Betting on failure

The Thinker by Rodin

I regularly look to see what’s trending on my blog. Given the relatively little traffic that it gets discerning trends is kind of hard. My Craigslist posts frequently get hit, which is why I decided to encourage the trend with a monthly review of local Craigslist casual encounter posts. Also, no one else seemed to be doing as a form of entertainment. Over the last few months I’ve watched my Porter Stansberry tag trending upward. This probably means something too.

I wrote just one blog post in 2011 where I mentioned Mr. Stansberry and his dubious “research” firm. I mentioned him mostly in passing. His ads were following me all over the Internet so one day I gave in and spent forty-five minutes or so listening to his pitch. Of course he was trying to sell me something: a pricey subscription to his financial newsletter. He was looking for a certain kind of investor that I’m not, mainly the ultra paranoid “I’m ready for the zombie apocalypse” type.

Four years ago Mr. Stansberry was predicting the imminent collapse of the dollar but really all major currencies. He saw another Great Depression on the horizon and it was coming at us like a freight train. He had a plan to deal with an impending financial apocalypse that would let you survive it and ultimately prosper. When it hit you would presumably be sipping margaritas on your private island in Bermuda while the rest of the world went to hell. It was all pretty vague but his financial forecast was available in small segments via his pricey newsletters. They had to be pricey because not just everyone was good enough to afford his unique insights. Just the chosen, like you.

Four years later there has been no financial apocalypse. The stock market is higher than ever, even though incomes are not. Most of the income continues to go toward the top of the income scale, which explains why incomes still lag, our recovery feels somewhat tentative and why people are getting financially nervous again. China recently devalued its currency to make its products cheaper, basically to hold off a recession. Its stock market has lost roughly a third of its value the last time I looked, and might have lost more if China’s government hadn’t propped it up. Commodity prices are also falling as evidenced by the price of gasoline. Stocks while generally high are a bit off their peaks. So a lot of smart people are reading the financial tealeaves and trying to figure out if stocks are overvalued and whether they should be cashing those investments in for something safer. The bad news is that if you are chasing your financial fears you are probably going to take a financial haircut.

I won’t pretend to be an economist. However, I do feel my advice is at least as good as Porter Stansberry’s and most likely better. After all, I was not fined $1.5 million by a U.S. District court in 2007. Most of the fine was used to refund his investors who were urged to buy stock in a company based on fabricated insider information. Stansberry said it was sure to increase 100 percent. To find out the name of the company, you had to send him $1000. In any event, after the company’s announcement the company’s share prices fell after being artificially bid up by his investors. This led to the demise of his previous firm Pirate Investor and the creation of Stansberry Research and lots of videos hawking his presumably newly improved financial insight.

So even if you are a paranoid investor type, you should not trust Stansberry Research. Moreover, all the gold bullion in the world won’t save you in the event of a total financial collapse. The truth is that while there will certainly be future financial shocks and maybe even major widespread currency collapses, our financial system is too complex to go back to monetary sources based on perceived permanent value, like gold. Instead if there is uncertainty in the market, money will shift toward perceived safer forms of currency.

That’s happening right now with the collapse of the Yuan and slow slide of other currencies like the Euro. The dollar is perceived to be a safer currency, so its value is rising in comparison to most other currencies. This of course makes it harder for the United States to sell products and services priced in dollars. It’s the penalty for having a financial system less screwed up than everyone else’s. This has the ultimate effect of proving that we are all tied together. Investors running toward the dollar reduces economic growth in the United States, which makes it cheaper to buy commodities outside the United States, which hastens their recoveries at the expense of less economic activity in the United States. This cycle repeats endlessly but generally the United States is seen as having the most stable economic system, so generally cash is poured into dollars and U.S. treasury bills when economic uncertainty rises.

So when the value of the dollar rises significantly compared to an aggregate of all other currencies, this can be a warning sign that a financial correction is due. You don’t need Stansberry Research to tell you that. You can simply track currency valuations online and compare it with what happened in previous financial crises. What seems to be happening now is that the market understands that the recovery in the United States is much weaker than investors would like it to be, and that’s likely due to income inequality in the United States. When wage growth hardly moves upward that doesn’t give the majority of consumers a whole lot of money to buy more stuff. It stifles growth because as I pointed out before the top one percent will only choose to buy so much stuff. Hardly any economic growth ever trickles down from the top one percent’s personal spending.

Curiously, the best way to get economic growth on track again would be for voters to vote for a little socialism next year. Changing the rules so more income would go down toward the rest of us instead of the top would put more money in our pockets and start a virtuous cycle. Changing the rules to raise taxes on upper income people would have the same effect, since the government generally spends all it takes in and that feeds economic growth in the United States. Arguably the United States was never better than in the 1950s when top marginal tax rates were about ninety percent. That’s because taxes were put to use providing assets like our interstate highway system. Putting more money into the middle and lower classes gave people the means to spend it to increase their standard of living and keep the economy on a generally good footing. This is why there is more growth under Democratic administrations than Republican administrations.

It remains to be seen if voters will choose optimism or pessimism next year. The financial rumblings happening now and how we choose to react to them will probably influence voters in 2016. A downturn in 2015 would probably ensure a sustained downturn after the next U.S. president is sworn in, since the next president will have an austerity agenda.

None of this matters to Porter Stansberry because the fear of failure is the basis of his business model. It sells more of his pricey newsletters. As for me I will continue to play my financial cards the way I always have: keep a diversified portfolio and move toward more cash and bonds as I age. I’ll never win the game of timing the market, but no one actually does. Instead, investors sell themselves on the delusion that with the right financial guru they can outsmart it. The best thing we can do for our economy is simply talk to our neighbors and friends. We need to convince them to be cautious but rational, and to vote rationally in 2016.

President Obama famously campaigned on hope, which was derided by many Republicans. However, we’ve had seven years of economic growth and falling unemployment. Much of the growth went to investors and not to the rest of us, but it was growth nonetheless. We should hope for continued better times, but hedge our bets by electing politicians who will vote for some pragmatic democratic socialism again.

Paging Bernie Sanders.

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