Proud to be an American, vol. MMXXXVI

Did you know that in Texas you can vote if you show your handgun carry permit, but not your student ID?

It's gettin' ugly out there.

Hell, even North Korea knows you need to at least make sure people have food.

Hungry, unemployed people with guns are something we might consider trying to avoid, ya think?

What the hell are we becoming?

Up or down, that old question.

Investing these days is a nightmare. As I indicate in the previous post, there are just too many investors and too much data, and outcomes depend as much on the decisions of one random finance minister somewhere (will there be QE3? What terms will Greece get from the EMU?). Whether Angela Merkel enjoys her coffee this morning may have powerful effects on your portfolio value.

So where does this leave us little guys?

I think the safest thing we can do is ignore all that stuff and recede back into longer timelines, where things make a little more sense. For example, the population is growing, and developing nations are using more and more energy. Oil is a finite resource, so hold some for the long term. Knowing (but not caring) that over the next year it could tank. Or, the US has been propped up on low interest rates and QE, but both can't continue forever.

While many folks think US bonds will crash when the world "wakes up" and sees what a terrible credit risk the US is, it's only a nominal credit risk (meaning we WILL pay back our obligations, we may just do so in devalued dollars). But I see it a little differently. I think the US bond will tank as soon as there's a clearly much better option. For example, booming global world growth.

But this all, in my opinion, goes back to confidence. People take risk when they're confident. There are innumerable confidence-destroying issues out there right now. Will China implode on a GDP that is far too heavily weighted on the real estate sector? Will the US in its "let's cut everything" mode ever be a viable global consumer again? Will Greece lead to Portugal lead to Spain, bringing down confidence in banks world over?

And the government personnel in charge of driving the outcomes of these issues seem hopeless. Is there anyone out there who wouldn't prefer an 8th grade honors class be running the USA rather than the tragicomic clown show that is the US Congress?

So, long story short, morons are in charge far more than markets right now. This leads to lack of visibility, which leads to lack of confidence, which leads to lack of the desire to take risk.

So yes, Apple will sell to China for decades. Own Apple.

But be wary of the generic concept of "stocks for the long run" in that if you just buy some index ETF you don't have to think about what you're owning. Here's a nice "stocks for the long run" graph for you to ponder.

Japan (the blue curve) is an industrious, developed nation with a high work ethic and a consistent trade surplus. And the US (the red curve) used to be full of hope and promise, but now the US is....um...what, at the moment?

A world that depends on what it can't possibly understand is asking for trouble.

For the longest time, stock and bond markets were fairly simple. Stocks were shares of companies sold to generate capital for that company when it needed to expand. Bonds were promises to pay interest on capital borrowed. Really, most people kept most of their money in savings accounts, that paid - when I grew up - around 5 1/4 percent. Banks lent that money to people who wanted to buy homes for a couple hundred basis points over their borrowing costs. It was a much simpler system, which served to much more directly benefit borrowers and savers.

Now, this system bears no relevance to what’s going on out there in finance. Savers can’t use bank accounts to save. They’re actually losing money if they do, because real interest rates are below zero. So they plow money into “stocks”, whatever that means these days. It could be an ETF, an emerging market Mutual fund, or Apple. Well how do you evaluate Apple? They make some cool stuff, and China’s big and growing. Sure. And that’s about where it ends for most folks. What about China falling? What about the European debt crisis? What about Japan’s demographic problem? What about the US’s inability to do anything right?

Now certainly external effects have always played a part in financial market pricing, but it really does seem like things are getting different-er. Globalism is a huge part of that. There’s too much going on around the globe to be able to understand how various asset prices will be affected. And the lower barriers of entry to investing through basically “web based games” like Charles Schwab, etc bring so much more noise into the markets, and presumably make the herd behavior much worse.

So is this just a zero-sum game, where the level of complication just goes up more, and that benefits either the lucky or the brilliant? Probably mostly.

But I also think there may be an overall confidence effect: how can the average investor know what the hell to do with her money? With market opacity at all-time levels and growing, what do you trust?

The absence of an easy “no brainer” solution like savings account, is in my mind a really, really bad idea. And threatens to wipe out (again) those unsophisticated investors who get caught in risk assets. So what ends up happening is the savings of those folks gets transferred to more sophisticated (or lucky) folks. Making people even more scared and uncertain.

I think this uncertainty is really bad for the global economy. And adds incredible noise, and the possibility for huge blow-ups. To put it simply, we’re just not smart enough to understand the system we’ve created. And this is very dangerous imho. Because those with no savings and no job and no hope become violent. Wars begin. People die. Just look to the Middle East.

So what is my solution? We need to simply the global financial system closer to something our little human brains can understand. Yes, at the expense of liquidity. Yes, at the expense of potentially greater rewards for a few. But as soon as you get dependent on any system you don’t understand, you’re asking for trouble.