The shift, and it is imminent, will not change the larger trend, but it has the potential to be quite disruptive over the short term. The fundamentals that have caused so much pain and economic woe over the last ten years or so remain intact. If anything, they've gotten worse. We've gotten currency debasement, not just in the U.S., but especially in the U.S. Dollar, which is not just any currency, but the world's reserve currency.
We've got a truly mind-boggling expansion of the reach of government into all aspects of society and the economy, with all that implies in terms of regulation, taxation, controls over investments and finance, impact on personal liberty, and so forth. By recognizing this destructive trend for what it is, investors can position themselves to avoid the worst, and to profit. Think safety and tax - deferral here.
There is growing evidence that in the next month or two, we will head into a very dangerous period. The Fed has been extremely supportive of the U.S. government's insane spending, polluting its own balance sheet by buying up toxic loans by the hundreds of billions and by pumping enormous quantities of cash into the money supply.
You don't have to look very hard to understand why we have seen some small recovery in the economy, much of which has been driven by the financial sector that has been the recipient of so much - it was bought and paid for by the government working hand in glove with the Fed.
But there is about to be a fundamental change in this arrangement. It appears that the Fed has decided that it's time to take a step back from its' monetization - or quantitative easing (QE) as they now term it - in the hopes that the market will step in to fill the large gap it will leave. They can't know how that's going to work out, but if they don't stop pumping money into the economy, they never will know if the quantitative easing has worked.
The problems that made the economy stumble in 2008 have not been solved. As I said before, most have gotten worse. Have the impossible levels of sovereign debt and trillions in unresolved bad mortgages embedded in the balance sheets of Fannie, Freddie, the banks and even the Fed been resolved? Hardly. Is there any real sign coming out of Washington that the deficits will be substantively tackled? You don't have to be as active as a skeptic as I to understand that the deepest spending cuts being discussed don't even scratch the surface of the $1.5 to $2 trillion deficit. As for the $60 trillion or so in deb and unfunded obligations, forget about it.
The U.S. government and the governments of most large nation-states are fundamentally bankrupt. In time, they will have to default on their obligations. While there will be some overt defaults, I expect most of them to follow the path of least resistance, which is to try to inflate (inflation) the problem away. Now is the time to think safety, guarantee of principal, guaranteed income for life, and tax deferral. Call us, we can help!
Tom
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