FYI – I am in the UK and Ireland this week so forgive my sporadic blog entries…
At 37,000 feet, I am wondering if I get a different perspective on all that has been happening in the the world of finance over the past year, 2 years, 5 years, heck 30 years. I am discovering that I am getting no different perspective. So there goes that thought. However, I did get a chance to reread last week’s Economist, which I found filled with mounds of great information. However, please understand that the main reason I reading last week’s Economist is that for the 100th time it seems, the mailman did not deliver my copy on Saturday.
I was hoping to have some good new reading material for my flight to England and Ireland this week (I know I didn’t tell you I was going) and since the Economist covers European matters also, it would be nice to be a bit informed as I arrive. Alas, it is not to be. Therefore, I will spend my time writing to you.
I want to cover again the fall of the dollar and the interconnection of macroeconomic forces that exascerbate the problems associated with that and the forces that are exascerbated by this – a sort of vicious cycle to say the least.
As I outlined in a previous post how we got to where we are now, I won’t go over that again. Let’s focus on where we are now. The Fed, whether because they feel obligated to by a wimpy public that can not stand the slightest bit of economic pain, or whether the Chairman feels that it is the Fed’s responsibility to solely support continuous economic growth (an impossibility), or whether it is to protect the Fed’s reputation lest they be blamed for causing all this mess, feels the need to stimulate growth by loweing rates and increasing access to easy money.
Some of the problems we are seeing is that the consumer is tapped- finally. We are at the point where no matter how cheap money is, people can not borrow any more. In addition, lenders don’t want to risk giving them any more (ask fleck quote from friday). Therefore, the Fed is “out of ammo” to quote Admiral Stockdale. Our entire economy has been leveraged, propped up so to say. It is similar to a consumer on an individual scale who has been paying credit card minimum payments with cash advances from another card. Eventually, this situation will blow up, for the individual example AND our economy. It’s that serious.
What can we do? We need to raise rates a bit on the monetary side and cut expenses on the fiscal side. We are already encouraging entrepreneurial, hard-working potential immigrants to choose other countries to bring their ideas and sweat to due to our current immigration policies and unfriendly corporate tax levels. Raising taxes to fix a problem that our sissy legislature has put off for 40 years is not the way to go (our entitlement spending is not just a problem of the current Congress – past Congresses had competent economic advisors forecasting the aging population problem we have now but didn’t do a darn thing about it – I especially blame those that have been there the longest and have said nothing). As a quick aside, since social security was meant to originally kick in when we turn 65, and that was also close to the average life expectancy, the average person shouldn’t have expected to collect for too long. So raising the age to 70 in our age of lengthening lives is completely reasonable.
So raising rates will attract global investors to our bonds. it will also help stop the slide in the dollar (which is also affecting millions of people whether through lower saving returns on CD’s and money markets or higher inflation on necessary living items). It will also help stop the ridiculous leveraging of risk by trigger happy big investors and foolish house flippers alike.
Fiscal responsibility is also key – we must get rid of our debt. Our debt is handcuffing us. If we do not lower this, then rising rates will cause the borrowing costs of the US to increase substantially. We also spend a huge chunk of our budget on paying interest. We need to cut entitlement spending (raising the social security age for example) cut defense spending (we spend WAY too much here too), and reduce debt (which cuts interest costs). These are 3 of the biggest budget areas.
If the term limit-needing legislature could get on this, and Bernanke would stop lowering rates, we would start back on the road to fiscal sanity. But, since I know neither will happen, I have invested our clients’ and my personal money accordingly. Funny thing, people keep saying in various articles or on TV, something to the effect that, if inflation is contained and the dollar rises, then how I invest, and how most of the people I admire invest (Faber, Grant, Fleckenstein, Grantham, Rogers), will blow up in our face. However, I am so confident of the foolishness, imprudence, lunacy, and limited-thinking of those in charge, that I am not worried one bit about my allocation. They have effectively, ‘guaranteed’ my returns in my opinion.