The talking heads talk and the doom and gloomsters make yet another appearance. Both will be back in their caves soon having made little profits and learned nothing despite what they might say. We are revisiting the 1936 economy and the only way to create wealth now is like some of our fathers did then.
We had what in our opinion will be called at some point down the road a stock market temper tantrum this week. Do not be surprised if the adolescents more commonly know as stock traders have more tantrums down the road. Traders who only think in short term decided it was time to abandon the market since the Chinese economy appeared to be sinking and sold with out thought and created some serious long term buys in stocks such as Apple, Citigroup and JP Morgan all of which we who are the adults in the room and have a long term investing approach scooped up at the near fire sale prices. For about a 48 trading hour period fear overcame greed in the stock and bond markets. Our opinion long term the economy and stock market have changed little and when wiser heads assess the roller coaster of the past week they will come to that conclusion as well. Let's note one factoid that Warren Buffet uses for stock value. The 10 year US Treasury is yielding 2.1% and the S&P 500 forward earnings is about 6.2%, so owning stocks gives you about 4% more than holding bonds, a fair value for the small extra risk involved.
China finally came clean just a bit and noted that to all except those who did their homework earlier their economy is not growing at 7% plus annually and is more likely not growing at 5% reported either. China used several tools in their socialist tool box last week to try and stabilize the stock market to almost no effect. Note we said they tried to stabilize the STOCK MARKET and not stablize the Chinese economy. The reason is simple almost all large companies in China and shares of stock are majority owned by the Communist Chinese government. The only control they do not have is the part of the stock market where they have allowed Chinese citizens and some outsiders the chance to own shares. So when the Chinese were found to be over speculating in Chinese stocks the government stepped in to try and keep the panic down, it had little or no effect because when one tries to merge capitalism with socialism, in an effort to bail out socialism's huge faults it does not work, never has and never will. Socialism fails every time it has been tried throughout history and leaders in China and now many in the US have never learned the time honored lesson. For the record we own one Chinese stock, unlike others we know who own many, and that stock is China Mobile since we are of the belief mobile phone service is a no brainer in China as much as it is in the US.
We in the US have one own brand of command and control economy going right now. We have defined this ad nauseam in our postings as the political economy and financial engineering. Like it or not until someone or some Congress comes along and changes the path of Obama's huge federal spending we will continue to have out of control federal spending and lots of largess filling the mega corporations money pots. Like it or not until the Federal Government changes fiscal course the Federal Reserve is being forced to keep rates near zero since that is the only thing propping up the slower the slow growth US economy. We continue to say no rate increases until late 2106 if then and if they do move forward expect a 25 basis point move and back to a sleep that would make Rip Van Winkle jealous.
So how does one play this new US command and control economy? Once again we have changed little in our advice. Despite the roller coaster movements in the stock market this week we are basically back to where we began and that after finding out the almost all large companies in the US are affected little and have low exposure to the Chinese economy. Imagine that China is not the big bad bully we have been lead to believe. In fact the Chinese economy, like Brazil, like Russia, like Europe, like just about every other economy in the world is dependent on guess who, the United States capitalist economic machine to survive. The problem is the US economy is subject to too many regulations, too high taxes, and too much federal spending largess, that only helps the biggest and baddest corporations. We have as in the 1930's over reached in our attempt to make sure everyone is safe from the fact that indeed free markets have recessions. Recessions that in the end make for better allocation of resources and more high paying jobs. Maybe one day the ingenuity, the American dream, and the sheer powerhouse that the American economy can be will be unleashed once more to produce jobs and wealth for the average American citizen. Until then, until we change policy in Washington DC, as we have opined seemingly now forever keeping your investments with the mega corporations benefiting from all this crony capitalism is the way to go.
As Warren Buffet has opined about where to put his wife's money after he passes you too should do the same. Try the Vanguard 500 Index fund or ETF. Invest and forget about it, well at least until the American voters change politicians and policies in Washington DC. This is not what we prefer, but as we told someone else this week "it is what it is" and smart people play the game until the game changes. If you have assets to invest consider yourself blessed to have the option to ride along with the mega corporations benefiting from the spending of the federal government and the low Federal Reserve rates that allow your mega corporation to sell cheap tax advantaged bonds and buy back more stock pushing up that share price even more. In a slow growth economy why reinvest in your business that is not adding customers or customers buying more of your products when your profits can be plowed into stock buybacks making your shareholders and managers wealthier and wealthier. If you have assets enjoy the ride. If you do not and need a job or maybe some real hope and change, change your vote.
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