Public opinion appears to blame the free market system for the current state of affairs in which we find ourselves. Voters have turned overwhelmingly to the federal government for answers to the economic malaise that exists throughout the 50 States. The Obama administration has spent hundred of billions of dollars already and pledged trillions more in an effort to get consumers spending and the economy expanding once again - to the applause of a majority of U.S. citizens. Yet, it is the misguided fiscal and monetary policies of the last 50 years (with the exception of a brief period in the 1980s) that have culminated in the worst recession since the Great Depression. It is the continued application of those policies that will almost certainly lead to more economic pain in the coming decades. Americans must get a clue! It is the Federal Government which bears overwhelming responsibility for the current mess. It is the Federal Monster that must be reigned in and subjugated to the will of the free people of the United States of America, or most of us will die poor.
Not interested in politics? You should be. Politics is the process by which groups of people make decisions, among the most important of which are how to allocate scarce economic resources. Politics, when left to run amok, can ruin an economy, as has happened in Zimbabwe, where inflation is running at 11,200 percent per annum. The United States is not immune to hyperinflation and, in fact, may be barreling head on into just such an environment. Highly inflationary environments are not typically good investing environments. Wealth preservation becomes problematic to say the least, never mind wealth creation.
Right now the markets are running nicely and many economists and political pundits are declaring victory over the recession that has been with us now since sometime in 2007 (the precise start of the economic contraction is still open to debate and will likely be moved back closer to 2006 (once the government is finished massaging the data for political purposes and the academics move in to correct the record). The folks at ECRI say that their leading indicators are pointing toward a very strong recovery in the economy; they are far less sanguine about the chances of a sustainable recovery.
The problem is that the Obama Administration is not addressing the underlying structural problems with our economy, choosing instead to simply stimulate the economy with additional credit, which may have positive short term consequences, but is unlikely to provide a lasting source of economic expansion. We have too much debt; the government is loading more debt on at a furious rate. We have too little manufacturing; the government is doing nothing to address the hollowing out of American industry, which has occurred over the last 30 years. We are fighting two wars, but do not have the money to pay for either. The cold war is over. We need to pull out of most parts of the world. We are not the world's policeman; there is no money in our Treasury for it and the world does not reward us for it.
Get the Federal Government out of state and local affairs. Shut down the giant spending machine that is increasingly sapping our national vitality and robbing us of our individual initiative. Get government out of business so that businessman can compete against one another, rather than having to compete against a government that can change and manipulate the rules at will to ensure supremacy. Let American ingenuity have free reign once again. Let small businesses grow unfettered by government interference! Job growth will follow. Real income growth will follow (Real income is currently below 1973-1975 recession levels.)
The stock market isn't likely to keep its gains. The consumer is 70% of the economy and the consumer has no money to spend other than what the federal government is handing out. The economy is highly likely to slip back into recession more or less as soon as the federal government stops giving people money to spend. The profit recovery implied by the stock market rally from the March lows is unlikely to materialize. We are entering silly season in the stock market - that period where the boys on Wall Street underpin the market in an effort to maximize year-end bonuses. The most likely outcome of this secular bear market rally is a nasty sell-off sometime early next year, perhaps around the March time-frame.
We are maintaining our price discipline by refusing to pay up for businesses that are no longer undervalued, and by taking profits on companies that are up 40% or more since the March lows (business valuations do not change so rapidly as that in the real world). We are acknowledging the lunacy of our federal government's (this isn't a Democrat/Republican thing by the way - both parties are responsible) fiscal and monetary policy by favoring tangible assets over financial, and international assets over domestic.
We strongly urge investors to tread with extreme caution over the next six months as the government's massive spending winds down and the underlying structural problems reassert themselves. The piper has not yet been paid for 30 years of over consumption, over spending, and easy credit.
