Outside the Box

Out On A Limb: An Investor’s Guide to X-treme Monetary and Fiscal Conditions

March 8, 2013

I landed in Buenos Aires early this morning and have a day layover before heading off to Cafayate; but it is time to send you this weekend’s Outside the Box, and what a wonderful, powerful piece it is. I read John Hussman’s latest on the way down and had to review it several times. There is just so much meat here. And more than his usual quota of those wonderful graphs he comes up with. Did you know there is a 94% correlation between the price of beer in Iceland and the S&P 500? This is a teaching moment we must heed!

I will tease you with a few paragraphs:

Let’s be clear about what Bernanke is saying: “[A ‘deferred asset’] is an asset in the sense that it embodies a future economic benefit [to the Fed] that will be realized as a reduction of future cash outflows [to the public].

In effect, to the extent that the Fed experiences losses because it overpaid for Treasury securities that it bought from primary dealers (comprising the too-big-to-fail banks and Wall Street investment firms), the U.S. public will pay for those losses without any need for Congressional legislation. This doesn’t mean that the Fed will refrain from continued quantitative easing, but we should all understand how this policy works, and the risks and potential costs that it quietly imposes on the public.


Another assertion that makes me wince is the idea that “since 2009, there has been an 85% correlation between the monetary base and the S&P 500.” This is a distressing use of statistics, because two data series will always have an extremely high correlation if both series capture an uncorrected diagonal move. For example, it is equally true that since 2009, there has been a 94% correlation between beer prices in Iceland and the S&P 500. That’s not to dismiss the enormous effect that Fed policy has had on the markets in recent years, but the implication of an “85% correlation” is that if one increases, the other is sure to increase as well. There is little basis in the data for that belief. The exception is that when stocks are down significantly from their level of 6-months prior, monetary easing is often eventually capable of boosting confidence and reversing recent spikes in risk premiums.”

Hussman also leads us through four economic policy choices and outlines the outcome for each choice. You can make your own decision about what your country is likely to do.

I will be with John in about a month (April 5) in Sonoma, where we will both speak at Mike Shedlock’s fundraising event. John is graciously matching your conference fee, and it all goes to ALS research. You can find out more at Mish’s Conference. And for the two people left out there who don’t know John Hussman, he runs the Hussman Funds and writes his brilliant commentary at www.hussmanfunds.com.

 As I left last night the movers were packing up the last boxes to take to storage. My staff members Mary and Shannon have been supervising the move while I just keep working and every now and then agree to throw away more accumulated material (I won’t say junk!). I am going to take advantage of a perfect day here in BA and do a little touristy browsing. It has been years since I was in the cemetery here in the Recoleta, and it is just a block away. I fly out early tomorrow to Salta, meet up with my old friend Tony Sagami, and then drive up the magnificently scenic canyon to Cafayate.

I think we will somehow make it to Bill Bonner’s Estancia early next week, along with Doug Casey, David Galland, and Olivier Garret. It’s way back in the Andes on about 200,000 acres of god-forsaken high desert. I am told it is breathtaking and have been wanting to get there for a long time. It may turn into the longest time I have been without internet in a decade. We will see what the withdrawal symptoms are like. Though I have to confess, I do have close to a thousand pages of miscellaneous reading on my iPad, not to mention 20 books. I think I can cope. 

Have a great week; I know I will. 

Your letting it all soak in analyst,

John Mauldin, Editor
Outside the Box

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Out On A Limb: An Investor’s Guide to X-treme Monetary and Fiscal Conditions

By John P. Hussman, Ph.D

Government intervention in the U.S. economy is approaching the point where probable long-term costs exceed short-term benefits – straining to maintain the pace of extraordinary fiscal and monetary measures that have repeatedly nudged the U.S. economy from the border between new recession and tepid growth for three years. U.S. Treasury debt now exceeds 105%…

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Mike Fahey

April 18, 2013, 11:19 p.m.

Well reasoned article, but how to achieve the desired solution? Carrot and stick, it seems to me.  The incentives have come and gone, but the stick has not been applied at all.  Put a limit of 3 years on retained earnings before they automatically become taxable, and also significantly all M&A activity, including fees.  Then offer the carrots of early writeoffs, job growth tax credits, etc.  There has to be a risk of loss of capital from just sitting on it to force companies to take risks, which is what capitalism is supposed to be about, not playing Monopoly.

Frances Shepperdson

March 12, 2013, 11:07 a.m.

Damned if you do, damned if you don"t, in all economic theories held dear at the moment.
Take a serious look at Cafayete, it looks like the future to me.

Dallas Kennedy

March 10, 2013, 11:15 p.m.

An excellent piece, as Hussman’s pieces always are. The gross investment equation is related to the equation that Mauldin presented in a piece of his, the relationship of changes in the private balance sheet, the public balance sheet, and the net external blanace.

The solid, and always defensible, way to offset the tendency to save more is an increase of domestic investment. As Hussman emphasizes, this means investment in the real economy, not financial leverage. A nation’s wealth is its productive powers; its income is the stream of goods and services that those productive powers generate.

Unfortunately, we have an exceptionally hostile environment right now toward investment, growth, and jobs. The bias is towards consumption, stagnation, and dependency. The last two elections have made very clear what much of the aging and hopeless American public wants. But the drift has been evident since the end of the 1990s.

Ralph Kehle

March 9, 2013, 2:34 p.m.

How many in the Council of Economic Advisors would agree with the analysis and conclusions of Hussman’s article?  In addition to Mr. Hayes’ excellent suggestion, I can think of many other initiatives.  For example, allowing the immediate write-off of all capital investment, a proposal I made to the late Jack Kemp which passed the smell text of the balance of his advisors during his last campaign (with a 5 year phase-in).  Threats to eliminate deductions related to oil/gas drilling and production go in the opposite direction and will reduce an activity that is generating jobs, real wealth and energy security.  There are dozens of other areas where the government impedes rather than stimulates the needed investments.

Greg Froning 51842

March 8, 2013, 11:03 p.m.

I cannot remember reading a more well thought out piece that so succinctly defines our many problems while also recommending the most sensible solutions. Outstanding. As an Over My Shoulder subscriber, I look forward to logging on as I know I will likely be entertained and will always be educated.