Wednesday, April 28, 2010

Two Simple Thoughts

If the economy is going to lag, then seeking dividends is the only sensible way to allocate capital.

If employment stays low, then interest rates will, too. That's how the Fed works. Thus, assets will re-inflate (cheap money is too tempting to pass up), which will set the stage for yet another burst bubble (a bank failure in Austria was the spark that ignited the Great Depression). If that's the case, the only risk-approved way to allocate capital is to invest in blue chip companies that have the power and resilience to weather another broad decline. If those companies have been shown to be favored by the government (ahem, big finance, automobiles, GE), so much the safer, right?

And one less simple thought. The economy has found its footing. The housing market has found its bottom nationwide (more or less, regions and neighborhoods have decoupled, which is a sign of fundamental strength). Greece and the other PIGS will find a bailout. China will allow its currency to float a bit. These are all very good signs, but the question remains as to whether the skeleton has healed. A human body in traction is fragile, even if you dress it in Armani. I still believe that America faces a necessary step backwards in its standard of living. My reasons for this are not motivated by envy of the uber-rich, or a loathing of materialism. My gut math just doesn't add up. I can't help but think that the American consumer has been the victim of a macro version of a pump-and-dump scheme. Multinational corporations invest in facilities where labor is cheap, then sell the manufactured crap to Americans. Once the cost of money stabilizes (in part the dollar's relative strength is a result of a lack of confidence in other people's money -- increasing lack of trust in the American system and the American fisc will bring the dollar down), the dollar will find itself extremely overbought. Then multinationals will dump their junk on the next round of suckers (India, Brasil, China?).

And what will Americans do for a living? Build more houses?



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