Thirty Year Bear Market

An economic forecaster once told a class I attended that he loved to make thirty year forecasts because no one would remember his forecast when the events actually occurred. So he could collect his fee without fear of request for a refund. I will make a thirty year forecast, nonetheless. We are in for soft and declining markets for the rest of my life.

The unfolding of the banking problems in the past two years and the ongoing subsidization of the housing and stock markets via low-to-negative real interest rates will have predictable effects. The current situation is complicated by the de facto pegging of the dollar by international central banks. The real effects of the subsidization are wealth transfers from productive to unproductive factors of production. The chief beneficiaries of the transfers are beneficiaries of government (both employees and welfare recipients), investors and speculators in assets, including stocks, currency, bonds, commodities and real estate. The chief losers are savers in cash and productive workers.

The debt of the US government is growing in absolute numbers to an extent unparalleled in history. Generally, large government debt increases have been associated with monetary expansion and inflation. This time, central bank dollar pegging has limited inflation in the US. The pegging is a form of international inflation. That is, the nations that are supporting the dollar are making their citizens poorer in order to keep them working.

Ultimately, the complex deception becomes untenable. The public starts to question why harder work is met with ever lower rewards. Larger and larger transfers to asset holders are required to keep markets steady, and workers will become poorer and poorer, driving increasing numbers out of the labor market. Democrats and collectivist altruists will say that the deprivation of the productive is in the public interest.

It has become apparent that the US government will not allow the stock and real estate markets to fall. As well, it cannot afford to pay off its massive, ever-increasing debts. So it will depreciate the dollar.

The alternative to stock markets that are soft and retain value only because of government subsidy and dollar holdings that are vulnerable to hyper inflation is commodities. But there is no reason to trust the stability of commodity markets. The pegging system coupled with carry trade and hedge fund activity ensures support for the dollar when it weakens.

The forces for inflation and dollar (and international currency) depreciation are far more powerful than the forces for stability, for the debt is growing too quickly to ever be repaid; the Fed is creating a bubble in US Treasury debt; and the Fed has shown that it will not permit real estate or stock markets to fall. So in the long run, over thirty years, commodities will be better than dollars. But it will be a bumpy road.

Given the uncertainty, firms cannot think long term in the new world socialist order and so sustainable economic growth is out of the question for the foreseeable future. Likewise, the growth absorbing power of government will ensure a declining economy. Innovation in the US once powered the world's advancement, but unless the Asian nations more aggressively permit entrepreneurship, there is no longer a growth engine. It certainly is not the United Socialist States of America. As George Soros pushes for an American society ever more closed and totalitarian, opportunities for shorting and going long on commodities and currency become greater.

Do not expect the highs of the early 2000s to be significantly surpassed in real dollars. But there will be plenty of inflation to confuse everyone.

When Will They Ever Learn?

Larwyn just forwarded a post by the Dinocrat blog that led me to paraphrase the old '60s anti-war song "Where Have All The Flowers Gone?":

Where have all the conservatives gone?
Long time passing
Where have all the conservatives gone?
Long time ago
Where have all the conservatives gone?
Gone to big government solutions every one
When will they ever learn?
When will they ever learn?

Dinocrat links to Mike Masters' Senate testimony and refers to Dan Dicker's article. Masters and Dicker blame speculators for increasing commodity prices and aim to regulate commodities markets. Dinocrat doesn't indicate whether Masters and Dicker are from Wall Street, are long on stocks or short on commodities and are offering self-serving testimony to Congress or whether they just like the Bear Stearns bail out. Wall Street dislikes commodity speculation.

There is a much more accurate explanation for the run up in commodity prices than commodity speculation: Federal Reserve Bank inflation, which is now currently working its way through the economy. If futures prices are higher than the underlying demand warrants, there will be a correction in prices. The index speculators will pay for their errors if commodities are at higher-than-market prices. As well, foreign producers can enter the market and undersell inflated commodity prices.

There is a more fundamental error in the Masters-Dicker proposals. Few people can outsmart financial or commodity markets, and those who can are very rich. Why should anyone believe Masters and Dicker are smarter than the funds who are buying the commodities indexes? Passing a law limiting economic activity because a few observers have a hunch based on limited information that they are right and the market is wrong would be inept.

If limits are put on ways of trading or holding commodities, these will not reduce commodity prices. For example, if pension funds are not permitted to hold commodities, traders outside of pension funds will profit from the Masters proposals. Likewise, if limits are put on commodity prices, then there will be shortages.

It is true that across-the-board price increases are a major public concern, but these have been caused by the Federal Reserve Bank, not by speculators. If the speculators are over-bidding, then farmers and commodity producers from overseas will undercut the speculators and bankrupt them.

We do not need a "Federal Commodity Commission" to create more bureaucratic waste and to rip off the American public to a greater extent than the Federal Reserve Bank already does.

Howard S. Katz's Portfolio Returns 20% in Two Weeks

I have been subscribing to Howard S. Katz's newsletter The One Handed Economist for about 3 years. Howard tracks what a "conservative" portfolio. He bases his analysis on Austrian economics as well as technical analysis. The portfolio tracks from 1999. During this period the major stock indexes have gone up and down but now are not much higher than in 1999. In contrast, by the first week of March 2008 Howard's conservative portfolio was up about 115% over the nine-year period. Howard's latest edition came out a few minutes ago. In the past two weeks his portfolio went up better than 20%. It was about 215 in early March when he called a top in precious metals. He moved into several construction stocks which brought the portfolio up to 260. Wow! This was the kind of thing that until now I had read about but not directly experienced. Yay Howard!

Read this doc on Scribd: katz conservative