Sunday, August 15, 2010

Lorimer Wilson's Interesting Observation on Kitco

Quoting Jeff Nielson, Lorimer Wilson makes the following observation in his article on Kitco.  It would be funny if it wasn't tragic:

"Nielson pointed out that 'decades of gerrymandering have transformed roughly 80% of U.S. electoral districts into the permanent holdings of one or the other of the two U.S. political parties. As such, the candidates of the favoured party are essentially guaranteed seat for life and this eliminates any incentive for them to produce positive results for their own constituents - other than bringing home the ‘pork’. As a result, partisan politics has taken precedence over any, and all, other considerations in the U.S. and regretfully, the #1 rule of partisan politics is to never allow the party in power to accomplish anything good of significance.
The one exception to this scenario of total indifference is the American Association for Retired Persons (AARP) which is not only the largest voting bloc in the U.S., but it is comprised of the only segment of the U.S. electorate which has a consistently high 'turn-out' in every election. Not surprisingly, their two most important issues are Social Security and Medicare - the two social programs which are 100% certain to bankrupt the U.S. economy. Barring a complete 'metamorphosis' of the entire U.S. political system, these 'unfunded liabilities' are essentially carved in stone, since they are the only issues where doing something unpopular could threaten the security of the sitting politician and this leaves current and future U.S. governments with nothing but terrible options.'"

Government's two choices: (one) fund the hot potato boomer entitlements through the Fed's printing press, which will mean massive expansion of the money supply or (two) cut benefits.  So far, inflation has been offset by declining real estate values.  But, Nielson and Wilson argue, the boomers have little saved and lots of real estate, so a trillion dollars of real estate on sale to fund boomers' retirement will submerge already under water real estate markets. Government's response? More printing.  Also, the stock market poses a retirement fiasco as ultra-low interest rates are what's keeping the markets at their current level. The moment interest rates start climbing, what do you think will happen to the S&P 500?

It seems to me that commodities in general are the way to go, even if you think gold is overpriced because of speculation.  Silver, agriculture and general commodities are hedges against inflation as well as gold and they have not been so robust recently.  However, my coin flip method of investing tells me that a crash in all financial markets could occur within two or three years.  Hence, I am waiting for a healthy correction before making a major commitment.  Caution may be the smartest play right now, or rather, be like the fox waiting to spring on the fawn, strike when opportunity bounds.


Anonymous said...

Rates will not climb. You are living in a fantasy world. The ten year benchmark treasury yield is 2.58% down from 2.97% a couple of months ago. Gimme a break.

Mitchell Langbert said...

Are you the same person who said that tech stocks would always go up circa 1999? Or the same person who said that there would be a future of unending stock market increases circa 1929? Or the person who said that the S&P 500 always goes up over a 5 year period circa 2000? Or the person who said that gold is a barbaric relic circa 2001?

While it is true that banks have curtailed lending, at the same time the Fed has printed a considerable amount of money that has been deposited in the banks and lent to Wall Street, which has been investing internationally. As well, the large international dollar holdings are potentially volatile. Hyper-inflation is certainly a possibility. For example, if the interest rate climbs a couple of percent, the federal government's debt payment will increase significantly, forcing a tax increase that the nation cannot support. The likely answer? Print more money. But the unending stimulus will likely overcome the banks' reluctance to lend. Even now, many pro-banker economists are advocating increases in stimulus and monetary expansion. If this money is used for anything, inflation will result.

The response to inflation is an increase in interest rates. If the Fed does not tighten the market will demand an increase. Either way, the stock market will do badly.

Investing through a rear view mirror is a common mistake.