bearfund

Are You Ready to Stop Whining and Put Your Money to Work?

This is true every time, until it isn't. You can be right 2,766 straight times and then lose everything being wrong once.

The United States is deeply broken: politically, socially, economically. Its citizens do not save, do not invest in assets that improve their competitive position or productive capacity, and have repeatedly opted for more paper wealth over sound money and long-term strength. Their government is completely unresponsive to both their interests and common sense, and their answer is to continue electing more of the same. They view government borrowing and handouts as part of the solution, not part of the problem. They all want something for nothing, and when things go bad, they expect their government to make them whole. They never question where that money comes from or whether it's really worth anything.

For these reasons, Americans are now more indebted - at every level - than ever before. There are people who will point out that "household assets" top "household debt" by at least $40T. It is unclear what those assets are or how they are valued. It's safe to assume much of that is in residential real estate and could never be realized as cash. Perhaps more still is in stocks. Knock another 20-50% off. The stark reality is that Americans are not deleveraging at all; leverage is increasing as asset prices fall and marginal participants are forced to borrow to keep their heads above water. And we haven't even started on the public debt, an $11T giant sucking sound, most of it financed by short-term bills and notes. The world's willingness to lend to a weak economy with a bad balance sheet, in its own currency that is being printed like it's going out of style, at 2.7% for 5 years cannot be infinite. Only the sleepy complicity of the central bankers' club in keeping global rates at rock bottom has anyone interested in such paltry returns at such great risk. This game, too, will end some day. When it does, there will be no way an America with decrepit infrastructure, horrible individual balance sheets, and decades of malinvestment behind it will be able to finance a $12-15T debt at the double digit rates the world will then demand.

I do not know what will happen then. Perhaps Americans will repudiate the debt, return to their forefathers' frugal ways, and begin investing in themselves again. Perhaps they will simply tax their economy to death. Perhaps they will hyperinflate, destroying both their creditors and their own economy in a scorpionesque fit of devastation. Whatever happens, it won't be profitable for holders of US equities. Which means buyers are betting that the reckoning is well off in the future. It may be. Or we could already be committed to it in the next year. No one can say, because it depends primarily on the actions of secretive foreign central bankers, notably in China. So when you buy those underpriced stocks, understand that you're really investing not in paragons of transparency but in the shadowy halls of the Forbidden City.

Good luck with that. I'll stick with gold.