Asian investment in plant has run ahead of Western ability to consume. The debt-strapped households of Middle America, or Britain and Spain, can no longer hold up the dysfunctional edifice. Asians must take over, or it will come down on their own heads.
The countries actively intervening in exchange markets to suppress their currencies – China, Japan, Korea, Thailand, even Switzerland, to name a few – are all too often the same ones that have the biggest trade surpluses with the US.

at a global turning point

Goldman Sachs has raised its 12-month forecast for gold to $1,650 an ounce, citing expectations for further quantitative easing in the U.S. and prospects for long-term interest rates to continue falling.

Nothing defines a country like the soundness of its money.  No nation can afford to have its money dramatically lose purchasing power.  That country will be punished in foreign exchange markets and its global influence will diminish.  If a nation covers its overspending by printing money (monetizing its debt) the currency of that country will depreciate.  If this process of paying bills with newly created money continues, as it has in the United States, it insures dollar devaluation.  This constant money and credit expansion to pay for runaway spending will inevitably destroy the value of the dollar.  Make no mistake about it the dollar can be rendered worthless.

Every financial decision a person makes should keep this thought in mind.  If the government persists in covering its debt with newly created purchasing media the dollar will fail.  Dollars are like anything else, if there’s an over-supply the value falls.  A glut cheapens the value of an item.  Unfortunately for the U.S., falling tax revenues and excessive spending have created a gargantuan deficit that must be covered by government borrowing or money printing.  You can only borrow so much and then you must create new dollars out of thin air.  That’s happening now.

Washington, Wall Street and the foolish Keynesians of the New York Times insist that inflation (dollar depreciation) is not a problem.  They’ve been saying these things for decades.  The best way to judge their argument is to look backwards.  When I started Investment Rarities a loaf of bread was a quarter.  There are a million examples like that.  What we’ve been told about low inflation is as truthful as what Bernie Madoff told his investors.

These modern Keynesians argue for greater government spending (bigger deficits) and care little of the consequences.  John Maynard Keynes would never condone the excessive government spending of today.  Keynes viewed inflating as a threat and expected any excessive purchasing media to be withdrawn in good economic times.  Pumping out money has become the central bank’s answer to recession but taking it back has gone the way of the passenger pigeon.

Here’s the rub, the nations expenditures are totally out of control and a balanced budget may be impossible.  One side blames military spending and the other blames social spending.  It’s the latter that threatens to break the bank because the voters won’t sanction cuts.  Government employees, unions, subsidized citizens and politicians on the left insist on massive social spending.  It’s impossible to cut these growing programs because so many people have come to rely on them.  There’s a certain amount of heartlessness in repealing them.  Unfortunately, they carry the seeds of their own undoing.  Social Security, Medicare, Medicaid, subsidized housing, food stamps, welfare ad infinitum are like an aneurism.  The bigger it gets the greater threat it is to the host, until it finally bursts and kills the patient.

An article in our newspaper chronicled the work of two young ladies who recently graduated from law school.  They were busily enrolling homeless men in Social Security so that these alcoholics and addicts could get a monthly check (in addition to whatever other subsidies they got).  What once was a retirement plan has morphed into a massive social welfare scheme with millions of recipients who contributed nothing.  I don’t need to tell you about escalating costs in Medicare and Medicaid.  These are financial backbreakers that simply cannot be funded out of government revenues.  Consequently the currency must be inflated until its value becomes suspect.

Those who claim inflation is not a problem never mention that the sound dollar of yesterday is now worth $.02 in current purchasing power.  Nor do they seem to realize that price inflation can accelerate for reasons other than high consumer demand, rising wages and a business boom.  Inflation can soar upward from a falling dollar.  Imports and commodity prices will rise if the dollar drops in international markets.  A sinking dollar means higher prices for natural resources, food and oil.

We are in between a rock and a hard place.  The government insists on breaking the bank with its spending.  Our runaway social cost can’t be stopped without blood in the streets.  A tax hike will harm the economy.  You could double taxes and we’d still be deep in the red.  Continued money printing (quantitative easing) will ruin the dollar.

Nobody knows the future, but it’s easy to conclude that Washington will make the very worst choices.  The nation’s fate is tied to the dollar.  This is the worst economic mess in history.  All you can do is look out for your financial well-being, practice charity and support those who want to lead the nation out of this terrible predicament.

Over the past 10 years, the S&P 500 has achieved a total return, including dividends, averaging -0.03% annually. Over the past 13 years, the total return for the S&P 500 has averaged just 3.23%. Why have stocks performed so poorly? One word. Valuation. If investors take nothing else from these commentaries, there are two primary lessons that should be clear. First, the poor market returns that investors have achieved for more than a decade were entirely predictable during the late 1990’s, based on the historical relationship between valuations and subsequent returns. Second, from current valuations, the similarly poor returns that investors are likely to achieve over the coming 5-7 year period are also predictable based on the same evidence.

While we regularly emphasize that valuation is not particularly useful as a timing tool, we know of no factor with a better record in setting expectations for long-term market returns. We spend a great deal of time discussing market conditions, economic policy, investor sentiment, and other factors in these weekly comments. But it is critical to recognize that these factors simply modify the short-term course that market returns take over periods of perhaps 1-2 years. They do not significantly affect the long-term course of market returns. Once valuations become unusually rich, disappointing long-term returns become baked in the cake.

We frequently cite our projections in terms of 10-year returns, since that horizon is a common definition of “long-term.” Generally speaking, however, large deviations of market valuations from their historical norms have generally been corrected within about 7 years. As a result, 7-year return projections are somewhat more sensitive to overvaluation and undervaluation than 10-year returns are. Think of it this way. Suppose that stocks achieve sub-par returns of 2% annually in order to correct an initial overvaluation, but that after 7 years, valuations are once again normal enough for stocks to achieve 10% annually over the next 3 years. Clearly, the 7-year total return is simply 2% annually. The 10-year total return is a bit less hostile, at 4.34% annually.

I remain concerned about the likelihood of a second economic downturn, and find little in the recent economic evidence (including last week’s employment report and the negligible shift in the ECRI Weekly Leading Index to -7%) to reverse that view. That said, we do not rule out the potential for an improvement in economic tone, and will respond to that evidence if and when it emerges.

More importantly, however, investors should recognize that the presence or absence of immediate economic pressures does nothing to change the likelihood that stocks, from their current valuations, will achieve negligible returns in the coming 5-7 years. To understand this, investors need to ground themselves in exactly how reliable valuations – based on smooth, low-variability fundamentals – have been in explaining subsequent market returns throughout history.

….read more and view charts HERE