June 13, 2014
By Steve Blumenthal
“Believe in yourself. Have faith in your abilities! Without a humble but reasonable confidence in your own powers you cannot be successful or happy.”
– Norman Vincent Peale
When I was young, I was crazy about soccer. My dad, like many, was a baseball, basketball and football dad. Despite knowing nothing about the game, our fathers stepped up to coach with the key coaching points being “GO, GO, GO!”
To the rookie eye, the game looks like a simple kick and chase exercise; however, at the highest level it is a complicated, synchronized chess match that requires tremendous team cohesion and yes, some luck!
Back then US soccer was a “C” team on the world stage. We had no role models to watch on TV, yet some of the greatest international players of all time were playing: Pele, Beckenbauer, Cruyff, Best, and Platini to name a few.
Since that time, some US soccer legends have been born. One of them is my former college coach, Walter Bahr. He captained (and frankly coached) the US national team that beat England in the 1950 World Cup. There is a film titled The Game of Their Lives that details the true story of the 1950 US soccer team which, against all odds, beat England 1-0 in Brazil during the World Cup.
Walter shared a fun story about how the US team was roasted at a dinner the night before by an overconfident England squad, predicting a 10-0 win. They pissed off the wrong man – Walter assisted on the winning goal. He has said, “To win 1-0, you only have to touch the ball once.”
During his 14-year tenure at Penn State, his team was selected to the NCAA Tournament 12 times. Walter was named NSCAA Coach of the Year in 1979 and elected to the National Soccer Coaches Association of America Hall of Fame in 1995. His overall coaching record is 448 wins, 137 losses, and 70 draws. You may recall his sons, Chris and Matt Bahr. Both earned Super Bowl rings during their time as field goal kickers in the NFL.
In 1979, at 18 years old, I had no idea of the depth of the man that was coaching us every day. He was one of the most prominent figures in US soccer history. I’m embarrassed to say it was an “are you kidding me?” moment in my junior year when I learned Coach captained the 1950 US World Cup squad.
Believe in yourself – have faith in your abilities – stay humble. That’s Walter. I will remain forever grateful. When you watch the World Cup, be on the lookout for the mention of Walter Bahr and tip your hat to this fine, modest man.
With six kids, all soccer players, and a wife who coaches soccer at a high level, needless to say our house is humming with World Cup excitement. I share with you a very enjoyable YouTube clip that my oldest son sent me today. It is really funny and short. Picture an old man inserting himself into a pick up soccer game. The players are all younger and not happy with the intrusion. Until the old guy (really a younger man in old man makeup) turns on his game. Share it with your children, grandchildren and friends. We here in the US are a collective melting pot of families from so many wonderful countries – best of luck to your favorite team.
Soccer has come a long way since 1950 and 1979. My gang will have jerseys on and popcorn lined up as we root for our national side. The US team, now a strong tactical and technical squad, once again find the odds against them at 100-1. Advancing from Group Stage against Ghana, Portugal and Germany will take monumental effort but hey – it only takes 1 goal! (and a little luck).
Grab a coffee and find a quiet place. This week’s On My Radar highlights another great global competition: the Keynesians vs. the Austrians:
- Fed Continues to Monetize about 70% of Net Treasury Debt Issuance for the Public
- What Henry Hazlitt Can Teach Us About Inflation in 2014, by James Grant
- Violating Say’s Law, by Patrick Barron
- Trade Signals – Extreme Bullish Investor Sentiment
Fed Continues to Monetize about 70% of Net Treasury Debt Issuance for the Public
70%! The Treasury issues bonds. The Fed prints and buys those newly issued government bonds. Continually operating in a deficit, much of the money used to finance ongoing government spending is from the Fed. Debt grows. This is unconventional behavior to say the least. The following from John Williams at ShadowStats.com:
- “Despite the recent tapering in the Federal Reserve’s quantitative easing program, the Fed’s net acquisition of U.S. Treasury securities so far in calendar-year 2014 (through June 5th), versus net debt issuance of the U.S. Treasury for the public in the same period, effectively has reflected monetization of 68.8% of the increase in debt. That is a minimally-reduced portion from the effective monetization of 71.8% of the net issuance of publicly-held debt for the full calendar-year 2013.”
- “The ongoing monetization of the Treasury debt likely is a contributing factor to the minimal pick-up seen in broad money supply (M3) growth to 4.6%, as of May 2014; it also shows that the market in U.S. Treasury securities is anything but free and open; and it artificially depresses yields and correspondingly boosts bond prices.”
- “As reflected in the following graphs, despite the ―tapering‖ in debt purchases, the monetary base remains topped-out, temporarily, at $3.933 trillion (May 28th) near its record high level of $4.012 trillion (April 16th). Year-to-year growth, however, has started to slow, as the current flat-to-minus level of activity is measured against a year-ago period of rapid growth.”
- “As the dollar began to push recent lows, policy efforts were undertaken in the euro area, again, to drive funds into the U.S. dollar. (SB: I wrote a few weeks back, Antifragile, about the tens of trillions printed and channeled into SWAPS with the European Central Bank. http://www.cmgwealth.com/ri/on-my-radar-antifragile/) Similar activity was seen as an effort to counter a nascent U.S. dollar selling panic in August 2011. The underlying fundamentals described in the summary section following could not be worse for the U.S. dollar. A massive dollar sell-off against most other major Western currencies remains likely in the near future.” (SB – I’m not so sure about this, as I express below)
- “With the U.S. economy slowing anew, domestic banks will be increasingly troubled and stressed, and more QE will be likely to flow from the Fed. Again, such would be under the political cover of a rapidly slowing U.S. economy.”
Source: http://www.shadowstats.com/article/no-634-may-retail-sales-monetary-conditions?display=pdf
I note that others don’t see an imminent decline in the dollar. We lead in world trade, have the broadest capital markets system on the planet and generally look to be in better shape in regards to assets and resources (upcoming energy independence) than Europe and Japan. We also have an entrepreneurial culture of excellence. They have their own set of debt related issues which are worse than ours on a relative basis. I think this favors the dollar for now.
A surprise may actually be a rush into US stocks from foreign investors fleeing tax and asset confiscation (Cyprus like). We need to have a global view on capital flows. Perhaps we see a melt up before the next major meltdown. Such capital flows will drive the dollar higher, not lower.
The point here is that unconventional policy means unconventional risk – especially in an overpriced and overconfident market state.
What Henry Hazlitt Can Teach Us About Inflation in 2014, by James Grant
Here are several highlights from the piece:
- “In 1946, as now, the government held up the threat of deflation to justify a policy of ultra-low low interest rates and easy money. Now ladies, and gentlemen, I have devoted thirty-one years of my life to writing about interest rates, and I have to tell you that I can’t see them anymore. They’re tiny. And so they were in 1946. Then, as now, the Fed had been conscripted into the government’s financial service. Just as it does today, the central bank pushed money-market interest rates virtually to zero and longer-dated Treasury securities to less than 3 percent. Just as it does today, the Fed had its thumb on the scales of finance.”
- “If interest rates were artificially low, it would follow that prevailing investment values are artificially high. I contend that they are, and you may or may not agree. But you must allow the observation that we live in a kind of valuation hall of mirrors. We don’t exactly know where our markets should trade, because we don’t know where interest rates would be in the absence of central-bank manipulation. Natural interest rates — free-range, organic, sustainable — are what we need. Hot-house interest rates — the government’s puny, genetically modified kind — are the ones we have.”
- “When interest rates are kept arbitrarily low by government policy, the effect must be inflationary,” he wrote. “In the first place, interest rates cannot be kept artificially low, except by inflation. The real or natural rate of interest is the rate that would be established if the supply and demand for real capital were in equilibrium. The actual money interest rate can only be kept below the natural rate by pumping new money into the economic system. This new money and new credit add to the apparent supply of new capital just as the judicious addition of water add to the apparent supply of real milk.”
- Hazlitt concluded that “the money rate of interest can be kept below the real rate of interest only as long as the supply of new money exceeds the supply of new real capital. Excessively low interest rates are inflationary in the second place because they give an excessive stimulation to the volume of borrowing.”
- “Why, I could quote those perfectly formed sentences in Grant’s today (and I believe I just might). They’re as timely now as they were during the administration of Harry S. Truman. The effective federal funds rate has been zero for well nigh six years.”
Violating Say’s Law, By Patrick Barron
From the article:
- “Keynes’s dogma, as stated in his magnum opus, The General Theory of Employment, Interest and Money, attempts to refute Say’s Law, also known as the Law of Markets. J.B. Say explained that money is a conduit or agent for facilitating the exchange of goods and services of real value. Thus, the farmer does not necessarily buy his car with dollars but with corn, wheat, soybeans, hogs, and beef. Likewise, the baker buys shoes with his bread. Notice that the farmer and the baker could purchase a car and shoes respectively only after producing something that others valued. The value placed on the farmer’s agricultural products and the baker’s bread is determined by the market. If the farmer’s crops failed or the baker’s bread failed to rise, they would not be able to consume because they had nothing that others valued with which to obtain money first. But Keynes tried to prove that production followed demand and not the other way around. He famously stated that governments should pay people to dig holes and then fill them back up in order to put money into the hands of the unemployed, who then would spend it and stimulate production. But notice that the hole diggers did not produce a good or service that was demanded by the market. Keynesian aggregate demand theory is nothing more than a justification for counterfeiting. It is a theory of capital consumption and ignores the irrefutable fact that production is required prior to consumption.”
- “The governments and central banks of the world are engaged in a futile effort to stimulate economic recovery through an expansion of fiat money credit. They will fail due to their ignorance or purposeful blindness to Say’s Law that tells us that money is the agent for exchanging goods that must already exist. New fiat money cannot conjure goods out of thin air, the way central banks conjure money out of thin air.”
- “This violation of Say’s Law is reflected in loan losses, which cannot be prevented by any array of regulation or higher capital requirements. In fact rather than stimulate the economy to greater output, bank credit expansion causes capital destruction and a lower standard of living in the future than would have been the case otherwise. Governments and central bankers should concentrate on restoring economic freedom and sound money respectively.”
- “The governments and central banks of the world are engaged in a futile effort to stimulate economic recovery through an expansion of fiat money credit. They will fail due to their ignorance or purposeful blindness to Say’s Law that tells us that money is the agent for exchanging goods that must already exist. New fiat money cannot conjure goods out of thin air, the way central banks conjure money out of thin air.”
Trade Signals – Extreme Bullish Investor Sentiment
The cyclical trend remains bullish for both the equity and fixed income markets. Sentiment is back to extreme optimism.
If you are going all-in on one bet, go with what you believe and push the chips to the middle. If, like me, you are more investor than gambler, there are ways to grow your wealth and smartly protect your downside. Risk is high – step forward with that in mind.
Yet, despite relatively high valuations, the primary cyclical trend remains favorable. The cyclical trend remains positive as measured by Big Mo and the Fed remains supportive for now. Caution is advised as the cyclical bull is aged and investor sentiment is once again in the Extreme Optimism zone. Hedging, adding diverse tactical strategies and the use of other types of disciplined strategies can further enhance your portfolio construction.
Click here for a link to Wednesday’s Trade Signals.
Conclusion
Two teams take the field – each side with its die-hard fans, true followers and deep believers. It is the Keynesians vs. the Austrians. In this matchup, I believe the Austrians will win.
All of the World Cup hype has me thinking about my great coach this week. I remember that every once in a while, Walter would stop practice and gather us in. “Look at that,” he would say, pointing to the sun setting over the mountain, “Remember to stop and look around, life is far bigger than just you.” He would add, “and never forget that you are here to do great things.” Thanks Coach. Indeed. Let’s do great things.
Catch a sunset this weekend. And go USA! Here’s to one goal and a little luck.
P.S. Happy Father’s Day
With warm regards,
Steve
Stephen B. Blumenthal
Founder & CEO
CMG Capital Management Group, Inc.
Philadelphia – King of Prussia, PA
steve@cmgwealth.com
610-989-9090 Phone
610-989-9092 Fax
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