August 13, 2011



It’s time to take a victory lap, at least a short one, after this budget battle, which has at least turned the rhetoric and direction from increased government spending toward decreased government spending. My article, Welcome to the Revolution, was one of the first calls for a budget brawl. In another piece called Starving the Beast I asked that a line be drawn when it comes to raising the national debt, despite it being raised the previous 39 times without debate. Later, in The Next Big Idea, I asked readers to join in a fight to reduce tax rates in exchange for across the board elimination of corporate welfare, subsidies, and loop holes. In May I identified the end of the inflationary trend and a return of the recessionary/disinflationary bias thereafter. Last week I said I expected the American debt rating would be downgraded, and this week it was. I also wrote that contrary to “expert” opinion, it would not have an adverse affect on either interest rates or the dollar—and it didn't. But now the big question is, where do we go from here?


We need radical reform, not just a Band-Aid. It’s time to go the extra mile. John Boehner and Barack Obama were on the verge of a four trillion dollar deficit reduction package, until Obama changed the terms. He threw in raising tax rates and increasing taxes by an additional 400 billion dollars above the already agreed to 800 billion. The increase in rates was a deal buster. They need to return to that original formula, which is basically the Boles/Simpson Commission’s recommendation.


I believe the 12 person super committee should reach for that four trillion dollar number, even though they are not charged with doing so. I think even Congress can move on an ad hoc budget cutting agenda without them. But with or without consensus, if Obama drops his demand to raise rates and the Republicans concede to more reductions in tax goodies to corporations and rich farmers, we can come out with a decent agreement even more ambitious than what Congress passed.


This will not solve the real problem however. In my article The Goal, I made it clear that we must reverse the trends in an inexorable way, shooting toward eventually paying down the national debt. In this pursuit, there is no “conservative” or “liberal” math. There is only math. If the President and Congress refuse to face reality, the markets will force them to, in what would most likely be a swift and disorderly process. This is why it would be better that those in charge do the math and get the job done now.


Entitlements are the key – they must be reformed. If they can’t come to consensus on this, the just passed budget law will automatically decrease spending across the board. Even if that happens and all we get is 2.1 trillion in spending cuts, we needn’t stop there. We should pocket that two trillion and push for even more cuts in 2013. This is an ongoing problem which requires an ongoing solution.


Beyond mere budget cutting we need to do something about the heap of regulations descending on the economy. A regulatory moratorium is in order. Once additional regulations stop, business can make plans again. Only then will they feel free to reinvest the huge mountains of cash they are sitting on.


Obamacare needs to be either repealed or reformed, although the Supreme Court may eventually do that by striking down the individual mandate. And Dodd-Frank needs a lot more reforms and a lot fewer regulations. There is much to be done: pass the free trade bills in Congress, address tort reform, extend the payroll tax cut, reform the tax system so that it is flat, fair, and less encumbered by deductions, loopholes, subsidies, and corporate welfare. In fact, immediate tax reform plans need to be drafted. A bill to allow businesses to repatriate the two trillion in cash they are sitting on abroad, would be a good start.


Perhaps the biggest thing we can do to spur economic activity and job creation is to get government off the back of the energy industry. Free companies to drill for oil and gas and we will see an economic boom in this country. Imagine what a million new jobs in the private sector paired with increased tax revenue and lower gas prices would do for our economy! Liberals say this is impossible due to EPA standards. My answer? Get rid of the EPA. We would save additional billions and the bureaucrats who claim to know so much about energy can find private jobs exploring for it, pumping it out of the ground, or refining it.


There is much work ahead, but we must go that extra mile if we agree our goal is a smaller, less expensive, and less intrusive government. A larger more productive economy would be the result, and no matter what is actually accomplished from the above list, it is important that these issues are the ones that are aired, and that we push this kind of agenda between now and the election. The table must be set for a debate which will rouse voters to act if we are to see any lasting change. It is a referendum that is needed in November of 2012 – and it will be then that the real progress can begin.


Market Update:


Well…did everyone have fun this week?  After an historic four days of ups and downs of 4, 5, and 6 hundred point stock market moves we ended up almost unchanged for the week.  Gold hit new highs as gold stocks plummeted. Interest rates hit levels that even shocked bond bulls, and as currency markets fluctuated wildly, the dollar remained flat. This week had something for everyone!


On Tuesday the Fed instituted a new monetary policy. They will keep the fed funds rate low, not just for "an extended period,” but through mid 2013. That led to a 400 point rally in stocks and a huge drop in interest rates. The Fed has finally understood that the economy will grow at a slow rate for "an extended period" and they’ve made their move, thereby tossing the stimulus ball back into the court of the Obama administration and Congress. While I am against the Fed fixing interest rates, there are always trade-offs. There is much to be said for certainty in policy, even if the policy is wrong.  At least people can plan.


I will be looking at the long end of the interest rate curve, which is uncontrollable by governments, for the real rate of interest. I will also be watching inflation and the dollar. The money supply, as defined by M2, has begun to surge, and I will be keeping a keen eye on that. Most importantly I will be focused on growth and profits.  I expect a pause (at the very least) in growth, due to the trauma of the last three weeks. Consumer confidence has been shaken and I'm sure few cars and houses were sold last week. This consumer and investor freeze-up will be reflected in future GDP, as a result of the nasty debt fight, the down grade of our credit rating, the European crisis, and the subsequent plunges in stocks.  All this will lead to another ratcheting down of the growth rate for the third quarter. Growth for the year will do well to exceed 1.5%


As for the markets, I think we are about to enter a trading range in the broad stock market. Just as I believed we were headed for a Year of L, so I believe is the stock market. I’m looking at a range of about a thousand points, either side of where we closed today which was about Dow 11,200. This has two implications for traders and investors. One, traders should sell rallies and buy dips. Two, investors should not expect large gains or huge losses from here, except where due to company specific news. We are entering a stock pickers market.


The stocks I am in are companies that I believe have better than average growth prospects. I have assumed years of L shaped recovery lie ahead. I doubt gold will move much higher or lower from here, unless we have severe damage to the economy or a total lack of confidence in the currency system. If economic activity and commodity prices both stagnate, the only reason to be in the market is if you believe your stocks will return good profits over time.


I am very comfortable with my portfolio as constructed. Half of the portfolio is in REIT's that will return yields which are among the highest possible on securities guaranteed by the government. The other half is in some of the most promising mines I could find in the world, poised to produce resources which will be desperately sought for years to come.


Portfolio in order of weight:


Cash and cash equivalents, CXS, MFA, & TWO - (Average yields are about 12.8%) equals over 50% of portfolio.

Rubicon Minerals

Verde Potash

Nevsun Resources


Aurizon Mines

US Silver Corp


Copper Fox