06/10/2009 - More of the Same — Looking back over the past 3 months, not much has changed.  We continue to receive mixed economic results with generally poor employment news.  There are signs the recession is decreasing in severity, but these are ambiguous.  It seems clear we need to take a longer view of the political situation to see the likely result of the numerous governmental actions that have been taken over the past year.

First, our enormous budget deficits will clearly have a negative impact on all future economic performance.  From crowding out to dollar weakness, there will be a price to be paid.  And the continuing unwillingness to face the looming demographic catastrophe will exacerbate everything.  We cannot ignore the built in future deficits resulting from increased social security and medicare for much longer.  Plus, these are inflation linked, which will make things much worse. It all adds up to the same thing: low growth, higher inflation, higher rates, lower financial asset prices and reduced standards of living.

While it is difficult to be optimistic in the face of all this, we need to remember the positive impact of technology on our society and the economy.  We continue to progress, at an exponential pace, towards massive change in this area, as our computing power  and our understanding of various physical and biological processes continues to dramatically improve.  Will this be enough to offset all the negatives?  Only time will tell.

03/07/2009 - Crisis in Confidence Continues and the Law of Unintended Consequences – The markets continue to be buffeted by an unending barrage of bad news.  Only recently has our new President begun to put a more optimistic tone on things.  But, as the saying goes, too little … too late. Just compare the market reactions to the current crisis with the past few. In 1987 we had a massive breakdown, similar to the current situation in many ways.  But then, Chairman Greenspan made many comments about protecting the market stability and stand behind institutions.  Because the markets had confidence in his ability the Fed  and the Treasury had to actually do very little.  The same was true during the LTCM blowup.  Compare that with the situation last year as the crisis developed.  The Fed and the Treasury were forced to back up their promises because the markets had little confidence in the Fed or the Treasury.  Viewers of the news are subjected to a constant barrage of “crisis” stories.  One of the main reasons why the markets have no confidence is the inconsistent actions of the government by rescuing Bear Stearns while letting Lehman fail.  Markets hate uncertainty and if they don’t know who will be saved, they will pull back from all transactions.

 Until the world public regains confidence in their leaders to repair the damage, the carnage will continue, fueled by the never ending bad news bears.

Unfortunately, the actions taken by President Obama will lead to further problems in the future.  Some government spending is positive in these situations; massive deficits are not. Although we should have learned from the experience of Japan in the 1990’s and our own experiences in the 1970’s and early 1980’s, it appears we have not.

Governments do not spend money efficiently; businesses and consumers do it better.  Certainly infrastructure spending is positive and productive.  But that only accounts for a smaller part of the massive spending proposed.  The correct solution is to put more spending power in businesses and consumers by cutting most taxes.  An exception would be to increase the gas tax to promote alternative energy development and add more to the infrastructure pool.

 However, just like this slowdown was predictable years ago, a few things seem very obvious.  If congress approves this spending fiasco we are in for years of higher inflation and low growth; stagflation.  And the current Fed remains “challenged”.  Chairman Bernanke has done little right over his term and will continue to cause market volatility.  Unfortunately, it’s too late to do much about other than try to replace him with someone who can regain market confidence.

It’s not a pretty picture.  Investing in TIPS, and hard commodities should be among the better strategies, although as the early 1980’s showed us, once this process has begun, there’s no easy way out.