The Real "Crisis"

With all eyes focused on the economy and the financial crisis, let us take a different approach to the issue than has been forced upon the struggling private sector by the privileged public sector -- a reflective exercise now that the Administration has begun its victory lap for avoiding another Great Depression and ushering in an economic recovery (or so they claim).

There were no problems within the financial system to be solved that could not have been solved by a free market. If we accept the premise that it is inherent within a capitalist system under a fiat currency structure that business cycles will consist of periodic booms and busts in order to adjust for the overages and “underages” in its economic activities -- then all was normal; but, that is not to say all was ethical or just. As though governed by gravity, the headier we prosper during the boom period, the further we fall during the bust. Over time, a willing and creative society will lose less than it gains during these normal economic cycles, thereby allowing all to enjoy some part of the fruits of labor. Think of an economic tide that raises all boats, if you will.

So, what was the “crisis” that demanded such urgent action and the unprecedented intervening in our business cycle and our laws? Simply, the “crisis” was the fear from the governing elite of dismantling the facade of the Federal Reserve as an entity to responsibly protect the monetary system and the strength of its citizens’ currency. Truth be told, the accomplishments of the Federal Reserve since it was conceived behind the veiled doors on Jekyll Island nearly a century ago have been to destroy the purchasing power of the U.S. dollar through inflation by approximately 97%, equivalent to three cents on the dollar now, and to enslave the working class to the bankers and politicians. History is clear. The U.S. Congress gave the country’s destiny over to a group of private bankers with the establishment of the Federal Reserve in 1913. With just a swipe of a pen or a change in interest rates, the Federal Reserve can affect the spending patterns, desires and well-being of our society.

Trillions in stimulus have been spent and what have we gained? We have exonerated and, in fact rewarded, much of the financial sector by transferring the illegitimate, greedily conceived, overly ripe investment creations and mal-investments over to the citizen-slaves of the country, that is to say hard-working taxpayers. To date, the majority of banks have been reluctant to increase lending and for good reason – America is already overleveraged. Banks have instead been borrowing from the Fed at near 0.0% and buying Treasuries with the borrowed funds for a guaranteed profit. These actions account for some of the unexplained “demand” for Treasuries and likewise lower interest rates. However, there is a real cost to the society for the socialization of debt. We will pay in the form of inflation and the further loss in the purchasing power of the U.S. dollar as these debts become monetized. The only reasonable method of liquidating our insurmountable debt is cheaper dollars, and our trading partners are becoming all too aware of this reality. Recent reports indicate that China is looking for ways to convert a portion of its dollar hoard in an uneventful manner and is a willing and able buyer of gold from the International Monetary Fund. The IMF is rumored to desire increasing their reserves of U.S. dollars in exchange for an eighth of its gold reserves, or roughly 300 metric tons valued at about $13 billion. We suspect that it was China who initiated the exchange with the IMF although we have no way of knowing.

Economic growth through government stimulus and further borrowing is not sustainable, and markets will become fearful of investing in this type of environment. Economic “green shoots” wilt if not properly nurtured. A return to near full employment and U.S. manufacturing will be key to any sustainable economic recovery. At this time, we are still losing jobs, as well as homes to foreclosure at an alarming rate. Although we may see an uptick in GDP in the third or fourth quarter of 2009 and “technically” an end to the recession (due largely to inventory rebuilding), this will have been largely orchestrated by way of government stimulus and cash incentive programs for the auto, housing and other industries. With our economy so reliant on consumer spending and with jobs increasingly scarce, we believe that the “technical” recovery will be only temporary. The recovery for Wall Street may be here, but the recover for Main Street has yet to turn the corner.

The market, on the other hand, has had a significant rally off the March lows. This is a typical response to a severe market downturn and usually referred to as a bear-market rally, albeit, admittedly stronger than expected given the unresolved economic issues. The market could still move somewhat higher from here just on momentum buying alone. But, the market appears to be pricing in a pretty good economic recovery later this year and next with the overall market trading at near historical norms of 16 times earnings. It is also conceivable that with the U.S. dollar’s prospects so bleak, the market may be getting some support from investors eager to exchange “paper” for real assets or stocks that have a call on those real assets. With so many economic and monetary uncertainties however, equity prices could quickly reverse course and possibly retest earlier lows. So, it remains prudent to invest cautiously, that is to say conservatively, and be willing to accept higher than normal allocations to cash temporarily where principle is protected against capital loss. We believe that the market is, at the very least, fairly priced and most likely over-priced at these levels. A big question remains for the economy: will the private sector pick up where the public sector left off, once government stimulus has ended?