Clipped this from today's comments. If this is even half true it highlights why it is now more imperative than ever that we break this nexus that Howard has formed with Bush. It will take us all to disaster as the US attempts to solve its economic problems by widening the scope of its bellicose activities...
July 15, 2004 -- Yesterday, I wrote that I was going to come up with a "shocker" today. Well here's the shocker. I strongly suspect that the Fed and the Bush administration know that we're in a "balance sheet recession." Consequently, they're going to fight the "new balance sheet recession" with all the weapons in their command. And the administration has a lot of places to spend it. As far as the Bush administration is concerned, we're at the "beginning of World War III." And you know something -- they could even be right.
I hate to sound too cynical but subscribers may remember a few years ago, when I said the US has a problem -- The US has no national purpose, no focus. We needed a national purpose, and historically that purpose has usually been to defeat an enemy, to defeat a threat. Now we have an enemy -- it's the world terrorist organization. And any amount of money is justified in our all-out effort to destroy this new enemy (as for other possibilities, Russia is no longer our enemy, and China doesn't quite fit the bill).
But despite all the hopes and wishes and talk, US corporations continue to run down their debt. We see it clearly in the continuing downtrends in Industrials and Commercial Loans.
Now it appears that the American consumer is beginning to cut back. This is reflected in the across the board softening in retail stocks. Stores report "disappointing sales," and to all appearances -- US consumers are close to being "tapped out." The problem -- US consumers have mountains of debt and precious little in the way of savings.
What wealth consumers do have is in their homes. Roughly 69% of American families own their own homes, that is, if you can say that a family with a fat mortgage actually own its own home (in my thinking, the bank owns the home until the mortgage is paid off).
With it all, that leaves it up to the US government to keep the economy rolling. And if the government is the savior, that means that the US government, in order to stave off dangerous deflation and recession, will have to run deficits, big deficits, huge deficits, maybe deficits of up to a trillion dollars a year. Impossible, you say? Hey, we're running budget deficits of half a trillion dollars now -- and as recently as the year 2000 we were running budget surpluses.
So what's the government going to spend the money on? My thoughts immediately turn to the "Big D" -- defense. After all, who can object to our defending our nation from the new enemy? Whatever it takes, baby, whatever it takes.
The US is now fighting two wars, and daily we're hearing that the nation is under siege with the implication that maybe World War III is about to start. Believe me, from now to election time we're going to hear endless talk from this administration about terrorism, danger, the need for a bigger military, more ships, more planes, more bodies in the military. Get ready for code yellow, code red, danger signals, and increasingly the need for a major build-up of the defense system. After the election, if the Bush team is still in, it would not surprise me to hear more about a draft. And to be honest, I don't know if it will be any different if the Kerry team is triumphant.
This then, is the way the government plans to hold off deflation and recession. It can all be expressed in four words -- MORE SPENDING and BIGGER DEFICITS.
You think this won't happen, you dreamers? Just watch the news and the statistics as we go along. And you might check the Defense Average of 15 stocks that appears daily in Investors Business Daily (the Average is currently at a high for the year). I show a few weekly charts of major military suppliers below. Don't worry about 'em, they're doing fine.
What I'm wondering is how far the Bush administration will go on defense, assuming that Bush wins the election. And if Kerry wins, will he continue the military build-up or will he cut back? Either direction has tremendous implications for the economy, which is probably one reason why the stock market is now so"undecided"?
The Christian Science Monitor, in its July 14 edition, states that "this election is being played out on a political landscape more sharply, and evenly, divided than any other in generations. . . Bush, the first president in 112 years to win the electoral but not the popular vote, now stands as one of the most polarizing presidents in history. Republicans grant him enthusiastic approval, while Democrats express an equally strong loathing. . . The same dynamic holds true in Congress. Republicans now control both houses of Congress, but by narrow margins and with deepening partisan rifts that have kept both parties in a confrontational posture."
According to Monitor calculations, electoral votes leaning towards Kerry are 168, while 190 are leaning towards Bush. But 180 "swing" votes are up for grabs.
Russell Comment -- Look for the campaigns to become nastier and crueler as we near election time. Nothing will be off limits.
OK, question -- "How should you and I perceive the situation and what should be do about it?"
First, according to the conservative American Enterprise Institute, Bush in his first term increased spending by 29 percent. Would Kerry be any different? Kerry plans to introduce $621 billion in new spending over a four-year presidential term while repealing "tax cuts for the rich."
Under Bush or Kerry, it appears to me that spending is going to increase. But the markets may have something to say about all this proposed spending. If spending gets totally "out of hand" (whatever that means), then we are going to see it first in the action of the various markets. We'll see it in the action of the stock market, the bond market and the currency markets -- and probably the stock market first.
So here's the real story, as I see it. The greatest speculative bubble in history burst early in the year 2000. When a great bubble bursts, the normal aftermath is deflation and correction, along with the pain that this involves. The Greenspan Fed decided that they could put off the pain through their fiscal and monetary policy. The Fed policy involved low interest rates and a massive infusion of liquidity.
The of the plan was to keep consumers buying, keep the government spending, keep the Fed jaw-boning -- and at the same time allowing corporations to work off their debt. So far, the Fed's plan has been operating in a strange way. Nothing has actually been corrected. Consumer speculation has simply transferred from the securities market to the real estate market. The stock market has simmered down a bit (although stocks are still overpriced) while real estate prices have sky-rocketed in many areas of the nation. Corporations are still paring down their debt, and the government is still spending wildly.
The stock market has now stalled out, bonds are creeping just a bit higher, the dollar, after declining for weeks on end, is rallying. And nobody, and I'm including the professionals, seems to know what to do about anything when it comes to investing.
The old Wall Street adage tells us, "When in doubt, stay out." Which is pretty much what I, personally, have done. I'm mostly in cash with my largest non-cash position being gold and gold shares.
Cash? What kind of cash? From every corner, from Templeton to Buffett we hear the advice -- "Get out of dollars -- get into foreign currencies." Can they all be right? Well, with the way the US is going, it's certainly possible that they all can be right.
It's easy to diversify out of dollars. Look up Everbank on the net. Buy short-term bills denominated in euros issued by Germany. My friend, Bob Inbody at Morgan Stanley here in La Jolla (858 729 5010), can handle these. Or just stay in dollars -- after all, you're living here in the USA, which is where you spend your money, and the dollar still buys bread and wine and steak here. Of course, if you go overseas with your dollars, that's a different and rather sobering story (see e-mails at the end of this site).
I don't know why the ridiculous and suspicious lag in the issuance of a gold ETF backed by actual gold. In the meantime, I'm asked about Central Fund of Canada (CEF) which is a fund which is made up almost entirely of actual gold and silver.
I like this fund, but the problem here is that the fund sell at about a 12% premium over actual gold and silver owned per share. However, in a bull market the premiums tend to hold or even increase, so that if you don't want to physically own the metals, buying CEF is an acceptable way to go. Certainly it is a very liquid way to participate in a precious metals bull market.
