"I am quite concerned about Fiscal Cliff." - Alan Greenspan
"I am a firm believer in the people. If given the truth, they can be depended upon to meet any national crisis. The great point is to bring them the real facts." - Abraham Lincoln
"Any idiot can face a crisis - it's day to day living that wears you out." - Anton Chekhov
Alan Greenspan the former Chairman of the Federal Reserve is not my favorite person. Now I cannot blame him for everything because that would be unfair, but I do believe that his loose monetary policies started the drive towards a fiscal cliff by allowing politicians to behave irrationally and spend money in a flagrant way. Once he had started the ball rolling Bernanke picked it up and has run with it better than Hussein Bolt breaking the world 100 meter dash. So it is ironic to me that the ex-Chairman has finally decided that the Federal Reserve is not all powerful and that unless the politicians get their act together that the looming Fiscal Cliff will create an economic problem.
By once again voting to postpone the inevitable day of reckoning our politicians have driven us once again to the edge of a Fiscal Cliff so the questions are how will it get resolved and if it does not what does that mean? Let's start with the second question first. The Fiscal Cliff was created in the third quarter of 2011 when congress was at an impasse regarding raising the debt ceiling. In order to push through the increase in the debt ceiling (they had to as the level of the debt had reached the maximum allowed) they agreed to severe tax increases and spending cuts in an effort to curb the spiralling budget deficit. In true political fashion they kicked the can to the end of Obama's first term and so these all kick in at the end of this year.
According to economic consensus if all of the tax increases and spending cuts go through it will shave roughly 4% off GDP growth. Some have it pegged at slightly less than that while others have it as high as 7%, but either way, as the economy is only growing at under 2% a year at present, shaving 4% off that pushes the United States into a recession instantly. So now that we know what the Fiscal Cliff means what is going to be accomplished between now, the Presidential election and the end of the year?
Politicians are by nature very slippery. It is a shame that we could not get the truth out of them, but that seems like an impossibility especially around election time. On the surface it appears that there are some cuts and tax increases that will be allowed to happen regardless of who is elected. Both candidates have said that the tax on the wealthy will happen and both have said that they want to try to protect the middle class, so if you strip out the tax increases that are pointed at the middle class you have taken out just under half of all the tax increases. The remainder will more than likely go through and this will create a minimum of a 2% drag on economic growth.
So what are the other pieces that will go through? On the tax side there is $79B to the wealthy, $140B increase in Social Security (this will hit small business hardest) and extended unemployment benefits for a total of $219B. On the spending side there is the Budget Control Act of $160B mostly targeted at defense spending for a grand total of $379B. If these are left to kick in that drag on the economy would knock a minimum of 2% off GDP and would effectively wipe out any growth in 2013. I would say that this is almost a sure thing regardless of who wins the election as if the Republicans lose, they will want to ensure that Obama does not spend in his second term and if Romney wins he will want to prove himself tough and will take the hard choices up front in an effort to give himself time to recover later in his term.
Combine this with weak earnings from businesses, a weak global economy and you have the very real potential that this 2% drag will be enough to push the United States into a recession in 2013. I still believe that it will be relatively mild in terms of GDP contraction, but I also believe that the stock market is priced for perfection and that a recession, no matter how mild will have a tremendous impact on the market.
Friday, October 26, 2012
Friday, October 19, 2012
Romney and the Market
"An election is coming. Universal peace is declared, and the foxes have a sincere interest in prolonging the lives of the poultry." - George Eliot
"Now, let me be clear. The path I lay out is not one paved with ever increasing government checks and cradle to grave assurance that government will always be the solution. If this election is a bidding war for who can promise the most goodies and the most benefits, I'm not your president. You have that president today." - Mitt Romney
Now I am not a politician. Never have been and I don't plan on ever being one, it is just not me. However, this election is going to have a dramatic impact on the market if Mr. Romney is elected AND if he stands by his election campaign rhetoric. As I have repeatedly mentioned in previous blog posts, the fate of the market is in the hands of the politicians. Never in my 25 years of trading the markets has it been this skewed towards their policies.
The main reason for this is that over the last few years government has been taking a larger and larger share of the market from buying up Collateral Mortgage Obligations (CMOs) to owning large blocks of GM and other companies to printing money in order to stimulate the market (Bernanke's words not mine). So the government through the Federal Reserve is trying to manipulate market prices and so far as the stock market is concerned it is working. But with an election looming what would happen if Romney gets elected?
The first thing he has mentioned is that he will remove the head of the Federal Reserve, Ben Bernanke, and replace him with someone that is of similar mind to his own. Based on the quote above that would mean cutting the money printing from the Federal Reserve and working towards balancing the budget. Without the support of the money printing machine the stock market will be destroyed and already it is showing signs of tiring and this is not being helped by poor results from bell weather companies such as IBM, Google, Microsoft and Apple.
So what of the bond market and interest rates? At present due to the continued economic weakness any elected president requires that interest rates remain subdued. If interest rates spike any form of recovery will be dismantled and there is no chance of balancing the budget as increased interest payments will offset any cuts in spending. There is one caveat here though, if the United States is seen to be more austere then there is a fair probability that the reward will be continued low rates. How low is a big question but I would be surprised to see rates on the 10 year note rise above 2.5% to 3.0% for the simple reason that during a stock market meltdown, demand for safety becomes tantamount and at present the only safety left is either gold or bonds. Furthermore while rates may start to rise higher, whomever is the Federal Reserve Chairman will have as his or her mandate that rates need to remain low.
So how can this be done without continued printing of money? He would have to rely on international buyers of United States debt. The Germans would argue that being more austere should lead to a dollar rally and this will attract foreign capital keeping interest rates low. Think about it for a moment, if the United States was seen to be balancing its budget and thereby taking care of its debt issues it would be viewed in a positive light as a good place to invest for safety. A dollar rally would also take the lid off much of the inflation drivers as oil and other commodity prices would fall. So if inflation remains muted and the currency remains strong there is every chance that interest rates will remain low for an extended period. Furthermore I would argue that if interest rates on the 10-year Treasury rose to say 4% that there would be an enormous demand for the product as that rate combined with a strengthening currency cannot be found anywhere. For a while it was available by investing in Australia and their economy boomed during this period, however it has since faded with the problems in China. That said it is a model that can be shown to work and one that I would expect Romney to hang his hat on.
So what are the chances that he gets elected? Well based on some of my sources it seems that the probability is relatively high. With unemployment stubbornly high and spiralling government debt it appears that most people want a change to see if that helps. In looking at the market one thing that it does not like is uncertainty and the coming election is creating uncertainty and this is showing up in the slow roll over in the indices. It is pointing toward a hard hit if Romney is elected but to me the interest factor is to see how interest rates react as if they do not spike on a Romney win then there is a better chance that he can pull off a continued low interest rate environment while implementing his policies.
The last criteria would be the longer term. I believe that while the market may sell off sharply in the near term on his announcement it is always hard to believe a politician until his actions start to match his words. Will Romney bow to congress once president and change his policies to suite them and will there be a congress that supports his measures if they get too tough to swallow. One thing is for sure, creating jobs by cutting the deficit, while it sounds good and will work in the long run, is sure to create short term pain and if I know anything about politicians it is that short term pain always wins over long term gains!
"Now, let me be clear. The path I lay out is not one paved with ever increasing government checks and cradle to grave assurance that government will always be the solution. If this election is a bidding war for who can promise the most goodies and the most benefits, I'm not your president. You have that president today." - Mitt Romney
Now I am not a politician. Never have been and I don't plan on ever being one, it is just not me. However, this election is going to have a dramatic impact on the market if Mr. Romney is elected AND if he stands by his election campaign rhetoric. As I have repeatedly mentioned in previous blog posts, the fate of the market is in the hands of the politicians. Never in my 25 years of trading the markets has it been this skewed towards their policies.
The main reason for this is that over the last few years government has been taking a larger and larger share of the market from buying up Collateral Mortgage Obligations (CMOs) to owning large blocks of GM and other companies to printing money in order to stimulate the market (Bernanke's words not mine). So the government through the Federal Reserve is trying to manipulate market prices and so far as the stock market is concerned it is working. But with an election looming what would happen if Romney gets elected?
The first thing he has mentioned is that he will remove the head of the Federal Reserve, Ben Bernanke, and replace him with someone that is of similar mind to his own. Based on the quote above that would mean cutting the money printing from the Federal Reserve and working towards balancing the budget. Without the support of the money printing machine the stock market will be destroyed and already it is showing signs of tiring and this is not being helped by poor results from bell weather companies such as IBM, Google, Microsoft and Apple.
So what of the bond market and interest rates? At present due to the continued economic weakness any elected president requires that interest rates remain subdued. If interest rates spike any form of recovery will be dismantled and there is no chance of balancing the budget as increased interest payments will offset any cuts in spending. There is one caveat here though, if the United States is seen to be more austere then there is a fair probability that the reward will be continued low rates. How low is a big question but I would be surprised to see rates on the 10 year note rise above 2.5% to 3.0% for the simple reason that during a stock market meltdown, demand for safety becomes tantamount and at present the only safety left is either gold or bonds. Furthermore while rates may start to rise higher, whomever is the Federal Reserve Chairman will have as his or her mandate that rates need to remain low.
So how can this be done without continued printing of money? He would have to rely on international buyers of United States debt. The Germans would argue that being more austere should lead to a dollar rally and this will attract foreign capital keeping interest rates low. Think about it for a moment, if the United States was seen to be balancing its budget and thereby taking care of its debt issues it would be viewed in a positive light as a good place to invest for safety. A dollar rally would also take the lid off much of the inflation drivers as oil and other commodity prices would fall. So if inflation remains muted and the currency remains strong there is every chance that interest rates will remain low for an extended period. Furthermore I would argue that if interest rates on the 10-year Treasury rose to say 4% that there would be an enormous demand for the product as that rate combined with a strengthening currency cannot be found anywhere. For a while it was available by investing in Australia and their economy boomed during this period, however it has since faded with the problems in China. That said it is a model that can be shown to work and one that I would expect Romney to hang his hat on.
So what are the chances that he gets elected? Well based on some of my sources it seems that the probability is relatively high. With unemployment stubbornly high and spiralling government debt it appears that most people want a change to see if that helps. In looking at the market one thing that it does not like is uncertainty and the coming election is creating uncertainty and this is showing up in the slow roll over in the indices. It is pointing toward a hard hit if Romney is elected but to me the interest factor is to see how interest rates react as if they do not spike on a Romney win then there is a better chance that he can pull off a continued low interest rate environment while implementing his policies.
The last criteria would be the longer term. I believe that while the market may sell off sharply in the near term on his announcement it is always hard to believe a politician until his actions start to match his words. Will Romney bow to congress once president and change his policies to suite them and will there be a congress that supports his measures if they get too tough to swallow. One thing is for sure, creating jobs by cutting the deficit, while it sounds good and will work in the long run, is sure to create short term pain and if I know anything about politicians it is that short term pain always wins over long term gains!
Friday, October 12, 2012
Where Has The Protection Gone?
"The Sharpe ratio measures the excess return (or risk premium) per unit of deviation in an investment asset or a trading strategy, typically referred to as risk, named after William Forsyth Sharpe." - Wikipedia
"If you are not willing to risk the unusual, you will have to settle for the ordinary." - Jim Rohn
"This report, by its very length, defends itself against the risk of being read." - Winston Churchill
In the world of finance the Sharpe ratio is a key aspect of investment. What you want is a high Sharpe ratio meaning for every unit of risk that you are taking you are receiving more than a fair share of reward in the form of return. For example, if you invest in a highly speculative stock that has a good chance of providing you with returns of 50% a year for the next five years and only a small chance of a loss, this position would provide you a high Sharpe ratio. Taking this one step further, funds are measured against an index and those that beat the index with a low level of volatility (risk) provide the investor with a high Sharpe ratio. They provide the investor with a higher return for the same or lower amount of risk. As an investor this is what you want!
So how is a high Sharpe ratio achieved? The easiest way is to find a basket of diverse investments that produce a high rate of return. This sounds easy and in many instances it is sold as being easy to do, but a recent study showed that not only do most investments have poor Sharpe ratios but that these numbers are dropping.
The first problem is that in the modern world of finance finding or creating a diverse portfolio of investments is almost impossible. Most people are ignorant to the fact that buying an array of mutual funds does not achieve the diversity that they need. This is due to the fact that many of the mutual funds hold the same investments even if they call themselves different things. For example a growth large cap fund and a value large cap fund more than likely have as their largest holding Apple. Buying both of these means that you are now doubly exposed to a movement in the price of Apple. This is great while it goes up but it is not a diverse portfolio.
A greater problem for the prudent investor is that the value of diversifying is losing its merit at precisely the time that it is needed most. The way that a portfolio is created is by finding investments that are not correlated to one another. As an example if you know that Apple will go up in price if the price of the raw materials of copper and nickel go down because Apple's profits will rise, then it would be said that copper and nickel have a negative correlation to Apple stock. So by buying all of these you would be protected as if Apple goes up copper and nickel go down. The one offsets the other. This reduces the risk of the portfolio but in this example would not provide you any capital gain.
In the real world it is impossible to find a correlation as perfect as this so money managers and investors look for investments that will not move in exactly the same direction or at the same speed at the same time. The idea is to weight the portfolio to capture some upside while limiting the downside which results in a properly diverse portfolio. Now if this portfolio beats the index tracked then it would have a high Sharpe ratio as the risk of the overall portfolio is reduced and it is still producing gains in excess of the market. This is the holy grail of investing but it is seldom if ever achieved.
The reason for this is many fold and I will delve into a few reasons here. The first reason is that correlation between asset classes are constantly changing. The trader knows that correlation trades last until they don't, meaning that you should trade the relationship until it breaks. A classic example of this was that up until recently if the dollar strengthened the market went down and vice versa. A great trade would therefore be to be long the market and the dollar and pocket the spread, however that correlation has weakened recently breaking the trade. In a portfolio to properly handle this constant change in correlations you need to constantly change your portfolio allocations. This comes with the added risk of the cost of moving the investment and the fact that once you have moved you may miss a good run in the position that you just sold.
The second reason is that correlations between all assets are becoming more closely linked. International stocks used to be a good hedge against movements in the United States back when I got into this game in 1985, but now they all move together. I also remember a time when commodities were a great hedge but nowadays that is also gone. Think about copper, it seems to lead the market lower or higher as people use it as a leading indicator rather than as a hedge.
Finally, as we have seen during the recent market melt down, at the exact time that the diversification is needed to protect your portfolio (when the market explodes) is the exact time when correlations move together and everything gets killed at once. So while countless hours are spent trying to build a perfect portfolio to protect against Armageddon, when that day shows up everything is pounded at once eliminating the desired protection.
So what is one to do? As with all studies it is far easier to link the main investment opportunities together than to dig for things that lie outside the box. For one, most people and most studies exclude private equity investments. This is why these are not typically linked to other investments. Just because the market is tanking does not mean that your investment in privately held regional Internet or biotech company has been impacted. Looking further, while local real estate markets are being pounded does not impact the short sellers or the buyers of foreclosures, in fact it benefits their business tremendously.
I remember being an analyst in the early 1990's during that recession and while many of my friends were struggling our business was flourishing. The reason was we specialized in bankruptcy and commercial litigation, both of which are busiest during recessions. The key to the story is to look at your portfolio and see what your true weighting is in each asset class and then try to find something that will provide a level of protection if and when the market collapses.
As with everything there are no guarantees but hiding the money under a mattress comes with its own set of risks such as loss to inflation, risk of theft or being lost in a fire. Look at alternatives to the standard investment portfolio and it should stand you in good stead during these tough times.
"If you are not willing to risk the unusual, you will have to settle for the ordinary." - Jim Rohn
"This report, by its very length, defends itself against the risk of being read." - Winston Churchill
In the world of finance the Sharpe ratio is a key aspect of investment. What you want is a high Sharpe ratio meaning for every unit of risk that you are taking you are receiving more than a fair share of reward in the form of return. For example, if you invest in a highly speculative stock that has a good chance of providing you with returns of 50% a year for the next five years and only a small chance of a loss, this position would provide you a high Sharpe ratio. Taking this one step further, funds are measured against an index and those that beat the index with a low level of volatility (risk) provide the investor with a high Sharpe ratio. They provide the investor with a higher return for the same or lower amount of risk. As an investor this is what you want!
So how is a high Sharpe ratio achieved? The easiest way is to find a basket of diverse investments that produce a high rate of return. This sounds easy and in many instances it is sold as being easy to do, but a recent study showed that not only do most investments have poor Sharpe ratios but that these numbers are dropping.
The first problem is that in the modern world of finance finding or creating a diverse portfolio of investments is almost impossible. Most people are ignorant to the fact that buying an array of mutual funds does not achieve the diversity that they need. This is due to the fact that many of the mutual funds hold the same investments even if they call themselves different things. For example a growth large cap fund and a value large cap fund more than likely have as their largest holding Apple. Buying both of these means that you are now doubly exposed to a movement in the price of Apple. This is great while it goes up but it is not a diverse portfolio.
A greater problem for the prudent investor is that the value of diversifying is losing its merit at precisely the time that it is needed most. The way that a portfolio is created is by finding investments that are not correlated to one another. As an example if you know that Apple will go up in price if the price of the raw materials of copper and nickel go down because Apple's profits will rise, then it would be said that copper and nickel have a negative correlation to Apple stock. So by buying all of these you would be protected as if Apple goes up copper and nickel go down. The one offsets the other. This reduces the risk of the portfolio but in this example would not provide you any capital gain.
In the real world it is impossible to find a correlation as perfect as this so money managers and investors look for investments that will not move in exactly the same direction or at the same speed at the same time. The idea is to weight the portfolio to capture some upside while limiting the downside which results in a properly diverse portfolio. Now if this portfolio beats the index tracked then it would have a high Sharpe ratio as the risk of the overall portfolio is reduced and it is still producing gains in excess of the market. This is the holy grail of investing but it is seldom if ever achieved.
The reason for this is many fold and I will delve into a few reasons here. The first reason is that correlation between asset classes are constantly changing. The trader knows that correlation trades last until they don't, meaning that you should trade the relationship until it breaks. A classic example of this was that up until recently if the dollar strengthened the market went down and vice versa. A great trade would therefore be to be long the market and the dollar and pocket the spread, however that correlation has weakened recently breaking the trade. In a portfolio to properly handle this constant change in correlations you need to constantly change your portfolio allocations. This comes with the added risk of the cost of moving the investment and the fact that once you have moved you may miss a good run in the position that you just sold.
The second reason is that correlations between all assets are becoming more closely linked. International stocks used to be a good hedge against movements in the United States back when I got into this game in 1985, but now they all move together. I also remember a time when commodities were a great hedge but nowadays that is also gone. Think about copper, it seems to lead the market lower or higher as people use it as a leading indicator rather than as a hedge.
Finally, as we have seen during the recent market melt down, at the exact time that the diversification is needed to protect your portfolio (when the market explodes) is the exact time when correlations move together and everything gets killed at once. So while countless hours are spent trying to build a perfect portfolio to protect against Armageddon, when that day shows up everything is pounded at once eliminating the desired protection.
So what is one to do? As with all studies it is far easier to link the main investment opportunities together than to dig for things that lie outside the box. For one, most people and most studies exclude private equity investments. This is why these are not typically linked to other investments. Just because the market is tanking does not mean that your investment in privately held regional Internet or biotech company has been impacted. Looking further, while local real estate markets are being pounded does not impact the short sellers or the buyers of foreclosures, in fact it benefits their business tremendously.
I remember being an analyst in the early 1990's during that recession and while many of my friends were struggling our business was flourishing. The reason was we specialized in bankruptcy and commercial litigation, both of which are busiest during recessions. The key to the story is to look at your portfolio and see what your true weighting is in each asset class and then try to find something that will provide a level of protection if and when the market collapses.
As with everything there are no guarantees but hiding the money under a mattress comes with its own set of risks such as loss to inflation, risk of theft or being lost in a fire. Look at alternatives to the standard investment portfolio and it should stand you in good stead during these tough times.
Friday, October 5, 2012
The Independence of the Federal Reserve
"The Congress established maximum employment and stable prices as the key macroeconomic objectives for the Federal Reserve in its conduct of monetary policy. The Congress also structured the Federal Reserve to ensure that its monetary policy decisions focus on achieving these long-run goals and do not become subject to political pressures that could lead to undesirable outcomes." - Board of Governors of the Federal Reserve System
The Federal Reserve must be celebrating today as unemployment dropped below 8% for the first time since 2009. Finally the open ended purchasing of toxic debt and other assets, keeping interest rates at unsustainable low levels, has paid off as we are now trending in the right direction. A number of interesting things jump out of the page regarding these numbers.
First of all is the fact that the majority, 582,000 of the 873,000 jobs created, were part time. Now I wonder how many of those part timers were looking for a full time job. Furthermore it ties in with an article written in the local news paper last week that there are plenty of part time jobs available as stores ramp up for the holiday season. Is it just me or does this holiday season seem to happen earlier and earlier every year? It appears that retailers are trying to get a jump on the competition and boost frail sales numbers but either way part time jobs come and go and this is a seasonal adjustment.
The next interesting question is the timing of the release. It could not have happened at a better time for Obama. Interesting again is the fact that the Bureau of Labor Statistics had been under reporting the actual employment numbers all year and suddenly found their mistake this month. I don't know about you but to me the timing is questionable. Certainly Obama will use this number to show the world how effective his leadership has been and that sticking to his plan will create jobs. So let's look at the plan.
More than a trillion dollar a year deficits for as far as the eye can see covered by the printing press that is the Federal Reserve. The Federal Reserve's purchases of the government's massive trillion plus dollar deficits is what is called "monetizing" the debt. By monetizing the debt the Federal Reserve is giving Congress a blank check book saying spend as much as you want and we will buy the junk. Fiscal discipline is out of the window and in its place is a government that is out of control attached firmly to the umbilical chord of the Federal Reserve to preserve their madness. How anyone in government can look themselves in the mirror and say "It is only a few more trillion of my constituents money but it is well spent" is definitely not in touch with reality. That is why mirrors are banned in the White House! Only joking of course but how else can you wander around actually believing that what you are doing is solving the problem?
This dysfunctional government is creating a vast wall of debt that is rapidly becoming unmanageable however as long as the Fed keeps interest rates at the lowest level in our recent history the debt service charge is as low as it was $7 trillion dollars ago. Remember back 10 years ago, everyone was shocked at a $158 billion deficit and $6 trillion in debt. What would we give for that "little" of a number today? I bet that you cannot imagine us ever going down to such a low level again, but unless we do trouble lurks ahead. Just think about it for a minute, 10 years ago a massive deficit of $158 billion and now the deficit is 10 times that amount! That equates to a growth rate of 22% compounded annually!
So let's look at the results of all of this printing. Jobless rate of 8% five years after the Recession began and this is supposedly the recovery period. 47 million Americans on food stamps. Four years of declines in household income to a level equal to that of 1995. The lowest labor level participation since 1981. Gasoline prices above $4 a gallon up from $1.50 in 2002. Is this a recipe that is working? And yet the Fed continues to believe in printing money to bolster stock prices, housing prices and raise asset values so that the man in the street "feels" more wealthy and then will open their wallet to buy things stimulating the economy. Now I did not make that last sentence up, it comes directly from the mouth of the Fed Chairman! So this is how yous timulate an economy, manipulate all asset prices to give everyone the warma nd fuzzies so that tehy can spend money they do not have and get creamed by the next burst bubble. Nice!
Let's not also forget that they also need to monetize the ludicrous policies of the government and you have a situation where the independence of the Federal Reserve is vaporized. No longer are their policies to assist employment and keep prices stable for we have just seen that neither of these metrics is happening. What is happening is that they are manipulating prices and letting the government spending spin out of control with no accountability. Please do not get sucked into this manipulated market rally, look around you and see what is going on and protect your assets.
The Federal Reserve must be celebrating today as unemployment dropped below 8% for the first time since 2009. Finally the open ended purchasing of toxic debt and other assets, keeping interest rates at unsustainable low levels, has paid off as we are now trending in the right direction. A number of interesting things jump out of the page regarding these numbers.
First of all is the fact that the majority, 582,000 of the 873,000 jobs created, were part time. Now I wonder how many of those part timers were looking for a full time job. Furthermore it ties in with an article written in the local news paper last week that there are plenty of part time jobs available as stores ramp up for the holiday season. Is it just me or does this holiday season seem to happen earlier and earlier every year? It appears that retailers are trying to get a jump on the competition and boost frail sales numbers but either way part time jobs come and go and this is a seasonal adjustment.
The next interesting question is the timing of the release. It could not have happened at a better time for Obama. Interesting again is the fact that the Bureau of Labor Statistics had been under reporting the actual employment numbers all year and suddenly found their mistake this month. I don't know about you but to me the timing is questionable. Certainly Obama will use this number to show the world how effective his leadership has been and that sticking to his plan will create jobs. So let's look at the plan.
More than a trillion dollar a year deficits for as far as the eye can see covered by the printing press that is the Federal Reserve. The Federal Reserve's purchases of the government's massive trillion plus dollar deficits is what is called "monetizing" the debt. By monetizing the debt the Federal Reserve is giving Congress a blank check book saying spend as much as you want and we will buy the junk. Fiscal discipline is out of the window and in its place is a government that is out of control attached firmly to the umbilical chord of the Federal Reserve to preserve their madness. How anyone in government can look themselves in the mirror and say "It is only a few more trillion of my constituents money but it is well spent" is definitely not in touch with reality. That is why mirrors are banned in the White House! Only joking of course but how else can you wander around actually believing that what you are doing is solving the problem?
This dysfunctional government is creating a vast wall of debt that is rapidly becoming unmanageable however as long as the Fed keeps interest rates at the lowest level in our recent history the debt service charge is as low as it was $7 trillion dollars ago. Remember back 10 years ago, everyone was shocked at a $158 billion deficit and $6 trillion in debt. What would we give for that "little" of a number today? I bet that you cannot imagine us ever going down to such a low level again, but unless we do trouble lurks ahead. Just think about it for a minute, 10 years ago a massive deficit of $158 billion and now the deficit is 10 times that amount! That equates to a growth rate of 22% compounded annually!
So let's look at the results of all of this printing. Jobless rate of 8% five years after the Recession began and this is supposedly the recovery period. 47 million Americans on food stamps. Four years of declines in household income to a level equal to that of 1995. The lowest labor level participation since 1981. Gasoline prices above $4 a gallon up from $1.50 in 2002. Is this a recipe that is working? And yet the Fed continues to believe in printing money to bolster stock prices, housing prices and raise asset values so that the man in the street "feels" more wealthy and then will open their wallet to buy things stimulating the economy. Now I did not make that last sentence up, it comes directly from the mouth of the Fed Chairman! So this is how yous timulate an economy, manipulate all asset prices to give everyone the warma nd fuzzies so that tehy can spend money they do not have and get creamed by the next burst bubble. Nice!
Let's not also forget that they also need to monetize the ludicrous policies of the government and you have a situation where the independence of the Federal Reserve is vaporized. No longer are their policies to assist employment and keep prices stable for we have just seen that neither of these metrics is happening. What is happening is that they are manipulating prices and letting the government spending spin out of control with no accountability. Please do not get sucked into this manipulated market rally, look around you and see what is going on and protect your assets.
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