Tuesday, August 25, 2009

Cash for Clunkers -- The Investment Fallacy

The cash for clunkers program is the height of liberal group think gone wild. Our deeply in debt government is borrowing money to buy vehicles that still have economic value only to destroy them. The program is a modern version of the broken window fallacy; the belief that an economy is stimulated by the destruction of property. Of course, if a hurricane destroys houses, many of them will be rebuilt and many a home builder will make good profits. This is nothing but a transfer of wealth from one person to another. This is the second bailout for our auto industry this year. Here is a video of a vehicle, one with new tires for heaven's sake, being destroyed.

In other craziness, the draft of the health reform bill is a complicated mess of over 1,000 pages. Hopefully, independently minded citizens will vote against those who support government gone wild. The good news is that the people are showing that they will vote against the supporters of this madness.

The Investment Fallacy

From the investment point of view, the current idiocy is wonderful. Markets historically climb walls of worry, during a time of discontinuity. Americans are upset with the massive waste they are seeing to the point of taking their eye off the investment ball. We have entered a new and powerful business cycle. A time of low interest rates and high profit margins is leading to a share price recovery and a pending economic boom.

A couple of weeks ago, a fellow said he sees no signs of economic recovery. This is a bit like not being able to see the wonderful views from the mountaintop while still on the valley floor. There is no place to go but up! The signs are everywhere. Today's best example is the fact that the oil to natural gas ratio has zoomed right past the extreme peak it reached as the economy started its recovery from the last real estate recession, the one in 1990-91.

Economically, what does it mean that the price of oil relative to the price of natural gas is off the chart? Who cares?!

I am reminded of the old joke in which the patient says, "Doc, it hurts when I raise my arm" and the Doc says, "Then don't raise your arm"! There is much I could say about the slack in the industrials, materials and mining sectors demonstrated by the low demand for natural gas (a slow down in fertilizer being made to throw on valuable crop land to grow corn to make a poor substitute for gasoline, for example), but the important point is that such a sharp peak in oil versus natural gas portends a boom in the high tech markets.

Another great sign of pending recovery is the rapidly rising prices of mortgage debt. The easy way to see this increase is to notice the price of Fannie Mae and Freddie Mack shares. Of course, the rising value of mortgages is great news for the banks that hold large amounts of mortgages. They will report these gains as pure profit, having written down the mortgages to the previous lows.

So, don't get caught-up in a powerful pity party. Yes, our two party political system is producing the results predicted by George Washington's prescient farewell address. We have serious problems that need to be fixed. What we currently have is a classic case of not defining the problem before trying to fix it. We are having a national debate on health care when we should be having a national debate on how to fix the business-government partnership of greed and its attendant corruption.

The fat cats are making hay while the pity party participants are reading about home foreclosures but not stepping up to the auction to get the best deals they will see in their entire lives! Goldman Sachs is making billions in the stock market while the pity party participants are sticking what little liquid cash they have into a lock-box called the 401-K!


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