ Flannigan ] Well, I would bring it up a little bit up to date as far as the evolution of the markets. Traditionally when you think of a commodity it is something that you can... that is... is deliverable. In other words, if you buy wheat some one is going to deliver it to you or if you sell it short your are going to deliver it to someone. And that, of course, is the same in the gold market and the currencies and what have you? Well, we have the establishment of some commodities now where there really is no delivery of the underlying commodity. One good example is the stock index futures of which is about five futures and eight options on different indices. That would be, for example, the ... the Dow Jones Industrial Average and there is a futures contract that trades off of the 30 Dow Jones industrials.

Well, for someone who purchases a major market index, which is the futures that trade on that, you can’t physically deliver each individual share that makes up the basket of this contract. So here you have a contract that is not a deliverable contract. So that is an interesting shift. It is a financial instrument that has... doesn’t have the underlying commodity as... as a tangible type asset that can go from a buyer to a seller. The implications of that are... are... I don’t understand all the ramifications for that, but it is ... starts to border on, as opposed to speculation, I won’t say gambling but it isn’t in the same vein. It is a new instrument. It is new on the horizon.

And a more recent one is just in the last month and a half is the commodity research bureau inflation index which is a basket of 27 commodities. So you are not speculating on what you think an individual commodity is doing, you are speculating on what you think the whole gamut of commodities, silver, copper, wheat, soybeans, each of these commodities included in the index. So you have an opportunity of speculating and anticipating whether you think there will be a general deflation in prices over ... overall or an inflation in the prices. And I would go back to what Dan mentioned that ... that people are not satisfied with the returns that they are getting in say bonds and stocks and what have you and I will just say it from my end of this since I am in the retail commodity business. There is an explosion of activity for people out there used to a 13 percent return now getting five and a half percent on their t-bills. And all of the sudden they say, “Commodities, this sounds like the greatest thing since sliced bread.” And, of course, they find out soon enough that unless they have the... they are aligned with the right people that they are... they can have run into some very big problems.

Just briefly, Rush, I would say this, that... that we are ... it is possible we are in the eye of a storm and both Dan and myself view that as these are the greatest, most sophisticated markets that have ever existed in history by far and the profit potential and loss is ... is unparalleled. So we are in a unique spot as far... I find that we are both very optimistic about the potential for making money in the markets whether we are as optimistic about the underlying fundamentals in the economy that is a whole other subject, but this is... we are seeing the markets of historic proportions. And, you know, history would teach us, of course, that sooner... at some point the government will come in and they will limit market activity or eliminate the market. It is inevitable. An certainly we have the situation right now set for speculative bubble bar none, you know, second to none in history. And it will be interesting to see how that plays out.

[ Rushdoony ] I won’t mention any names, but you would recognize the name, someone not too far from you who was in the commodity market and found out how real it was because they got busy and didn’t keep in touch with their broker and came back home and found, to their horror, that a carload of pork bellies was on their way to them. It is a very real market, still is, if you are not careful. You will get delivery.

I would like to read something from the July Better Investing magazine, the editorial, just the first half of it. And I quote, “Yes, you can lose by taking a profit. One of the dangers we face as investors in a high stock market is the temptation to give up a good stock because we can get a good price for it. After all, as the old saying goes, you can’t lose by taking a profit. The logic of that statement seems irrefutable. Yet, by taking a profit on a good stock, it is possible to lose out on the 10, 20 or 100 times multiplication that comes with a long term holding of growing companies. A 50 percent or 100 percent profit is impressive, but not at the expense of losing greater multiplication. As we look back on stocks that appeared in Better Investing as stocks to study 20 or 25 years ago and see them up 1000 percent or more and still moving upwards, it is clear that holding on to a good growing company is an investment strategy that pays off. Converting stocks into cash for a handsome profit is rewarding if we know of a better place to put our money so that above average growth can continue. But just selling to get cash and lock in profits can be self defeating. Cash is a depreciating asset. While we have won the battle against the high inflation rates of a few years ago, even at today’s low inflation, it doesn't long for money to be worth less,” unquote.

Any comments? Do you want to start, James?

[ Flannigan ] Well, I would say that the ... that is the most common mistake for traders that I come in contact with is, you know, using that Wall Street maxim, you know, you can’t go broke taking a profit. And forgoing the appropriate Wall Street maxim which is cut your losses short and let your profits run. And... and I am sure Dan would agree with me that you have to ... you have to force yourself. It is easy to want to take a profit and lock in a profit. It is very difficult to stay in a position and be patient and certainly what tends to happen more times than... than I care to count is that a market always goes further and faster than you originally anticipated. So if you get out prematurely you are going to miss out ... you are going to miss out on a tremendous moves.

Now to give you an idea of psychologically speaking that is very difficult for a trader. By definition in... particularly in the commodity market that I deal with, when you implement that strategy of letting profits run and cutting losses and you are going to take more losses then profits. I do. I go into the office every week knowing I am going to take more losses than profits. And some times you can run into five, six, seven losses in a row before you get on a profit that is going to yield you all of that loss and then some. So there ... there... there is ... that is one psychological motive that ... that traders have to come to grips with. And hardly any of them do. They.... they will tend to either be random in their system in... in one instance taking profits as soon as they get them. In some instances they may let them run, but there is no consistency. And as a trader you have to be absolutely consistent. And what I have found in order to maintain you learning cure and knowing what you are doing right and what you are doing wrong. And I have found that the only way to make money and big money is to get into a position that you believe in, that can move much higher. Have some vision as to where it is going to be two or three years down the road as opposed to what it is going to do next week, because there may be a buy out and the price goes double in one week. If it is a sound underlying stock or commodity I feel I deserve everything that is coming to me by forecasting it correctly and that just. That... I try to impress upon myself all the time being patient with the winner, staying with the sure user... a stop loss order, an order to get you out if a certain amount of that profit is taken away and usually that is no worse than break even once I have a nice profit. But this would be a Wall Street maxim that I hear often. You know, it is an old Wall Street song that has been around for 100 years, I guess, but, you know, you never go broke taking a profit. I have never seen anyone get rich taking a profit in that context.

[ Rushdoony ] Dan?

[ Harris ] I would agree with what James said and just add in that many times people ask me what are my trading rules. You know, what rules do I follow when I am trading at the mercantile exchange? And I... I... I have several, but I will just bring to your attention two or three of the most important. My number one rule is I never enter trade unless I have up to date graphs. And I would say this would be true. I would encourage everyone if they are thinking about buying stock or investing in the company, go their local library and check out the value lines survey or look at Moody’s and just take a look at the history of the last few months, the last few years of that particular stock. It doesn't take a college education to look at it and see if the trend is up or the trend is down. The graphs are very simple even for an unsophisticated person to see. If it looks like the trend is up, that is a good starting point.

The second rule I follow absolutely as important as the first one is before I enter a trade I decide ahead of time where I will take my loss, like if it drops down to a certain place when I will sell out or where I am going to take my profit, my profit objective on the upside. And I have to decide that before I enter the trade, because as soon as I get in, I am married to it. And I start thinking about all the reasons it is going to do what I was so smart in figuring out in the first place. And if it starts going against me, I will close my ears and I will just be my own worst enemy.

Now of the longest trend, long term traders I would just add a third rule which is having set your profit objective and your loss objective don't get out until the trend changes. Otherwise you are trading money instead of trading the market. And the person who says, “Well, I have got a nice profit,” is not looking at the market. They are looking at money. And money does not tell you how to make money. It is a byproduct, just like happiness is a byproduct of doing the right thing.

[ Rushdoony ] One thing I have noticed over the years is this. When I was quite young the situation was dramatically different as far as the market for the overwhelming majority of people in it was concerned. Thus, I can recall over the years up until the 60s any number of men who would tell their widow as they talked about the future, “Now, everything is taken care of. I have got money in such and such stocks. You don’t need ever to touch them. They will take care of you to your dying day. They are good companies that will produce year in and year out.”

The volume of trading in a day was very small in those days, because the companies were there to stay. They paid good dividends and people would buy a stock to hold it very often for life. Now it is very different. The market is made up of people who are in and out constantly. The volume of trade, the trading is astronomical. Would you like to comment on that situation, either of you or both of you?

[ Harris ] Well, I would say that there are several reasons why this amount of trading has gone up. One reason is that you have got a large growth of pension funds and people providing for their pensions as the population of the US has expanded and the stock market has been the darling or where the prudent man managing a pension fund would put his money. Now why they are going in and out of stocks I don’t know. Maybe you would know, James. But as far as the volume of trading goes, they do have the largest input. So it would be important to see what are the ... the changes over the years regarding how pension funds handle the large sums of money that they are putting in and out of the stock market.

[ Rushdoony ] Are people counting as much on dividends today as they are on appreciation?

[ Harris ] Well, I recently read a study that said that approximately half ... if you take the profits in the stock market, approximately half come from dividends and half from price appreciation. It is that ... that much of an important factor and yet is not often figured into people’s decisions.

[ Flannigan ] It would be... I... that would probably be a longer term figure, because, well, dividends are important or, say the coupon interest from bonds it really needs to be looked at secondarily if that. The... the last four years in the stock market you are up 150 percent in four years which, you know, amounts to about 30 percent a year. Well, if you are getting dividends of seven percent they really pale in comparison. In the bonds you are getting a coupon rate of eight percent and yet you have seen bonds, as Dan mentioned, move from 55 almost to 110. So... and, in fact, bonds have been more volatile on a percentage move basis than the stock market, so you are... you are seeing tremendous volatility in what is traditionally a conservative asset. But anyone ... anyone who gets caught looking at dividends or… or, you know, rate of return, coupon rate on bonds, is really missing the bigger picture which is... is a tremendously volatile market.

I will say one thing that is in passing, one cycle that we have seen as very effective, a long term cycle has been the 50 year cycle. And I am sure you know, Rush, what occurred through the 70s, many of the newsletter writers will touch on the congruity of wave as a... as a very effective indicator of periods of inflation versus deflation, also optimism, pessimism, that type of thing. And one, I would say, point that really comes home currently is we have seen the biggest bull market ever in bonds. Interest rates have tumbled more quickly. But what we are seeing is that successively greater bouts of inflation and stimulus are propelling us to lower and lower levels of productivity. So that continues in... in tact and ultimately that would lead to, say, a... a bear market down the road. But from the 70s, early 70s, each time we have had this inflationary bout or an injection from the federal reserve and what have you, there have been lower levels, lower highs of productivity in the economy and that is what is occurring right now. And it fits in every nicely with the long term congruity wave which essentially said that the ... that the markets topped out in the 70s, productivity topped out in the 70s, that there could be a plateau period and then we would see general deflation leading to more pessimism and lower prices over the succeeding decades.

And I have to say that many of the people that use that as an indicator of things, and it really was in vogue to talk about the congruity wave in the 70s saying here we are in the... in the topping pattern. It is not getting as much credence right now when it is working. And it is... it is the most effective ... it is... I mean, that cycle has been right on. So we have seen in general commodities whether it is the commodity research bureau or what have you we have seen a decline in percentage decline in commodity prices which is the largest in 50 years, taken into the basket of commodities.

[ Rushdoony ] Let me throw out something now. Over the years we have seen ups and downs since 1970 in the economy and the market. And when these things happen I see the difference in the giving to Chalcedon and as I talk to church leaders, various groups across the country, I consistently find that some groups go under when you have these recessions, especially those that are in debt.

But this year is very peculiar. Several times lately at conferences I have heard from a number of groups how very critical the situation is right now with regard to giving. Your big TV evangelists are finding it to be the same. The economy as a whole seems to be bad, but the stock market looks good. Now how do you account for that difference this time?

[ Flannigan ] Well, first of all, Rush, I say you should probably get us the chart of the ... the... the offerings that you get. We could probably forecast where you will be in the next couple of years. If it is bad, we won’t tell you. But it is... it its rue. There are segments of the economy and as, you know, we have been talking about being technicians and not fundamentalists, so I don’t dig into the fundamentals knowing what is happening in different segments of the economy, but just briefly I would say that there are parts of the economy that are extremely weak. The different industries, the agricultural industry, automobile industry. There are other industries that are strong. The stock market had been a two tiered market, primarily consumer related stocks have been leading the way in a lot of the higher capitalization stocks have been lagging.

So you know that is some ... as far as work is concerned that is something that I would want to get in more, but I am not really qualified to talk about. Perhaps Dan could add something.

[ Harris ] Well, this is.... this is an area of ongoing discussion. It is a very good question. We are all just seeing pieces of it, but I know that there have been some major mergers recently and so if you have the same amount of dollars chasing a fewer number of companies, it is going to be pushing the prices up towards that... that group.

I was also going to add one other point that I hear some things bandied about quite a bit that I could set the record straight. First of all, some people think that stock traders or commodity traders on the floor manipulate prices. And I would like to say that generally we are manipulated by huge orders that hit us like a wave hitting a surfer on the beach. We could be standing there one minute with having bought something and then the next minute a huge wave of selling will hit you. So although there are little jiggles during the day, by and large we are reacting to the large orders that come in to a pit, so I think it is more of calling sour grapes when the people say that they lost money because there were people manipulating it. They may have been trading too short term or whatever.

The second thing I would say is with all the people starting to use computers trading in the markets now it is funny how it seems to give the same signals very often. And yet over the long haul supply and demand overcome anything that would keep us from having a true state of what the prices should be. Those things are just sort of bumps on the road.

[ Rushdoony ] Are having a shift in what indicates market help? In other words, it used to be that the rails and a few other things who are the major index, but now it seems to be shifting to other areas. Would you like to comment on that?

[ Harris ] Well, if you could find the Judas goat that leads everybody else, you would be a millionaire and that is one of the big areas of research. What are the leading indicators? What are the concurrent indicators? What are the lagging indicators? Some people look at stock groups and industry groups, the airlines, you know, drugs, technologies, And James mentioned that the consumer oriented stocks have been the biggest gainers.

The Dow Jones 30 industrials, even though they are only 30 companies out of over 10,000 stocks that are listed on all the exchanges, yet they have approximately one third of all the investment dollars that are in the stock market. So that is a very good group to look at.

[ Rushdoony ] Yes.

[ Harris ] And you have got 15 utilities and 20 transportations. Those 65 comprising a very important indicator.

[ Rushdoony ] Well we are running out of time. I want to thank both of you for being with me today and I think you have contributed a great deal to my insight into things. My market is the local grocery store, but I think it is important for me to know of the commodity and stock and bond markets because they have such a profound effect on all of us including the work of Chalcedon and the giving to Chalcedon, the giving to churches. So we need to understand these things because they are important to our future. They are the circumstances of our life. And they tell us something about the health of the economy and of the country.

Well, thank you both and I will look forward to seeing you both again very soon.

[ Harris ] Thank you, Rush.

[ Flannigan ] Thank you, Rush.

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