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Revisiting The Big Picture


Overspending has caught up with us.

Editor's Note: The following originally appeared on November 25, 2005 and, in light of current events, has been reprinted here for the benefit of the Minyanville community.

A few weeks ago I posted a diagram depicting what is really going on with global capital flows. I drew a picture that debunks the "the U.S. is efficiently using the excess savings of the world" kind of statements we are hearing from our politicians (yes, the Federal Reservists are politicians, too).
Minyanville's Why Wall Street Will Never Be the Same
In Ojai I was on the bear side of the discussion, not because I thought the stock market was going immediately down (I stated then and I repeatedly do so now that the biggest driver of stock prices is sentiment, or the risk premium investors attach to various assets, and that can lead to long periods of overvaluation or undervaluation), although I did warn it is extremely overvalued and dependent on zero real interest rates. I was and am on the bear side of the discussion because I am warning as loud and as often as possible about untenable imbalances, debt, and the structure of the economy in general. The long term repercussions are scary.

Bulls can laugh as stocks go up, but I'd like to tell them one thing: I really am on their side more than they know. I want this country to grow and be great, just like them. I want my children to go to good schools and lead happy and productive lives, just like them. That is why I'm warning them not to look at stock prices going up (maybe they should view it merely as all currencies going down for no one is wealthier, they just have more currency) as a signal that all is well. All is not and it is getting worse for the reasons stocks are going up.

World central banks have bought into the idea (actually they were created for the idea) that printing currency cures all ills. But all it has done is exacerbate the imbalances between the great economic powers of the world.

It's rooted in the requirement that we must depend and trust in each other: The Chinese have our best interests at heart and they will never let us down. This will be true only when they have ownership in large amounts of U.S. assets and thus their economic interests fully align with ours. Until then they could easily change course, to our utter detriment.

The point is that the US has put itself in the position of exposure, one reason being that we are politically incapable of doing the tough thing and have been for years.

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No positions in stocks mentioned.

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