Back in December I wrote about what I called The Big Bubble and asked the question: What should an investor do to survive the looming government debt bubble?   Now along comes a book that attempts to answer that question.  Investing in the Age of Sovereign Defaults by Peter Treadway addresses that question.  He hedges a little about the timing and gives a range of options but the example that stuck with me was that during the hyperinflation of the 1920′s in Germany the place to be was export oriented Blue Chip Stocks.

Good Advise for this next inflation?

Who knows?  But at least people are thinking about it.

Here is the review I wrote of the book on Amazon:

Best Available

Many of us in the investing class have sensed that the ever increasing sovereign debt of the developed democracies is not sustainable. Now along comes a book that purports to tell us the best way of Investing in the Age of Sovereign Defaults. It starts strong with a clear description of the current situation and its implications and then it hedges. Treadway defines and predicts massive defaults by governments but doesn’t know when. He doesn’t seem able to explain how the current situation of a deflationary contraction and its reaction of central banks monetary easing will morph at some unspecified future date into runaway inflation.

And then the book finishes strong. Based on the history of sovereign defaults from the first section Treadway makes actual recommendations about where investors should have their money when the inflation starts. Hint it is not gold.

This is an imperfect book and it really doesn’t live up to its titles claims but, and this is a big but, it is the best book on the current financial situation and what to do about it that I have found. Treadway is on the investors side and some of his comments about minorities, unions and democracy can sound extremely harsh. He also makes some very pithy and solid observations that make the book very readable and thought provoking.

A few quotes: “ It is the will of the people that their governments overborrow. Democracy more than any other form of government expresses the will of the people.”

“The history of fiat paper money is one of descent into worthlessness.”

“The same voters who vote for politicians to expand their benefits do their best to avoid paying for them.”

Who will be demonstrating in your town this spring?  Last year about this time the Occupy Wall Street demonstrations were getting started and were replicating around the nation as the “Occupy Anything” movement.  It is almost spring again.  What will send young people to the streets this year?

Non sequitur photo

If a Republican were president it would almost certainly be the administrations Predator Drone attacks on US citizens without due process.  But a popular Democrat can get by on this one.  Imagine if George Bush were doing it…

It might be the undocumented going to the streets to protest for a pathway to citizenship, I would understand, although I’m not sure it won’t be counter productive.  It might be better to have a stealth campaign where everyone just approaches their friends,neighbors, coworkers and employers and asks for their support.  But these things are unpredictable.

It might be the Tea Party protesting the negative unintended consequences of “Obama Care” that are starting to reverberate through the economy.  We just had a 25% increase in our health care premiums.

My money is on the young over trained under employed intelligentsia.  They have time on their hands and real gripes.  Like no jobs.  What their specific grievance will be is anybody’s guess.

Who do you think will go to the barricades this spring?

“When/if information of a trial becomes available, I will inform you immediately.

Please continue to pray for Israel (if that is your custom)“

Jessica Schwartz

I suppose “if that is your custom” is inserted to show inclusiveness toward non-prayers.  Color added for emphasis.

The sub-prime housing bubble of 2008 was a classic bubble.  It almost brought down the world financial system and did cause a recession in the United States that spread to most of the developed world.  But just two years earlier in 2006 almost nobody was predicting that the housing bubble would burst and how much apparent equity would be lost.  One of the things about a financial bubble is that while it lasts it is good for almost everyone involved, so nobody wants it to end and everyone is generally unwilling to look at the underlying faulty assumptions.  So far I’ve written nothing new.  You can read all of this in much more detail in many books on the housing bubble or if you want a historic perspective in Charles MacKay’s classic Extraordinary Popular Delusions and The Madness of Crowds.

Now we get to the new part.  In late November 2012 a headline in the WSJ reported that Mongolia was able to issue $1.5 billion worth of bonds at less than five percent.  If you read the article you found out that Mongolia has defaulted on its debt five times in the last 22 years and yet it was still able to sell new bonds at relatively low interest rates.  It suddenly dawned on me there is a new bubble going on and it is being fueled by the US Federal Reserve.  If Mongolia can borrow at less than five percent based on their record then the financial markets are being distorted.  We are in a government spending bubble.

The Fed, to avoid the deflation that Keynesians say caused the Great Depression, has been increasing the money supply and suppressing interest rates in an unprecedented way for a remarkably long time. Banks are being allowed to hold sovereign debt without reserves and governments are deficit spending without a hope of ever being able to pay it back especially if interest rates rise.  Like in previous bubbles everybody has benefited.  Politicians can spend money without raising taxes, Bankers have access to almost free money and financiers make massive fees for lending money to borrowers, like Mongolia.  This is the sub-prime housing bubble on steroids.

To personalize the horror of this vision.  What should someone with a modest amount of assets now invested in the stock market do to avoid the havoc that will be caused by the government spending bubble bursting?  And is there anything that the same someone can do to benefit from it?  Help.

I was at a meeting last week and out of the blue a few of the more liberal democrats in the group went off on a rant about how racist the recent presidential election was.  Now I didn’t see it that way and I asked for some examples that showed racism.  The only two presented were lawn signs that said “Believe in America” and the slogan “The Makers versus The Takers.” To me these are no more racist slogans than “Forward,” the Obama campaign slogan, is a communist slogan.

I don’t really know what to make of this.  Charges of racism should never be made lightly and I took it personally because I supported Mitt Romney and so apparently in my liberal friends eyes I am in the same camp as racists.  Seeing other people as racist because they disagree with you does not increase the civility of the debate but it does allow you to dismiss the real arguments that the other side has without considering them.

Arguments like:

• The need for some fiscal sanity so we stop borrowing from the future.  The federal government can’t do everything for everybody.
• The need for reform in “entitlements.”  The situation has changed, people live longer and consume more healthcare.  Change the programs.  They are full of perverse incentives.
• The need to end the monopoly of the public employees unions so, for instance, poor people can have school choice like the rich people do.

On the Rational Immigration site I wrote some advise to the Republicans on what I thought that they should do to get back in the game.  It is unlikely that they can take it and keep their coalition together.  The Democrats have a similar problem.  Their coalition of public employees, well-to-do liberals and ethnic groups is frail at best.  The country is very divided on lots of issues but I don’t think that there are many racists on either side any more.  I still don’t know what to make of this.

“A democracy cannot exist as a permanent form of government.

It can only exist until the voters discover that they can vote themselves largesse from the public treasury. From that moment on, the majority always votes for the candidates promising the most benefits from the public treasury with the result that a democracy always collapses over loose fiscal policy, always followed by a dictatorship. The average age of the world’s greatest civilizations has been 200 years.”

Alexander Fraser Tytler.

Scottish Lawyer

1747 – 1813

In one of my largest mistakes ever I publicly and loudly predicted that President Obama would lose last nights election. (My June Prediction) In fact I predicted that he would lose by a large margin.  (My prediction on Monday 11/5) I was wrong and now I’m eating crow (while drinking vodka), and paying off my gambling debts. Scott S, Mark E, John L and Sharon G, you will all be hearing from me.

This is a crow substitute.

I wish President Obama wisdom and luck.  He certainly had the street smarts to put together a coalition of class warriors and ethnic groups that was just large enough to carry the day.  In his first term he failed to fulfill his promise to Latinos and the economy failed to respond to his efforts to revive it.  I hope he learned from these mistakes. I’ll be writing more about the immigrant issue on Rational Immigration.

Republicans cannot win going forward unless they accept that there will be abortions, that immigrants are a good thing and that smaller government won’t work if we also want a larger military and farm subsidies.  Time to adjust.

I will be spending some time retraining as a prognosticator (no I’m not going to stop) and adjusting my investments to recognize the new tax regime that President Obama will be now be allowed to implement.

Tomorrow is the final exam on my June prediction that Obama will not be re-elected.  I’m still confident that Romney will win and I do think that he is the best choice for the country but I don’t expect any miracles to come out of the election.

Our lives will be effected very little.  If Romney wins taxes will go up, abortion will still be legal, law students will have to buy their own contraceptives, domestic energy production will grow and the Federal Government will expand slightly more slowly.

Pasadena City Hall

What a great country we live in where transitions of power can happen without violence.

 ”False’ doesn’t mean ‘wrong.”

Debbie Wasserman Schultz

Chairperson of the Democratic National Committee

on CNN 10/10/2012

I’ll need an example of this one.

“Fathom the hypocrisy of a government that requires every citizen to prove they are insured… but not everyone must prove they are a citizen.”

Now add this, “Many of those who refuse, or are unable, to prove they are citizens will receive free insurance paid for by those who are forced to buy insurance because they are citizens.”

Ben Stein

Author of What Would Ben Stein Do?