There’s nothing like a good bearish article to warm the cockles of a bear’s heart. So sit down and enjoy this one (PDF), the glow will last all weekend, at least until the market opens. Thanks to “Investment Postcards from Cape Town” for the reprint.

It is frequently pointed out that bonds are not a good investment, because the yield on quality bonds, i.e. Treasuries, is insufficient to compensate for inflation.

The problem is, there are no good investments available. Where investment is defined as an income-producing asset with low risk of principal loss. Essentially all asset classes are overpriced. Equities have been overvalued continuously since 1991. Real estate, well don’t go there. Commodities and currencies aren’t investments, they don’t produce income.

So one does what everyone else is doing, one becomes a speculator, betting on future prices. Yuck. I hate it, but there is no alternative. This has meant, and continues to mean, markets where there is no tie to investment value, price action is the only thing. Manipulation is prevalent. But in the long run, I believe that value will govern. I’ve been in the speculation mode since 1997. I want to go back to being an investor. The overvaluation is driven by an excess of cheap credit. People borrow because they can, drive up the price of assets with the borrowed funds, and come to believe that they are investment geniuses. The great deleveraging, which will remove the supply of cheap credit, has started. The banking system is a collection of zombies, dead companies still trading, their capital an accounting fiction. I am just stunned that seemingly intelligent people think that the economy can resume growth with securitization of credit essentially shut down, and a banking system that is desperately short of capital already, and facing more losses in the future.

There is nothing that the Fed can do without a well-capitalized banking system, it is not a lender to end users of credit (except the brokers, I guess). It needs to look at the Japanese example and learn, not to wait as long as the BoJ did to restructure a broken system. It will not, and cannot, heal itself. Of course, the systemic failure is largely due to the actions of the Fed itself and recognizing this will be difficult. It is perhaps not something Mr Bernanke is capable of doing, given that he is so imbued with the nonsense of modern monetary “economics.” It is not what we don’t know that hurts us, it is what we know that isn’t so.

The employment report was pretty much as expected (-62,000, 5.5%) and so the index futures are up. Or maybe it is because oil is a few pennies lower. Not that it matters. The birth-death model contributed 177,000 new jobs for the report, including an increase of 29,000 in construction. The last two months employment reports were revised downward (bigger losses than originally reported) and, perhaps more tellingly, the weekly jobless claims number popped over 400,000. That’s a bit of a magic number for recession.

Anyway, despite the waterboarded statistics, unemployment is clearly on the rise. We’re going to see how the “services” economy holds up under stress. Not well, I expect. What needs to be done for recovery, in my not-so-humble opinion:

• Replace the income tax with a consumption tax to encourage saving and investment and eliminate the huge adminstrative overhead.
• Change the Federal Reserve’s mission to solely that of providing a currency with stable purchasing power.
• Stop the wars and drastically reduce the defense budget so that the resources used by the military are re-allocated to the consumer.
• Stop sending money to thugs. Reduce energy consumption by taxing transportation fuels at levels similar to those in Europe, and quickly clear the way for development of the domestic oil shale resources. The technology is ready, politicians are the problem.
• Develop the equivalent of the Resolution Trust Corp. to take over the assets of failing banks and S&Ls, to protect depositors. The FDIC is not up to the task.

Edit: The ISM Services number came in at 48.2, indicating that service businesses are contracting. No surprise.

I’m underperforming on the sell-off because I have chosen to position most of my bear puts in the NDX, Nasdaq 100, which appears to be the last refuge of the bulls and is still a long way from its March lows, unlike the Dow and the S&P. While that’s a little frustrating, I’m not concerned because these GOOGs, RIMMs and so forth are the most overpriced stocks around and will have their day in the barrel.

Relative performance is based on Fidelity Magellan, FMAGX. Inception refers to reporting on the blog, and is based on the close of 2005.

6/30 portfolio.

A warning from the BIS (Bank for International Settlements):

“Should governments feel it necessary to take direct actions to alleviate debt burdens, it is crucial that they understand one thing beforehand. If asset prices are unrealistically high, they must fall. If savings rates are unrealistically low, they must rise. If debts cannot be serviced, they must be written off.

“To deny this through the use of gimmicks and palliatives will only make things worse in the end,” he said.

To which one can only say, Amen.