While at a social event yesterday with a group of about 40 entrepreneurs, I was bombarded with questions regarding the economy, investing, and ‘geo-arbitrage’. On the topic of ‘geo-arbitrage’, a good friend of mine, Phil, has asked me on several occasions what is the appeal of moving abroad.
Over the last 2 years, I spent the better part of it living in Eastern Europe. Right now I am back in the US until my house sells. When that happens, I will be going abroad again, but permanently this time.
Phil has asked this question before as have many other friends. Normally I give a variety of friendly, feel-good reasons like;
• Lower cost of living with no sacrifice in quality of life
• Lower tax burden
• Giving my kids an international experience
• New and interesting opportunities
This time I decided to explain one of the most important reasons I have for moving abroad;
• The US is going to shit and it’s not getting any better anytime soon
Of course this is a bold statement and certainly very opinionated. However, from my travels around the world and in the US, it’s becoming truer every day. There are many places in this world where big brother is not watching over you making sure you are following each and every one of its draconian laws to the letter.
Ironically when I got home from the event yesterday, I was greeted by a letter from the school board where my daughter attends high school. The school is now threatening us with legal action because my daughter has missed 4 days of school this school year – the legal limit is 3.
My daughter reads 2-3 books per week, is an A student and is most likely smarter than most of her teachers. But the state has a law that limits absences to 3 per year so now we are being threatened with criminal prosecution. At what point did the state become the parent of my child?
In addition to the various ‘nanny state’ actions in our country that just ticks me off, the current state of economic affairs is grim and getting worse.
Yesterday afternoon we listened to a press release by the almighty Puppeteer, Ben Bernanke. He told the world that QE2 would end as planned in June because of the improvements in the economy. He also stated there would be no need for QE3 (in so many words).
Of course he also mentioned that he would roll the estimated $17B of monthly expiring treasury bonds over – meaning that as the bonds mature, he would use that money to buy more treasury bonds. He also mentioned that if necessary, he would provide more liquidity as necessary.
Hmmm, wait a second! Didn’t he say quantitative easing would end? This is doubletalk in the grandest 1984 style.
Beginning last November Benny said he would buy $75B of treasuries per month for the next 8 months. That’s a grand total of $600B of bond purchases. But let us not forget the Fed commitment to also buy $300B of mortgage backed securities (MBS) during this same time frame.
For those of you unaware of how the Fed can afford all of these bond purchases, let me tell you. It’s called printing. Or adding zeros to a balance sheet in today’s electronic world.
The Fed commits to buy $900B of worthless debt obligations offering ridiculously low interest rates with money that did not previously exist. In other words, massive inflation here we come.
Why would the Fed do this? The US government has 2 ways to pay its bills; taxes and borrowing.
With the Obamessiah running deficits in excess of $1T annually, we have no choice but to borrow massive amounts of money. Hey, how else were all those worthless companies like GM, Chrysler, AIG, Bank of America, CitiGroup, and the hordes of other failed businesses going to survive if we didn’t save their asses?
The reality was that we were rapidly running out of buyers of US debt obligations, so Benny came riding into town to save the day with his commitment of $900B over the next 8 months.
Over the past few months the Fed has been buying on average 70% of all treasury bonds and has now become the largest holder of US treasury debt. In a roundabout sort of way, we have obligated future generations to pay off the mistakes of today guaranteeing a lower quality of life for our children and grandchildren (herein lies another major reason to move abroad).
Without the Fed stepping up to buy these bonds, the buyers would have been in short supply. If you know anything about economics you know when the demand shrinks and supply rises, prices fall. In the bond market, when prices fall, interest rates rise.
Of course the last thing the Bernank wants is rising interest rates to stifle growth. And of course the indirect (or maybe direct) beneficiary of this loose monetary policy over the past few months has been the stock market.
Money is like water, it follows the path of least resistance. And with an extra few billion floating around, it inevitably found its way into the stock market. Combined with soaring Wall Street profits due to drastic cost cutting, this has really buoyed the markets giving the common man a feeling of wealth.
All in all, Benny Boy’s plan seemed to work like a charm. Except for that one little albatross – repaying that nasty debt. Raise your hand if you voted for this debt burden…
So for now it seems the stock market is safe. The money printing will continue thus the markets should continue to get a lift from Uncle Ben.
While I do disagree with the Fed’s monetary policy, it wasn’t for me to decide. However wherever turmoil persists, opportunity exists. I hope you are all taking advantage of this opportunity. The Grand Puppet master has told you he intends to prop up the economy and thus the markets. As any great trader will tell you, “don’t fight the Fed”.
My recommendation is to be long high quality stocks, but also hedge your portfolio and tighten up your trailing stops. That’s what I’m doing anyway.