Investing for a Republican congress.

[we_are_toast]

It seems more likely that the Republicans will take over congress in Nov. The question is, how do we invest for such a change? Will it change any of your investment allocations? Should it?

The day after the elections of 2004 (long before I discovered iTulip), I went from 0% gold, to 50% gold. Elections have economic consequences!

I know it's very early to be considering this, but I would hate to be scrambling a few days before the election to figure out how to reallocate.

Here's what I believe would be the results of a Republican takeover of both the house and the senate, but mostly the senate;

Complete and total gridlock. Few if any judges getting appointed, absolutely no economic reforms getting introduced, no senate hearings of the problems that led to the economic crises, anti regulatory legislation passed and vetoed, Tax cut legislation passed and vetoed, no more stimulus or jobs programs, possible filibuster of attempts to raise debt ceiling, a complete lack of ability to handle any new crises... and a complete loss of trust, by the public, that the government can accomplish anything. Welcome to government, California style.

My initial feeling is that the paralysis will lead to a deflationary (not disinflation) environment. If the timing coincides with a China bust, this could be the mother of all black Swans. Short commodities, short gold, short everything?

I don't want to get into a pissing contest of who's better, Dems or Repubs, I just want to know what your honest feelings of what will happen to the economy if the Repubs take over and if you'll reallocate.

[Sidewinder]

Re: Investing for a Republican congress.

Thanks Toast - I would like to second the motion.

Was thinking exactly this last night as well as the pending China bust... What channel(s) is your scanner tuned to so I can block them:rolleyes:??
SW

[Ghent12]

Re: Investing for a Republican congress.

My initial feeling is that the paralysis will lead to a deflationary (not disinflation) environment. If the timing coincides with a China bust, this could be the mother of all black Swans. Short commodities, short gold, short everything?

You're certainly more financially savvy than I, but can you go into a bit more detail as to how this will cause a deflationary environment? Both parties are deep inside the pockets of FIRE, and I don't believe Bernanke when he says he won't print forever.

[jiimbergin]

Re: Investing for a Republican congress.

You're certainly more financially savvy than I, but can you go into a bit more detail as to how this will cause a deflationary environment? Both parties are deep inside the pockets of FIRE, and I don't believe Bernanke when he says he won't print forever.

I agree, I do not think there is much of a possiblity of a deflationary environment.... and we know EJ does not think so either

jim

[we_are_toast]

Re: Investing for a Republican congress.

You're certainly more financially savvy than I, but can you go into a bit more detail as to how this will cause a deflationary environment? Both parties are deep inside the pockets of FIRE, and I don't believe Bernanke when he says he won't print forever.

If I were financially savvy, I certainly wouldn't still own UNG.

Here's my theory. There will be no more bailouts of GM, Chrysler, the post office, Real Estate, Fannie and Freddie... There will be no more jobs programs and no more stimulus. And because they are running on, we want smaller government, I don't see how they don't send up a budget that has severe cuts in government spending. Whether we like it or not, Gov. spending is the major thing holding up GDP. I think most investors understand this and are very nervous with the current theory that Gov. spending will stimulate private spending, but if you cut out Gov. spending, what's left? The investors will run for the exits and we enter a downward spiral.

Then there's the deficit. The Republicans will most certainly propose a tax cut or an extension of the Bush tax cuts. Most Americans believe you can cut the deficits by eliminating foreign aid, waste and abuse. Most foreign investors have run the numbers and know you need major tax increases and budget cuts to get to a balanced budget. Obama won't sign a repeal of health care or massive cuts in the safety net, and the Republicans won't pass a tax increase. The stalemate will send a signal to Treasury investors that we're heading for QE and it's time to run, maybe.

So the whole thing gets dumped into Bernanke's lap. What to do? No more TARPS or TALFS, no more rabbits in the hat. The 1st hint of backdoor QE, and foreigners holding 6 trillion $ worth of treasuries start dumping, but where's the buyers? A big black Swan for China, and a world dollar crises. What are Bernanke's choices? QE leads to a dollar crises. Large Gov. spending cuts leads to a double dip recession and fear of depression, which forces QE, which leads to a dollar crises.

This may be inevitable anyway, but I think if congress goes Republican this fall, the day of reckoning may come a lot sooner than we expect. Maybe I'll amend my concern for deflation to, a severe bout of disinflation.

$.02

[Ghent12]

Re: Investing for a Republican congress.

So the only solution to avoid a dollar crisis is to keep government spending at record levels via record deficits? I don't buy that. Besides, Republicans don't cut spending.

I think the real answer is far closer to "there is no solution," than most want to admit. My instincts say to get this whole messy affair over and done with, and allow reindustrialization to begin in earnest. Then again, there's that annoying parasitic element known as FIRE...

[Ghent12]

Re: Investing for a Republican congress.

On another pass, I think that perhaps you are on to something. After all, we were in a "deflationary" environment for four months during the financial funstorm. It is not inconceivable that we will re-enter a brief period similar to that. If you can be well-positioned to take advantage of that situation, then more power to you.

That of course leaves out that the 'right' course of action and is just commentary on what may happen. However, I think any long-term deflationary environment is likely impossible.

[ViC78]

Re: Investing for a Republican congress.

The investors will run for the exits and we enter a downward spiral.

$.02

IMO, you are absolutely correct. If you take a look at the Richard Koo presentation linked in this thread by Rajiv, he points out that in a debt deflation/ balance sheet recession, whenever the government prematurely withdrew stimulus and tried to reduce the fiscal deficit, the economy crashed back down again. If the Reps run on a platform of reducing the fiscal deficit and a program of austerity (as it seems will be the case), it is curtains for the economy and consequently the markets, because I don't think anybody over here argues that this is a self-sustaining "recovery". Too bad we wasted trillions bailing out the bankers.

[ThePythonicCow]

Re: Investing for a Republican congress.

You're certainly more financially savvy than I, but can you go into a bit more detail as to how this will cause a deflationary environment? Both parties are deep inside the pockets of FIRE, and I don't believe Bernanke when he says he won't print forever.

They are not just printing money. They are creating off-setting debt as well. Unlike Zimbabwe, the basics of double entry accounting are thoroughly ingrained in Western accounting (even if sometimes an entry is wholly fraudulent.) Money, in our day and age, is monetized debt.

Presently they are moving debt to the Federal balance sheet, from various corporate, local, state, pension, ... books, and taking the cash thus generated to get more durable forms of wealth, such as land, gold, resources, and tax and rent income streams from us serfs.

They know full well that us serfs won't be pleased with our decreasing prosperity and freedom and declining empire, so they are cranking up the various forms of "crowd control" for use as needed. Some of my most controversial iTulip posts are over on the Rant and Rave Forum, attempting (without success, it seems) to expose to others some of these forms of "crowd control."

In particular, they seek to further weaken the independent power of separate nations, especially the U.S. That's one of the reasons they are piling debt onto the Federal (U.S.) ledger at an accelerating rate. They're driving the U.S. into austerity, as they have done to so many other less powerful nations in recent decades.

The history of money:

• Once upon a time, money was backed by gold and silver.
• Then other nations' money was backed by dollars, and dollars by gold.
• Then other nations' money was backed by dollars, and dollars by U.S. debt (monetizing the income tax stream collected by the United States I.R.S., roughly.)
• Then all nations' money will be backed by some G20/IMF/BIS SDR-like concoction.

That U.S. debt engine currently backing up the Dollar (in the world's most liquid market, buying and selling U.S. Treasuries for Dollars) will soon blow up, like a runaway steam engine with a broken governor, faster, faster, faster ... until it blows up - splat!

EJ has long documented and anticipated what he labeled KaPOOM. What I'm saying here goes one step further: KaPOOM*Splat*.

After the brief Ka phase in which value rushes to the core (which made the Dollar a more valued currency at times over the last year), then (POOM) they make the dollar worth less and less (inflation due to expanding U.S. debt), and then (*Splat*) they take most of these dollars away (higher taxes, unemployment, confiscation, failed pensions, failed businesses and governments, private, public and corporate defaults and bankruptcies, ...) The U.S. Dollar loses it's status as the world's reserve currency and the sun finally sits on the "United Kingdom -- United States" Empire. In another thousand years, some historian will write of "The Decline and Fall of the Anglo-American Empire."

Imports will cost more, but we Americans (of the serfdom class) will have less to spend. Certainly less in real value, and for many of us, less in nominal value as well. There will be fewer opportunities to engage in productive economic activity, whether as laborer, entrepreneur or consumer.

Those who say "they (FIRE) can just print more money" make a fundamental error. This is not a simple plumbing problem. One cannot simply offset the lowered value of a Dollar with more Dollars.

A major portion of a monetary system involves long term debt, contracts, wage, rent and tax arrangements. These make the amounts of money needed and available "sticky." When the value of the monetary unit (e.g., the Dollar) changes, this shifts wealth in these long term arrangements. If the shift is sufficiently dramatic, then many such arrangements fail (debts are defaulted, workers are layed off, homes are foreclosed, etc.) When this happens on an international scale, trade becomes war.

When such an economic system breaks down, it results in miss-allocation of resources. The potential productive capacity of labor, capital equipment and resources is no longer available. People stand around doing nothing, impoverished, while factories, fields and mines lie idle. People live in cardboard boxes under bridges, while McMansions lie empty. Neighborhoods become unsafe. Government officials become increasingly corrupt. The general health and wealth of the people decline.

In hard times and declining empires, there is grave danger that the people will fall for a charlatan leader, exchanging their freedom for a yoke of lasting tyranny. Americans are well along the path to debt slavery. There is little reassuring evidence in the American elections of the last few decades that America has any immunity from this risk.

Hmm... looks like I'm going not one, but two, steps past KaPOOM, to KaPOOM*Splat*DOOM, with a long period of darkness (DOOM) following the *Splat*. EJ will not be amused; he's no doomer ;).

[c1ue]

Re: Investing for a Republican congress.

The deadlock in government between Obama and a Republican Congress is irrelevant.

There was deadlock in the Clinton era, ditto for the 2nd half of Bush, and in both cases the Fed continued to do whatever it wanted.

As for the monetarist case: So far the monetarists are still wrong on China (bubble hasn't burst), and equally the case is still open for the US (massive deficit spending and falling foreign Treasury ownership hasn't increased interest rates...yet)

The safe play is to play safe: preservation.

The iTulip strategy is as good as any and better than most.

The unsafe play is to do what I'm doing now: nest egg abroad and internet startup (self funded).

[doom&gloom]

Re: Investing for a Republican congress.

They are not just printing money. They are creating off-setting debt as well. Unlike Zimbabwe, the basics of double entry accounting are thoroughly ingrained in Western accounting (even if sometimes an entry is wholly fraudulent.) Money, in our day and age, is monetized debt.

Presently they are moving debt to the Federal balance sheet, from various corporate, local, state, pension, ... books, and taking the cash thus generated to get more durable forms of wealth, such as land, gold, resources, and tax and rent income streams from us serfs.

I agree "big daddy" is not only absorbing debt, it will absorb more! and when that is done, yet even MORE! As states and municipalities start to falter under pension obligations, and voters turn down noew taxes at the state level, big daddy will be "tapped" and the CONgress will give in (not initially) because those "representatives" will want to keep their home voting districts afloat in union dues-paing voters. I see the states being only marginally successful over time at bridging gaps in loss of tax revenue as the ture nature of union largess in pensions and HC makes it out into the public discourse. And since many state/local governments cannot, by law, discharge their financial "dues", someone will have to make up the difference. This will come under the rallying cry to "save the muni markets" on the part of the states. Even more drive for a VAT, if not already passed by that time, will come as a result.

They know full well that us serfs won't be pleased with our decreasing prosperity and freedom and declining empire, so they are cranking up the various forms of "crowd control" for use as needed. Some of my most controversial iTulip posts are over on the Rant and Rave Forum, attempting (without success, it seems) to expose to others some of these forms of "crowd control."

Presently "crowd control" consists of never-ending UI bennies. Eventually that money will run out, and we should see the first riots in the inner city areas if we get a nice hot summer (with all this GlowBall Warming we have). If that occurs, we will get a taste of how well crowd control will work.

In particular, they seek to further weaken the independent power of separate nations, especially the U.S. That's one of the reasons they are piling debt onto the Federal (U.S.) ledger at an accelerating rate. They're driving the U.S. into austerity, as they have done to so many other less powerful nations in recent decades.


The history of money:

• Once upon a time, money was backed by gold and silver.
• Then other nations' money was backed by dollars, and dollars by gold.
• Then other nations' money was backed by dollars, and dollars by U.S. debt (monetizing the income tax stream collected by the United States I.R.S., roughly.)
• Then all nations' money will be backed by some G20/IMF/BIS SDR-like concoction.

That U.S. debt engine currently backing up the Dollar (in the world's most liquid market, buying and selling U.S. Treasuries for Dollars) will soon blow up, like a runaway steam engine with a broken governor, faster, faster, faster ... until it blows up - splat!

I see the blow coming when the "bond vigilantes" figure out that the "mysterious" buyers of USTreasuries have been the banks themselves thru some alternative, off balance sheet entities. Face it, so long as the Fed gives out free mony to the toob-ig-to-fail, it does not take much of a nod and a wink to convince said banksters to buy up excess UST's to help keep rates down so said banksters can continue to game the system. If/when this game is exposed for what it truly is, and rates explode giving us the "sudden stop" syndrome, THAT is when things will get very interesting.

EJ has long documented and anticipated what he labeled KaPOOM. What I'm saying here goes one step further: KaPOOM*Splat*.

After the brief Ka phase in which value rushes to the core (which made the Dollar a more valued currency at times over the last year), then (POOM) they make the dollar worth less and less (inflation due to expanding U.S. debt), and then (*Splat*) they take most of these dollars away (higher taxes, unemployment, confiscation, failed pensions, failed businesses and governments, private, public and corporate defaults and bankruptcies, ...) The U.S. Dollar loses it's status as the world's reserve currency and the sun finally sits on the "United Kingdom -- United States" Empire. In another thousand years, some historian will write of "The Decline and Fall of the Anglo-American Empire."

I see the "splat" as the next war, which always gets trumped out when things turn to total shit. Party does not matter. Splat will be the waste of lives to decrease the surplus populations around the world no longer needed de to cheap labor and mechanization/automation. Empires tend o die hard when there is a lot of political capital at stake, and this is a BIG empire.

Imports will cost more, but we Americans (of the serfdom class) will have less to spend. Certainly less in real value, and for many of us, less in nominal value as well. There will be fewer opportunities to engage in productive economic activity, whether as laborer, entrepreneur or consumer.

I explain to everyone it is "deflation in the things you own, inflation in the things you need". As necessities like energy, food et al consume more of people's checks, they will need less toys, big houses, RV's etc.

Those who say "they (FIRE) can just print more money" make a fundamental error. This is not a simple plumbing problem. One cannot simply offset the lowered value of a Dollar with more Dollars.

A major portion of a monetary system involves long term debt, contracts, wage, rent and tax arrangements. These make the amounts of money needed and available "sticky." When the value of the monetary unit (e.g., the Dollar) changes, this shifts wealth in these long term arrangements. If the shift is sufficiently dramatic, then many such arrangements fail (debts are defaulted, workers are layed off, homes are foreclosed, etc.) When this happens on an international scale, trade becomes war.

I don't necessarily agree a declining dollar will cause war, as many nations are now clamoring for a new "trade unit" and some are already trading without dollars like China/Brasil.

When such an economic system breaks down, it results in miss-allocation of resources. The potential productive capacity of labor, capital equipment and resources is no longer available. People stand around doing nothing, impoverished, while factories, fields and mines lie idle. People live in cardboard boxes under bridges, while McMansions lie empty. Neighborhoods become unsafe. Government officials become increasingly corrupt. The general health and wealth of the people decline.

In the US I doubt the ruling class will allow the people to go hungry easily, as hunger easily brings on revolutions -- and we are a heavily armed population. They will keep the people fed, and look for staw-men to blame for the mess over time. Maybe, we can only hope, the world banksters!

In hard times and declining empires, there is grave danger that the people will fall for a charlatan leader, exchanging their freedom for a yoke of lasting tyranny. Americans are well along the path to debt slavery. There is little reassuring evidence in the American elections of the last few decades that America has any immunity from this risk.

We already have a charlatan leader, who won on a nebulous program of "change we can believe in" but actually runs the country as a Korporatist and Krony Kapitalist.

Hmm... looks like I'm going not one, but two, steps past KaPOOM, to KaPOOM*Splat*DOOM, with a long period of darkness (DOOM) following the *Splat*. EJ will not be amused; he's no doomer ;).

I see darkness only insofar as the whole peal oil event, or perhaps oil embargoes or shipping cut-offs as a result of an oil blockade by Iran or similar...

[ThePythonicCow]

Re: Investing for a Republican congress.

Thanks for the comments, doom&gloom. Good points.

[doom&gloom]

Re: Investing for a Republican congress.

Thanks for the comments, doom&gloom. Good points.

always happy to depress the situation!

[we_are_toast]

Re: Investing for a Republican congress.

I believe I will continue to add to my shorts of the S&P

Complete and total gridlock. Few if any judges getting appointed, absolutely no economic reforms getting introduced, no senate hearings of the problems that led to the economic crises, anti regulatory legislation passed and vetoed, Tax cut legislation passed and vetoed, no more stimulus or jobs programs, possible filibuster of attempts to raise debt ceiling, a complete lack of ability to handle any new crises... and a complete loss of trust, by the public, that the government can accomplish anything. Welcome to government, California style.

There Will Be Blood

Former Senator Alan Simpson is a Very Serious Person. He must be — after all, President Obama appointed him as co-chairman of a special commission on deficit reduction.

So here’s what the very serious Mr. Simpson said on Friday: “I can’t wait for the blood bath in April. ... When debt limit time comes, they’re going to look around and say, ‘What in the hell do we do now? We’ve got guys who will not approve the debt limit extension unless we give ’em a piece of meat, real meat,’ ” meaning spending cuts. “And boy, the blood bath will be extraordinary,” he continued.

Think of Mr. Simpson’s blood lust as one more piece of evidence that our nation is in much worse shape, much closer to a political breakdown, than most people realize....

The fact is that one of our two great political parties has made it clear that it has no interest in making America governable, unless it’s doing the governing. And that party now controls one house of Congress, which means that the country will not, in fact, be governable without that party’s cooperation — cooperation that won’t be forthcoming.

Elite opinion has been slow to recognize this reality....

These days, national security experts are tearing their hair out over the decision of Senate Republicans to block a desperately needed new strategic arms treaty. And everyone knows that these Republicans oppose the treaty, not because of legitimate objections, but simply because it’s an Obama administration initiative; if sabotaging the president endangers the nation, so be it....

My sense is that most Americans still don’t understand this reality. They still imagine that when push comes to shove, our politicians will come together to do what’s necessary. But that was another country.

It’s hard to see how this situation is resolved without a major crisis of some kind. Mr. Simpson may or may not get the blood bath he craves this April, but there will be blood sooner or later. And we can only hope that the nation that emerges from that blood bath is still one we recognize.

http://www.nytimes.com/2010/11/22/op...rssnyt&emc=rss

[c1ue]

Re: Investing for a Republican congress.

I believe I will continue to add to my shorts of the S&P

How's that working for ya?

I'd think the Fed and what not would dictate avoiding such risky strategies.