It's Only a Label, It's Only a Label, It's Only a Label, It's Only a Label...

IT may seem like it is only a movie, but it is real. It is time for a change in asset allocation.

As you might know, one of the primary items I monitor to determine investment policy is the activity of the largest consumer in our economic system: Government. It is now biting out a larger piece of the economic pie. In 2000 total government expenditures were proximally 17 ½% of total GDP. As of the end of 2010, they were approximately 20% of GDP. It does not take a giant leap of faith to assume that over the next several years the government's portion of GDP will increase drastically with the new healthcare program and collections needed to pay debt. To give you a feel of how large the debt is becoming, deficit spending in the month of February of 2011 was $222.58 billion. The budget deficit for the entire fiscal year 2007 was $162 billion.

The Congressional Budget Office (CBO) projects that starting in 2013 the deficit will begin dropping very, very dramatically. From 2011 through 2013 they see it dropping by over 52 %. To accomplish this they are expecting GDP to increase by

·    2011-3.7%,

·    2012-4.4%,

·    2013-5.1%

This can happen, but it would be considered aggressive growth. Of course, it would require that Congress and the Administration actually spend according to assumptions. Stranger things have happened. I actually do not know what these stranger things might be. But I'm sure they have happened.

The whole point here surprisingly is not the size of the deficit. The result of this deficit is what is more important. When I evaluate the results of Executive Order 6102 (see the picture above), I see that it leads directly to where we have come. In 1933, we had a depression. Prices were dropping, factory output was following suit, and GDP was taking a huge hit. This all led to unemployment and soup lines. Since that is pretty far off of the political correctness charts Franklin Roosevelt issued this order. It required that except in some circumstances (jewelry, manufacturing, artwork, etc.) everyone turn in their gold and receive below market prices for their efforts. The goal was removing gold from the system and making it an illegal tender. He figured that if we could remove gold from the system and replace it with fake money (a.k.a. fiat money: the dollar we know now) he could regenerate the system by causing inflation to replace deflation. This would cause wages to increase and demand to increase and factories to begin working again creating the products to satisfy the newly found demand. Subsequently he began doing what our federal government has done ever since: printing even more money. Within two months the amount of inflation in the system was measurable. He got his wish on this and several other labor related issues likely resulting in an extension of the economic pain much longer than it had to go (Ohanian and Cole, 2004: UCLA).

Fast forward to today. During the approximately 80 years since, have you ever heard of the government reducing the amount of money in our system in order to increase the value of our dollar? I have not. In fact, all they have ever done since this period is create more money. A dollar now buys about what six cents bought in 1933. So, don't think of at dollar as worth anything specifically. The word "dollar" really only represents a floating currency whose purchasing power is constantly being lowered. This is my concern now. I should probably remove "dollar" from my lexicon. It really is only a label. I should probably replace it with "PP" standing for purchasing power. That's what money really is all about. With this tsunami of debt and subsequent issuing of new currency by the Treasury I think we need to re-think how we allocate our assets going forward.

There should be significant emphasis upon maintaining purchasing power in an inflationary environment. There are caveats, however: inflation has typically occurred when factory utilization is 90% or above. We are at about 75% now. Additionally, it has occurred as wages have ratcheted up. Wages are barely keeping pace with population growth right now. Without these, there could be a legitimate question as to whether we will have inflation. I'm going to take the stance that we will have inflation, but perhaps not runaway inflation like in the 1980s. However, I do think we are susceptible to enough inflation to dramatically reduce the purchasing power of our money.

I'm only sharing with you right now the tip of the iceberg on the research that I've completed over the last four weeks. There is much more to cover but a blog such as this is really not the right place to do it.

I will summarize by saying that we are probably at a tipping point where portfolios should be reallocated with a goal to counteract inflation. Therefore, over the next 2 to 3 months everyone should be in for portfolio reviews. Please call the office (952-230-1340) at your earliest convenience to set this up.

Chris Gerber
952-230-1340

The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investment(s) may be appropriate for you, consult your financial advisor prior to investing.