FedUpUSA

Archive for the ‘Federal Deficit’ Category

An Introspective Look At The Future Of America

By Craig Harris
earthblog.news@gmail.com

As we close out 2009 and look forward into 2010 and beyond, this has been a year of near financial catastrophe and monumental change, none of which benefited America or ordinary Americans. Late in 2008 and throughout 2009, events have happened in the US which would have been labeled unfathomable just a few short years ago, and yet already these monumental changes are expected to be filed into the memory hole and Americans are expected to believe nothing has changed.

As we exit the year, we are told the US is a laissez-faire free market economy and yet the US government is now the largest owner of housing in the US as well as the owner of last resort for some of the largest and completely insolvent US corporations. The Federal Reserve, a privately and anonymously owned and controlled corporation chartered with issuing the nations currency, were given the green light by themselves to transfer to themselves and their shareholders the people’s wealth in the form of their future labor. The FED balance sheet has ballooned to become a junk bond warehouse as they overtly and covertly buy their own debt, immune from any sort of oversight, regulation or auditing and operating above the law. Along with that, increasingly coercive brute force measures are now routinely necessary to manage and manipulate so called “free market” asset prices which are cheerled by so called “financial news media” whose board members and management are all the same people who transferred the people’s wealth to themselves. The corporate media party line idea of a “free market US economy” now seems like a distant memory and it all feels like systemic fraud, corruption, malfeasance and organized crime at the very highest levels.

During 2009 we have seen the continued collapse of American industry amid wave after wave of layoffs. The corrupt corporate media cartel likes to trot out a group of FED sponsored shills who call themselves “professors” to call this a “jobless recovery” although it’s difficult to imagine a recovery where American industry has collapsed and is now owned by the government. US cities both large and small have been decimated by the loss of the US manufacturing base. Detroit now resembles a third world country with a 50% unemployment rate. Ransacked, foreclosed houses go for a dollar apparently because no one who has a choice is willing to own property or live there. The US has an officially stated unemployment rate of ten percent and a real unemployment rate of over 20 percent. Wall Street may have recovered due to a direct injection of capital from the future labor of the people, but there has been no action taken whatsoever to improve the situation of the average citizen as the disconnect between the ruling Oligarchs and Wall Street, the real economy and the lives of ordinary Americans continues to widen. The people’s bailout money, which represents the future labor of Americans, went directly into the pockets of the people who created the crisis in the first place because they are in the enviable position of being “too big to fail”. Interestingly, or sadly, the same people and institutions responsible for and who profited from the catastrophe are still in charge and have handed even more power and control to themselves. Although there has been talk in Washington of “too big to fail” being undesirable, the result of the post collapse policies have resulted in ever fewer, ever larger players with more power and control and instead of being “too big to fail” now wield so much money and power that they demonstrate wholesale ownership of the entire US political body.

Due to the post collapse monetary and fiscal policies, the people have now been saddled up with an unpayable level of debt. The cause of the near total collapse of the financial system was too much debt and the “solution” has has been even more debt piled on to the original debt. During the year, the Dallas FED estimated the financial obligations of the US government at 99 trillion dollars. The head of the TARP program estimated the bailout cost at 24 trillion dollars. Totaled together the US has in the neighborhood of 120 trillion dollars of current and future obligations on an annual revenue of around 2 trillion dollars which is falling due to high unemployment, higher state and local taxes and fees and lower wages. Cutting that down to size, imagine earning 200,000 a year and having a debt of 12 million dollars. In short, the US dollar has become a token of an unpayable debt and thus the anchor of the entire global financial system is a ponzi fraud. It becomes impossible to compute the value of anything as measured in a fraudulent currency that represents an unpayable debt.

The banking system is not lending money because it’s still insolvent. The people, having lost over 5 trillion dollars in the real estate bust are also collectively insolvent. Many US states and cities are bankrupt or near bankrupt. One in nine Americans subsist on food stamps. Even as a college education has become unaffordable to most Americans, college graduates now find themselves jobless. One in seven households now have their adult children living back at home due to the inability to find a job. The homeless population is growing and tent cities sprouted up across America during 2009. The estimated homeless population in LA alone is 40,000 people a night. People in the US if they have a job are working longer and harder to make the same income. Wages have remained stagnant and the real cost of living continues to spiral ever higher for ordinary Americans. The new man in charge, elected on a platform of “change”, has delivered his change in the form of change=no change, or how do you like your change now?

By any metric you choose, whether it’s the median home costing half the median income even at artificially low interest rates, to the ballooning cost of insurance, healthcare, education or anything else people spend their money on, the US is experiencing a rapid decline in the standard of living for ordinary Americans and an emerging ultra rich ultra powerful shadow oligarch rule amid a generalized and widespread financial and social decay. The US population is becoming a nation of voiceless serfs with fewer and fewer remaining civil and property rights and a rapidly decaying standard of living, the antitheses of everything America is said to represent and strive for.

The hypocrisy and fraud of the oligarch rule corporate media story line is now nearly impossible for an educated, informed adult to digest. As Jim Grant pointed out recently, according to Section 19 of the Coinage Act of 1792, the penalty prescribed for any official who fraudulently debased the people’s money is death, yet in 2009 debasing the people’s money resulted in a “man of the year” award from the self serving corporate media who will be next in line for a bailout from the people for their good service to the new oligarch rule. This organized crime, this theft, occurring right out in the open, may explain why employees of the largest US financial institution are now not allowed to gather in groups larger than 12 outside and their executives are carrying firearms. In an affront to the intelligence and sensibility of any citizen of this planet, the new US president expanded a war he was elected to end and started a new frontier in Pakistan, for that he was awarded a Nobel Peace Prize. The people who were awarded hundreds of billions of dollars of the people’s money because they lost all their money are skimming millions and billions off the top for themselves and their associates in what they call “bonuses”. 2009 has been a year of egregious assault on the American public by the people in charge.

The “people’s representatives” as they like to be called, no longer represent the people at all but instead solely represent and pledge allegiance to the special interests and corporate lobbyists who have bought and paid for their votes, along with the media oligarchs who control who sits in the seats. Regardless of whether they call themselves Democrats or Republicans, they are a group of self important, self serving, morally bankrupt, corrupt, clueless buffoons and criminals running unchecked by a complicit corporate media.

Every American should be ashamed, embarrassed and sad that their country has been bought and sold to an organized criminal enterprise which includes the entire political body and the media. The only thing the “people’s representatives” have in common is contempt for the people they are ostensibly representing. It is revolting for any American to watch these cretins heaping praise Ben Bernanke at the congressional theater of the absurd. His institution has already debased the dollar by 95% and failed miserably in every mandate they had since they took over in 1913. If any American has managed to retain or save any money, he can now put it on deposit in their banking system and earn a negative real return (a loss of his purchasing power) while at the same time the banks will take his deposit and loan it to his brother at 30% interest. So Mr Bernanke the money printer has control over the largest legal loan sharking operation ever concocted and it is funded by the America people, against the America people.

During 2009, the leadership has taken actions which benefit the corporations and special interests who own them, while showing nothing but wanton disregard for the millions of citizens whose lives their sponsors have destroyed. What we are headed towards in the US if we are not there already, is a Straussian society of ultra rich, ultra powerful oligarchs and a serfish powerless population with no middle class to speak of. The US president De Jour is, and from here on out will be a yes man, subservient to the ultra powerful too big to fail oligarchs who control the money and power and are responsible for putting him in the drivers seat. This is not compatible whatsoever with prosperity, democracy or anything else the US still holds itself out as. Here at the end of 2009, the United States has morphed into a bankrupt fascist oligarchy which owns the military machine as a policy enforcement tool, the entire political body and the media. It isn’t going to fix itself because the fraud, corruption and malfeasance is systemic. It meets every definition of organized crime and it’s all happening right out in the open.

In my way of thinking, this is not at all unlike the breakdown of the Soviet Union where for a period of time a sort of mafia of oligarchs weilded the wealth and power, carved up the remaining wealth of the country among themselves and had their way with the country amid a climate of manufactured fear, chaos and decay. The key point being that the people in control are out to make money and increase their power at the expense of the citizens. Mr Orwell said “the purpose of power is power” and that statement needs to be well understood. These megalomaniac, sociopathic aspirations of ever more power and control by an elitist group of criminals come at the expense of America and future Americans. It doesn’t matter whatsoever to the oligarchs because they have property waiting in Croatia. When the remaining wealth has been extracted from America, they will all pull out and the citizens will be left with a rusted out bankrupt hull. I believe the circumstances for this eventuality have already been created, just not yet realized due to the enormous size of the economy and the momentum it has. In other words, I believe it’s collapsing as fast as it can although living through it seems like slow motion. When viewed from the future in a historical context however, I think it will have seemed fairly rapid.

The financial markets have deteriorated into a Las Vegas casino atmosphere where the the only consistent winners are the house and the too big to fail entities trading on foreknowledge and inside information shared freely between the treasury and the few remaining large trading houses. The entire system is bankrupt, fraudulent, corrupt and irretrievably broken. The anchor of the global financial system, the US dollar, has become the worlds largest ponzi scheme and the remaining 95% of the worlds population would like a new, viable standard. At this point however, despite any action the FED may or may not take, the US debt is far too large to ever be repaid. It is questionable if the interest payments will even be serviceable if interest rates were to rise, and the only reason interest rates are low is because the FED is using brute force. At this time the only way out without a complete collapse is to inflate away the debt, thus turning a deflationary collapse into a long period of inflationary decay and declining standard of living.

I have been of the opinion that what we saw in October 2008 was a collapse of the global fiat financial system which was more or less expected due to the collapse of the real estate bubble. I have reminded my subscribers that when I was forecasting a drop in real estate prices of as much as 50% during the heyday of the mania, that sounded unfathomable. What I believe is in store for our future sounds nearly as unfathomable now as that idea did back then. I believe the reason it sounds unfathomable is due to the constant barrage of lies, misinformation and propaganda from the tight knit corporate media oligarchy which has essentially merged with the new power structure of the US in a corrupt, overt form of fascism that would make Mussolini blush or Goebbels the propagandist nod in approval.

Over a period of decades and with one FED induced serial bubble after another, the financial system finally reached an unsustainable level of debt and leverage in 2008. When the FED started raising interest rates, when the real estate bubble burst, it involved so much debt and leverage that the whole system failed, pricing models and risk models failed, and the banking system quickly became insolvent.

I believe we have already had a systemic collapse, and the only thing the FED can do now is alter the look and feel of the collapse and to manage the allocation of the remaining wealth. In the end, whether by deflationary collapse or inflationary decay, the result of the collapse will feel the same to the US general population regardless of the interim path taken.

If the FED had done nothing, the whole system would have quickly degenerated into a deflationary collapse and failure of the financial system due to insolvency. The course the FED chose however is the one myself and many others predicted beforehand…the FED chose to solve the problem of too much debt by creating even more debt by taking the unprecedented action of buying it’s own debt under euphemisms like “quantitative easing” and “debt monetization” and also covert buying to artificially force negative real return rates of interest. Through this course of action, the FED so far has been able to turn what would have been a rapid deflationary collapse into a decaying inflationary depression which is euphemistically called “a recession that is now over” by the six people who control 96% of the global media and attempt to pass off propaganda as “news” to a woefully mis informed, dumbed down and apathetic general public.

Going forward, If the FED doesn’t buy enough of their own debt, then interest rates on the long end would rise and the risk becomes a deflationary collapse into insolvency for the FED and it’s banking system. If interest rates remain effectively at zero on the short end and artificially suppressed by quantitative easing on the long end, then the real estate market can recover and the banks can regain solvency. If interest rates rise as the free markets would argue for however, then the real estate market sinks even further, the US dollar rises, and greater insolvency of the banks follows. The higher interest rates go, the thinner the knife edge gets and the FED would quickly find itself staring into another October 2008 collapse kind of situation. On the other hand, if by buying enough of their own debt they can keep short and long term interest rates down, then the free money percolates through the banking system, puts pressure on the dollar, lifts commodity and real estate prices and pulls out of the collapse via inflating away the debt so long as they can avoid run away hyperinflation in the process. This is the path we have traveled throughout 2009.

The key point is that the FED has had the option of doing two things…creating even more debt in order to save itself and the banking system, or do nothing and watch themselves collapse into a mass of failure, loss of power and control, insolvency and domino style bankruptcy and default. They have chosen the expected course, which is to increase the debt and print money, which is the way they save themselves and their banking system. In short, given a choice between saving the people and saving themselves after a collapse, they have taken the expected course which is to attempt to save themselves. What else would you expect? If they had wanted to save the people they would have taken the peoples bailout money and handed it to them in the form of a check. Instead they handed it to the banks.

Although they have been somewhat successful in reducing the insolvency of the banking system, they have effectively created a giant wealth transfer mechanism whereby all the money that disappeared in the collapse was re created out of thin air and given to the banks and wall street. I think of it as a sort of shell game. The money disappeared from Mom and Pop’s 401k and re appeared on the balance sheets of the banks via freshly created new money (debt). As a result, we have something still called “free market capitalism” which is not free market capitalism at all. We have emerged from this crisis with a sort of financial oligarchy where a few entities who control all the wealth and power also control politics and media. Understanding this will help to understand issues like “healthcare reform” which will involve you paying more and getting less, with the primary beneficiaries being the oligarchies who control health care and insurance.

The one major point I have to make at this time is throughout 2009, there was no action taken that put the average citizen in a better position, but instead during the course of the year there was a gigantic wealth transfer from the citizens to the banking system, effectively orchestrated by the so called “people’s representatives” who are in fact, all owned by the banking system and Wall Street with half a dozen or so oligarchies and lobbyists in a public display of fraud, malfeasance and corruption that sets a new historical precedent.

I have been and remain of the opinion that the ultimate “solution” to this crisis will be for the entities who now control the wealth and power to accumulate even more wealth and power via a global central bank and global currency which now for the first time in public has been discussed on and off throughout 2009 and described as the New World Order by such luminaries as Henry Kissinger. So looking out beyond 2010, I see a new global reserve currency emerging and a global central bank which will effectively also be a global governing authority where the heads of state effectively report to the group of central bankers and their anonymous shareholders who effectively control the money, power and politicians on a global scale. When the global currency is introduced, only then do I expect a sort of collapse of the US dollar versus this global currency. In this way, the world can carry on while the former global reserve currency called the US dollar will be free to depreciate to a level where solvency is regained and the now unpayable US debt is inflated away to the point where it can be repaid in depreciated dollars. US citizens will experience a continued decay as the US becomes to resemble more and more, a third world country. Detroit is already there. The corporate media won’t show it to you but if you do a youtube search on Detroit what you see will shock you.

My view of the world tends to be the long view. Throughout 2009 I have been positioned and trading in in various hard assets including but not limited to gold silver, back month crude oil, Soybeans, raw land and Americana. I own and trade some Chinese shares but no US equities or bonds. I have lost confidence in the US leadership. I have lost confidence in the fairness of the “system” where some elite entities are free to keep the profits and nationalize their losses. I have opted to opt out by embarking on a long term effort to transfer more and more capital “off wall street” and their organized crime ring they call the banking system, and instead investing in things without fraudulent or impaired balance sheets. At some point in the future, I want to be short US 10 and 30 year bonds because it is nonsensical to me that anyone would be willing to loan a bankrupt country money for 30 years at an interest rate of 4% or so. The only reason this situation exists today is due to the FED monetizing debt and attempting to manipulate the long end using brute force.

So as we head off into 2010, I see a lot of uncertainty in the short term. If interest rates rise and the US dollar gets stronger, by mid year I would expect a repeat of October 2008. What I expect to happen over the longer term however is that the FED will ultimately print enough money to attempt to slowly inflate the debt away to a manageable amount amid a generalized and severe decay in terms of the standard of living for Average Americans. At some point along the line, I expect the world reserve currency role to be moved into a global currency and for the US dollar to be allowed to float against it without the benefits associated with the world currency role, and for the US standard of living to continue to decline and eventually decay into a societal collapse followed by something different. I expect China to emerge as the dominant economic power in the world and to purchase a large amount of US assets. Somewhere along the line I also expect the Nobel Peace Prize recipient to bomb Iran because he will be ordered to do so by the people who control the money.

Personally, based on what I see coming over the long term I have elected to forego city life and have embarked on a long term project in the picturesque Appalachian foothills in an effort to increase my degree of self sufficiency and insulate myself from the continued decay and declining standard of living sweeping the country. My long view for the US is high inflation which will not show up in the government’s fraudulent statistics, along with a declining standard of living, increasing decay and ultimately leading to chaos, societal and government collapse in the US within a decade or two, maybe sooner.

I would like to end by quoting Marc Faber with one of the most compelling quotes of 2009. I find this quote compelling because the price of anything as measured by a fraudulent standard is meaningless. To me, it is a gift to be able to still exchange US dollars for anything with real value.

“I would buy every three months some gold and not worry so much about the price because the weight stays the same”

From The Inoculated Investor blog:

As the ‘naughties’ (what a perfectly descriptive name for the 2000-2009 period) come to a somewhat anti-climactic close, it is important for those of us in the investment community to take stock of what new lessons have been learned, what immutable laws have been reinforced, and what changes in policy, strategy and execution need to occur in order to avoid a repeat of the booms and busts of the last decade.  The reason I think such an analysis is critical is that I do not believe most investors are cognizant enough of the dangers lurking in the world’s financial markets. Memories are very short and despite suffering through a number of serious market downturns over the last 10 years, I worry that we have already started a snowball rolling that has the potential to cause even more lasting damage than the dot com bubble or the real estate bubble and subsequent financial collapse. Therefore, it may be true that only by understanding the past can we hope to avoid such a fate.

The following list is not meant to be all encompassing. I’m sure each individual investor can come up with additional items and could justifiably disagree with some of my conclusions. Also, you will surely recognize some of these rules and guidelines as often repeated clichés. That is the point. I am not trying to re-invent the wheel or point out things that are not relatively obvious. However, I do believe that people who keep these beautifully simplistic lessons in mind have a much better chance of successfully navigating through persistently treacherous financial waters than those who ignore the past.

1. Trees cannot grow to the sky: This rule is number one for a reason. No matter how many times this idea is repeated or shown to be true in the market setting, another hot investment invariably comes along that causes people to forget that appreciation has its limits. However silly it may sound at a time of irrational exuberance, the restrictions on unending price increases consist of these pesky little things called fundamentals. For example, since no company can compound revenue growth at 20% indefinitely, fundamentals rarely justify paying exorbitant price to earnings multiples for stocks, regardless of the sell side’s bullish extrapolations. Or, since rents often do not increase by more much than CPI inflation on a yearly basis, real estate price appreciation that is significantly above the inflation rate is not likely to be sustainable. Basically, aside from commodities that are valued mostly based on supply and demand dynamics, most assets need to be valued based on the cash flows they can produce. It really is that simple. Accordingly, when price increases become decoupled from cash flow growth, the ensuing bubble is likely to eventually explode and devastate those who forgot that those annoying fundamentals will invariably win out.

This is a lesson that was reinforced a number of times over the last ten years within a number of disparate asset classes. However, this is the one lesson that is never sufficiently learned. As true as it is that the sun will rise in the east and will set in the west, investors will inevitably be willing to pay far too much for certain assets based on unrealistic assumptions about growth. Therefore, the solution for prudent asset allocators is to find investments in which it is possible to buy at a price less than intrinsic value and get any future growth for free.

2. Fighting the Fed means you can lose your shirt: All I can say is that I totally underestimated what near zero interest rates, a flood of bank liquidity, and an implicit government backstop of all risky assets would do to the price of everything but the US dollar. In retrospect the valuations of many stocks at the 666 low on the S&P in March reflected a draconian outcome for the US economy that was probably unlikely, especially with the Fed stepping up to the plate. It is now abundantly obvious to me that incredibly low interest rates punish savers and force people to go further out on the risk curve. Even worse, historically low rates apparently can cause lasting distortions when it comes to asset prices. Thus, it was foolish not to expect some rally in stocks. The length of the current rally has been impressive and clearly driven by some extent by the Fed’s money printing. Anybody who was significantly short during the last nine months has suffered mightily at the hands of the Fed’s attempt to reflate all asset classes (but the dollar) simultaneously.

Accordingly, this is a lesson that any and all short sellers should take to heart. When both the Fed and the officials in charge of fiscal policy make known their intentions to throw money at a situation with impunity, it likely to be very profitable to cover and go long risk, regardless of the underlying fundamentals. For investors who shun such speculation, when the Fed gasses up the Helicopter and loads up the money bags, it appears that the best course of action is to take short exposure way down and if valuations are right, add more to existing long positions.

Now the question facing all investors is whether or not the Fed’s actions will continue to stimulate price appreciation in various asset classes. My guess is that the corollary to the above rule is also true: when the Fed is eventually forced to take away the punch bowl, it is the longs who are bound to suffer while the shorts prosper. Therefore, it may be prudent for long-biased investors to take some profits if and when the Fed finally starts to consider hiking interest rates and shutting down the money spigot.

3. Ignore the warnings of The Oracle of Omaha at your own peril: I am just about finished with Alice Schroeder’s epic biography of Warren Buffett entitled The Snowball. The book serves as a fabulous reminder that investors should heed the advice of their elders. At the annual Sun Valley meeting in 1999 Buffett notoriously warned the crowd that technology stocks and the equity markets appeared overvalued and that stocks were poised to deliver mediocre returns in the coming years. What happened? You might recall that the tech bubble burst and many people, especially retail investors, experienced severe wealth diminution. Then, over the next few years Buffett wrote about and spoke of derivatives as weapons of mass destruction and indicated that he believed some kind of crash would come as a result of their proliferation. If you can’t see the prescience imbedded in those statements I suggest that you review what happened to AIG and what that company’s near demise did the global financial markets.

Recently, Buffett has made “all in” bets on America after his October 2008 op-ed piece in the NY Times and his enormous purchase of Burlington Northern Railroad (BNI) in 2009. What he hasn’t said directly about some of his recent moves (but has discussed in other contexts) is that these investments are actually hedges against inflation. In an inflationary scenario the best assets to own are solid businesses that have the ability to raise prices and those that will benefit from spikes in the prices of commodities (railroads for example). The Oracle is telling people to be positioned for coming inflation. After the number of things he has gotten right over the past 10 years it would be absolutely foolish to dismiss his words this time.

4. While being early may look and feel a lot like being wrong, investors must stick to their convictions: John Paulson knows this better than anyone and the tremendous profits he made shorting the housing market serve as an example of the need for investors to stick to their guns. I saw Paulson speak in New York earlier this year and the insight into his thought process during the 2006-2008 period was invaluable. From what I recall, Paulson was early in making bets against the RMBS market and actually closed out some shorts at a loss. However, he then discovered the magic of credit default swaps as a way to profit if the housing market tanked and by staying with his investment thesis was able to make billions of dollars for his fund and himself in 2007. It would have been easy to have gotten scared out of these contrarian positions, especially when people like Ben Bernanke were swearing that a widespread housing crisis in the US was just about impossible (isn’t it amazing this guy kept his job AND got re-nominated for another four years?). Fortunately for Paulson, he had done the necessary in-depth research and understood the dynamics and risks inherent in the RMBS market better than central bankers, policy makers, investment banks and institutional investors.

What current investors need to remember is that markets are absolutely not efficient all the time and the herd can potentially be wrong for an extended period. Thus, as long as you can stay solvent longer than the market remains irrational (a big if for firms that employ a lot of leverage), you can make fistfuls of money when your thesis plays out, even if you are a bit early.

5. Risk is not the same as volatility: The distinction between risk and volatility is crucial and investors must always be on the lookout for opportunities that arise from a general lack of understanding of the difference. Risk should always be defined as the potential for permanent capital impairment. Specifically, risk implies a drop in the value of an asset. In contrast, measures of volatility are derived from fluctuations in prices and have nothing to do with a change in intrinsic value of an asset. For reasons that have to do with behavioral and structural biases, investors continue to confuse these concepts and subsequently sell assets whose price has dropped but whose value has remained intact. Situations in which selling is based solely on declines in prices are the best times to be a value investor because companies with solid balance sheets and distinct competitive advantages can fall out of favor when sentiment turns against them. This creates an opportunity for knowledgeable investors who focus on the measurement of intrinsic value to back up the truck and load up on shares of their favorite companies. Accordingly, volatility is the friend of a value investor while risk is something that needs to be guarded against. If we have learned anything in recent years it is that it’s imperative to spend time attempting to evaluate the cash flows a company will generate as opposed to a completely useless metric such as a stock’s beta.

6. Never forget that politicians’ main objective is to get reelected: What this very sobering lesson implies is that there is almost never the political will to make tough choices that will lead to short term suffering even if current sacrifices are likely to lead to future prosperity. As a group, lawmakers seem to be consistently unwilling to risk their political aspirations for the good of the country or to hold to true to their beliefs. This is especially true in elections years like 2010. However, as a result of the exorbitant cost of running a political campaign, even in non-election years our elected officials are forced to continue to raise money and become even further indebted to special interests and powerful lobbyists.

The takeaway from this perverse situation and overwhelming desire to be reelected at any cost is that investors can count on legislators and the White House to kick the can as far down the road as possible and even create laws that exacerbate the problem in the long run but serve as a potential quick fix. The perfect example of this behavior was the passing of the Medicare part D legislation, a program that Paul Krugman argues created an $9.4 trillion unfunded liability over the next 75 years.  Such giveaways are a nice way to get reelected, may help boost the stock market temporarily, but could end of bankrupting future generations of Americans. Therefore, long term oriented investors must be prepared to deal with the lasting secular trends that result from knee-jerk reactions to cyclical events.

7. Relying on so-called experts—central bankers, economists, and financial pundits—can lead investors down a slippery slope: If you turn on CNBC you have the wonderful luxury of being able to hear the opinions of hundreds of people who work with the markets on a day to day basis. Since these folks spend all of their time living and breathing financial markets, they should know best, right? Well, it turns out that experts are often wrong; not necessarily because they are bad people or are fools, but because accurately predicting the future is incredibly difficult. Accordingly, investors should remember that any prognostication, no matter who it comes from, needs to be taken with a grain of salt and that person’s particular incentives and biases must be taken into account as well. In the end people need to make up their own minds based on the facts in front of them and the extensive research they have performed. Making investments by relying on the advice of strangers or as a result of minimal time invested in understanding underlying valuations and fundamentals is not much better than random speculation. As the past ten years have shown, such behavior is a fantastic way to lose money.   

8. When a market dynamic does not make sense fundamentally, that probably means the trend will not last: I think this is one of the most important takeaways from the numerous bubbles we have witnesses in the past decade. If you can’t understand the rational for specific trend or the fundamentals fly in the face of that trend, you have to believe that a severe reversal or correction is inevitable. On great example I remember of one such situation occurred in early 2008 with Martin Marietta Materials (MLM). With the stock trading well above $100 a share I continued to read sell side analyst reports touting the strength of the company’s aggregate reserves and resilient revenue stream. Unfortunately, at the time the US economy was going into the tank AND there was a huge supply of aggregates coming online over the next year. Not very bullish fundamentals for a company whose stock price depended on the price of aggregates. Predictably, the subsequent free fall in the US economy caused demand to decline dramatically at the same time the company had ramped up production. Despite the bullish predictions of sell side analysts the stock proceeded to go from close to $120 in September 2008 to just over $60 in November. Now, I have nothing against the company and have no opinion about the current stock price. But, at the time the gravity defying price of the stock did not make any sense based on the very obvious headwinds facing the company.

So, when you see zombie companies like Fannie, Freddie and AIG trading way up one day or notice their prices consistently climbing higher, keep in mind that if the reason for such activity completely confounds you, it is unlikely to be based on sustainable fundamentals.

9. Sexy financial and economic models often fail to capture the idiosyncrasies of actual functioning markets: Honestly, I don’t think I can do this topic sufficient justice. If you need a refresher on why intricate models have failed so badly, check our Nassim Taleb’s recent testimony in front of Congress. Let’s just say that cute models look great on paper but when irrational people get involved, they often fail to predict how markets will react. You would think that the world would have figured this out when LTCM blew up and almost dragged all the banks down along with it. The sad thing is that companies continue to use flawed models like Value at Risk (VaR) to assess risk. Shouldn’t we have realized the models’ limits when David Viniar of Goldman Sachs admitted that the company was seeing 25 standard deviation events several days in a row? No, the world was not experiencing some tectonic shift that caused asset prices to do things that should happen once every 100,000 years. The models were just wrong and continuing to rely on them is only going to enhance the risk of an extreme tail event that would even make a black swan blush.

10. When it becomes impossible to distinguish economic theory from religious theology, economists are likely to become blinded by their own beliefs: Why did so few economists see the financial crisis coming? Maybe they were too busy calling each other names to see the unsustainable debt levels and financial company excesses building up in plain sight. While the financial crisis has allowed the behavioral economists to gain deserved popularity, it is an indictment of the entire economics community that so many people who dismissed the rational actor fallacy were marginalized by the mainstream. Now, in spite of compelling conclusions about the way irrational people impact markets, somehow many neo-classical economists continue to hide behind their theories in a curious attempt to try to explain away the recent financial crisis.  

Now on to the disciples of John Maynard Keynes. Could it be that the neo-Keynesians are so wedded to the belief that unlimited fiscal stimulus and deficit spending are the only paths back to sustained prosperity that they have lost sight of the risks of such profligacy? What if the Keynesian response to the recession was the correct reaction but the magnitude of the fiscal policy was far too strong and will eventually lead to some very unpleasant outcomes? With Keynes no longer alive but still deified by his followers, could the true believers even see it if they had it all wrong?

In my view, the constant bickering between the saltwater and freshwater economists and complete inability to see the to the other side of the argument (not to mention the absolute dismissal of the Austrian school’s tenets) seems more like an entrenched religious battle in which each side believes only one methodology can be right. Unfortunately, unlike arguments about the existence of god, market outcomes are not necessarily binary and the nuanced truth could lie in between economic theories. Thus, people who are willing to defend their position in the face of mountains of contrary evidence are likely to be so biased that they cannot be trusted to assess the state of the economy.

Even more concerning is this article in the Huffington Post that argues that the Fed effectively controls, monitors and censors what is published in economic journals. That’s the last thing the US needs: formerly autonomous and free thinking economists being controlled by the banking oligarchs who have a definite inflationary and Wall Street bias. We have already seen where that has gotten us and it is not pretty.

The conclusion that needs to be drawn about those who belong to what appears to be a very closed-minded and divided economic establishment in the US is that many have been compromised and may not be the most reliable evaluators of the past, present or future global economy.

11. Leverage is miraculous on the way up and a killer on the way down: My favorite analogy regarding the risks of too much leverage comes from none other than Warren Buffett. Buffett likens carrying too much debt to driving a car with a dagger attached to the steering wheel pointed at your heart. Everything is fine until you hit a bump and that dagger goes right into your chest. Of course if you are lucky and there are no bumps for a while you can make an incredible return on your equity. However, eventually that bump in the road is going to come and smart companies and households never put themselves in a position to allow that bump to be life threatening. Further, there is some compelling data that suggests that financial bubbles are almost always driven by too much leverage. The good news is that by in large companies have solidified their balance sheets over the last two years and households are finally starting to deleverage a bit. Thus, at least in the private sector and among consumers, the dagger is slowly being pushed further away.

However, I do worry that there is one particular institution that has ignored the above lesson and has taken on far too much leverage. Who is that you ask? Why the US government of course. One risk is that something unexpected happens, the government is forced to print even more money, the deficit spirals out of control, and in the end the quality of life for all Americans is impacted. We are already fighting two wars, have thrown trillions into the financial markets, have huge Social Security and Medicare obligations and on top of all that have passed stimulus legislation in an attempt to prevent a depression. Therefore, we can ill afford any unexpected expenditures. Even now it is hard to imagine how the US will live up to all of its obligations. Let’s just hope that the economy improves, tax revenues come back, and our foreign creditors are somewhat appeased before we hit that next inevitable bump. If not, both equity and bond markets could be devastated by the fallout.

12. Wall Street wins whether the economy prospers or fails and whether markets go up or down: This may sound like populist propaganda, but it is hard to argue that this is not precisely how the last few years played out. Yes, Lehman and Bear are gone and Merrill Lynch is now a part of Ken Lewis’s failed empire. There have clearly been a few losers in the aftermath of the dramatic financial crisis. But, in aggregate, Wall Street has not only survived, but has also prospered immensely at the expense of American taxpayers and businesses. Expected record bonuses this year are only icing on the cake. When many Americans spent this Christmas wondering if they were going to lose their jobs or whether they will be able to feed their families, I’m sure many on Wall Street enjoyed a very comfortable holiday. If this seems unjust given the fact that without government assistance many firms might not exist anymore, that’s because it unequivocally is.

At the center of all of this (but not alone) is Goldman Sachs. First, Matt Taibbi documented the success of Goldman in up and down markets in his July 2009 piece. Then, just before Christmas Gretchen Morgenson alerted the masses to what the investment community already knew: Goldman consistently bet against the same clients it was selling dodgy assets to. Don’t forget that despite unemployment rising above 10% Goldman somehow managed to only lose money on trading on one singular day in the 3^rd quarter of this year. If a baseball player batted .900 or higher for 3 straight months he would quickly be crowned the greatest hitter who has ever played the game. But when Goldman accomplishes a similar feat in what used to be a zero sum game, we don’t even blink anymore.

What all of this means is that through their political connections and too big to fail status, Wall Street firms are just about guaranteed to receive favorable treatment relative to the rest of us no matter how well or how poorly the economy is doing. Thus, investors who short these firms are at the mercy of the actions of a Fed and Treasury that do very little to protect against moral hazard. In fact, at a certain point, regardless of the dubious activities such as high frequency trading and so called trade huddles, it almost makes sense for investors to give in any say, “if you can’t beat ‘em, join ‘em.” Well, I said almost.

13. The most dangerous words in investing are “this time is different” but this economic cycle in the US may really and truly be different than the recent ones: The book by Carmen Reinhart and Ken Rogoff entitled This Time is Different is on my seemingly endless reading list but I have yet to get to it. But, from the reviews and commentary I have read, the authors do a great job analyzing past boom and bust cycles and disproving the notion that individual situations are different and thus certain countries can avoid experiencing the devastating and enduring impacts of financial crises. The title of the book is obviously ironic in that the authors show that there are common factors that cause financial debacles. Surprisingly, people make the same mistakes over and over again under the false premise that their own personal or country-specific circumstances will allow for a different outcome than others have experienced. Inevitably, such beliefs end in tears.

What does this have to do with the current economic and fiscal situation the US finds itself in? Everything. First off, the duo provides lessons about governments accumulating too much debt and pinpoints what leads to sovereign defaults. Second, if the US is following the same path as Japan (as the authors assert) in terms of dealing with the insolvent banking system, why should we expect a different outcome? These are just two of the topics addressed in the book that give investors a way to understand the risks associated with investing in government debt and bank stocks, for example.

In the end, my real worry is that the title of the book has a double meaning. While financial crises and the associated lasting effects on economies may be similar, I am concerned that many policy makers are viewing this downturn as if it were a typical inventory recession that can be cured by low interest rates and some targeted government stimulus. I fear that it may be that this recession is actually different from ones like the post-September 11^th slump. Accordingly, if Reinhart and Rogoff are right and this financial crisis is going to play out like others have around the globe, the template suggests that the US’s experience this time may be dramatically different from other recent domestic recessions. What that could mean for investors is a long slog of mediocre GDP growth and substandard returns on equities as the powers that be prolong making the tough choices needed to purge the system of debt and get back to fiscal sanity.