The equity rally has been going on for nearly 3 months straight. It took a while longer
but corp and emerging market bond spreads have also improved. Obama has done a lot to goose the market w/the approval of mythical accounting standards and "get out of jail free" cards even as the FDIC Friday bank failures contiue.
However, the greater macro-economic and fiscal health of the US government have also detiorated by an inversely proportional amount. Every tick upwards in the market indices was accompanied by a further slide in the dollar's purchasing power. Moreover, the worrying state of local finances has also grown considerably. While a lot of attention has been focused on rising Treasury bond yields, another sector to consider is muni bonds.
Why own munis? B/c of the tax free benefit? Perhaps that attitude made sense when state governments had some modicum of fiscal restraint.
But now?
State revenue is falling rapidly as property and sales and income tax receipts continue to decline.
Funds CAN and WILL be downgraded or unable to roll over their commercial paper thus forcing yields to rise. And while Treasuries have SOME modicum of safety due to their deep capital market access, it can essentially be summarized as a giant pyramid scheme of suckering emerging market lenders like China and Brazil to continue speculating in future American tax receipts.
While I am very bearish over all as to America's future there DOES remain a shining light. The US has unrivaleled comparative advantages in its agriculture sector - vast fields of golden wheat, oats, corn stalks, rice fields, and herds of cattle, pigs, and other farm animals.
So, here is my proposal.
Instead of basing the dollar on an implicit backing of government stability, replace it w/an explicit basket of hard assets. Assets that foreign investors can rely on to continue retaining their value. Remember, most of America's foreign trade partners can care less about such abstract principles as democracy, free markets, and other fancy rhetoric. Recent events have shown that policy makers have about as much respect for these things as banking capital adequacy ratios.
Replace "In Debt We Trust" w/"In Grains We Trust." The dollar's new value will be based against the market price of a basket of hard assets such as agricultural grains. Investors have always trusted physical assets - tangible items of value that can be touched and stored.
The Federal Reserve will be abolished and its functions replaced by the Dept of Agriculture whose forecasts, weather predictions, and pest analyses will take on the same importance as Monetary policy meetings.
Friday, May 22, 2009
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