Friday, May 08, 2009

A 61 year history of unemployment

Unemployment is ramping up to 1960s and 70s levels. Along with the history of interest rates I would say we are entering a secular bear market for bonds. This would be fairly good for equities.

Like I've said before, the Fed and Treasury have 2 options: reflate the money supply and try to instill confidence at extremely high rates of leverage or face the debt destruction/deflation music now. The bond market is saying "F you" to Bernanke and will not pay a premium for bonds that will be inflated away through monetization by the Fed. King Obama is going to borrow at whatever cost so he can socialize the automakers and major banks. These will end up in total failure. All you have to do is look at Fannie and Freddie. They are unmitigated disasters. When the policy of politicians gets in the way of running a business, the business is a subsidized arm of the government.

Businesses are out to provide an optimal return to shareholders. Politicians will use the levers of a controlled business to facilitate vote purchases which come at the expense of lower to negative returns to shareholders. Over time any retained earnings and efficiencies are lost due to lack of efficient resource allocation. The company then requires a permanent government bailout. This is why there will be massive hyperinflation if the policy of our imperial government continues.

The bond market says there will be higher interest rates if that is the case. They know that protecting capital requires a move from fixed income to variable income tied to money supply, which means commodities and equities. I would expect to see a secular bear market in all bonds for the next 5-10 years at least while the debt binge works itself off. Equities will rise as long as the Fed keeps monetizing. After that, we will likely see a long period of stagflation.

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