Sunday, October 11, 2009

The Rally is Over for Now

2009, so far, has been a great year for stocks. The first two months of the year certainly didn't look that way as the Dow collapsed to the 6400 level by the 9th of March. But, since then, it has been nothing but straight up. My guess is that this rally is basically over.

The headwinds are enormous. Where to begin?

The US national debt is spiraling out of control. The debt situation is far, far worse than is being reported because of: 1) consistent underestimation of future spending; 2) consistent overestimation of future economic growth and future tax revenues; and 3) the staggering amount of "off balance sheet" obligations of the US government. The Congress and the Administration have consistently favored legislation that adds to the national debt and resist any effort to slow its growth.

The war on lower income Americans by the President and the Congress implies high and persistent unemployment levels, a lack of credit availability, and a growing dependence on government as opposed to the private sector. Things like a nearly 40 percent increase in the minimum wage in just a few years mean fewer jobs for low income Americans. Remember that the minimum wage law does not say: you must hire this person and pay them a minimum wage...that is not what it says. What the minimum wage law says is: if you would like to hire someone (or be hired by someone) at less than $ X per hour, you are a criminal. Minimum wage laws outlaw contracts desired by both parties! You and your employer's views don't matter in this equation...only the government's views matter. Most people who support this kind of legislation will never be subject to it -- unions, highly educated folks, rich left wingers...they love this stuff, because it doesn't extract any penalty from them. Only the poor and low income suffer from this type of legislation.

Some version of the Obama "health care reform" legislation will be passed by this Congress and signed into law. That "reform" will add trillions of dollars to the already staggering national debt (for reasons cited above). It will also add layers and layers of government bureacracy to the health care system and, ultimately, abolish free choice and free markets from our health care system. There will be a decline in the quality and quantity of our medical personnel (a trend that is already in place) and America's health care system will eventually rank side by side with its public education system -- among the worst in the civilized world. Meanwhile, plaintiff lawsuits will abound with taxpayers more and more the target of the John Edwards crowd, since the government will more and more become our health care provider.

"Cap and trade" will pass in some form and will deal another body blow to the US's economic future. A new law that does nothing to lower global carbon emissions will bring crippling increases in the electricity bills for all American households and businesses. This act of economic suicide will be cheered by Europeans and others who despise the historic strength of the American economy. But, it will be another body blow to the average American trying to dig out of the current malaise.

The new regulatory regime will have the effect of shifting global capital market primacy away from the US and to other countries. New York will loses its prime position (that trend is already under way...the Obama policies will simply accelerate that trend). Lending markets will become much, much more restrictive under the new regulatory regime and financial innovation will be effectively outlawed in the US. Shanghai and Hong Kong will be the beneficiaries. The Asian economies will not adopt these self inflicted wounds that would prevent their capital markets from flourishing. The Asian economies will flourish.

Where to invest?

Here is what I would guess:

1) Bet against the dollar and against the US treasury market

2) Buy US real estate. The reason this works is that America will become more and more like Europe. Business innovation will shift to Eastern Europe and Asia and America will become a stagnant land of folks spending their time trying to divide up a never growing economic pie. Stagnant assets do well in that environment. The US will become cheap compared to the rest of the world as the American dollar collapses. It won't take too many yuan to buy the average American house in a few short years.

3) Buy a diversified portfolio of global stocks and bonds with the heaviest weights in Eastern Europe and Asia. Underweight the US and Western Europe. They are going nowhere fast and are preoccupied with programs that devastate economic growth.

The world is changing and economic strength is shifting. The US and Western Europe are digging their own economic graves. That may not be so bad though. Perhaps it is time the rest of the world got a shot at economic prosperity. My guess is that Asia is most likely to fill the void that the US is rapidly creating.

1 comment:

Fmalik13 said...

I agree with the "Cap and Trade Bill" not working. The Democrats believe that it will work because it worked with Sulfur Dioxide which produced Acid Rain. However, that was a local issue in comparison to the the global issue we have today. Unfortunately, everything is effected by environmental changes. The Republican Bill if one carefully looks at it, truly is the better bill and I have no bias in this respect because I am not a Republican nor do I have anything against Republicans.

The US should have waited until the UN meeting and Copenhagen talks to get some insight from the other countries. Especially since the US wants to lead this effort, I would think they would take as much advice as they could get...