How to Profit on the Road to National Serfdom
We’re fast approaching the critical 1,040 “support” on the S&P 500 – below which technical analysts tell us there is a dark abyss that includes a retest of the March 2009 lows.
The idea goes: If the S&P falls below 1,040, then we’re likely to revisit the lows below 700. Who knows if this widely cited “if, then” conditional probability is valid? We may find out soon enough. When universally accepted technical support levels are breached, we tend to see heavy bouts of “self-fulfilling prophecy”-based selling.
Regardless of how the technical conditions play out, there’s still a big difference between current stock prices and the prices that most value investors are willing to pay to assume the risks of owning stocks. The word “risk” is key. In periods of heightened economic and political risk, investors demand higher risk premiums to hold stocks. A simpler way of stating “higher risk premiums” is “lower stock prices.”
These risks include the speed at which politicians are driving national economies down Friedrich Hayek’s proverbial “road to serfdom.”
Austrian theory acknowledges both the “seen” and the “unseen” effects of government policy, while Keynesian theory ignores the unseen in the pursuit of managing this thing we call “GDP” at all costs. The conceit that GDP can be managed by enlightened bureaucrats usually undermines vital capital foundation. Too many people confuse economic activity (measured by GDP) with economic progress (which usually involves rising living standards driven by rising productivity and falling consumer prices; see the U.S. industrialization in the late 19th century).
The road to serfdom, originally outlined by Hayek, is now taking the global economy down one of two paths:
Painful austerity plans and deflation that salvage what’s left of today’s currency system by promoting savings and encouraging new capital formation;
Endless stimulus injections into economies with the promise of austerity “once the economy recovers.” Unfortunately, most Western economies are now thoroughly addicted to government spending. Each fiscal and monetary injection into zombie banks will likely have to be larger in order to offset the withdrawal symptoms of losing the last stimulus plan. Entrepreneurs figure this game out and gradually withdraw from participating in the economy in a healthy, productive manner. This loss of entrepreneur confidence in the system will ultimately accelerate the demise of all paper currencies.
The second path one is more likely in my view, because it’s more politically popular – especially once the European “pro-austerity” camp discovers just how addicted their economies are to the welfare state. Hopefully, a critical mass of people who value freedom over the illusion of economic security can move to wean us off today’s frighteningly powerful roles for governments and central banks. But based on the decisions we’ve seen in recent years – decisions driven mostly by political considerations – I’m not holding out much hope at this point.
After this weekend’s G-20 meeting in Toronto, we’ll know more about the direction in which the “world improvers” seek to drag their constituents. Ideologues are lining up on either side of the political debate between a) austerity and b) “endless stimulus and money printing.” Where one stands in this debate will depend on one’s view of the proper role for government.
Based on polling data, I probably don’t need to convince you that confidence in Washington, D.C., is near an all-time low. This normally shouldn’t be a concern for the stock market or the economy. But it is becoming a growing concern, because politicians keep pushing unpopular big-government agendas in a truly tone-deaf manner – agendas that will further dampen the entrepreneurial spirit that made the U.S. economy the envy of the world (while other countries were sabotaging their own progress with various flavors of Marxism during the 20th century).
Threats from Washington, D.C., include everything from raising tax rates, to bailing out cronies at zombie corporations, to a debased dollar, to an energy policy that – regardless of how it’s sold – will, in practice, have the effect of dramatically raising prices and worsening the U.S. dependence on oil imports. Case in point: The answer to the BP oil spill is to take away the right for Gulf Coast oil workers to work on statistically safe drilling projects for the next six months, and then put them on BP-funded welfare checks.
No price was too high to bail out the financial terrorists at the “too big to fail” banks. There’s not much desire for the current Congress and the Fed to end embarrassingly large subsidies and guarantees for the big banks. Apparently, in the wee hours of this morning, bank lobbyists succeeded in watering down the “Dodd/Frank” financial reform bill enough to render it almost meaningless. This bill serves to ultimately transfer even more wealth from the middle class to Wall Street kleptocrats (mostly via the hidden inflation tax, engineered by a politicized Federal Reserve).
This bill also did nothing to reform the monstrosities most directly responsible for inflating the housing market with underpriced mortgage credit: Fannie Mae and Freddie Mac.
Bottom line: This environment is dangerous for the stock market. Bull markets require healthy risk appetites among those with capital to invest.
July 6, 2010