Don't Worry, Spend . . .

Don't Worry, Spend . . .

November 2001

Don’t Worry, Spend . . .

On October 7, 2001, the United States, with Great Britain’s help, struck back at the Taliban in Afghanistan and the al Qaeda network they harbor. It was gratifying for most Americans, I’m sure. After the September 11 attacks in which a handful of suicidal terrorists murdered thousands of innocent civilians while they were working at peaceful tasks, I think it was about time we finally struck back.

I know the “war” against the terrorists will take years to win. I know it takes time to mobilize, develop a strategy, and launch a retaliatory strike. I fully understand why a war against terrorists will be mostly an underground war. For a fact, I’m in favor of fighting back as long as we are at risk or were wronged. On the other hand, I don’t think we’d be at risk if our politicians followed the same foreign policy path our nation’s founding fathers so carefully blazed. Contributing to our nation’s leadership problem is the quality of today’s politicians. For the most part, they are immoral, self-serving, pompous, lying, pied-pipers who are incapable of connecting with Americans. They are not wise patriots. They are not intellectuals. They are crafty, power-crazed crooks.

In this issue of TSR I include a speech by Ron Paul, one of the few credible, honest, intelligent, wise, statesmen-like congressmen on the hill. He gave the speech before the House of Representatives. His comments on our country’s monetary and political situations cover some of my concerns.

Interventionist Policy Puts Us in Trouble

I believe the United States government puts its citizens in harm’s way with its interventionist foreign policy. The government has also weakened our nation financially by promoting debt-based money, debt-based economic growth, free trade, innumerable socialist programs, an even greater number of pork barrel spending programs, and thick layers of regulations. Our government did this because the politicians, who pass the laws and influence the masses, are protecting, coddling, and enhancing the interests of a few over the interests of many. Our interventionist foreign policy is only part of their agenda. But it’s a part that now has us in even deeper trouble. I’m convinced our international relations have deteriorated so much that until our nation’s foreign policy program is addressed and changed 180 degrees, the war will continue. So far, our politicians and the press blame the terrorist attacks on religious fanaticism, envy, desire for political domination, and ignorance. They refuse to address the possibility that maybe our country’s interventionist foreign policies could be making it the most hated country in many regions of the world. When they do address it, they believe “American views” are right and unless other governments and their citizens agree to our point of view, they’re wrong.

By providing “foreign aid,” by supporting “freedom” fighters, by promoting democracy as the only legitimate form of government, by acting as the world’s policeman, and by telling everyone that it’s “either our way or the highway,” our nation loses more friends than it gains. For a fact, each one of those policies will create enemies in whichever region we’re dealing with. Therefore, because of our nation’s foreign policies, I believe the war against the terrorists is very much like the drug war. It has no end.

In “American’s New War,” every time we strike we become more obnoxious in the views of some of the people in the Middle East. And with every attack, the more likely it is we will kill some poor “innocent” soul. For every such soul killed, another “innocent” soul feels justified in picking up the fallen flag. Every time we tell foreigners they are either with us in this war or they are the enemy, we will only gain more enemies. This leads to only one solution, which is the same one early American settlers used on the American Indians. The slogan they had for their Indian policy says it all: “The only good Indian is a dead Indian.” In other words, to win this “New War” against the terrorists, we’ll have to kill every man, women, and child of Arab descent that lives in the Middle East–and elsewhere.

The Sources of Strength

To wage war, a nation must be strong. In my opinion, our nation is not as strong as we’d like to think it is. In fact, I don’t think there is a country in the world that has the surveillance capabilities, quality of military forces, sophisticated weaponry, money-printing ability, and capability to develop and manufacture even more weaponry than the United States. On the other hand, our country is very vulnerable. Its twin policies of debt-based money and debt-based economic growth jeopardizes our money-printing ability and weakens our nation’s resiliency to economic shocks. Even more vulnerable is our nation’s fragile and unsustainable infrastructure, which is exposed and centralized. Many of our goods are imported. We are most vulnerable in our food production, water supplies, and energy sources. This means we provide the terrorists with nearly an unlimited number of highly strategic targets to attack while the targets they provide in return are comparatively insignificant.

Based on all this, I think it is rather ridiculous when our nation’s leaders (crooked politicians) tell the masses they should forget about the war, the threats, and the risks (other than to be vigilant) and get back to business as usual. Our nation’s leadership seems almost desperate in its pleas for Americans to get back to their stock buying and consumptive-debt-funded, materialistic-driven spending on goods and services. The Fed has lowered short-term interest rates to the inflation rate or less, which according to the negatively-slanted CPI was 2.65% over the past 12 months. In other words, real interest rates are now zero or less. The M2 money supply has increased 10.7% in the past 12 months, and the MZM money supply is up a sizzling 19.1% in the same period. Industry leaders are meeting to determine ways to get Americans spending again. And over and over again Americans are told they should go on about their business as if nothing bad had happened or will happen and that the good times will roll again if we just spend our money.

I believe this is irresponsible leadership. Strength comes from the masses, not the magnates who control and run the international businesses or the elected crooks in Washington. If the masses have cash in the till (preferably gold) and sustainable lifestyles, they can battle anyone for any length of time. If they are living hand to mouth and are in debt to the hilt and their livelihoods and critical needs are at risk, they live desperate lives that have little time or energy left for battling foes from afar. In addition, if enemies are targeting hard-pressed civilians and their infrastructure rather than the military, shouldn’t the politicians encourage the people to shore up their personal defenses, financial resources, and necessities instead of telling them to spend, spend, spend on trinkets and toys as if there will be no tomorrow?

Our Government Failed Us

Americans have trusted their government to date because they believe they are getting their money’s worth. They still trust it in spite of the fact that the government’s most important function is to defend them from attacks by foreigners. (There are only two other legitimate functions of government: to provide a court system and an internal police force. All other governmental functions are superfluous.) The terrorist threat is old, not new; therefore, I believe our government failed its citizens on September 11 by not performing as it should. It had opened our borders. It did not restrict known and possible terrorists from our land. It did not respond to the increasing threats of violence even though it was monitoring those threats on a daily basis. And worst of all, it did not have a plan in place to respond quickly to the terrorists. In other words, our country’s huge, expensive, powerful defense system was caught flatfooted, just like it was when the terrorists blew a hole in the USS Cole.

I don’t care how many excuses there are about the “underfunding” of the CIA, how distracted a president may have been, or what have you; our government is responsible for the defense of the homeland and it failed in the worst way, period, end of story. Now our government is following up that failure with a “New War” and a foreign policy stance that will keep all Americans at risk.

I’ve said it before and I’ll say it again: Our politicians do not act for the people; they respond to whatever lines their pockets or satisfies their vices, improves the business interests of their buddies in the large corporations, and buys the greatest number of votes. An example of that was the politicians’ rapid response to subsidize the airlines. The airlines are some of the world’s largest corporations and supposedly they ended up flat broke after being shut down for only a few days. They weren’t shut down for a month. They didn’t have all their assets destroyed. Their banks didn’t go bankrupt. They were just shut down for a few days. Yes, their traffic didn’t recover immediately, but it’s coming back and getting better every day. So why did they need or get a government bailout?

There are thousands of small businesses that get shut down for one reason or another every month here in the United States. Maybe they’re shut down because of inclement weather, power failure, fire, robbery, sickness, accident, or what have you. But they don’t get government bailouts because they couldn’t open their doors for a few days or even longer. So while the airlines received a politician-dictated subsidy that came out of the pockets of the little people, the many small businesses that serve the airlines and their customers didn’t get a dime of subsidy, yet they too were shut down. How come they’re treated differently? Was it because they weren’t big enough?

Airlines Are Debt Heavy and Cash Poor

For a fact the airlines were big enough. They’re so big, if they had started filing for bankruptcy they could have set off a domino-type reaction that would have imploded the nation’s banking system. But how could that be if our country is so strong financially? Well, the monetary plight of the airlines is a clear indication of what happens when companies are in debt big time and don’t have large cash reserves. Most of the big U.S.-based businesses (except those in the computer industry) are structured financially somewhat like the airlines. To be “more efficient” and competitive in the “modern world” they are in debt up to their eyeballs and have very small cash positions. Their inventories are so razor thin they can’t reduce them to add to their cash positions and still stay in business.

Obviously, huge, international, indebted corporations are not as sustainable as thousands of small enterprises that are supported not only by sweat equity but by conservative operating principles that include inventories and cash reserves. Therefore, a country whose people are dependent on the hiring decisions of huge corporations headquartered from afar are not very secure. They are in dependent positions that look great during the good times, but they could end up independent in a hurry during the bad times.

In a nutshell, the United States is vulnerable. It can’t support itself with its own productive capabilities; therefore, the society is not sustainable. The leadership cannot see the perils; it only sees the money. And the money it sees is backed by debt, and the printing press is the driving force for pumping up the sales of the huge international corporations the politicians favor. As for real money, who knows how much or how little gold the country has anymore? Rumors are the United States has been leasing out its gold hand over fist for quite a few years now, in spite of official denials. (I wonder how much of our nation’s leased out gold ended up in the hands of the Arabs?) Our government’s foreign policy is unnegotiable, and it will defend to our death its “right” to dictate how others in foreign lands should live. Consequently, there’s no way we can’t rule out the possibility of WWIII.

Freedom Is Relative

A former U.S. Ambassador to Afghanistan was on FOX News. He made some comments that set off the young lady who was interviewing him. She was in his face because she had “been there” and knew the situation first hand. He replied that she had visited Afghanistan but that he had lived there. And he liked to look at the situation from the Afghan perspective. In effect, he said the United States was in their face and was not welcomed by those the United States opposed. He said the Afghan people had no political rights, but even as poor as they were they still had many other freedoms. I thought the man’s comments made lots of sense and the interviewer’s caustic remarks were way off base.

America is selling the advantages of democracy to the entire world. That’s crazy since our founding fathers had ruled out democracy as a form of government because throughout history democracies always led to tyranny. But Americans are ignorant, so they persist where our founding fathers refused to go. Americans are so convinced their way is the right way they can’t understand why the Afghan people may have more freedoms than they do. Sure, Afghans don’t have one political right. They don’t have a lot of material things like we do. In fact, some of them hardly have any material things. But they also don’t have OSHA, SEC, IRS, EPA, FDA, USDA, and all of the other U.S. government agencies that control every aspect of our lives. They also don’t have literally dozens of different police agencies monitoring their lives. I believe Americans can be arrested by authorities from more different governmental agencies than any other people on earth. So if our government has laws governing every aspect of our lives with more laws being passed every day and there’s a whole host of separate, specialized police agencies to enforce those laws, just how free are we compared to the Afghans?

Americans do not have a God-given right to be the moral, social, ethnic, economic, and political dictators of the world. To even attempt to attain that lofty position goes against the grain of mankind. Therefore, it’s a policy that only results in conflict.

Investment Perspective

Why should an investment letter spend so much time analyzing this situation? I think the most important reason is the September 11 attack was a defining moment. For several years now I believed the United States had overextended the good times. I believed the stock markets were vulnerable and the economy was overdue for a major consolidation or even a setback. Now the war has focused, and will continue to impact, the minds of all Americans to one degree or another. Already some Americans have lost some of their materialistic leanings. On the other hand, American industry is geared up for customers to have an ever-increasing materialistic drive. Without sales growth, American industry can slip into the same financial condition that impacted the airlines. It may not happen as fast, but it will happen. And no matter how much money the government prints and spends on military action, it won’t be able to mobilize enough spending for blowing up tents in the desert to offset the reduced spending of the overextended consumer.

Another factor is confidence. Back in 1970 I first heard John Exter say, “Confidence is suspicion asleep.” (John and I first met in the men’s room at the Sheraton Hotel in Portland, Oregon. I’ve never forgotten that meeting, many subsequent meetings, and his teachings. He was incredible.) His words rang out in my head during the 1970s and for a period in the early 1980s when I saw first hand what he meant. People can lose confidence in whatever. Today people are very confident in America and its military, economy, government, paper money, and stock market.

It took incredible levels of confidence for the masses to bid up stock prices to the heights achieved in 2000. Even now with the Wilshire 5000 index off about 33% from its peak in 2000, it’s only down to the same level it was in 1998 when I thought stocks prices were way too high! It has taken incredible levels of confidence for folks to accept the paper money the government prints at will without backing. It takes incredible levels of confidence for folks to borrow and spend on consumable items without a thought given to the business cycle. It takes incredible levels of confidence for the people to believe that the Fed, Alan Greenspan, the crooked politicians, and President Bush are capable of controlling the economy and the markets to such an extent that every setback sets the stage for more good times ahead and is a buying opportunity for stocks. It takes incredible levels of confidence to believe the government was paying down its debt and that price inflation was under control. It takes incredible levels of confidence to believe the negative balance of trade doesn’t matter. It takes incredible levels of confidence to believe our nation’s “New War” will not impact our daily lives. I don’t think these high levels of confidence will persist in the months and years ahead, primarily because they are based on myths, fallacies, and outright lies.

Valuations Have Their Limits

Values are relative and can be too high, just like they can be too low. Therefore, there are limits to valuation distortions. In addition, times change and events cycle. As times change and peoples’ beliefs change, confidence can be impacted. I remember how folks felt about the stock market in 1981. They were afraid of it and thought that anyone who was in it was stupid. So from 1981 to 2000 there was a swing from total abhorrence to absolute confidence in receiving 20% annualized rates of gains from the stock market.

So here we sit today. The stock market peaked in 2000. Debts are higher than ever, and the consumer has never been more overextended. The government is continuing to print paper money. Government debt, which is already at a staggering level, is soaring higher. Our balance of trade is hemorrhaging red ink. Businesses have structured their finances, plant and equipment, and inventories on the expectations for ever-increasing sales. Free trade policies continue to eat away at the manufacturing heart of our nation. And now we are starting a “New War” that at its best may only be neutral in terms of impacting confidence. Based on these factors and more, the people of our nation, and the world for that matter, are overdue for a new perspective, one that may offset the extremes of confidence the masses exhibited during the 1990s.

The charts show how the market trends were starting to change before the attacks. The long-term constant-dollar uptrends are breaking. Relationships in the perceptions of value between tangible things and intangible things are starting to narrow. The gold price bottomed two years ago. Constant-dollar commodity prices, which apparently have not yet bottomed, are lower now than they were in 1932 at the depths of the Great Depression. Do the masses have the same attitude today regarding tangibles that they had for stocks in 1981? I think so, and in time their attitude will change. That’s why investors should be seeking out undervalued liquid tangible assets while disposing of overvalued intangible assets whose bloated valuations are dependent on confidence.

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