Archive for September, 2010

Gold vs. stocks the past 5 years

(Click on chart to get sharper image.)

This a chart comparing gold bullion (GLD) to stocks (SPY) priced in dollars the past 5 years. It tells me several things:

  • The Federal Reserve is steadily debasing the dollar.
  • The U.S. economy can’t get of its knees.

I see nothing on the political and economic horizon that makes me think that these trends won’t continue for the foreseeable future.

The “New Normal”= a lower standard of living

Excepts from Bill Gross at PIMCO.  Full article here.

Bill says: “The New Normal has a new set of rules. What once pumped asset prices and favored the production of paper, as opposed to things, is now in retrograde.”

Translation: The FIRE  economy (finance, insurance, and real-estate) is dead. Better get your hands on tangible wealth: food, commodities, gold, oil. Nothing phony or speculative.

Bill says: “The hard cold reality from Stan Druckenmiller’s “old normal” is that prosperity and overconsumption was driven by asset inflation that in turn was leverage and interest rate correlated.”

Translation:  The old normal was just a ginormous bubble.

Bill says: “Investors are faced with 2.5% yielding bonds and stocks staring straight into new normal real growth rates of 2% or less. There is no 8% there for pension funds. There are no stocks for the long run at 12% returns”

Translation: If you’re a fixed-income saver, consider going back to work.  Pension plans are in serious trouble.  Nary a yield to be found – anywhere.

I  agree with Bill’s conclusion, “…the most likely consequence of stimulative government policies that strain to get us there will be a declining dollar and a lower standard of living.”

Translation: The “New Normal”= a lower standard of living.

My relationship with the most powerful man on earth: B.S. Bernanke

If he’s an agent of the global banking cartel – purposefully sucking the value out of the dollar and middle-class America to enrich the global banks and political elites – then I hate his guts.

If he’s basically a good guy that’s stuck in a difficult situation  – carefully deducing that the U.S. is ill-equipped to compete in today’s global market and that the only way to “save the economy” is to wipe out the middle class by devaluing the dollar – I guess I should thank him for buying me some time to sell my house, cash out my 401k, get out of all dollar-based assets, and buy a little farmhouse in Argentina.  (Oh, and some gold.)

“Is this my new reality, Mr. President.”

Great question from Mrs. Velma Hart at recent town hall meeting with President Obama.  (starting at 0: 57 – 2:04)

In brief, Velma, yes – this is your new reality.

  • Workers in China make things for 1/20th of your salary – with no benefits.
  • Workers in India will answer customer services calls, do accounting, payroll, collections and other “back office” duties for 1/10th of your salary – with no benefits.
  • Blue collar jobs flooded overseas in the 90s, then white-collar jobs after that.  Currently there are  20 construction workers vying for every 1 job opening in the U.S.
  • The finance, insurance, and real-estate sectors that were propping up the rest of the economy,  just went belly up.
  • If you want to move to where the jobs are, you’d still have to pay off your under-water mortgage – if you can sell your house that is.

There’s no money in the Treasury for Obama’s spending, so helicopter Ben Bernanke is printing it out of thin air and selling T-bills like mad to cover it, mostly to foreign creditors that hate America. This is giant mountain of debt that you and your children have to pay-off.

Your government doesn’t give a rat’s ass about the average American. Just follow the money (your taxes and mortgage payments)…straight to the crony capitalists on Wall Street and the global banking cartel.

I’m very sorry to break it to you, Mrs. Hart, but meals of “hot dogs and beans” are your new reality.   Meals of “rice and beans” will be the reality for your daughters and grand-kids.

Why won’t Mr. Obama just come out and level with you?  You can only extend and pretend for so long. Wake up, the American Dream is over.

“We a now paying for the funeral of Keynesian economics.”

To echo a recent article by Eric Sprott and David Franklin, “We a now paying for the funeral of Keynesian economics.”  Keynesianism has been the economic religion of the Western world for the past century.  For the uninitiated,  the intricacies of this theory can be summed up in a single sentence: government intervention in the economy is good.

Here are the underlying, and if I might say so,  fallacious assumptions of this theory.

  • Private markets over-produce certain products. This causes a glut, job loss, and deflation.
  • The government can step in with stimulus, via government programs, low-interest rates, and monetary policy (basically money printing) to reverse the above.
  • Government stimulus “grows” the economy by stabilizing prices and maintaining full employment.
  • Subsequent growth in the economy eventually multiplies to the extent that the initial cost of the stimulus (increased taxes, money printing, and/or government deficit spending) is easily eclipsed by overall increase in productivity.

Tweak everything perfectly and we get efficiency, full employment, exponential growth, and gradual inflation.

Since the 1930s we’ve all been dancing to the Keynesian beat.  It worked okay for a while, but now we’re driving right of a cliff.

What do we have to show for our faith in the religion that is Keynesian economics?

  • More debt than we can ever repay.
  • Incredible waste of capital on politically expedient make-work projects.
  • Continual erosion of the value of our money due to inflation.
  • Central-bank sponsored boom-and-bust cycles, each bigger and more catastrophic than the last.

Keynesian manipulation supplants basic supply and demand as the central impetus of modern economies. As such, stimulus creates the very problems it’s supposed to solve: gluts, unemployment, and unstable prices.

Now Keynesianism has reached the point of no return:

Deficit spending can not go on forever. Debt is debt is debt. A Government Accountability Office (GAO) report from January 2010 states the following: “In our alternative simulation, which assumes expiring tax provisions are extended through 2020 and revenue is held constant at the 40-year historical average; roughly 93 cents of every dollar of federal revenue will be spent on the major entitlement programs and net interest costs by 2020.”

That’s in 8 years dude. Only problem is, the economy is so fragile that raising taxes to pay down the debt will crush any recovery.  It’s at an endpoint.   We’re damned if we do, and damned if we don’t.

Thank you Mr. Keynes! (Keynes was actually a damn smart dude, but his name has stuck to this, so bummer for him.)

Even if stimulus worked most of the time, there’s still the final back-breaker:  Exponential growth of debt requires exponential growth of productivity.

Denial of this fact will result in an “epic fail.”  Exponential growth cannot go on forever. It’s a finite planet, with finite resources.

Economics, as presently practiced by the Keynesian maniacs, is unsustainable.  Unfortunately, the only alternatives at this point are 1) radical change or 2) collapse.

Losing an illusion makes you wiser than finding a truth

If you want to know what the hell is going on with the economy, you need to rid your mind of the following myths:

  • The debt is payable.
  • It’s a free market.
  • If the liberals and conservatives could work together it would fix things.
  • Countries exist.
  • Governments are in charge.
  • Borders matter.
  • Money equals wealth.

The global banking cartel likes to keep the foregoing ideas in circulation as propaganda, but in reality, these are all false statements. In actuality:

  • The debt can never be paid: Unless more money is printed, there is never enough money to pay back interest.  Each time more money is made, more debt it put into the system. . Debt-based money is the ultimate weapon of the banks and the governments that serve them. The system depends on the exponential growth of the money supply, otherwise principal + interest could never be repaid.  This makes us all slaves to debt-based fiat currency, asset bubbles, and inflation.
  • It’s an unfair, rigged market.  The stock exchanges are certainly manipulated, if not controlled, by the banks. (In the U.S. this requires  collusion between the U.S. Treasury department, the Federal Reserve, and the big Wall Street Banks. The government and the Wall Street banks get freshly printed bills from the Federal Reserve to make more loans or to speculate in markets they largely control. Of course they leverage up by 10, 50, or a 100 times the real value to insure more debt is issued to the populace.
  • The banks fund and control both parties, so it really doesn’t matter who is in office. The banks and their agents in government guide policy, make backroom deals, and even start wars.  It’s about money and power, not left and right, Republican or Democrat. The banks own the powerful members of Congress and are content to let the junior, stupid, or outright corrupt Senators and Congressmen continue their perpetual dog and pony show, blame games, character-assassination -mud-fests, and general bipartisanship.  It’s a charade.
  • Borders mean next to nothing to banks. Borders are just arbitrary lines on a map that denote collectives of debt slaves. It’s a global debt empire for the banks, not a collection of sovereign nation-states.  China, Russia, Iran, and North Korea might be the only exceptions.
  • Governments are not in charge. They are the police force and propaganda machine for the global power banks. The U.S. government lost control of the currency in 1913. Since then, the Federal Reserve and the banks it represents have been the powerhouse behind all the branches of government.
  • Debt-based money extracts wealth from the bottom (us), to the top (the banks).  Even if you pay back the principal plus  interest, you’re still a slave to inflation and asset bubbles blown up by those that control the money supply.

Through the TARP bailout, to cite a recent example, the banks have orchestrated the biggest transfer of wealth in history. Never ones to let a crisis go to waste, the big bank’s “toxic assets” are now your responsibility. Subsequently, the Fed has reloaded large banks and multinational corporations with trillions of freshly printed dollars through QE1 and POMO.  I wonder what they’ll do with it? Help you get a job?  Yeah…right. “Why waste time in America?” they say, “It’s tapped out.” They’ll take your bailout money and buy assets in emerging markets before the dollar goes to pot. Next they will take down Social Security, health benefits, your mortgage, and your 401k by confiscation or by hyperinflation. (In no specific order.)

If you follow the money and steer clear of the propaganda this all becomes crystal clear.  Time to start losing some illusions people. Main street, the middle-class, and the ignorant, if patriotic tax-payer are screwed.

Hubris and humility in the face of uncertainty

Let’s face it. Economics is not a science. The endless blathering and posturing on Fox News, CNBC and Bloomberg shows just how difficult prediction is, especially about the future. (wink)

Markets are human creations and as such are subject to human short-comings: tribalism, self-deception, fraud, greed, and short-sightedness. The fact that very few of us intuitively grasp exponential functions or complex probabilities compounds the problem.

Despite what your retirement advisor says, the efficient market hypothesis is crap.  The market is ruled by fraud, power-plays, politics, and emotion, not sterile logic. Keep that in mind when anyone suggests that the market “should” do “x”. Unless they’re on Ben Bernanke’s speed dial, they don’t know.

The fantasy that markets are mathematical, predictable, and subject to a set of hard and fast rules injects hubris into the study of economics. It finds its personification in the likes of Alan Greenspan, Ben Bernanke, and every Nobel Prize winning economist you’ve never heard of.  Irrational to the point of exuberance, these high-priced fortune tellers approach their pet theories with religious zeal.

No doubt these folks are smarter than most, but they really can’t purport to know how the whole beast functions.  It’s a Leviathan of enormous complexity.

Basically, humans need a medium of exchange (money) as they  labor to provide for their physical needs (food, water, shelter). This leads to basic supply and demand.  Beyond that, all bets are off. (Unless you actually control the money supply, but that’s a topic for another day.)

The rest what we call “economics” is an increasingly complex array of probabilities whose functions defy scientific reduction. Economic turbulence is just that, turbulence.  Throw in power politics and geopolitical imperatives and you have a complex system that defies mathematical modeling.

The bottom line (pun intended) is that no one understands the whole of it. No one can predict what will or will not happen with any degree of accuracy. Forecasts are just educated guesses. Take everything the gurus say with a grain of salt. Most of the cocky ones are selling you something. The quiet ones are busing transferring your wealth to someone else. The politically connected ones risk shaking the confidence of the populace if they’re too honest.

I don’t mean to suggest that trends can’t be identified or that the past isn’t prologue to future.  But just because every swan you’ve ever seen is white doesn’t mean that the 99th one you come across might be black.

Because of these facts, humility, not hubris, is the essential mental prerequisite for anyone interested in learning the art, not the science, of economics.

Here’s a clip from Nassim Taleb (author of the Black Swan) and Benoit Mandelbrot (inventor of fractal geometry and an expert in probability and complexity theory) from PBS.

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