Thursday, April 15, 2010

Blind Faith and Insidious Debt

Blind faith is a blessing in one's religious life but it can be a curse when money becomes a variable. There is nothing more wonderful than having a direct connection to your Creator. But there is nothing more devilish than someone putting a roadblock between a spiritual traveler and paradise and then charging a fee at the gateway to the promised land. If there is a purgatory then it should be filled with people using the idea of Hell to make large amounts of money as the gatekeeper to Heaven.

Presently our elected officials are the gatekeepers to our Financial Heaven. They are spitting fire and brimstone as they tell us that if we don't borrow money and give it to the government and Wall Street then we are risking financial Armageddon.

Metaphorically speaking, savings is the road to the financial promised land. In a rational world a benign government would reward savers. This would help individual households grow and make our country strong. At the very least a government should stay out of the financial system.

But in our present irrational world our elected officials are using extreme measures to keep our citizens in horrendous debt. Currently our households are desperately trying to pay off the debt that the government has spend trillions of dollars to subsidize. Over the last two years our households have been able to pay off a few hundred billion dollars of debt as our government is creating trillions of dollars of debt to hostile foreign nations that households will be required to pay off at high interest rates in the future.

So as a country we have experienced two years of financial pain. This pain was fruitless because we have increased the amount of total debt that households will be required to pay in the future.

This corrosive debt cycle is getting more and more irrational every day. So why does no one care? Because we have blind faith that our elected officials will get us out of this mess that they are almost solely responsible for getting us into in the first place. Our nation has become totally disconnected from financial reality.

We have many recent examples of this disconnect. The Tech Bubble, the Credit Crisis and the Housing Bubble were directly propagated by our government. The financial collapse of Iceland, the collapse of the Japanese financial bubble and the contraction of the PIIGS(Portugal, Ireland, Italy, Greece and Spain) are examples of how corrosive debt can destroy an economy. We are ignoring all of these recent episodes as our government is desperately trying to recreate them.

How are most people dealing with our current period of insanity? They are creating another financial bubble. Stocks have become overvalued. Housing in some markets is going back into a bubble. Long term bonds are in a bubble. This is happening as our economy is contracting as households are desperately trying to eliminate debt.

How am I dealing with our current situation. I sold my primary residence in 2007 and rented a house in Lafayette. I started shorting the peak of the stock market in 2007. When the government started to make more irrational decisions, I moved to a house with half the rent payment in Walnut Creek. I jumped into the stock market as everyone was selling in March of 2009 and presently I am market neutral as stock investors apparently see blue sky forever.

I carry no debt and I am saving 50% of my household income. If the stock market keeps going up I will consider shorting the market in the fourth quarter of 2010. I will not buy a house until the next recession, probably 2012. Or maybe I will never buy a house if our government is successful in keeping our households in their current insidious debt ridden state.

Whether it is credit card debt and mortgage debt or government debt and higher taxes is not of consequence. It is all debt that will have to be paid back in the future by our households. Families like yours and mine. Anybody that tells you something different is lying to you, plain and simple. I don't care if it's a Nobel Prize winning economist that's paid by Wall Street or your financial advisor that is sucking you dry as your accounts go lower and lower.

I might add that both of these people have missed predicting every single major economic shift of the past ten years. But they are excellent at cheerleading you to borrow more money and speculate during bubbles.

Most people say that I'm crazy. I have become very used to it. I have developed a tough skin trying to talk people out of buying stocks during the Tech Bubble, houses during the Housing Bubble and getting into debt during this Debt Crisis.

Some would say that I am now acting irrationally and I really can't disagree.

But I would like to suggest that in an insane world it might be prudent for the rational man to act irrationally.

I would also like to suggest that our government and the Wall Street economists don't deserve the blind faith that should be saved for your connection to the Creator.

There is only one Savior and it is definitely not our government or Wall Street.

Good luck with your investing, your saving and your worshiping.

No comments:

Post a Comment