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Tuesday, October 13, 2009


The Next Bubble - The Public Sector

Yes, another bubble is inflating, but this time it's not another asset bubble like stocks or housing or tulips. It's another credit bubble - the public sector. Public debt, securities issued by Federal, state and local governments, is completely out of control and vastly overrated in terms of safety. The likelihood of outright defaults in the state and municipal debt areas is very high, but a federal default will likely take a different form - debasement of the currency. Already, in the short but inept tenure of the current administration, the dollar is down by a double digit percentage against a basket of other currencies. While the Bush administration was notorious for talking about a strong dollar while allowing it to weaken, the Obama mob has doubled down on that strategy. The excuse usually given for such a goofy policy is that the weak dollar helps exports and reduces the trade deficit.

In reality, dollar debasement is an insidious inflationary tactic that reduces federal debt in real terms even as it increases in nominal terms. Since Obama budget deficits are headed toward the sky and the tax base is exhausted even before tax increases resulting from expiration of the Bush era tax cuts and the federal takeover of the health care industry, there is really no other way for the administration to keep the debt service from swallowing the whole of government revenue. Of course, the implementation of necessary spending reductions are not on this crowd's radar screen.

Though most signs point toward a gradual and sustainable recovery, the Obama administration will assure a double drop recession (drip is too mild) by allowing, even pushing for these tax increases.

Given that situation, what is an investor to do? Keep in mind the situation is rapidly nearing a tipping point since the private sector is shrinking so fast, it will no longer be able to produce the revenues that support the public sector (which produces nothing net of tax expenditures). My view is that the enactment of federal health care, which, no matter what you hear, will spell doom for private health insurance and the 17% of the GNP it supports, means the end of stock investing as a stable and profitable exercise in this country. At that point, we will liquidate the portfolio. Where to put the proceeds? There will be few choices, since US cash will not be viable for obvious reasons. However, other, more stable foreign currencies can be a haven. Also precious metals and land. In short, the few things that might hold their value in a world where governments, and specifically ours, can no longer be relied upon to preserve the inherent value of capital.

After all, what businesses will invest in employing people, building production capability, or risk taking in a country transitioning to full blown socialism?

The politicians better wake up and fix what's happening and soon. What is occurring today in high tax states (capital flight) can also happen on a national and international scale. That will be a very sad day for the US and for our children and future generations.


And while we're at it, Olympia Snow today wins the Arlen Spector award for proving what true conservatives already knew instinctively - the GOP is better off without such moderates and being a minority party than it is having them in its ranks, falsely sporting the Republican label when in fact, they are likely to cave on all the big issues. Better that she and Senator Collins just cross over to the other side of the aisle and see if they can win a Democratic primary, rather than exhaust GOP campaign funds in a Republican party primary and then in a general election between tweedle dum and tweedle dee. Frankly, Pennsylvania Republicans are chomping at the bit to oust Spector (if the Dems don't do it first via their primary). Look for Snow to be cast adrift as well.

Speaking of awards, the biggest laugh of the week was the Nobel Peace Prize going to President Obama as he (ineptly) prosecutes two wars and has the country in grave danger of future hostilities with Iran and North Korea, and maybe even Venezuela. Of course, the left wing Norwegian panel that grants the prize will never fully comprehend the role appeasement plays in leading to hostilities. Somewhere, Winston Churchill and FDR are rolling in their graves, but not with laughter.

It's more fun to talk sports. In baseball, I had three of the series figured out but the one that I got wrong involved the Cardinals, whom I picked to go all the way. Of course, they had game two in the bag until a dropped fly ball (lost in the lights) cost them that one. If they had gone back to St. Louis even, well you never know.

The Yankees had lots of good fortune against the luckless Twins, but if the Twins had won a game in that series, it would have been their first against the Yanks this year. On paper, NY figures to beat the Angels, but the games are played on the field, and there, Mike Scocia's Angels have had the Bombers' number for years. The Angels are in the Yankees' heads the way the Yanks are in everyone else's, and I expect it to play out that way again, even though the Yanks have the odd home game. The pick here is Angels in 6.

In the NL, the series is a toss up on paper, but again, on the field, the Phils have been the most resilient team in recent years. With Ryan Howard again dominating, I think the Phils will top the over achieving Dodgers in 5 or 6 games.

The Jets and Miami treated Monday night football fans to a really entertaining game last night. They may not be the best teams in football, but both of these clubs seem to be progressing and they sure played hard and comparatively mistake free.

More disturbing for the NFL is the pathetic performances turned in Sunday by its bottom echelon teams. Really, the Raiders, Rams, Panthers and a few others are just beyond awful. By the way, the Bills really phoned it in too, losing to a pitiful team. Also what was the Jaguars' excuse? it's one thing to not be a contender and another thing to not even be representative.

At least we have Giants - Saints to look forward to. Should be a fun game to watch.

On October 6, we bought 700 shares of Frozen Food Express (FFEX) at 2.95 a value buy. On Friday, we bought 1900 shares of Blockbuster at 1.08, a zero buy. The Blockbuster deal with TIVO is a business model that finally makes sense with the promise to outperform the Netflix model without taking them on directly. With this approach, the closing of the retail outlets makes sense. My original idea years ago that led me to Blockbuster was that the stores were undervalued as a real estate play, a strategy that would be laughable now.

Also on Friday, we bought 200 shares of Aegon Preferred (AEH) at 16.77. Yesterday, we bought 100 shares of Lindsay (LNN) at 38.39. All the buying represents redeployment of the proceeds from the Axsys and CDIC sales.

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