Listening to Bernanke and Geithner today, I feel of a sense of revolt that is stewing and growing amongst the many members of our generation. The socialization of America and its current administration has a spooky feel to it. It reminds me of a darker time and if we are not careful, it could usher in a era similar to the 1950s where suspicion and doom and gloom permeated our every day lives.
BIG BROTHER
Not satisfied with managing the defense of America and running two wars, in one swift scoop, the US federal government is now LENDER, BROKER, INSURER OF STATES AND MUNICIPALITIES, POLICEMAN, BANKER, HIGHER EDUCATION DISPENSER and eventually graduating from offering you unwanted proctological diagnoses to a battery of government sponsored HMO services.
All this happened because Americans had to blame the last administration for its own failings. Relying on Keynesian economics to move your social agenda DOESN'T WORK!!! We tried it here in CANADA in the 1970s. Galbraith and Trudeau? Remember those do gooders? OUCH it was painful for twenty years after!! On this course, the OBAMA administration can only promise to accelerate the destruction of the purchasing power of at least THREE generations: Grand-parents, Boomers and their kids. If we don't do anything about it, our grand kids will be next.
WHY?
SIMPLE
PRINTING MONEY IS NOT THE ANSWER
The government is printing money in the hope of replacing the consumer as the engine to start the economy. This is not going to work. Money is a MECHANISM to exchange goods and services NOT a substitute for productive assets that create jobs, savings and wealth. Consumers have changed bro! I guarantee you that if you go polling the average American, most will NEVER consume the same way, EVER!!!! SO why try to save something that has no chance of surviving?
Like any reasonable history buff, I will summarily give you the reasons which got the US on its current path and end by giving some suggestions to prevent a repeat of past failures.
35 YEARS OF AWFUL ECONOMIC PLANNING
The US population. as a whole, took the last 35 years to decide that working in a rust belt factory wasn't such a great idea. It was easier to buy Japanese cars, move to the burbs, living vicariously through video consoles and TVs. Why bother urging Washington lobbies groups for American manufacturers to keep reinvesting in their future? Volcker and Greenspan gave Yuppies credit cards and the illusion that their future was secure. Cheap money was the ticket. Coastal city dwellers lived, insouciant, through US Media that gave them needed and affordable escapism and a view of acceptable consumerism. Meanwhile, Bible belt residents were given their own weekly opium and their moral majority dialogue in Washington. Wal-Mart made consumption available to all.When views of others clashed with the purely manufactured American dream, demagogues, wrapping themselves in the American flag and religion if not both, using the word FREEDOM a lot won the day for the good old USA. Democrats and Republicans were the same animals using different rhetoric but with the same end game: REELECTION with the best health care, pension fund and tax free campaign surpluses. Intellectuals were only allowed lip service and often drew only the minute Birkenstock crowd to voice a social conscience. The latter weren't much help as they also espoused the philosophy of " Not in my backyard" ( aka no new: nuclear plants, recycling plants and Refineries). In 2002, A movement to change the way things got done in Washington started to emerge with the manufactured position paper designed by the GORE think tank. That movement is still alive but currently has no influence over concrete policy. Don't they call that lip service? The Pentagon budget runs the show and until it is decimated nothing will change. Until 2007, educated Americans preferred living in double height garages for their massive SUVs, 10,000 sq.F homes with Imported furniture, Italian embroidery, watching any of their 5 60" plasma TVs and having holiday retreats in Cabo. In the process, they shipped out jobs by the millions. They voted Republican and made sure the wealthy had the luxury of the most complicated tax code to keep their lifestyle going. A healthy budget for the Pentagon and a me,myself and I foreign policy did the rest. The middle class used their house as ATMs to look prosperous. They moved to urban enclaves, got jobs in shiny towers pushing paper and eventually emails, basically to witness the whole US economy become the world's most sophisticated network of movement of goods (made elsewhere). The working class slowly became the poor, the uninsured and eventually the incarcerated.
THE 3 KABOOMS
HOUSING & FINANCIALS 2007
COMMODITIES 2008
GOVERNMENT BONDS 2009
In 2007, the American dream got shattered because the HOME OWNERSHIP which had meant for generations the path to wealth and exciting lifestyle followed a well known law of scatological physics, ( if you can't spot the sucker at a poker game...) and soon jumped the accounting divide of a balance sheet and became a liability to all concerned. The word "toxic" was suddenly abundant yet abhorrent Within 4 months, Americans realized that there was a problem with this pungent credit problemo. Fannie and Freddie, which were but a few of the profligate federal money purveyors, aka party pals, were locked up when their massive tabs were obviously going to remain unpaid.
In 2008,Bear and Lehman would take the party to lock-up. This wasn't a minor snafu anymore. The American dream became a nasty wake call into a nightmare all so real reality show. INFLATION had to be contained at all costs. As if it was the culprit!
Western governments gambled badly when they pointed to hedge funds as the greatest threat to their economies. Governments assumed that highly leveraged speculation on commodities were the potential fuel of inflation that may threaten long term rates used to price mortgages. Therefore hedge funds had to be reigned in. In fact it was the last hurrah of this largely unregulated industry. The savings of a generation that were leveraged 30 times over would evaporate in the next 18 months.
When commodity funds started to implode because of de-leveraging, NO matter which side of the trade you were on, the losers would precipitate the closing of contracts and the winners saw their winning positions closed ahead of their losers. The whole process accelerated and many investors saw their holdings decimated by up to 80%.
It took with them their feeder funds managed by ex-Lehman, BS, GS, JPM managers, well you know the list... Soon enough, A tsunami of credit contraction took out all the backstop insurance of the mortgage guarantors. With no housing and commodities left, the US finance industry was left in the spot light to notice the carnage as it gained in ferocity.
NO AMOUNT OF MONEY THROWN AT THE PROBLEM CAN FIX YEARS OF NEGLECT !
THERE IS NO SUCH THING AS TOO BIG TO FAIL
The current erroneous judgment calls of both BERNANKE and GEITHNER (B&G) are that AIG has to honor guarantee Credit defaults swaps or else that municipalities and banks will never be able to issue bonds. If i know anything, the guys HOLDING the bonds now are the best to renegotiate terms of repayment. THEY have the most to loose yet somehow the OBAMA administration just like the BUSH administration before it is led to believe that it's the financial industry's job to price risk! With no such industry left, the reckless B&G continue on this same failed path .... THAT is ludicrous. THE MARKET will eventually price bonds without a guarantee and there is NOTHING B&G can or SHOULD do about it. ALL will be WELL. JUST LET IT HAPPEN! Until then, the market will continue to fail...
On a silver lining, government, by imposing limits on executive salaries in the investment world, is doing a potential good deed, by making sure that bright minds are barred from making money off the next generation of taxpayers and may seek to find reward in an honest job. I am not holding my breath though. Once you get to rake $20MM to push buttons, schmooze a CDPQ guy out of billions, tough to go back to drawing a rapid transit system or farmer's market layout.
WHAT YOU NEED TO BE READY FOR:
A 40% contraction in the economy. Big box concepts stores within a mile of each other are useless if not detrimental
THE SOLUTIONS?
1)RETOOLING AND CHANGING EXPECTATIONS
America needs to get back to MAKING things. It needs to make them better than the Chinese. Americans need to consume less, exercise more, produce better, improve the environment and invest more in PERMANENT education and health care. How do you do that? By building better roads, highways, bridges? HARDLY!
You need healthy food, clean air & water, increased use of public transport, access to education and CHEAP health care solutions. What you don't need are obsolete car factories, issuing $5MM missile P.O. to heavily lobbied Defense Contractors and sponsoring $250K surgical procedures reimbursed by Medicare.
HOW DO YOU RECYCLE THESE SALESPEOPLE AND LOBBYISTS... KIBBUTZ TRIPS ANYONE?
The best minds should find solutions to weening a society off the combustion engine and the daily commute to suburbia. It took thirty years to get people to stop smoking, how long will it take to make High Octane gasoline the next buggy whip? It will be difficult and challenging.
2)LET THE MARKET BE A MARKET: DEMOGRAPHICS
THE HEALTHY MUST THRIVE
Well first you make sure healthy companies survive and that the lesser ones are meant to fold QUICKLY. Companies that survived their usefulness because of flawed access to credit should get their just reward: BANKRUPTCY! I think MAN invented it the process and only current politicians (who think they are GODS) try to stave off the inevitable. This isn't doing anybody any good.The longer it is allowed to last the longer the repercussions.
POLITICIANS SHOULD NOT ENGAGE IN DECIDING WHO GOES BANKRUPT OR NOT!
THE JOB OF GOVERNMENT is to ensure companies operate lawfully in a environment for the collective good. I find it hilarious that the Administration and Congress are promising swift legislation to "re-regulate" an industry when it can't even police the regulated ones ( AIG, Madoff with how much?)
Let the banks that lent on a model of ever growing population go into oblivion. PRODUCTIVITY, not capital, defines the needs for INVESTMENT CAPITAL.
Who needs 250,000 malls when 100,000 suffice? Municipalities must be swift, close down malls and businesses that don't pay their taxes, outlived their usefulness and turn the land back to farmers and productive use! I do not look forward to a repeat of a decimated POST Vietnam America!
Make sure urban and rural planning is independent from influence.
Responding to the upcoming needs of an aging population should be the constant preoccupation of business and academia and not relegated to politicians who think in 4 year increments.
CONCLUSION
As a follower of the North American investment community over the last 35 years, I know I can only invest in securities if the government gives me a stable environment that is conducive to holding on to future returns. At the moment, the CURRENT guarantee I am contemplating revolves around savings that promise to be worth less because of all this money printing scheme. It goes counter to what I believe is good economic sense. (read up on the Austrian School).
Our politicians need to be reminded that the laws of supply and demand also applies to paper currency. With the dozens of trillion of fiat dollars, Euros, Yens coming to roost in our near future, I fear we are looking at rampant inflation and subsequent price controls!
TRADING STRATEGY
I have now doubled my shorts on US Treasuries 20yrss and 7-10yrss, sold my gold holdings ( Going back in when it falls back to $800-850).
Good trading to you!
DCW
