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.

1 comment:

  1. Production and savings are the only way to grow an economy. Expanding government, extreme debt loads and over regulation will slow an economy. It seems pretty simple, unless you are an economist.