Let me start out by asking a few questions. How many of you were pro-bailout? How many pro-healthcare? How many think borrowing trillions of dollars to “stimulate” will really have any long term effect what-so-ever on the economy? How many realize that borrowing and spending really isn’t the cure for a problem caused by too much debt and too much consumption?
Now let me ask another question. Aren’t our politicians supposed to represent the will of the people?
I’m going to assume that the vast majority answered no to the above questions and yes to the last one. If that is the case then why in the hell did we hand over billions and billions of dollars to the banking industry? Was that in our best interests? How on earth did the health care bill get passed? And why, why, why are we throwing trillions of dollars down the drain in stimulus that has no earthly chance of having any long term positive effects?
Of course we all know the answer to the question. All these things came to pass because politicians don’t actually represent the will of the people. Politicians represent our desire to avoid short term pain and their own personal desire to get re-elected.
So how did we get in the mess we are in?
Let’s start off with a little history. Let me say that nothing is happening today that hasn’t happened many times in the past. I’m fairly certain human nature hasn’t changed in the last 5000 years or so, and I really doubt it’s going to materially change in the next 5000 either, so I can virtually guarantee we will go through this again…and again, and again.
Historically about every 70-80 years humanity suffers through an economic depression. It takes about that long for society to forget the ravages of the last depression. And what causes it is a credit bubble.
I know we would like to blame our troubles on the greedy bankers and leave it at that. But that is way too simple. Bankers are just human, no different than anyone else. Trust me, no one is immune to the pull of greed. Sure the financial system should have foreseen that no good could possibly come from loaning half a million dollars to someone with a $30,000 a year job. And what about the speculator that bought that half million dollar house. He knew darn well when he took out the loan he couldn’t afford to make any payments once the teaser rates expired. Isn’t it also his fault when he lied about his income? Or how about the loan originator? Was it really in everyone’s best interest to underwrite a loan for several hundred thousand dollars to a guy sitting on the other side of the table wearing a McDonald’s work uniform? Or was it just the quickest way to make a commission? And what the heck, everyone else was doing it. If they didn’t make the loans they were just going to put themselves out of business while all their competitors were getting rich.
The same could be said for the appraisers. They certainly knew the prices they were quoting had no basis in reality, but then if they tried to act responsibly they would quickly find themselves out of a job.
How about the home owner who annually or biannually refinanced their house so they could take equity out and buy a new Hummer, home theater system, or a swell vacation, etc. Aren’t they also just as much to blame as the bankers?
We’ve coined the term Banksters as a sign of the contempt we feel towards the perceived instigators and originators of our current malaise, but perhaps we need another term, one that is a bit harder to stomach but just as appropriate. Sure, the Banksters were a big part of what went wrong but no more so than the average Americanster. All those folks living on home equity, all those buying houses, sometimes several at a time to flip, all those people lying about their income, were they not also driven by greed? Weren’t they just as much at fault for the mess we are in as any banker?
Next I want to point out that none of this would have been possible without the co-operation of our elected officials and especially the Federal Reserve. After all it was Alan Greenspan and now Ben Bernanke who cut rates to near zero and supplied the free money that was required to get the ball rolling down the hill. No bubble was possible without the consent of the Fed, the very people who are supposed to be looking out for this very thing.
Of course Greenspan has insisted it isn’t possible to spot a bubble before it pops. What a load of baloney. Anyone with half a brain could spot not only the tech bubble but also the housing bubble a mile away.
Amazingly we are now going to give the Fed even more power to regulate and oversee markets. The very people whose monetary policies enabled the credit bubble in the first place. The very same people who couldn’t see it as it formed. The very same people who repeatedly denied it as it imploded.
Do we really want to trust these folks with regulating the system? Let’s face it, their track record leaves a lot to be desired. Why should we think they will get it right this time when so far they are batting zero?
There are right and wrong ways to deal with this kind of problem though. History has shown over and over that the quickest and cleanest solution is to let the market work. Let the system collapse and cleanse. Sure it means hard times. There really is no avoiding that. The countries that have allowed the market to function have suffered 2 or 3 years of extreme pain. Regretable, but unavoidable.
However, every country that buckled down and accepted the cleansing process emerged from the other side much stronger. Brazil in the early 80’s, Vietnam in the mid 80’s and Russia in the late 90’s are just a few examples. And without exception these countries all saw explosive growth after allowing the cleansing process to run its course.
On the other hand the countries that fought the market without exception entered long periods of hard times. In the 1930’s Roosevelt took this path and turned what should have been just a bad recession into the Great Depression. Ultimately all the efforts to halt the depression only made it worse, culminating in World War II.
Japan chose this path and was rewarded with 20 years of on again, off again recessions, culminating in finally bankrupting their country.
Now we are faced with the same problems as Japan in the 1990’s and Roosevelt in the 1930’s and what path have we chosen? The path of least resistance, of course. We’ve decided to kick the can down the road.
We are certainly in good company as almost every major empire in the history of the world has chosen this path to oblivion. And it always starts with currency debasement.
Take a good look at the following chart.
You probably read the article by Michael Burry. The book, The Big Short, is a fun read. Fun in a three stooges kind of way…and there’s nothing wrong with gambling, even at the billion dollar level as long as the gambler takes the loss if it happens.
The taxpayer is taking the loss now and you are absolutely right about voting out the incumbents. I voted for Obama but I regret that vote now. It sucks to have paid all MY bills, mortgage, etc., kept my 50 employees working and paid plenty of taxes only to find out that the administration is catering to the idiot who can’t pay HIS bills not to mention the banking industry which apparently pulls the strings.
I sent the Michael Burry article to a friend with the question “Are our elected officials idiots or crooks?” Either way it doesn’t bode well for the honest citizen.
I love when someone says exactly what I’m thinking/feeling in such simple terms. Saves me a lot of work!! THanks for your thoughts. I have a blog, as well, but since the birth of my son four months ago, I have let the blog slide for th time being. I appreciate your work.
I hear what Gary’s been saying about what he’s been following for over a year now (“Dawler”, cycles, sentiment, smart money SOS/BOS, etc) but mysimple take of what’s happening: The yen.
1st Half 2008 we witnessed non-stock risk markets, notably crude oil, go overdrive after a good 2007. Now, the dollar is broadly STRONGER compared to then. Stocks are on a tear.
The difference now with stocks and commodities broadly accelerating upwards is a “collapsing” yen.
Witness Aussie Dollar against Yen, as opposed to Dollar.
Now the Loonie (Canadian). I have no idea what’s going on with this currency, but strengthening commodity prices is no justification for its strength, when the Aussie is hardly making new highs against the Dollar.
I think I would short anything Canadian at this point.
Revisiting what I said earlier, the yen’s relationship to risk is exactly like pre-August 2007, pre Credit Crunch era.
“Vote out the incumbents”. And vote in who?? Ohhh, Gary. Do you really think that there are two parties?
No of course not politicians are politicians no matter what party. But we the people can enforce term limits by simply not allowing any politician a second term.
Something they will never do voluntarily.
So it took you thousands of words to say “Throw the bums out”? Not a new sentiment, nor a particularly sophisticated one. It’s kind of naive and disappointing.
Imagine you threw out every sitting politician and installed someone from the opposite party. Would anything change? No. Because politicians by their very nature like to spend. They like to spend because we want them to. We claim we don’t want them to, but when it comes to individual items — the Medicare prescription drug plan, Social Security, military spending, expensive home-state projects that “create jobs” — we want them to spend more. And they do.
So we have the spectacle of people who live on socialized medicine — i.e. Medicare — protesting socialized medicine. We have unemployed people who demand unemployment benefits so they can go to Tea Party rallies. No one ever offers to give up their own big-government handouts — they only object when someone else gets some.
If Barack Obama had let the banks fail and then balanced the budget, we would have had a fast but deep and violent deflationary depression. The country would have been on its way to working out its true problems, but he would have been impeached.
So he, like George W. Bush before him, chose the cancer over the car crash — the long, slow process we are going through now. No other politician would have done it any differently, because it’s in the nature of all politicians to seek re-election. They are short-term thinkers by necessity.
Oh, and by the way, it’s only going to get worse. The recent Supreme Court decision on corporations’ election contributions (which no one protested at all) guarantees that no politician will dare stand up against future bailouts. It would be like signing your own political death warrant.
“Throw the bums out”? Please. If only it were that simple.
Hmm, I odn’t know anyone who was for the bailouts, stimulus, healthcare, higher taxes, etc. So I’m not sure who you are talking about when you say we want them to spend?
If you have a better idea of how we regain control of the political system I’m all ears.
You’re really only spouting the TeaGOP line when you say “Roosevelt caused the Great Depression” and only leave me hearing your Freudian side.
C’mon, you TeabaggersGOPs have all the answers until you get in office and F@#k things up with Reagan Voodoo bs. The GOP screwed us all finally and now are trying to blame the dems.
Can you count? The voters can: Dems 57+2 Gop 41
Oh, you know a LOT of people who were for the stimulus, healthcare, bailouts, etc.
For instance — the majority of the stimulus consisted of
1) an increase in unemployment benefits. Would you personally have slashed benefits to people who lost their jobs in this recession, Gary? If so, I admire your consistency, if not your sense of human decency.
2) Stimulus to the states for jobs projects. A lot of politicians publicly objected to the stimulus — then campaigned at home on how much money they brought home to their districts. Do you know why? Because those infrastructure projects and the jobs they brought were very, very popular.
And then there’s “healthcare”. Do you think we should end Medicare, Gary? Because that’s the biggest driver behind our exploding deficits in the future. Most health care costs are incurred by people over 65 (obviously). Would you like hospitals to simply stop treating elderly people?
What do you think happens when people aren’t insured? Do you think they don’t get sick? Of course they do. And hospitals treat them. And they pass on the costs to two people: 1) you, the taxpayer via Medicare, and 2) you, the consumer, via health insurance premiums.
You’re already paying for “healthcare”. You just don’t seem to realize it.
As for the bailouts — they were very popular with the big banks, who have financed and will finance the campaigns of all candidates from both parties. This is how politics is done in America, how it’s always been done and always will be done.
The reality is that nothing is going to change until we reach the breaking point. Until we can’t finance our deficits anymore. At that point some very ugly choices are going to be made, and we will have to get our financial house in order.
But I wouldn’t look forward to that day too much, because the “solution” won’t be pretty. It will involve more poverty and homelessness among the sick and elderly. It will involve much higher taxes and lower standards of living.
Simplistic solutions like “throw the bums out” are what substitutes for a real hard look at the nation’s balance sheet and the tough choices that must be made now.
“Hmm, I don’t know anyone who was for…” The oligarchy democrats were the ones for it Gary.
We fought a war once over taxation without representation. Let’s hope the naive American voting public wakes up this next voting go around.
Anon 3:32 sounds just like a politician.
You need to read a little more closely.
A little bit of selling on strength in IWM today. Surprisingly, none in SPY.
Actually I think the money would have been better spent as a safty net to get people through the hard times instead of wasted on banks and make work projects. So yes to extended unemployment benefits.
Make work projects didn’t work during the depression and they won’t work now. We need real jobs producing real products that real people want and need. Just building a bridge to nowhere or repaving a street that doesn’t need repaving does nothing but waste taxpayer money.
All that accomplishes is to raise taxes and inflation so in effect the governement takes from the solvent to give to the insolvent and in effect weakens the entire system in the process.
That strategy has never worked. Just ask Russia or any communist nation for that matter. I’ll take the uneven distribution of wealth or the even distribution of misery any day.
Apparently I didn’t make myself clear. I’m not pro Dem or Republican. I think all politicians are basically worthless. I’m not advocating voting out the Dems and putting in Rrepublicans. I’m saying we force one term limits on politicians… all politicians.
BTW I sill haven’t heard any other ideas. Instead of telling us why forcing one term limits won’t work, tell us what you would do to change the system and put us on the right track that doesn’t lead eventually to another economic collapse and likely another war.
Absolutely to term limits. As well as a balanced budget ammendment that also specifies that the U.S. Gov’t can not grow faster than real GDP.
That with all fed $ that comes back to the states be based solely on each states population. That is to say, so much $ per person. No more, no less.
All that combined would put a damper on the spend thrifts trying to buy votes.
I thought Bush and the Republican Congress was sad the way they spent the money. But what we have now is truly scary.
When are you going to start making us money? Is this a political blog now? 🙂 I am too young for this s*it.
I agree that make-work projects don’t work. But they are very popular with voters. That was my point.
Our entire society lives beyond its means. Our government does it, and we as individuals do as well. Our entire civilization is addicted to debt. We make a big show of talking about kicking the habit, but it’s all for show. When it comes to debating tough decisions — how much should Medicare and Social Security benefits be reduced? — no one is interested in having that conversation. It’s not much fun.
As I said in my previous post, our political system guarantees that no real change will happen until we finally reach the breaking point — until our creditors (i.e. the bond market) force us to accept austerity measures a la Greece.
Presumably you understand this, because it’s the basis of your investment thesis. If our government were to reverse course, gold would crash. But that’s not going to happen under either party. Debase or default are the only options.
So go ahead and vote for whoever you want. It won’t make any difference whatsoever. The system we have now is designed to allow you to release your frustration by pulling a little lever every few years, with the illusion that this is somehow going to change things. It won’t. It just keeps you switching from Coke to Pepsi and back again. It’s the illusion of choice.
If you want to “make a difference”, stop shouting and start thinking. Start having a serious non-partisan discussion on your website about the national debt. “In order to balance the budget we are going to have to make tough choices on taxes, Social Security, Medicare, defense spending, education, etc. What are we willing to sacrifice to get to a balanced budget?” “In order to stop the bailouts we are going to have to get serious about getting corporate money out of politics”. Et cetera.
Ultimately, I doubt that it will do anything, because people like to blame others for their problems. They don’t like to take responsibility, and they don’t like to make sacrifices. But at least it wouldn’t be an exercise in self-deception.
Very good observation.
It’s all about priorities. Persons who are in power sets the priorities which suits them best. It has nothing to do with real public opinion.
As you rightly said you have to undergo painful time but in fairly manner means to recover later stronger & better.
Today main street is baring all the pain & fraudster are enjoying unfair bailouts.
Only way to out of this situation is to attract FDI to US for creating JOBS with competing wages those of BRICS countries.
Encourage the concept of saving by offering attractive Interest Rates on term deposits & then slowly back to normal consuming economy (not back to artificially elevated consuming economy)
Its a long process.
Talking politics ain’t going to make any of us any money. Gary, I’m not sure why you have turned into a trader. You used to talk about being an investor, now you wanna pick tops and bottoms. You’ve said youself, it can’t be done.
“Sure, the Banksters were a big part of what went wrong but no more so than the average Americanster. All those folks living on home equity, all those buying houses, sometimes several at a time to flip, all those people lying about their income, were they not also driven by greed? Weren’t they just as much at fault for the mess we are in as any banker?”
Since you asked, the answer is a resounding NO. Anyone who cant understand why shouldn’t bother writing a financial blog to give others advice. But somehow it seems apropos that you would be an apologist for the banksters, by minimizing the depth of their depravity
I’m not excusing anyone. Not the bankers for making the loans they should have known better or Joe Sixpack for buying 5 houses with no money down expecting to rich without having to actually risk anything. They are both guilty as charged.
Give it a break. Right now the best strategy is to wait for a correction and then buy. If you don’t want to do that or you don’t have the patience then buy but be prepared to weather a drawdown. Those are your choices. Make one.
No Gary, there was another choice. And that was to get long at the bottom and stay long. Sorry if you don’t like me pointing that out.
I still have my remaining positions in miners that have been long the entire period.
If you would like me to see into the future and then go back in time and tell you what to do I’m sorry those kind of abilities are out of my league.
Or do you just want to complain about something? If that’s all then I understand it’s a never ending battle one has to endure in this business. But all in all I think you complained enough so it’s time to either be patient or buy and be prepared to hold.
Thanks, that’s great advice. Go long at the bottom & stay long. I’m going to write that down.
Yes as if anyone actually has a crystal ball and could possibly “see” a bottom in real time.
Sometimes I’m just amazed at the pinpoint accuracy of hindsight. LOL
Gary: You are right on.
Some of the intelligent people on this blog I am reading still don’t get it! Do some reading, folks… Of course there are 2 parties!
Looks like gold is doing its own thing, dollar bull or bear…
I agree with most of the argument about letting the market work, but I think the analysis from this perspective is always limited and doesn’t take into account the downside of market forces. In the end neither the government or the private sector should be allowed to have too much power, influence, or control. What is needed is an interplay between these forces that checks and balances the functions of each and demands accountability on all fronts and transparency. It is the aggregation of power, secrecy, and manipulation in any arena that leads to devastating effects on those not in the loop; ie. all the rest of us. Market forces left on their own will always lead to an aggregation of power and wealth and the inevitable “correction” with the associated pain for most while those who have the financial resources to ride out the tide, aggregate more assets, power, and money. That is not a healthy system. Why accept extreme cycles as the norm? We can do better than this but only if self-interest includes an understanding of the inter-relationships that make life viable and valuable for all.
Eloquent and passionate diatribe, Gary. I would just like to add one thing. Simply voting out incumbents is not enough. We need to vote IN individuals who are not members of the duopoly (DEMS and REPS). Incumbent or not, as long as you vote in a member of the existing duopoly, you loose because they do not work for you. They just prostitute themselves to the highest special interest bidder. If you vote DEM or REP, you are just throwing your vote away.
I tend to agree. It’s too bad we don’t have a system that would allow us to remove any politician midterm for just cause.
The truth is that the American people are to blame. They all want something for nothing.
Democracy has failed, it cannot succeed with a citizenry that has discovered that it can vote and get things without paying for them.
The American people keep voting for the politician that makes the biggest promises. The American people are the culprits to this mess.
Totally agree, Gary. Unfortunately I don’t see a way out other than emigrating. Too bad I like southeastern Arizona so much. But if things get much worse (and since we’re on a collision course with system collapse, they surely will), I will start thinking of other places.
You have any suggestions? Canada (too damn cold), Mexico (too scary), Italy, New Zealand, Oz…?
I’ve been thnking about Australia, although I would have a really tough time learning to drive on the wrong side of the road.
I am a US citizen, now living in Portugal. I considered and visitied all of the countries you guys are contemplating emigrating to before I chose to live in Portugal. My next choice would have been New Zealand. Wherever you are planning on moving, start your plans now. The way things are going, I would not be surprised to see US citizens lining up for visas for other countries to get the hell out of a debt ridden US rife with “third world” type corruption. Maybe I am exagerating, but you get the idea. Oh and Gary, learning to drive on the left side of the road took me oh all of 20 minutes. So relax.
There’s no such thing as a free lunch. Americans get free federal election campaigns. The result is every federal elected official from the president on down bought and paid for by corporate interests.
Any federal politician that gets elected in the US has to have raised a lot of money and the way to do that is through corporate donors. They in turn get paid back many times what they donate in giveaways of taxpayer assets.
The system is broken. The process assures runaway deficits and an inability to reform anything of significance including healthcare.
All elected officials have been bought and paid for by corporate interests without regard to party affiliation. It would be far cheaper to directly fund campaigns than the current craziness that has us paying many times the original cost. How else are you going have elected officials actually respond to the needs of the people as opposed to corporate special interests?
I agree with Doug. Without public campaign financing sentiment is dangerously manipulated by “big money” and it becomes nearly impossible to pass good legislation.