I thought taking a vacation at the end of 2013 might allow me to come back to the markets with a clear head and new viewpoint. My hope was that a little detachment would bring the forest back into the picture at 35,000 feet. I’ve now caught up on my reading and research and find the markets just as schizophrenic as they were when I left. While the markets remain as confusing as ever, our trip did provide me with the sense of awe that comes from physically standing in the presence of thousands of years of history. One thing is for certain; mankind always finds a way.
“The government faces some very tough decisions in the months ahead. The very real concerns over the growth of our own debt must be balanced against the need to nurse the recovery along. Washington deserves to hear our voices as we express our own opinions on the amount of debt we’re willing to carry versus the benefit we’ll receive from its creation. The most important thing is that we force them to recognize the very real issues at hand and not allow them to sit by idly as our economy pushes towards our own unsustainable European outcome.”
That was my closing paragraph in December of 2011. Apparently, the politicians were too busy with re-election plans throughout 2012 to do any damn thing about any damn thing other than ensure their own welfare, care packages and raises in 2012. Fiscal Cliff? Debt Ceiling? Payroll Tax Extension? Tax Reform? It’s starting to look like half of our governing officers jackhammer potholes just so the other half will have something to fill. Meaningful legislation and the idea of elected public servants has simply become a yearning for the, “good old days.” The reality is that this is exactly the same type of yearning that guarantees the perpetuation of this futile cycle.
The grandiose version of this cycle is that we should all have everything we want, when we want it. It’s been pounded into our brains through mass marketing that tells us we NEED their new product. It’s been made available to us through buy now pay later, lay away, credit cards, refinancing and high interest paycheck loans. Finally, our government who encourages us to spend, spend and spend endorses it. Everyone deserves to own a home and the only reason 98% of us don’t have more is because 2% of us have too much. Frankly, we’ve become an insatiable society that feeds off the entitlements garnered by our individual representatives.
The psychology behind the society we’re quickly becoming is best viewed through Dr. Loretta Breuning’s satisfaction experiments with monkeys. The applicability of this train of thought requires the general public to assume the role of monkey and we’ll place the government in the role of experiment coordinator, Dr. Loretta Breuning. She showed that monkeys fed the same diet are perfectly happy and well adjusted. She then adjusted the flavor of the leaves in their diet to be super tasty. The monkey’s appreciate the new flavor and quickly favor it above all other foods. The final step is the monkeys’ observed behavior when the leaves are returned to their normal flavor. The monkeys react with rage, even though they were perfectly happy with the same leaves prior to the experiment.
The exaggerated negative response to the leaves returning to their original flavor clarifies the human principle that losing something that was given elicits a much stronger response than unexpectedly gaining something new and pleasurable. Our minds focus on what we’ve lost, rather than what could be. Similarly, benefit programs and economic stimulus generate a much stronger negative response upon their repeal than the positive response generated upon their implementation.
This axiom holds true at the individual level as well as for the economy as a whole. This experiment, in greater detail, also showed that the positive effects of the new flavor were short lived. Therefore, positive reactions diminish much more quickly than the negative ones. This aspect of her work compares favorably to the diminishing returns of economic stimulus programs. For example, there have been three rounds of quantitative easing. Each round has provided a smaller bang for the buck than the previous round. Comparison in an apples to apples format would show that when we as individuals and when the economy as a whole expects another handout, the less we appreciate what we’ve already been given. However, the removal of those handouts will create an alarm that rings far more loudly than the chorus of, “thank you,” could ever be.
The politicians from small towns to Washington D.C. are all aware that their livelihood rests upon election. Therefore, in their own self-preservation they must introduce more special interest bills to replace the specially flavored leaves of the previous administration and heaven forbid they should try and take away what has already been given. This is what the, “fiscal cliff” has brought us. “Grand Compromise?” Hardly.
The agreement to raise taxes on the top tier and extend the unemployment benefits has done nothing to solve the cultural dependency of handouts for votes that has gotten us into this mess to begin with and will increase the Federal debt by $4 TRILLION over the next decade, according to the Congressional Budget Office. The votes bought by the politicians and paid for by us continue to push us deeper and deeper into the same economic ditch as the European socialist governments.
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk of loss in investing in futures.
The National Bureau of Economic Research, the ones in charge of official business cycle dating, said Monday that the recession officially ended in June of 2009. Their statement allowed that although economic conditions may not have been favorable since then and that the economy has not returned to normal operating capacity, the recession ended and a recovery began in June 2009. This is good press for the incumbent party heading into election season. However, this is also a brightly burning example of why we shouldn’t trust a sound bite.
The bursting of the domestic consumption based economic bubble has left the politicians scrambling to secure their next terms in office. The best way to guarantee re-election is to make everything seem all right to the general voting public. I’m not taking sides in this. The problem is more systemic than it is partisan. The issue starts at the top with former Federal Reserve Chairman Alan Greenspan and the torch has been passed to Ben Bernanke, another Federal Reserve Chairman bound and determined to keep the money flowing. My sincere fear is that the day of reckoning will come when the people who buy our Treasuries to service, and grow, our debt will say, “This is a bad deal. We need to be paid a higher interest rate to take on your credit risk.”
The United States as a country has become an unfortunate reflection of the consumer society that our politicians have sought for generations to instill in their constituents. We are now facing the same economic problems at the national level that used to be handled at the dining room table by the family. We are simply over extended. We have spent too much for too long. We must admit that the budget surplus of the Clinton era had more to do with fortuitous timing than sustainable growth and that our projections were wrong. The paradox is that the same legal/governmental system that is all too ready to jump in and save the individual from their own bad decisions fails to acknowledge their own fallibility. The institution of government is being failed by the hubris of the individuals running it.
Enough hyperbole. The shell game is being played out in the transfer of private debt to governmental debt. This has enabled business and personal consumption to carry on with as little personal or, corporate lifestyle adjustment as possible. The United States’ personal rate of savings has climbed from 0% in June of 2004 to 6% currently. Over the last 50 years, 6% is much closer to the average. As individuals began to save, governmental spending increased 82% and our deficit grew from 7.35 trillion in 2004 to an estimated 13.4 trillion this year. It is estimated that the gross federal debt will approach 90% of gross domestic product. That leaves 10% of GDP to make the interest payments on existing debt and cover all national expenditures. For example, if your take home pay were $50,000, $45,000 of it would cover your minimum monthly interest payments. The leftover $5,000 would have to cover a year’s worth of basic living expenses like food, clothes, gas, entertainment, etc. The Congressional Budget Office estimates that gross federal debt will exceed gross domestic product by 2012.
The government, just like us, has run deficits going back to the Civil War. The issues are size and accountability. Deficits were designed to allow for the purchase of goods and services based on future earnings. This is how we buy houses and cars. The concern is the overextension and lack of self or, governmental control. It is the inability, “Just say no,” that gets all of us into trouble. A politician who stands up and suggests we all tighten our belts will have $0 funding for his election campaign. Businesses won’t contribute, banks won’t contribute, special interest groups won’t contribute and if the politician’s constituents listen, they won’t contribute either. Therefore, the plan to get us out of this mess is by spending more money while devaluing the U.S. Dollar.
The plan goes something like this. The government sells more Treasuries on the open market to generate stimulus funds to be spent on domestic programs to placate the people, domestic businesses and special interest groups. The more Treasuries the government sells, the more U.S. Dollars it places in circulation. The more Dollars in circulation, the less they’re worth. The less the Dollar is worth, the more expensive it becomes to purchase foreign goods and services. This encourages more people to, “buy American.” This also makes domestically produced goods and services cheaper to purchase for foreign countries, therefore, increasing U.S. exports. The hope is that this will allow U.S. businesses to gain traction and begin hiring again.
In normal times, this has kept the balance of things moving forwards. I would suggest that these are not normal times. First of all, we are starting this process from a much higher debt ratio than ever before. Assume that you’re very nearly maxed out when an unexpected major medical expense or car repair comes up. Secondly, the U.S. has been able to grow its debt periodically through the sale of Treasuries when needed because we have, more or less, managed our expenses, which made the U.S. a safe credit risk. This is like being able to make at least the minimum monthly payments to your creditors in the roughest of financial times. Third, the Dollars we are borrowing will not be worth as much as the Dollars we are repaying. Typically, this difference is made up in the interest that we have to pay back with the principal. Finally, this is the same path being sought out by the entire Euro zone, England, and Japan, which puts us in the middle of a global competitive devaluation.
The end result is that it won’t take long for the countries that are lending us money to decide that they can do better lending to someone else, perhaps another country or, their own populations. Keep in mind that we are talking about the creation of new debt or, extending more credit on top of the current debt we will be struggling to pay the interest on. Essentially, following the path of increasing deficits in an attempt to grow our way out of societal gluttony and the misguided actions of elected representatives will only continue the downward debt spiral until someone has the courage to stand up and yell, STOP! As we approach this election season, I’ll cast my ballot for the candidate that simply states, “We’re going to have to learn to do more, with less.”
This blog is published by Andy Waldock. Andy Waldock is a trader, analyst, broker and asset manager. Therefore, Andy Waldock may have positions for himself, his family, or, his clients in any market discussed. The blog is meant for educational purposes and to develop a dialogue among those with an interest in the commodity markets. The commodity markets employ a high degree of leverage and may not be suitable for all investors. There is substantial risk in investing in futures.