Inspiration, Move Me Brightly
Restless. Let's dive right in.
Deflationists lose again
A deflationist, in conventional meaning, is someone that believes deflationary forces are too strong, a sharp contraction of the money supply is near, a sharp drop in prices (usually asset prices, but some think all prices will fall) is coming, and anyone not holding cash will peril.
My definition is simpler: a deflationist is someone that forgets the world is run by central bankers.
Deflationists can never be right as long as central banks around the world exist, let alone have the power to intervene and prop up the bubbles they created whenever they can. Deflationists are always wrong. Remember that. There has never been a persistent drop in the general price level in any country, even in Japan, since the 1950's. If my math is correct, that's 50-60 consecutive years of persistent price increases. Betting on deflation is like betting the money line on the Washington Generals. You're going to be wrong so many times, you won't have any money left for when you are finally right.
Inspiration, move me brightly.
Light the song with sense and color;
Hold away despair.
Why the Stock Market doesn't crash
Among the deflationists, their major concern is another stock market crash. Many will trot out charts with P/E ratios today, during the low point in March 2009, and historical P/E ratios in other crashes.
These charts have little value, but not for the reason you think. The problem is current P/E ratios are distorted by inflation. Allow me to explain.
Let's say that in 1930, the P/E ratio for the DJIA was 8. That meant is costs $8 to get $1 of earnings. Let's assume that in 1931, the central bank tripled the money supply. What's the new P/E ratio? If you said 8, go to the back of the class. You don't understand inflation. If it were true that inflation increased everyone's bank accounts equally, and that every new dollar created out of thin air spread evenly across the economy, then you would be correct. We would now have $24 in price and $3 in earnings, leaving P/E at an unchanged 8.
But the world doesn't work that way, and if it did, what would be the point of creating new money? Hmmmm...... stew on that for a minute.
Inflation rewards the people that get to use the money first: 1. governments, 2. government contractors, 3. bankers, 4. politically connected businesses..... Last place? The poor.
(Oh, progressives. When will you wake up and fight the real fight?)
Along the way, a great deal of money is put to unproductive uses - that is, if you believe that money can be used in unproductive ways. If so, you are smarter than legendary Keynesian economist Paul Samuelson, a man who made no distinction between the two yet was allowed to sell economics textbooks to millions of American students for a generation. And you wonder why nobody understands economics.
So the amount dollars in the economic system is ever increasing, but the earnings of productive companies does not increase in step. Earnings trail inflation and the spread gets wider over time.
Therefore, if you are looking at P/E ratios from the 1932 bottom and expecting the 2010 stock market to reach those levels, good luck to you. It's going to be a long wait. It's simply not possible.
More than this I will not ask,
Faced with mysteries dark and vast.
Statements just seem vain at last.
Some rise, some fall, some climb, to get to Terrapin
More on the Markets
We like to assume that the stock market is a positive sum game, and to some extent it is. But the truth is that in a world of unhampered competition, where anyone is free to compete for the market dollar without restriction, it is the consumers that gain the most. Some businesses will gain market share, others will lose market share, and others will break through and develop new markets. But always the consumer is the winner. That's the real positive sum game.
With that in mind, the stock market fairy tale of perpetually rising prices for stocks can not come about through competition. Without breakthroughs, like the development of Internet based businesses, the general level of stock prices would remain constant. After all, what other factors could increase the amount of money in stocks? Obviously as expectations of a great earnings season rose, money could be pulled in off the sidelines, but that would not result in a long term rise in the general price of stocks.
Keep in mind that I am talking about the stock market as a whole here, not the fortunes of individual companies, or sectors.
But the general rise in stock market prices America has witnessed since 1932 is almost entirely due to the printing of money.
Which brings me to my next point: When the market rises on junk, this is a bad thing.
Companies that spend money quickly, before prices rise, can report earnings that look better than they really are. This is why terrible companies often lead rallies. This is not the sign of a healthy economy. This is the sign of a centrally planned economy run by technocrats.
In this scenario, you might make a quick buck and pat yourself on the back, but the central bank and its conies are doing high-fives.
As Jim Rogers said, the DJIA can go to 1,000,000 if the Fed creates enough money. And trust me, you don't want that.
Counting stars by candlelight,
All are dim but one is bright
The spiral light of venus, rising first and shining best.
What is a good regulator?
Let's assume for a moment that I'm right: big business writes regulation to protect itself from competition. This is a bit different than regulatory capture theory, which says that well-intentioned bureaucrats get captured and held hostage by big business to write favorable regulation. On the contrary, it is my belief that big business is the driver, pushing regulations from the start to protect themselves from upstarts. It's a subtle but important distinction.
If I'm right, what type of person, ideologically speaking, would big business most want to have as regulators: conservative, liberal, or libertarian?
Let's start with conservative. The conservative isn't expected to do much, hence the name. He won't aggressively investigate and repeal old regulations that hamper competitiveness. Name the number of major pieces of legislation ever repealed by a conservative Congress in America since FDR. I'll give you hint: it's less than one. Bringing in a conservative rewards me with the status quo.
Up next, the liberal. The liberal is expected to aggressively pursue new policy options. This is good for me. It's also highly doubtful that the liberal will investigate the worthiness of old regulations, since he begins with the framework that all government action is necessary and most business action is immoral exploitation. This is also good for me. Finally, for the liberal, the ability to regulate is power. So we can expect them to be active in finding new ways to regulate my industry. That means less opportunities for newcomers. If I'm lucky, we'll all be sued, and I can get a guaranteed monopoly for the rest of my life, like Marlboro cigarettes, all in the name of the public good!
Finally, we have the libertarian. The first thing the libertarian is going to do is investigate existing regulations, the majority of which have no benefit for the consumer, but benefit me by keeping out my competition. He will tear up any regulation that I have helped to craft that keeps my profits secure. I hate libertarians. And he will resist any push for further regulations, no matter what crazy scare tactic I use.
In other words, Big Business can't wait to get Elizabeth Warren in power.
Oh, from the Northwest corner
Of a brand new crescent moon,
While crickets and cicadas sing
A rare and different tune, Terrapin Station
The Biggest Hypocrite of My Generation
Karl Rove. Seriously, someone needs to slap that man across the mouth, twice. What a colossal scumbag. I don't really care what chances that woman in Delaware has. I don't really care that she's not a libertarian. If Karl Rove dislikes her, she's ok in my book. I wouldn't vote for her, but I wouldn't vote for anyone Rove likes either. I just find him to be the most repulsive hypocrite to ever appear (briefly) on my television (in the split second it takes me to change the channel.)
While you were gone
These face filled with darkness,
The obvious was hidden
With nothing to believe in
It can be distressing, disappointing, despairing, etc. to be interested in the truth in economics and politics. You find yourself awash in a sea of deceit and naiveté.
Cheer up, cobber. You got along fine before you knew the world is run by liars and idiots. You'll get along just fine with that knowledge too.
Buy things of value. Don't hold cash. Reject everything told to you by the MSM, the government, and educators. Reject it and investigate it on your own. Work for yourself. Build your resume. Add skills. Learn web design. Learn to fix things. Get on the Internet. Provide something of value to the market.
Reject the assumptions of egalitarians and politicians. Reject their moral high ground.
Embrace counter-culture. Then reject it. Reject collectivism. Reject the ordinary. Embrace the creative and the spectacular.
Earn everything. Take nothing for granted.
David in Qatar