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Wednesday, July 27, 2011

“Plus ca change Plus c'est la même chose"—"the more things change, the more they stay the same.”

 The More Things Change the more they stay the same 
The more things change the more they stay the same 

Ah, is it just me or does anybody see 
The new improved tomorrow isn't what it used to be 
Yesterday keeps comin' 'round, it's just reality 
It's the same damn song with a different melody 
The market keeps on crashin' 
The more things Change – Bon Jovi (partial lyrics)

"Plus ca change Plus c'est la même chose"—"the more things change, the more they stay the same."
This familiar proverb of French Origin is credited to the novelist Jean-Baptiste Alphonse Karr (1808-90). I am sure the phrase is familiar to you as it has appeared in many instances from George Bernard Shaw’s “Revolutionist’s Handbook” to an utterance by Kurt Russell as he depicted “Snake Pliskin in “Escape From LA” the movie sequel to “Escape From New York”. Perhaps watching those films might be in order as if things continue on the current trajectory society could end up imitating art. Now please understand dear reader I am not an alarmist by nature but I do believe in looking at things from many perspectives.

The current Kabuki Theater as I have called it for the past few weeks in my Tweets continues to drag on and on far longer than I had expected. It is obvious to me that there is a dearth of leadership, economic knowledge, reality and cooperation by all parties involved. There is much talk about “sharing the pain” but whether it is coming from congress or comments on articles posted on the net the message is clear we should share the pain as long as someone else is getting the pain. In other words cut that program or increase that tax but don’t cut my program or increase my tax. Instead of sharing the pain or fixing the problems we are all engaged in this twisted form of “class warfare”.  I am not interested in the politics of the situation just the reality. The reality is that we are now subject to the laws of large numbers.

It does not matter how we got here or who is to blame because we are all to blame. We are all to blame because we have all benefited from the excesses of Government in one way or another. Really, how many of you reading this bought a car under “cash for clunkers” or a new appliance using “dollars for Dishwashers” or even a home with the $8,000 first time buyer credit? Even if you did not participate in those deals there are so many other areas where the government has been subsidizing throughout the economy that virtually everyone has contributed some to this mess whether they realize it or not.

Alexis de Tocqueville’s quote describes the point at which we have arrived in our society. "A government that provides total security for its people, foresees and supplies their necessities, manages their principal concerns, directs their industry, regulates the descent of property and subdivides their inheritance-what remains but to spare them all the care of thinking, and all the trouble of living.”  Along the same lines in 1917 Vladimir Lenin looked around at what he saw at the time and made some predictions that: “Germany will militarize herself out of existence, England will expand herself out of existence, and America will spend herself out of existence." These two individuals had the foresight to connect the dots as to the probable future outcomes; while it is ironic that the father of communism would be one of the predictors, he obviously had a grasp of human nature and government.

As I watch what passes for Government leadership and compromise I am brought back to an article I read back in 2009 when things seemed pretty dire, but at least at that time the government appeared to be functional. Today the Debt Ceiling deadlock has exposed a raw nerve that is a crack in the republic. The Wall Street Journal featured an article regarding the predictions of one Prof. Igor Panarin. Panarin a 52 year old professor is a former KGB analyst, as well as the dean of the Russian Foreign Ministry's academy for future diplomats. Needless to say Panarin is an expert on US - Russian relations. His prediction at the time of the article was that the US will split in to 6 separate regions by 2010. The regions are depicted in a graphic contained in the article. Back in 2009 when I read this I dismissed the theory out of hand and felt that Professor Panarin may be an expert but he is not an American so he cannot fully understand our republic. With each day passing I can see the divisions and fractures that are growing in the republic. While I still believe that the good Professor is wrong I will say it does feel as if we are accelerating down the path toward his vision as the rhetoric, vitriol and lack of cooperation grows in Washington.

Our leaders and government are making it impossible to work toward repairing our republic. Now please understand dear reader I have made it clear that I feel that both parties are to blame for this mess so I am not looking to pin blame on either side. I believe that neither party is competent or has our best interests at heart.  We all know that George W. Bush was a big spender and swung the country from the miniscule surplus, but surplus none the less, to some pretty large deficits.Of course people also fail to comprehend that just because there was a surplus does not mean that we did not havea large national deficit, but it was much more managable at that time. Not that I am defending Bush but after he took over he did have to deal with the tech wreck, 9/11, Afghanistan, Iraq, prescription drug program then the Lehman\subprime debacle. Obama has the continuation of Bush’s problems, auto bailouts, omnibus stimulus bill, Obamacare and Libya to name a few items. Due to the combination of circumstances and his own ideology Obama has been a big spender as well, but unfortunately for him we are much closer to the endgame and the spending measures don’t have the same effect as in the past.  To papprhase John Maynard Keyenes, "in the long run we are all dead" and we have arrived at the long run. Many people misinterpret the meaning of what Keyenes said as a live for today mantra, but that is not what he meant. Keyenes knew that the policies that he put forth and have been adopted as a psuedo religion would eventually undo the economy, but he also knew that the leaders of his day including himself would not live to see theaftermath.

The current Debt Ceiling debate and “deficit reduction” are a giant sham. To truly take care of this situation would require enormous pain on all ends from rich to poor. No politician alive with the goal of getting reelected will do the right thing, so we are condemned to a crisis before this is repaired. Congress has not put forth a budget in 2 years since Obama took office because instead of addressing real problems they had to both deal with issues in the economy as well as create massive new legislation which we have yet to see the unintended consequences of.   On the other hand Obama to his credit presented a budget back in 2010 that would have had us on a course for $1T deficits basically as far as the eye could see. Obama’s rosy ,if you can call it that, budget made some assumptions to get to the $1T mark. The budget was predicated on the assumptions that we cannot have a recession, the unemployment rate needed to fall from 9.6% to 8% and lastly GDP would have to grow 3.2% in 2010, 4% in 2011 and 4.6% in 2012. The people who made these budget assumptions have all subsequently bailed on Obama, probably because they all knew that this scenario could never happen.

This brings us to the Current situation which has rocked the confidence of the nation as we are on track this year to run a deficit of $1.7Trillion.  Tax Receipts account for about 2.2 Trillion of our roughly $3.9 trillion in spending for the year. Obviously because the assumptions were incorrect the deficit is larger than the $1Trillion projected and will be larger again next year if the economy does not improve. It is possible that the current projections will be off yet again and the Debt Ceiling will need to be addressed earlier than Obama or congress believes. Without front loading of real cuts any deal is suspect at best and I don’t believe will fix anything. First off looking at both the Boehner and Reid plans the “cuts” all come in the latter portion of the 10 year plan, which the next congress will at best modify or at worst ignore rendering them ineffective. Furthermore, the Government is the only entity in the world that can increase baseline spending but still call them cuts. You see dear reader if the Government is slated to increase spending by 7% but they agree to spend only 6.5% more then it is considered a cut, don’t you wish you could do that! Additionally, many of the savings in both plans are fictitious as they count things that may not happen but it is still a cut and savings you see, like money for ending the War in Afghanistan but not counting the action in Libya.

Even if it is not publically admitted the Republicans and Tea Party members have scored a huge victory for their side. They stuck to their guns and changed the direction of the dialog. If you notice dear reader that the original discussions had the Democrats and Obama looking for a revenue rise (..IE Tax increases) and no cuts for social programs. The Republicans were seeking the opposite side of the coin. Both sides were at least paying lip service to deficit reduction but without any real way to get to that end. The problem is so large that you can’t cut your way out without causing real problems for individuals and the economy. 

You can’t tax your way out, in fact there is a great YouTube video that explains this better than I can. You can watch “Eat The Rich” by clicking here. Politicians always use linear thinking when it comes to Taxes as they think if 10% tax brings in $100 then raising it to 20% will automatically bring in $200. The problem is something known as Hauser’s law which was coined by Kurt Hauser, Former Chairman of the Hoover Institution, at Stanford University. Hauser studied Federal Revenue as a percentage of GDP since WWII. What Hauser found was that regardless of the tax rates federal revenues hovers around 19.5 percent of GDP. This is because the higher rates influence behavior and result in lower growth levels for GDP and consequently tax receipts suffer. Hauser’s law is kind of like the law in physics that states nothing can travel faster than the speed of light.

So it appears to me that we are not addressing our problems and whether we passed either plan currently in congress we are just papering over the problems. We as a nation have been papering over things for decades so the powers that be believe that they can do it again just like before. It is kind of like buying a fixer upper house that has lots of holes in the walls but instead of repairing them you just put wall paper over it to make it appear fixed.  The rating companies like S & P or Moody’s know what the deal is and this is going to result in a downgrade in addition to more debt both of which will devalue the Dollar further acting as a tax on the economy and citizens. In many respects we have now entered a visious feedback loop that is extremely tricky to extricate the country from. Even without a downgrade it should be apparent to the whole world that we are not addressing our issues and this will cause the Dollar to decline, because the day of reckoning has not been averted but only postponed.

The US won’t default as tax receipts come in on a monthly basis that are adequate to service the debt and pay prioritized bills. The Default notion was tossed out by Obama and backed by Turbo Timmy as a political tactic to light a fire under congress to act and I consider it fear mongering which is what Bush constantly accuesd of(and I think he was guilty of it too). The law of unintended consequences reared its ugly head at a most inopportune time resulting in congress linking the debt ceiling extension to deficit reduction, based upon Obama's insistence as part of his move from the political left to the center. So instead of dealing with the two problems separately and calmly a crisis has been manufactured that is having unpredictable results. Markets are all over the map because uncertainty is the theme of the day and each time one of our leaders gets on TV to report the chasm between the sides it is like pouring gasoline on the fires of political machinations.

So with uncertainty on the rise here the markets are becoming unglued as there is not much good news to focus on since earnings are essentially done and the economic reports are not coming in so strong.  So what is an investor to do? For starters you need to keep a close eye on your portfolio and protect gains. One can buy some inverse ETFs to profit from a down turn and if you are comfortable you can hedge your positions with puts on the S&P or NASDAQ. It makes no differnece if either of the plans passes or the US defaults(very unlikely) I believe that we will see a further decline in the dollar which will drive precious metals even higher. Ironically if we the US does default it is possible that the Dollar could have a bust of strength up for a short period as a result of asset realignments around the world creating demand for dollars before the dollar resumes its decline. The stocks of companies that have pricing power and exposure outside the US will recover and rise as well.  My current plan is the same I am continuing to average in to Precious metals funds outside the US like Central Fund Of Canada (NYSE : CEF), Sprott Physical Gold Trust (NYSE : PHYS), Central Gold Trust (NYSE :GTU) and certain intermediate and exploration precious metals stocks. If you are looking to buy CEF, GTU or PHYS I have updated a spread sheet that was originally created by Jesse From Jesse’s Café American(a Gold site). The spreadsheet calculates on a delay basis the gold silver ratio as well as the premium or discount on the various closed end precious metals funds. If you are looking to acquire precious metals then you want to buy when the premium is the same or better than what you would pay for physical, so this tool will help you identify that situation.

 I am also in the process of making a shopping list of stocks and price points especially in the more blue chip and international names as this impasse will probably drive prices further down creating some tremendous bargains. Of course if you believe Professor Panarin I would not be worrying about investing as much as acquiring stuff you will need to survive, I am not there yet so let’s hope that our leaders can get their act together before it comes to that.

All the same we take our chances
Laughed at by time
Tricked by circumstances
Plus ca change
Plus c'est la meme chose
The more that things change
The more they stay the same

                Circumstances (Chorus), Rush

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