Market Watch - January 5, 2015
More wealth was created in the United States in the last year than in any other year in our history. 2014’s economic performance has set the table for the next few years. The success of the stock market, coupled with the enormous amount of cash in businesses and banks, provides corporations and individuals with excellent avenues of potential financing to expand businesses. The dollar is strong again. Consumers are receiving enormous benefits from lowered fuel costs, and the nation’s unemployment statistics continue to improve.
The country is also in a position to set right its finances. Should Congress be able to get the federal government’s spending under control, and cease borrowing from the public to cover the cost of current operations, the economy should continue to prosper, and the stock market should continue to reward us as it has these past few years. The U. S. economy is currently positioned to produce increases in asset values for several years to come.
Question: It seems as if all of this increase in wealth is “paper wealth” and not “real” wealth. Gold, silver and precious metals are substantially down in price. Where does real estate fit into the picture?
Answer: It is astute to realize last year’s “record wealth increase” was almost entirely from paper assets like stocks and bonds. Gold and silver are currently depressed and they are excellent buying opportunities. The increase in the value of paper wealth is an indication of the public’s expectations of future returns on their investment. This optimistic attitude has been adopted because interest rates remain at all time lows. Borrowing money is the most important expense in real estate transactions. Cheap money, coupled with cheap fuel, are two of the greatest expenses in real estate development. Great economic expansions are preceded by increases in capacity provided from real estate development. The relative cost of business expansion is as cheap as it has been in several years. The outlook for real estate development is excellent.
Question: Does the investor face any potential disasters in 2015 from the markets?
Answer: Probably not. There are difficulties all around the world that do not currently exist in America. If we can keep our nose clean, keep our foot on the economic gas pedal, and get this tremendous increase in government regulations under control, we should have good sledding in 2015 and 2016. It is important to remember that this record amount of cash held by businesses can either be spent for expansion, or taxes. Expansion not only provides tax breaks, but it increases capacity, improves morale and aids in productivity increases.
Question: Market Watch has written a lot about pending catastrophes. How can we balance the current optimistic outlook with the potential for disaster?
Answer: We cannot provide the balance. The market is emotional, and market values swing with human emotions. Now we are optimistic. Now we are well financed. Now we have the first opportunity since the early 1990s for Congress to get our act together. There are outstanding economic thinkers that disagree. James Rickards, author of Currency Wars, and subsequently of The Death of Money, presents sound mathematical proofs that we are standing atop a major disaster, primarily due to two things, (1) there is no backing for our money, like gold and silver, as mandated by the Constitution, and (2) our overwhelming debt on the federal level is so huge that we must borrow money just to pay interest on that debt. These thinkers all have excellent points. The mathematical soundness of their proofs cannot really be argued. But, what they don’t take into consideration is that we can improve by getting our act together fiscally, and we are very, very slowly getting there, with, perhaps, great opportunity to consummate the task because of a more conservative outlook towards fiscal matters in the new Congress.
Question: The real culprit here is increases in the debt ceiling, which allows deficit spending to continue. Market Watch pointed out in a 2014 article that when debt increases were voted upon, 70% of that time the Republicans were in power. Republicans are in power again, so why should anybody believe we would get our fiscal act together?
Answer: All we have is hope. THERE IS NO REASON to believe there will be any significant changes in the way we are governed over the next decade or two. This knowledge is very important to us as investors because we are likely to continue to have booms and busts in the market. As investors it is in our best interest to “ride the waves” when the market is going up as it is today. As importantly, we should realize when another bubble is coming, get liquid, and sit on the sidelines while markets deteriorate. There is no real answer to a question concerning what we might expect economically from Republicans being in power because both parties are culpable in our excessive spending and borrowing.
SUMMARY
It is a shame that the U. S. economy is prospering partially because of miserable economic conditions in much of the rest of the world. The dollar’s big rise in value lately is a result of currency conversion into the safer dollar, and dollar based investments. Greater demand for the dollar has increased its value against the rest of the world’s currencies, and has helped fund the government’s deficit by purchasing U. S. debt. Japan and Germany have huge problems. China has huge problems, just from their dramatic growth the last 10-years. Europe and Russia are both a mess. The current bright spot in the world’s economies is America.
But all America has right now is what she has always had: opportunity. Again we taxpayers and voters are offered an opportunity to upright the ship. Should we do so, we are in a position to prosper for another several generations. And if we fail to do so, we will be mired in the ups and downs of the stock market, and the pain it causes families, much as we have been the last 40-years.
It is a difficult balancing act we are faced with as a country. The imbalance between citizens who work and pay taxes, and citizens who don’t work and don’t pay any taxes, is at an all time high. Historically, in democracies, groups of people dependent upon the public dole continue to vote for politicians who will help them in their efforts to not work. Historically, those economies fail, and when they fail there is usually tremendous social upheaval, as James Madison pointed out at the Constitutional Convention.
Can America escape this social unrest? Can we prosper for another century like we have for the last two? Based upon current demographics and the behavior of our politicians the last several decades, it looks like we will not meet the challenge. But as optimistic Americans, we are best off to continue to put one foot in front of the other, do what we have to do to get our elected representatives to make every vote be dictated by the Constitution, keep our finger’s crossed, and enjoy!
Carpe Diem.
George Rauch
January 5, 2015
