Sunday, August 30, 2009

No, Your Government Will Not Do the Right Thing

I have accepted this and understand it better now that I have reviewed some historical cycles and seen the previous mistakes that governments around the world are repeating through the current economic mess. What is needed is a return to fiscal sanity. No more debt, no more profligacy, no more making promises that cannot be kept.

But, alas, the opposite is what will occur. Government will rush to "fill the void" left by tapped consumers (i.e. citizens). Our government (and most around the world) will borrow even more money than it already has to "stimulate" us. More needless war, more "cash" for goods programs, more "new job" creation, etc., etc. Of course, none of it will do anything but make for a few lousy campaign slogans and drive a stake through the heart of the productive economy. Keynesian economics is blasphemy and an insult to common sense, but it persists because it allows governments and their central bankstas to maintain and expand their power.

I love charts because I think they can sometimes show things in a precise and eloquent way. Here's what we have to look forward to in terms of the personal and government debt picture in the U.S. over the next 10-20 years, based on what Japan is still going through now (data chart from Bank of Japan):

The time frame of interest in the chart above is 1990 (when their stock and real estate bubbles popped and caused a secular credit contraction) through now. The key point is that individuals will start to de-lever (and deliver) soon, whether through savings and paying off debt or defaulting on it. Government will get the country further into debt, working against their citizens by "stimulating" them and their economy. But eventually, the efforts of the citizens of the U.S. will cause our scary debt to GDP chart to decline and once we can get it to decline enough (which will take 10-25 years), a new secular bull market and credit expansion can begin. Of course, this is a painful, long process and economic growth will be anemic throughout the next decade or two while citizens gradually win the war against their government to reduce debt and restore economic health.

There will be cyclical stock and commodity bull markets throughout the now well-entrenched secular bear market, but until that debt to GDP ratio gets back to under 150% or so, there will be no new secular bull market in equities or commodities. The stock market peak in the 1929 Dow Jones Industrial Average was eventually bested - it's just that it took until 1954 to do it. If our government hadn't created "New Deals" to force citizens to borrow more money "for their own good," it might have only taken a decade to make new highs. Japan's stock market peaked in 1990 and they are still 70% below those highs almost 20 years later!

So, no, our government will not do the right thing. They will get us further and further into debt with "guns and butter" programs and policies while most of those of us spending only our own money will tighten our belts and try to reduce debt. The government will be working against the economy and its productive citizens every step of the way. It is frustrating to see the same insanity tried again and again by policy makers when history has already shown that every single time it is tried it doesn't work and in fact makes things worse.

Fortunately, there are some places one can make money in such an environment. The best thing to do for the average investor looking to take a reasonable speculative risk is to buy a basket of Gold mining stocks after the next stock market dive (but not yet). You see, Gold stocks have a way of doing well during decades when general stocks do poorly. It has been true during the 2000-2010 decade and it will be true for the next decade as well.

I continue to wait patiently for a bottom in senior Gold stock indices. I was hoping to not have to wait this long, but I know that this patience will be rewarded. Buying high is not a good option while in the middle of the worst cyclical general stock bear market any of us will likely see during our lifetimes.

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