Nov 18 2008
I’ve been a follower of economics since I had the opportunity to try to understand America. I immigrated from Italy as a 10 year old, and everything was “new” to me. In school I strived to understand cause and effect. Having studied economics for almost 50 years, this article best describes how I feel about it all. Enjoy!
Sep 29 2008
Video courtesy of KETV News.
Jul 30 2008
The “We are in the worst economic climate since the Great Depression” wackadoos sure put up a good fight. But now more folks are finally seeing through their flawed logic.
From a recent Newsweek article:
The specter of depression stalks America. You hear the word repeatedly. Are we in a depression? If not, are we headed for one? The answer to the first question is no; the answer to the second is “almost certainly not.” The use of “depression” to describe the economy is a case of rhetorical overkill that speaks volumes about today’s widespread pessimism and anxiety. A short history lesson shows why.
Jun 26 2008
(G. Edward Griffin)
On our next two radio programs (June 29th and July 6th), the guys and I will be joined by my pal, Ed Griffin.
We will be discussing topics from Ed’s longtime best-selling book, The Creature from Jekyll Island.
By listening in, here is what you will learn:
Regardless of how well versed you are in current events, you will never fully understand real world financial safety until you’ve listened to Ed’s fascinating discussion.
Tune in with an open mind on Sunday morning at 9AM Central on 1110 AM on your radio dial. If you are outside the Omaha area, you can download the program from the Manarin Investment Counsel website.
Related Post - What is the Job of the Federal Reserve?
Recommended Viewing - America: Freedom to Fascism
Jun 07 2008
The infusion of what is called “loose money” is always a stimulating consequence for the economy in the short term. The analogy I often use is pumping oxygenated blood into your body.
The downside is the Federal Reserve’s ability to create money without limit does create malinvestment of capital.
But the growth of the money supply is, in my opinion, very healthy for the economy.
Long-term, the creation of money out of nothing always causes inflation, which is a problem, especially for those investors whose portfolios are filled with dollar-based investments. The reason we haven’t seen major waves of inflation despite mass creation of money is because the U.S. and global economy does not have a shortage of goods and services. This is acting like a sponge soaking up the new money.
Remember the real definition of inflation: It’s the increase in the supply of money which causes prices to rise when not enough goods and services are available to absorb the new money.
The difference between today and the Jimmy Carter days of the 1970s was that back then there was a major structural problem with the economy. Simply put, there weren’t enough factories to produce enough stuff to soak up the money being created.
If you double the money supply without doubling the amount of goods and services, prices will eventually double.
In our current go-round, the Fed has doubled the money supply but the supply of goods and services has also doubled so it’s nearly a wash.
I say “nearly” because in reality, there is actually a lot more inflation than what the government-published statistics indicate. In the long-term, inflation is like the tide coming in pushing up the prices of assets, including stock prices.
Investors who are concerned about the money supply growth creating inflation are certainly thinking correctly but they also have to take in to account what is happening with that money.
Jun 03 2008
My personal investment portfolio is quite simple. It’s broadly diversified among ownership positions using equity mutual funds and I hedge my portfolio against the depreciation of the dollar using a link to gold.
That allocation offers me the opportunity to do well during most economic environments while keeping the portfolio safe.
But to have a portfolio designed to offer true financial safety, that portfolio must also be able to weather any economic environment that is thrown our way.
A threat that we’ve not experienced in some time is deflation. A deflationary environment is when there is a decrease in consumer prices and an increase in the buying power of money. Historically, deflation has often led to a depression - such as the one America went through during the 1930s.
So what if the Federal Reserve’s monetary policy triggers another deflationary environment like it did in the late 1920s? How would my portfolio be protected then?
If deflation is on the horizon, I would add a second hedge position to my portfolio and that would be a slice of long-term U.S. Treasury bonds.
Interest rates (the cost of renting money) and bond prices are inversely proportional so as interest rates decline in a deflationary environment, the price of long-term government bonds goes up.
Why TREASURY bonds? As long as the federal government has the ability to create money out of nothing and holds the power of taxation, the threat of credit risk is virtually nonexistent.
Why LONG-TERM bonds? Simply put, the greater the length to maturity, the greater the impact interest rates will have on bond prices. Therefore, if I see the economy heading down the path that leads me to believe the threat of deflation is probable, I want to buy some Treasuries in my portfolio as far out as I can own them.
Remember 1987?
There was a threat of a deflationary collapse due to Alan Greenspan’s tightening of the money supply. Knowing I had to protect my portfolio, I allocated 10 percent of it to long-term U.S. Treasuries.
Then in 1994, there was a spike in interest rates which presented an opportunity to buy more - which I did, and hung on until 1998.
Throughout the year, headlines were filled with news about the Asian crises and the Long Term Capital hedge fund fiasco. The media was touting their usual doom and gloom so the public was buying up bonds which drove up the price of the bonds I owned.
About that time the economy was experiencing high money supply growth and one of the iron laws of economics is you cannot have deflation when new money is created at such a rapid pace. Inflation, yes; but not deflation.
Once I believe Greenspan had created enough money to cover the major deflationary pressures, I sold the long-term Treasury bonds for a handsome profit and have not owned any since.
In summarizing, until there is a compelling reason to argue a pending deflationary collapse in the economy, my portfolio will have nothing to do with bonds.
Until then, diversified ownership is the way to go.
Jun 03 2008
“Duh Roland,” you say. The job of the Fed is to run the economy.”
True. The primary function of the Federal Reserve is to oversee the economy but what exactly is “The Economy?” Conventional dogma (and the politicians in Washington) would have you believe the economy is like a machine which can be controlled and managed.
I share a slightly opposing viewpoint. In my opinion, the economy is more like a living environment made up of people and their activities and behaviors. That means every time the Fed messes around with the economy by manipulating interest rates and the money supply, their monetary policy decisions have consequences that impact you, your family, and everyone you care about.
Not many people alive today remember a time when there was no Federal Reserve. Prior to its creation the nation got along just fine without it. In fact, America transformed itself from a tiny colony to the wealthiest nation on the planet in just over 120 years.
I’m not saying it was an economic utopia; there were still the usual economic concerns but most issues like recessions, inflation, and depressions where confined to regional areas and healed themselves rather efficiently.
It was during this pre-Fed era that America experienced explosive growth in wealth and prosperity unlike any the world had ever seen. Life was so good that the average worker could get by earning $20 a month and still support a large family at home.
So what happened?
The Fed is what happened.
From its creation in 1913 to the present, the Fed’s meddling has created more booms and busts than any time in U.S. history. These boom/bust cycles can offer wonderful opportunities to investors who understand what is going on and are prepared. For those that aren’t, well, things get a little dicey.
That’s why I’ve long believed any investment decision not based on the consequences of fiscal and monetary policy is likely to be extremely unsafe.
To understand basic monetary policy, visualize the Federal Reserve holding a giant stick. At one end of this stick is the price of money (interest rates); and at the other end, the quantity of money.
In the 1970s, when I first entered the investment business it was commonly assumed the only way for the Fed to control the economy was by manipulating interest rates.
During the spring of 1978, Jimmy Carter gave a speech telling the public that in an effort to help more Americans own a home, he had instructed the Treasury and the Fed to work together to make more money available at lower interest rates.
The next day, hardly a word of this was mentioned in the media but to me Carter’s new policy translated into future inflation. So I began telling investors that the Fed had to make a change because Carter’s policy was destroying the economy and the dollar.
A change came in 1979 when Paul Volcker became Fed Chairman who then orchestrated a reversal in monetary policy where the Fed began managing the quantity of money in the long term, non-inflationary way. The Fed began to shrink the growth of the money supply down from the huge levels seen under the Carter administration.
By early 1981, with the Dow Jones trading between 800 and 1000, it seemed logical that corporate profits would increase as the cost of capital fell so in a letter to my clients in August of 1982, I made the conservative estimate that within the next 10 years the Dow could reach 3000. The first time the Dow Jones ever traded above 3000 occurred in the summer of 1990 so those investors who were prepared fared quite well.
And that brings me to — where are we headed today?
The mainstream media rarely says anything about this but Ben Bernanke has a far better grip on the economy than Alan Greenspan ever did. Bernanke’s policies are moving us back in the direction of Paul Volcker’s policies. Greenspan made the disastrous mistake of managing interest rates versus what Bernanke appears to be doing which is managing the quantity of money and allowing the free market to determine the price of money.
Using simple arithmetic, I recently made the conservative prediction on my weekly radio show that there is a better than even chance by 2020 we’ll see the Dow Jones reach 40,000.
40,000 on the Dow in 13 years? Has Roland gone mad?
Possibly. In 1982, many people thought so. The fact that I was right on then does not guarantee that I’m correct again; but if I am, handsome profits will likely be made for those of us who are diversified across ownership positions.
A book I highly recommend is THE CREATURE FROM JEKYLL ISLAND by G. Edward Griffin. The title sounds like a Stephen King novel but it’s actually the story behind the creation of the Federal Reserve System.
You might also want to check out Ed’s lecture that he gave on the topic of his book.
