Big in Japan

While I was never a "Dead Head," I remember the phenomenon. The same people attending the same concerts, listening to the same music, reliving their misspent youth. But with the death of Jerry Garcia in 1995 the band disbanded. All good things must come to an end. 

In the same way the current decades-long bond bull market must come to an end. I think it likely that the current increase in interest rates will be followed by a drop as the Fed ain't done yet. What can't continue, won't continue.

So in one sense my feeling is that Bill Gross, the bond fund king of Pimco,  is right:

“Yell, ‘This ship’s going to make it to port,’ Fed, PIMCO, and PIMCO co-captains willing. Those icy Atlantic money market waters are likely to be with us for a long, long time. Have a cocktail, tell the band to stop playing dirges, because you’re gonna be just fine with PIMCO at the helm.”

In another sense, this cannot go on forever. Interest rates less than zero means that there is no reason to buy anything that gives an interest rate. Cash is king, not bonds. The Fed Head experience must eventually come to an end.

Where will it begin?

While they were more than a one-hit wonder, the band Alphaville tells us where it will begin in their most popular song. Apparently Alphaville was "Big in Japan."

Wimpy Economics

I remember one of my father's favorite jokes. He would tell the story as if it actually happened. Maybe it did.

"My friend," my father said, "told me that his multi-million-dollar purchase had fallen through. I asked him why." My father would pause for effect and then conclude with the words of his friend. "The bastards wanted one thousand dollars down."

So by wimpy economy I do not mean a weak economy. I mean the character from the Popeye cartoon—Wimpy.

His signature line was always,"I will gladly pay you Tuesday for a hamburger today."

It is Tuesday.

Update on Tuesday, July 9, 2013 at 9:22AM by [Positive Dennis]

One of my friends pointed out that I was wrong, it is in fact Monday night. This sounds about right. 

Record Low Interest Rates

Things are actually looking up. In one sense I find this surprising, but in another sense I do not. I have been predicting what the old seasoned investors call a “sucker's rally.” There has been a combination of three factors that has caused this. Taxes were raised at year’s end; the budget is being cut modestly due to the automatic budget cuts; tax receipts are tending up. 

The reason that tax receipts are going up is a combination of historically high corporate profits and historically low interest rates propping up the housing market.

Here is how Jon Harrison, at the online magazine Liberty, describes it:

The brightened fiscal picture is the result of a recovering economy. In February the CBO estimated the deficit would be about $200 billion higher than it now projects. Better than expected revenues caused the CBO to revise its forecast in May. About $100 billion is accounted for by increased individual and corporate tax receipts. The other half comes from payments to the Treasury by Fannie Mae and Freddie Mac, the result of an improving housing market. A continued slow to moderate expansion of the US economy, together with the tax increases and spending cuts enacted earlier this year, will, the CBO says, get us to a deficit that’s only 2% of GDP by 2015. 

Jon points out that the CBO's new projected deficit over the next ten years has dropped to 6 trillion. We live in a strange world where a 6 trillion dollar deficit is good news. 

Here is his concluding paragraph.

To continue as we have will almost certainly lead to fiscal and economic ruin in the 2020s or 2030s. The short-term shrinking of the deficit is an unexpected gift that we must not squander. We are being given a brief span — a few years only — to correct the errors of the past half-century. If we listen to the Krugmanites we may not become Greece writ large, but we will doom our descendants to less prosperity and a burden of debt that they had no part in creating, and that may, eventually, crush them. 

I am not quite so optimistic. I think that 3 to 7 years remain for the US to get its house in order. It could be 10 to 15 as Harrison is implying. The power of Leviathan, or Babylon as I call it, is immense. This should never be forgotten. (I recommend Harrison's article.)

How will the crisis start? I have no idea. In fact my guess is that the crisis will begin in Japan and Europe and this will be bullish for the dollar—until it isn't. 

But as Herb Stein said, what can't continue, won't continue. Look at this chart of UK interest rates

I will conclude by quoting my favorite blogger, myself. 

In fact the low interest rates have been fueling a resurgent Real Estate bubble. The rates are not just low; they are not just at generational lows; they are as low as they have ever been in history.

All bubbles pop. While I am guardedly pessimistic about the future and still hope for reform, get ready just in case. 

The next crisis won't be pretty. Rising interest rates will tank the economy, and interest rates will rise. 

In The Land of the Blind

One of my favorite sayings is that in the land of the blind, the one-eyed man is king. This is my answer to the question I said I would answer last week, "Is the US Toast?" The US is like that proverbial one-eyed man. Things are bad, but they are not catastrophic.

Japan is a bug looking for a windshield, as John Mauldin is fond of saying. If Japan had started a less aggressive program 10 years ago it might have worked, at least that was the conclusion of the John Mauldin show I just saw. Since you have to register, I can not embed the video. Japan is not toast, it is bread so burnt you can not recognize it. (Note that you may have to register if you want to watch this video. Click here.) 

Mauldin did not mention China as it is difficult to invest there. But I stand by my prediction that China is burning toast. It may still be edible toast, but there are huge problems.

Europe is burnt toast. It is still edible, but no one really wants it. I have this gut feeling that selected companies in Europe will do well, but I am not smart enough to pick them. Actually, the main point of the Mauldin video is that no one is that smart so an investor needs to buy indexes and diversify.

Maybe the perception that the US is in better shape than the rest if the world is false. But as long as the rest of the world thinks this is so, it will be so. Thus when the crisis hits in 3 to 7 years, I predict the dollar will increase in value.

In a relative sense things will not be that bad, but if you are the one that gets laid off, you might have a different perspective. The crisis will spread, and it will not be pretty.

Is the US toast? No, things will not be as bad as elsewhere. But things are going to be bad when the fecal matter hits the air circulation device. Are you ready? 

Deregulation Didn't Work

I risk losing whatever libertarian "creds" I have left by stating the obvious. Deregulation did not work. I suppose I could cover my metaphoric libertarian nakedness by saying that no true deregulation occurred.  While this is true, just try to open a business in California where I live. In some areas the cost of starting a business is so high that profits are unlikely. But that does not explain why deregulation did not work anywhere. 

This argument also risks committing the "No True Scotsman" fallacy.  

The use of the term was advanced by British philosopher Antony Flew:

Imagine Hamish McDonald, a Scotsman, sitting down with his Glasgow Morning Herald and seeing an article about how the "Brighton Sex Maniac Strikes Again". Hamish is shocked and declares that "No Scotsman would do such a thing". The next day he sits down to read his Glasgow Morning Herald again; and, this time, finds an article about anAberdeen man whose brutal actions make the Brighton sex maniac seem almost gentlemanly. This fact shows that Hamish was wrong in his opinion but is he going to admit this? Not likely. This time he says, " No true Scotsman would do such a thing".^[2]

When the statement "all A are B" is qualified like this to exclude those A which are not B, this is a form of begging the question; the conclusion is assumed by the definition of "true A".

It is better to admit your theory is faulty than to develop ever more elaborate excuses. If a template, as I call it here on the blog, fails, then discard it. This reminds me of the astronomic theory that the earth was the center of the solar system with everything revolving around it. As telescopes and observation occurred more and more adjustments had to be made, but the theory remained the template. The adjustments involved the planetary bodies revolving in circles around circles, which revolved around circles. It did not work.

Deregulation did not work either. 

My own theory as to why it did not work involves the evils of centralization. Centralized economies, even capitalistic ones, do not work as well as theory says they should.  When I look at the systems God set up for his people Israel and his people the church they were not centralized. Why should I be surprised that God is not a fan of the centralized system that is our modern Babylon. 

I do have an interesting audio interview from former assistant secretary of the treasury under Reagan-Paul Craig Roberts. He has been going through the same process I have talked about today. Deregulation, as implemented by one of its original champions, the same Paul Craig Roberts, does not work. Robert's recognition of this is the heart of the interview.