The Global Put: Inspired By 'Endgame' By John Mauldin And Jonathan Tepper

Includes: DIA, QQQ, SPY
by: Turtle Management

Most people are familiar with the now infamous “Greenspan Put.” The Greenspan Put is a reference to Alan Greenspan’s tendency to prop up the market in times of duress by keeping interest rates low. While there is a case to be made regarding his loose financial policies and their fueling of the credit binge bubble and banking crisis (a very strong case I might add) I want to focus on our current “Global Put.” This Global Put comes from governments. Whenever the market starts to go down due to a weakening global economy, investors cry for stimulus and the governments deliver. As a result, they add to our deficit, burden the taxpayer, and worsen the long term outlook for this country. Business cycles are normal. There have always been times of boom and times of bust throughout the history of the global and individual economies. Our current policies have been temporarily avoiding the bust times to prolong the boom just a little longer. We have traded in short term pleasure for long term pain.

There are basically two ways in which we or any country can free itself from excessive debt. First, it can default or be forgiven of its loans (if you are a small developing nation you can be bailed out by the IMF and grow out of your slump, but that discussion is for another time. If Greece were the size of Italy it would have defaulted already, but because it is so small the Germans can afford, temporarily, to bail it out). The second way a country can get rid of a deficit that they cannot grow out of is through inflation via the printing of money. Politicians always choose to print and inflate a currency as opposed to outright default in order to make total debt a lesser percent of GDP and revenues making payments more manageable as it is a stealthy default. Most people do not realize that the country is in fact defaulting. As a result, the politicians won’t get booted from office as they would if they just came out and told domestic bondholders (mostly pension funds and older citizens looking for a risk free return) that they won’t be getting 20% or 30% or 50% of their money back. Instead they give them the $100 or whatever they were promised, but that $100 only buys 50% of what it did when the investor first lent the government the money. Inflation is not an immediate threat as deflation is more of a concern due to Europe, but we will come back to this discussion in a bit.

Whenever the market drops people cry for the Global Put. They want the president, the Fed, the EFSF, the ECB, whoever it may be at the time, to step in and increase government spending. Whenever consumer spending/consumption drops (consumption makes up about 70% of U.S. GDP) the market cries for the government to increase spending in order to stop the natural recessionary business cycle and put off the pain of a recession. Like a teenager, no one wants to be held accountable and pay for their prior mistakes (the mistake here being borrowing too much at the consumer, state, and federal level). This is a major problem.

The longer we put off biting the bullet in the short term the more pain we will feel in the long run. Every time we print we devalue the dollar (greater supply of anything means each individual unit is worth less), add to the deficit, push up the price of oil (it’s traded in dollars), and crush the poor and middle class. Printing boosts asset prices, both housing and stocks because they are bought and sold in nominal dollars not real dollars (real dollars refers to dollars adjusted for inflation so you can compare purchasing power, apples to apples kind of thing). Yes housing prices are still falling, but that is because they never found their true bottom; once the stimulus dried up the housing market started to go down again. Who owns real estate and stocks? People with money, the wealthy. The poor and middle class don’t have a lot of money in real estate or the stock market; where is there stimulus?

This is a long term problem because our country is not and cannot grow out of its debt, the demographics do not support it. We have too many people entering retirement looking to collect social security instead of entering the workforce. Wage growth has been flat while the dollar has been declining pushing up the price of gas at the pump. People have been earning less or the same amount of income for the past few years while the cost of living in terms of both food and energy has increased, all thanks to stimulus and a depreciating dollar to name a few.

I am not saying that we should not have bailed out the banks as it was the lesser of two evils at the time. However, we cannot run from our problems now either. Government spending to boost consumer spending and consumption is not a long term fix. We will have to pay back the money we borrowed at some point in some fashion. Most likely we will pay down the road in part via inflation. Inflation is essentially a tax on the people of a country who use the inflated currency as a medium of exchange; it’s a tax on the responsible, a tax on savers. Let’s say you worked really hard and saved $1,000,000 over the past 20 years. If the government inflates the dollar 50% over the next 5 years (a little over 8% per year, which has happened before look at the 1980s), your $1,000,000 that used to buy 4 Ferrari’s now only buys 2. You essentially incurred a 50% tax on your money over a 5 year time period.

Crying every time the market falls and asking for stimulus has not and will not solve anything long term. I hate to be so negative, but we can’t grow out of our debt thanks to an aging population (you need to increase either your labor force or your productivity to increase GDP), Europe can’t grow out of their debt either. In addition, we cannot keep running a $1.2T annual deficit. We have to stop spending more than we make as a country. Cutting government spending will cause short term pain, a lot of pain. The alternative is to print money, but as I have shown that will also cause pain for the poor and middle class, which won’t help the rich either. Printing and borrowing just puts off the inevitable and puts us in even more debt which will make our situation even worse (look at Europe now).

Stay away from the dollar as much as you can when investing over the long term. The dollar is garbage. Unfortunately, so are many other currencies and many countries will try to devalue to boost growth like we are/will. This is another reason why we can't grow or export our way out of debt.

You can say I am being too negative or whatever, but there is a reason the price of farm land has gone up while the market and housing have gone down or remained flat. Look at the numbers. People are still losing jobs here and unemployment is very high. The Fed is trying to do the best they can by not killing a recovery by cutting spending too fast. They want to reign in the deficit over the next few years and then will look to try and inflate out of this mess at maybe 6% per year or so. Inflation is very hard to control and once it is unleashed it can run wild. The Fed cannot play God and do so with 100% success. Expect the next 5-10 years to be as tough as the last few. Don’t be so eager to cheer the coming of the next Global Put (QE3), remember that you are giving up a piece of long term prosperity for short term gain.

Bottom Line: The Fed and Washington are very limited in what they can do here. There is no quick fix or pain free solution. There is no "right" answer in terms of printing or cutting spending; there is no get out of jail free card.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.