Shock and Awe - 6 / 3 / 2009

It is shocking to me the lessons learned by the US Government during the last 10 years. While I believe there is a need for proper regulation and taxation in the creation and management of overall US and Global productivity (a.k.a. the world economy), the US Government continues to err on its approach in good times and bad. The United States has at least 25% of the greatest economic and business minds the world has to offer. And ultimately it's these men and women whose collective actions or decisions drive the US Economy and its productivity. Some are entrepreneurs who have become Fortune 500 CEO's, some are commercial and investment banking CEO's and Executive Officers. Some are top end academics, some are capital markets investors or speculators. And some are US Government Finance Officials. Make no mistake that these US Government Officials and the people mentioned before them are as smart as they come.

What shocks me is that the US Government Finance and Executive Branches have since 1999 and Greenspan's "irrational exuberance" speech, decided that they must communicate with the US Equities Markets. That some how the fate of the US Economy is determined by the direction of the stock market. The belief is that higher, bullish trending, stock markets result in better funding opportunities for established and growing businesses. Better funding opportunities means economic expansion and economic expansion means economic prosperity. This magic bullet for American prosperity, the Executive branch, the Fed, and Treasury believe begins with the US Stock Markets.

This could not be more wrong and, could not be more damaging ultimately. Right now, the US Markets are trading at the direction of the Fed and the Treasury. The Fed and Treasury in turn are being directed, as they have been since 1999 when Greenspan let his term "irrational exuberance" slip, buy the Executive Branch. That was the moment that the Executive Branch recognized that if the economy was going in the wrong direction their ability to fix it quickly could only be effected via a super liquid capital markets enviornment combined with an advancing stock market. That simply reducing interest rates was not fast acting enough for the Executive Branch. Readers this government, and the Clinton and Bush governments, have had an active economic policy that supports and endorses speculation as the way out of economic down cycles.

What they should endorse is an economic policy that supports productivity. Why have we seen 2 speculative bubbles in 10 years? Because that is the type of economic policy that our governments, democratic or republican, endorse through the Federal Reserve and US Treasury. And now we are trapped in yet another cycle of announce good news when the markets are trending down, and announce bad news when the market starts to surge. This is managed speculation and it continues to add NO VALUE to our productivity base.

Why is this? The sources of capital to grow productivity, Commercial and Investment Banks, have no interest in long term investments that enable the creation of productivity expansion in small and mid sized businesses because, ultimately, they can make more money over a shorter time horizon, speculating in the capital markets. You want answers to the decline in the value of the dollar, the decline in wage growth, the decline in employment rates (or the increase in unemployment), the decreased time in economic cycles...It is all because the US Government has by its economic policies over the last 10 years, created speculative markets, rode them higher, and then stepped aside and searched for scapegoats to describe the result of any speculation that comes without relative increases in productivity, a crash. In 1999 it was CS First Boston and Carlucci, now its AIG and Citibank.

But really, it is the short sited government economic policies that have us bound to a boom / bust economy. These policies serve their purpose. They transfer wealth from one group to another (creating new wealthy), and they enable the Executive branch, if managed properly, to point to a rising stock market as a sign of successful policies and point to the beneficiaries as the bad guys of the those markets in a crash.

What has been lost in all this is the US industrial state. Once the envy of the world. We have lost US productivity and US quality. Short sited speculative economic policy can't support value creation and productivity over a 10 year cycle. It is Shocking to me that this is the approach the government continues to take, and I am in awe that they have been able to keep the media from recognizing it.

So if you are an investor, or a trader you have no choice. There are no rewards in this system for long term investors in productive companies. No rewards for people who save their money (because inflation robs value). So ride the next wave of speculation, just put your upside and downside limits in and you will be protected. We may be in a Bull Market, but it cannot be sustained without productivity gains. And this government just like the past 2 governments, is not addressing that issue properly.

Build Value Every Day

Bradford Van Siclen