Saturday, October 30, 2010

Big Week Ahead

This coming week is a big one that we need to pay attention to.  No, it is not the election.  While the election will be interesting to see what happens, the real big news will be the following day when the Fed wraps up its meeting.

We can be reasonably sure that its stance on interest rates (the Fed funds rate) won't change.  The market is keeping the rate near zero.  It is not really current Fed policy that is keeping it there.

The big news will be on what the Fed says about QE2 (more inflation).  How specific will the Fed get?  Will the Fed say exactly how much inflation it intends to create?  Will the Fed say what it is going to buy (short-term bonds, long-term bonds, mortgage backed securities, etc.)?

The next question will be if the market is disappointed.  We can only hope so.  If the market is happy with the Fed's announcement, we really should be prepared for some massive inflation.

There is also the X factor hanging out there.  Is there anything that we're not expecting that the Fed might announce?  Will the Fed announce that it will force the banks to lend?  Will it stop paying interest on excess reserves?  There is always the possibility, although highly unlikely, that the Fed could announce that it will pursue a higher reserve requirement for the banks so that all of the monetary inflation it is about to create is not all pumped into the system at once.  Again, it is highly unlikely, but you never know.

The elections won't mean much to your investments.  A Republican majority in the House may slow down Obama a little bit, but we will continue to see massive deficits until the Fed refuses to inflate.  The more important happening this week for your investments is what Bernanke and the Fed says.

Thursday, October 28, 2010


Ok, this post doesn't have much to do with investments per se, but since election day is coming up, it might be a good time to discuss politics and political strategy.  If you are reading this blog, you are most likely a libertarian.

Some libertarians think you should try to choose the best candidate for each open slot.  Some believe that you should only vote third party.  Some think that you should only vote for certain races and certain people.  Some libertarians even think that you should not vote at all.

I come down in the third category.  I can understand the position of not voting at all and sometimes I do that, but I don't necessarily agree that you are going against principles by voting.  It is true that if nobody showed up to vote that nobody would be elected.  Of course, the candidates and their families will always show up.  But I don't think you are endorsing the system just because you are playing the game that has been set up, even if you disagree with it.

I agree with Murray Rothbard on this one.  If you were in jail (let's say it was for a non-crime) and you got to vote on what was for dinner or who your warden would be, wouldn't you do it?  You could stand on principle and not vote because you didn't commit a crime and shouldn't be in jail, but that doesn't really change the situation.  Wouldn't you at least like to get a good meal and a warden who might treat you decently?

With that said, I don't think you should be voting for the lesser of two evils, unless one is dramatically less evil than the other.  In other words, you really shouldn't vote in a lot of cases.  Unless you have a good third party candidate (unlikely) or a really good Democrat or Republican (highly unlikely), then it is better to leave your ballot blank or write in your own name.

Let's say you have a Republican who says he wants lower taxes and less spending (where have we heard that before?).  If this person doesn't offer any specific spending cuts, you can be pretty sure that he/she is not going to vote for lower spending.  These people tell you what you want to hear.  They will say anything to get elected.

That is the key to voting for candidates.  Only vote FOR candidates and not AGAINST candidates.  Only vote for candidates that can offer specifics on how to reduce the size of government.  If you aren't hearing anything substantial, then don't vote in the race.  Vote for and against the state amendments if you have them.  If there is nothing worthy to vote for or against and no worthy candidates, then stay away from the election booth.

Wednesday, October 27, 2010

The Dollar vs. The Stock Market

In the last few months, there has been a very strong correlation between the dollar and the stock market.  It seems that when the dollar is down, the stock market is up, and vice versa.  This means that the main driver of the stock market right now is monetary policy.  It also means there is somewhat of a correlation right now between gold and the stock market.  A weak dollar is benefiting both.

If you are invested in the stock market, then monetary policy is the most important thing to pay attention to.  Forget about company earnings or balance sheets.  Maybe for individual stocks it is something to pay attention to, but for the broad market, it is the words and actions of the Fed that is driving it.

Right now, it seems that everyone is expecting QE2.  This is the second round of "quantitative easing" or money creation.  The big looming questions right now are how much and for how long.  Another question is what form it will take.  Will the Fed just buy bonds the old fashioned way?  Or will the Fed try something different for a "shot in the arm" for the economy.  Either way, it will be horrible policy, but it will affect the dollar and the stock market.

It will be interesting to keep watching this correlation.  If the stock market and the dollar start moving down together, then watch out.  It is unlikely that we will see them move up together.  Let's see what Bernanke and the Fed actually do in the coming weeks.  We have heard a lot of talk up to this point, but we haven't seen much action.

Tuesday, October 26, 2010

China and the Business Cycle

China has made incredible progress over the last 30 years.  China still has a communist government or at least that is what it is called.  It is still communist in some aspects.  In other aspects, it is less communist than many western governments, including in the U.S.  China does not have the Americans for Disabilities Act.  While the economy is still centrally planned in many ways, there is also less red tape in many areas compared to the U.S. and other so-called democracies.

China has been inflating at a high rate in the last several years.  China has a property/ real estate bubble that may be worse than what happened in the U.S. a few years ago.  Although the economy in China has grown tremendously and many people there have a higher standard of living for it, some of the recent prosperity is also illusory.  China cannot defy the laws of economics any more than any other country.  China's boom will turn into a bust.

The Chinese government has already announced an interest rate hike to control inflation.  There is no other choice unless they are willing to risk hyperinflation.  The Austrian business cycle theory tells us that a reduced inflation rate will lead to a bust.  China is not immune to this.  China will face its very first recession/ depression, unless you consider almost the entire 20th century as one big great depression.

If you are considering buying Chinese stocks, don't.  You would be better off to short the market.  There are ETFs to do that now.  The only problem is timing.  That is always our problem.  China is going to experience a major downturn, but we don't know when.  It will likely be soon, but does that mean in one month, one year, or five years?  My bet is that it will be less than five years.  It is harder to say if it will be in the next year.

Don't be surprised when China does crash.  The Austrian business cycle theory does not just apply to the U.S.  While much of China's prosperity has been real, we can't ignore that some of it is illusory and will come crashing down.  That's what happens when you have a central bank managing a fiat currency.

Monday, October 25, 2010

Deficit Spending

There have been stories the last few days on Obama's commission to reduce the deficit.  Of course, this is to reduce the deficit, not the debt.  It is like running up $10,000 a year in credit card debt and saying that you are cutting back next year and you will only run up $5,000 in credit card debt without paying it off.  The balance that you owe actually increases, even though you say that you are cutting your spending.

The federal debt is nearing 14 trillion dollars.  The yearly deficit is well over 1 trillion dollars.  If Obama could cut the deficit to 500 billion dollars, he could say that he cut the deficit by more than half.  The problem is, the national debt keeps getting bigger and bigger.  This was the same game that Bush played while he was in office (although the numbers were a bit smaller).  Bush promised to reduce the deficit in half by 2008.  That was in his first term.  He left office having signed the TARP bill, the biggest bailout in history.

The only way Obama is going to reduce the deficit with any significance, let alone the debt, is if the government goes completely broke and the Fed refuses to print more money because of the threat of hyperinflation.  Only then will Obama have a chance at getting anywhere near a balanced budget.  And technically speaking, the budgets do come from Congress, so it isn't even up to Obama completely, although he could certainly have influence.

Even if the Republicans win big next week, don't expect much to change.  Most of the Republican politicians have vowed not to touch Social Security or Medicare.  Of course, they wouldn't dare touch their precious wars or any part of foreign or military expenditures.  They could eliminate the entire rest of the budget and that would barely balance the budget.  In other words, expect massive deficit spending until the Fed refuses to inflate and interest rates rise.  Then we will see something out of Greece where the politicians will have no choice but to cut spending.

Obama's deficit commission is going to recommend tax increases.  It is easier for them to do that than to recommend any serious cuts.  They are going to recommend getting rid of certain deductions and tax credits.  This is a tax increase.  Let's see if the Tea Party and the rest of the American people resist.  In order to resist successfully, they must advocate spending cuts.  It can't be little things, although that would help.  We have to see massive cuts to military spending and a reduction in entitlement benefits.  The easiest reduction there would be is to raise the age that you can collect Social Security and enroll in Medicare.

I don't know if the Tea Party and the rest of the American people have it in them yet.  We need massive spending cuts.  It will be painful, but not as painful as what hyperinflation would feel like.

Saturday, October 23, 2010


Oil has actually been a boring investment over the last several months or more.  It has seemed to stay around $80 with a fairly narrow trading range.  While certain days might seem volatile, overall the volatility has been low, especially after the extremely high volatility of a few years ago.

If the economy takes another downturn (likely), then oil and oil related investments could easily go down in price in the short-term.  Although most people continue to use gasoline for their cars in a recession, some people might cut back.  It is also consistent that commodities tend to go down in price during a recession/depression.

There is a good argument to be made for higher oil prices in the longer term.  There is more worldwide demand than in the past, but a worldwide depression might dampen that.  Also, there is always the threat of more war.  Luckily, talk of war with Iran has calmed down, but if anything did happen there, the price of oil would explode.

The most likely scenario for a rise in the price of oil is simply from inflation.  If the Fed goes through with another round of monetary "stimulus" and price inflation becomes more significant, then oil will likely go up.  A weakening dollar and high price inflation will favor a higher oil price.

Whether you are investing in options/futures or if you are buying oil ETFs or oil company stocks, the price will depend on what the Fed does and also whether the Fed/government force or encourage the banks to lend.  Just like the price of gold or silver, the oil price will eventually depend on the actions of the Fed.

Thursday, October 21, 2010

Harry Browne - Still the Best Advisor Around

Robert Wenzel, of, wrote a piece the other day on Harry Browne.  He says that despite his passing, Browne is the best money manager around.

This is a short article and well worth the read.  I couldn't agree more with his comments.  Wenzel also recommends that everyone keep at least half of their investments in a setup like the permanent portfolio, as outlined in Harry Browne's book, Fail-Safe Investing.  I completely agree and that is for advanced investors.  For conservative investors or investors who don't know what they're doing, I would recommend closer to 100% being put in a permanent portfolio.

Harry Browne was a clear writer and a clear thinker.  His investment advice is as good today as it was many years ago.  And as Wenzel points out with his discussion with Lew Rockwell, Harry Browne's book, How You Can Profit From the Coming Devaluation, is a great easy-to-read book.  It lays out the Austrian business cycle with pure simplicity.

Wednesday, October 20, 2010

Shorting Bonds

There was an article the other day on LRC that talked about shorting bonds.  The author says that the bond market is the next big bubble.  He also has suggestions for mutual funds and ETFs that short bonds.  If you haven't already, you should read the article.

Overall, there is not much to disagree with in the article.  The author makes a great case and lays out a number of true and relevant facts.  There is just one problem and that is the main problem for students of Austrian economics who invest.  The problem is timing.

There were libertarians/Austrians predicting a crash in the housing market or a crash in the stock market 5 years before they actually happened.  There were Austrians predicting that gold would spike up in price in the 1990's.  These were accurate predictions, but far too early.

I can predict right now that China will have a major recession/depression.  They have a bubble economy.  Some of their growth has been real, but some of it is also artificial and illusory.  This is because of the Chinese central bank inflating.  They will eventually face a choice of hyperinflation or recession/depression.  They will choose the latter.  The Austrian business cycle theory tells us this.  It won't be a surprise.  The problem is, again, timing.  Maybe the boom will last a few more years before we see the bust.

It is the same with government bonds.  It is likely there is a bubble.  It is likely we will see much higher interest rates in the future.  But we are also competing against the Fed with endless money.  The Fed can and will buy bonds.  In the long run, this will cause interest rates to rise due to the inflation premium.  In the short run though, it can actually drive rates down.

If you short bonds now, what will happen if it takes two or three years to play out?  What if rates go down?  Can you afford to wait it out?  Even if rates stay steady, you will be paying fees for a mutual fund or ETF.

If you are going to short bonds, I would suggest you do it carefully.  I don't usually like to look for confirmation with investments because you miss out on the easy money.  In this case though, I would look for some confirmation.  At least wait until we see some substantial price inflation.  With an investment like gold, it is easy to buy and hold.  Shorting bonds is a little trickier and you should be cautious about doing it.

Tuesday, October 19, 2010

More Trade Deficit Nonsense

There was an article on today.  It is reprinted from the Economic Collapse Blog. (LRC) is the best libertarian site there is (IMHO).  The second best site is the Mises Institute, which was founded by Lew Rockwell.  It is rare that I disagree with anything significant in the daily articles on the Mises Institute.  I find a little more disagreement at times on LRC.  Lew Rockwell will publish articles on his site if they are informative, even if they are not pure libertarian.

In reading this article today, I actually was wondering if the whole thing was sarcasm.  I was waiting for a punchline at the end saying, "just kidding".  I think it is a serious article.  I will never take anything seriously written by the "Economic Collapse Blog".  There are a few things right in the article.  Even a blind squirrel gets a nut once in a while.  Overall, it is horrible.  The person who wrote this piece just doesn't know what he is talking about.

He says that a significant percentage of young Americans can't tell you what a trade deficit is.  Yet, I'm not sure that whoever wrote this can define it.  He sure doesn't understand it.

Then he quotes Warren Buffett, that free market capitalist (now that is sarcasm).  Buffett is quoted as saying that the trade deficit is a bigger threat than the federal budget deficit.  I presume the author agrees, or he wouldn't have quoted it.  If he understood anything, he would understand that the trade deficit wouldn't really matter if there were no budget deficit.  The Chinese wouldn't be buying U.S. treasuries because the U.S. government wouldn't be selling any if there were no budget deficit.  The only way a trade deficit would occur then is if the Chinese invested in the private sector.  Now why is that so bad?

Then the author (or maybe authors) goes on to sound like a pure leftist/socialist blaming China for the problems created by the U.S. government and Federal Reserve.  He says China doesn't play fairly.  They keep their currency lower than it should be.  I guess it should be whatever this author determines it should be.  He says it is a subsidy to China's exporters.  What he doesn't mention is that it is also a subsidy to American consumers.

If the U.S. had a stable money (like gold) and the government was small with a balanced budget, then it wouldn't really matter what China did.  This author doesn't understand any of this.  Of course, he has to add in the typical leftist line that we need "fair trade".  That is never defined.  It is whatever he thinks is fair.

This is a lesson.  LRC is a great site and very informative.  But you have to be careful what you read anywhere.  I will never trust anything written by the Economic Collapse Blog.  This piece is garbage.

Saturday, October 16, 2010

Bernanke's Next Move

Ben Bernanke (a.k.a. Helicopter Ben), chairman of the Federal Reserve, has been in the news quite a bit lately.  There is a lot of speculation on QE2 (quantitative easing 2).  QE1 occurred 2 years ago when the Fed more than doubled its balance sheet, mostly by buying toxic assets.

Bernanke is not being specific on what the Fed might do.  He says that he is worried about a lack of inflation.  I guess that means he thinks the average American should be paying higher prices for food and gas than what they are currently paying.

It is hard to imagine that Bernanke is a dumb guy.  Maybe he does or maybe he doesn't understand Austrian economics.  He is certainly a political person, but anyone who gets to that position would be.  The president, congress, and bankers would not allow someone in that position who is not political.  They want somebody who is going to toe the establishment line.

I think Bernanke knows the threat of another major session of quantitative easing (money creation).  The Fed more than doubled the monetary base two years ago and this has not led to high price inflation because most of the money has remained on reserve.  The banks are not lending it out.  If the Fed creates even more money and triggers price inflation, it might lead to the money already created being lent out.  This could be doubly disastrous for price inflation.  I think he understands that the Fed has to be careful.

It seems that a better strategy, if the Fed wants to increase price inflation (whether they actually think it will help or whether it is for political reasons) would be to force the banks to lend.  At least this would more likely prevent a hyperinflation scenario.  We can't be sure why Bernanke is not being specific.  We can't be sure if he is dumb enough to start another round of money creation.  I just can't imagine that he is dumb enough to completely jeopardize the dollar.  Hyperinflation would destroy him as much as every other American.

Right now, the Fed is not inflating.  The monetary base has gone down slightly.  We'll continue to watch the charts more than what is being said.

Thursday, October 14, 2010

France and Retirement

There are protests currently going on in France because government officials want to raise the retirement age.  Of course, nobody seems to ask why the government determines the retirement age in the first place.  Shouldn't it be up to each individual to determine at what age they will retire?  The problem, once again, is government.  In this case, it is government involved in the retirement/pension business.

It is actually kind of amusing watching these protests, as long as they aren't too violent.  These people don't understand TANSTAAFL - there ain't no such thing as a free lunch.  They have been deceived into thinking that the government would take care of them and now the system is blowing up in their face.  They simply want to repeal the laws of economics.

It is comforting to know that there are no signs of protests like these in the U.S.  I would rather see tea party protests (even if some are uninformed) than protests asking for more government.  Maybe we'll see protests when discussions get more serious about raising the age for Social Security and Medicare.  Still, let's hope it isn't anything like the welfare mentality in France and other parts of Europe.

It is not to say that we shouldn't feel a little bit sorry for some of these people.  They have been forced to pay into the horrible system and they have continually been told, probably their whole life, that government would take care of them in their old age.  It is naive of people to believe this and perhaps irresponsible, but it is a shame.

It is fun to watch these struggling governments in some ways.  It is particularly fun when you have some leftist/socialist in power, whether in Europe or in a state like New York or California.  In California, why not hope that the Democrat will win.  That way, when budget cuts are the only choice left, it will have to be done by a leftist.  There is nothing better to see the unions, government workers, and welfare slugs out there protesting against a leftist governor that they put into office.  The governor is left with no choice (since there is no Federal Reserve at the state level), but the protesters expect him or her to repeal the laws of economics.

Enjoy the scenes over the next few years.  Governments will continue to be forced to cut back.  The day of reckoning has finally arrived.  Politicians can no longer promise the moon and the sun to everyone.

Wednesday, October 13, 2010

Long-Term Outlook

Being a libertarian, there is a lot to be pessimistic about.  The federal government is running a 1.5 trillion dollar yearly deficit.  This would have been unheard of even 3 years ago.  The unfunded liabilities (mainly Medicare and Social Security) are in the neighborhood of 100 trillion dollars, an amount so ridiculous there is no point on thinking about it.  The Fed more than doubled the monetary base in late 2008 and early 2009.  Politicians are as crooked as ever and government keeps getting bigger and bigger.

Understanding Austrian economics is an advantage in that we can understand that there is a lot more trouble on the horizon.  The economy tried to correct itself in 2008 by flushing out all of the bad investment that had previously occurred due to Fed policy and big government.  Instead of allowing the correction, the Fed and government have provided massive stimulus with bailouts and fresh money.  This not only prolongs the problem, but it makes it much worse.  The next correction, if allowed to happen, will be even worse.  Sometimes it seems that ignorance is bliss.

With all that said, there is reason for hope.  The biggest threat to the politicians and big government is the truth.  The truth shall set you free.  With today's communication technology, particularly the internet, the truth is getting out there more and more.  Politicians can't get away with as much as they did in the past.  People are starting to understand economics.  Not everyone believes the Keynesian lies.  Not everyone believes that more government spending and more debt will solve our problems.  In fact, we are almost at a point where even a majority of Americans don't really believe it anymore.

There is going to be a lot of pain and turmoil in the coming years.  But there are a lot of reasons to be optimistic for the long-term.  It is hard to think that we will be worse off 20 years from now than we are today.  There are no guarantees, but human beings generally want to be free.  Get rid of the propaganda (which the internet is helping to do) and the seductiveness of socialism fades away.  People want to be able to own their own property and control it how they want.  People want to be able to keep the fruits of their labor.  If enough people feel this way, big government will not continue.  There are only 535 congressmen and 1 president.  There are over 300 million people living in the U.S.  If enough of those 300 million plus people feel strongly enough about freedom, then it won't matter who is elected or how they try to govern.

Tuesday, October 12, 2010

Bonds and Inflation

There was an article posted today on LRC by Peter Schiff.  Schiff understands Austrian economics and can explain it simply to the average person.  The article talks about Fed inflation, but the most interesting part is near the end when he talks about bonds.

Schiff states: "A confounding factor is the strong performance of US dollar-denominated bonds. When the Fed creates inflation, that erodes the value of fixed-asset investments like bonds, which can't adjust their returns to the new price level. So many commentators are pointing to the record-low bond yields as evidence that inflation is not a threat. But this is a misreading of the situation.
What is overlooked is that when the Fed prints more dollars, it typically uses them to buy bonds. Traders know this, so they are stocking up on bonds at ridiculous prices just to flip them to the Fed. They don't care that, in the long run, the Fed's policies will destroy the bonds' value because in the short run, the weak dollar policy serves as a tremendous subsidy to bond sellers."

Schiff is saying that low interest rates don't mean that there is a low threat of inflation.  The Fed buys bonds when it is inflating, thereby driving down interest rates, at least for a while.  He is certainly right in what he is saying.  I do think that rates will go up quickly, if and when inflation is perceived as a major problem by the general population or even by the investment community.

This subject has been discussed often here before.  I think it is unlikely that we will see gold go to $2,000 an ounce without seeing rates go up.  But Schiff's point should not be taken lightly because gold may be a warning sign to interest rates.  Perhaps this is what is happening in the latest rise in the gold price.

The point is, don't wait for interest rates to rise to protect yourself against inflation.  Interest rates and bonds may lag because of the Fed trying to suppress rates.  The Fed may "succeed" for a little while, but it will fail in the end.  Get your inflation protection now.

Monday, October 11, 2010

Does the Trade Deficit Matter?

There is often talk of the trade deficit.  It is also referred to as the balance of payments.  This is not to be confused with the national debt.  While I don't think the trade deficit is completely irrelevant, I believe there is misunderstanding.

There really is no problem with having a trade deficit if it occurs naturally.  The U.S. government has a trade deficit with China (to use one example).  China has a trade surplus.  China sells products to people in the U.S.  Instead of using the U.S. dollars to buy U.S. goods, the dollars are often used to buy U.S. treasury bonds.  This represents the trade deficit.

Again, there is nothing wrong with a trade deficit.  The Chinese (whether it's the government or a businessman) could also put dollars into U.S. stocks.  They might prefer to invest there.  New York City runs a massive trade deficit.  Money flows to Wall Street, but Wall Street isn't producing consumer goods.  Nobody seems to have a problem with that (although there's probably someone).

One of the problems with the massive trade deficit is that much of it may be caused by excessive debt.  If the government weren't running a huge deficit every year, then it wouldn't need to sell treasury bonds.  If the U.S. government had no national debt, there would be no trade deficit to worry about.  If there were a trade deficit, it would be foreign countries (governments or people) investing their dollars in other things.

The only threat of a trade deficit is that a foreign government could decide to unload U.S. treasuries all at once and drive up interest rates quickly.  But again, we wouldn't be in that predicament if there were no national debt.  But the same could happen if U.S. citizens decided to sell bonds also.

There are three main buyers of U.S. treasuries.  There is the Federal Reserve.  There are individual investors (U.S. or foreign).  And there are foreign governments/central banks.  These treasuries could be unloaded by any one of these parties.  The only one controlled at all by the U.S. government is the Fed.

Don't get all worked up over the trade deficit.  We should get worked up over the massive national debt that causes the massive trade deficit.

Thursday, October 7, 2010

Money Supply Update

The adjusted monetary base has been flat or even declining a little in the last several months.  The explosion in the monetary base occurred almost 2 years ago.  The chart is here:

The excess reserves held by commercial banks has practically mimicked the monetary base.  The chart is here:[1][id]=EXCRESNS&s[1][range]=1yr

The rise in gold does not seem to be because of imminent price inflation.  Perhaps it is based on fear that there will be severe price inflation once the banks start to lend.  We'll continue to look at these charts.  If the excess reserves start dropping rapidly without the monetary base falling, then we should look for price inflation to follow.  The same could be said if the monetary base increases but the excess reserves don't.

It is important to pay attention to what is actually happening instead of what is being reported.  We had high monetary inflation 2 years ago, but the banks have kept that money out of the system.  The Fed is not inflating now.  Perhaps the Fed will start again soon, but we can't be certain until it actually happens.

Wednesday, October 6, 2010

Fed Officials Mull Inflation

That is what an article from the Wall Street Journal says.  Of course, the article starts off wrong right out of the gate.  It says, "The Federal Reserve spent the past three decades getting inflation low and keeping it there."  Sure, maybe if you compare it to the awful 1970's or to Zimbabwe.  While price inflation rates were not in the double digits annually in the last 30 years, it was still significant.  And of course it is hard to completely trust the CPI.  While the CPI is not totally useless, it doesn't fully account for all of the bubbles that have taken place in stocks, housing, and other things.

The rest of the article is still worth reading only to realize that Fed inflation is a real possibility in the near future.  The Fed and the government really are worried about the economy and the politicians don't really know what to do about it.  While I think most of the politicians in DC are dishonest, along with Bernanke at the Fed, it wouldn't matter much if they were honest.  They don't understand Austrian economics.  They don't understand the business cycle that is caused by fiat money creation.  Bernanke is probably not quite as dumb as the rest of them, but he is still somewhat clueless.  If anybody at all had a clue, it was Alan Greenspan.  But that just makes Greenspan evil because his policies were bad and he knew it, but did it anyway and continues to lie to this day.

The only solution the Fed has right now is more monetary inflation.  They like to call it quantitative easing now, but that is just word games.  If and when the economy shows signs of more weakening, the Fed will likely create more money out of thin air.  It doesn't want to see a depression, so it will kick the can down the road and try to hold it off, even though it will just make things worse.

We'll continue to pay attention to what the Fed says.  More importantly, we will pay attention to what the Fed actually does.  I don't see a Paul Volcker moment coming soon.  I see more monetary inflation first.

Tuesday, October 5, 2010

Gold Again

Gold was up again today, hitting a new record at about $1,340 per ounce.  It is hard not to comment while running a blog called "Libertarian Investments".  Gold represents sound money, everything that big government is against.  It is really amazing that gold is at all-time highs (at least in nominal terms) while mortgage rates are near all-time lows.

So what should we be doing right now in terms of gold and how it fits in with our investments?  If you don't have any gold or gold related investments in your portfolio, do what you can to get some as soon as possible.  Every portfolio should have some exposure to gold at all times.

If you have some gold, let's say 10 to 20 percent, then it would be wise to increase your exposure a little bit, but you should wait for dips to buy.  Needless to say, today would not be considered a dip.  But you shouldn't sell with that amount, especially in today's frightening environment.

If you have over 25% of your portfolio in gold and gold related investments, you might actually consider selling a little bit.  You might ask why a libertarian would sell his gold.  First, just because gold would be the most likely choice of the market in a free market for money, it doesn't mean we are in that situation now.  Whether we like it or not, the U.S. dollar is the money we use in the U.S.  If you try to shop at Walmart or your local grocery store with gold coins, they will look at you like you're nuts.  You still need U.S. dollars as that is what acts as money in our world today as it exists.

Second, you should consider selling a small amount of your gold investments (if you already have a lot) because it is good to take some profits off the table, even if those profits are denominated in dollars.  Think of it this way - if you sell a little gold and the price goes down, you will be able to buy back even more in the future.

Gold is making a good run (while the dollar declines) and it is not surprising.  At the same time, we shouldn't be surprised if there is a pullback below where it is now.  The bond market doesn't see price inflation right around the corner.  The gold market may be telling us something different.  Is it acting as the canary in the coal mine or is it a false alarm?  Only time will tell.

Monday, October 4, 2010

Debt to GDP

The debt to GDP ratio will soon be at 100%.  This counts the IOUs for Social Security and Medicare.  It does not count all of the unfunded liabilities (promises) that include Social Security and Medicare.  The IOUs consist of money that was collected through payroll taxes in the past and spent on other things (vote buying).  The rest of the promises are unfunded liabilities.  Unfunded liabilities are estimated to be as much as $100 trillion.  This will never be paid.  There will be benefit cuts which will include an increase in the retirement age.

The debt to GDP ratio hitting 100% is not something really meaningful other than it being a milestone.  Japan's ratio is close to 200%.  The biggest thing about hitting this number for the U.S. is that it will make some headlines and remind people of how much trouble our government has gotten us into.  The debt is somewhat manageable right now for the government because interest rates are low and foreign governments continue to buy, or at least roll over, U.S. debt.

The ratio will continue to increase and eventually rates are likely to rise.  This will be a tough scenario that seems inevitable at this point.  The U.S. will be discussing austerity measures like Greece if we are not discussing mass inflation or hyperinflation.  Mass inflation seems like a good possibility.  Gold seems to think so right now too.  We could easily see price inflation of 20% or more.  Hyperinflation is much less likely.  It would destroy the banking system and cause revolution.

We'll keep an eye on the debt to GDP ratio in the next several months.  When it hits 100%, it should at least be fun to read some headlines.  Some will be alarming and others, written by Keynesians, will say "no big deal".  It is a big deal.  It is taking capital away from the private sector and lowering our standard of living.

Saturday, October 2, 2010

Permanent Portfolio and Timing

Keynes is quoted as saying that markets can stay irrational longer than you can stay solvent.  This is probably one of the better things that Keynes said.  Austrian economics can teach us a lot, but it can't really teach us how to time our investments very well.

That is one of the reasons that I am an advocate of the permanent portfolio (as described by Harry Browne in his book Fail Safe Investing) even for advanced investors and investors that understand Austrian economics.

Many libertarians will criticize the permanent portfolio for investing 25% in bonds.  They say interest rates will go up and bonds will be a loser.  These people will be right one day.  The problem is, when?  There were libertarians predicting higher interest rates 5 or more years ago.  Bonds have been a great investment over the last 5 years, especially compared to stocks.

I don't disagree that interest rates will eventually rise and that bonds will fall.  The problem is that I have no idea when this will happen.  Most people are not rich enough to continue to bet against bonds.  And even if you just avoid them, then where will you put all of your money?  Stocks have been horrible.  Gold has done very well, but even gold could take a major hit if the economy goes into free fall again.

The most difficult thing about investing (for those that aren't Keynesians and understand some free market economics) is the timing.  That is why I think everyone should put at least half of their money into a setup like the permanent portfolio.  Use the rest of your money for speculation if that is what you want to do.  And just remember that markets often seem irrational and the market doesn't care about your reasoning or about your solvency.