Although my wife may ardently disagree, sometimes I don’t like being right. If you look over the older posts on this blog, you will see that I was claiming quite some time ago that the story of “Recovery” that the administration was trying to sell was complete garbage. There is no recovery. The only thing that has improved is the stock market and that has been because Wall Street thinks things are going to get better. The market is now overvalued and has pulled back significantly because it is realizing that it had greatly overestimated the recovery. So, in this entry, I will attempt to explain why I believed there was no recovery and there will be no recovery until we change course. Most “financial experts” will disagree with my premise, just as they disagreed when I said housing was going to crash; just like they disagreed when I said we should be buying gold; just like they disagreed when I said silver was overvalued; and just like they disagreed when I said “stimulus” wouldn’t work. Please do not interpret what I am saying as bragging. Rather, I am attempting to illustrate that by deploying common sense and basic reason, we can all outsmart the “experts” who are usually too smart by half. I am no genius; I can assure you. I’m just the guy in the back of the crowd who is attempting to point out that the king simply isn’t wearing any clothes.
Once again, this is not a political critique. I ABSOLUTELY disagree with anyone claiming that Obama and/or his administration were lying about the recovery. I am quite certain that they did and still do believe they are on track and taking the necessary actions to get us back on track. The reason I am so confident that Obama, Bernanke and the rest of their ilk are sincere is because I have spent quite a bit of time in the collegiate economics circles. My time at a certain unnamed mutual fund company had me submerged in the theories of academic types who accept Keynesian (if you are reading this blog for the first time and are unfamiliar with Keynesian economics, we discuss it at great length in previous posts) economics as gospel. They all live in an echo chamber, horrifically afraid to go against the grade lest their colleagues and contemporaries think less of them. To me, the problem is simple: the Fed began pumping money into the economy in an effort to buoy the banks and the financial system at large. None of the underlying problems that created the mess were dealt with. So, surprise surprise, companies have accumulated large piles of cash and have trimmed costs WHEREVER possible. They aren’t dumb. They realize that money is cheap right now. Interest rates will be moving up in the near future which makes borrowing money more expensive. CEO’s get paid based on their company’s profitability. As cash gets more and more expensive to borrow that large stock pile will become increasingly valuable and let them take advantage of opportunistic situations, such as mergers and acquisitions. That is how they will increase their working force and grow the business. The economy and the consumer are in trouble right now, you know it and so do they. Herein lies the problem with trying to spend your way out of this mess. The underlying issues that are prolonging—unemployment and housing—are actually getting worse. The only way to get housing to stabilize is to improve the employment picture. The only way to improve the employment picture is to give companies an incentive to hire. How would you do that? Well, I believe the most effective way to do that is to lower tax rates on corporations. Hear me out here. If we just give companies money to “stimulate” them, they will do what they are currently doing which is sit on it. If you give them tax breaks instead, they are forced to transact more business. The only way to take advantage of a tax break is by making money. Also, that cut in taxes has made transacting business less expensive as those tax savings drop right to the bottom line. Well, we all know companies and CEOs are greedy. So, that greed will drive them to exploit that tax cut as much as possible (transact more business) which will require them to hire more people. It is the only way to grow profits and for CEOs to hit their bonus targets. By pumping money, we are rewarding companies for sitting still and cutting costs. By cutting taxes, only the companies who transact more business will make more money.
Let me state plainly that I am not advocating getting rid of taxes. Furthermore, the answer isn’t ALWAYS just cutting taxes. Taxes are really a balancing act. For instance, most people think that increasing tax rates will increase government revenue. Well, if the tax rate was 100% the government would receive no revenue. In other words, if you had to pay 100% of your income to the government you would most likely quit working. The flip side of that argument is if the tax rate was 0%, the government would receive no revenue either. The trick is finding the sweet spot, and I can assure you that right now, with this economy on the ropes, that sweet spot is not higher. Consider this: would the government make more money with 100 people paying 50% of their income in taxes or with 120 people paying 40%? It’s not even close. We must find that sweet spot and let the free market do what it has proven it can do time and time again. The free market has created more wealth and raised the global standard of living more than any other social or financial system in the history of mankind. Why do we doubt it now?
I hope people took my advice and took some profits in the last few months. I may be wrong, but I believe this market could keep heading south in a big way. We are keeping cash on hand and holding on to our gold positions. As I suspected, silver has come back down to earth. I continue to love dividend stocks as long as your cash position is big enough. Oil could be under some pressure, but I really think it is a compelling buying opportunity at 90 or below. I really believe that we will see another round of quantitative easing and look for gold to go much higher. It may get a bit pinched in the short term, but it should do well over the longer term.
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