Thursday, August 11, 2011

All the King's Horses and All the King's Men...

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At U.S. Megatrends, we have never completely bought into the illusion that the U.S. or world economies were completely on solid footing.  Quite contrary, we have speculated before that government intervention has in many regards only temporarily averted market meltdowns, and more importantly contagion. In 2008 and 2009 several of us including the Axman and myself had placed short positions as a hedge on a market that we both understood to be fundamentally flawed.  

Personally, I am thankful that the government has tools in the toolbox of the Department of Treasury and Federal Reserve to address these issues.  The good of our country, and the economic recovery that had ensued to this point has had less to do with market fundamentals and more to do with intervention.  And many of us understood the intervention to be a temporary fix, not a true solution to the problem. ITulip's Eric Janszen explained (paraphrased)  That attempting to re-inflate the F.I.R.E. Economy (Finance, Insurance, and Real Estate) would only prolong the pain by treating the symptoms, not addressing the cause of our true economic problems.

Now what once appeared to be a small crack in the world economy has now become a deeper rift not only played out in financial markets, but also in the streets of places like Athens, Tel Aviv, Damascus, Tripoli and of all places London. London should be a city of particular interest as what was once a spark over a police shooting (Click Here) , has erupted into a maelstrom of looting a pillaging.  A darker shadow has reared its head, one that has revolutionary overtones.  Not one particular ethnic group or social class is to blame for the riots, but a generation of youths who have a bleak outlook on their future.  (Click Here)  This is by no means defense of the youths, but more  it clearly identifies a group with at explanation behind their behavior.
I do not believe the riots will continue in London. But there is a reasonable chance that the conditions are right throughout the world for riots in other locations. Every country has populations like this. In difficult economic times their presence is more pronounced.

We realize that globalization will take a few steps backward during this next decade... and it will take at least a decade to straighten this mess out...  And whatever emerges as the economic and political order, we must understand that it will be new and different from the old one.  For now financial markets will continue to reel under the weights of fear and more importantly a deeper mistrust of financial institutions and sovereign debt.

In the United States, we have seen a group of anti-tax free market capitalists known as the Tea Party who are willing to shut down the government in order to save it.  And whether the Tea Party is right or wrong in their actions, they have clearly helped move the political football down the field. The Republican Party to a degree has been radicalized by this movement.  And the movement tends to be based on economics as well as a table-turning political as well as social agenda.  Many Americans thought they were Tea Party members until they learned that the Tea Party was going to cut their favorite government programs as well.

Investments will center around a few simple themes.  I do not believe the stock market is broken.  I do believe it will not continue to be business as usual.  A more aggressive effort must be made to win back the confidence of the people.  The term bankster was a term given to bankers during the 1930s.  And it will be more difficult to erase the image this time around.

Investment Watch
Long Positions in Silver and Gold (both physical and silver).
Long Positions in stocks that pay dividends (particularly those with stable balance sheets).
Sector Specific Plays  (As some sectors do see tangible growth in spite of economic conditions).
Shorts Specific Plays (Stocks that rely on discretionary spending and middle class income).

A renewed belief that the best money invested is a product or service that you have direct control of.  Just throwing money into the wind, and hoping that it grows does not work long-term on Wall Street.  Rely more in your own abilities to develop a cash flow system, and less on the good will of Wall Street. 

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