Account Overdrawn

Paul Nathan | January 10, 2011 | 10:32 am Top Companies 

It is a mistake to talk about America being broke.  It is the government that is broke. Americans have 56 trillion dollars innet household wealth. In other words, after paying all debts, Americans as a people are rich. It is the government that is poor. The government has only what it takes, borrows, or steals.

The US government collects taxes on the income of the American worker. That’s how it gets most of its money. The American worker produces a gross domestic product of over14 trillion dollars a year. That’s a lot of money. In the last year the GDP is actually up 50% from a decade ago. The per capita income of the American worker is ten times that of a Chinese worker.  And our standard of living is far greater than that. Yet, some would have you believe that it is China that is rich and America bankrupt. It is the Chinese government that is rich and the American government that is bankrupt.

Americans as a people do not run deficits — they save part of what they earn. That is where the 56 trillion dollars of net household wealth came from. All individual income amounts to about twelve trillion dollars a year. The government takes about 25% of American’s income and spends it all, and more. So if the government wants or needs more money to spend than it has, it must either raise taxes or borrow the money from individuals, or anyone else willing to lend it money around the world — or print it.

When our government leaders tell us “we must get out financial house in order,” it is the government’s house they really mean. It is city, state and federal budgets that are in crisis, not individuals per se. Since this country went into recession, consumer debt has declined each and every year, three years in a row. This sequence of declines is the best since 1953. Individual savings have increased to the highest level in 20 years.  Debt to income ratios have declined to near normal levels. And corporate balance sheets are the best in history.

But while the average American and business has been busy repairing their balance sheets, government has been busy destroying its credit and credibility. So, when you hear the accusation that America is broke, and has been living way beyond its means, don’t buy into it. Not all of us have. Most individuals and businesses have been living normal, and responsible lives, paying close attention to their personal finances and quickly adjusting to tough times.

As the figures cited above show, we as citizens, were the first to move to tighten our belts. Some individuals have not, but they are the exception, not the rule. Only a small percentage of Americans run their lives irresponsibly. It is government that has been guilty of real irresponsibility and living beyond its means, come hell or high water; during good times and bad times. Do not let the government, or anyone else, transfer its guilt on to you or your neighbors.

Again, the government is broke. It has only the amount of money it can garnish from the American people and the investors and governments around the world. The government’s future, as the government has known it, is over. Its account is overdrawn. It’s time to pay the bills.

And how should the government do this? By taking the money back from those the government has been giving it to; not by taking it from workers, but by taking it from the grantees. It can start by taking the money back from the public employee unions, from the farmers and corporations it subsidizes, from the financial institutions, and from government agencies like Fanny Mae and Freddie Mac — and yes, even from the Defense Department. And, taking the money back from the thousands of bureaucrats and the hundreds of new agencies they have created over the years.

All of the lavish salaries, benefits, grants, subsidies, and entitlements must be reduced, if not eliminated. An across the board decrease in budgets and entitlements is the fairest way to do this. And with this legislated, then focus on the over paid, the incompetent, the inefficient, and the duplication, waste, fraud, and abuse, within government.

Only after we reduce or eliminate all of the above and reduce the size and power of government to the lower levels our Founding Father’s envisioned will we return to real freedom and prosperity. The process begins now.

Market Update:

Lexam gold (previously VG gold) was the star of the week, this week. It is up a hundred percent since I entered it only a few months ago. Many of the stocks in my portfolio are now up 5 fold. And yet, having taken profits in most, I feel comfortable holding these companies even in the face of a possible further sell off in metals.

The prospects of all of these miners are great. Copper Fox jumped ahead of Rubicon and now leads my portfolio of resource stocks.l The one lagging stock in the group is Rochester, and while I only have a tiny position is this company, it is looking more and more like dead money. I will hold it a little longer.

TBT was very active this week, falling from 40 to the 36 area, then bouncing back to over 39 by the end of the week. I am raising my mental stop to 36.50, locking in another half point profit. Let me re-state my thinking on TBT.

The way I look at this position, which is a third of my portfolio, is as cash on the sidelines.  It represents the profits I have taken in resource stocks that I want to preserve, not speculate with.  All of the rest of my portfolio is speculative stocks. So, this is my one conservative play. (Most investors would consider my characterizing a double short position in government bonds as “conservative”, — a little nuts).
The bet I am making is that the combination of higher inflation, debt concerns, and world wide growth, together with better American growth, all have converged to drive long rates higher, and will for some time.  But, I am aware that any renewal of the Euroland crisis can push rates lower, and quickly. So, I am following my position with a mental stop, each time raising it and locking in the “interest” on my cash.
This also acts as a hedge against metals going down. It will at least to some extent blunt the decline.  Also, at any time I can sell all or part of TBT and reinvest in those miners that have declined on a steep correction, or pick up new opportunities if and when they present themselves. Needless to say, I see TBT as an important part of my investment strategy for the future.
It appears we are in a correction in commodities. How far it takes us down is unknown, of course, but it is overdue. I would not get too excited about a fall in portfolios. However, if you need to, or choose to sell some stocks, try to do it on an up day, especially with the thinly traded penny stocks. You will be sure to get much worse price fills on down days since the buyers simply dry up, and bid prices are exaggerated on the down side.
Likewise, if you choose to buy, this is the time to do it.  Put in a buy price on a down day and let the market come to you. We have seen most of our stocks rise substantially. Any correction is normal, but these corrections can be painful.