After a few months long hiatus from writing, it was time to come back…

Martin Armstrong was very kind to ask me to share my views on global real estate. The links to the report are below. First comes Martin’s highly insightful piece on now unfortunately mostly forgotten real estate booms and busts of the 18th and 19th century USA, followed by my review of real estate opportunities around the world (as well as places to avoid).

(pdf form)

Real Estate – The Global View 

(html form)

Real Estate – The Global View

“I place economy among the first and most important republican virtues, and public debt as the greatest of the dangers to be feared. To preserve our independence, we must not let our rulers load us with perpetual debt.” (Thomas Jefferson)

I was reluctant to waste time commenting on the debt ceiling and ‘spending cuts’ farce, but here it goes anyway…

Washington provided us with quite a spectacle this summer; first the tantrums in the debt ceiling debate, followed by the finger pointing and blame shifting in the aftermath of the Standard & Poor’s downgrade of long term US credit rating from AAA to AA+.

Regardless of how much – or rather little – credibility the S&P has left, the downgrade should not have surprised anyone, nor was it unjustified. Sure, the US is unlikely to default on its debt (after all, it can count on the printing press magic), but nobody seriously believes it will pay its creditors the $14.6 trillion (and counting) in anything but devalued currency.

Instead of confronting the problems, politicians aim at postponing any painful remedies ad infinitum, while debts continue to snowball. According to recent Congressional Budget Office projections (based on unrealistically rosy GDP growth forecasts) the national debt will grow by $9.5 trillion over the next 10 years. Even if the reductions proposed in the debt ceiling deal were to be implemented, the US would still accumulate $7.1 trillion in new debt by 2021!

The debt ceiling deal (allowing Obama to borrow a further $2.4 trillion – just enough to carry him to the end of his first term) and fight about a meager $2.4 trillion in “spending cuts” over a decade denounce an inability or unwillingness to face reality.

Does anyone truly think that $2.4 trillion “spending cuts” spread over 10 years will do anything to solve the problem when US federal debt stands at some $100 trillion, including the unfunded entitlement liabilities that lurk beneath the debt ocean?

(Not to mention, even the $2.4 trillion are heavily back-loaded, so the vast majority of these cuts won’t be implemented by the current Congress. The deal calls for a laughable $25 billion of savings in 2012 – in a $3.8 trillion budget! – and some $47 billion in 2013.)

Only politicians, intellectuals and academics would want to fix a debt crisis by issuing yet more debt. The problem wasn’t too low a debt ceiling but too high a debt. Yet far from attempting to remedy that… what Washington spent months arguing about are not even actual spending cuts – they are cuts in the rate of increase in spending. For anyone with half a functioning brain cell, cutting the projected rate of spending growth does not equal a spending cut!

It is also rather disingenuous of the politicians and media to talk about a $14.6 trillion national debt, when the true figure – including unfunded liabilities (Medicare, Medicaid and Social Security) – stands somewhere between $80 and 100 trillion (depending on estimates). While it’s true that people have been making payments for Social Security and Medicare, those earmarked funds have over the decades been plundered by both parties to pay for wasteful, vote-grabbing spending.

The reality nobody wants to acknowledge is that the US government has been on a historically unprecedented spending binge, accumulating debts for seven decades, and that the welfare state – enthusiastically embraced by Americans since the 1960s – has bankrupted the country just as European welfare states have bankrupted most of the old continent.

The truth is, neither party wants to do much to cut public spending. Laughably, Obama and the Democrats found the scapegoat for their failure to meaningfully cut spending (and the subsequent ratings downgrade) in the Tea Party, when Tea Party politicians have been the only ones taking the debt problem seriously.

If one wanted to cast blame, it would appear we mostly have the Democrats to thank for the gigantic entitlement liabilities of a welfare state that has created mass dependency on the government and destroyed the values that made America strong (self-reliance, industriousness, family, traditional morality): FDR’s Social Security, LBJ’s Medicare and Medicaid. (You can also include Obamacare – yet another under-funded, dependence-creating monstrosity.)

Entitlement reform (i.e. large-scale entitlement cuts) is absolutely essential if the US is ever to get its debt and deficit crisis under control. The Congressional Budget Office estimated that by 2025 all of the government’s income will go to entitlement spending and interest payments, leaving nothing for any other expenditures.

Debt reduction and balancing the budget can not be done without significant pain. The problem is, Americans (government and citizens) have lived so far above their means for so long that meaningful belt tightening holds little appeal. Hence poll after poll has shown people’s theoretical support for the idea of balancing the budget and cutting spending – provided they don’t have to bear the consequences. (Everyone agrees with spending cuts as long as their own programs and entitlements are not touched, and the 51% of Americans who pay no income taxes gladly approve of a higher-still tax burden for the ‘rich’ but not a much needed broadening of the tax base.)

The chances of the US voluntarily making a dent in that $100 or so trillion debt mountain are precisely zero. The government will do whatever it takes to keep the party going, which most likely means borrowing, printing, inflating and shifting debts onto future generations. Eventually, and quite inevitably, the country will default on its internal obligations to its citizens (i.e. Social Security, Medicare promises).

In the meantime, the massive $1 trillion+ annual deficits are here to stay for years to come. Borrow, tax and spend is what politicians do. More spending means more votes, especially once more than half the population has become reliant on government largesse. Federal government is now a giant wealth-transfer machine, taking money from a shrinking number of taxpayers and handing it out to a growing list of dependents.


“Payments to individuals” (Social Security, Medicare, Medicaid, public assistance, food assistance, housing assistance, unemployment assistance and student assistance) account for nearly 70% of total federal spending – the highest rate in history. The US now pays out more in benefits than it collects in taxes. More than half of Americans (59%) receive a Government payout in one form or another. Government transfer payments account for 18.4% of personal income.

National debt – at $14.6 trillion – has now surpassed 100% of GDP. The government currently borrows about 43 cents for every dollar it spends.  In 192 years – from George Washington to Ronald Reagan – US government accumulated only $1 trillion of debt. In the last 30 years it has added $13.6 trillion in additional debt. (When G.W. Bush took office the debt was just under $5.8 trillion. By the time he left office, it had nearly doubled, to $10.6 trillion. Under Obama it’s already at $14.6 trillion – a staggering $4 trillion increase in just two and a half years.)

The government has, in the last few decades, been piling up debts at an unprecedented speed, creating more and more bureaucracy, employing ever larger percentage of American workers and ensnaring countless millions into welfare dependency. More recently, it spent trillions of dollars on stimulus and QE I + II, with the sole result of greatly increasing the levels of debt.

The problem is relatively easy to grasp – the US spends vastly more than it earns. As such, the solution is simple as well, at least theoretically. All we’d need are enlightened voters willing to accept short term suffering for the sake of their (and their children’s) long term prosperity, and principled politicians willing to do the right thing even if it was to cost them reelection. Well, I did say theoretically simple.

Thanks to a huge expansion of entitlement spending over the decades, the debt the US has piled up is too large for the country to be able to grow or tax its way out of it. The focus has to be on massive spending cuts. Paring back entitlement programs should be accompanied by scaling down of the public sector, as well as a tax reform. The tax code should be simplified, loopholes, exemptions and deductions eliminated, the tax base broadened and tax rates cut for individuals and corporations alike. (A flat tax would be better still.) Lifting some of the crushing burden of bureaucracy, regulation, counterproductive taxation and immoral, dependency-creating entitlements would revive the growth-generating dynamism and industriousness the US used to be known for.

Unfortunately mass democracy doesn’t lend itself to doing unpleasant things for the sake of a better future.

——

It is not just the US. The entitlement nations of Europe have too, for decades, been spending more than they earned. And, much like in the US, the so-called spending cuts are, more often than not, merely cuts in the rate of spending increase. Welfare is still booming, and politicians – while paying lip service to slashing spending – are as set on voter-pleasing as ever.

I’m not known for overt sentimentality, but watching the TV coverage of the last Space Shuttle returning to earth last Thursday morning was one of the saddest moments I can recall. Once Atlantis touched down it was all over; there would never be another Shuttle.

I’ve always had a penchant for all things space related. As a child I dreamt of space ships, aliens and far flung galaxies, religiously followed every NASA mission, and was glued to the TV screen each time a Shuttle rocketed into the sky or landed. I’d often wished to have been born some years earlier, to have witnessed the thrill of watching Neil Armstrong step onto the moon. (Undoubtedly influenced by my dad’s recollection of that incredible event as one of the most memorable of his lifetime). It didn’t matter that we were in the then Eastern Bloc; we watched the various US advances into space with awe and pride, just as millions of Americans did. It was yet another milestone for Western civilization and human achievement. The greatest of human adventures.

I was convinced some years later we’d get to Mars and beyond. Alas, it was not to be. I suppose it’s fitting that all this is over now. The US (and the West) have given up. The end of manned space flight is just one more symptom of the cultural, moral and economic decline.

The space program was an expression of the energetic, vigorous, optimistic, united America of the late 1950s. It symbolized the country’s ambitions, aspirations and hopes for a better future, its belief that Americans can achieve great things and do them better than anyone else. All that is history now. Today’s America lacks a sense of identity and vision, its confidence is on the wane, exceptionalism has become a nasty word, unity has been replaced by tribal rancor, idealism and pioneer spirit are long gone, substituted by all-pervasive bureaucracy and political correctness.

Is it surprising that instead of reaching out to the stars manned space flight is returning to where it started – science fiction?

The landing of Atlantis ended the 30-year Space Shuttle program. The entire US space age lasted just five decades: it was May 5, 1961 when Alan Shepard’s 15 minute sub-orbital flight made him the first American in space. Just eight years later Apollo 11 blasted off for the Moon.

The Space Shuttle fleet began setting records with Columbia’s launch on April 12, 1981 and continued with Challenger, Discovery, Atlantis and Endeavor. The Shuttle has, during its 135 missions, carried people into orbit, launched and repaired satellites, conducted cutting-edge research and built the largest structure in space, the International Space Station. One of its key successes was the deployment of the Hubble Space Telescope (launched into space aboard Space Shuttle Discovery in 1990); the Shuttle and its astronauts were also crucial for each repair and servicing Hubble needed over the years. (Hubble, aside of giving us hundreds of thousands of awesome images, has revolutionized our knowledge of astronomy.)

Countless technological innovations we take for granted today are also result of the US space program and Shuttle research. The Space Shuttle program alone has generated more than 120 technology spinoffs, including miniaturized heart pumps that save lives, thermal protection system materials, bioreactors (help chemists design new drugs and antibodies), compact laboratory instruments, sensitive hand-held infrared cameras, light-emitting diodes for treatment of cancerous tumors, lighter and stronger prosthetic limbs, an extrication tool to remove accident victims from wrecked vehicles, and many more. (NASA has an entire website dedicated to spinoff technology.)

Now the Shuttle is gone and there is nothing to take its place. The US no longer has the ability to put astronauts into orbit. NASA will have to rely on the Russians to hitch a ride to the International Space Station – on the old-fashioned Soyuz spacecraft, at some $50 million per ride.

It wasn’t supposed to end like this. A few years ago George W. Bush announced the return to manned space exploration with the Constellation program. Missions to the Moon (by 2020) were to be followed by a manned flight to Mars and beyond. Then came Barack Obama who, believing in social programs and wealth redistribution rather than science and exploration, promptly cancelled Constellation, the country’s only chance at continuing with human space flight.

In any case the space program no longer seems appropriate for today’s America. Space exploration was a symbol and inspiration for Americans who believed in excellence, courage, self-reliance, achievement, science (hard science, not the politically correct pseudo-science of today). That country no longer exists; its spirit has been broken. The “virtues” America, and the West, worship today – equality, diversity, feminism – are a fast-track to a third world status, not to the stars.

As much as we may want to convince ourselves otherwise, it seems clear we no longer have the ability to achieve great things, space flight or otherwise. I suspect Bruce Charlton is onto something when he writes that “human capability reached its peak or plateau around 1965-75 – at the time of the Apollo moon landings – and has been declining ever since”.

“This may sound bizarre or just plain false, but the argument is simple. That landing of men on the moon and bringing them back alive was the supreme achievement of human capability, the most difficult problem ever solved by humans. 40 years ago we could do it – repeatedly – but since then we have *not* been to the moon, and I suggest the real reason we have not been to the moon since 1972 is that we cannot any longer do it. Humans have lost the capability. “

The US space program started on its downward trajectory in the early 70s, slowly drifting away from further development of deep space missions and new technologies. (The Shuttle itself is 1970s technology and should have been replaced by a new generation of spaceships years ago.) NASA has been gradually taken over by technologically and managerially inept bureaucrats lacking any vision and imagination. Instead of attracting the brightest engineers, scientists and innovators, the agency has cared more about politics and displaying its commitment to ‘diversity’. Well, at least now that manned space flight is no longer, NASA can work on its preferred mission – Muslim outreach.

Those who claim the US could no longer afford its space program would be well advised to look at the actual NASA budget. While during most of the 1960s NASA spending came to between 2-5% of the annual federal budget, since mid 70s it’s been less than 1% and in the last few years only about 0.50% of the federal budget ($17-18 billion p.a.).

So you can’t afford to spend a minuscule share of the annual fed budget – one half of one percent! – on space exploration, but consider it a good use of money to waste a couple of trillions on entitlements and welfare programs and $700 billion on stifling bureaucracies (i.e. various executive departments and agencies, most of which would serve the nation best by being abolished)? Not to forget the estimated $3 trillion cost of ObamaCare.

And what about the supposedly too expensive Space Shuttle program itself? The total cost of the Shuttle program over its entire four decade lifespan (including 10 years of R&D) was just under $200 billion. Expensive? Well, the US federal government, at present rate, spends $200 billion every three weeks!

I don’t see anything that has brought taxpayers a comparable return in industrial and technological advancement, increased understanding of our world and universe, as well as prestige, pride and inspiration as the manned space program.

But this isn’t about money or savings… it’s about a nation’s priorities. An America that spends trillions of dollars a year on welfare, entitlements and bureaucracy is an America that lacks any purpose, identity or belief in future; a space program is something such a nation has no use for.

Mankind has always felt the call to explore and push back the boundaries of human capability. I have no doubt there were people in Columbus’s day who wanted to find a ‘better’ use for the money that was to finance his voyages. Thankfully King Ferdinand and Queen Isabella of Spain had more vision and sense than Barack Obama.

We can only hope that a more enlightened people, perhaps the Chinese or Russians or Indians, are going to take over space exploration and become a beacon of hope and inspiration to those in the rest of the world, as America once used to be.

—-

Thank you, Space Shuttle, for all the memories.

—-

NASA – The Shuttle Program: A tribute in pictures (mission by mission)

Major moments in the Shuttle program (incl video)

NASA’s Space Shuttle pages

Hubble website (awesome images)

Atlantis – final landing (video)

Links to interesting articles I have read over the past few days that you might also enjoy…

Barron’s mid-year roundtable: Buy Low, Stay Nimble

Avoiding Losses Is One of the Keys to Managing Money

Everything You’ve Heard About Fossil Fuels May Be Wrong

Modern Portfolio Theory Is Harming Your Portfolio

Checklist: How to Spot a Bubble in Real Time

Free Book Downloads! National Academies Press Offers More Than 4,000 Titles

‘I’ve Got Nothing to Hide’ and Other Misunderstandings of Privacy

The Onion: Nation Down To Last Hundred Grown-Ups: ‘Mature Adults Could Be Gone Within 50 Years,’ Experts Say (funny… and true)

Guest post by Cantillon
On occasion it can be remarkably frustrating putting the case for an investment thesis to an unreceptive audience based on its intrinsic and rational merits.  Over time one perhaps learns that the approach one takes to forming an insight into likely prospective market developments is simply not compatible in the general case with the best way of persuading people of the correctness of that view.  Markets have their own intrinsic logic, and people have their own logic and the different logics do not play nicely together.  Indeed it could hardly be any other way, for were that to be the case we would see many more incidences of consistent investment success than we actually do see.
It is interesting how people do not generally seem to learn from their mistakes in the market.  If in July 2008 they listened to the hawkish rhetoric from the ECB and were swept up in the general climate of inflationary fear and as a result remained positive on inflation hedges and negative on European fixed income with unfortunate financial repercussions, then in May 2011 with perhaps a very similar setup it seems that they are quite content to make the same mistake.  And then as commodity prices correct, inflationary expectations ebb, and European fixed income rallies they say “well, the facts change”.  But the facts changed in an absolutely predictable, and predicted way that could be identified based on the initial conditions before the moment of hysteria started to exhaust itself due to natural forces.  And I wager that, once again, many commentators and economists will learn little from this experience, and what they learn will be the wrong thing.
But the world is so noisy, and our culture so unreflective and reactive that often being needlessly wrong has little adverse career impact.  In fact it is much better not to upset people with then-unconventional (and therefore unsound-seeming) ideas though they may yet become conventional wisdom with the passage of years; the path to success for most is to reinforce the audience’s self-esteem by uttering the conventional and acceptable platitudes and bromides of the time, paying lip-service to originality and the importance of recognizing reality, but without actually letting such a dangerous creature into the room.
In this context, I find it worth reminding oneself of the Dunning-Kruger effect.

The Dunning–Kruger effect is a cognitive bias in which unskilled people make poor decisions and reach erroneous conclusions, but their incompetence denies them the metacognitive ability to appreciate their mistakes. The unskilled therefore suffer from illusory superiority, rating their ability as above average, much higher than it actually is, while the highly skilled underrate their own abilities, suffering from illusory inferiority. Actual competence may weaken self-confidence, as competent individuals may falsely assume that others have an equivalent understanding. As Kruger and Dunning conclude, “the miscalibration of the incompetent stems from an error about the self, whereas the miscalibration of the highly competent stems from an error about others”

Perhaps one must therefore adopt the rules appropriate to the domain one is working in.  Form one’s market view based on relevant considerations; communicate it informed by the rules developed by authors of antiquity. And reserve most conversations about the nitty gritty behind the view for the elect who have proven their competence and discernment in previous interactions.

Guest post by Cantillon

In recent years it has become very fashionable amongst the want-to-be contrarian crowd to focus on the relative valuation of gold to other assets – particularly vs equities.  There are clearly long swings of relative equity appreciation and then of relative gold appreciation – the latter being not terribly happy ones economically, socially, politically and geopolitically.  The argument has been made that since in previous cycles the value of the Dow to Gold reached an extreme of 1.5 to 2, that this is a reasonable expectation for what can be achieved in the present or most recent cycle of relative Gold appreciation.

Possibly this may yet be proven right, but it is interesting to note that we have  close-to-hysterical public sentiment regarding the perceived consequences for commodities of QE (the Glenn Beck special was really quite amazing, as has been the widespread public chatter over a supposed large dealer short in the precious metals) and objectively still-negative big picture sentiment towards equities (consumer confidence in the dumps, Obama approval rating very low with Osama bounce almost erased, net AAII relatively oversold, and a generally grumpy public mood).

Just today, I was struck by the FT publishing an admiring profile entitled “Angus Murray: believer in real assets”. Mr Murray is the CEO of a $500mm asset management company that offers a wide range of offerings including commodities, emerging market equities, and post-war art organized around a unifying thesis that a devaluation of money is under way, and that inflation is significantly understated based on the official data.  He believes that in addition to the end of imported disinflation from the emerging world, the increase in the money supply seen in recent years will lead to acceleration in this devaluation of money from here.  He recommends a portfolio of 40% emerging markets equities (since he is sure that returns will be poor on developed world equities) and 60% precious metals.

Now I do appreciate the evils of monetary inflation – I first read Milton Friedman and Hayek in 1989; have worked at the Cato Institute, where I read many books by the Supply Siders and journal contributions by the late 70s/early 80s advocates of restoring the gold standard; I persuaded Sir Samuel Brittan (then editor of the FT) to review David Glasner’s book on free banking in the FT; in summer 1999 I asked a member of the Austrian seminar at NYU if we were not at a moment very like in the 1920s (monetary inflation hidden by productivity growth and imported disinflation).  And I have been a long-term commodities bull since shortly after I first heard Jim Rogers speak in London at the Institute for Economic Affairs on the launch of his first book.  In summer 2003 I expressed very strongly to my boss, head of an investment company with substantial assets, that it was a momentous trade at that juncture to take the free money from the Fed and buy hard assets. So I do appreciate the longer-term arguments in favor of precious metals and against equities.  I just don’t think making money in the markets is as easy as some otherwise very smart people seem to believe.  Secular investment trends have a habit of expiring just when one is finally able to persuade a reasonable number of people of the merits of one’s argument and to be recognized for that.

To step back for a bit – the chart below shows what is easy to forget – that it’s really a paper asset vs commodities cycle: taking a view on stocks vs gold is similar to taking a view on stocks vs crude over the long run.  Crude sentiment and positioning is extreme, and reading the media/bank research response to the selloff reveals astonishing complacency.  Even my deflationist friends (“the US is like Japan, only much worse”) are bullish crude based on a supposed structural supply-demand imbalance.  Reading notes of the recent Skybridge hedge fund conference – held one week after the silver crashlet -  (with some heavy hitters incl Burbank, Steve Cohen and others)  showed participants very worried about ‘black’ swans involving commodity prices taking off to the upside, but there was not one mention that prices could go significantly lower, let alone break Mar 2009 lows in some commodities with adverse consequences for more leveraged producers.  The legendary Mark Fisher, author of the “Logical Trader” put forth what seemed to me to be a nonsensical argument: up till now there has been no fear premium; since there now is starting to be one, one ought to earn this by buying every dip or selling put spreads. At the risk of not paying sufficient respect to those more experienced, to me this shows a complete failure to grasp the intensity of the present mania for hard assets (and therefore scope for a substantial mess when it reverses).

Five factors come to mind that might lead to substantially weaker commodity prices on a 6mo – 2.5 yr horizon

• Falling resource intensity of Chinese growth – possibly we are quite far up the S curve of industrialization.  Plenty left to go in other regions, of course.
• Slowing growth in the emerging world as lagged response to rate hikes and rising inflation in the developed world with  tighter US policy – fiscal and monetary – leading to strong dollar.
• Unanticipated increase in supply from the Arab world, at least temporarily, as a consequence of the Arab Spring.
• Dawning realization that high commodity prices of past years have in fact led to large increase in supply (at least in some areas) – with a long lag.  We mistook delay in supply response for no response. (Particularly significant with regards to Shale Oil, which by some estimates could lead to an increase in supply of 3mm odd barrels per day by 2015).
• Ebbing of inflationary psychology amongst producers, consumers, investors and speculators.  Maybe people are just tired of being bullish.

If I am right about commodities, it’s hard to expect that Gold doesn’t also experience a substantial correction – although no doubt it would hold up a bit better than copper or crude.

Of course the other leg to the trade is that consumer confidence, consumer spending, job growth, credit growth and house prices are all at a juncture where much lower gas prices (up 50% from August low last year!) could kick start the next leg of the recovery and the next leg in an equity market rally.

(Since first drafting the above rather longer term take, I realize that I suppose I should include the brewing mess in Europe.  No matter how much support core Europe can be persuaded to give to the periphery, there is no way for the periphery to recover competitiveness without maintaining very much lower inflation than the core for some years.  And of course of late they have actually continued to experience inflation.  Germany’s higher rate of growth in productivity simply makes the extent of the problem worse.  So the only way we can possibly avoid an unraveling is with EUR/USD very much lower, and substantially higher German inflation over time.  Once we get there, German exporters are likely to see a surge in profitability, since they are already profitable at the present high exchange rate.  Of course wages are likely to grow under such circumstances and we should see rents and house prices rise also.  I think the best case scenario is that we have a messy few months ahead for the periphery; and this isn’t by any means the most likely or only case.  Weaker global growth, weaker risk appetite and a strengthening dollar would of course tend to hurt commodity-related plays much more than US equities).

I do not want to discuss it in much length at this juncture, but I am not sure that art – of whatever period – will be such a rewarding place to hide.  In the old days, before art was considered a legitimate asset class, it was always the case that art and collectibles would perform very impressively just as the surge in liquidity was coming to an end.  The boosters of this market suggest that things are different this time.  I am not so sure.

Regarding breakeven inflation – that subject deserves an entire post of its own.  But I think that the present focus on inflation is overcooked in the near-term.  Stabilization in commodity prices will bring headline inflation back down closer to core.  And if we do see commodity prices fall, as I expect, the current short-term panic that we see should ebb.  I don’t think that changes the longer-term picture though that we are indeed early in a cycle of rising inflation (that began shortly after the tremendous outbreak of complacency and self-congratulation amongst central bankers as they recognized the ‘Great Moderation’).  Even a horrible central banker can bring down inflation progressively over each cycle with little effort if imported goods are falling and there is a period of modest productivity growth at home; at the best of times, and in the best of cultures, it is much more challenging to decide to impose short-term pain in order to achieve a long-term benefit of low inflation and belief by people in price stability.  Since World War Two we have grown rather accustomed to comfort, and I wonder how much suffering we will need to endure before we realize the cost of not recognizing what must be done and executing it rather than ignoring the painful aspect of the situation and hoping it will go away.

The point is that I think liquidity flows into asset prices early into an inflation.  This is fun for the wealthy (who benefit from asset prices going up) and less so for the poor (who see their cost of living go up without a compensating increase in wealth).  Later we may see a period that is less fun for everyone – assets go down, but the cost of living goes up.

Many of the ‘hard asset’ bulls seem to have forgotten that a rising cost of living does not imply hard assets go up in price – particularly if it is a rising nominal rate environment.  There is a prevalent belief that assets and commodities will rise so long as real rates are negative and credit growth exceeds nominal GDP growth.  There may be some truth to this over decades, but if one incurs the minor unpleasantness (discomfort again!) of getting hold of the data and studying it, it becomes evident very quickly that this belief is misplaced on a shorter-term horizon.  Industrial commodities tend to peak (or at least experience their most positive phase) when credit growth is at its height.  If credit growth falls, even if it is from say 30% to 20%, that is outright negative for commodities in the short run.

I do think that one buys the dip in breakeven inflation.  This is a tremendous trading environment for people involved in these markets.  Sadly it seems to me that many investors have a misplaced exposure to this asset class – for example holding inflation-linked bonds on an outright/unhedged basis.  Not exactly the ideal trade in an environment of rising real rates!

Here is a picture of a long-term perspective on the Dow/Gold and Dow/Crude ratios – it shows very well my earlier point that hard asset bulls – even Gold bulls – are making a much bigger bet on industrial commodities (crude included) that they might realize.
Dow/Gold and Dow/Crude Ratios

With regard to the outlook for equities here – I do think that there are many US equities that are at attractive valuations and will perform well on a longer-term basis.  Sentiment about the economy is very negative, and should improve if gasoline prices come down as I expect.  But would prefer not to run a large outright long trading position in US stocks, given various risks I see to growth and to risk appetite in the shorter-term.

Links to interesting articles I have read over the past few days that you might also enjoy…

Ray Dalio: The Billionaire Who Expounds Truth

More Dalio: Pursuing Self-Interest in Harmony With the Laws of the Universe and Contributing to Evolution Is Universally Rewarded

John Paulson’s View on Markets

What Exactly is Dow Theory?

Dylan Grice On The Coming Japanese Hyperinflation

Peter Thiel: We’re in a Bubble and It’s Not the Internet. It’s Higher Education

What does one TRILLION dollars look like?

10 Fascinating Facts About The World’s Richest People

Top 20 Countries in All Science Fields

The 16 Greatest Cities In Human History

California vs. Arizona (funny… and true)

It’s been a busy few months…exploring new opportunities and new countries (more on that shortly). Back to a more regular posting now. In the meantime here’s the sequel of the hugely successful Keynes vs. Hayek rap. Enjoy!

Fight of the Century: Keynes vs. Hayek Round Two

And here’s the round one:

Merry Christmas and a Happy and Prosperous New Year!

Here are links to a few interesting articles I have read over the past few days that you might also enjoy…

Global Recovery Status (interactive map)

Difference Between AAII Bullish And Bearish Sentiment Highest Since 2004

Kicking the Can

Why The Status Quo Is Unsustainable

The Real Great Depression (Panic of 1873)

Blue State Armageddon On The Way

In China’s Orbit: After 500 years of Western predominance the world is tilting back to the East

Quantitative Easing Explained (video)

It’s Time to Stand Up for Courage and Conviction

Nigel Farage To European Parliament: “The Euro Game Is Up”

…and a great Eric King interview with Nigel Farage (mp3)

The UK government has unleashed its latest weapon ready to destroy any still surviving business – as well as whatever remains of our individual freedoms. The vicious new Equality Act came into force earlier this month.

The progressive Con-LibDem coalition decided to implement the draconian equality laws proposed by Labour’s Harriet Harman and championed by current Home Secretary and minister for women and equality Theresa May. (Note: Safest way to recognize a nation is doomed? Look for things like ministries for ‘women and equality’.) Undoubtedly David Cameron, our faux-conservative leader and champion of political correctness, is feeling all warm and fuzzy for having imposed on Britain the most radical-PC law to date.

The Equality Act introduces a myriad of ‘rights’ which will allow staff to sue for any perceived offense imaginable.

It also creates the concept of ‘third party harassment’, meaning an employee can overhear a joke which was not even directed at them, perceive it to be offensive and then sue the employer. Workers can sue if they feel any comments ‘violate their dignity’, create an ‘intimidating, hostile, degrading, humiliating or offensive environment’, etc. A one-off incident is enough – the ‘victim’ doesn’t need to have warned the ‘offender’ that their comments were unwelcome.

As if that wasn’t bad enough, the legislation extends to everyone in the workplace; hence staff can sue their employer even if they were offended by something said by a vendor, customer or contractor.

Basically, the law aims to prevent anyone being offended by anything and any person, and allows workers to sue if their fragile feelings do get hurt. And as the years of rampant political correctness have already created a nation ready to take offense at even the most trivial remark, the lawyers and employment tribunals will undoubtedly soon find themselves very busy.

But wait, there’s more. Questions about a prospective employee’s health are now banned; it is for example illegal to ask how much time off work a person has taken. ‘Discrimination’ of any sort based on health is also illegal – for instance, staff who take a large number of sick days or periodically miss work because they are looking after an elderly or disabled relative will find it easy to sue for discrimination if they feel they have been treated unfairly.

Employees will be able to claim they were discriminated against because of a disability of any nature. Worse still, they no longer have to prove they were treated less favorably than non-disabled colleagues – the employer is guilty until proven innocent! (For instance, dyslexic workers who have been barred from carrying out certain tasks because of their tendency to make spelling mistakes can sue under the legislation.)

Another new category introduced by the law is ‘discrimination by association’, which allows workers to sue if they feel they have been disadvantaged because of an employer’s perceived prejudice against a relative (e.g. a gay brother). Combined discrimination has also been introduced – workers can claim they were treated unfavorably because of a combination of factors, for instance age and gender… to make sure some will stick, in case one allegation fails.

Shocking enough? Well, we aren’t finished yet! It is also illegal to discriminate against someone for the ‘perception’ that they are one of the ‘protected’ groups (for instance gay) – even if they are not. As you can see, anyone can sue for discrimination on any ground, whether plausible or not, and the burden of proof is not on them but on the employer (who clearly has no way to prove his or her innocence in such cases.)

On top of that, employment tribunals will have power to ‘recommend’ changes to a company’s business practices, such as imposing diversity and equality standards, rather than just dealing with the case of the individual who brings a claim.

A small part of the Equality Act is yet to be implemented (but undoubtedly will soon be) – the requirements for larger companies to publish the differences in pay between male and female employees and take action to remove them; and affirmative action to recruit more female and ethnic minority staff (regardless of their suitability for the position).

Who will benefit from all this lunacy? Lawyers of course, and a (likely significant) number of people keen to extort money from their employers or exact revenge on their co-workers and bosses for perceived wrongs. One thing is certain – discrimination claims will skyrocket and the burden of red tape will increase exponentially. And if businesses – already struggling to recover from the recession – end up facing ruin, so be it. Who needs those evil, greedy capitalists anyway? (According to the British Chambers of Commerce the employment law ‘reforms’ will burden business with £11.3 billion in extra costs.)

The UK has already been one of the worst places to run a business (at least based on my experience from a handful of countries worldwide): the burden of an ever-growing stream of new rules and regulations, massive bureaucracy and red tape strangling companies of all sizes, constant changes (and rarely for the better) to the law including tax laws (which have already been among the most complex); not to mention the ever increasing tax burden (especially when one includes individual taxes).

Yet all that has not been enough for our progressive governments. And the madness will undoubtedly not end with the Equality Act either. Why would anyone in their right mind invest their money, time and hard work to build a business in such an insane anti-business environment?

One might have thought there would be some resistance to such disastrous ‘progressive’ experiments, especially at a time when we could use all the jobs and entrepreneurial activity we can get.

But, alas, it appears much of the country has been successfully infected with the equality/diversity/fairness disease and as such sees nothing wrong with the so-called Conservative party wholeheartedly embracing this highest of all ideals. Sadly, in a country that has long ago rejected and destroyed any traditional and moral values – along with last remnants of common sense – equality/diversity/fairness (i.e. the chief tenets of political correctness or, if you prefer, Cultural Marxism) have become the new, true religion.

In a culture where nobody takes any responsibility for their own actions and everyone is a victim, taking offense has become a national sport. People’s lives and livelihoods are routinely destroyed for falling foul of any of the myriad new laws, rules and regulations aimed at enforcing PC; freedom of speech and individual liberties have been stripped away.

Supposedly, this is all for our benefit – for we will create a fair and equal society and everyone will be happy in our new Utopia.

As a wise man once said: Marxism didn’t fail with the fall of the Soviet Union; it has instead been fully implemented in the West.

Having grown up in a formerly communist country, it seems the UK (and much of Western) population is far more brainwashed with political correctness than we ever were with communism. Worst of all, they don’t even realize it. Perhaps that’s what inevitably happens with complacent, comfortable, distracted peoples who have thrown away the values that once made them great. (Of course the mere concept of objective and true values is now rejected; everything, morality included, is relative. That which makes people feel good about themselves is good, everything else is judgmental and hence evil.)

I can see why imposing equality of outcome has proven so popular with the very many who benefit from it. And when it comes to those who are forced to pay dearly for such ‘progress’? That’s where indoctrination and coercion come into play. After all, who could ever object to the pursuit of “social justice” (code for forced equity), right?

Collectively as a society we are in complete denial of reality, having happily embraced our pretty illusion that we are all special, all equal, equally important, equally smart, equally valid.

Therefore, if some people earn more than others and wealth is not equally distributed, it is a clear sign we live in an ‘unfair’ society and some people are oppressed or discriminated against. Such injustice must therefore be rectified by government intervention. If women earn on average less than men it can only mean gender discrimination (you didn’t think the fact women take months or years off work to bear children, work far shorter hours, and tend to choose professions that are financially less lucrative could have anything to do with this, did you?). If certain groups of pupils do worse at schools than others, it must be racial discrimination, or class discrimination (how dare you think intellectual faculties, hard work or dedication could be the true reasons).

And so we have, step-by-step, legislated a perverted, delusional and coercive version of equality and increasingly made it a crime to treat (and pay) people according to their abilities, efforts and achievements.

Many consider this a good, ‘fair’ thing. As C. S. Lewis recognized, “The claim to equality, outside the strictly political field, is made only by those who feel themselves to be in some way inferior. What it expresses is precisely the itching, smarting, writhing awareness of an inferiority which the patient refuses to accept. And therefore resents. Yes, and therefore resents every kind of superiority in others; denigrates it; wishes its annihilation.”

Self-interest aside, for anyone who does believe such preposterous fairy-tales – it may be time to wake up from your Marxist dream. People are self-evidently unequal. Some are more virtuous, intelligent, attractive, fit, moral than others. Some are more apt for certain tasks and professions than others. Some work hard and others less so. There is nothing ‘unfair’ about them being employed and rewarded accordingly.

Everyone who wants to can be a valued member of society, in whatever role fits their God given and acquired abilities. But one can not force others to consider him or her a better man or woman than they are – it’s not something that can be legislated; it has to be earned.

When people are free, outcomes are naturally unequal. Whether you like it or not, human liberty results in economic and social inequality. You can have either equality or liberty, but not both.

And so it is of no surprise that these great ideals we like to worship are never reached by protecting individual freedoms. Quite the opposite; they are always achieved by removing rights and liberties. Equal outcome requires tyranny, forced suppression of the rights of some in order to enhance the rights of others, be it through progressive taxation and redistribution, affirmative action and special rights for certain protected groups, or rules and laws which restrict freedom of some for the benefit of others. Wherever you look, we’re enforcing equal outcomes rather than equal standards for all. (Of course this near absolute control over all aspects of life and business goes hand in hand with the creation of an ever-growing and all-powerful bureaucracy.)

And yet all that is apparently a price most people are more than willing to pay. For what were once (granted, a rather long time ago) proud, self-reliant and free people, decades of welfare state and ever expanding and intrusive government have transformed into mere slaves, dependent on the state for handouts and guidance. Indeed the only freedom many wish for now is freedom from any responsibility.

As Ben Franklin wisely said, “Those who give up essential liberty to obtain a little temporary safety deserve neither liberty nor safety, and will lose both.”

I shall leave you with the timeless words of C. S. Lewis…

“Democracy is the word with which you must lead them by the nose… You are to use the word purely as an incantation; if you like, purely for its selling power. It is a name they venerate. And of course it is connected with the political ideal that men should be equally treated. You then make a stealthy transition in their minds from this political ideal to a factual belief that all men are equal… You remember how one of the Greek Dictators (they called them “tyrants” then) sent an envoy to another Dictator to ask his advice about the principles of government. The second Dictator led the envoy into a field of grain, and there he snicked off with his cane the top of every stalk that rose an inch or so above the general level. The moral was plain. Allow no preeminence among your subjects. Let no man live who is wiser or better or more famous or even handsomer than the mass. Cut them all down to a level: all slaves, all ciphers, all nobodies. All equals. Thus Tyrants could practise, in a sense, “democracy.” But now “democracy” can do the same work without any tyranny other than her own. No one need now go through the field with a cane. The little stalks will now of themselves bite the tops off the big ones. The big ones are beginning to bite off their own in their desire to Be Like Stalks.” (C. S. Lewis; Screwtape Proposes a Toast)