Via Mark J. Grant, author of Out of the Box,
OUT OF THE BOX: THE JOKER & THE THIEF
“There must be some way out of here, said the Joker to the Thief.”
-All Along the Watchtower, Bob Dylan
I am sorry to tell you that whatever door that had been opened is now closed. We currently find ourselves locked in a vault of our Masters’ making and whatever treasure it had held is being rapidly depleted and yet more, I am afraid, will be demanded. America has turned the corner from the self-sufficiency of an individual to a new ideology for this country which is that incomes and life-styles should be equalized by taxes in the name of patriotism and for the greater good. The Socialism of much of Europe has arrived at our shores and spread from sea to shining sea and the safety net of decades past for our less fortunate citizens has been raised to a harmonization of social/governmental benefits regardless of hours worked or income earned. Obama is right that a new day is dawning but the mist is cold upon our faces, the horizon appears bleak and those more prosperous citizens that can find alternatives will do so.
“The collection of any taxes which are not absolutely required, which do not beyond reasonable doubt contribute to the public welfare, is only a species of legalized larceny…Whenever taxes become burdensome a remedy can be applied by the people; but if they do not act for themselves, no one can be very successful in acting for them.”
The calls are increasing and insistence is rising from the White House to end the exclusion for tax-exempt bonds, to end the DRD (Dividends Received Deduction) program for preferred stock, to end the write-off for home mortgages especially second houses and to increase taxes to pay for the social programs ingrained in the new Socialism of the United States. The next four years are likely to bring State and Federal taxation to levels that will curtail both innovation and profits as the demands of income harmonization affects both individuals and corporations alike. The financial capacity of the country, even now, is not based upon our economics but upon a Federal Reserve Bank that buys what the Treasury and various Agencies offer creating puffs of little green paper that buoy the markets because nothing else is sufficient. Stock markets rise, Treasury yields decrease, other bonds compress because there is no place off-world to invest money and it must be put somewhere. We are living in a fantasy world of the voters’ making and, I predict with some certainty, that we will all suffer the consequences of our decisions. The problem is extremely serious, answers are frustrating and aggravating and great care must now be exercised because this cliff is exceedingly steep.
“Anyone may so arrange his affairs so that his taxes shall be as low as possible. He is not bound to choose that pattern which best pays the Treasury. There is not even a patriotic duty to increase one's taxes.”
-Judge Learned Hand
So much for this notion; goodbye and thanks for all the fish. The country has turned the corner and around the bend is startling façade that is just coming into view. Now I do not write my commentary to take social positions and I am not advocating any new political agendas but having identified the problem, having seen the writing upon the wall and speaking to the some 5,000 financial institutions that receive my musings; once having identified our new reality it is then a question of what is to be done about it to preserve capital and to win at our new-fangled Great Game as re-set by Mr. Obama and friends. Pay close attention here, focus your intellectual capacity; the Great Game has been re-set!
“The political promises of yesterday are the new taxes of today and tomorrow.”
The paths may well diverge in the woods and the roads are marked by two well-worn street signs; Inflation and Valuation. Inflation calls for TIPS, corporate bonds linked to Inflation, hard assets such as Real Estate, Gold and other metals. The other boulevard is a more treacherous route as Valuation calls for Gold, currencies and bonds of nations not engaged Socialist agendas though given the collective actions of the world’s central banks there are scant places to go and none with the liquidity that is necessary so we are backed into a corner where all that separates us from this treachery is a fervent hope that we will not go there because Valuation is the three headed dog at the gates of Hades from whom there is little chance of escape. Fervently hoping that we do not need some Armageddon agenda, and the intermediate stop in any event, it is likely that floating rate notes will be a sufficient alternative in our new, new world. I continue to advise taking some profits in equities, in bonds and rearranging your portfolios.
Vanilla floating rate notes, fixed-to-float bonds, long floaters for insurance companies or those needing duration and any other structures that rise with increasing interest rates either as engineered by the Fed, the markets’ reluctance to accept the political agendas as offered or the realization that the economies in America and in Europe are floating in hot air and that the sun is setting. It has not been just mad dogs and Englishmen that have been out in the midday sun but evening approaches and the sounds of the night may not be quite such a harmonized tune as once thought.
“Unquestionably, there is progress. The average American now pays twice as much in taxes as he formerly got in wages.”
Now when I first said that Greece was going bankrupt in January 2010 the yield on their ten year sovereign was 4.38%. Peering out into the future is not predicting what is going to happen in the next twenty-four hours and time and preparation are what is necessary to reorient your portfolios. The hedge funds will “bet with” or “bet against” and during the next turn of the wheel fortunes will be made and lost but I speak today to investors, to those that are charged with “Preservation of Capital” and I mark the areas in red where the denizens of the dark stand ready to serve their fare upon silver platters where you might find your own head underneath the gleaming dome. Nothing is worth that experience and so I carefully point out the minefields to be avoided.
So come Watson; and Dancer and Prancer and Rudolph and Vixen. The three little pigs are asleep in their houses. The big bad wolf is at the door. The seven dwarves are off to work and Little Red Riding Hood is arriving. The fairy tale is “once upon a timing” and the Dragons and Barbarians are at the gate. The Wizard is off in Oz and the Wicked Witch is riding her broomstick unobstructed. The Great Game is afoot!