How to Profit on the Road to National Serfdom
We’re fast approaching the critical 1,040 “support” on the S&P 500 – below which technical analysts tell us there is a dark abyss that includes a retest of the March 2009 lows.
The idea goes: If the S&P falls below 1,040, then we’re likely to revisit the lows below 700. Who knows if this widely cited “if, then” conditional probability is valid? We may find out soon enough. When universally accepted technical support levels are breached, we tend to see heavy bouts of “self-fulfilling prophecy”-based selling.
Regardless of how the technical conditions play out, there’s still a big difference between current stock prices and the prices that most value investors are willing to pay to assume the risks of owning stocks. The word “risk” is key. In periods of heightened economic and political risk, investors demand higher risk premiums to hold stocks. A simpler way of stating “higher risk premiums” is “lower stock prices.”
These risks include the speed at which politicians are driving national economies down Friedrich Hayek’s proverbial “road to serfdom.”
Austrian theory acknowledges both the “seen” and the “unseen” effects of government policy, while Keynesian theory ignores the unseen in the pursuit of managing this thing we call “GDP” at all costs. The conceit that GDP can be managed by enlightened bureaucrats usually undermines vital capital foundation. Too many people confuse economic activity (measured by GDP) with economic progress (which usually involves rising living standards driven by rising productivity and falling consumer prices; see the U.S. industrialization in the late 19th century).
The road to serfdom, originally outlined by Hayek, is now taking the global economy down one of two paths:
Painful austerity plans and deflation that salvage what’s left of today’s currency system by promoting savings and encouraging new capital formation;
OR
Endless stimulus injections into economies with the promise of austerity “once the economy recovers.” Unfortunately, most Western economies are now thoroughly addicted to government spending. Each fiscal and monetary injection into zombie banks will likely have to be larger in order to offset the withdrawal symptoms of losing the last stimulus plan. Entrepreneurs figure this game out and gradually withdraw from participating in the economy in a healthy, productive manner. This loss of entrepreneur confidence in the system will ultimately accelerate the demise of all paper currencies.
The second path one is more likely in my view, because it’s more politically popular – especially once the European “pro-austerity” camp discovers just how addicted their economies are to the welfare state. Hopefully, a critical mass of people who value freedom over the illusion of economic security can move to wean us off today’s frighteningly powerful roles for governments and central banks. But based on the decisions we’ve seen in recent years – decisions driven mostly by political considerations – I’m not holding out much hope at this point.
After this weekend’s G-20 meeting in Toronto, we’ll know more about the direction in which the “world improvers” seek to drag their constituents. Ideologues are lining up on either side of the political debate between a) austerity and b) “endless stimulus and money printing.” Where one stands in this debate will depend on one’s view of the proper role for government.
Based on polling data, I probably don’t need to convince you that confidence in Washington, D.C., is near an all-time low. This normally shouldn’t be a concern for the stock market or the economy. But it is becoming a growing concern, because politicians keep pushing unpopular big-government agendas in a truly tone-deaf manner – agendas that will further dampen the entrepreneurial spirit that made the U.S. economy the envy of the world (while other countries were sabotaging their own progress with various flavors of Marxism during the 20th century).
Threats from Washington, D.C., include everything from raising tax rates, to bailing out cronies at zombie corporations, to a debased dollar, to an energy policy that – regardless of how it’s sold – will, in practice, have the effect of dramatically raising prices and worsening the U.S. dependence on oil imports. Case in point: The answer to the BP oil spill is to take away the right for Gulf Coast oil workers to work on statistically safe drilling projects for the next six months, and then put them on BP-funded welfare checks.
No price was too high to bail out the financial terrorists at the “too big to fail” banks. There’s not much desire for the current Congress and the Fed to end embarrassingly large subsidies and guarantees for the big banks. Apparently, in the wee hours of this morning, bank lobbyists succeeded in watering down the “Dodd/Frank” financial reform bill enough to render it almost meaningless. This bill serves to ultimately transfer even more wealth from the middle class to Wall Street kleptocrats (mostly via the hidden inflation tax, engineered by a politicized Federal Reserve).
This bill also did nothing to reform the monstrosities most directly responsible for inflating the housing market with underpriced mortgage credit: Fannie Mae and Freddie Mac.
Bottom line: This environment is dangerous for the stock market. Bull markets require healthy risk appetites among those with capital to invest.
Regards,
Dan Amoss
Whiskey & Gunpowder
July 6, 2010
Dan Amoss
Dan Amoss, CFA, is managing editor for Strategic Short Report and a contributing editor to Whiskey and Gunpowder. Dan joined Agora Financial from Investment Counselors of Maryland, investment adviser for one of the top small-cap value mutual funds over the past 15 years. As a buy-side analyst, Dan refined his value investing approach by meeting with corporate executives and sell-side analysts and writing proprietary research for the fund’s management team. Dan has made appearances on MarketWatch, and was quoted in Corporate Finance Review, a Thomson Reuters publication.
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Umm, you didn’t tell us how to profit. We’ve heard all the rest of this (Road to Serfdom) point of view a thousand times already. Was hoping for something new. Disappointing.
You profit by moving your money to someplace besides the NYSE, that’s how you profit.
The Agora folks have been offering multitudes of clues about various market sectors which will do well in different terms, whether short or long. That’s even without being a subscriber to any of their commercial newsletters. Same for the Doug Casey folks.
Hey, it’s called “Homework”.
As usual, I’m with th’ Rat. You stop looking for something for nothing and look for something priced at less than it is worth. That doesn’t mean that ALL stocks are bad, necessarily, but depending upon what your goals are you might even stop trying to make an abstract like fiat currency and use what you have to buy things that will improve your life, your business, or your skills. “Deflation” is difficult to get a handle on until you realize that it is all around us. Things go up, things go down, and they do it unevenly. One way to profit is to see what sectors are in a down turn that are of interest to you, or something you expect to go down further, such as the housing market. Lordy, no, I wouldn’t buy a house right now! However, I wouldn’t be surprised if we shake another 25% off the current pricing, and at some point a house could make excellent sense. Particularly if you could pay cash for it. One of the ways we got in this mess (as individuals and as nations) is too many people wanting things they knew they couldn’t afford. An old aphorism is, “Cut your coat to suit your cloth.” Given your choice of an underwater mortgage and $2500/mo payments for the house of your dreams you can’t afford to heat or cool, a more modest house you could AFFORD makes much more sense. What’s really in a deflationary stage right now is luxury goods, because most people are overextended and can’t afford them, of course. It is a wonderful time to buy a good used car IF you don’t obsess about gas mileage. Figure out how many miles a year you drive–and work out ways to reduce them. Find yourself a comfortable, safe USED car you like that gets about 25 mpg and don’t worry about that extra 5 mpg. It could take a very long time to make up in gas savings what you spent on an anonymous tin box you can’t find in the parking lot that won’t survive a fender-bender. I thought I was in hawg heaven when we added an ’88 XJ6 in superb condition with 67,000 miles on her to our collection last year for $4,000…until Charles surprised me with a VandenPlas with 62,400 on her, in magnificent shape, for $1800 last week! Let’s see…you can’t buy anything fit to drive for $20,000, and that’s going to be a Hyundai. If gas hit $10/gallon, my magnificent old beast gets 25 mpg, and I could buy 1800 gallons of gas at that price differential. At $5/gallon, I can have 3600 gallons, which will take me 9,000 miles, while you went 12,000 in a 30 mpg death trap…except my gas was already paid for by the choice I made. Maybe your idea of fun isn’t luxury and safety and a ride so smooth and quiet if you aren’t careful you’ll look down and discover to your horror that you’re doing 85 in a 70 mile zone. He handed over cash, not monthly car payments for six years. Insurance is less on a 20 year old car, and lots less when one gets to be 25. Somewhere out there is the car you always yearned for at a price you can afford. If you go look, there are similar good bargains in other things.
I am feeling like Manny at the end of Robert Heinlein’s “The Moon is a Harsh Mistress.” His “friend,” a computer which became so large it developed self-awareness, was damaged so badly during the war between earth and the moon that either his personality was destroyed or he went into catatonic shock. Years later Manny would still go into the main computer room and call “Mike?” There was never any answer.
As Manny says, “I’m only 150 years old, maybe I’ll immigrate to the stars.”
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Can we move on to a new article, this one is getting a little stale after a week?
And this Amoss character looks all of 22 years old, are you sure I should be taking him seriously?
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Dunno, Dave, maybe th’ kid ran a lemonade stand?