Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

At almost mid day.
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The Problem with Too Many Republicans

As a Republican mouthpiece, FOX is not worth watching and it is only barely worth talking about. Hannity seals the argument. Much of the programming is just preaching to the choir.

There was a day many years ago when Republicans did stand for sound business practices and plausible economics. Those days faded with my childhood and I am almost 70. Now, one can only sympathize with the remaining reasonable, moderate and informed Republicans.

Today, Republican economic illiteracy in Congress significaantly exceeds that of the Democrats, especially when judged by spoken inane comments. I see four reasons for this.

First, much of the problem arose when the religious right came out of the closet, joined the Republicans and showed them it was alright to lie about anything as long as you got what you wanted, because after all they were doing God's work, and what can trump that?

Secondly, the joinder of the religious right brought Republicans a simple and simple minded mind set that just doesn't fare well with more complicated issues, especially those involving business and economics.

Thirdly, another part of the problem arose when fewer Republican candidates were drawn directly from the business community and instead came more from the general community.

Finally, I think fringe-right talk show hosts and commentators provide training and direction to Republican candidates, showing them which postures seem to work politically with voters and which don't.

Now, the situation is more sad and pathetic than not, especially in regard to its implications for America. The good guys seem too much out numbered

Comment to post by Paul Krugman in N.Y. Times.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

In the Third World, construction proceeds slowly, in fits and starts as money becomes available.
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What If and Is It Too Late? The Infrastructure Rebuilding Program and a WPA

What if Obama had really gone forward with his program to rebuild America's infrastructure that was a major part of the original stimulus package, but somehow largely got derailed? What if, instead of paying and then rolling over most unemployment benefits, the administration had adopted a Work Projects Administration (WPA) type of program to employ such welfare recipients and implement rebuilding America's infrastructure under the stimulus program, largely along the lines of what was originally planned.

I think the answer pretty clearly is we would be better off regarding unemployment then we are now. I suspect, however, that many of the funds targeted for new jobs and infrastructure repair went to the states to avoid governmental layoffs and to stimulus funding of Democratic pet programs, but I am not sure. It is quite difficult to get good information about what happened to the infrastructure rebuilding program. But as Peter Morici reports, now only about $100 billion of the $759 billion stimulus package is slated for brick and mortar programs. Infastructure rebuilding is not only proceeding too slowing, it has been largely gutted by the Administration.

Assuming the moneys were as much diverted as not into tax cuts and aspects of the Democratic agenda, it seems that the federal government made a pretty big mistake here. If I had known more conclusively, I would have included this error of the Administration in my recent article on Washington's Problem is Poor Economic Solutions. But the water is a bit muddy. What is clear is the infrastructure rebuilding program too largely went nowhere and we have high and rising unemployment.

But the next question is, is it too late?

That is, is the economy too much on an upswing and mending to get such a WPA infrastructure rebuilding program and funding for it on its feet in time to be really useful? The answer largely depends, I think, on one´s assessment of where the economy is going with unemployment and what the worth of a repaired infrastructure and some clean up is.

The stock market now clearly thinks the economy is on the mend. Many here at Seeking Alpha have serious longer run reservations. Many economists and others believe the unemployment problem is going to last for a good while; some think a large part of it is permanent. Paul Krugman, himself quite an optimist, apparently has his doubts about employment improving quickly, too. So does Brad DeLong.

Such a program is certainly the most direct way to attack unemployment; however, as I pointed out in my article above, indirection and obliqueness have been the government´s big problems in trying to solve the nation's economic problems. The proposal here would fix that regarding unemployment.

But what should we do now?

I think we should initiate a WPA type of program now and take people off the unemployment rolls and put them for starters on the "shovel ready" projects in their areas that never really got started. Also, much general repair and clean up is needed in America that they could also start on. Taxpayers would get something local and tangible for their money, for a change.

The infrastructure clearly needs help, some $2.5 trillion in maintenance, repairs and rebuilding according to the Americans Society of Civil Engineers. The expense of those unmade repairs and lack of maintenance grows annually with further physical deterioration. Basic maintenance is lacking in too many areas. It will cost us much more later. We are digging ourselves into a hole here. The program suggested should help. We would not be having people dig holes and then refill them. There is honest work to be done.

If it turns out that the economy recovers more quickly, fine; continue with the program anyway. We need it. If the economy has a relapse, then we should be glad to have the program in place and we can expand it. Unemployment is forecast to continue for a good while anyway. The repairs are badly needed. We should get on with it.

These suggestions are better than simply giving the money away in unemployment benefits and planning a new stimulus program that has only temporary effects and costs too much. Much useful can be done in almost all areas, down to picking up the trash strewn about America. Too, it would not cost us $92,000 to $257,000 per job, as some have variously estimated the last stimulus program cost us -- the price of Washington's economic indirection and obliqueness, I contend.

I also believe that such a program, in addition to impacting the unemployment problem, could seriously improve our nation's spirit and outlook. Something tangible would be getting done. People who had no work, would be usefully employed. Bridges in shambles and roads badly pocked would be getting fixed and repaired. Things would get cleaned up and look better. People would notice. It would do us good and it would be useful.

We should have implemented such a program at the outset, but it is not too late. We should do it now.

Posted and published on seekingalpha.com

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

Lines, forms and textures.
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Washington's Problem Is Poor Economic Solutions

The Fed observes the banking system has a deleveraging problem. So what does it do? It increases liquidity. Deleveraging and liquidity don't really cancel each other out. In fact liquidity creates the leveraging problems that later call for deleveraging. Another example. The Fed wants to lower mortgage rates. Instead of opening a window and making mortgage loans available at low rates to help the housing slump, what does it do? It decides to pursue a zero interest rate policy and quantitative easing, which lower most interest rates, including those for mortgages a bit, and it thereby creates a worldwide asset bubble and increases asset prices in the U.S., by lowering the rate of interest used to discount assets' returns and increase their value.

Now, we have asset price inflation in the U.S., but are verging on price deflation for goods and services, while a worldwide asset bubble is also building from the carry trade and people moving their money to distant areas providing higher returns. The Fed has obviously never heard of the medical maxim of "Do no harm."

The Fed and our national government want to increase GDP and get us back to where we were, so what do they do? The Fed does what it has done and our federal government engages in multiple stimuli programs which don't really fix our underlying problems and give us only temporary increases in GDP, at considerable expense. The approach ignores how we got to where we are and has the Fed and Washington putting their collective heads in the sand. Our short history, for these purposes, is easy enough.

China and the Pacific Rim arose economically, and we shipped many labor intensive jobs in the manufacturing sector overseas and made capital intensive the production of those products we could continue to manufacture here, the net result being additional unemployment from that portion of our manufacturing sector too, over and above the jobs shipped overseas. And we wonder why our unemployment is high. Manufacturing in the U.S. and employment in that sector have been substantially gutted, relative to where we would have been.

Our unaddressed problems beyond that include our in part resulting huge trade deficit. As Keynes said, countries which persistently run large trade deficits will persistently stay in a depressed state. The other major problem we ignore is the very badly skewed distribution of income which lowers the average propensity to buy consumer goods and services and reroutes that money, via the top households in the income distribution, into the secondary financial markets, driving prices up further. Do you ever wonder how it is we can have the DOW pushing over 10,000 at the same time the recovery is faltering and going nowhere fast and unemployment is also shooting up? I just provided the answer.

The approaches of the Fed and federal government are too oblique. They are not direct enough. If you want low mortgage rates, offer to make mortgage loans directly at low rates. Don't drag down interest rates generally and create a global asset price bubble. If you want to deleverage the banking system, do that, but don't drown the banks in liquidity. Instead run the bad boy and troubled banks through FDIC or similar proceedings that scrape off their bad debt, along with their stockholders, bondholders and management, and then sell them off to new buyers for fresh and balanced starts.

The new, proposed regulatory reform bill, which is really in large measure a proposed banking system reorganization act wants to do just that, but after pouring billions down the drain on TARP programs used to maintain top executive salaries and bonuses in the banking industry and to expand bank trading programs.

Aside from pulling us back from the brink during the credit crisis, the Fed´s and Washington's approach to our problems has been either misdirected, backasswards or to ignore them. This is not a good way for us to dig out of our recession and get on our feet. Instead, we now face additional problems created by the bad solutions adopted by policy makers.

This is not a good situation, but the regulatory reform bill does offer some hope, if it can just get past the political muscle of the money center banks. I worry that Congress does not realize how important the reform bill is. Congress likewise has been too much out to lunch on economic matters of late.

Posted and published on seekingalpha.com

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

For smaller boats. Complete with a breakwater.
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Roubini's Forecast

This is from an article by Keith Ronison that he posted and that was published by the editors of Seeking Alpha (seekingalpha.com):

" . . . The key speaker of this year's conference was Noriel Roubini. The NYU economist was recently voted the fourth best financial mind in the world by Bloomberg terminal users. He stated that he expects the recovery to be "U" shaped although the markets are pricing in a "V" shaped recovery. As a result asset prices have increased "too much, too far, too soon". He said that there is a 25% probability of a "W" or a double dip in the economy and he stated if a "W" were to occur the markets would break through previous lows set back in March.

"Speaking on commodities, Roubini said that the move from $30 oil to $80 oil has not been justified by supply and demand. He believes oil could go as high as $100 a barrel as a result of the dollar carry trade and that it would cause severe damage to global growth, but he said that hyperinflation is not a scenario that could play out due to the weakened state of the United States economy. The dollar carry trade, which Roubini said is starting to create bubbles in risky assets, could quickly pop sending investors fleeing for the exits. He told the audience that a short dollar trade reversal would be rapid and would cause a massive downturn in risky assets.

"Looking forward Roubini is worried about the second half of 2010 and advised the audience to be cautious. By then the stimulus funds will have finished moving through the economy and China will not be able to carry the world on its shoulders. He dismissed ideas that emerging markets could decouple from the United States. Structural issues exist in China that cause a high savings rates among citizens and these issues cannot be changed for at least a decade. He stated that their current growth is unsustainable and that the excess capacity that is currently being added will eventually be adding to global deflationary pressures. . . ."

Comment. I basically agree; however, I think the U.S. economy has some structural problems I have written about that compromise our longer term prospects relative to what they could be if those problems were addressed and repaired. There is some hope that will occur. The misnamed Regulatory Reform bill, which is actually a banking reorganizational bill, is a start.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

One of too many in the third world or a home never completed. A consequence of no construction loans.
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An Open Comment to Paul Krugman on the "Stupidity Economy"

Paul Krugman thinks we are too restrained by the desire not to run big deficits and and by other limitations on ever bigger stiumlus programs, all of which is creating what he calls the "Supidity Economy." I agree that we have a Stupidity Economy, but for different reasons. As I explained it:

Professor Krugman, I truly think you and other Keynesians view the real economy too much from the implicit vantage point of the rarefied flow models you have been schooled in. Recipe ��" Turn on model. Calculate output gap. Determine multiplier. Pour in cash. Shake, do not stir. And voila, the nasty gap is closed.

If our federal debt becomes too large from doing this too much -- because the multiplier keeps dropping and the stimulus affect keeps waning -- no sweat. We will just inflate our way out of it. That is a great way to deleverage the economy at the same time, anyway. Then everything will be better and back to normal, when the dust settles, even if the dollar will only be worth a farthing.

NOT! No way, I suggest. Sure, monetary policy is tapped out, interest rates are floored and our mighty insolvent money center banks are scared to death to make a loan because good borrowers are scarce and anyway they need the funds for their trading operations, salaries and bonuses.

Yes. The banks are a part of the problem, to be sure. We dropped mega-bucks into them and darn, they're still insolvent. They really need FDIC-like proceedings, also with a little supervision. Who knows, maybe the misnamed Regulatory Reform bill (aka bank reorganization act) might help us with this problem��"by scraping off banks' bad loans ��" and while we are at it, lets scrape off management, stockholders and bondholders, too. We can show the world there is a price for deliberately and knowingly getting it wrong. After all, we are not sending anybody to jail, so why not? It's the only thing sensible thing I've heard so far.

The original TARP idea of drowning insolvent banks with bad loans in liquidity always struck me as odd anyway. Too much liquidity creates bad loans; it doesn't get rid of them.

Then we have this nasty big trade deficit no one wants to talk about, that Keynes and others say is going to keep us in a depressed state relative to where we should be. But if there is anything policy makers and politicians want to talk about less than the trade deficit, it is the present maldistribution of income currently estimated to put only 20% of income into the hands of the bottom 60% of households and over 50% of income into the hands of the top 18% of households.

Now you can imagine what this does to the average propensity to buy consumer goods and services, and the impact of that on aggregate demand, but, hey, good lobbying and the prosperity of Congressional men and women and their wealthy well-lobbied for friends has to be preserved and taken care of. Taking care of their own is not to be messed with, or even discussed, no matter what its doing to aggregate demand and the distribution of income. Open your mouth on this one and they say, "out! go away."

Meanwhile, the top end of the income distribution keeps dumping much of its considerable unspent income into foreign and domestic financial markets, pushing those asset prices up. This whole situation gives us deflationary pressures on consumer good prices and inflationary pressures on financial asset prices --worldwide, I might add. Surprise! We are getting seriously mucked up here, but who notices?

Now if you wanted to use a little corrective fiscal policy - instead of just giving more tax breaks to the wealthy and abandoning the estate tax - and perhaps use a little negative income tax too, to repair the maldistribution problem and get those who matter back to buying stuff again -- well, good luck. Congress does not want to kill the goose that laid its golden egg, so you see, we are basically stuck, literally, and with the rats we have purportedly representing us.

Socialism is just fine for banks and big company bailouts, but not for redistributing income. It is no surprise that a smartie like Warren Buffet has taken big stakes in companies that got a lot of federal money, like poor old Goldman Sachs and little old GE, for examples.

I don't see a V or U or W shaped recovery. I see a V shaped recovery, but one that looks like this \___ where perhaps, the horizontal bar is raised a little a bit and is not a straight line, but a wavy one. The new real economy "lower normal," as some call it. But why not? Are we fixing (1) our banking problem? no, (2) our huge trade deficit problem? no, (3) our income distribution problem? no, or (4) the huge unemployment problem arising out of our manufacturing sector over the last 15 years or so? no. We are not doing anything except throwing money around carelessly.

We cannot even get the infrastructure rebuild and repair program (aka the Reinvestment and Recovery Act) on its feet and running. Worse, too much of the program turns out to be Congressional pork anyway. Outrageous! We were sold a bill of goods and the program is way behind. Meanwhile, the infrastructure sags even more and the price of fixing it is rising fast. Not too smart.

INEFFECTIVE is what we are and who pays for it? - the poor unfortunates that don't have anything to eat at the end of the month and live in the lower 60% of the income distribution with only 20% of the country's income. That's who. The wealthly and Congress don't want to hear about it. Why? Because they are doing just fine, in their gated communities.

Like I said, I do agree with Paul Krugman that we have a Stupidity Economy, it is just I think so for different reasons

Posted and published on seekingalpha.com -- very popular!

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

On a pleasant afternoon.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

Maintenance 'R' Us -- not exactly.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

A simple, pleasant setting.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

Shoes are a bother and an expense.

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Kimball Corson
11/08/2009, Neiafu, Vava'u, Tonga

Polynesians love being near the water and kids, in it.

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Kimball Corson
11/04/2009, Neiafu, Vava'u, Tonga

On the pier on a rainey, overcast holiday.
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The Mother of All Asset Price Bubbles

Many, here and elsewhere, have argued that the stock market is overbought and due for a correction, but the market has nonetheless trudged along within its narrow band of about 500 DOW points. While its seems unable to climb above its ceiling of about 10,000 for the DOW, it is not collapsing either. Sideways movement largely predominates. But there is a problem.

The level of the stock market is clearly bubbled up. Few seem to doubt that especially given our recent 3Q GDP performance, properly viewed. The reason is the Fed´s current policies of a zero Fed funds rate, quantitative easing and very large purchases of longer term debt.

Together with credit easing, these policies are generating not only a massive outflow of funds into foreign stock and other financial asset markets via the carry trade, but also a massive inflow of capital into the U.S. by means of an accumulation of forex reserves by foreign central banks that are fed by that same carry trade and then used by those banks to purchase U.S. debt and other assets in the U.S.

This capital inflow is making it much easier to fund the federal deficits, but it is also creating and sustaining the stock market bubble. The dollar has not collapsed from the carry trade as those involved in it convert to local foreign currencies to buy foreign assets because foreign central banks have then used their forex reserves they get from that trade to buy U.S. debt and other U.S. assets.

Basically, interest free loans are being spread around the world like crazy and used to push up asset prices here and in foreign financial markets as well.

The stock market bubble is simply a part of an inflation of asset prices world-wide largely created by the Fed's policies and the huge carry trade they have developed. The problem is Washington policy makers seem unaware of what is going on in these regards. They do not recognize the carry trade as being a problem because they do not focus on foreign central banks uses of their accumulation of forex reserves. They don't keep track of foreign asset prices. They do not recognize the problem they are creating in world financial markets. They simply notice that their policies make it easier to finance the federal deficits and seem not to depress the dollar significantly.

This global asset bubble is no more sustainable in the long run than is the U.S. stock market at present levels, absent a strong recovery. The problem will come when the Fed reverses its policies and begins reserve mop-up operations and raises interest rates. The carry trade will all but evaporate; foreign central banks will have their accumulation of forex reserves markedly diminished; the federal government will have a harder time financing its deficit without the Fed monetizing them, and the sea of debt that has been generated by the zero interest rate policy will undermine financial markets worldwide and will place a heavy burden on our government to manage its finances.

Like all bubbles, it will have to unwind. The question is how. If instability develops in world financial markets as the Fed reverses its policies, the likelihood of a crash in world financial and stock markets becomes more probable. As Nouriel Roubini sees it, we have created the mother of all bubbles, world-wide. It is unsustainable. It will collapse, the only question is will it unravel and collapse in a moderately orderly way or will there be a world financial crash.

Ironically, while recognizing that overleveraging substantially lead to the recent financial crisis on Wall Street, the Fed and the federal government have pursued policies which again have created a new tremendous leveraging, not only in the U.S., but in other world financial markets as well. At one level, it would seem that we did not learn much.

Given this mother of all bubbles and its global scope, I see no way that the Fed can effectuate an exit strategy that stands a reasonable chance of unwinding this asset inflation without precipitating a world financial crisis that could well dwarf the one we had on Wall Street with the credit crunch. The likelihood too is that it will clobber the U.S. recovery and compromise the projected recovery of world growth, presently estimated to be turning positive for the European Union (with Spain wobbling) and excellent for China. The IMF just raised its 2009 estimate for China to just shy of 8.5 percent and noted the E.U. should fare better than earlier expected, too, and encounter less contraction.

But all this ignores the mega asset bubble that has been and is still being created.

It seems that, in our effort to escape from one economic mess - the great U.S. recession - we have created another one which threatens not only the U.S., but world financial markets now as well. At the same time, it is not clear that much has been done for the U.S. economy either, aside from pulling it back from the brink at the time of the credit crunch - no small feat.

However, GDP growth in the U.S. is seen to be flagging, once the 3Q number is more carefully analyzed, and the last thing the U.S. economy needs at this time or in the near future is another financial crisis.

But how else do we deflate asset price bubbles?

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Kimball Corson
11/03/2009, Neiafu, Vava'u, Tonga

Two girls on a wharf. The pretty one afterward threw me a kiss I did not catch, photographically. Shoot, by age, I could be her great grandfather. Ah, to be young again. She is definitely a cutie pie. I have always appreciated genuinely attractive women and they know it instantly.

Note the "I love you" handsign. (http://en.wikipedia.org/wiki/Types_of_gestures)
Both girls spoke English, as do most Tongans here.
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The World Bank and the IMF Speak Out Against World Asset Bubbles

While not viewing the matter as broadly as some of us do, both the World Bank and the IMF are becoming aware of asset prices bubbling up in various parts of the world.

The World Bank warns that the sudden appearance of billions of dollars of investment capital in east Asia is "raising concerns about asset bubbles" in equity markets throughout Asia and in real estate markets in Hong Kong, Singapore, Vietnam and indeed, mainland China.

At the same time, the International Monetary Fund cited the risk arising from a flood of investment capital, particularly in Asia, pushing up asset prices so that they become divorced from the underlying economic realities. The IMF too is focused on asset bubbles.

Our own stock market, well up on its March lows, hovers more at a DOW level befitting a strong V shaped recovery, if not a stable, full employment economy in the middle of a strong growth cycle. While the flow of money against consumer goods worldwide may be waning well below what policy makers would like to see, the flow against financial assets is accelerating, pushing the prices of those assets up, so that now we even have conservative institutions like the World Bank and the IMF speaking up about the matter.

While some deflationary forces exert themselves in regard to consumer goods and services on a worldwide basis, the opposite is true of financial assets. They are undergoing substantial inflation, also worldwide. The flow of funds is strongly away from those in the bottom halves of income distributions with high average propensities to purchase consumer goods and services and concentrated much more in the hands of wealthier families and businesses with lower average propensities to consume and higher propensities to purchase financial assets.

The ultimate source of most of these moneys worldwide is the U.S. federal government and Federal Reserve System, either directly via the carry trade and the zero interest rate policy, or indirectly through various similar means.

Policy makers in Washington, if they are aware of the problem and if they understand it, seem to have no comment and voice no concerns about it.
Indeed, the Federal Reserve just said, in effect, that the zero interest rate policy will be continued.

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Kimball Corson
11/03/2009, Near Neiafu, Vava'u, Tonga

Just over the hill from Neiafu. Mostly now reefed in, but an area off to the lower right is still accessible by boat at any time. At low tide, as here, wandering pigs go out on the reef and root for edibles. Taken with a 300mm lens.
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The Problem of Where to Invest Now

If, as Nouriel Roubini suggests, we face an asset price bubble worldwide, arising out of the Fed's zero interest rate policy and the carry trade, what assets are safe for long positions in this bubbled up condition?

Not the dollar, if the Fed drops that policy or complications arise. Besides, basically the dollar is going nowhere, neither solidly up nor down. It mirror images the reverse of the stock market, also going nowhere.

Gold and silver? They too are bubbled assets, but silver less so.

Brazil, the emerging markets, China and maybe the BRICs? As I have shown elsewhere, because of trending in the stock market and human nature, ETFs and the like in these areas move or trend with the market, and are therefore are too open to collapse in a deflating price bubble, regardless of underlying real conditions.

No sanctuary there. Foreign currencies? Perhaps, but only if financial assets have not bubbled up in the relevant country, from the mother of all worldwide asset price bubbles.

Perhaps the Brazilian real, as Brazil struggles to isolate itself from these problems and its own economy is relatively healthy. The real has moved above $0.50US recently for the first time and now hovers near $0.58. But such investments are not easy or practical for many. Too, U.S. access to the currency may be subject to the trending problem I identify above. Not too much is left.

If the Fed decides at some future point to reverse its zero interest rate and associated policies, then the threat of collapse in asset prices world wide increases markedly. If it does not reverse its policies, but instead prolongs them, then more worldwide asset prices will continue to rise to accompany those already bubbled up.

However, price rises in assets already bubbled up tend to occur more slowly, as caution and better knowledge of the situation set in, just as in our own stock market. Serious slippage in prices can occur, but has not yet developed in our own stock market. Just understanding the situation and believing the gains of being in the market are not worth the risks can sideline many, but as I will show, they are not really sidelined. There are very few if any sanctuaries from the systemic risks.

Yet short positions entail some danger here as well these days, although mostly minor from small movements to the upside. Shorting anything much can therefore be as risky and profitless as taking long positions. If that is so and we face bubbled prices, is there anywhere left to safely invest?

The quick answer is largely nowhere, on simple long and short positions. Cash, if the dollars slides, is no better than gold if asset prices fall. Few foreign currencies are not similarly vulnerable from their own local asset price bubbles.

The problem is further compounded by most real economies, other than China, several in the far east and Brazil. The real economies of most major national players on the world scene are too much going nowhere. Many, like the U.S., hover at zero growth or worst and that growth is from a lower depressed level that some say is going to be the world's "new normal" because structural problem in the U.S. and in other countries are not being addressed. In short, from these circumstances, we find no immediate and compelling argument, to take long or short positions, especially given the risks and poor returns. We get no help from this quarter either.

We seem to be trending nowhere in real or financial terms at the moment, but simply sit hovered near the apex of too many asset price bubbles. Presently, the Fed's policies are doing more to expand the scope of those prices bubbles worldwide than they are to press existing price bubbles higher. This is because of the risk and return problem I identify here and the higher returns on more remote and less accessible assets in the world that are not so bubbled up. The far corners of the world affected are not so easily reached by U.S. investors who lack ready access.

Gold, silver and other precious metals cease to become a worthy store of value to the extent their prices are also bubbled up and face the prospect of collapse or decline like other prices. Sure, the store of value function might well be restored with a huge collapse, but consider the losses incurred by hold such assets to reach that point. This is the reason more countries have not followed India's example of stock piling gold. Only a Fall of Rome scenario, like that painted by Richard Duncan, gives stock piling gold any real prospect. The more likely prospect is many will simply buy such metals at higher prices and then watch their prices fall.

The perversity of the situation is that not even cash - the classical refuge from the market - is safe. The dollar too is vulnerable, especially if we consider the prospect of inflation. Too many seem not to realize this and think that by being out of the market and into cash they are shielded from risk. Some risks, yes, but not the risk of a declining dollar or the prospect of inflation.

We no longer face, in any particular stock, just the risks of a good company facing an uncertain economy. We have that situation and more. We face in any particular stock now not only market trending risks, but certain serious systemic risks arising out of the policies that have been adopted by those who make them in Washington. The systemic risks have increased markedly and affect us all. They arise largely as a set of unintended and unforeseen consequences by policy makers.

We proceed at our peril. All of us should come to realize that there are no true safe havens left and, regardless of how much we would like to garner a little profit now at minimal risk, few good opportunities exist to do so either, long or short.

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Kimball Corson
11/03/2009, Neiafu, Vava'u, Tonga

On the stairs near a bar.
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A New Economic Indicator?

The Washington Post recently reported that --

"In a year of job losses, foreclosures and bag lunches, Americans have spent record-breaking amounts of money on guns and ammunition. The most obvious sign of their demand: empty ammunition shelves.

"At points during the past year, bullets have been selling faster than factories could make them.

"Gun owners have bought about 12 billion rounds of ammunition in the past year, industry officials estimate. That's up from 7 billion to 10 billion in a normal year.

"It has happened, oddly, at a time when the two concerns that usually make people buy guns and bullets -- crime and increased gun control -- seem less threatening than usual. . . ."

The reasons for the increased sales are said to be varied, however, the more interesting and common reason voiced is that economic insecurity is now being translated into physical insecurity of possible criminal violence, most likely attending public unrest.

That view turns such sales increases into an economic indicator. One obviously reserved for periods of great economic insecurity, stress and concern.

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Kimball Corson
11/03/2009, Neiafu, Vava'u, Tonga

At a pier on a rainy day.
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