The End of "Growth"

I am bearish on most equities. Not much of a secret around here. The equity market in the U.S. is pricing in future "growth", and there is no "growth" to be had.

When you see conditions where stocks are priced at 20X or 30X or 50X earnings, that stock market believes that earnings growth, and eventually top line growth, will be commensurate.

I see little chance of this (growth). Ergo, buying stocks as investments that do not pay, and do not have a history of increasing, dividends is a fools errand. In most cases I would prefer corporate bonds to corporate stocks. I do like big dividend payers, but WHEN you buy them, and at what price, obviously matters a great deal.

The most likely course of events here is continued deflation followed by currency disaster and U.S. sovereign debt default. If I knew exactly when (and if I were correct in the first place) these events would play out... the Russian mob would be looking to kidnap me, so I guess its ok that I do not.

The Silver/Gold ratio is back to 70. Not sure what it means, but I think I will be buying a little Silver here at some point. In fact, I have sold out of the money puts for our Hedge Fund - more than that, I cannot say in this forum. I am not going to "back up the truck", because I still fear some kind of dislocation that will bring sellers to the market looking to raise money for margin calls. A long Silver/short Gold strategy might make sense for sophisticated traders... and it might not. My sense is I will put a trade like that on at some point, but have not as yet.

It is my sense that we are about 25% through the U.S. Oil import crisis give or take. This phenomena will not be linear, so there will be flat periods and accelerated periods, but by 2020, it will mostly be done with, and the next 10 years will be among the most interesting decades of the past couple of centuries.

It will be interesting to see how population is distributed in the U.S. Over the past 50 years, the U.S. population migrated to the major cities, as has been the case in much of the world. Each country, though, has different reasons for this phenomena. In the U.S., financial services grew from less than 4% of GDP after WWII (and was roughly 5% in the mid 1970's) to over 23% of GDP in 2007 (as a percentage of earnings in the S & P 500, the percentage was somewhat higher... in some years financial services earnings totaled nearly 50% of the S & P 500's earnings). This work was in the cities, not in the country side, and we built the office towers, dry cleaners, and restaurants et al, in the cities to support the burgeoning industry's work force.

Now that process has come to an end, and is in fact in reverse. It is rather bizarre that 23% of the nation's GDP came from moving bytes around on a computer screen... and this does not take into account the industry's legal, accounting, and technology support cast... unto themselves no small percentage of GDP... Remember these bytes are merely ownership interest in the world's finite: Ranching, Agriculture, Fisheries, Forests, Minerals, Energy, and Water assets. You can increase the number of bytes. The amount of those underlying assets? Not so much.

(Somewhere along the line it seems that we expected that 100% of the work force would work moving bytes around a screen and we would "off shore" everything else... )

For better or worse, the financial services industry over the next decade or 2 will revert to 4 or 5% of GDP, down from 23%. That means a lot of things... like 80% of the office space that was built to house these workers will no longer be needed, and 20% of that is already empty. There are many more impacts and outcomes on the way... this is the very definition of "no growth" - and that's if we are lucky. In a mature economy there is a great deal less to do. "Maintenance" is very much different from "Growth", and this is very hard to manage politically. For instance, let us say the new, no growth economy requires .97X automobiles, not 1.00X. Overly simplified, either we pay each worker less, or we fire a certain number of workers, or the industry goes bankrupt. Of course, the first 2 are politically unacceptable, and so we go for option 3... sound vaguely familiar? What if its 3%, or 5% or (gasp!) 12% less per year, every year?

This is what is going on all over the economy. Our governments, local, state, and federal, budgeted growth in perpetuity. Government unions were fantastic marketers during the good years, pulling at the heartstrings of populace, most whom have never heard of the mathematical concept "e", and were able to negotiate tremendous pay and retirement packages for school teachers, police, fire, et al, based on never ending growth. Then the growth stopped, as it must must by mathematical necessity, and here we are- with the "have nots" struggling and suffering to pay the pension and healthcare benefits of the "haves". Welcome to Oil and Water, or socialism mixed with capitalism.

Given the lunacy of the political extremes, there is no hope for a rational, negotiated outcome. It then follows that debating and inserting macro solutions will fail. This makes a great deal of sense of what we are seeing in government at every level. Government is in the business of making macro adjustments and solutions, and I as I just laid out macro solutions won't work under ANY circumstance. This is why your "Hope and Change" has turned out to be more of the "Same old Sh*t" - and it is not anyone's or any political party's fault.

"It is what it is".

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