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Three Competing Theories

July 18, 2011

Long-time readers are familiar with the wisdom of Lacy Hunt. He is a regular feature of Outside the Box. He writes a quarterly piece for Hoisington Asset Management in Austin, and this is one of his better ones. Read it twice.

“While the massive budget deficits and the buildup of federal debt, if not addressed, may someday result in a substantial increase in interest rates, that day is not at hand. The U.S. economy is too fragile to sustain higher interest rates except for interim, transitory periods that have been recurring in recent years. As it stands, deflation is our largest concern …”

As I write, Europe is starting to unravel. This is going to be much worse than 2008, at least as far as Europe is concerned, and odds are high that it will be very bad for the US. And the markets are still acting as if the problems in Europe can be resolved. The recent bank stress tests were a joke, as they assumed no Greek or Irish defaults. This simply can’t be. There is a banking crisis of massive proportions in our future.

As Lacy notes, we are testing the economic theories of three (I think von Mises should be added) dead white guys. The dominant theories are being shown to be wrong. The sooner we acknowledge that the better. But don’t hold your breath waiting for the major economic schools to come to grips with their failure.

This is a real problem, and there is just no way to avoid it. I wish I had more positive things to say.

Your trying to figure this out analyst,

John Mauldin, Editor
Outside the Box

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Three Competing Theories

The three competing theories for economic contractions are: 1) the Keynesian, 2) the Friedmanite, and 3) the Fisherian. The Keynesian view is that normal economic contractions are caused by an insufficiency of aggregate demand (or total spending). This problem is to be solved by deficit spending. The Friedmanite view, one shared by our current Federal Reserve Chairman, is that protracted economic slumps are also caused by an insufficiency of aggregate demand, but are preventable or ameliorated by increasing the money stock. Both economic theories are consistent with the widely-held view that the economy experiences three to seven years of growth, followed by one to two years of decline. The slumps are worrisome, but not too daunting since two years lapse fairly quickly and then the economy is off to the races again. This normal business cycle framework has been the standard since World War II until now.

The Fisherian theory is that an excessive buildup of debt relative to GDP is the key factor in causing major contractions, as opposed to the typical business cycle slumps (Chart 1). Only a time consuming and difficult process of deleveraging corrects this economic circumstance. Symptoms of the excessive indebtedness are: weakness in aggregate demand; slow money growth; falling velocity; sustained underperformance of the labor markets; low levels of confidence; and possibly even a decline in the birth rate and household formation. In other words, the normal business cycle models of the Keynesian and Friedmanite theories are overwhelmed in such extreme, overindebted situations.

Economists are aware of Fisher’s views, but until the onset of the present economic circumstances they have been largely ignored, even though Friedman called Irving Fisher “America’s greatest economist.” Part of that oversight results from the fact that Fisher’s position was not spelled out in one complete work. The bulk of his ideas are reflected in an article and book written in 1933, but he made important revisions in a series of letters later written to FDR, which currently reside in the Presidential Library at Hyde Park. In 1933, Fisher held out some hope that fiscal policy might be helpful in dealing with excessive debt, but within several years he had completely rejected the Keynesian view. By 1940, Fisher had firmly stated to FDR in several letters that government spending of borrowed funds was counterproductive to stimulating economic growth. Significantly, by 2011, Fisher’s seven decade-old ideas have been supported by thorough, comprehensive and robust econometric and empirical analysis. It is now evident that the actions of monetary and fiscal authorities since 2008 have made economic conditions worse, just as Fisher suggested. In other words, we are painfully re-learning a lesson that a truly great economist gave us a road map to avoid.

High Dollar Policy Failures

If governmental financial transactions, advocated by following Keynesian and Friedmanite policies, were the keys to prosperity, the U.S. should be in an unparalleled boom. For instance, on the monetary side, since 2007 excess reserves of depository institutions have increased from $1.8 billion to more than $1.5 trillion, an amazing gain of more than 83,000%. The fiscal response is equally unparalleled. Combining 2009, 2010, and 2011 the U.S. budget deficit will total 28.3% of GDP, the highest three year total since World War II, and up from 6.3% of GDP in the three years ending 2008 (Chart 2). Importantly, the massive advance in the deficit was primarily due to a surge in outlays that was more than double the fall in revenues. In the current three years, spending was an astounding $2.2 trillion more than in the three years ending 2008. The fiscal and monetary actions combined have had no meaningful impact on improving the standard of living of the average American family (Chart 3).

Why Has Fiscal Policy Failed?

Four considerations, all drawn from contemporary economic analysis, explain the underlying cause of the fiscal policy failures and clearly show that continuing to repeat such programs will generate even more unsatisfactory results.

First, the government expenditure multiplier is zero, and quite possibly slightly negative. Depending on the initial conditions, deficit spending can increase economic activity, but only for a mere three to five quarters. Within twelve quarters these early gains are fully reversed. Thus, if the economy starts with $15 trillion in GDP and deficit spending is increased, then it will end with $15 trillion of GDP within three years. Reflecting the deficit spending, the government sector takes over a larger share of economic activity, reducing the private sector share while saddling the same-sized economy with a higher level of indebtedness. However, the resources to cover the interest expense associated with the rise in debt must be generated from a diminished private sector.

The problem is not the size or the timing of the actions, but the inherent flaws in the approach. Indeed, rigorous, independently produced statistical studies by Robert Barro of Harvard University in the United States and Roberto Perotti of Universita Bocconi in Italy were uncannily accurate in suggesting the path of failure that these programs would take. From 1955 to 2006, Dr. Barro estimates the expenditure multiplier at -0.1 (p. 206 Macroeconomics: A Modern Approach, Southwestern 2009). Perotti, a MIT Ph.D., found a low but positive multiplier in the U.S., U.K., Japan, Germany, Australia and Canada. Worsening the problem, most of those who took college economic courses assume that propositions learned decades ago are still valid. Unfortunately, new tests and the availability of more and longer streams of macroeconomic statistics have rendered many of the well-schooled propositions of the past five decades invalid.Second, temporary tax cuts enlarge budget deficits but they do not change behavior, providing no meaningful boost to economic activity. Transitory tax cuts have been enacted under Presidents Ford, Carter, Bush (41), Bush (43), and Obama. No meaningful difference in the outcome was observable, regardless of whether transitory tax cuts were in the form of rebate checks, earned income tax credits, or short-term changes in tax rates like the one year reduction in FICA taxes or the two year extension of the 2001/2003 tax cuts, both of which are currently in effect. Long run studies of consumer spending habits (the consumption function in academic circles), as well as detailed examinations of these separate episodes indicate that such efforts are a waste of borrowed funds. This is because while consumers will respond strongly to permanent or sustained increases in income, the response to transitory gains is insignificant. The cut in FICA taxes appears to have been a futile effort since there was no acceleration in economic growth, and the unfunded liabilities in the Social Security system are now even greater. Cutting payroll taxes for a year, as former Treasury Secretary Larry Summers advocates, would be no more successful, while further adding to the unfunded Social Security liability.

Third, when private sector tax rates are changed permanently behavior is altered, and according to the best evidence available, the response of the private sector is quite large. For permanent tax changes, the tax multiplier is between minus 2 and minus 3. If higher taxes are used to redress the deficit because of the seemingly rational need to have “shared sacrifice,” growth will be impaired even further. Thus, attempting to reduce the budget deficit by hiking marginal tax rates will be counterproductive since economic activity will deteriorate and revenues will be lost.

Fourth, existing programs suggest that more of the federal budget will go for basic income maintenance and interest expense; therefore the government expenditure multiplier may become more negative. Positive multiplier expenditures such as military hardware, space exploration and infrastructure programs will all become a smaller part of future budgets. Even the multiplier of such meritorious programs may be much less than anticipated since the expended funds for such programs have to come from somewhere, and it is never possible to identify precisely what private sector program will be sacrificed so that more funds would be available for federal spending. Clearly, some programs like the first-time home buyers program and cash for clunkers had highly negative side effects. Both programs only further exacerbated the problems in the auto and housing markets.

Permanent Fiscal Solutions Versus Quick Fixes

While the fiscal steps have been debilitating, new programs could improve business considerably over time. A federal tax code with rates of 15%, 20%, and 25% for both the household and corporate sectors, but without deductions, would serve several worthwhile purposes. Such measures would be revenue neutral, but at the same time they would lower the marginal tax rates permanently which, over time, would provide a considerable boost for economic growth. Moreover, the private sector would save $400-$500 billion of tax preparation expenses that could then be channeled to other uses. Admittedly, the path to such changes would entail a long and difficult political debate.

In the 2011 IMF working paper, “An Analysis of U.S. Fiscal and Generational Imbalances,” authored by Nicoletta Batini, Giovanni Callegari, and Julia Guerreiro, the options to correct the problem are identified thoroughly. These authors enumerate the ways to close the gaps under different scenarios in what they call “Menu of Pain.” Rather than lacking the knowledge to improve the economic situation, there may not be the political will to deal with the problems because of their enormity and the huge numbers of Americans who would be required to share in the sacrifices. If this assessment is correct, the U.S. government will not act until a major emergency arises.

The Debt Bomb

The two major U.S. government debt to GDP statistics commonly referred to in budget discussions are shown in Chart 4. The first is the ratio of U.S. debt held by the public to GDP, which excludes federal debt held in various government entities such as Social Security and the Federal Reserve banks. The second is the ratio of gross U.S. debt to GDP. Historically, the debt held by the public ratio was the more useful, but now the gross debt ratio is more relevant. By 2015, according to the CBO, debt held by the public will jump to more than 75% of GDP, while gross debt will exceed 104% of GDP. The CBO figures may be too optimistic. The IMF estimates that gross debt will amount to 110% of GDP by 2015, and others have even higher numbers. The gross debt ratio, however, does not capture the magnitude of the approaching problem.

According to a recent report in USA Today, the unfunded liabilities in the Social Security and Medicare programs now total $59.1 trillion. This amounts to almost four times current GDP. Modern accrual accounting requires corporations to record expenses at the time the liability is incurred, even when payment will be made later. But this is not the case for the federal government. By modern private sector accounting standards, gross federal debt is already 500% of GDP.

Federal Debt – the End Game

Economic research on U.S. Treasury credit worthiness is of significant interest to Hoisington Management because it is possible that if nothing is politically accomplished in reducing our long-term debt liabilities, a large risk premium could be established in Treasury securities. It is not possible to predict whether this will occur in five years, twenty years, or longer. However, John H. Cochrane of the University of Chicago, and currently President of the American Finance Association, spells out the end game if the deficits and debt are not contained. Dr. Cochrane observes that real, or inflation adjusted Federal government debt, plus the liabilities of the Federal Reserve (which are just another form of federal debt) must be equal to the present value of future government surpluses (Table 1). In plain language, you owe a certain amount of money so your income in the future should equal that figure on a present value basis. Federal Reserve liabilities are also known as high powered money (the sum of deposits at the Federal Reserve banks plus currency in circulation). This proposition is critical because it means that when the Fed buys government securities it has merely substituted one type of federal debt for another. In quantitative easing (QE), the Fed purchases Treasury securities with an average maturity of about four years and replaces it with federal obligations with zero maturity. Federal Reserve deposits and currency are due on demand, and as economists say, they are zero maturity money. Thus, QE shortens the maturity of the federal debt but, as Dr. Cochrane points out, the operation has merely substituted one type for another. The sum of the two different types of liabilities must equal the present value of future governmental surpluses since both the Treasury and Fed are components of the federal government.

Calculating the present value of the stream of future surpluses requires federal outlays and expenditures and the discount rate at which the dollar value of that stream is expressed in today’s real dollars. The formula where all future liabilities must equal future surpluses must always hold. At the point that investors lose confidence in the dollar stream of future surpluses, the interest rate, or discount rate on that stream, will soar in order to keep the present value equation in balance. The surge in the discount rate is likely to result in a severe crisis like those that occurred in the past and that currently exist in Europe. In such a crisis the U.S. will be forced to make extremely difficult decisions in a very short period of time, possibly without much input from the political will of American citizens. Dr. Cochrane does not believe this point is at hand, and observes that Japan has avoided this day of reckoning for two decades. The U.S. may also be able to avoid this, but not if the deficits and debt problem are not corrected. Our interpretation of Dr. Cochrane’s analysis is that, although the U.S. has time, not to urgently redress these imbalances is irresponsible and begs for an eventual crisis.

Monetary Policy’s Numerous Misadventures

Fed policy has aggravated, rather than ameliorated our basic problems because it has encouraged an unwise and debilitating buildup of debt, while also pursuing short term policies that have increased inflation, weakened economic growth, and decreased the standard of living. No objective evidence exists that QE has improved economic conditions. Even before the Japanese earthquake and weather related problems arose this spring, real economic growth was worse than prior to QE2. Some measures of nominal activity improved, but these gains were more than eroded by the higher commodity inflation. Clearly, the median standard of living has deteriorated.

When the Fed diverts attention with QE, it is possible to lose sight of the important deficit spending, tax and regulatory barriers that are restraining the economy’s ability to grow. Raising expectations that Fed actions can make things better is a disservice since these hopes are bound to be dashed. There is ample evidence that such a treadmill serves to make consumers even more cynical and depressed. To quote Dr. Cochrane, “Mostly, it is dangerous for the Fed to claim immense power, and for us to trust that power when it is basically helpless. If Bernanke had admitted to Congress, ‘There’s nothing the Fed can do. You’d better clean this mess up fast,’ he might have a much more salutary effect.” Instead, Bernanke wrote newspaper editorials, gave speeches, and appeared on national television taking credit for improved economic conditions. In all instances these claims about the Fed’s power were greatly exaggerated.

Summary and Outlook

In the broadest sense, monetary and fiscal policies have failed because government financial transactions are not the key to prosperity. Instead, the economic well-being of a country is determined by the creativity, inventiveness and hard work of its households and individuals.

A meaningful risk exists that the economy could turn down prior to the general election in 2012, even though this would be highly unusual for presidential election years. The econometric studies that indicate the government expenditure multiplier is zero are evidenced by the prevailing, dismal business conditions. In essence, the massive federal budget deficits have not produced economic gain, but have left the country with a massively inflated level of debt and the prospect of higher interest expense for decades to come. This will be the case even if interest rates remain extremely low for the foreseeable future. The flow of state and local tax revenues will be unreliable in an environment of weak labor markets that will produce little opportunity for full time employment. Thus, state and local governments will continue to constrain the pace of economic expansion. Unemployment will remain unacceptably high and further increases should not be ruled out. The weak labor markets could in turn force home prices lower, another problematic development in current circumstances. Inflationary forces should turn tranquil, thereby contributing to an elongated period of low bond yields. The Fed may resort to another round of quantitative easing, or some other untested gimmick with a new name. Such undertakings will be no more successful than previous efforts that increased over-indebtedness or raised transitory inflation, which in turn weakened the economy by directly, or indirectly, intensifying financial pressures on households of modest and moderate means.

While the massive budget deficits and the buildup of federal debt, if not addressed, may someday result in a substantial increase in interest rates, that day is not at hand. The U.S. economy is too fragile to sustain higher interest rates except for interim, transitory periods that have been recurring in recent years. As it stands, deflation is our largest concern, therefore we remain fully committed to the long end of the Treasury bond market.

Discuss This


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Greg Strebel

July 24, 2011, 6:34 a.m.

Some serious oversights in the argument.  Money supply expansion (credit creation) which is not supported by real wealth, that is, by production of actual real goods, is unavoidably simply the creation of new claims to existing wealth, and therefore is inflationary. 
Savings are, by definition, unconsumed wealth.  It is important to recognize that by saving money wages, one is deferring consumption, freeing existing products to be used by another entity who/which is borrowing those savings. 
Investment is the principal mechanism of wealth creation, using savings to create capital goods, for example, with which to create new goods.  This is the basis of the economic identity Savings = Investment.  Investment is the process by which wealth grows geometrically and raises the standard of living of the entire population.  There is no simplistic multiplier to investment but it can be readily recognized that borrowing for consumption reduces the pool of savings available for investment.  This is true whether the borrower is an individual or a government. 
It is on this point I take specific exception with Mr. Lacy’s contention that “military hardware, space exploration, and infrastructure programs” have positive multipliers.  This is a generalization which is largely false, typically ignoring opportunity costs, that is, the economic benefits which would have accrued if the resources consumed in these activities had been devoted to activities prioritized by projected economic returns in a free market.  The “bridge to nowhere” is a good example of an infrastructure program which is actually wealth destroying, with a negative return on investment.  It should be obvious that most munitions fall in the same category.
The argument that we will not see higher interest rates because the economy is “too fragile to sustain” them is a political statement rather than a statement of fact.  Greece is the current poster child illustrating that facts will overtake political preferences.  Greece cannot stand bond rates of 30%, but that is what they have been facing none-the-less.  The administration and the Federal Reserve will try to find a gap between the Scyllan cliffs of monetary expansion (QE aka money printing to purchase treasury securities) and the Charybdisian cliffs of currency revulsion and hyperinflation, but Ben and Tim will not find one.  The situation is intractable and will not be resolved by financial repression, the artificial suppression of interest rates (and wages) to below zero real rates to reduce the real burden of accumulated debt.  This is absolutely clear from the fact that the required difference between real and official CPI is already too big to hide. 
The concluding contention that deflation is the biggest concern and that long bonds are an appropriate strategy may be accurate in the very short term, but in the medium term is going to be proven to be a grave error.  Yes, a lot of money is going to evaporate when debt defaults cascade, but that does not make deflation inevitable.  The government is politically constrained to a course of money printing, albeit in acute spasms, and, in short order, the dwindling purchasing power of the dollar will result in a flood of the $5-odd Trillion of overseas dollar holdings being liquidated to acquire real goods while the dollars have any purchasing power left.

Ty Thompson

July 20, 2011, 5:16 a.m.

Low interest rates just guarantees more of the same, finance is speculation on future profits. As technology develops faster, this becomes much more of a risk. The new machine is suddenly obsolete and the profit projections no longer hold. You’re forced to eat losses running it or expand and buy a newer machine. So long as finance is the main funding of business, we will see instability.
In a high interest rate environment most investments are made with profits. Profitable businesses expand and those that aren’t don’t. The only risks are operational costs and marketability of your product. This environment may not engender explosive growth but it will be to the positive. Any losses had are against profits already generated so it does not hinder future growth(in aggregate).
The recent polls of small businesses showed that lack of credit was not hurting their plans to expand, because few were looking to in this environment. What doesn’t show up are those that do not start businesses because of excess finance. There can be an opportunity for profit but many will not take it, why? Because any yahoo with a line of credit can duplicate their efforts. I would like to see a study of how many businesses were not started due to this.

Carlos Ledezma

July 20, 2011, 2:05 a.m.

Excellent analysis.  It is incomprehensible to me that most educated professionals fail to see the logic behind the arguments posted.  Faith in the dogma that record money supply is the single most valid method to spur demand is dangerous and perhaps capricious.  The entire subject is extremely complex, yet simple at the same time.  You must choose to keep it simple.  Markets depend on confidence, consumer spending levels depend on the confidence that secure jobs and growth provide. 

Unfortunately, we keep walking along the edge of the abyss, failing to comprehend that the simplest, most promising solution is the one that is the most painful.  The first graph is the most terrifying, because it looks as if US Debt as a percentage of GDP may actually begin STABILIZING at these levels. 

We may very well suffer what Spain and other countries are experiencing, an exodus of our most talented and intelligent minds to other countries, where they feel they can grow.

John Connelly

July 20, 2011, 12:56 a.m.

Jack Connelly
This a cogent and comprehensive economic over view.  However, politics will rule the short term ( next 5-10 years or so) and politicians embrace the short term, reelection, POV.  Hence, (1) print more money and inflate our debt away; (2) start a war( 3) hire more police to subdue the “riots in the streets” when Joe Average can not stand it any more (4) and/lastly, shout the big lie as our standard of living declines.
I am in the inflation/ QE3 QE4 etc camp, and then a right wing demigod will ride in to save the day

K Delay

July 19, 2011, 9:15 p.m.

What I find to be missing is how Hunt has come to the decision to be long on Treasury bonds, especially since he has just exposed to us the reasons why we should be fearful.  On what does he base this decision?  I can understand how Japan can get away with funding its own deficits for two decades, given its deflationary price environment and the reputed Japanese nationalist loyalty.  But will the US’s creditors act like Japanese pension fund managers and Japanese private-sector purchasers of Japanese bonds?  And is the US really headed for price deflation, a la Japanese?  I wonder about the first, and doubt the second.  I would put Bond-megeddon (sorry, couldn’t resist) at November 2012 if Obama is reelected.  If he is not, then maybe Hunt will win the bet.  (Side note: I just read that even the Japanese are beginning to buy gold out of vending machines, although I don’t know the volume.)

James Grauer

July 19, 2011, 7:36 p.m.

I whole heartedly agree with Lacy Hunt’s conclusion, but arrive at the same from a different prospective.

With the phasing out of QE II by the Federal Reserve, received wisdom from the economic cognoscenti suggests that medium to long term interest rates, specifically yields on U.S. Treasury debt, will substantially increase as the lagged effects of $1.5 trillion in new reserves explode the nationâ??s money supply resulting in rampant inflation.  This tract explores the antipodal view that a combination of no new quantitative easing programs by the Fed, a cinctured banking system, an improving dollar, and an attendant sell-off in risk assets (i.e. equities and commodities) will result in dramatically lower yields on this asset class.

For those interested in the full analysis, you can peruse it at www.stomaster.com/TheEndofQEII.pdf

Tim Malik

July 19, 2011, 7:24 p.m.

Talk about pulling numbers out of the air!  It is hard to believe her rift about a 2 to 3 negative multiplier for tax increases on the wealthy, which runs contrary to common sense and has no supportable evidence.  What is this…making it up as you go?  And first-time homebuyer programs and cash for clunkers exacerbate the problem?  She confuses temporary relief with run away fraud in the finance industry. 

By the time she gets into projections on modifying the tax code, I was in speed-read mode.  At 64%-of-GDP US debt, and the largest economy in the world, by far, we have plenty of gas to burn, if we did not have House of Representative members willing to slit the wrists of every American family before tapping the assets of the mega wealthy (mega wealthy proportionally greater than ever before). 

John - you can do better than publish such rubbish as this.

David Myhre

July 19, 2011, 4:52 p.m.

Cogent article up to the last sentence. Why anyone would want to be in long maturity Treasuries is inexplicable.  Yes, debt is a problem but the casino of derivatives “betting” on default is massive.  I’ve seen esimates of global derivatives ranging from $500T to over $1,000T.  Given global debt loads, default somewhere is IMO certain. Once the first domino falls, we have global economic and fiscal chaos.  There won’t be one cent of my assets in Treasuries.

There was a recent article in Stansberry’s forum adding the total national(public and private) debt service plus cost of government showing those two items taking up more than 50% of GDP.  Clearly the private sector is starving.  And government has become obese. Politics is dysfunctional.  There is NO political will to fix our problems.  It is all theater.

I believe the only investments worth holding are things that have intrinsic value.  Currency debasement is just getting started.  And when the next crisis happens, it will make the recent “credit crisis” look like a cloudy day at the beach.


July 19, 2011, 3:59 p.m.

Well, you wouldn’t publish my comment, but please read:
Why Banks Arenâ??t Lending: The Silent Liquidity Squeeze

You owe it to your readers not to misinform them, while helping the banks destroy the economy, the real one.

Rodney Fitts

July 19, 2011, 3:44 p.m.

I’ll give you a fourth economist, Schumpeter. We will never be Japan because our demographics and our status as world currency will save us but we are looking more like England after WWII to me. With all this discussion about our debt issue no one has seemed to be able to voice the simple truth. The U.S. is not going to default nor will it be able to madly print money to monetize its way out. Our political system will not allow either outcome. Where do you go when there is nowhere to go? the answer is nowhere.
  This situation is going to go on for a very long time as our high cost of labor and lagging educational system continues to make us less competitive. My daughter’s department at work is being outsourced to India. That departments monthly employee expensee was 2.4 million. The same work will be done in India for $148,000. When I was in China recently, I had it explained simply to me by a manager of a US company who had moved its manufacturing to China, a guy who is a West Point graduate. He simply said “there is no justification to manufacture in the United States”.
  Were do we go from here? It’s not the end of the world but it is the end of an era. Eventually housing inventories will decline but it could take decades for prices to recover to 2006 levels and in that process this country will become aware of the fact that we longer can afford to maintain the life style and the presence in the world that we have in the past. I think the dye is cast (Schumpeter’s Creative Destruction). The good news, in a way, is that through this process of declining standard of living and decreased government spending our competitiveness will increase but, once again, it could be decades. I don’t think that will happen in my life time.
  Concerning the moderate term (in my life time) you can forget both techincal anaysis and rational investing. Their relevence has been greatly dimminshed, the game has changed. There are only two truths I feel I can rely on. Reversion to the mean and the fact that the more complex a system becomes, the more susceptible it will be to external shocks. The Schiller P/E ratio has stocks over priced 40% and this world has certainly become more complex. There will be opportunities to make money but they may be only short term and will certainly require a different style of investor than what we have seen in the past.

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