Sunday, August 1, 2010

Statist Quo Changing?

Now that the Ministry of Truth or whatever it's called has revised economic growth lower during the reign of the president who has become an unperson as well as for 2009 which of course had an economy that stank due to the Party of the unperson, naturally whatever growth is claimed during the reign of the Party now in power will be compared to a lower base and will therefore look better. This is especially so because the administration appears to be asserting, more or less, that any jobs created or saved during its tenure are due to its policies, but all the difficulties are due to President Unperson.

So now that we know that official statistics are unusually uncertain, and the future as always is unknowable, what is an investor to do?

As Mark Twain cracked, every month in the stock market is risky. Historically, the two worst consecutive months are August-September. So a decent respect for history is wise, especially following a marvelous July for the averages.

Nonetheless, consider relative values of stocks vs. government bonds in the past ten years. Then, govvies yielded 6-6.5% per annum. The S&P 500 traded at 30X earnings, which is an implied earnings yield of 3.3%, with a dividend yield not much above 1%.

Now matters are partially to completely reversed. In addition, company after company is better financed than the Feds, with many fewer contingent liabilities.

A decade ago, "everyone" "knew" that the abstraction called "the economy" was unendingly strong. Now there is chronic depression upon the land, at least psychological if not in economic reality. But the corn remains as high as an elephant's eye and there are no shortages or almost anything except common sense out of Washington; so the basis of economic scene remains a real potential (if that phraseology makes any sense). And help may be on the way for those of us who oppose the statist trend of the past several years: legislative gridlock already appears to have hoved on the scene.

Another positive trend is that the practical failures of money printing have become more and more apparent to more and more people. The Dems should have known better: why should they embrace a creed (deficits stimulate the economy) that that loser Richard Nixon embraced four decades ago, when he announced that he was (and we allegedly were) all Keynesians now? After all, the only president of their party to have won re-election since FDR was Bill Clinton, whose big economic achievement was to raise taxes in the teeth of an allegedly jobless recovery.

What may happen is that just as in 1993, some degree of balance will be restored to the public and private accounts as the will of the people appears to dictate, the world will not end as this Federal government is not very good at stimulating productive enterprises with a very positive return on capital, and the country can get back to meeting the real needs of real people rather than the desires of the entrenched powers who have grown fat on the malinvestments of the past years.

So on one hand, there is reason to hope that the rapid growth of Federal involvement in the economy of the past 24 months has peaked; but on the other hand, the Party currently out of power has shown little evidence of new thinking.

The seasonality of markets and the unfortunate gigantic role that Leviathan now plays in the American economy suggest that the next couple of months are good ones for investors to prepare a game plan for the months ahead, as the weakening economy becomes more apparent to more people and the political landscape becomes, perhaps, clearer.

Future posts will report and theorize on this topic in more detail.

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