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Not Buying It


John is bearish and frustrated. He called me last night pointing out all kinds of reasons why the market shouldn't be doing what it is doing, why volatility should be higher and the market lower. I listened carefully and patiently, something that I have learned to do after many mistakes. It has saved me from many more.

Patience and forethought: two sorely lacking attributes in today's world. But I am here to tell you that it is not just today's world that lacks them.

I can remember 1930 after the stock market crash of 1929 things were similar. People had grown accustomed to a certain lifestyle, expecting what their forefathers could only dream about. The new world was here and they were living it...until their world came crashing down.

People were in shock and they would do anything to get it back. Instead of looking at the real problems and causes, such as high debt, they wanted quick fixes. President Hoover was there to save the day. He injected huge amounts of liquidity into the system through fiscal and monetary policy and lower taxes. Things looked pretty good six months later as the stock market retraced nearly 50% of its losses from the highs, but the stimulus only exacerbated the debt levels and by June of 1930 the market began to head back down, with a vengeance.

The most significant difference between now and then in my mind is that Hoover was somewhat limited in monetary stimulus because the dollar was still tied to gold. Today the U.S. can print as many dollars as they need and we have been told by the mouthpieces of the Federal Reserve that is precisely what they intend to do.

Most people are familiar with the 1929 scenario, although most do not know just how much Hoover and his administration intervened. That is why I used it. In actuality, I view today's situation more similar to Germany after World War I. The country suffered from hyper-inflation. This is the danger when there are no restrictions on paper money.

The intervening forces at work here are massive, well-coordinated and determined. This simply means that market forces will take more time to work.

In order for the U.S. government to be successful at "re-inflating" the economy, it would also have to effectively reduce the massive debt used to finance this current expansion: they would have to at some point cut government spending dramatically in order to assuage our foreign creditors. Perhaps this is part of the "well-coordinated" part. This means eliminating many of the U.S. entitlement programs and much of the $44 billion in unfunded liabilities that they represent. Perhaps the current Medicare bill is the precursor to that.

Regardless of whether or not it works, this is high risk economics. Patience is crucial here. There is an overwhelming urge to buy into all this, to not miss the party.

Being as old as I am, I am not buying it or any financial asset right now.
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