Time to face reality

Just like when Obama won the general election and equities tanked, the Inauguration rally many expected failed to materialized. The correct interpretation is that while Main Street hopes Obama will save the day, the smart money says his stimulative policies will fail. Artificially propping up insolvent industries may be populist, but history shows it is counterproductive in a failing economy. And history always show contrarians eventually are proved correct in predicting inflection points by going against the consensus. Even though Obama is riding a huge wave of popularity, the consensus is always proven wrong. If billion dollar deficits are bad, then trillion dollar deficits are supposed to be good?

The silver lining (or more correctly, the gold and silver lining) is that my investment theses are still intact: the US Dollar is continually being debased due to profligate credit and quantitative easing--in a desperate attempt to save the economy from further decline. But in doing so, we mortgage our future, dampening growth with high taxes, lower corporate earnings, and lower purchasing power. Interest rates have nowhere to go but up from here, while hard assets such as gold and silver will be one of the few safe havens from financial and economic turmoil. Healthcare seems to be the only other recession-resistant industry. Markets don't move up or down in a straight line, so we will experience corrections against the prevailing trend, but these trends are already paying off, so any pauses will be opportunities for me to add to my already profitable positions. In other words, I don't know how gold prices will move tomorrow, but I do know 2 years from now, a debased US Dollar almost guarantees gold will move substantially higher.

Today, despite general public optimism, equities tanked again, led by distrust in financials and their ability to get their arms around their huge portfolio losses. The disturbing fact is that the economy can't grow without a healthy banking industry, with high reserve ratios and solid balance sheets. With unemployment soaring, lending ground to a halt, and loan defaults rising, banks are in a pickle to stay solvent themselves.

Meanwhile, the price of gold surged, while yields on 30-year Treasury bonds rose (hence, our short T-bond position). All trends are behaving as I predicted, even tho I was unsure of the timing, whether the big moves start tomorrow, next month, next year. One could argue that gold has been in a secular bull market since 2001, when it was trading at $257/oz, due to the aforementioned dollar debasing. In the same vein, gold has tripled in 8 years: the sad corollary is that the US Dollar has been devalued by two-thirds. Mathematically, when you create obscene distortions in financial vehicles, you will experience painful regressions to the mean--in laymen's terms, you've created a bubble that will eventually burst. This massive credit expansion and deficit spending has been especially toxic, and now the Federal government thinks extending more credit will somehow magically cause our economy to resuscitate itself.

Today was a great day for many reasons, and shows that we have evolved as a country. But financially, it also means we have sealed our fate economically, and that we should expect another decade of negative wealth and disinvestment.