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"One should either write ruthlessly what one believes to be the truth, or else shut up."

Arthur Koestler 

Tuesday
Mar192013

John Mauldin is Guardedly Optimistic

John Mauldin Is Guardedly Optimistic. Mauldin tries to justify this by quoting Lenin, who said:

 "There are decades where nothing happens, and there are weeks when decades occur."

We are in such a period. But Mauldin thinks it is a transition into something better.  "If something cannot be sustained, it will change," he said. Mauldin then quotes economist Laurence Kotlikoff who estimates that the US has 200 trillion in unfunded liabilities. (I have talked about this previously.) Mauldin comments, "We can't pay that amount. What happens when we realize this?" He thinks that when this becomes evident change will occur.  "Expenses cannot rise faster than income," he says.  He thinks that, "It is the end of the world, yet I am excited" because things will have to change for the better. 

2020 will be great, after the world economy goes through this transition period. What will be the characteristics of this transition? Here is what he thinks (note that what I put in quotes is not his exact words, but it is close. When I put something in parentheses, it is me speaking.):

Pension and health care are the reason for the troubles due to demographics. Sweden tied benefits to GDP, it is necessary, not heartless. (This means that a certain percentage of the economy is devoted to helping people. This is something I have long advocated.) Eventually everyone will do the same. (I hope he is right.) 

Peak oil is false; energy prices will go up, but no catastrophe. (I agree.) 

Japan is a bug in search of a windshield. (What a great line!) 

In Europe, France is the new Greece—then the US.

In China the demographics are awful—they have more people leaving the workforce than entering it. Japan and Europe have this problem as well. 

"Of course austerity does not work, that is why it is called austerity." (My question would be, "What choice did Greece have?")

"Government has made promises they cannot keep." 

Krugman is not an economist. (Ha.)

Adapt to change, not fight it. We don't have enough money to protect people from change.

Social Security is welfare.

Invest in things that central banks can't print—gold, technology, and corn, for example. 

Alas, his presentation was not well rehearsed for the time he was allotted, so the speech ended somewhat abruptly, but Mauldin does make you somewhat more hopeful. What he calls optimistic is what I have been calling guardedly pessimistic. No, I do not think the crisis I have been predicting to happen in 3 to 7 years is The Powers That Bethe Apocalypse, nor Ragnarök, but it will be very bad.  I am guardedly pessimistic because I do not think the "powers that be" will act against their own best interests. No, the "powers that be" do not meet in secret conclaves and decided the future. They each act in their own best interests, and since they all have the same interests it can appear there is collusion. (The TV drama, The Man, I will post tomorrow assumes that there is a conspiracy. It is a great "drama," but quite wrong-headed.)  

Here is Mauldin's presentation. 

Monday
Mar182013

What Do You do? 

I am reminded of a story I read many years ago. A Chilean business owner had his business nationalized. They paid him a "fair" price. But he had no place to put the money, no credible investments. Because of capital controls, he could not put the money elsewhere. Added to this there was hyperinflation. He spent many of his evenings in a casino gambling. 

In a world where there are no investments that make sense, what do you do? 

MILAN (AP) -- Lamborghini says its worldwide deliveries of super sports cars rose 30 percent last year to 2,083 units but remained shy of pre-crisis highs.

The Italian carmaker owned by Volkswagen said Tuesday that deliveries were up by half in its top U.S. market and up by 34 percent in Europe despite the region's financial crisis.

Revenues for the year were up 46 percent to (EURO)469 million ($610 million).

The car company, based in Sant'Agata Bolognese, sold a record 2,430 cars in 2008 before the global economic crisis devastated the luxury market.

Last year's sales comprised 922 new Aventador LP 700-4 and 1,161 Gallardos.

Lamborghini previewed the one-off Lamborghini Veneno at the Geneva Motor Show last week to mark its 50th anniversary.

You do not need a Lamborghini to leave Babylon, in fact owning one will keep you in Babylon. 

Sunday
Mar172013

Fine Without You

Yes, I admit it. I like Trance. You have to admit that listening to this is better than discussing the Cyprus Bank Crisis. 

Saturday
Mar162013

Are Animals a Part of Sustainability? 

In contrast to the sustainability lecture I posted last week, this speaker takes a different approach.  Joel Salatin is the owner of Polyface farm. Rather than shun animals as Bittman implied last week, all the while saying he was not saying that, Salatin incorporates them into his farm. Unfortunately this lecture does not allow us to see the slides.

I wonder how many of those that advocate sustainability actually know anything about farming? Salatin does. What he says, based on my ten years of ranching, make sense.

On a personal level, since I live on a rock, I need a greenhouse.

Salatin is an enjoyable speaker and well worth your time.

Friday
Mar152013

What is Money?

Money makes the world go around. You would think this question has an easy answer. It doesn't. The Federal Reserve has many different definitions. Here is one definition from the Federal Reserve:

The money supply is commonly defined to be a group of safe assets that households and businesses can use to make payments or to hold as short-term investments. For example, U.S. currency and balances held in checking accounts and savings accounts are included in many measures of the money supply. 

Here is an example of recent money supply calculations based on two different definitions of Money from the Fed. If you can figure it out, you are a smarter person than I. Or maybe you have more time than I do! Or you could read the Wiki entry on the money supply. I did until I had a bad case of EGO—eyes glazed over. 

So after much reading and thought I decided to present my own amateur musings. Hopefully you will conclude that I am a talented amateur. 

Some people actually think that money grows on trees-more on this next week. The primary category of "money" is wealth that can be accessed immediately—currency, savings accounts, checking accounts, and here is where I probably disagree with many…short-term treasury bills. 

Secondary "money" would be financial assets that are highly liquid and have a small transaction cost: stocks, CD's at a bank, gold, silver, and other semi-monetary metals, or medium-term debt from the government.   

Tertiary "money" would be real estate, corporate bonds, and long-term government debt. These have either high transaction costs or interest rate risk, or both. In my view anything in an IRA or a 401K would be in this category. 

Quaternary "money" would be things like collectables and derivatives.   

So what is money? How about real estate with a line of credit on it? You just pick up a phone and voilà, the money is in your checking account and you can spend it. Is this "money"? Or what about Apple stock? One call to your broker and it is in your account and it can be spent. Apple has been volatile lately, but the transaction costs on stock sales keeps dropping. Is an investment in Apple stock money? 

Before I answer these questions, you probably have another question. "Why does this matter?" It matters because we all like to plan for the future; I hope you do anyway. So among the hard money types the question of the moment is “Are we headed for deflation?” Mish Shedlock would be in this school. Or, are we headed toward hyperinflation? Peter Schiff is in that school. John Mauldin speaking at the Cambridge House seminars I attended offered a third way. 

This would be just as true with a picture of Bush.Who is right? If you define money as in my first definition, we are in an inflationary period. Hooray for Peter Schiff. If you use the second definition we seem to be in a neutral period. Hooray for John Mauldin. If you use definition three then we are in a deflationary period. Hooray for Mish Shedlock. (Even Peter Schiff thinks real estate is grossly over-valued, and sorry Peter, but this is deflationary.) If you include the fourth definition of money, then it changes nothing but does manage to intensify the alternatives. 

We cannot trust the definition of money. We cannot trust the price increases announced by the government CPI, Consumer Price Index. If we use the same method that kept Jimmy Carter from being reelected, our inflation rate is 5 to 7%. Remember that Nixon was horrified and instituted wage and price controls when inflation was at 4%. Even if inflation was the 2% the government insists that it is, a 22-year-old college graduate just now entering the work force, good luck by-the-way, would have 90% of whatever he saves today stolen from him over his 45 year working life. Yes, inflation is "only" 2%! We cannot trust the government announced unemployment rate. 

We are screwed. This is not the word I wanted to use but this is a family-oriented blog. 

What is money? I have no idea. Yogi Berra was right. “It is difficult to make predictions, especially about the future.” Liza Minnelli and Joel Grey were right too. 

I have decided to conclude with an analogy. Imagine you are in a plane in a blinding hailstorm. The plane's navigation systems fail, just as our financial system is mostly failing today. After the financial plane crash you might be eaten by dinosaurs! Co-pilot Schiff says we will crash and die and we will all go to inflationary hell. Co-pilot Shedlock thinks we will crash, and the plane will be a total loss and we will go to deflationary purgatory. Co-pilot Mauldin thinks we will crash, but we will repair the plane and fly again to heaven. I might wish that Mauldin is right, but I would not rely on it. I plan to talk about Mauldin and his theories on Tuesday. 

I remain guardedly pessimistic. 

In the meantime, here is an interview with another opinion, this time by co-pilot Gary Schilling. He thinks that everything is A-OK and that there is no reason to worry, the plane will have a safe, but bumpy landing. I think in the short run he is right, the government will spend money and sell bonds until it doesn't, then the plane will hit the ground. 

Are you wearing your financial seat belt? 

Thanks to Eric Anderson at Universe of Lies for pointing out this video.