HOPE SPRINGS ETERNAL
Bernanke, by creating negative yields, thinks he can push the big boys into buying equities and investing in the economy. But what if they distrust the government and they
just buy hard assets, like gold, silver, grains, crude oil, etc. thus creating ever larger inflationary pressures? What is he going to do then? Print the money and short gold?
Meanwhile, by creating 0% interest rates, he as killed the CD and money market funds, leaving no safe pension investments. The ones hurt the most are the common people
and seniors as savers suffer most. No wonder retail sales are way down as people won't spend the last of their savings when they are so worried about the future. Yet, by
inflating both the Bond and Stock Markets with QE1 and QE2, in the last month or so, the market has edged higher in the face of pessimism on the promise of the coming QE3; it's hard to push the market higher without QE3. They won't buy at P/E’s of 14, 15
no matter how cheap Wall Street tells us it is. They think they know better; without QE3, there will be no real buying and that's why the volume is so low. Ben is trapped, but he'll
never admit it.
THINGS “SEEN” AND “UNSEEN”
It was the famed Free Market French Economist of the 19
father of Austrian Economics, who fostered the accent on Freedom and Individual Choice as the best and perhaps the only way to properly handle both the things Seen
and Unseen. Far too many investors react incorrectly to the “seen” or obvious events in place because they do not concentrate on the BIG PICTURE and therefore cannot
appreciate what is currently “unseen” and what most likely lies ahead. Take for instance the nearly 3-4 hour 2% jump in the Stock Market when GDP came in at above
expectations. That “seen” event was an increase in GDP ahead of estimates. But what kind of estimates were they? Since they were only a smidgen of an increase, the rally
did not last out the day. Were they realistic estimates or ones designed to be beaten so as to give a false reading as to what is actually going on? To make matters worse it Century, Fredric Bastiat, the was, like most “NEWS” events are, outdated information because it dates back to activity for the quarter ended in June.
As you may remember, the majority of the economic data started turning sour near the end of the last quarter; bad enough to bring down the Q2 GDP by 0.5% from the Q1
reading, but not bad enough to scare anyone just yet, by maintaining a false sense of optimism. This means that the new quarter starting in July came stumbling out of the
gate. Both ISM reports show a marked slowdown along with most of the regional activity reports and like the unemployment reports are completely misleading, placing the
unemployment rate closer to 13% than the reported 8.2%.
So what will happen to real GDP if these trends continue and we have a full quarter of soft data? And what happens when that information becomes more public and weighs
on consumer and business sentiment? And what happens when the Fiscal Cliff becomes visible virtually guaranteeing a 1% to 01.8% reduction in GDP instead of the
3% to 5% increase; especially since to start with, there was no real growth in the first place? It is the part that is unseen (the truth) which is most important. That is why I
examine the government published misinformation most losely, relying much more on the “SHADOW STATISTICS, especially in this election season where the government is
more interested in getting re-elected than they are in what’s good for the people and the economy. The Truth Be Dammed.
Essentially, the Debt Super Cycle is the decades-long growth of debt from small and easily-dealt-with levels, to a point where both the Bond the Stock Markets rebel and the
debt has to be restructured or reduced or a program of austerity must be undertaken to bring the debt back to manageable proportions. The history of the U.S. is characterized
by a long-run increase in indebtedness, punctuated by periodic financial crises and subsequent continuing policies of inflation. The subprime blow-up is the latest
installment in this ongoing Debt Super Cycle story. During each crisis, there are always fears that conventional re-inflation will no longer work, implying the economy and
markets face a catastrophic debt unwinding. Such fears have always proved to have been unfounded, and the current episode, because of its size in relation to both the USA’s and the World’s economies, may well prove to be the exception.
A combination of Fed rate cuts, fiscal easing (aimed at relieving the subprime distress), and a lower dollar simply trigger another up leg in the Debt Super Cycle, and a new
round of leverage and financial excesses. The objects of speculation are likely to be global, particularly emerging markets and resource related assets. The Super Cycle will
end if foreign investors ever turn their back on the U.S. Treasuries, triggering capital flight out of the Dollar and robbing U.S. authorities of any room to maneuver. This could
happen a lot sooner than anyone expects as powerful forces such as China, Russia, Japan, the Middle East oil sheikdoms, and Brazil (just to name the larger countries) are
trying to replace the US Dollar as the world’s only RESERVE CURRENCY with a NEW RESERVE CURRENCY that will probably be at least partiality GOLD BACKED, if not
fully Gold Backed. What happens to the price of gold then?
Many so called experts believe that we are nowhere near the ending of the Debt Super Cycle; but ask yourselves, who is paying them? Even though the government is stepping in to buy its own Bonds because private debtors are cutting back, we have just
shifted the focus of where the debt is coming from and who is buying it, expanding the Debt Super Cycle in the US, Europe, Great Britain, Japan and other developed
countries (yes, even Greece!) at an ever expanding rate. This is still very much in play as the increases are magnitudes larger than any possible decreases in the private
sector debt as governments explode their balance sheets. Meanwhile, total debt continues to grow.
But what is most worrisome is that government’s off-balance sheet obligations are exploding at an even faster rate than their bond obligations. Plus the fact that
in the US, the Baby Boom Generation is now retiring at a rate of 15,000 a day for the next 20 years. Up until now, they were the generation that did most of the saving, investing, and spending and paid most of the taxes. They have become the takers
(Social Security and Medicare), selling their homes, pension funds and 401Ks in an attempt to maintain their standard of living.
There is a limit to how much debt you can pile on. But this time is different or is it?
Most of the large borrowing has come from foreign sources and not for the increase of productive capacity, but mostly for consumption. Up until recently, it took $3 of debt to
create a $1 rise in GDP where as now, each $1 rise in debt is government debt, and has a negative multiplier – so in truth all that new debt actually hurts GDP.
Talk about unsustainable. The US cannot borrow another $15 trillion in the next ten years. It's just not there. Long before that, the Bond Market will simply rebel, rates will
skyrocket, and the aftermath will make the last crisis seem like a cakewalk. Some say (like me) that the coming election is the most important one this country has ever had. It
is one thing for the Tea Party movement and Independents to elect a Republican Congress. However, the GOP Power in Washington are NEOCON Keynesians and although the spending will slow, without the quick passage of Term Limits eliminating
the need to get re-elected, the economy cannot cut back fast enough and will first slow into a Double Dip Recession and then slip into Depression by 2014/15.
Then, the really important election will be in 2016 when everyone will have to decide the new direction the economy and country will then take going forward. Without term limits,
it won’t make much difference who gets elected as the world will slip into WORLD WAR III, which history tells us always follows worldwide Depression. One thing for sure, the
economy will not be booming by 2014, as there is no leader in sight who is able and willing to lead the US into a new era of FREE MARKET CAPITALISM.
Will voters in 2014, 2016 and 2018 decide that no economy can possibly sustain a nanny entitlement country? Can they stay the course for fiscal and entitlement control or
will they scream for more and more FREE STUFF?? Will they take the long view and let politicians make hard choices or will they send the message that short-term choices are
what they want? Will they give lip service to going on a diet and exercising and then stay on the couch and eat chips and watch TV? Or will they really get fiscal religion and
say NO to Socialism and go back to individual responsibility and freedom and small government Capitalism?