The survival of Western Civilization is today at risk, and that risk is being reflected in the global financial markets. We are currently experiencing the most widespread, pervasive financial bubble of all time. It is a bubble that is not widely recognized because it involves US government debt, considered by most to be the safest asset on earth, and because it is being encouraged by the Federal Reserve. But the massive accumulation of government bonds, notes and bills by all types of investors over the last several years has created a bond bubble that indicates collective insanity. Real returns are now negative on US Treasuries, the most broadly held financial asset in the world and an obligation of an entity that everyone knows is rushing rapidly towards insolvency. Buyers of Treasuries today cannot possibly earn a reasonable return on their investment. Yet institutional investors and individuals continue to throw money at government debt and increasingly high risk junk bond funds while throwing away stocks. That makes absolutely no sense.
One has to wonder why investors are punishing stocks when it is interest bearing debt securities and their derivatives that have caused all the trouble in the last ten years. Apparently investors are now scared shitless of investing in the common stocks of American corporations, which are the very essence of capitalism, following two significant bear markets in less than a decade. The pummeling of equities began more than a decade ago with the bursting of the dot-com bubble. The realization that internet companies producing nothing but a fantasy vision of future riches were not really worth anything caused a 46% collapse in the stock market beginning in the year 2000 and lasting until the summer of 2002. Stocks gradually recovered following the tax cuts of 2001, and reached a new peak 2% higher than the previous one in the summer of 2007 before the meltdown of the housing bubble slammed the market again, causing it to drop 48% over the next eighteen months. That disaster was a bit more bizarre since it had everything to do with mortgage debt and debt derivatives and very little to do with common stocks, unless you were talking about the common stocks of the big financial institutions at the center of the calamity.
In retrospect it is clear that an event prior to even the dot-com collapse set the course for the wholesale abandonment of equities over the last decade. The flight from stocks into fixed income (bonds, notes, bills) began with the effective repeal of the Glass-Steagall Banking Act of 1933 as a result of the enactment of The Financial Services Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act. The repeal of Glass-Steagall let commercial banks back into the businesses of investment banking, investment brokerage, money management and insurance services. Each of these businesses create conflicts of interest with commercial banking operations, a situation that should not be tolerated since it opens the door to fraud. But most devastating, the repeal let banks engage in the high risk business of proprietary trading, or trading securities speculatively for their own account, in which they promptly increased their unmeasurable risk exponentially with the massive use of leverage.
The investment vehicles of choice for the financial geniuses at the big institutions became leveraged mortgage debt, derivatives of that same leveraged mortgage debt and creative securities (credit default swaps) designed to hedge against the collapse of those securities. And when yields became too low for some, they moved into the even more high risk speculative trading of junk bonds. Trading crap became much more lucrative than investing in stocks of profitable companies, and trading the crap is what led to the financial meltdown. Despite the bailout, those activities have continued to this day as the big institutions distribute and trade debt at record low yields while shunning stocks, even while many companies experience rising earnings and display strong balance sheets. Go figure.
The only fundamental factor weighing on stocks today that makes any logical sense is the concern over whether or not capitalism will survive the policies of the politicians currently in charge of the US government. There is no question that if we stay on the current political course of massive government deficit spending, continuing to flood the global markets with more and more government debt that cannot be repaid, it can be said with near certainty that we are all doomed. That course is unsustainable. If it is maintained the collapse of the Bond Bubble will likely occur suddenly and swiftly, will utterly devastate the US and world economy, and take many difficult and turbulent years from which to recover, if we ever can.
But it doesn't have to happen that way. If a government is elected that can manage a gradual reversal in current trends of excessive government spending and remove the impediments to the efficient and productive operation of free enterprise, then there is hope we can all get through this without severe economic depression, catastrophic political turmoil and collapsed living standards. It is clear that America is in a critical life and death situation, and it is imperative that we boot the Progressives (i.e., state socialists a.k.a. communists) out of government and elect responsible leadership that can get us back on track. We need a president who has experience as an organizational manager. We need a president who understands economics while having a social conscience, one who also understands the basic American principles that produced both freedom and unprecedented prosperity. We need the anti-Obama. After all the damage he has done, if Barack Obama truly loved this country he would vote for Mitt Romney, too.
The most important policy moves government must make is to remove the legal and regulatory shackles from private enterprise, reform tax policy to eliminate preferences and re-establish an operating environment where the rules and regulations don't change every year. We must reduce the size of government. It employs too many people who make too much money. Public employees serving the people should not be compensated with salaries, benefits and job security that is better than those who pay for them. Government jobs are inefficient because they have too many people doing the same unnecessary jobs, which means the public work force must be reduced. And it would certainly help to make consumers and investors responsible for their own actions rather than expect government to protect them from their own ignorance and irresponsibility. Of course businesses must be held responsible for their activities and products, particularly when negligence or fraud is involved. But frivolous class action lawsuits for losses or damages sustained because the buyer did something stupid must end.
Even more important, we must stop spending federal money for programs that have no purpose other than politicians buying votes. One example is absurd agricultural subsidies to rich farmers. Another is subsidized student loans to anyone who wants one, even though there are no jobs available for them to generate income to pay the loans back even if the recipient did finish college. Perhaps the most bizarre is the food stamp program that has doubled the number of eligible participants and the cost in just the last three years. One out of seven Americans is now eligible for food stamps, including folks who make 130% of the federal poverty guideline, have thousands of dollars in savings and perhaps own a million dollar home. How ridiculous is it that the Agriculture Department runs radio and TV ads promoting the food stamp program? Those who truly need food assistance know it is availabe. Those who don't need it but see the ads like the idea of free food, paid for by the chumps who pay taxes. And the list of such programs goes on and on. The bureaucracy is out of control.
America must make a clean sweep of its elected officials. If Barack Obama is re-elected, the Democrats retain the Senate, or any big spending Republicans masquerading as conservatives remain in office it will be time to turn out the lights because the party is over. We don't have more time. The presidency, the Senate and the House must be controlled by statesmen who are on the same page regarding what must be done. It won't be easy. Even if capable and competent leaders do win office, the policies required to stop, reverse and recover from our current course towards economic and social Armageddon will cause hardship and suffering that the political opposition can and will exploit in their attempt to regain office and resume their policies of mass destruction. It will be difficult to stay the course. But it must be done, or else the United States of America is done. Yes, it is that critical.
The big question for many folks who still have some investable assets and know they can't count on social security to support them when they retire is what does one do with their financial assets? Great question. Unfortunately it depends on many factors, including whether the bond bubble implosion happens rapidly or over time, leads to global economic collapse or a division into strong and weak countries, results in inflation or deflation, and what currencies emerge to dominate what is left of global commerce. The answer to the question is that no one knows. But the prospects for a favorable outcome improve substantially if responsible conservatives resoundingly win the elections this fall.
Assuming the real economic conservatives win, how does one invest their personal money now? Investors could keep their money in fixed income expecting to retain some principal value while we go through tough times, but the inevitable increase in interest rates will eventually cause bonds and bond funds to fall in price, potentially producing significant losses. Personally, I believe that if we can achieve all of the objectives mentioned above it would mean the rebirth of capitalism and the end of the assault on common stocks. Right now could be a perfect time to take advantage of the overwhelming negative sentiment towards American and foreign stocks. Equity prices always reflect future results, and a re-awakening of free enterprise around the globe could produce strong gains over the next several years. That is the way I am betting. If I am wrong, I am going down with the ship. That is not as risky of a bet as it may seem, because if I am wrong and the current government remains in office there is little doubt that the ship is going down. And then we are all screwed.
