Wednesday, February 20, 2013

History Rhymes!

This is from a financial advisor friend of mine, Baron Benham. I edited it down for space.

This is my first Briefing of 2013. I hope you are off to a good start this year!

I've been wrestling with how to go about keeping you informed without depressing you and frankly that's a tall order when the subjects are economics and politics! So rather than struggle to sugar coat my essays I really have no choice but to let the information speak for itself.

Let's look back to a similar period in history and ask ourselves what happened. This time let's use the Prime Rate as our example since most people are pretty familiar with that. Back on March 10, 1966 the Prime Rate was 5.5%. By Dec. 19, 1980 the Prime Rate topped out at 21.5 Ask yourself what happened to the stock market during that period? What happened to prices (inflation) during that period? What was happening politically during that period? What were the winning investments of that time?

Someone once said history doesn't repeat but it rhymes! The rhyming going on is unbelievable!  First we had the Vietnam War which we didn't pay for. Instead we deficit spent to cover it. Then President Lyndon Johnson instituted the "Great Society and War on Poverty". His solution? Massive government spending on the poor but did he pay for it? No, he borrowed massive amounts of money. Did we eliminate or even reduce poverty? NO! Poverty increased! Prices (inflation) lit up! In 1971 Nixon instigated wage and price controls and inflation was 4%! What investments were the winners? The stock market? NO! Hard assets such as real estate and gold and silver and commodities were the winners.

Ok, so how did we right the ship? First we elected a cowboy named Ronald Reagan. What did Reagan do? He hired a new Federal Reserve Chief Named Paul Volker. Prior to Volker we had a very accommodating Federal Reserve. Accommodating meaning artificially keeping interest rates down by borrowing massive amounts of money from the Treasury and buying our debt. Sound familiar! Volker had a different take on things. He told our politicians to go ahead and spend all you want but you are going to pay market interest rates! Volker allowed rates to float and seek their natural level. The Prime Rate hit 21.5%! The result? The voters got extremely angry and voted out a huge proportion of the incumbents. Throughout the 60's and 70's politicians were spending our money to buy our votes! Sound familiar? ... What happened to interest rates and prices and gold and silver and commodities? What happened to the stock market? The result was a twenty-year ongoing reduction in inflation and the mother of all bull stock markets. Gold and silver and commodities and real estate took it on the chin.

So let's fast forward to 9-11-2001. What happened? We were attacked. What was our response? War! Seems reasonable. Both parties overwhelmingly voted for it despite the revisionist history of the Democrats who were for it before they were against it. Did we pay for it? No! We borrowed massive amounts of money. What else was happening? Bush (the socialist) went along with the Democrats (socialists and communists) and Congress went on a spending spree. Bush and Kennedy created the first new entitlement since Johnson's Great Society failure. The Prescription Drug bill. The cost was put forth at $400 million. Real cost is now greater than social security! Both parties also went hog wild at the pork barrel. Our deficit began to soar! Then along comes Barrack Hussein Obama who, like Johnson, believes that socialism is the answer to poverty. Did he pay for it? NO! The result? Rocketing Deficits and the highest poverty rate since the Great Depression. Who is at the Federal Reserve? Bernanke. What's he been doing? Borrowing money from the Treasury and buying our debt. Last year the Federal Reserve bought 61% of our debt! Up from about 40% the year before. The reasons are many.

1. To keep interest rates artificially low (sound familiar)

2. To keep a good face on our problems. By this I mean our country cannot afford to have a bad day at our debt auctions. We cannot risk having a weak auction. To do so would be risking the damn breaking and a complete meltdown of our dollar as the world runs to dump our debt.

3. Japan and China have stopped buying and adding our debt to their balance sheets. They are merely rolling over what they already have. Ditto for many other countries.

Several years ago I read an economic report showing that by such and such a year at our current rate of debt expansion there would not be enough money in the world to buy it all even if all countries bought all they could. We are very close to that day. If the Federal Reserve stopped buying our debt (monetizing the debt) today our dollar would immediately collapse!

4. Political reasons. Got to keep the shell game going so the encumbents don't lose their jobs. 

5. To keep civil unrest from growing. (Ask yourself why our Department of Homeland Security has purchase something like 1.5 billion rounds of ammunition. More ammunition than used in all of WWII.) Why do you think they want to disarm us now. The powers in charge are very afraid, very, very, very afraid. Since Obama took office American's have purchased 60 million guns! There must be a reason!

You get the picture. Interest rates and inflation are on their way back up and will probably trend up for the next two decades! So do you buy stocks? NO! You buy gold and silver and commodities.

The economy is facing major headwinds over the next twenty years. I think we all need to get used to 2-3% growth rates and be thankful for that if we can even get that. I also foresee all sorts of political turmoil in the years ahead that this country has never had to face before and I continue to see our poverty rate increasing along with taxes and inflation. The result is we all make more money that is worth less and taxed more. Ever creeping poverty as the middle class continues to get squeezed.

Finally, I see our government getting progressively more evil. Again all you need to do is look at history. As the economic wheels come off, governments turn on their own people. The U.S. population has one ace in the hole and that's our Second Amendment Rights and even now the very, very scared politicians are trying to take that away from us. Keep in mind that in the 20th century 280 million people were butchered at the hands of their own mostly fascist socialist governments. These people were unarmed and I guarantee you that they wished they had guns to defend themselves! So what sort of government do we have now? I would say we are closer to a fascist socialist communist government than we are to a true Republic free enterprise model. It is what it is.

So I hope this helps you all see and understand the cycles. Today's events are right out of the 60's and 70's. We survived that because our national debt when we started was high but relatively low compared to today.

Governments are always trying to bend or break the laws of economics and it is impossible. Eventually the pressure builds until the damn breaks and equilibrium is restored. I believe we are beyond the tipping point politically and possibly economically. So I hope you all take this seriously and get your economic house in order and prepare for an economic collapse and all that will entail. Social unrest will be very high and the heavy hand of government will be coming down on everyone.

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