Wednesday, December 24, 2008

When trust evaporates

The Bernard Madoff ponzi scheme has everyone talking. Why don't most people seem to recognize these scams until it's too late? The short answer: trust.

Madoff was a former chairman of the NASDAQ stock market, so people trusted him. Hmmmm. Isn't this sort of like people now trusting Bernanke, Paulson, and Obama to fix the economy and restore prosperity?

Do you think government bureaucrats are smarter than average people? Do you think getting a PhD in economics from Princeton University (Bernanke) makes you an expert on what to do during a global financial crisis? Our current government leaders and central banksters are EXPERIMENTING with taxpayer money in an attempt to keep the biggest Ponzi scheme of all going: trust in the promises made by the United States government.

We as a country are broke and yet borrowing money at an accelerating rate. Does this meet the common sense standard? We have ABSOLUTELY ZERO MONEY SAVED to pay for baby boomer social security or medicare benefits, yet everyone pretends the money will somehow be there when the poop really hits the fan. Pretending to believe this lie told by our government is asking to be swindled. Why do people insist on believing things that are obviously unrealistic and likely to be false? Because it's easy.

The key to successful investing is to do your own learning, thinking and analysis, not to put all your money into an S&P 500 index fund and forget about it. Yes, it takes effort, but why wouldn't it? Do you think that everyone else will take care of your money and be concerned for your future because they are altruistic?

Trust is breaking down and it should be. The world is not ending, it is changing. All the people living in a debt dream who thought they were wealthy because they leveraged to the hilt to buy things they didn't need are silently (or not so silently) screaming in agony right now. The debt bubble has popped.

A debt bubble popping is a good thing for the long term global economy but requires a painful adjustment period to heal and cleanse the economy of the toxic sludge created by debt. Debt is a noose around the economy and it has reached the point where the noose is too tight. Bernanke and Paulson say they want to "stimulate" bank lending or the creation of more debt. This is the opposite of what is needed. Bernanke and Paulson, as financial people, should and probably do know this, but bankers make money by creating indebtedness. Obama most likely has no clue about economics and is listening to advisers who tell him the economy needs to be "stimulated."

The government stimulated the living shit out of the economy during the first great depression. Anyone who tells you otherwise is ignorant or dishonest. Period. What did it accomplish? Nothing except to prolong the recession required to liquidate the excess debt so that a new cycle could begin. Japan has been "stimulating" its economy for almost two decades now, to no avail. People who tell you the Japanese did it wrong or were too slow or nonaggressive are ignorant or dishonest.

Remember the most important lesson of economics to help you in your investing career: governments don't control markets, people with real jobs do. Bureaucrats are parasites on the economy who can only distort or divert the primary trend, not reverse it. A deflationary bust must run its course before central gangster (I mean bankster) money printing can work. Once the deflationary bust is over because the people with real jobs decide that it is, the bad monetary medicine applied by those who envision themselves as financial alchemists will make the recovery more erratic, fast and volatile than it would ordinarily be due to their incompetence and impatience.

Home prices will not stabilize until people with real jobs in aggregate decide they should and are able and wanting to do something about it. The stock market will not stabilize until people with real savings decide it is time to buy and have the funds to do so. Commodities will not stabilize until people who run private companies demand enough raw goods due to orders from people with real jobs.

When governments are buyers of assets, any price gains are temporary and illusory, as central planners have no incentive to be smart and careful with other people's money. If this were anything but true, communist governments would always have the fastest growing economies in the world and no one would espouse free markets or democracy!

Trusting in bureaucrats to save your house, pension or 401k account is as misguided as trusting in Bernie Madoff was. The preposterous paper promises of paupers are burning and when they go up in smoke, there is only hope to replace it, not truth or real money. Hope won't put food on your table. Buy physical gold, the only true money in today's world, and protect some of your savings from theft by aggressive devaluation and fraud.

By the way, happy holidays! I believe 2009 will be an enormously profitable year for those investors willing to turn off CNBC and do their homework. If you want to buy some stocks and forget about all this financial crap for a few years, buy solid, blue-chip gold stocks and come back in 2-3 years.

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