February 14, 2019

A Balanced Budget

The Green New Deal is silly and isn’t worthy of our attention. The broader point it makes—that we can have anything we want if the Federal Reserve extends credit—is.

Let me blow your hair back for a second. The two biggest stock market rallies in the history of our stock market (in the 1920s and in 1990) occurred against a backdrop where the budget deficit was disappearing or had disappeared.

Calvin Coolidge is perhaps the second-least well-understood president of the 20th century (behind only Warren Harding). I’ll give you the abridged version: Coolidge was perhaps the biggest CF known to mankind. He ran the country like he ran a household budget. Talk about austerity—wow.

I worked for the government under the Clinton administration. Clinton was not well-liked by government employees. He kept telling people to “do more with less.” No money for trips, no money for projects, no money for boondoggles.

Go look at the budget figures from the 1990s—the size of government remained pretty constant, which is something. It was the closest thing we’ve had to austerity in nearly 70 years. The drunken spending spree, replete with new government bureaucracies and multiple wars, was kicked off by 9/11.

(In hindsight, it should not have come as a surprise that stocks went straight up in the 90s. Free trade, peace breaking out all over, balanced budgets, innovation—really an amazing time to be alive. And people were miserable.)

Do you think it is an accident that the two biggest bull markets roughly correspond with government austerity? I do not.

Today, the opposite is happening. In the 2000s, Dick Cheney said that deficits didn’t matter, but at least he was constrained by the bond market. I suppose that if MMT were implemented, foreign exchange markets would have their say about it (provided we still had floating exchange rates).

Don’t you think it’s weird that the government can spend as much money as it wants, but you can’t? That the government gets to play by a different set of rules?

Household Budgets

Regardless of how much money the Fed prints, what they do with their balance sheet, or how many railroads across the Pacific we build, you are faced with the harsh reality of having to spend less money than you make. You can temporarily make up a shortfall with debt (just like the government), but after a while, your creditors get sick of you and the gig is up.

It is kind of hard to tell people to mind their personal finances while the government is going bananas. But that is what we do. We tell people to eliminate debt and manage risk, and part of the reason we tell people that is because people have to manage the stupidity of governments.

In civilizations modern and ancient, governments have found the temptation irresistible to borrow and spend and mess with the value of their currency. If you happen to be a resident of one of those countries, then you will get mowed over as an innocent bystander.

Unless you take measures to protect yourself.

This isn’t a precious metals newsletter, but the way you protect yourself from plans to demolish every house and kill all the cows is… gold.

Other hard assets, too. Base metals, timber, diamonds, stuff like that.

Interestingly enough, in 2009-2011, people thought it was really important to own that stuff (because of QE). I was one of those people. It didn’t cause inflation, unless you think it works with a really long lag.

The stuff people are talking about now is way more radical than what was going on during the financial crisis.

I own a lot of gold, most of it from before the financial crisis. I have never been sorry about my decision (though I was a little stressed out when the drawdown got to 45% or so). You own it specifically for times like these. Crazy town.

Should I Own Physical Gold?

Don’t bother if you don’t have any assets to protect in the first place. The point is not to punt it around. I think that’s where people went wrong in the last big bull market—it was a punt, rather than a hedge.

And I don’t mean that it’s a hedge in the portfolio sense, as in gold goes up when other stuff goes down. I mean, physical gold is a hedge on your life. You have a tube of Eagles on your nightstand that you can put in your pocket and run to the airport with if things start getting kinky.

There are a lot of people who buy gold. They do so for a reason.

Some people say that gold doesn’t track inflation very well. But one thing it does well over time is maintain purchasing power, with some minor variations along the way.

I bet Venezuelans wish they had some gold. And guns!

That’s the most depressing thought in the world—that one day, we might need gold and guns in this country, like in some right-wing dystopian fiction. I hope not! Things usually work out for the best. But sometimes they don’t.

It’s dumb to have 100% of your portfolio in gold, but it’s also dumb to have 0% of your portfolio in gold.

This isn’t a market call on gold (though I am a bit bullish). It’s responsible to have a good chunk of bonds and it’s responsible to have a little bit in gold. It’s irresponsible to have it all in the QQQ.

P.S. Three Things You Should Know About SIC 2019

If you’re thinking about going to the Strategic Investment Conference in Dallas in May, here are a couple of things I’ve learned from all the SICs I’ve gone to and spoken at:

Here’s the link to sign up and get that $1,000 discount. Hope to see you there.

Jared Dillian
Editor, The 10th Man

Share Your Thoughts on This Article

Was this email forwarded to you?
Click here to get your own free subscription to The 10th Man.

Use of this content, the Mauldin Economics website, and related sites and applications is provided under the Mauldin Economics Terms & Conditions of Use.

Unauthorized Disclosure Prohibited

The information provided in this publication is private, privileged, and confidential information, licensed for your sole individual use as a subscriber. Mauldin Economics reserves all rights to the content of this publication and related materials. Forwarding, copying, disseminating, or distributing this report in whole or in part, including substantial quotation of any portion the publication or any release of specific investment recommendations, is strictly prohibited.
Participation in such activity is grounds for immediate termination of all subscriptions of registered subscribers deemed to be involved at Mauldin Economics’ sole discretion, may violate the copyright laws of the United States, and may subject the violator to legal prosecution. Mauldin Economics reserves the right to monitor the use of this publication without disclosure by any electronic means it deems necessary and may change those means without notice at any time. If you have received this publication and are not the intended subscriber, please contact service@mauldineconomics.com.

Disclaimers

The Mauldin Economics website, Thoughts from the Frontline, The Weekly Profit, The 10th Man, Connecting the Dots, Transformational Technology Digest, Over My Shoulder, Yield Shark, Transformational Technology Alert, Rational Bear, Street Freak, ETF 20/20, In the Money, and Mauldin Economics VIP are published by Mauldin Economics, LLC Information contained in such publications is obtained from sources believed to be reliable, but its accuracy cannot be guaranteed. The information contained in such publications is not intended to constitute individual investment advice and is not designed to meet your personal financial situation. The opinions expressed in such publications are those of the publisher and are subject to change without notice. The information in such publications may become outdated and there is no obligation to update any such information. You are advised to discuss with your financial advisers your investment options and whether any investment is suitable for your specific needs prior to making any investments.
John Mauldin, Mauldin Economics, LLC and other entities in which he has an interest, employees, officers, family, and associates may from time to time have positions in the securities or commodities covered in these publications or web site. Corporate policies are in effect that attempt to avoid potential conflicts of interest and resolve conflicts of interest that do arise in a timely fashion.
Mauldin Economics, LLC reserves the right to cancel any subscription at any time, and if it does so it will promptly refund to the subscriber the amount of the subscription payment previously received relating to the remaining subscription period. Cancellation of a subscription may result from any unauthorized use or reproduction or rebroadcast of any Mauldin Economics publication or website, any infringement or misappropriation of Mauldin Economics, LLC’s proprietary rights, or any other reason determined in the sole discretion of Mauldin Economics, LLC.

Affiliate Notice

© Copyright 2019 Mauldin Economics