Thursday, November 27, 2008

A Look Ahead

Let us look ahead.  Not next quarter, or the one after that.  Not next year, not the year after.  We are constantly told by Wall Street and Washington to look at the "Long Term".  5, 10, 20 years.  

Earlier this year I made the mistake of thinking that the deflationary pressures in the Anglo world's (and the Euro zones) Real Estate and debt instruments (declining credit expansion, then contraction and availability) would not be able to overwhelm the energy shortage.  I thought the only thing that could have brought this about were poor monetary policy decisions by the Fed, ECB or some other extraneous event.  Recently, I even began to think that house prices were not too far from a bottom because I believed that the Fed would be able to "reinflate".  Oh, well.  At least I was not confident enough to put my money, or anybody else's money, where my mouth was.

Successive U.S. bailouts of various companies or industries are not a means to prosperity.  I firmly believe that the actions our government are taking are intended to slow the rate of change so that the American people do not panic and turn this into an outright collapse.  I certainly hope they succeed - I value the freedoms I have (though I would like to stop the erosion of these), law and order, public safety, clean water, etc... that we Americans take for granted but are by no means assured.  I also firmly believe that Messrs. Bernake & Paulson, and Obama's economic team know precisely how bad the situation is, and I believe they are going to borrow and spend and print and beg and steal... whatever is necessary "by whatever means necessary" in order to prevent that collapse.  Each dollar bill should come with a disclaimer similar to security prospectuses: 

"There can be no assurance that we will achieve our objectives".

Encouraging consumption, rather than savings and investment, only digs the hole we find ourselves in deeper. (As we all know, when you find yourself in hole - stop digging).  The U.S. has been able to maintain its standard of living through the export of its currency as the world's reserve currency, but we are doing our best to destroy the future value of the very thing standing between us and disaster (not that it is sustainable for long).  Were it not for the US$'s role in world trade, the U.S. would be in the same boat as Argentina, and I am here to tell you that that circumstance will not last for the "Long Term".  So why pretend that it will?

I was never a "Tin Foil Hat" kind of "Gold Bug" guy.  Then a couple of years ago it dawned on me that if the U.S. energy supply declined for ANY REASON economic growth would stop, and then contract.  The only reason to hold U.S. denominated investments versus hard assets was continued economic expansion.  Now that expansion has come to an end.  Suddenly, I felt an overwhelming desire to exchange some $'s for Gold.

I know a number of folks feel that Obama is going to do this, that, or the other thing... and then it is back to the socialist utopia that the Left has been agitating for for decades.  I am willing (and I have) to bet big that this will not happen, and that when the Obama honeymoon is over and the economy is still deteriorating the U.S. markets and currency will be in a shambles.  This will not be Obama's fault, nor GWB's, Bill Clinton, nor Bush, Reagan, Carter, Nixon, Johnson, Kennedy, etc... WE have collectively done this to ourselves, and assigning blame will not save a drowning man, nor your career or investments.  In the environment I foresee a political crisis is all but certain, and a political crisis would spell US$ and market disaster.  Not that a political crisis is necessary for this outcome - it just speeds the rate of change drastically.  
The "Long Term" investment horizon we are pitched by Wall Street's hucksters and Washington's narcissists just ain't the "Long Term" we are going to get.  

"False Promises" will by necessity be replaced by hard assets.  People know what the value of a bushel of corn or wheat, an ounce of Gold, a barrel of Oil, or an acre of farmland is in any given market anywhere in the world.  The value may vary by local, market conditions, etc... but for the fellow needing one or more of these commodities value is established., and trade can commence.  Not so financial assets, all of which are based on a promise from the contra party, the party on the "other side".  These will turn out to be, for the most part, "False Promises", indeed (in my humble opinion at THIS moment).

Hard assets will be the flavor for the next decade or two (or three).  For my money, rallies are an opportunity to sell financial assets, and this collapse in commodity prices is giving folks who missed the last commodity run a second chance.    Either way, by mathematical necessity, we will become poorer in the aggregate.  Sometimes, losing less than you might have otherwise is the best you can do.  Of course, those who can get this right will prosper wildly.  

Meanwhile, back at the economy...

As I said earlier, we cannot "bailout" our way to prosperity.  We can affect the nominal rate of change, but that's about it.  House and commercial property values are going to decline for years, and then stagnate for years more.  That means more deflation, a contracting economy, and lower stock prices in real terms.  In short order, declining energy availability will rear its ugly head, further contracting economic output.  As this unfolds, it appears that our government is bound and determined to deficit spend our way to prosperity, which, if they were prescient and got EVERYTHING right, they might actually be somewhat helpful (as opposed to a complete disaster).  I would bet against this at every turn.  

It is my opinion at THIS moment that the U.S. economy is going to worsen over time for many years, with all of its concomitant effect on everything else.  That does not mean we will never have a rally in the market, or a couple quarters of expansion with politicians and Wall Street waving the "All Clear" flag - we will.  It DOES mean that these are merely short term opportunities, and that you should not get sucked back into the "Long Term" pitch.  

Good Luck

Mentatt (at) yahoo (dot) com


Anonymous said...

Thanks for taking family time to write this up. Much appreciated and very helpful.

Enjoy your holiday.

bureaucrat said...

Long, long term, humanity got along just fine without the oil and natural gas and electricity that is so common and relatively cheap today. There will be some inconveniences, our household farm animals will smell more, we may not have the BEST medicine, and we may not get down to Florida every year for summer vacation. We might be more exposed to famines and plagues. But beyond that, we will make due. Although I do have to ask .. just what good is gold and silver in an agrarian economy with nowhere to escape to to spend it? If I want to accumulate "wealth," I'm thinking I should have white rice and white sugar and cigarettes, stuff that lasts a long time and has "use."

Anonymous said...

i read your threads daily. i felt this is relative to what you post although off topic to this thread.
this is the future. they say they can produce the oil at 80 a barrel. this would solve our mass landfill problem along with our dependence on foreign oil. although im sure the big companies will buy up or somehow ruin this technology.

Donal Lang said...

To Bureaucrat; that's all fine except for the fact that in my lifetime the population of the World has more that DOUBLED, from 3 billion to 6.8 billion, and in 40 years time is expected to reach 9.5 billion, all fed from oil-fuelled crops.The last time we lived without oil the population of the World was about 1.5 billion, and many of those were starving!

Re Greg's post; its hard to see how tranferring a bankrupts debt from the private sector to the government changes much - the debt still exists and while the company (or bank) may no longer have to file for insolvency, nothing has been solved. So, long-term, we've just re-scheduled Judgement Day.