I will be taking a long break from this blog
A lot has happened in the past few months, with the most significant being that I have purchased a home. It is my primary residence and is a fixer-upper. I've stayed away from looking at real estate as a major investment in the past, but I believe this property qualifies. It is an 80-year old craftsman bungalow located a mile from downtown, and I think (I hope) I haven't bitten off more than I can chew with the work needed. I will be taking an indefinite break from this blog while I tackle this new project and wait for some intelligent thought to strike me regarding the future of our economy.
To comment on what has transpired in the markets and the economy over the last several months, there are two major things that have happened. First, in my view the Fed realized that the major financial pillars of our country were still in horrific shape and were going to require another major bailout. There are several ways to conduct a bailout, and the method by which the US government directly hands over billions of dollars of cash is seen as extremely unpopular. Because the government wanted to avoid going down that road again, it instead is simply creating a hyper-profitable environment for banks through tools such as a highly subsidized discount window. This has the same effect of bailing out the banks at taxpayer expense, but is less direct and thus is much harder for Mrs. Palin and her proverbial "Joe Sixpack" to understand. Thus, same results occur with the same costs, but without the protests or regime change. It has another side effect which is bankers patting themselves on the back and using more of those profits to pay themselves large salaries at shareholder expense. I would have preferred direct transfers of wealth from the taxpayer and all the anger and regulation that accompanies it, but then I don't have as much money as Goldman Sachs so that battle is over before it begins.
The banks are still in bad shape and are still facing ever-expanding numbers on the liabilities side of the balance sheet, but the earnings side will be growing at a faster rate than the liabilities side in this environment. Thus, many major banks will simply grow their way out of debt eventually, thanks to the taxpayer.
The second thing that occurred (although related to the first) was that we created an ultra-liquid environment. All that liquidity needs to chase something, and so it is chasing assets such as stock, bonds, commodities, foreclosures in California, etc. It is all the liquidity chasing assets that has pushed up the stock market without a corresponding rebound in the economy. It is why so many people are wondering if the market has gotten ahead of the fundamentals of the economy (it has), and it is why people are wondering if we are repeating the last 20 years of Japan's markets (we are). If you consider the fundamentals, the market should still be at levels near March, but it is not. There would be a slight premium added for the fear being gone, but not to this degree.
This highly liquid environment is currently viewed as a positive to people who held bad assets such as financial stocks, but it is soon likely to have some negative impacts on the real economy. If liquidity starts chasing oil, we're going to see oil prices spiking higher even while demand stalls or decreases. We saw this happen in 2007, and it has a very real, very negative impact on the economy (although a positive impact on the environment).
It would be nice if we would preempt this move in carbon-rich energy by taxing it so that - assuming the price will increase anyway - we would get the surplus income rather than Saudi Arabia, but that is another post for another blog.
How should you position yourself? I don't think stocks are going to perform in the future at the level people aged 40 and under are expecting. I think you should buy old world valuables like gold, oil, and property and hunker down against inflation. I don't believe we have a modern-day Paul Volcker who will break the back of inflation, and I don't believe we will get one until we've already suffered several years of severe inflation and are willing to sacrifice in the present to be better off in the future. That doesn't happen very often because the policy cycle tends to be longer than the election cycle.
I personally am hunkering down by locking in a 30-year loan at 4.5% and paying it off as slowly as possible while keeping it tied to an inflation-proof commodity (land). A lot of smart guys (John Paulson) like gold. I personally would prefer other things that have more utilitarian value like oil or trees or land or lithium or whatever strikes your fancy.
I want to thank you for reading my blog in the past. I'm sorry I didn't foresee this method of bailout and the liquidity chasing asset prices above their economic worth. The best I can do is analyze fundamentals and make decisions based on that analysis. I had a very profitable and entertaining time during the liquidity crunch, and a very unprofitable and unpleasant time during the rise in liquidity. What have I learned through all of this? It is a smart move to short segments of the economy when you see a ticking time bomb, but don't hang around too long trying to catch the bottom. Also, never underestimate the motivation of the federal government to keep markets rising at any expense to the taxpayer.
Take care, and thanks for reading.
" has been one of my favorite movies since I was about 11, so I take this sort of thing much too seriously. Given the market turmoil there is a lot of fodder for the movie so it could be a good one, but despite the involvement of Michael Douglas and Oliver Stone I fear the worst. Time will tell.
