Monday, August 23, 2010

The Roulette Wheel Doesn't Have Your Number

Small investors have pulled 33 billion from the stock market so far this year when you would normally expect at this point in the “recovery” to have 10 to 20 billion flowing in. Where is the money going? Some of it simply doesn’t exist anymore as many in the middle class have stopped being middle class but much of it has been shifted into Treasury bonds driving the prices up and yields down.

Stock market salesman (oh I meant financial advisors) are pointing out that some blue chip stocks are paying bigger dividends than the return on bonds. They don’t mention that dividends can dry up overnight at the whim of corporate CEO’s who put their own paycheck at the top of the “to do” list and paying your dividends at the very bottom.  Your investment can also evaporate with the next flash crash and take decades to “recover” not counting inflation and if you are in managed fund, it can disappear completely.

Bonds are not without their own risks. The bond market appears headed for its own bubble and while your investment is relatively safe in that the literal default of the US government is generally believed to be unlikely.  The problem is that they pay in USD and the dollar’s value is subject to hyper inflation that could make bonds in reality not worth much at all. China has been taking advantage of the bullish bond market to unload US debt, selling more than 3% of its US Treasury holdings May and a similar amount in June.

I do often refer to deflation which in theory would make bonds a great bet but the problem is that there is such a huge amount of Treasury debt, that there is no way that the casino could pay off. You can have hyper inflation of prices and deflation of assets at the same time, in the seventies they called this sort of thing stagflation.

Basically it’s all a rigged game to separate the middle class from its wealth and redistribute it to the top one tenth of one percent. There is no way to out-smart the system, the wheel will never stop on your number. Even putting all your money into gold won’t protect you, although I’m not opposed to owning some if you don’t have room for anymore canned goods.

Oh, and eight more banks failed on Friday, the FDIC said early in the year that they expected the peak in failures would come in the third quarter. There are about 2000 banks that are on shaky ground so the peak isn’t anywhere in sight. It’s commercial loans dragging these banks under and not mortgages. Small business is still in full decline, none of the policies of the last thirty years have been changed and if the neo-austerity that is being contemplated in Washington comes to pass, the work of Ronald Reagan will be complete. That pesky middle class who thinks they should live the American Dream will become extinct once and for all.


Anonymous said...

What drives me crazy is that everyone talks about a "recovery" that, if it isn't quite here yet is on the way. Even some honest sounding people (Dean Baker) don't come out and say THE JOBS ARE NOT COMING BACK.

Only you, P2, will admit that the destruction of the middle class was the design all along and it is pretty much accomplished.

BTW, I just finished a book by Thomas Geoghegan: Were You Born on the Wrong Continent?

It's written in an impressionistic kind of way -- no boring lectures, plenty of what he saw and thought during several trips to Germany.

He describes how living in a social democracy could operate, where people have a say on the job as well as at the ballot box. And the implications of that kind of involvement.

One of Geoghegan's interviewee's, after explaining aspects of their economic system, ended by saying, "And people get to live in a just society."

That hit hard! Summed up in a flash just how bad off we are.

Andrea said...

Just sold most of the rest of my stocks. I'll buy them back when they are at 1.00.

Anonymous said...

I think in the long run canned goods will out pace gold.Gold may seem a safe bet, but I'm thinking ahead. Isn't that what savy investors do? Getting in now in the canned goods market seems a win win opportunity, especially in the spendy catagories, like asparagus spears. Also, I bet in the coming future the can could prove more valuable than it's contents.

prairie2 said...

If you want to speculate in the "canning" market. Home canning could become popular during a post industrial "economy" and jar lids maybe hard to come by. Also being able to dry food might become a handy thing to know how to do.

ickenittle said...

Gold may be good, but I'm thinking of investing in canned goods to add to my portfolio. Not in a cannery, or canned good company, but in the goods themselves. Like all savy investors do, I'm thinking ahead of the game, and I see big things happening in goods like asparagus spears. Who knows what the next big thing will be?

Anonymous said...

"Everyone" is bailing out of stocks and buying bonds? The herd mentality? Like the internet bubble and the real estate bubble. Everyone piling in? Well, I say, do the opposite. Get rid of your govt. bonds and buy stocks.

prairie2 said...

Doing the opposite of the herd is thinking that the lion depends on.