Sunday, July 10, 2011

Zero Gravity Flight

Over the past 4 years our government at all levels has borrowed $6 trillion in future productive resources that taxpayers must pay back. Little of this largesse has made it's way back to private sector Middle Class Producers. Much of this money is pooling in the bank accounts of; The Rich, Big Banks, Multinational Corporations, Overseas Investors and Wall Street.

The Federal Reserve is redistributing our savings in the same fashion. Ben Bernanke has the Federal Funds rate locked permanently at 3,000% below the 10 Year Treasury bond Yield. This is in effect confiscating the investment returns of savers. The money is pooling or "stagnating" in the reserve accounts of the Big Banks.

Although the amounts are getting larger and more aggressive, these policy choices that I mentioned above have been consistent for the last 15 years. We continue to rob resources from the future to reward government favorites now.

Taking resources from private sector production and savings and then distributing them randomly to the government’s public sector favorites is not a formula to create sustained growth in an economy. At the very best it will create economic stagnation, which is easy to see in our economy today. For the past 15 years real household incomes have stagnated. We continue to lose private sector jobs, while the total size of the public sector has been growing faster than Mississippi sumac in summertime.

Looking at the situation logically, the policy choices that our government has made over the last 15 years should lead to economic stagnation.

For the past 15 years we have had economic stagnation.

How could any rational person not see the cause and effect.

The problem is that investors don't seem to understand the cause and effect of this situation. It is very important that the market understand the probable outcomes and consequences of our government’s policy choices:

“We have borrowed extreme amounts from the future and locked ourselves into a slow growth economy now. The limited resources available during our slow growth period will probably continue to be directed by the choices of government officials as much as our free markets.”

The previous statement would give full disclosure to our current economic situation. Our future will be a slow growth environment with resources being allocated by the capriciousness of government officials instead of the free market.

But when the facts are distorted, the misinformation becomes a big problem for our investment markets and our economy.

Presently government policy makers continue to tell our financially incompetent populace that more private sector jobs are coming and economic recovery is on the horizon.

Obviously this is an impossible outcome given our government’s current policy choices and our limited economic options.

Therefore this erroneous information from a trusted source creates a large disconnect between reality and expectations. Misinformation is creating huge investment bubbles in our economy. We are now at the apex of our third bubble in 12 years.

Investment prices are floating dangerously higher than the valuations that support them.

Our present bubble is like an airplane achieving its maximum altitude as it flattens out and begins a quick decent. Presently we are at the point in the parabolic arch where gravity no longer exists. This is called Zero Gravity Flight and in an airplane or an investment market this period can only be temporary.

Zero Gravity Flight can be very enjoyable if you understand what is happening. But it can be very dangerous if the captain of the airplane tells his passengers that this weightless condition will continue for the rest of the flight.

So if everyone on the airplane becomes detached from their seats at the apex of the parabolic loop with unrealistic expectations, it becomes a mania. These unrealistic expectations of the future can come crashing down once gravity exerts its force.

Overvaluation in our assets will bring the same result as our economy slows.

Presently just about all asset classes are overvalued. Commodities and bonds are historically overvalued. Investors are only interested in watching their investment returns sail to the moon. They are blind to the consequences.

Investors are desperate to stretch the risk curve, at absolutely the worst time in the economic cycle to stretch the risk curve.

So as Investors are joyously bouncing off the sides of the airplane cabin and as our captain has permanently turned off the “fasten your seatbelt” sign.

There has never been a better time for the prudent investor to sit down and buckle your seat belt tight.

Tuesday, July 5, 2011

Hummingbird Economics

Biff has been fixated with hummingbirds since he was five years old. He has written many books and articles on the care and feeding of nature’s most important bird.

Unfortunately none have ever been published.

Amazingly, hummingbirds don’t seem to be a priority for most people. So Biff never received the recognition that his brother Ben receives.

Biff used an inheritance to purchase a 1000 acre valley in upstate Vermont. The parcel has always been known as Honeysuckle Valley. He bought the property to be closer to his birds and to distance himself from Princeton and the success of his brother.

Biff like his brother Ben has always been focused on improving his environment, so he started placing honeypots out in the open to lure more hummingbirds to his property.

Over the years Biff began noticing a change in the hummingbirds. They seemed to be growing in size so it was obvious that his honey was helping the birds. The only puzzlement was that the extra bulk seemed to make the hummers less nimble in escaping the advances of their predators, the hawks.

Biff thought about this constantly. He remembered his brother talking about disequilibrium in an economy. Could this be the same?

He called his brother Ben and asked for help. Ben explained his theory about stimulating slow moving economies with more money. So together they surmised that it made sense to stimulate the slow moving hummingbirds with more honey.

Biff started his own version of Economic Stimulus for his hummingbirds. This seemingly small event turned into a watershed moment in economic history.

As Biff provided more and more stimulus for the hummingbirds an amazing equilibrium came about that no one could have predicted.

Like the hummingbirds, the bears have learned to use Biff’s stimulus. The bears now stay by the honeypots constantly waiting for honey. The slow moving hummingbirds have also learned to stay by the honeypots to utilize the benevolent bears as protection from the hawks. Continuous economic stimulus has created a new higher standard of living in Honeysuckle Valley for the hummingbirds and the bears.

Many years ago economic philosophers such as Plato and Jefferson suggested that a government that chooses “winners” and “losers” in a society would always end in corruption.

Then Keynes and Friedman postulated that small amounts of “temporary” stimulus during economic downturns could bring positive overall benefits to an economy provided the government manipulation was reversed after the recession ended.

Biff with the help of his brother Ben provided the research that has allowed government economists to take the final step away from our inefficient free markets and toward the inevitable “managed economy”. The findings in Honeysuckle Valley have proved that constant stimulus by a benevolent third party can increase the standard of living of all participants equally.

(It must be noted that the brothers decided that the hawks did not merit being a variable in their study because the pesky creatures left the valley and moved to New Hampshire midway through their research.)

Economists from all over the world now come to Honeysuckle Valley to study the first documented case which proves that continuous and unlimited economic stimulation can create a higher standard of living for everyone. This new theory is presently being utilized in Japan, Portugal, Ireland, Italy, Greece, Spain and of course here in the United States by Biff’s brother Ben.

Biff is rich and famous and is getting the recognition that he deserves.

There is only one thing that bothers Biff now.

He hates the first question that comes from all new visitors to Honeysuckle Valley:

“What in the heck is that Smell?”