According to thefreedictionary.com, one definition of prudence is the ‘care taken in the management of one’s resources’. We should all consult ‘Mother Prudence’ before committing any money to any investment. Given today’s climate for stocks (3/22/2013), here are the contents of a letter I sent to ‘Mother Prudence’.
Dear Prudence,
Take a hike. Beat it. Scram. Get lost. Leave me alone. Don’t ever interfere with my investment thinking ever again! I know I am supposed to manage resources wisely. I know I am supposed to analyze the daily data and make wise decisions concerning money and stocks. All of my analysis should be based on truth and reality. My investment decisions should therefore be somewhat cautious given the real risks of monetary loss in the event incorrect interpretation or judgment. But Prudence, you have not been any help over the last few years. In fact, you have been an impediment to asset appreciation. So now I ask you - I beg you - leave me alone and don’t ever bother me again.
You see, Prudence, I no longer have any need whatsoever for the care you provide. Nor do I have a need for your imposed judgment, discretion, or concern for investment risks. The reason is because today, there are risks no more.
Prudence, the truth is Ben Bernanke and his Federal Reserve Bank have taken control, ownership, and management of the US economy and the stock indices as well. Stock prices are rising because Mr. Bernanke wants to restore net worth to his wealthy friends. In 2008, everyone suddenly came to the realization that the world was broke due to a collapse of derivative prices. Of course, derivative values are derived from the value of underlying assets. If derivative prices collapse, then asset prices themselves have already collapsed. Mr. Bernanke has been busy supporting and boosting these asset prices since his big banker friends lost all of their money and bankrupted their companies dabbling in the quintillion dollar derivative universe. That derivative universe that almost melted down the world economy is today just as big as it was in 2007. It is also just as precarious. The big banks still own huge portfolios of derivatives. The companies that insure the derivatives still don’t have any money. It could all collapse in an instant. But here’s the thing, Prudence. I am not supposed to know that stuff. In fact, the more I know, the worse off I will be as an investor. Ignorance is the new tool of the Bernanke era. Stupidity is also a good tool because truly stupid people don’t even realize that Mr. Bernanke has ‘rigged’ the game in favor of the home team.
Dear Prudence, the stock indices have been transformed by central banker intervention much like the Harlem Globetrotters transformed the game of basketball. Yes, the Globetrotters play an ‘entertainment’ and ‘exhibition’ form of basketball. The baskets are still ten feet high and the court size is the same. The rules of the real game become nothing more than an outline or a form to follow as the Globetrotter members go through their various hijinks. They commit traveling violations, they stuff the ball in their jersey, they switch the real ball for one attached to a giant rubber band, and they periodically halt games to play out comedy routines. But in the end, the Globetrotters always win. Their win-loss record against their Washington Generals opponent is something like 12,000 wins and only 6 losses. Is it real basketball? No. Is it real competition? No. Is the fate of the game pre-determined? Absolutely. Fans don’t pay to watch a loser. Mr. Bernanke has now perverted and commandeered the stock indices such that a real market no longer exists. The only way to make money is to bet on the Globetrotters. And so, we must ignore reality and risk and bet on Bernanke.
But Prudence, I’m not supposed to know this. I am supposed to think that stock prices reflect an improving economy. Sure it does. The EU is the second biggest economy in the world and her members are drowning in debt and choking on a perpetual recession. Japan is the fourth largest economy in the world and they have recently embarked on a currency devaluation scheme in hopes of inflating their listless economy. China has slowed a bit even as they built dozens of ‘ghost cities’ in an attempt to fool the ignorant into thinking their economic growth is organic. These are all great risks to investors but only if reality matters. Please Prudence - take a hike! And please, don’t bother me with reality. I need to make money in stocks.
In the US, unemployment is falling and the economy is adding jobs. That is, unless we take into account reality. From the most recent jobs numbers, we learned that the economy created over 200,000 new jobs and nearly half of that figure comes from the ‘birth/death’ model. The economy also witnessed a reduction in the workforce of some 300,000. The truth is the workforce is declining even as the population grows. This trend cannot continue. The math does not work. Added risks? Please Prudence, leave me now!
The US housing market continues to rebound with both sales and prices rising. I don’t want to know that about a third of all distressed properties are bought by investors and two-thirds of all damaged foreclosed properties are bought by investors. I don’t want to know that according to RealtyTrac, 43% of home sales in 2012 were distressed properties. I’m not supposed to know that home prices are still down some 30% from their peak in 2006. I’m not supposed to know that distressed property values continue to fall. Why can’t I embrace the regime’s story of the housing recovery. It’s your fault, Prudence. So beat it!
And Prudence, median income per capita in the US has stagnated over the last five years. Consumers still owe close to a trillion and so do students. The savings rate is almost as low as it was a few years ago and the largest percentage of the supposed new jobs are low-wage additions. As for stocks, the Dow has made a new all-time high and that’s proof that the economy has healed thus restoring wealth to investors. No one wants to talk about the Nasdaq although this index represents a higher market capitalization than the Dow. No one wants to talk about the Nasdaq because it is still down some 40% or so from it’s all-time high reached in 2000. Worst of all, the Federal Reserve continues to buy $85 billion per month in US debt from the big banks to keep the bubble inflated. Where does that come from? Debt. The US issues debt. The big banks buy the debt. The Fed buys the debt from the big banks who no doubt profit from the insider trading. With what does the Fed buy assets? Federal Reserve Notes printed by the US Treasury. Who pays for the debt? US citizens do. Who gets the Treasury assets? The Federal Reserve does. How did they acquire those assets again? With our money. Isn’t that called ‘stealing’? Please Prudence, leave me and take knowledge, intelligence, reality, and truth with you. I will be a much more profitable investor with you gone from my conscious. I don’t need to know anything. All I need to know is that Ben has a little plastic ring and he keeps dipping it in soapy water. Blow Ben, blow!
Prudence, are you gone? Good! All we want to know is can the Dow keep going higher? Of course it can. How high? Well, let’s put it this way. If the Globetrotters play the Generals another 12,000 times, how many games do you think the Globetrotters will win?
Disclaimer: The views discussed in this article are solely the opinion of the writer and have been presented for educational purposes. They are not meant to serve as individual investment advice and should not be taken as such. This is not a solicitation to buy or sell anything. Readers should consult their registered financial representative to determine the suitability of any investment strategies undertaken or implemented. BMF Investments, Inc. assumes no liability nor credit for any actions taken based on this article. Advisory services offered through BMF Investments, Inc.
