Tis Only My Opinion! · 2012. 12. 30. · A combination of spending cuts and taxation increases also does not solve the problem caused by politicians buying votes with programs that

Outlook 2013 Page 1

'Tis Only My Opinion!

January 2013 - Volume 33, Number 1

Outlook 2013

According to Federal Reserve Chairman Ben Bernanke, the U.S. economy is sluggish as gross domestic product is

only growing at a 2% annual rate. Further, there are structural long-term changes in jobs and as a result, the U.S.

is experiencing chronic high employment at over 7.7% as measured by the Ministry of Truth.

Chairman Bernanke at the recent FOMC meeting suggested the monetary and fiscal goals that needed to be met

before withdrawing any stimulus from the financial system would be a 6% unemployment rate and an inflation

rate of 2% to 2.5%.

The Federal Reserve will continue its quantitative easing initiative in the amount of $85 billion per month in 2013

pushing the Fed's balance sheet to in excess of $5 trillion by the end of 2015. In 2013, the $85 billion per month

stimulus program will inject $1,020,000,000,000 of new funny money into the financial system. It is all going to

be created out of “hot air.”

The Fiscal Cliff

The Fiscal Cliff is occurring because federal spending is out of control. The following chart dramatically illustrates

the spending problem largely caused by future entitlement spending (Figure 1).

Figure 1 - Spending is the Problem

The solution should be obvious - increase taxes, reduce spending or do both. Each year of the Obama

administration has seen a cash-based deficit of $1 trillion (Figure 2).

Outlook 2013 Page 2

Figure 2 - U.S. Cash-based Deficit from 2002

Of course, this is only the tip of the iceberg. The real GAAP deficit from the Congressional Budget Office is over $5

trillion this year and Figure 3 shows the data for each year since 2002.

Figure 3 - U.S. Cash-based and GAAP deficits from 2002

Outlook 2013 Page 3

Increase taxes

The negotiations over the Fiscal Cliff have centered upon an increase in taxes on the wealthy. However, if you tax

100% (confiscate) of all personal incomes which are over $1 million the cash-based deficit still exists, let alone the

GAAP deficit.

In 2011, the IRS stated that only 433,000 individual taxpayers in the U.S. had an income over $1 million.

Confiscating all income made by those over $1 million would only add about $825 billion to the tax coffers. The

cash-based deficit in 2011 was $1.2 trillion while the GAAP deficit was in excess of $5 trillion.

After-tax corporate profits will only be about $1.7 trillion in 2012. If a substantial portion is taxed, the effect upon

the level of the equity markets may be interesting.

Figure 4 - After Tax Corporate Profits

There are two problems. First, a substantial portion of those profits are earned overseas. Second, if you tax a

significant portion of those profits, you call into further question where will corporations find the capital

necessary to make capital improvements and hire additional workers.

Decrease spending

After decades of promising voters “goodies” - the piper is coming to be paid. The third rail of politics is going to be

a hot plate for politicians. Entitlement spending will have to be revamped in order to ever have a chance of

Outlook 2013 Page 4

balancing the budget. All discretionary spending must be justified. One of the big problems is that politicians love

base-line budgeting. The elimination of baseline budgeting and sunset justification for every program must be

undertaken.

Pandora’s Box

Any serious attempt to solve the fiscal cliff rather than merely kicking the can down the road opens up a real

Pandora's Box. Reduced GDP growth under any serious spending cuts will mean that the economy will continue

to be under significant pressure and may cause a depression.

The continuation of the Federal Reserve stimulus programs will almost certainly minimize the dollar’s role as the

world's reserve currency. As the currency is debased further, the possibility of hyperinflation arises.

A combination of spending cuts and taxation increases also does not solve the problem caused by politicians

buying votes with programs that cannot be funded. The math is simply not workable.

The stated-cash debt of the U.S. is currently $16.274 trillion. According to Treasury Secretary Geithner, it will be

exceeded by the end of 2012. President Obama has proposed that Congress allow for an infinite expansion of the

U.S. stated-cash debt. However, the real problem lies in the GAAP debt that exceeds $85 trillion.

Not only is the U.S. facing a Pandora’s Box dilemma but the Pied Piper is about to come calling.

Demographics is Changing the Face of the U.S.

Politicians have made promises but have failed to understand the consequences of demographics on the costs. As

of the 2010 U.S. Census the population of the United States was 308 million people of that approximately 72.4%

were white or European Americans. The diversity of the US population is shown in Figure 5.

Figure 5 - Diversity of the U.S. population

Outlook 2013 Page 5

In the 2010 Census, 83.6% were neither Hispanic nor Latino. The Hispanic or Latino ethnic as a group was about

16.4% of the population as shown in Figure 6.

Figure 6 - Further classification of U.S. population

As people live longer because of increased nutrition and healthcare advances, the number of people over 65 years

of age who are the primary beneficiaries of the Social Security program, the Medicare program and the Medicaid

program grows as shown in Figure 7.

Figure 7 - Rising number of people over 65

The cumulative effect of the baby boomer generation reaching retirement and increasing life span can be clearly

seen in the following chart (Figure 8). The entitlement costs will continue to increase as the baby boomers retire

during the coming decade.

Outlook 2013 Page 6

Figure 8 - U.S. births from 1930

Social security in 2012 had a deficit of non-interest income relative to expenditures of about $49 billion in 2010

and $45 billion in 2011. The Social Security program ran a $47.8 billion deficit in fiscal 2012 as the program

brought in $725.429 billion in cash and paid $773.247 for benefits and overhead expenses, according to official

data published by Social Security Administration.

The Social Security trustees projected that the deficit will average about $66 billion between 2012 and 2018

before rising steeply as the number of beneficiaries grows at a substantially faster rate than the number of

covered workers.

Congress has tapped the Social Security trust fund to pay for current expenses since the President Johnson

administration. As a result, the IOU’s are simply worthless and the taxpayers will have to fund them out of

current earnings in the future.

The population pyramids (Figure 9 and Figure 10) show dramatically the problem facing the taxpayers and the

Social Security trustees going forward.

Outlook 2013 Page 7

.

Figure 9 - U.S. Population Pyramid - 2010

Figure 10 - U. S. Population Pyramid - 2020 Estimated

One of the most important factors in the changing demographic profile of the U.S. is the difference in the fertility

rates of various racial and ethnic groups. Birth rates are a reflection of changing moral and societal values. The

following chart from the National Center for Health Statistics illustrates recent changes (Figure 11).

Outlook 2013 Page 8

Figure 11 - U.S. Fertility Rates by Group

For a society and/or a race to be stable or grow requires a fertility rate of approximately 2.2. As the above chart

shows the non-Hispanic white, the Asian or Pacific Islander, and the Indian or Native Alaskan groups are not

meeting that requirement. As a result, they are not replacing themselves and will continue to become less of a

factor going forward.

The U.S. birthrate overall has now fallen to a record low (Figure 12). Non-Hispanic whites will become less than

50% of the total U.S. population by 2040 if the current trends persist.

Figure 12 - U.S. Birth Rate by Group

The National Institutes of Health reported that in 2009 there were 1.6 million births to unmarried women. Of

these births, 40.8% were to unmarried women. In 2012, it was estimated that 42% were to unmarried women. Of

those births, the birth rate of unmarried women aged 15-44 years was 47.6 per 1,000 unmarried women.

Moreover, the difference between various ethnic groups is significant as shown in the Figure 13.

Outlook 2013 Page 9

Figure 13 - U.S. Births to Unmarried women by group

The ultimate effect on the U.S. society will be profound. The U.S. demographic makeup will no longer be

dominated by white Europeans that came to America seeking personal freedom and with a work ethic that built

the country into the powerhouse which existed after World War II.

America found great comfort in the melting pot concept of its civilization. However, beginning in the 1960’s,

something changed … the rebirth of ethnic and nationalistic awareness. As a result, the overall effect has been

that the entrepreneurial work ethic has been watered down and an increasing percentage of the population has

demanded more from the government. The self-reliant drive for freedom espoused by the founding fathers has

waned.

The changing face of the U.S. can be seen in the following three charts from the Pew Research Center (Figures 14,

15 & 16).

Figure 14 - Change in marital classification in the U.S.

Outlook 2013 Page 10

Figure 15 - Marital status of parents

Figure 16 - Household Composition

Today, the number of people receiving benefits from the government has grown to the highest percentage in the

country’s history. The costs of entitlement programs such as Social Security and Medicaid, Medicare and many

others are largely responsible for the deficits at the federal level.

The changing face of the United States can be seen in the following graph (Figure 15) which plots since 2001 some

of the important changes. Food stamps have increased 158%. Thanks to the baby boomer generation, Medicaid

enrollment has increased 52%. However, government employment has been flat while the total private

enrollment has declined by 2%.


Figure 17 - Changing Face of America

If these trends continue, it will be impossible for the United States to avoid bankruptcy.

DEBT and CURRENCY

Inflation is a key component of any Keynesian economic theory. Inflation is nothing but a method for

governments to steal wealth from their citizens.

The Federal Reserve has a goal of a 2.5% inflation rate. Over the course of a decade, the Federal Reserve is really

saying that the government wants to steal 22.4% of its citizen’s wealth. A 4% target rate means that 33.5% is

taken and a 5% target rate confiscates 40.1% in a decade.

Figure 18 - Effect of various inflation rates over a decade


The Constitution, Money and the Federal Reserve System

The U.S. Constitution is not a list of what the federal government cannot do; it's a list of what the

federal government is authorized to do (what it can do). Unfortunately, this is often overlooked by

the public and politicians. The Constitution authorizes the federal government to regulate and coin money

as follows:

Article I, Section 8, Clause 5: The Congress shall have Power…To coin Money, regulate the Value

thereof, and of foreign Coin, and fix the Standard of Weights and Measures.

Over time Amendment IX and Amendment X to the Constitution have been often usurped by politicians and a

liberal judicial bench.

AMENDMENT IX RIGHTS RETAINED BY THE PEOPLE The enumeration in the Constitution, of certain rights, shall not be construed to deny or disparage others retained by the people.

AMENDMENT X POWERS RETAINED BY THE STATES AND THE PEOPLE The powers not delegated to the United States by the Constitution, nor prohibited by it to the States, are reserved to the States respectively, or to the people.

With the imposition of the Federal Reserve System on the U.S. in 1913, the growth of the federal debt (Figure 19)

has grown almost exponentially as fiat currency has gradually supplanted the currency of the U.S. Constitution.

Figure 19 - U.S. Stated Federal Debt since 1900

Basically, printing fiat currency is NOT one of the enumerated powers authorized by the Constitution.

Technically, the Federal Government doesn't print fiat currency; it borrows fiat currency from the Federal

Reserve. Since 1913, the value of the U.S. currency which was previously linked to the price of gold and

silver has fallen as the debt as risen as shown in Figure 20.


Figure 20 - The Ravages of Inflation

The combination of inflation and a government that spent more than its tax revenues has brought the U.S. to its

current economic dilemma. The U.S. position as the world’s reserve currency has managed to keep the financial

implications from the U.S. citizens until now. However, with the rise of many nations to reduce the role of the

U.S. currency the dominant position of the U.S. as the world’s reserve currency is waning.

As the dollar has been debased and the cash-based federal debt level has grown, there has been an interesting

correlation as shown in Figure 21.

Figure 21 - U.S. dollar value and U.S. Stated-cash Debt


Under Chairman Ben Bernanke, the Federal Reserve has been increasing the amount of money in the system

failing to recognize that the problem is not one of liquidity but rather one of insolvency. Various stimulus

programs have expanded the balance sheet of the Federal Reserve Bank beginning with the bailout and collapse

of two Bear Stearns hedge funds beginning in June 2007.

In August 2007, the Federal Reserve balance sheet had assets of about $870 billion of which $680 billion was in

U.S. Treasury securities. Since then it has expanded to almost $3 trillion in December 2012, a four-fold increase.

A chart showing the composition and growth of Federal Reserve assets is shown in Figure 22.

Figure 22 - Federal Reserve Assets

The Federal Reserve as seen in Figure 23 is the largest holder of U.S. Treasury paper today with almost $2.6 trillion

far surpassing China ($1.1 trillion) and Japan ($1.05 trillion).

Figure 23 - Largest holders of U.S. Government Debt


One of the unspoken reasons why the Federal Reserve’s holdings has increased is the fact that many governments

and investors no longer believe in the value and safety of U.S. government securities Figure 24 clearly shows the

declining appetite by foreign accounts since June 2009.

Figure 24 - Total Foreign Awards of Treasuries at Auction

Figure 25 shows a couple of assumptions relative to the Federal Reserves’ stimulus program as announced in the

December 2012 FOMC meeting. The FOMC is now proposing to buy $85 billion of various Treasury and mortgage

securities per month next year. In other words, they will pump another $1,020,000 million of additional liquidity

into the financial system in order to stimulate the economy.

The Federal Reserve oligarchs fail to understand that the real problem is insolvency, not a lack of liquidity. The

Fed’s stimulus is a perfect example of what Albert Einstein often said, it is simply:

Insanity … doing something over and over and expecting different results.

While President George W. Bush pushed open the stimulus dam just a little, the current flood belongs really to

Chairman Bernanke and President Obama.

By the end of the Obama administration, the balance sheet of the Federal Reserve may balloon to as much as $7

trillion. The relationship to the price of gold and the growth of the feds balance sheet since 2008 is also shown in

the chart. Whether this correlation since 2008 will remain going forward remains to be seen.


Figure 25 - Gold and the Expansion of the Fed's balance sheet

Gross Domestic Product

The U.S. economy is the largest in the world at about $16 trillion in 2012. The $1,020,000 million that the Federal

Reserve will create in 2013 is more than the Gross Domestic Product of all but the 15 largest countries in the

world. It is simply not possible for that amount of fiat currency to not have an impact on asset levels and

purchasing power. The investor will have to understand the difference.

The Ministry of Truth by changing its methodology of calculating the country’s gross domestic product has the

public believing that the recession is over and that the economy is growing albeit at a slow pace. Over the years,

seasonal, substitution and hedonic changes have been made to the GDP calculations.


For the past few quarters, the economy has been operating at about a 2% annual growth rate on a seasonally-

adjusted basis according to the Ministry of Truth.

However, if you use the methodology from 1980 as John Williams of Shadow Government Statistics does, the

economy remains in the recession that began in the 3rd quarter of 2004 prior to the Bear Stearns fiasco and

Lehman’s meltdown. Figure 26 shows the official Ministry of Truth data along with the Shadow Government

Statistics calculations of GDP.

Figure 26 - U.S. Gross Domestic Product since 1980

Jobs and Unemployment

The most important aspect of the nation’s GDP is the provision of meaningful jobs for its citizens despite the rise

of technology.

On a non-seasonal basis, total non-farm payrolls fell from 139,090,000 in November 2007 to a low of 129,569,000

in July 2010 or by about 10 million. The November 2012 jobs report showed that non-farm payrolls had only

increased to 135,069,000. As a result, the economy has about 4 million fewer jobs today than at the peak in

November 2007 as seen in Figure 27.


Figure 27 - Non-Farm Payrolls, NSA

Moreover, since then the U.S. population has increased. Hence, to reach full employment, total non-farm jobs

should be over 141 million. The critical point is that during Obama’s first term, the number of workers who left

the labor force was almost 10 million (Figure 28).

Figure 28 - Potential workers not in labor force, NSA

The Ministry of Truth suggests that through November 2012, the unemployment rate on a seasonally-adjusted

basis for the U.S. was 7.7%. However, once again, there are various ways for calculating the unemployment rate.

The official rate is the U3 rate while a broader rate which includes part-time and underemployed workers is the

U6 rate. However, if you use the methodology that was used during the 1930’s, you have John Williams of

Shadow Government Statistics numbers. All three series are shown in Figure 29.


Figure 29 - Unemployment rate, SA

Irrespective of which data stream you want to use, the recovery from the latest Ministry of Truth recession is the

slowest in recent history. Figure 30 shows the failure of the job market to recover to pre-2007 peak job levels.

Figure 30 - Job recoveries in recessions

Extended unemployment benefits may have had a significant impact on the inability of the economy to generate

jobs. Likewise, as extended unemployment benefits ran out, there was a large increase in the number of people

filing for disability benefits under social security. Of course, once on disability, an individual is no longer counted

in the workforce and seldom is taken off the rolls. Figure 31 shows that as the number of claimants lost their

extended benefit status, a significant number of them were added to the disability roles.


Figure 31 - Unemployment Claimants vs. Persons on Disability

The 900lb Gorilla in terms of the "fiscal cliff" is not the tax rate changes or spending cuts -- it's that EUC 2008

number. Approximately 2.1 million people will instantly lose their unemployment benefits on January 1st.

The real reason the official Ministry of Truth numbers are inaccurate is that both the employment population

ratio as well as the participation rate have been significantly reduced as shown in Figure 32.

Figure 32 - Employment Population Ratio and Participation Rate


Consumer Price Index

The Ministry of Truth plays the same games with the consumer price index as it does with other statistical series.

Joseph Goebbels said it:

“If you tell a lie big enough and keep repeating it, people will eventually come to believe it. The lie can be

maintained only for such time as the State can shield the people from the political, economic and/or

military consequences of the lie. It thus becomes vitally important for the State to use all of its powers to

repress dissent, for the truth is the mortal enemy of the lie, and thus by extension, the truth is the

greatest enemy of the State.”

Of course, that is what actually happens when you present a series that has been changed 18 times since June

1996 and represent it as being indicative of reality.

According to the Ministry of Truth, the consumer price index is relatively benign running at a 1.8% annual increase

through November 2012. However, according to John Williams of Shadow Government Statistics, the consumer

price index is running at a 9.4% annual rate. A comparison of the rates since 1980 is shown in Figure 33.

Figure 33 - Annual Consumer Inflation


The Fiscal Cliff

Thanks to the inability of Congress to solve the financial and taxation problems facing the U.S., we are now facing

the so-called “Fiscal Cliff”. If nothing happens, there are several things that will affect every taxpayer and many

government programs. Among these are:

• Higher long-term Capital Gains Taxes (15%) to (20%).

• Higher Dividend Taxes (15%) to (39.6%).

• AMT taxes increasing & 22 million more taxpayers covered.

• Estate tax threshold could be lowered to $1 million from $5 million creating major financial problems for

every moderately successful small business and most ranchers and farmers.

• Possible loss of Mortgage Interest deduction might impact the real estate market negatively.

• Possible loss of the tax-free municipal interest advantage which will increase costs to most states and

municipalities.

• Means testing for various government benefits including social security, Medicare and Medicaid.

The sectors and groups which may benefit if we do not go over the fiscal cliff are:

• Specialized real estate investment trusts

o Health care REIT

• `International Storage REITs

• Consumer discretionary

o Autos

o Clothes

o Restaurants

• High-quality tax-free municipal bonds

The sectors and groups which may not benefit if we go over the fiscal cliff are:

• Defense Budget

o Procurement programs – BEAV, DGI, GEOY, PCP

o R&D programs

o Defense industry stocks including aerospace

• Health care providers

o Hospitals, HCA, THC, UHS

o Long-term care facilities -CSU, SRZ

o Basic research funds to National Institutes of Health

• Agriculture – BG, SYT

• Utilities

• Oil prices

• Commodities

• Bonds


• Alternate energy programs

• Dividend ETF’s

Is there a Way Out?

To solve the buildup of national debt, policy-makers and the Federal Reserve have few choices. The current

discussion in Congress revolves around raising taxes, cutting spending or doing both.

With the FY 2013 federal deficit projected at $1.258 trillion, it is simply impossible to raise taxes high enough on

the so-called rich to eliminate the deficit. In FY 2011, there were about 433,000 individuals with income in excess

of $1 million. The average income was $2,906,843. Confiscating $1,906,843 on average from each taxpayer

would only result in the Treasury receiving $825,663,019,000.

According to the Internal Revenue Service, if the tax rate on all individual income over $1 million was 100%, the

Treasury would only receive about $825 billion leaving a $433 billion deficit. Of course, if this were to occur, the

exodus ala France would be devastating to the U.S. economy.

Likewise, raising taxes on corporate profits which in 2012 are running at about $1.3 trillion would also be counter-

productive as the capital to invest in new industries and jobs would simply wither away.

Of course, there is the unthinkable … the risk of hyper-inflation.

Sectors and Groups to Watch

In an inflationary environment, some sectors might benefit including:

• Energy

• Industrial Materials

• Consumer Staples

o Food

o Tobacco Products

o Alcoholic Beverages – ABVC, BFA

• Financial Services

• Real Estate

• Pawn Shops


Things to Watch For!

While the fiscal cliff and the federal cash-based debt ceiling may be the focus for current thought, a broader view

will be needed to get clues about the economy in 2013. There are certainly potential flash points on the horizon

which could change any economic outlook. Some of these are:

• Possible clash between Israel and its Islamic neighbors.

• A disruption of the oil supply through the Hormuz strait.

• A confrontation between China and Japan over a few insignificant islands in the Pacific Basin ushering in

armed hostilities between the U.S. And China.

• The downfall of the Pakistan government and its nuclear weapons falling into terrorist hands.

• A default in the Eurozone by Greece, Spain and/or Italy.

• A loss of U.S. reserve currency status.

However, the growing shortage of food throughout the world could be the “black swan” event that pushes all of

the above problems into the background.

Food Supply

With a rising world-wide population and carry-overs of agricultural commodities at record low levels, production

in 2013 will be critical as continued drought reduces yields. The U.S. is the bread-basket of the world and the

world food supply is near critical levels.

Not only is the U.S. carryover for these agricultural supplies near critical levels on an absolute basis but also on a

world-wide per capita basis. Therefore, the 2013 commodity crop yields will be a major consideration going

forward. Hungry people make very interesting decisions as Pavlov’s rules come into play.

Growing conditions in South America are also currently facing stress from a combination of drought and excessive

moisture in other areas. The situation is much the same in Europe, Asia and Africa.

The crop consultant for Pro Farmer, Dr. Michael Cordonnier, has been reducing his estimate for the 2013 crop for

soybeans and corn for Brazil and Argentina each week during December.

Statistical tables showing the recent trends of the major U.S. agricultural commodities are shown in the next three

tables (Figures 34, 35 & 36).


Figure 34 - U.S. Wheat Supply and Use

Figure 35 - U.S. Soybean Supply and Use


Figure 36 - U.S. Corn Supply and Usage

Drought conditions in the U.S. have actually worsened during the past year as shown in the following chart (Figure

37). The corn and soybean yields that were obtained during the 2012 crop year depleted significant sub-surface

moisture in the Midwest corn belt. Failure to receive above-average snowfall and rains going forward into 2013

will reduce agricultural commodity overall yields further in 2013.

Figure 37 - USDA Drought Monitor - November 2011 and November 2012

Recent weakness in the price of wheat and corn can be traced to reduced demand from China. However,

agricultural commodity prices will probably not drop materially from the current levels as shown in the following

charts (Figures 38, 39 & 40).


Figure 38 - Wheat Prices

Figure 39 - Corn Prices


Figure 40 - Soybean Prices

Bond and Equity Markets

The old adage that the “stock market knows everything” probably had some usefulness decades ago. Today, with

the Working Group on Capital Markets and a financial system flooded with liquidity, it might have less relevance.

Following the financial meltdown of Bear Stearns and Lehman, the financial markets have seen a significant loss of

confidence by “Main Street.” Mortgage fraud, LIBOR price-fixing, the collapse of MF Global and Peregrine

Financial Group further eroded confidence.

The lack of any serious felony convictions and only token fines in non-felony situations by the major banking

institutions is seen by many as simply a very corrupt system in which the small investor does not want to play any

longer.

The additional requirements of Dodd-Frank along with other regulators including the FDIC and the SEC have

caused many banking institutions to add volumes of paperwork to simple transactions. Further, the Patriot Act

and its off-spring have also eliminated almost all aspects of privacy to transactions.

Investing is a very different process today with computers making decisions using algorithms operating at the

speed of light. The small investor is at a significant disadvantage and as a result, their confidence in the system

continues to decline.

The comparison of today’s DJIA index with other time frames is interesting. If the relationship holds going

forward, the markets are in for some tough sledding in 2013 (Figure 41).


Figure 41 - Comparison of Various Market Rallies

The Simple Timing Indicator (STI) has been around almost as long as the Dow Theory. The STI is basically an 8 x 20

Simple Moving Average of the NASDAQ and S&P 500 daily closing prices. It has a pretty fair record as an

intermediate trend indicator.

The STI is now suggesting that a change in direction from a positive trend to a negative trend could shortly happen

as shown in the following charts for the NASDAQ (Figure 42) and the S&P 500 (Figure 43).

Figure 42 - NASDAQ with STI indicator


Figure 43 - S&P 500 with STI indicator

With all the risks associated with the Fiscal Cliff, it is almost impossible to make a prediction about the direction of

the market. However, if the stock market indices do move higher, an investor must also take into consideration

whether the rise is a result of true growth or simply a result of the loss of the dollar’s purchasing power.

The impact of the Federal Reserve on interest rates has in effect stolen wealth from savers and the holders of

bonds by paying artificial historic low rates on bonds. There are those who believe that the Federal Reserve can

continue to keep rates low forgetting that throughout history the currency manipulators have always ended up

being crushed.

The yield on the 10 year U.S. Treasury note reached an all-time low of 1.394% in early August 2012 (Figure 44).

Only by purchasing in excess of 70% of all U.S. Treasury securities during FY 2012 by simply adding more zero’s to

the computer, did the Federal Reserve manage to keep interest rates down.

Figure 44 - Yield on the 10 year U.S. Treasury Note


If an investor can hold a position for a period of time, it might be rewarding to bet that the yield on the 10 year

U.S. Treasury note will increase going forward.

Remember that there is always opportunity to make money … the question is whether to be long or short!

Conclusion

The inability of politicians and economists to understand that the demographic time-bomb cannot be defused is

creating problems for the American economy and the electorate.

Americans will muddle-through the financial cliff mess but it may well take a financial collapse and a few years to

turn the corner. Some of the solutions will be found after much discussion and compromise between those

receiving benefits and those paying for them.

In my opinion, the country envisioned by our founders is and will continue to be changed … the democratic

republic may not survive. However, there are certain things that will be changed including:

• Obamacare will be revised and the drug monopoly will be dismantled.

• Insurance and medical costs will be contained and access restricted.

• A single payer system may evolve.

• Tax hikes on all taxpayers will be enacted. Most deductions will be eliminated. The cost basis of assets

will be indexed for inflation.

• Increased regulations of a “Big Brother knows best” state will dampen the entrepreneurial spirit.

• The Big Banks will be broken up and “Too Big To Fail” will disappear.

• Base-line budgeting will be modified and most government programs will face sunset reviews.

• Immigration policies will be changed to encourage skilled and talented people to gain citizenship without

quotas.

• Social Security, Medicare and Medicaid will be changed … means testing will be imposed as well as the

age for eligibility will be increased.

• Disability programs, access to food stamps, aid-to-dependent children and other welfare programs will be

scrutinized and changed.

• The role of the military/industrial complex in the economy will be downsized.

The current state of affairs is really not the fault of the politicians. It is really the fault of the electorate as they

failed to elect office-seekers who were true problem solvers. The results of the last election have changed the

dynamics of the country, perhaps, forever.

Whether the country can survive as a constitutional republic is another question!

Eventually, the electorate may realize that the law of unintended consequences changed the cost of many

programs. Whether this will occur before or after a major financial disruption remains to be seen. The electorate

may then demand that many governmental programs be revised or discarded as being ineffective.

Eventually, the politicians and bureaucrats will discover that you can’t borrow your way out of a debt crisis,

whether you are a family or a nation.


Mathematics will eventually prevail … it is just a matter of time.

The U.S. GAAP federal debt was over $80 trillion as of September 30, 2011 and the U.S. Gross Domestic Product,

or GDP, is only $15.1 trillion. The numbers simply do not work!

The basic problem is one of insolvency and not liquidity. You can’t borrow your way out of a debt crisis,

whether you are a family or a nation.

However, investors should also remember … there is always opportunity … you just have to be patient and

decide whether to be long or short!

But then - 'Tis Only My Opinion!

Fred Richards December 30, 2012

www.adrich.com

www.strategicinvesting.com

Corruptisima republica plurimae leges. [The more corrupt a republic, the more laws.] -- Tacitus, Annals III 27

This issue of 'Tis Only My Opinion was copyrighted by Strategic Investing in 2012. All rights reserved. Quotation with attribution is encouraged.

'Tis Only My Opinion is intended to provoke thinking, then dialogue among our readers.

'Tis Only My Opinion! Archive Menu

Last updated - December 30, 2012

Documents

Tis Only My Opinion! · 2012. 12. 30. · A combination of spending cuts and taxation increases also does not solve the problem caused by politicians buying votes with programs that