Apr

15

Cramer declares Depression over

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You would think after getting humbled by Jon Stewart on the Daily Show, Cramer would scale back predictions and prognostications…

Cramer has declared that The Depression Is Over.  While I admire his optimism, I find many important questions unanswered:

  • Is an inevitable bankruptcy of GM, Ford or Chrysler fixed?
  • Has the US stopped throwing money at wars?
  • Have Social Security, Medicare, Medicaid and municipal pension plans all been adequately funded?
  • Do you think any of these issues will slap consumer spending in the face?
  • Isn’t there a chance that people will liquidate their portfolios as savings draw down?
  • Isn’t it very possible things will get worse if our expectations about perpetually rising asset values are erroneous?

Tocqueville Asset Management did a great piece on this a while back.  Head fakes of 45, 54, and 67 percent happened in Japan, and they could likely happen here.  Likewise, we could have three bear market rallies and still end up lower 10 years from now.

The stock market is not the economy and the economy is not the stock market.  A stock market rally does not portend an improvement in the economy if the underlying fundamentals (entitlements, unfavorable business climate, corporate welfare, all-time low interest rates, proliferation of the FIRE economy) are not solved.

Takeaway:  It is important to have the most accurate model of reality as possible.  No matter which way the stock market goes, if the fundamentals haven’t changed, our economic behaviors (saving habits, spending habits) should not change either.

For my take on Cramer’s Daily Show appearance, click here.

Feb

13

Stimulus Alternative

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To get the US moving in the right direction, we first need to understand that the last four years of growth were due to an easy-credit monetary policy. As such, many loans never should have been made in the first place. Consequently, the more Washington tries to keep these loans from default, the longer it will be until the right types of loans are made. Loans to good credit risks and solid businesses cannot happen in a murky environment of bailouts, temporary guarantees and other federal promises.

A legitimate recovery will require prices bottoming and assets moving from weak hands (those incapable of paying debts) to strong hands (those that are). The notion that we need to “stabilize housing” is at the root of this crisis.

Recoveries cannot happen until losses are realized.

Since politicians are supposed to “do something” they will naturally do everything they can to fight economic reality and avoid this natural, painful part of the business cycle.

Five Things The Government Can Do Right Now to Help
Defeat the Stimulus Bill – The last thing we need to do is to get further into debt.

Eliminate the Commercial Paper Funding Facility, TARP, and all other financial acronyms that mask true transparency and price discovery – If you cannot succeed without the government backing your commercial paper, find a more viable source of funding, or start liquidating assets to raise capital. The taxpayer should not be on the hook for these losses. Instead of this corporate handout, eliminating payroll taxes and social security taxes is much more helpful solution for struggling families.

End the Wars in Iraq and Afghanistan and close non-essential bases around the world – There is no ROI for this spending, other than for the defense contractors and war-profiteers. Keeping America safe starts with a policy of common-sense national defense (easily cutting ¼ of our military budget) and avoiding involvement in foreign conflicts.

Eliminate bogus foreign aid – Giving billions after a natural disaster is one thing, but giving financial aid and weapons to warring countries has negative implications. Those actions come back to haunt us via blowback.

Most importantly, reset expectations – We have come to become dependent on cheap energy and resources, cheap sources of credit and government promises. These all need to be reset from “American” to “Reality”.

  • Cheap energy and resources – China, India and all parts of the world are now competing over fewer and fewer resources. Prices will rise for water, oil and arable land. The President should communicate this since these higher prices are unavoidable.
  • Cheap credit – A monetary system where bubbles continue to happen, banks with outrageous leverage can borrow from the government at below market rates and major distortions in the economy appear (growth of FIRE economy) are all signs of a broken system. Our fiat monetary system needs to be overhauled completely into something legitimate and stable (a whole topic for another day).
  • Government promises – The entitlement mentality in America is alarming given what has occurred over the last few months. How can we borrow $900bn, pay it back with interest and still pay for all Social Security and medical entitlements? At the state level, the market has declined by 30%, yet serious pension renegotiation talks are not yet on the table for teachers, police, fire and other government “heroes”. If we want people to start saving money, living within their means, and not rely on taxpayers to raise their children for them, then we need to change our attitudes about what the role of government ought to be. Government cannot create wealth other than by redistributing it or printing up the money (devaluing the currency). This needs to sink in with citizens. It should start at the top.

Take power away from the federal government and give states, businesses, and individuals their power, money and responsibility back.

Takeaway: The government will pass the stimulus, but reality will continue. Continuing to try and force consumption and production when there is no demand for either will only delay the inevitable. It would be wise to start mentally accepting the fact that this recession will be long and drawn-out.

Thanks for reading.

To read about more harmful intervention, read here.

Feb

13

Why the Stimulus Package Will Not Work

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The proposed stimulus package Washington is working on will not revive our economy as we are being promised. The stimulus might provide a temporary boost to certain beneficiaries, but this will only worsen our existing problems and push the inevitable difficulties further down the road.

The main reason the stimulus is a poor idea is simply because the United States does not have the money. The actual “stimulation” will be done by Japanese and Chinese central banks lending our government the money. If you or I borrow money when we’re deep in debt, it is a miserable idea unless the money borrowed can miraculously pay off the debt one is currently in. By focusing on projects which do not yield positive returns, the existing bills guarantee the money spent will not be worth it.

Large portions of the proposed bills revolve around improving infrastructure. Pouring tax dollars into repairing bridges will not provide a positive return for the taxpayer since the money we are borrowing will never be paid back, it is simply maintenance. This plan might temporarily decrease unemployment, but that does not constitute a long term economic solution.

Companies overexpanded during the easy credit period from 2003-2006. As a result, we are left with huge overcapacities in factories, stores, and residential and commercial real estate. This easy credit-induced expansion was never sustainable and to try and prop up failing businesses and homeowners with a stimulus bill is a bad idea. The market does not need a kick-start, it needs a self-correction, where businesses close and orderly defaults take place since only a true correction can lead to normalcy and, then, legitimate expansion.

Future growth will also be far less than projected by this bill. If a corporation or “green company” needs to get federal assistance from the government to pay the bills and hire employees, is it really a solvent company? Also, why is government taking the risk with our money instead of entrepreneurs and venture capitalists? Why is the taxpayer put on the hook?

Lastly, the bill is chock full of good ol’ pork barrel spending and constituent handouts. Any politician that thinks spending $20bn on food stamps and $1bn on airport screening equipment will lead to future economic growth is delusional.

Once the stimulus has been spent, what are we left with? Bigger bills to pay. The almost trillion dollars we will have borrowed and spent will need to be paid back, with interest. Will new roads, green buildings and Head Start funding create a boom that will create enough economic growth to pay off over a trillion dollars? Obviously not.

We as a nation have grown accustomed to a lifestyle based on a continuous stream of credit from which to draw upon. The notion that the State will always be there to lend everyone money and make economic reality go away is ridiculous. The stimulus package is the last thing our country needs and will only worsen our existing problems.

To read how “right” the experts have been, read here.