Sense and Nonsense

As you may have noticed, there have not been any money management and investment comments at Sense and Nonsense for six months or more. That is because I have simply been aghast at the speed which the US has moved from market driven to a centrally controlled economy. There is also an element of denial. It is hard for me to concede, to myself or anyone else, that the accumulated knowledge of some thirty years of successful investing is now obsolete and useless.

I concede. I must start over with little more than an open mind and willingness to adapt to new realities. This concession is not based on desperation or defeat – I have made at least a small investment profit every year since 2001. I have more assets and fewer obligations right now than I have ever had before. My life is good and I am grateful.

That said, reality remains a harsh master. The ideas that were profitable in the past are unlikely to be successful in the future. That is an astonishing statement that will be rejected by most investors. So, let me review the facts that lead me to that conclusion:

• As early as February, 2007, it was apparent that the major financial institutions in the US were bankrupt and would fail. They did.

• The federal government's response to this failure was to shift vast amounts of debt from the failed banks to the US taxpayer. This was done in the name of expediency to prevent an immediate general global financial collapse. It did not solve the problem but it did delay the day of reckoning. The debt is still there.

• The economy fell into recession with declining GDP and rising unemployment. The federal government responded (irrationally I think) by assuming more debt in the name of the taxpayer to “stimulate the economy”. It did not work because they found that they had to borrow and spend $5 to generate $1 of economic growth. The net result was that the public debt rose exponentially while the economy remained weak. Tax revenues began to fall.

• Again in the name of expediency and a deliberate policy of postponing and evading serious problems, the federal government assumed ownership (or at least effective control) of Fannie Mae, Freddie Mac, American International Group, General Motors, all of the major US banks and forced many competing businesses into bankruptcy. The net effect is that the federal government now has a dominant management role in all financial transactions and insurance in the US and a strong influence in manufacturing via control of General Motors and defense contracts.

All that is simply Keynesian economic theory and not enough to make me think that everything I know is obsolete and useless. We have done this before, although on a much smaller scale. I actually think we could muddle through if that was the end of the story. But it isn't.

Overlaying the situation outlined above is a radical departure from traditional US political and economic policy. It began when President Obama and an opposition-proof Democrat congress took office in January, 2009. They immediately began:

• Rewarding their political base by transferring wealth to them by decree and in violation of long established contract law. The pre-arranged bankruptcy of General Motors was the most outrageous example in that GM assets were transferred to the United Auto Workers union at the expense of senior bondholders. Less obvious, but just as outrageous, was the massive flow of public money to politically friendly organizations and institutions that was buried in the language of every bill passed by congress. This level of open corruption has never been witnessed in the US before.

• Crafting legislation in secret, closed-door Democrat Party caucuses and forcing passage without debate, deliberation or disclosure. By closing out the congressional opposition and preventing public scrutiny, massive bills with thousands of pages of details became the law of the land before anyone had time to even read much less understand or debate them. This level of raw power politics has never been witnessed in the US before.

• Expanding federal budget deficit spending to the point where no credible person thinks it can be repaid or even serviced and rolled over indefinitely. More than 50¢ of every federal dollar spent now must be borrowed. Tax revenues do not even come close to matching current spending nor can they in the foreseeable future. Either taxes on working Americans and profitable businesses must more than double or the US will eventually default on its debt. Either would be an economic disaster.

• Using federal mandates and regulation to force states and businesses to finance dubious federal social and political goals.

• Saying publicly that they do not care about public opinion or future elections. They have the power to do anything they choose now. By exercising that power to the fullest possible extent, they can neutralize any future opposition or challenge. I am not sure I agree with that – my mind rebels at the thought of it happening in the US. At the same time, I can see nothing to prevent it.

I could continue with both these lists but I won't. That is enough to make my point and let you know why I think everything I ever knew about investing is obsolete and useless.But hope springs eternal, as they say. Maybe it is just a temporary aberration that will correct itself. Americans have never tolerated such behavior on the part of their leaders.

Well maybe, but I doubt it. It looks to me like the harsh, biting bitch of reality is going to eat hope alive. Here is why:

• Previously respected, honored and admired Americans like Warren Buffet, Bill Gates and Bill Gross joined cause with wealthy foreign individuals (most notably George Soros)to finance and promote central control of the US economy. One can expect this greedy behavior from the New York financial cockroaches but Warren Buffet, the Oracle of Omaha?
  Why, I do not know. They have enjoyed the best that America has to offer. Maybe they just want to close the doors so no one will ever be able to match their achievements. Maybe they just want a few more dollars in their tax-exempt foundations. Why doesn't really matter – the fact is that the wealthiest people in America wholeheartedly support the destruction of the American middle class. Their influence is large.

• The vast majority of the American media support a centrally controlled economy. These are middle class Americans who actively want to destroy their own position in society. Do they really think they will all be promoted to Czar status in the brave new world? They delude themselves while they delude the American citizenry. When the news turns into government sanctioned propaganda, people are smart enough to know it and quit listening. The news just becomes background noise. But without a free and questioning news media, it is difficult (if not impossible) to have an informed public. Without an informed public, there can be no meaningful election.

• America has passed a tipping point where a growing majority of the citizenry is dependent on some sort of government paycheck, pension or subsidy. They can be expected to vote what they perceive as their own best self interest. That does not bode well for the private sector wage earning middle class or American business. It strengthens the move toward central control and equality in poverty.

So there you have it. That is why I think everything I ever knew about investing and personal finance is obsolete and useless for the rest of my life. What am I going to do about it? We can start by looking at the characteristics of a centrally controlled economy as opposed to a market driven economy. That will be the topic of future articles here.

Comments and ideas are welcome.

Cordially,
jch