No Fiscal Discipline in the Stock Market

As the federal government belly flops into sequestration, the stock market merrily rolls along.  Europe is sinking into recession, an inevitable result of its austerity and deleveraging policies.  Japan is in recession, and has pledged to worship at the altar of monetary accommodation in an effort to revive its economy.  American consumers are creeped out by continued government dysfunction, continued economic dysfunction and an increase in Social Security taxes.  Retailers are reaching for the little paper bag in the seatback on front of them.  But stocks are delirious.

Of course, it's all because Federal Reserve Chairman Ben Bernanke yesterday swore up and down that central bank accommodation is next to godliness, or something to that effect.  If the most powerful agency in the United States government promised to subsidize you indefinitely, you'd be delirious, too. 

By ignoring real world problems, and flying high on the Fed's fiat paper meth lab, the market is letting Congress off the hook.  Without someone or something twisting their arms behind their backs, the members of Congress have little or no incentive to get real and work out the nation's fiscal problems.  The stock market has the leverage to make Congress devote its full attention to a problem. In the fall of 2008, when the financial system teetered on the brink, Congress voted down a rescue package.  The market promptly nosedived, and squashed 401(k) accounts from sea to shining sea.  Constituents deluged Congressional offices with negative commentary (that's putting it mildly).  Congress immediately reversed course and enacted the TARP rescue legislation.

Today, however, fed by the Fed with printed money, the market romps.  Congress fiddles.  And the rest of us get nervous about the smell of smoke that waffles through the air.  By not holding Congress accountable, the market enables government dysfunction.  The market can be quite effective when it imposes discipline.  But an undisciplined market is scary.

Politics Keep the Economic Crises Going

We are vividly reminded today that the economic crises bedeviling the world are political in nature.  The election deadlock in Italy, with leftists likely to control one house of the Italian Parliament, and rightists and leftists apparently in  a draw in the other house, is a vote against austerity and centralization of the EU's governance. Although the political nuances differ from Greece's initial anti-austerity vote last year, the Italian election, like Greece's, signals that numerous voters have yet to learn the words of the pan-European version Kumbaya.  Another election in Italy may well be needed, or the country will be unable to stay on track to meet the EU's expectations.

In America, sequestration now seems almost a certainty.  The arbitrary cuts imposed by sequestration were supposed to be unpalatable to either party, and would therefore incentivize both parties to cut a real deal.  Fat chance of that in these days of political dysfunction.  Truth is there won't be a real deal.  That's why the Dems and Republicans kicked the can down the road when the fiscal cliff loomed and the debt ceiling threatened to descend like the Sword of Damocles.  The government right now can do little more than bring its foot back for another kick.  The one silver lining in the clouds is that the economy seems to be recovering to some degree.  The better the economy does, the lower the deficit will be.  We should hope and work for economic growth, because that is the only politically feasible solution to the budget deficit.  The federal government needs to repair and upgrade infrastructure, adopt a pro-growth immigration policy, work hard to cut the growth of health care costs (perhaps the biggest expense in future federal budgets), and work toward supporting and expanding educational opportunities while reducing the cost of education.  (Internet-based instruction may be a great way to educate at much lower expense, and should be encouraged and supported.)  The current squabbling in Washington over budget cuts and tax increases is a game of musical chairs that no one can win.  We have to take a different approach.

Keep Your Investments Simple, Because the Alternatives Could Be Worse

As reported by the New York Times (and linked through CNBC.com:  http://www.cnbc.com/id/100449551), retail investors are once again being burned by complex alternative investments.  This is an old story in the annals of investment busts.  The more complex an investment, the less likely a retail investor will understand it, and the greater the advantage an unscrupulous broker will have in foisting it on the unsuspecting.  What's troubling is that many of the victims weren't seeking a fast, speculative buck.  They were often conservative investors who were pushed by the Federal Reserve's scorched earth policy against interest rates to hunt in dark, dank thickets for elusive, ethereal positive yields.  Desperate for investment income, they fell victim to sales people saying what they wanted to hear, but maybe not what they needed to understand.

An underappreciated element of saving and investing is the need to manage risk.  Manage doesn't mean avoiding all risk, and it certainly doesn't mean seeing greater risk as the path to greater rewards.  It means understanding that risk and reward are linked, and that not getting too greedy about rewards is the way to long term success.  Some risk is reasonable, as long as you don't expose yourself to so much volatility that you grab the little paper bag in the seatback in front of you and put all your money in a mattress.  The tortoise beats the hare when it comes to investing.  Searching for quick returns is like donning wings of paraffin and flying toward the Sun.  Don't invest in anything that you don't understand--and that means having a full appreciation for every way your hmmmm can be deep fried.  Simple, steady and average are a decidedly better bet for making you comfortable in retirement than the latest in glam financial fashions.  For more, see http://blogger.uncleleosden.com/2009/11/techniques-for-retirement-saving.html.

Dow 14,000: So What?

What does Dow Jones Industrial Average at 14,000 mean?  Not much, when you consider that it's to a large degree the product of the Fed's unremitting money printing policy.  A "value" achieved through government policies, rather than market forces, has little intrinsic value.  Witness the real estate markets of 2007-08:  decades of government subsidies through the mortgage markets, tax laws and Federal Reserve monetary laxity puffed up home values until they exploded in our faces.  Comparable subsidies (like quantitative easing) and more easy Fed money can do the same to financial assets. 

Right now, retail money has started flowing into stocks again.  That's deemed by many market pros to be a sign of an impending market peak.  If you want to get in and out of the market--i.e., trade it as if it were an asset bubble--there may be some greater fools who would buy from you.  That is, if you act quickly enough.  But investor, beware.  The Fed is making an enormous bet right now:  that enough monetary stimulus will somehow revive the economy to the point that it will independently resume sustained growth and return to full employment.  That such will occur is unusually uncertain.  Aside from the fact that economic revival has been painfully slow even with all the printed money, one has the sneaking suspicion that the Fed has quietly placed a side bet that its easy money policy would push down the value of the dollar enough that America might export its way to prosperity.  But other export-centric nations are fighting back.  Japan has effectively undermined the independence of its central bank in order to push the yen down. China has stopped levitating the renminbi. And the Germans are starting to grouse audibly about the revival of the Euro.  Currency wars tend to take on the look and feel of a circular firing squad, and the major economies of the world are charging their muskets.