Wednesday, November 11, 2009

Hedging against government stupidity

Government stupidity abounds as 2009 comes to a close. Bailouts, Healthcare nationalization, escalation of the unwinnable purposeless war in Afghanistan, legalized accounting fraud at banks, official unemployment at 10.2% and real unemployment likely closer to 20%, and subsidies of the auto and housing markets have marked one of the most bizarre years for the growing rift between the autocrats and the common people.

Most people are law abiding rational people that just want to be able to take care of themselves and their families. What the autocrats are doing is making it very difficult to do just that by destabilizing and devaluing the money that you work hard to earn. An aspiring entrepreneur may have fewer clients to sell to because the clients' access to credit is tighter than it was just 12-18 months ago. This may push the business model from profitable to unprofitable. This may lead you to believe that access to credit is the most important factor to success. However, this is wrong. Ultimately, the consumer is the starting point of business. Businesses provide valuable products or services to consumers. Other businesses may provide products or services that make consumer product/service companies more efficient and bring lower prices to the consumer.

Consumers have stopped spending because their income has been consumed by debt service payments. The only way to get them spending is to have them repay their debt service or default on it to free up cash flow for consumption. These are the rational solutions that would be dictated by a free market system. Under an autocratic/aristocratic system, those who are owed (bankers/investors) are bailed out at the expense of the collective, which is what is happening now. The mechanism for this bailout is through the Federal government and its financing arm, the Federal Reserve. The Federal Reserve is monetizing some $2 trillion of Federal debt and mortgage backed securities at what is likely an above market rate. The gap between what the Fed is paying and what the market would pay is an effective theft on the back of taxpayers by repaying in cash the loss that would have been borne by the lenders.

As a normal person, how do you protect your money against the status quo chasing politicians, bankers, and lobbyists? Investing in commodities to me makes the most sense. Real assets such as gold, silver, copper, oil, grains, etc. are all priced according to end demand and the supply of money. When money becomes abundant, prices of real assets rise in nominal terms. As a trader in commodities, it is easy to see the effects of all the terrible policy decisions in real time. Oil, gas, food, and metals are all essential parts of life, and the costs of these are rising in lockstep with the amount of money the Fed is effectively printing.

This is why I have educated myself in commodity, currency, interest rate, and equity trading. In the next few months I will begin taking on clients to manage a small amount of initial money. If you see the uncertainty that is being caused by all of this government action, we might be a good fit for each other. Please contact me at if interested.


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