Deficits Don't Create Prosperity

“The total potential federal government support could reach up to $23.7 trillion,” said Neil Barofsky this week. He’s the special inspector general for the TARP — one of the government’s many bailout programs dumping billions upon billions. Say again… this whole mess could put U.S. taxpayers on the hook for just under $24 trillion.

Barosfky’s report was self-admittedly an overblown worst-case scenario… for example, it assumes that every mortgage loan on Fannie and Freddie’s books will go bad and that every government-aided bank will go bust. (Heh, we like this guy).

But we see why he bothered crunching all the numbers for a scenario that will never happen (or if it were to happen, no one would really care what the exact cost would be). This is what your government is willing to do in order to maintain the status quo. Votes for this year’s election are worth $24 trillion for tomorrow’s generation.

So when Congress asked, hey Neil, what’s your real guess? $3 trillion, he responded. Phew, what a relief!

“You cannot create prosperity through money printing and debt growth,” Dr. Marc Faber told us yesterday. Dr. Faber was the first speaker of our Investment Symposium and he preached an idea that is already becoming a theme of the event: Government fiscal and monetary intervention, “can postpose, but not prevent crisis…

“I believe next year’s economy will face even larger deficits. Their deficit is attempting to stimulate credit growth. Unless real credit growth returns, they will have to put more and more money into the system to maintain the status quo. All polices target consumption. That is a mistake.”

So what’s this mean for the market?

“The S&P 500 will not recover to 2007 highs. At the peak, 44% of the S&P was the financial sector. That is gone… not coming back.”

And since it’s our nature to cook things down and serve them in tasty little bits, here are some rapid-fire, take ’em or leave ’em themes to the first day of our Investment Symposium:

  • Do not expect a V-shaped market recovery. The crisis aftermath will be long and volatile
  • Short U.S. bonds
  • Technology breakthroughs in DNA over the next few decades will be akin to the Internet and computing breakthroughs of the last 20 years
  • Either invest like a contrarian or suffer like a victim (Rick Rule’s mantra)
  • Buy alt energy, especially geothermal
  • Buy commodities, particularly grains.