House Democrats propose to spend $550 billion of their two-year, $825 billion “stimulus bill” (the rest of it being tax cuts).  Most of the spending is unlikely to be timely or temporary.  Strangely, most of it is targeted toward sectors of the economy where unemployment is the lowest.

The December unemployment rate was only 2.3% for government workers and 3.8% in education and health.  Unemployment rates in manufacturing and construction, by contrast, were 8.3% and 15.2% respectively.  Yet 39% of the $550 billion in the bill would go to state and local governments.  Another 17.3% would go to health and education — sectors where relatively secure government jobs are also prevalent. 

If the intent of the plan is to alleviate unemployment, why spend over half of the money on sectors where unemployment is lowest?  Another 22.5% of the $550 billion would go to social programs, such as expanding food stamps and extending benefits for the unemployed and subsidizing their health insurance. 

- From Alan Reynolds’ recent editorial in the Wall Street Journal.   

Last Sunday the Wall Street Journal ran this article which offers a nice overview of the various ways in which you can have exposure to gold.  Here is what it had to say about my favorite method of gold exposure in an investment portfolio, gold mining stocks:

With publicly traded mining companies, you don’t own the metal but you do own shares of companies digging holes in the earth.  This is the most leveraged gold play, since a rising — or falling — gold price is spread across hundreds of thousands or millions of ounces the company has in the ground.

Pros: More bang for the buck.  Mark Johnson, portfolio manager for the USAA Precious Metals & Minerals Fund, estimates that ‘you probably have to put two times as much money into bullion or ETFs to get the same exposure to gold as you do with mining shares.’

Cons: Exposure to all sorts of corporate and geopolitical risks, based on the countries in which a particular gold miner operates.  And because mining is so energy intensive, rising energy prices can negate some of the increase in gold prices.

My Thoughts: By owning diversified mutual fund portfolios of gold mining stocks and holding for the long term, the risk of this asset class is minimized compared to picking a handful of individual mining stocks.  And in today’s environment, I currently have nearly 10% of my investment portfolio in gold mining stocks.

(Via Roland Manarin)

The Cato Institute’s Dan Mitchell sure seems to think so and he presents some very interesting evidence in his presentation below.  He opens with this great line:

Only in the upside-down world of Washington do people think that making government bigger is a recipe for economic growth.

Hat Tip:  Carpe Diem 

I Want My Bailout Money:

Some excellent points and a position I fully agree with in this excerpt from a recent Longleaf Partners shareholder letter:

Over 33 years we have operated successfully through six bear markets and are now in our seventh.  This one is the most severe, the most painful.  Conversely, it is the one that has created the most compelling opportunity and should produce the highest returns when the fear subsides.  Several observations indicate the extremes affecting the market, and we believe, imply that a bottom was reached in November. 

• The earnings yield of the S&P 500 relative to Treasurys has made equities the most compelling since the mid 1930s.
• The annual 10 year return for large company stocks has turned negative – something that has occurred only two other times, in 1938 and 1939, since tracking began in 1926.
• The VIX, an index measuring expected volatility and therefore fear, hit an all-time high in November.
• Significant margin calls and capital calls from various types of private funds have caused widespread selling of equities.
• Advisor sentiment measuring bulls versus bears has fallen to the lowest level in over two decades. 
• The amount of cash being held on the sidelines by individuals has grown to a sum significantly greater than the total market cap of U.S. stocks.
• Investors have bought Treasurys with no return, an indicator of the fear of other investments.
• Institutional managers have held high cash balances in spite of acknowledging equities’ undervaluation.
• Warren Buffett and Prem Watsa, two of the best fundamental investors, have made significant moves into equities.
• Insider buying at companies has been rampant.

Bottom Line:  In our opinion, buying ownership assets such as stocks, land, real estate, raw materials, or precious metals looks to be the smartest move any long term investor could make today. 

The form of economics taught to most baby boomers in school and to our children today is Keynesian (pronounced Canes-ee-an) which follows the classic big government, interventionist, currency debasement philosophy promoted by statists on both the left and right in Washington for decades. 

The new incoming Presidential Administration ran on the platform of “Change.”  Maybe they will surprise us but my gut tells me that America has been sold the same old bill of goods.  If change were actually in the cards, I would expect to hear the Obama team using similar rhetoric I hear from the Ludwig von Mises Institute or the Cato Institute, which are two of the finest anti-statist organizations out there. 

Recently on Cato’s blog, David Boaz had this to say about the Obama economic philosophy:

President-elect Obama proposes that the federal government “create or save” jobs by spending upwards of $600 billion.  Where would this money come from?  If it comes from taxes, it will be taken out of the more efficient private sector to be spent in the less efficient government sector, and the higher tax rates will discourage work and investment.  If it is borrowed, it will again simply be transferred from market allocation to political allocation, and our debt burden will grow even greater.  And if the money is simply created out of thin air on the balance sheets of the Federal Reserve, then it will surely lead to inflation.

There is no magic road to wealth.  You have to work, save, and invest.  And when the government lures individuals and businesses into making bad investments with cheap money, the malinvestment has to be liquidated.  Avoiding that truth, prolonging the process of adjustment, is a good way to turn a recession into a depression. 

Folks, history repeats.  And with that I don’t expect an economic policy change in Washington any time soon.  This is why I continue making investment decisions based on the model of economics used by early American leaders that transformed a poor group of colonies into the wealthiest nation the world had ever seen. 

Their recipe was simple:  Free markets, low taxes, and sound money.  Back then, those who followed this model were labeled heretics.  Again, we see that same history repeating today. 

So as you and those you care about are making serious decisions about your long term financial decisions, take a good look at the options available to you.  On one hand you can follow the crowd and the same tripe that got us into this present day mess.  Or you can recognize that more of the same probably wouldn’t be of much benefit to you or your bottom line. 

In either case, we are in a historic period of transition and the winners and losers through all this won’t be decided until years later.  It is my hope that you are making the right decisions today that give you the best odds for future prosperity.

Folks are still asking me about the collapse and what/who caused it.  Here is a video clip sent to me that helps clarify part of the story. 

For the uninitiated, the moral of the story is simply this:  Politicians invariably respond to crises – that in most cases they themselves created – by spawning new government programs, laws and regulations.  These, in turn, generate more havoc and poverty, which inspires the politicians to create more programs … and the downward spiral repeats itself until the productive sectors of the economy collapse under the collective weight of taxes and other burdens imposed in the name of fairness, equality and do-goodism.

Read the full article here. 

The Recent Fed Rate Cut

In my opinion the cut in interest rates is less significant than what the Fed is doing with the creation of money.  Sure, it may have some psychological benefits but what difference does it make if the rate is 0.25% or 0.75%.  It’s the availability of money that’s more important as this will help dissolve the credit freeze.

Money Creation

The Fed has been running full steam ahead with its aggressive expansion of the money supply.  Talk about historic!  Normally that would create a massive growth stimulus and it probably will, however, we don’t know when.  Historically speaking, it typically takes a 12 month lag for monetary policy to be visible on the street level.

Inflation

I don’t anticipate this being a problem (at least for now).  We have the current psychological fears to deal which are deflationary.  However, when confidence recovers and the velocity (the rate at which money changes hands) increases, there is the threat for high inflation.

Market Volatility

The volatility is down from what we witnessed months ago but investors are still hiding and the day-to-day market environment appears to be dominated by traders.  If investors ever start coming out of the closet, I expect we will see some serious upside in the market.  The bargains are clearly there but the public is so scared that another emergency is on the horizon so they stay out of the market.

Strength of Companies

Recently I read this article saying that there are more than 2200 companies around the world “offering profits to investors for free.”  That spells a classic panic.  Companies as a whole are far healthier than what we witnessed them to be in past bear markets.

Gold

The metal has been so manipulated that it is hard to come up with a true free market value.  Gold closed out 2008 at $867.  This is well below the $1011 price we saw back on March 17 which is still well below January 1980 high when priced in inflation adjusted dollars.  Over the course of last year we saw gold-mining shares fall due to the deflationary collapse.  When the dollar takes a severe nose dive, gold should increase in value and could shoot past $1000 again very easily.

Take a look at this cartoon strip created 15 years ago.  It is still very true today!