The US Treasury and Federal Reserve are pushing money out the door into the financial system as fast as humanly possible to stem the deflationary depression tide that is building steam in the US and around the world.  A variety of financial experts have added up the new US financial commitments so far and it is several Trillion dollars and growing.  And the Obama economic stimulus plan is still to come early next year.  The Obama plan appears to have a value of $600M to $700M dollars but it may exceed a Trillion dollars.

The US avalanche of cash can't even be usefully measured in Billions any longer, much less Millions, of dollars.  We must now use Trillions  or the big T in our financial vocabulary for the numbers to make sense (Does of any of this make sense?).  I must admit that I never expected to be using the T word in my life time to describe financial numbers other that an occasional description of the US budget or GDP or other huge value that is of more interest to economists than someone interested in markets.  Please remember that the unfunded liability for Medicare and Social Security is also tens of Ts.  The current financial disaster has occurred before the President and the Congress made any progress with regard to those big issues.

Obama has named his economic team and they are basically all insiders, but they support the Democrats and not the Republicans.  This is both good and bad.  These folks know all the inside scoop and are likely to be on generally the same page as the current team.  It will make the transition easier and the great cash injection can continue unabated.  For many people this is regarded as a good thing.  Even Larry Kudlow of CNBC, a die hard Republican, generally likes the Obama team.  The bad news is that none of the people he has named has said a word (that I know about) about the fundamental issues at play in our financial system.  Both the current team and the new team all come from the same colleges and the same financial institutions and they have the same basic influences on their thinking.  Paul Volcker is the only named individual that has a history of thinking differently when needed.  Unfortunately, Mr. Volcker is a very old man at this point and I don't know if he has the energy needed to fully participate on the financial team.  I certainly hope he has some spark of genius remaining to give to us.  We badly need it.

Everyone in the government is deathly afraid of a long term deflationary period and the depression that would result.  They want the consumer debt spiral to continue just the way it has for the past several decades.  None of these people is talking about the need to correct the mistakes of the past and take the pain that goes with those mistakes.  They will not accept any pain for anyone.  In the end this will be the ultimate mistake. 

All of us make mistakes of some type because we are human beings and not robots.  When we make mistakes there is a price to be paid.  At some point each of us has to take some type of penalty for our mistakes.  Hopefully, we learn from our mistakes and we don't make them again.  Unfortunately, our politicians don't think that way.  They just want everyone to live in la-la land and go about their daily business happy and content.  This is a huge error.  If there is no learning, there is no correction of errant thinking and no improvement in the future.  How much to you want to bet that these guys are simply compounding prior errors and the ultimate bottom of the economic cycle will be worse as a result?  How much to you want to bet that their fundamental thinking is wrong?  I will take those bets.  In the end the markets will tell us who was right and who made mistakes.

In my last blog I talked about the DJIA to Gold ratio.  This is a very long term cyclical trend that describes human emotions and behavior over decades.  I believe it is a critical indicator that will tell all of us who was right and who was wrong.  Time will tell.

How many T's will be injected into our financial system next week?

TPM

Now that the election season and the immediate aftermath have come to a close it is time to focus on the actions required to deal with our country's major issues.  President Elect Obama is moving quickly to appoint his cabinet and other key advisers.  

Our nations financial/economic crisis continues to evolve.  Unemployment continues to rise,  The CPI was negative last month.  Gasoline at the retail level is selling around $2.00 per gallon or less in many parts of the country down from a peak in excess of $4.00.  I paid $2.01 a couple of days ago.  The big three US auto manufacturers are running out of cash and may face bankruptcy.  Many financial organizations continue to fail or require federal government support to stay viable.  Obama has stated publicly that he will have a fiscal stimulus package developed and ready to be implemented as soon as he takes office in January 2009.

Virtually everyone in government, the Federal Reserve and the informed public believes that it is not acceptable for the US government to allow the current economic crisis to evolve into a modern day depression.  Every politician knows that a very deep recession or depression will create incredible unrest among the American people and their political careers are at stake.

Ben Bernanke, the Chairman of the Federal Reserve, is an expert on the history of the Great Depression.  He is known as "Helicopter Ben" for his statements several years ago that the Federal Reserve should distribute cash from helicopters if it must to keep Americans financially solvent.  The incredible growth of the money supply during the past few months tells us that Helicopter Ben is in action pushing huge amounts of cash into the financial system.  History has shown that it takes some time for huge increases in the money supply to impact the broader economy.

The combination of Obama's fiscal stimulus and Helicopter Ben's increases in the money supply will inject a massive amount of fiscal stimulus into our financial sysem that will likely have a material impact on the economy sometime in the second half of 2009.  There are different opinions as to what may happen as a result.  Some experts believe the combination of actions will eventually produce hyper inflation in the US similar to what happened in Germany in the 1930s.  Other experts believe the stimulus will produce mild inflation that can be easily managed by the Federal Reserve once the economy recovers and the financial system is more stable.  Others believe that the stimulus will fail to have any material impact and another great depression is unavoidable.  The last group believes a depression is eventually required to correct over 50 years of poor fiscal management by the US government and the excessive use of credit in the US economy.

I don't pretend to have a crystal ball that tells me exactly what will happen.  However, I believe that extremely well defined long term economic/financial cycles are real as they reflect changes in the actions and emotions of large populations of human beings interacting with one another over long time frames.  It appears that human beings are not capable of permanently learning economic lessons as their environment changes through decades of generational change.  We always hear the classic phrase "This time its different."   The reality is that the world environment is different but the fundamental principles are not.  Fundamental principles always rule in the end. 

One of the major issues we all face when we look at the long term value or buying power of our assets is maintaining the economic value of those assets over time.  Our government and many other organizations use the Consumer Price Index (CPI) to determine buying power adjustments.  The CPI has become an unusable adjustment mechanism in the past two decades because it has been politicized and no longer truly reflects changes in consumer buying power. 

I believe the the spot price of gold is the best mechanism to truly make value comparisons over decades or a century.  Gold has served as a currency since the beginning of trading in ancient times.  Virtually every person in the world from the most sophisticated investors to those that are dirt poor understands that gold represents wealth and value.  The US dollar could be exchanged for gold on demand with the US Treasury as recently as the Nixon administration in the early 1970's. 

There are many ways to measure the overall financial health of the US and the buying power of financial assets.  The Dow Jones Industrial Average (DJIA) has been used a measuring stick for our economic health for about a century.  Therefore, I think the DJIA can be used as a simple proxy for overall national financial health.

The most meaningful financial cycle to me is the long term ratio of the DJIA to the price of one ounce of Gold.  This ratio allows one to assess the fundamental buying power of financial assets in terms of a standard of wealth that has stood the test of time.  If you look at the long term chart of this ratio going back to the late 1800s through today it reveals an incredible ride.  The ratio rose from around 2 in the early 1900s, peaked in August 1929 at 18, and then declined to 1.5 in February 1933.  The next peak was a ratio of 28 in February 1966 and then a decline to 1.2 in January 1980.  The most recent peak was at 42 in May 2001.  As of today the ratio is 10.  You need to look at this chart to get a full appreciation of its powerful message.   If you send me an email request I will send it to you.  The big question is "Where is this ratio heading?"  Is it heading down to the 1 to 2 range like the prior bottoms in the 1930s or 1980s or is it heading higher? 

For those of us that are trying to manage our personal assets in the current environment the answer to the question regarding the destiny of the DJIA to Gold ratio is critical.  How can we protect the buying power of our assets in the current economic conditions?  Are we destined to complete the historical cycle or is it different this time?  What does it mean to the economic health of our nation if we return to a ratio of 1 to 2 in the years ahead?

More to come on this subject from TPM.

TPM

In the week following Obama's victory on election night we would assume that he and his incoming administration would be the primary political focus of the news media for months to come and maybe for more than a year.  It was that way for about four days or so.  Then the Sarah Palin backstabbing effort by McCain staffers started and Sarah took over as the current political media star and Obama has been pushed into the background.

This situation is absolutely amazing.  Sarah Palin is so unique that people just want to learn more and more about her.  In a "normal" situation a losing VP candidate would have disappeared from the media within a few hours and wouldn't reappear for a long time.  Sarah is getting more TV time now than she got during the election campaign. 

I think the McCain people were resentful that Sarah Palin became the Republican star during the campaign and they resented her fast ascent.  She drew bigger crowds than McCain and more attention than McCain.  The staffers didn't anticipate this situation at all.  I think they expected her to be a robot and a pretty face to appeal to women voters.  Instead they ended up with a very unique person that eclipsed all of them.  This had to be a shock to the campaign staff.

I don't believe John McCain had any material issues with Palin.  He knows she gave his campaign a jolt of energy that helped him to some degree.  He lost because of eight years of the Bush administration and the economic issues in the country.

We will see if Palin's media presence continues beyond this week.  I bet we have not seen the last of her.  As she said yesterday in one of her interviews, if she sees a cracked open door of opportunity, she will knock the door down to take advantage of it if she believes it will benefit her, her family, her state and the country.  I would not underestimate her future potential as a political force.  Let us see how the Democrats govern over the next few years and deal with the big issues.

2012 could be just the time for real conservatism to reemerge as a major political force.

TPM

John McCain has just conceded the Presidential election to Barrack Obama.  Obama is winning the election by a solid margin just as I predicted.  The Democrats are taking significant numbers of seats from the Republicans in the House and the Senate races.  It is not yet clear exactly what the final Congressional margins will be.  The US government may have taken a hard turn to the left today. 

Now we face the big questions.  What policy changes will actually occur?  Will US tax policy change significantly in a few months?  How will the Obama administration deal with the current economic problems?  What will happen regarding US policy on Iraq?  Will Obama moderate his views or become the most liberal president in the history of the US?  Is the US destined to repeat the Great Society failures that were created by huge Democratic majority during the Johnson administration?  I don't know the answer to any of these questions but we will out find out the answers in the months and years ahead.

The one conclusion that we should all be able to agree to is that today's events are a repudiation of the actions of the Bush administration.  The Republican party has failed our nation for a number of years and hopefully they have learned an appropriate lesson and will restructure themselves to be more responsive to a large constituency of Americans that will never be aligned with the Democratic party.

Barrack Obama is our next president.  We will give him the opportunity to prove himself to those of us that didn't vote for him through his actions as President.  We need Barrack to be successful.  The  direction of our country needs to change.  Hopefully, the changes that are coming will be the right changes.

We shall see what the future brings.

TPM

After all the discussion, analysis and debate we are now two days from the election.  I support the McCain-Palin ticket.  I believe they will do the best job of assembling a solid group of people to form the executive branch of our government and deal with our critical issues.  We need a maverick with a purple attitude to unify our nation's approach to many very difficult problems that must be addressed. 

From my perspective the Obama-Biden ticket is just too liberal and too inexperienced to be given the job of running our country.  Obama has tremendous presence and his speaking ability is second to none, but the fact is that he has no experience in making tough executive decisions at any level.  His past associations with people that are leftist extremists and his extremely liberal voting record are not good signs that he will be able to effectively lead our very diverse nation.  The combination of a solidly democratic Congress and Obama as President will create the environment for the rebirth of the 1960s liberal movement within our government that was rejected by the people in later decades.

While I support McCain-Palin, I expect Obama-Biden to win the election.  It is a shame that the Republican party has been disgraced to such an extent that they are literally handing the government of our nation to the liberal wing of the Democratic party.  It is easy to understand why a majority of voters will vote for Obama after hearing his message.  The Bush administration failures have cast a shadow over the McCain campaign that will not disappear.

One of the most interesting aspects of the campaign has been Sarah Palin's rise from an unknown governor of Alaska to a national celebrity within the past 60 days.  She has ignited discussion and debate from every corner of the political world.  Much is made about her early positive approval numbers that have been reduced over the past couple of weeks.  I believe that people are reacting negatively to her natural speech patterns that she uses in casual conversations.  Tina Fey's impersonations on Saturday Night Live focus on Sarah's unique method of speaking.  Her speech seams funny to those of us that don't speak that way.  When she was introduced right before the convention and at the convention she was reading speeches prepared by others and her unusual speech was not apparent to the audience.  Over time her natural speech pattern has been revealed to all of us.  It will be interesting to observe her future development.

I will be back with my post election analysis next weekend.

TPM