Contrary (Positive) Thoughts
I have been writing about the inevitable consequences of our fiscal and political insanity since 2001, when those inevitable consequences were almost universally ignored. Since then, much of what I warned about has come to pass, the balance is looming on the horizon, and it has become de rigueur to be pessimistic about the future of the U.S. and the world. (See the recent Mauldin Outside the Box newsletter “I’m Worried”).
Given the litany of problems we are facing and the epic scale corruption of our economic and political elites, it is hard not to be pessimistic these days. As a commenter on Naked Capitalism recently put it, “You can’t expect good long term outcomes from a culture whose elites are as openly corrupt as ours are.”
However, being a contrarian by nature, I have recently found my attention drawn to a variety of inputs that give pause to my pessimism. I have been reminded that despite the poor quality of our leadership and the damage they have inflicted on us, America’s culture of creativity and capacity for reinvention are something special in the world. Warren Buffet put it this way in a recent CNBC interview…“It’s a terrible mistake to get pessimistic on America…It has not worked since 1776 and it’s not going to work now.”
I am also reminded that the bottom always comes when things look the worst. Our “leaders” have kicked the can down the road about as far as they can, and are fast coming to the day when they will have no choice but to bite the bullet and deal. This will present a rare opportunity for resolution of longstanding imbalances, and for national renewal. There are huge opportunities for new growth and prosperity just waiting for the toxic sludge of past mistakes to be cleared.
I have recently come across several inspiring books and articles that offer ideas and insights into developing trends.
1) Ken Fisher has published an excellent and perfectly timed book on the election cycle, the nature of markets and the impact of politics on markets, entitled “Markets Never Forget (But People Do).” My recommendation is to run, not walk, to your nearest bookstore, or to your Kindle, Nook or smartphone to download this book. (Don’t overlook Ken’s brief history of the Wizard of Oz in the Appendix!)
Ken reminds us, and provides ample documentation, that worry over such things as the dreaded “double dip” recession, which almost never happens, and the “jobless recovery” are staples of market commentary and public perception during every recovery from recession. The job market is slowly reviving, lagging the general recovery as it always does, but the jobs being generated are not nearly equivalent to those that have been lost, and this is also typical.
The bottom line is, while anything can happen, probabilities are strongly in favor of solid economic growth and stock market gains for at least the next year or so. Ken Fisher is a “glass half full” kind of guy, and we can all benefit from his clear thinking and optimism.
2) From John Mauldin’s endlessly informative Outside the Box newsletter, is a gem from GaveKal on major developing trends entitled “Weeks When Decades Happen.”
GaveKal points out that technology, in particular, robotics, is undermining the advantage of cheap labor countries, sending manufacturing back to the U.S. and other consuming countries. This trend, combined with the trend to energy independence (and much cheaper energy) in the U.S., resulting in much smaller U.S. trade and fiscal deficits going forward, will promote greater balance in the global financial system and strengthen the dollar (or boost dollar denominated assets). GaveKal also highlights the recent birth of the RMB bond market as a historical development mostly overlooked by the press, and predicts the inevitable internationalization of the RMB.
3) Last but not least, Kirk Spano, proprieter of Bluemound Asset Management, recently penned a very insightful and upbeat series for Marketwatch on the dollar and opportunity in America, here, here, and here.
Kirk points out that the vast money creation from the Fed has since 2008 has for the most been replacement of the money previously created by the big banks and subsequently vaporized in 2008. That’s one major reason we have not had big inflation along with the Fed’s money creation…so far.
Kirk echoes GaveKal in pointing out the huge opportunity and future growth from the inevitable trend to energy independence in the U.S. He sums up his argument thusly:
“…America, and the dollar, will be fine long-term as long as the United States bends its spending curve down and continues on a path of becoming energy independent, as well as increases exports of food, high-end manufactured goods, technology and medicine over time.”
Taken together, these publications create a hopeful sense that something new is happening; that maybe, just maybe, the destructive trends of recent years have nearly spent themselves, and positive trends have begun. Perhaps that is that way it always is at the turning points...the attention is held by the spectacle and madness of wide scale destruction, even as new growth is quietly taking place.
It’s a presidential election year, and the stock market has been doing what it usually does in presidential election years...going up! Those who managed to remember this tendency last October when the sky was falling have been rewarded. Stocks (correcting at publication time) have been steadily “climbing the wall of worry,” creeping up on their all-time highs, while ignoring the tepid recovery, the meltdown in Europe, war drums in the Middle East, and the looming Taxmageddon.
The Obama Treasury and the Fed will be working full time to make sure that the trend continues into the election. Barring unexpected developments, that effort should be successful.
Precious metals are consolidating after an 11 year bull market that peaked in September of last year. No-one can say how long this consolidation will last or how deeply the metals will correct, but in the long run the dollar is going to continue to lose purchasing power and gold in dollar terms will find its way higher.
As the Fed continues to maintain negative real interest rates, many investors, desperate for yield, are buying junk bonds, others, treasuries for “safety.” Bond holders of all types need to be reminded that regardless of what the Fed does, or for how long, the upside for bonds is very limited, and the potential downside is very large. In the long run, rates are going to go up, and once they get going they will probably go much higher than anyone imagines possible at this time.
The Fed is clearly stuck between a rock and a hard place. More QE will spike inflation, less and the economy sinks back into recession. Last year the Fed bought over 60% of U.S. debt issuance. Yes, that’s right…60%. If ever there was an unsustainable trend, this is it. What’s a Fed chairman to do? “Helicopter Ben” Bernanke has long since made clear what he thinks. Political considerations may prompt a temporary halt to QE, but any signs of deflation will bring its swift return.
We are, in reality, in a controlled depression. The official unemployment rate is 8.1%. Shadowstats, a more reliable source, shows real unemployment running at about 22%...Great Depression levels of unemployment.
The problems in the Eurozone, slowing growth in China, the continuing technology revolution, globalization and looming “fiscal Armageddon” in the U.S. will continue to challenge job growth until there is some paradigm shifting development. That development could be something good, like the rise of enlightened leadership and global co-operation, or it could be something really painful like a global pandemic or financial collapse.
At present, as Ken Fisher points out, the recovery is following the normal path of all recoveries. This one is just proceeding from a much deeper trough than any since the Great Depression.
The ongoing sovereign debt crisis is like a simmering pot that threatens to boil over at any moment. The German-driven austerity guiding the policy response to the crisis to date is not going to last. Recent elections in France and Greece dealt a blow to austerity policies in those countries, and an upcoming referendum in Ireland is sure to do the same.
Austerity is Germany is waging war on its neighbors, as it has done for centuries. The outcome is most likely going to be as it has been in the past. After Germany lays waste to its neighbors, it in turn will be laid to waste. In this case, after Europe has had all it can take of German imposed austerity, German banks are going to take a massive hit as the rest of Europe defaults on its debts to Germany.
We could say that this is progress of a sort…at least this war is being waged with debt instead of bullets and bombs, but the underlying pattern continues. Can Germany be enticed to join with its neighbors without insisting on subjugating them? See “Europe’s Future is Not Up to the Bundesbank,” by George Soros.
“You can always count on Americans to do the right thing…after they’ve tried everything else.” Winston Churchill
It’s time. We have certainly tried everything else.
It’s possible that politicians have always been such as ours are. Perhaps in this information age it is more difficult for them to hide their nature. That is a hopeful thought (sort of), and unfortunately about the best thing I have to say about the state of our politics.
I will say this about the upcoming election. It is terribly important for our collective future. There are many hard choices and actions that will need to be taken, or that will be forced on us of they are not taken, after this election. I hope that the American electorate will be able to see through the rhetorical fog being generated by the big money, scorched earth, “win at any cost” super PAC ad campaigns to choose those who most likely will be willing and able to serve the nation rather than themselves, their parties or their financiers.
As far as the presidential candidates are concerned, anyone who thinks there is any substantive difference between Barack Obama and Mitt Romney, other than the color of their skin and the size of their bank accounts, has been listening to the spin instead of paying attention to what they actually do. On the political spectrum they both stand shoulder to shoulder in the space traditionally known as “moderate Republican.” Obamacare is in fact Romneycare gone national. That should tell you something.
Given the reality that Obama and Romney are indistinguishable in their personal political inclinations, the question is, who would better serve the nation over the next four critical years. I see three primary considerations:
- Political Dynamics: If Romney is elected, it will be much more difficult for him to make the hard decisions that need to be made. With Romney, we will most likely get four more years of posturing and positioning for re-election, as we have for the past four years, instead of decisive leadership. Obama will not have this motivation. There is no guarantee that Obama will deliver, but the probabilities are more in his favor. Political dynamics favor Obama.
- Supreme Court: If Romney is elected, despite his generally moderate tendencies, he will face intense, scorched earth pressure from his “base” to appoint right wing ideologues to the Supreme Court. The current right leaning court has already given us the egregious Citizens United decision, and “strip searches for all.” What other violations of our core values will we see with another right wing ideologue or two on the Court? America needs better justices. Obama has done well in his appointments. The future of the Court also favors Obama.
- The Team: A President does not govern alone. Despite the fact that Romney is a moderate himself, he will be under heavy pressure to include the extreme elements of the party that helped him get elected. With so many unresolved problems remaining from the last bout of extremist Republican policy, I don’t think America can take another round. Balance and moderation, not extremism, are what we need in these perilous times. The team also favors Obama.
Despite that fact that Obama has been such a big disappointment on so many fronts, he still offers us better odds of a favorable outcome over the next four years. Romney personally is no more or less offensive than any of the current crop of national politicians, but considering the pressures he will be under from the extreme elements of his party, the odds are stacked against him--and us--if he wins.
The geopolitical scene is dominated these days by the Iranian nuclear program drama. War hawks, led by Israeli Prime Minister Benjamin Netanyahu have been lobbying hard for military action against Iran. Just as they were building the chorus to a fever pitch, they finally began to get serious pushback.
President Obama chose the annual AIPAC meeting on March 4th to take the hawks to task, publicly lambasting them for “too much loose talk of war.” This speech was closely followed by Meir Dagan, a former leader of Mossad, making the case on 60 Minutes that an attack on Iran is not in Israel’s best interest, and an op-ed in the Financial Times by Walt and Mearshimer entitled “Mr Obama must take a stand against Israel over Iran.”
Most recently, in a rising tide of opposition to war, Elie Wiesel, the widely respected Holocaust survivor, rejected Netanyahu’s comparison of Iran’s threat to the Holocaust, Yuval Diskin, former head of Shin Bet, Israel’s internal security service, called out Netanyahu and his Defense Minister as “not fit to stand at the helm of government,” and finally former Israeli Prime Minister Ehud Olmert condemned Netanyahu’s Iran policies.
The net impact of all this pushback has been a blunting (if temporary) of the building juggernaut for war. Noteworthy: at this writing, Intrade places the odds of a U.S./Israeli attack on Iran this year at 25%, down from its high of 62% in February.
In the background, China continues its own juggernaut to extend its global reach and position the yuan as a competitor to the dollar. Currency swap arrangements with trading partners are being steadily expanded, as well as investments in raw materials and mining operations globally.
The first ever use of the SWIFT global financial telecommunications system as a weapon against Iran by the U.S. has accelerated the move away from the dollar as the preferred reserve currency. In response, the BRICS nations have set up a BRICS bank to compete with the U.S. dominated World Bank and IMF. It is noteworthy that India has rejected U.S. pressure to cut off Iran and has agreed to pay Iran for its oil with gold.
A very insightful and frank article by an influential Chinese policy analyst outlines China’s perspective on future relations and competition with the U.S. In short, they view it as a zero sum game, with the U.S. in decline, and China winning the future. My own thought: We’ll see about that. Maybe this is the challenge that the U.S. needs to get its act together.
For those wishing a clear perspective on the current state of the global financial system, and the history and prospects for currency war, James Rickard’s “Currency Wars: The Making of the Next Global Crisis” is a must read.
Hard assets and stocks are the most obvious opportunities at this time, given the ongoing debasement of the dollar and the strong indications of the Presidential cycle. See the articles referenced at the beginning of this newsletter for specific sectors and companies likely to benefit from developing trends in automation and energy development. Another opportunity for bond holders is to get out of the line of fire. In the long run, any bonds have only one way to go, and that is down.
I find myself feeling strangely optimistic. Maybe this is a passing thing, or possibly a sign that I should short the market. In any case I do think that we have either reached a nadir in public life, and things are going to start improving, or else we will soon go into a rapid and sustained decline. I hope that Warren Buffet is right. There are certainly major opportunities for new growth just waiting for the detritus of past excesses to be cleared away.
All hands are on deck to maintain calm going into the election. Presently, it appears that this effort will be successful and the Presidential cycle will follow its normal course. This effort requires sweeping a huge number of unresolved imbalances and dislocations under the rug, where they will not stay for long. The mega crisis marking the end of the debt super-cycle that began in 1998 is not over. Each sub-crisis since 1998 has been worse than the previous and the next will be worse than the last, until finally the global financial structure is reorganized or ruined.
We can only hope that behind the façade of happy talk about recovery there are real plans being made for a restructuring that can be implemented when the inevitable can no longer be delayed.