A Time For Realism

This is a time for realism. While our government and candidates continue to blather on about “solving the problem” by some odd mixture of bailouts, speeches, dollars, firings, and con games, the real crisis is ignored.

This is the crisis we’ve been warning about for many months. It is a crisis of the economy, the dollar, and the value of your assets, all rolled into one, and it is finally upon us. Or, more precisely, the awareness of the crisis is upon us. The initiation of the crisis was many months, even years ago. The fullness of the crisis may still be weeks away. The end of the crisis could be a few short years away, or, if the mismanagement continues, the end of it could be ten or twenty years away. I hope that I don’t need to elaborate on how desperate the situation truly is. Suffice to say that we have entered a period of dire financial crisis. There were many points at which we could have changed paths. Unfortunately, many continued to support this truly terrible government as it squandered those opportunities day by day. We saw Federal Reserve Chairman Ben Bernanke waffle about whether we were in crisis or not, and continue his relatively weak policies for months as the crisis mounted. We saw a series of costly bailouts in recent weeks, which squandered our future tax dollars on meaningless “solutions”.

It is now too late to avoid some level of crisis. My opinion of this latest bailout proposal is that it is the most atrocious piece of legislation that we’ve seen in our lifetimes. At some later date, we can debate what policies might have avoided this debacle, or whether this bailout is warranted. Regardless, it is likely to pass. At this point, we are in the midst of the biggest period of risk in history, and the important thing to our readers is to learn how to protect their assets against this coming disaster.

The first and most important thing to realize is that there is NO EASY WAY to protect yourself. The knee-jerk reaction is to pull everything out of stocks or bonds or whatever you might have invested in, and put it in the bank where it is “safe”. Unfortunately, what we’ve been learning is that banks aren’t innately safe. However, we still can hold on to the idea that the government has guaranteed our money through the FDIC or some similar institutions, and as long as government guarantees remain good, this may be ok. The bigger concern is inflation, even the potential of hyper-inflation. Any form of inflation will destroy the value of money over time, but hyper-inflation will destroy the value of cash overnight.

The key is to realize that there are many possible types of crises. At this point, it is still unclear what this one will develop into. We could see a period of growing inflation, much like the 1970’s. We could see this grow into hyper-inflation as is currently operating in Zimbabwe, or like what Germany saw between the wars, or like the “banana republics” of Latin America were accustomed to in the ‘70’s and ‘80’s. On the other hand, we could find ourselves in a recessionary period like so many we have experienced in the past. Or, more grimly, we could mismanage the economy in such a way to prolong this period of economic weakness into a time reminiscent of the Great Depression.

Of course, none of these things are what we hope to see. But at this stage, some challenges appear likely, and a wise investment strategy must prepare for ALL eventualities. The knee-jerk reaction that might protect you against ONE of these scenarios, might also devastate you in another. We need to be prepared for all possibilities.

In my opinion, our most likely scenario is a return to inflation. We can hope that it will not be worse than the 1970’s version. If this is the case, then the best protection is to hold assets such as gold and silver that are likely to hold their value in times when money is losing. In fact, in inflationary times, bonds and cash are relatively poor “investments”, and if inflation turns into hyper-inflation, both cash and bonds become worthless. Other investments that tend to do well in inflationary times are oil and oil equipment, real estate, and commodities. Even stocks can survive fairly well in inflationary times, and high-growth stocks are particularly good. Yet, if inflation reaches higher levels, over 20%, let’s say, stocks and real estate become poor holdings. Commodities, and even oil itself, tend to be very volatile, and should never compose a large portion of one’s portfolio. Real estate, in today’s environment, is still deflating from a bubble, and is probably due for more price dislocation before it settles back down. Therefore, we’ve preferred gold and silver, mining companies, as well as oil equipment companies, as some of our means to defend against inflation. We’ve also found TIPS, which are inflation-adjusted treasury bonds, as a safe means to protect against this kind of trouble.

A recession also seems to be a reasonable possibility. While a recession is certainly a negative outcome for stocks, it is not a devastating condition, and one that will be relatively short-lived. In the past, I’ve always advocated staying invested during recessions, with perhaps a preference for stocks that are somewhat recession-proof, what we call “defensive stocks” such as food and beverage, healthcare, and utilities – essentially the things that people will still buy when they don’t have money for everything. In that scenario, we avoid things like clothing, cars, etc., that are discretionary purchases. But, essentially, a recession is something we can make it through without serious re-adjustment.

The greatest concern would be the prospect of a serious depression. Until recently, I felt fully comfortable overlooking this possibility, and focusing on protection from inflation and recession. However, recent events have forced me to consider this possibility as well, because if our government is sufficiently foolish, they have the power to prolong a downturn and prevent the kind of re-adjustments that need to take place. If this happens, depressions can result.

Since I’ve recently given little thought to depression-era planning, I had to pluck a book off my shelf that I haven’t looked at since the 1970’s. The late Harry Browne’s 1970 investment classic “How You Can Profit from the Coming Devaluation” is one of the best books written on the subject of investing in financial crisis. This very old book is surprisingly current, and if you can find it, I highly recommend it to anyone who wants to learn more about the crisis we are facing. Browne suggests cash and bonds as the best places to be in a depression, and stocks and real estate as the worst.

What all of this tells us is that we need to be cautious, studious, alert, and nimble in the coming period. There is no single right answer to all of the possibilities. My personal favorite for today is the inflation-adjusted bonds that I mentioned, because, while they will not be outstanding performers in some cases, they are relatively safe in most, and excellent in some of the worst. On the other hand, if things get truly crazy, do we even know if the government will pay off? They may not renege completely, but I don’t find it beyond comprehension to imagine that they might refuse to pay for the adjustments if it becomes too costly. Nonetheless, these instruments are a good place to put some of your money for the present.

Finally, now, more than ever, it is critical to be diversified in your holdings. In light of the uncertainty, putting all your eggs in one basket, even a seemingly safe asset like cash, can be extremely risky. It is important to be somewhat prepared for any eventuality, and not to be too confident in your estimates of the future. It may be worthwhile to lean toward what you believe is the likeliest case, as I tend to do with my expectation of inflation, but there is little excuse to ignore other possibilities. The risks associated with arrogance in today’s market are too high.

There are other strategies that relate to an individual’s own situation. Personal debt levels, life situations, and range of assets might influence the way a safety plan should be developed. These are things that are better handled on an individual basis. As always, I stand ready to discuss developing such a plan with any of my readers. If you are concerned about how well-protected your assets are in the current conditions, please feel free to contact our office to arrange an appointment at (877) 622-9090 or frontdesk@valueview.net.

Bailouts, Bernanke and Bankers. (Oh, my!)

Until last Friday, I was confident. Confident that, while the economy was going to be dismal, I knew how to protect myself and my clients from the economic turmoil.

As of Friday, all bets are off. That's not saying that I'm confused or uncertain, but that on Friday, the government, under the watch of the president who will be remembered in history books, George W. Bush, decided to cancel free markets and move on to an amended form of socialism.

Not REAL socialism, mind you. At this stage, socialism looks relatively good. No, the Bush-leaguers are offering a form of socialism where big businesses still get to the profits, but the losses are socialized. Lest anyone wonder, this is SO much worse than socialism that I don't even question people who want to move to Cuba and serve under Castro anymore. I find my Marxist friends more reasonable than those who still defend the Bush-league idiocy. And, remember, my leanings are strongly free-market. But this administration has now gone SO FAR from free markets that they make anything look good in comparison.

To put meat into this argument, let's evaluate the most recent bailout plan. I emphasize "most recent" because after the last few weeks, it is not enough to talk about a bailout plan, because we've done so much in the last few weeks, and talked about so many variations of the same seven plans, that it becomes difficult to keep up. And just for perspective, we should recognize that more intervention in the economy took place in the last three weeks than took place during the entire balance of my lifetime. Given another three weeks, I expect these "big business-socialists" to exceed the entire 20th century in interventionism.

To add more perspective, consider Thomas Sowell's insights on the size of the proposed trillion dollar bailout:

"A trillion seconds ago, no one on this planet could read and write. Neither the Roman Empire nor the ancient Chinese dynasties had yet come into existence. None of the founders of the world's great religions today had yet been born. That's what a trillion means. Put a dollar sign in front of it and that's what the current bailout may cost."

So, that's the SIZE of the bailout. But, even if we get past that, the STRUCTURE of the proposed bailout is every bit as bad, if not worse.

The bailout is designed to have the government BUY all the bad, non-performing assets from the bad banks (and the good banks, and virtually anybody else). They will leave the institutions afloat, and take all the mistakes away. They will essentially get to start with a clean slate. While this may sound good to the untrained ear, it is essentially the worst of both worlds. Not only do we end up rewarding those who made bad decisions (at the expense of those who made good ones), but we do so at great cost.

This is precisely where the free market is supposed to improve on socialism. In fact, it is the failure of bankrupt companies that has allowed the U.S. to thrive over time. The "creative destruction" described by Schumpeter is key to growth. If we try to prop up these failed companies, we are not only expending enormous sums in doing so, but encouraging more bad decisions. Moreover, we are diverting money away from good decisions and successful companies. Money is not unlimited, and what is invested into poorly managed firms takes away from well-managed ones. The benefit of truly free markets is that poorly managed firms will eventually fail. It is this process that ensures that more money is invested into productive ventures than would be in a centralized economy, and it is this investment that does so much to grow a nation's economy.

Under the proposed program, we get the worst of both worlds. We get the messy business environment that is endemic in any free market, but we are "protected" from the consequences of free markets. We are "protected" from the failure of failed institutions. Instead, we are allowed to go the next ten to twenty years watching the zombie-like AIG, Fannie Mae, and countless other financial firms walk among the living, even though they are essentially failed businesses. We get to watch these government-subsidized institutions compete unfairly with other free-market institutions, until they too are forced to either accept government bailouts, or simply fail and drift away into history.

While I understand that it is not politically expedient to say no to this bailout, it is imperative that our congressmen do so. Without the bailout, it is very likely that our markets will crash, financial firms will fail, and people will be left poorer. But at least this devastating time will be short-lived. WITH the bailouts, not only am I certain we will still see market crashes, business failures and an increase in poverty, but the bailout will extend the period of the downturn for many, many years. I strongly prefer a 3-year recession to a 20-year depression. Anyone with me on that?

Jim Cramer on Mad Money

I've been critical sometimes of Jim Cramer and his call for more liquidity from the Federal Reserve. Undoubtedly, he's not perfect either, but as he shows in this interview with Presidential Candidate Ron Paul http://www.youtube.com/watch?v=Nq7Li1MOF2Y , he's willing to welcome others who criticize the Fed from other points of view. A great interview that should be viewed by everyone who cares about money and markets.

Time for Lindsay Graham (and Friends) to Go Home

S.C. Senator Lindsay Graham's now infamous comment, "We're gonna tell the bigots to shut up," was his means of arguing for the amnesty bill that was before Congress recently. Actually, it was his way of dismissing any dissent from HIS view of what should be done. As though average Americans should be allowed to disagree with HIS superior viewpoint. No, it was clear to Lindsay Graham that anyone who didn't see things his way must be a bigot. Because, clearly, there could be no logical reason to disagee.

Graham's arrogance again showed itself this past Sunday as he debated Sen. Jim Webb on the Iraq War. Again, he found no way to allow dissent from the Graham opinion, and at any point when Webb disagreed, Graham lit into him, accusing him of all sorts of evil. Webb's main point was that the troops needed to have recovery periods between tours of duty. Graham couldn't see how this could be tolerated.

In the end, Lindsay Graham has fallen prey to a sickness that infects many in Washington. It is what I call "Washington Syndrome". It is the belief that mere mortals could not possibly understand issues as well as they do, and that their superior intellect should be the deciding factor, rather than the will of the people. Graham has apparently gotten a very bad case of "WS", because in addition to believing as much, he also caught a huge dose of arrogance along with it. The only known cure for "Washington Syndrome" is a long rest, far away from DC. Yes, folks, it is time to send Lindsay Graham and others like him home.

Once we've established that Graham needs a long rest, we now need to consider how to accomplish this. This is difficult, because people with WS don't know they are sick. Therefore, the only way to give them a rest is to defeat them on Election Day. This can only happen if a viable opponent is discovered. Polls show that Graham is not that well liked even within his own party, and that he stands a good chance of being defeated, if not in the primary, then certainly in the general election.

So, who can we find to oppose him in February or November? Remember, we still want to see some kind of Senator in office who would offer low-spending, low-taxes, less regulation, and more individual responsibility. That's a natural. So, let's consider who to recruit to oppose Graham. Of course, it must be someone with some background that would raise support. Who could we get?

First, who is NOT going to challenge him? Probably no sitting Congressman is going to risk his seat on a venture like that. Also, the Governor is more likely to want to serve out his term, simply because he sees it as a contract with the citizens of the state. So, we probably need to look outside the box for prospects.

On the Republican side: Of course, most Republicans would avoid shooting down a "family member", but there might be a few who would consider it: Former Governor David Beasley appears to be looking for something to do. Carroll Campbell's son Mike took a shot at Lt. Gov. last year, he'd probably think about it. Or someone holding a ceremonial position like Lt. Gov. Andre Bauer is certainly a possibility. Then, maybe someone like Judge John Napier, who served one term in the U.S. House might still have some politics in his blood. Would he have to resign his judgeship to run? If so, that might be a dealbreaker. And then, you've got former Lt. Gov. Bob Peeler sitting around doing nothing. So, he's probably game for anything. Word has it that there is already a drive afoot to recruit Peeler to challenge Graham. Let's see if anything comes of it.

You might also consider old-line Democrats: Ken Holland, who served in the House back in the '70's and '80's might be conservative enough to merit attention. He talked about entering the Democratic primary for governor in 2006, but had trouble raising money.

OK, so those are some people who would probably be willing to run, if you dangled it in front of them. Now, it's up to you South Carolinians to decide which one best fits your values. Talk to them, see what they're about. See who fits your needs. But get it done! February is a few months away, and Graham needs to go!

Inflation in Zimbabwe and the U.S.A.

Inflation is a real problem, created by real actions of central banks. Zimbabwe is currently in a state of utter meltdown, as this article attests. And Iran is nearing a similar state, more reminiscent of the American Jimmy Carter era, which is why some of us believe attacking that nation is unnecessary. Why not simply allow it to implode on itself? But that's another argument.

My point today is not to focus on the economy in an African nation run by a despot or a paper tiger in the Middle East. Instead, my focus is on America's own inflation problem. For many years, I've been expressing concern about the inflationary behavior of the Bush administration. It has long been clear that their economic policy was much more reflective of a Nixon-Ford-Carter type of Keynesianism, than the more stable monetarist-leaning policies of a Reagan or Clinton. In fact, to my chagrin, the increasing pressure of added dollars being pumped into the economy has not had the expected result of rising goods and services prices. I've complained for years about the wild spending sprees and borrowing of this government. So far, it has led us to a real estate bubble, and we've seen rising commodity and oil prices, and some select services, such as education, have skyrocketed in price. But thus far, we haven't seen the "across the board" price increases that typically come from a highly inflationary economy.

The primary reason for that is that we've been importing and outsourcing. Some would argue that the loose standards on the border allowing millions of illegals entry has also been an influence. What we've seen is food prices remaining stable due to low-cost labor, the cost of technology remaining stable due to outsourcing of technical jobs, and the cost of clothing and household items remaining stable due to cheap imports. In the end, it's been a period of some success for those educated workers, but has contributed to a widening of the gap between rich and poor. More importantly, it has put down the roots of a disaster in the waiting. For inflation rarely, if ever, lays dormant for long. A depreciating currency will, over time, accelerate its depreciation. In fact, as people begin to move out of that currency, the acceleration may compound itself, leading to hyper-inflation, much like what Zimbabwe now sees.

In the U.S., the massive spending increases over the past 8 years have been largely financed by loans from countries like China and Saudi Arabia, who have been dutifully buying our bonds while we cooperate by allowing their own foibles to go unnoticed. Furthermore, central bankers worldwide have been using the "stable" U.S. dollar as their reserve currency stored in their banks. But what happens when that fabled stability becomes a thing of the past? When the dollar begins...er, continues...to fall on the international markets... Would we be surprised to see central bankers across the world to begin selling dollars on the open market and using a Euro, Yen, or even a Canadian dollar standard? No, I think not. There's little point to using a reserve currency that falls in value on a regular basis. Lest you think I'm puffing smoke, check out the fall of the dollar vs. the German mark/Euro here, and more generally here. Suffice to say that the U.S. dollar is very weak, and current policy is only leading toward a weaker dollar. The spending and borrowing alone must eventually lead there.

It's easy to say that we need to start thinking about owning commodity stores of capital, such as gold, silver, and precious gems. The problem with that is that these types of holdings are never more than a store of value. They don't grow! Yes, we may benefit by having an occasional upsurge in price that provides a profit, but that's not a long-term strategy, merely a way to turn a quick buck while we're in transition. Longer-term, we need a strategy that will help us make money in what may be tougher times.

If my analysis is correct, the strategy for this next period is to become an international citizen. Patriotic fervor and devotion to all things American can only set us back, if our government is intent on devaluing our currency. It will become increasingly important that we have some of our assets either denominated in foreign currencies or held in commodities.

Of course, we're headed into a presidential election year, and we could see a wholesale change in the way our economy is managed. I'd like to be optimistic here and anticipate the best, but what I've heard from most of the candidates is less than encouraging. Most of the Democrats tend toward an expensive, unfunded social program cornucopia, starting with the scam known as national health care. Sadly, most of the "top tier" Republicans are selling "Democrat-lite", including one who has yet to explain how his form of national health care differs in substance from the socialism of the left-side party.

Neither side seems to have a real solution to Iraq, a costly headache that seems likely to drag on incessantly at a cost that simply cannot be maintained without dragging our economy into a pit. Republicans, for the most part, are advocating more war without victory, while the majority of Democrats advocate less war without retreat. I would argue that either victory or retreat would be vastly preferable to this endless war strategy that is reminiscent of Vietnam.

One might be cautiously optimistic were Bill Richardson to win the Democratic nomination. His economic policies are probably the most similar to the Bill Clinton administration, probably even moreso than Mrs. Clinton's. And his strategy in Iraq is to simply end it and move on. While many would complain that this may lead to anarchy, some of us wonder how that differs from today. Moreover, it is at least a strategy, which is somehow superior to most of the bluster that passes for policy ideas coming from most of them. Yet, Richardson's chances are slim in a race carrying such big names with strong campaigns. Both Hillary Clinton and Barack Obama have strong support and backing from insiders with pull in the party. Neither appears likely to deflate anytime soon, and it doesn't seem likely that anyone else, with the possible exception of protectionist John Edwards, stands much of a chance. Even if Richardson were to win, we'd still be uneasy, as his credentials are not exactly those of a tax-cutter or inflation-fighter. He just appears to be the best alternative among the Democrats, given the choices. Mike Gravel, an anti-war former Senator from Alaska also has some decent proposals (among others that any free-market advocate would find insulting), but his chances appear to be even weaker, and he doesn't appear to be making much headway at present.

On the Republican side, the competition is much closer. The so-called "front-runners" are not particularly strong, have fair-weather support, and offer no novel ideas. Most of the candidates who represent a return to traditional Republican principles of low taxes, and controlled spending, have been relegated to the "2nd tier". John McCain joins 2nd tier candidates Mike Huckabee, Ron Paul, Duncan Hunter, Tom Tancredo, Sam Brownback, and Tommy Thompson as fiscal conservatives. One could easily throw non-candidates Fred Thompson and Newt Gingrich into that camp as well. Each would likely be an improvement over the current administration on spending and certainly on taxes. Only one, however, has outlined a clear understanding of inflation and demonstrates knowledge about monetary policy. That candidate is Congressman Ron Paul. While some of the others may mean well and attempt to cut rampant spending, only Paul can speak authoritatively on the inflation menace, and since this is probably going to be the biggest issue facing the next president, it behooves us to elect one that knows what it is. Unless you want to suffer through another decade like the 70's.

Given the overall weakness of the frontrunners, Paul's election, or the election of any of the 2nd tier candidates is a possibility, but not a certainty by any means. However, unlike the other party, Republicans seem more likely to choose an unlikely candidate. Dissatisfaction with the frontrunners, most of whom represent the old "Eastern Establishment" ties that Goldwater and Reagan struggled against, will probably lead to some shuffling before the final decision is made, but it's a gamble at this time to try to predict anything authoritatively. Polls are relatively meaningless at this point, because so few people in the country are engaged in the political sphere yet.

Inflation probably sounds like a meaningless term for those under 30 who have never lived through the Jimmy Carter years. Alas, most of us have only fleeting memories, but I do remember FarmAid concerts that Willie Nelson designed to help people keep their farms. The biggest fear was that all the family farms in America would be foreclosed upon as costs skyrocketed, and debts mounted. Overall, inflation leads to a "twilight zone" economy where saving is punished and debt is incentivized, while debt is risky and savings are needed. Prices rise while savings fall, and the middle class becomes poor. Not a nice time to live. Let's not return to that.

President Ron Paul has a nice ring to it, and he could probably bring inflation under control, but given the odds - I give him no more than a 20% chance of being elected at this stage - we need to be thinking about strategies to protect ourselves from the depradations. Three alternatives exist: holding commodities or commodity-based stocks, holding foreign assets, and buying inflation-indexed bonds. Each has its pros and cons, and the balanced strategy would encompass each. Given the current situation, though, ignoring inflation may become increasingly dangerous.

Invasion of the Party Snatchers

Goldwater's speechwriter, Vic Gold, has a new book out called "Invasion of the Party Snatchers" that discusses how the NeoCons and the Religious Right destroyed the Republican Party. Bill Moyers recently interviewed him here. It was a powerful interview, and well worth watching. Agree or disagree, it's compelling stuff, and says something about how far afield we've traveled from where we were. Today's "conservatives" bear NO resemblance to Barry Goldwater, or, I would argue, even Ronald Reagan. Vic Gold's take on it? He figures that Ron Paul is the only one that Goldwater would even recognize as his style of conservative. And he figures Goldwater wouldn't even want to be part of such as system as today's. Check it out and let us hear what you think!

Republican Renaissance?

A great article from the Republican Renaissance blog regarding why the Ron Paul candidacy is important for the future of the Republican Party. Check it out here.

Which Election Is It?

History has a way of repeating itself. What I can't figure out is which election this is a repeat of.

In 1964, a feisty Southwestern conservative beat out a a liberal New Yorker and a moderate named Romney for the Republican nomination. No, it's true. Really!

The parallels seem too perfect. Giuliani plays the role of Nelson Rockefeller. Mitt Romney gets to play his own dad (every actor's dream role), and you get to decide who gets to play Barry Goldwater. Some suggest John McCain for the role, and as a sitting Arizona senator with a gruff exterior, he seems natural, but I think Ron Paul has the out-of-the-mainstream conservative thing down better, and therefore is a better representative of what Goldwater represented. Anyway, Barry Goldwater, Jr. has been helping Ron Paul with fundraising, so it seems a better fit. Regardless, it's easy to see how these characters could bring up reminiscences of 1964.

And yet, even with so many of the characters in place for a repeat, I can't quite believe it's going to happen that way.

The reason is that this isn't 1964. Economically and emotionally, we're as far from 1964 as imaginable. This is 1976. In 1976, people were worried about gasoline prices and the housing market, were recovering from political scandals, were war-weary, and were desperately seeking change. Sound familiar? Yet, the Republicans, the party in power at the time, didn't get that, and nominated the man who least resembled real change, Gerald Ford. Also, a similar tune to what I hear from the party regulars. "Stay the course" is the mantra heard most often in the Republican debates. For while most of the nominees didn't want to be too closely associated with George W. Bush, few had any significant differences with his policies.

So, what happens when we put 1964 candidates into a 1976 environment? Ah, that's the question isn't it. No one really knows. Throw in a little 2004 Howard Dean internet and our view of the outcome becomes even more cloudy.

This might be another election where a "stay the course" candidate like Gerald Ford is put up against an unexpected upstart like Jimmy Carter (played by Barack Obama? Bill Richardson?). Or it may not. It may be John McCain's year. Or it may not. It may be a "perfect storm" kind of year for an outlier like Ron Paul. Or it may not.

The only thing we know for certain is that this will be a nail-biter. It's an election with weighty issues and strong differences of opinion nationwide. And the nation hasn't yet decided. One thing I do know: "stay the course" is not likely to get anyone to the White House.

The Future for Liberty

Gary North has posted an outstanding column here, comparing Ron Paul's drive toward the presidency to the role played by Barry Goldwater here, or Mahatma Gandhi in India. Surprising comparisons, yet they ring true. Definitely worth reading!