Let's Knock the Dust off the Biggest Bull on CAPS
*R.I.P. Steve Jobs
Well, well, well, guess who's back? I've been trolling your blogs for three months, and now it's time to knock the dust off this trick and pound those keys again. =P Yeah, that's dirty if you want it to be, but I am full defiance mode. I'm the Biggest Bull on CAPS and I'm back to once again put my rep on the line, this time going up against one of my all time F-A-V's, StatsGeek. I love SG like Ronnie loves Sammi, except I've never thrown his belongings off the balcony in a half-liquor half-steroid induced rage. But we'll get to back to this. First, the minutes from our last meeting, please.
Louden Swain has an appointment with Shute
If you get that reference, that means you're really old. I blogged a few months ago about some shadowy opportunity I was pursuing. We've taken the first steps. (Did you see that? I just referred to myself in the plural.) I quit my job in Qatar and moved to California, land of beautiful weather, women almost as hot as my fiance (hi baby!), and imploding government budgets. I love California almost as much as Tupac did. Maybe I'll throw some bones in the CPT in his honor. Today, I'm in Sacramento, gathering my meager possessions (I've always embraced minimalism as a practical measure. When you travel as much as I do, it pays to own very little.) Next week I will be in Simi Valley finding a place to live. It's enough excitement to turn my nipples into stalagmite, so the last thing I needed this week was warning that the stock market is going down like Deena on Paulie D.
Let Me Shove My Green Shoots Where the Sun Don't Shine
The mainstream Keynesian has finally turned bearish, whether it's the Conscience of a Phoney over on the Toilet Paper of Record, that crazy Bruce Bartlett http://www.economicpolicyjournal.com/2011/10/bruce-bartlett-goes-bonkers-on-cnbc.html, or the latest White House shill (ya know, when they're not justifying their boss's latest killing spree.) But once again, the mainstream has it completely wrong. I'm not going to be contrarian just for contrarian's sake, but let me assure you that if you bet against mainstream economists, you are almost guaranteed to be closer to the truth. There are signs of recovery/turnaround, but before I even cover those, I have to qualify what a recovery actually is.
If Recovery Were Easy, There Would Be No Alcoholics
Allow me to state this as unequivocally as I can. In an unbacked paper money substitute economy, there is no such thing as a sustainable recovery. It's not theoretically or practically possible. In order for sustainable growth to occur, investment in long term projects must match society's abstainment from consumption. In other words, you cannot build a house to sell three years from now if everyone wants their house right now! Three years from now, when it is time to sell the completed home, no one will be able to buy it. Even worse, along the way, the resources you need to build the home will have been either consumed by others or bid up in price by others. Then you end up bankrupt. This how we bust.
If you allow interest rates to work, they coordinate consumption with investment. This is especially important because long term projects are interest rate sensitive, since they require a great deal of capital and therefore a great deal of borrowing, usually. When people consume a higher than normal amount of resources (i.e. spend all their money on tanning products and designer tee shirts), interest rates rise due to a lack of funds. When people consume less, interest rates lower. In other words, in a free market, interest rates coordinate investments over time. When people want more in the present, investment reflects that. And when they want less in the present, low interest rates allow for greater investment in the future.
Now think about our society. Interest rates are controlled by technocrats. Technocracy is an anti-capitalist fallacy that assumes that market decisions can be replaced by nerds with t-squares and pocket calculators. Hey, I like nerds. I'm kind of a nerd, after all. But no matter how much love Ben Bernanke, Alan Greenspan, and their ilk profess for the market, they are not pro-capitalism. They are technocrats, and technocracy is a rival to the free market. The two are not compatible.
Recall that your desire to consume or refrain from consumption originates from your subjective value scale. You rank economic actions based upon the satisfaction you believe they will bring you. You very well could be wrong about those perceived consequences, but what is important is that no one else can know in advance what your value scale looks like. They can give you a survey questionnaire, but that has limited value, since you are likely to change your mind at any time between then and the final purchase. Only through your action is your preference revealed.
What this means is that technocrats are making decisions based upon information they cannot possess! Namely, your subjective value scales and those of every market actor. The technocrat believes he can read minds, and set interest rates according to your preference for present consumption. Obviously, he will always be wrong.
This is why Bernanke defenders crack me up. The only way you can defend the Federal Reserve is if you don't even know where value comes from. All value extends from the human mind. All value is based on the ends that can be achieved from the combination of labor, land, and intelligence. All ends are means to satisfy wants. All wants are ranked subjectively by consumers. Where does the technocrat fit in here? He doesn't. He inserts himself into the picture to replace subjective value scales with his subjective value scale. He wants people to consume now, so he lowers rates.
Boom Goes the Dynamite
In a funny money economy, the only solution for a bust is another boom. That's where we stand today, at the beginning of another funny money engineered boom. I say funny money, but it would most accurately be called money substitutes. Federal Reserve notes – the dollars in your wallet – are money substitutes. They are not money. I know this is upsetting. You worked your whole life for the meager notes you dropped off at the bank. It is infuriating to find out it is not actually money. But that doesn't mean your FRN's have no value. So let's walk through this as well.
There are some economic schools of thought that believe the past doesn't matter, that history is irrelevant in monetary theory. I am very wary of these people. I think it is extremely valuable to understand how we ended up slaves for paper. I like the coat check example as the best way to explain how we entered a money-less, money-substitute-only society.
Let's say that you walk into your favorite night club. You check your coat. You get a claim check. We'll call it a Diddy. So 1 Diddy = 1 Coat. Now let's say that you could trade the Diddy for a bottle of wine, giving the wine owner the claim on your coat. The coat is the underlying final good. Now imagine that everyone is using Diddys. Roughly speaking, everyone's coat was of equal value. Diddy's are circulating around the club and no one is actually redeeming them for coats. All prices in the club are now calculated in Diddy's. 0.5 Diddy's for a lap dance. 3 Diddy's for the VIP room. (We all have nice coats.)
Now something strange happens however. Over the weekend, prices double. Now it costs 6 Diddy's to go in the VIP room. Wyclef is furious and he writes a song about taking his favorite hooker to Mexico. It doesn't take to long for people to realize that their Diddy's are losing value, so they run to the coat room to turn them in for coats. Only there's a problem.
The people who run the coat room have been printing more Diddy's than there are corresponding coats. They cannot satisfy all the claims on the coats. So you throw a big hissy fit but there's nothing you can do, because the bouncers come down and tell you that all payments of coats have been suspended and if you don't take a hike, they'll start cracking skulls. And by the way, you owe them money for the privilege of getting your skull cracked.
That's how it goes, folks.
So pretty soon, we're stuck with these stupid Diddy's and no coats. Thankfully, since we've been using the Diddy's to buy things, there are already prices in them. So we all make do as best we can. Over time, the value of the Diddy's will continue to erode. There is nothing underlying them to prop up the value. It is an inevitability that they will one day go to zero. It is a slow, torturous process caused by government intervention. They took your money away from you (actually they did it to your grandparents in 1933), and left you with an increasingly worthless claim check. 1 Dollar used be a claim for 1/20th of an ounce of gold. It wasn't a price fixing scheme. It was a claim on private property. Today, that dollar can only claim 1/1630th of an ounce of gold. And it is only going to get worse because there is no underlying value to a fractional reserve note. It has been separated/severed from the underlying property. I put that in bold becaue the sooner you understand that, the sooner you will grasp all of the big picture issues that I have discussed over the last three years.
I know this is getting very long, but bear with me.
So we have technocrats planning interest rates and funny money that is backed only by the political establishment's willingness to use jackbooted thugs to crack your skull (thugs who take payment in the same funny money, which is funny in itself). So how does such a (nightmare) economy turn around? The only way is by re-inflating the bubble and creating another boom.
And that's what I see. And that's what brings us full circle back to StatsGeek's recent short but sweet post “Who's jumping in front of this freight train?"
Any dips we get from here on out are going to be the buying opportunities of a lifetime. I wouldn't recommend ever following my advice (though I think you can do worse with others), and I repeat that I hate being on the other side of StatsGeek as well as a tsunami of technical indicators that are bearish. I think they're all wrong.
So what do I see?
Declining personal bankruptcies
Rising automobile sales
Accelerating ISM factory index
Improving hotel occupancy rates
Higher demand for office rentals
More price inflation
(Btw, I have a bet with ETFsRule on this one. I'm feeling pretty good about it. Basically if price inflation is higher next summer than it was this summer, I win. Whaddya think?)
The Producer Price Index rose 7.2% over the last 12 months.
Even Fed economists now recognize rising price inflation.
Examine this chart closely (from the Fed). Notice that the distribution of price changes is shifting from small changes (0-2%) to larger changes (2-3% and more than 10%).
Most importantly, Fed money printing has not stopped or slowed. Investors think it has, but in reality it has not. It may have even increased, and the Fed spigot is the #1 indicator of a boom or a crash.
So those are my reasons to believe that, rather than entering a stock market crash and another recession, I believe the recession is finally ending and another funny money boom is about to begin. Of course, I don't see this as a good thing, since this boom will be totally out of step with society's consumption patterns and will of course crash hard, even harder than this last one.
If I were betting man (which I am), I'd bet against a stock market crash. But if I were a betting man that wasn't me, I'd bet on StatsGeek.
Comments welcome. I will do my best to be civil, but I reserve the right to say whatever I want to whomever I want whenever I want.
David in Qatar... No More