Time to Opt Out of Government Sponsored Investing

The good news is, it’s easy to predict what will happen to the world economy in the next few years. The bad news is, the governments won’t let it happen. And who knows what they’ll come up with instead?

If you’ve ever thought that economics and finance don’t make sense, you’re smarter than you look. The economy doesn’t make sense. At least not to someone looking from the outside in. The economy only makes sense to each individual thinking about their individual life.

Why does rush hour strike each morning and evening? It’s a completely ridiculous idea to have everyone coming and going at the same time. But each individual stuck in traffic will have a very good reason for being there, usually because employers pay them to turn up at a certain time.

The economy wasn’t designed by someone thinking about what would be the best way of doing things. The economy wasn’t designed at all. It’s a web of constantly changing connections between individuals, which only those individuals can understand and appreciate.

If you understand this way of seeing an economy, it will start to make a bit more sense. The thing is, most economists don’t see the economy like this. They only see data and statistics. They see the congestion, not each individual’s reasons for being stuck in the congestion.

That’s why, even if their fixes reduce congestion, they interfere with people’s lives in a way that causes more harm than the congestion did. For example, a congestion charge stops people from taking job opportunities in the city.

Policies with results worse than the problems they address come from a focus on data and statistics. Nobel laureate FA Hayek called this mistake ‘Scientism’. It ignores what’s really going on in the economy.

For example, if you buy a car, that shows up in GDP, inflation and durable consumption statistics. It probably also affects unemployment, manufacturing and sentiment data. These are the things most economists see.

But there are far more important things going on when you buy a car. You have to value the car more than the money you hand over. And the car seller has to feel the opposite way. He has to value the money more than the car.

The fact that two people can perceive value differently is the whole point of the economy. If one man’s trash wasn’t another man’s treasure, nobody would ever trade anything. There wouldn’t be an economy.

But how much people value things doesn’t show up in GDP, inflation or the rest of the data and statistics. Values show up nowhere and can’t be measured. Yet they’re the whole point of the economy.

That’s why, as soon as anyone tries to ‘design’ an economy, it loses meaning. If the government tries to increase GDP and employment by subsidising the car industry, that bastardises the process.

Decisions are no longer made based on perceptions of value. They are made based on improving data and statistics. But the whole point of the economy is to meet individual’s wants and needs, not make data look good for politicians.

Without each individual showing their values and preferences through their decisions, the economy isn’t based on individual’s perception of value and therefore stops serving wants and needs. Instead, it becomes a political tool. A way for the rich and the powerful to become more rich and powerful.

Do You Want to Invest in this World?

Do you want to invest in a world where politicians decide what will happen?

What if you owned tobacco shares these last few years? Taxes, plain packaging and now there’s talk of forcing cigarette manufacturers to make their cigarettes taste bad. Tobacco has been a political target for years.

But what if politicians targeted the crown in Australia’s economy instead – the resources industry? Oh wait, they already did with their new taxes. Isn’t that how they started out with tobacco too? What’s next, taxing the retirement industry?

Investing in an environment like this is dangerous. You are playing political games, not providing capital to companies that meet consumers wants and needs. Profit becomes something bestowed by government, not earned. And if you break ranks with higher profits earned by serving your customers, you get taxed even more.

All this relates to the stock market in a surprisingly direct way. Only one politician has admitted openly that economic manipulation is about fudging information, not generating true economic activity.

The Japanese minister shocked the world with an explicit target for Japan’s stock exchange index. Business Insider reports on the bizarre new idea:

‘Economic and fiscal policy minister Akira Amari said Saturday the government will step up economic recovery efforts so that the benchmark Nikkei index jumps an additional 17 percent to 13,000 points by the end of March.

“It will be important to show our mettle and see the Nikkei reach the 13,000 mark by the end of the fiscal year (March 31),” Amari said in a speech.’

This completely absurd statement reveals how politicians feel about the stock market and other economic information. They are indicators there to be manipulated, not important pieces of information that allow the economy to work.

The chart below shows what’s wrong with that idea. The stock markets of the world haven’t been going up because of a better economy. Instead, money printing has driven up stock prices because people fear inflation. The economy and the stock market have diverged.

Source: Credit Suisse

If governments can drive up stock markets by printing money, you’re probably thinking that sounds like an opportunity to profit. You’re probably right.

For every company that is targeted by the government and struggles, there’s one that the government favours. In Australia, healthcare and banks are the top dogs. (In America, you can add the military industrial complex to the list.)

Aussie healthcare stocks skyrocketed last year, with the government funded healthcare system paying (our money) through the teeth. The banks get a whole list of benefits from the government: First home buyers’ grants to make mortgages more affordable, deposit insurance to keep customers happy, a central bank as an emergency lender and regulators asleep at the wheel.

So should you invest in these government supported industries? Well, you should have in 2012. The Australian healthcare index (red) trounced even the impressive financials index (orange) and both outperformed the wider market (blue)

Government Sponsored Investments Outperform

Chart Showing How Government Sponsored Investments Outperform
Source: Google Finance


But now what?

Investing in government supported investments, or ‘Policy Profiteering’, is a good idea while governments are doing well. But that time may be over soon. Europe is discovering that government control and meddling compromises the entire nature of the economy. That’s the point we were trying to make above. The government becomes like a parasite killing its host.

When people begin basing their daily decisions on government incentives designed to produce good looking data, rather than their own perceptions of value, the economy starts to rot from the inside out. Remember, that doesn’t show up anywhere in economic statistics.

They measure transactions, not the reasons why those transactions are made. The only place you can see this rot is in anecdotal evidence in your own lives. Here’s an example from an email Murray Dawes sent around the office on Tuesday:

‘Four Corners last night was very interesting and well worth watching on ABC iview if you get the chance. It followed the story of a few different families in America who have fallen on difficult times. There are car parks in California that open every night at 6pm for people who are living in their cars to come and park overnight. It really was an eye opening story. I don’t think those people are excited by the rising stock market.’

Kris Sayce recently pointed out in Pursuit of Happiness that financial planners now work around government benefits when planning for their client’s retirement. The renewable energy and car industry is busier getting grants and subsidies than improving technology and cheapening manufacturing costs.

Decent companies have to spend fortunes on lobbyists to compete with the fortunes spent by the likes of Eddie Obeid. With all this going on, the real purpose and nature of the economy is stifled. Trying to improve data and statistics with more subsidies, bailouts and corruption stifles the economy even more.

This has been exposed in many places around the world. We may be a few years behind in Australia because the rot hasn’t been exposed by a financial crisis, but that might mean we’ll catch up real fast.

You Have to Do Something

So, if you’ve had enough of profiting from government sponsored investing, or being burned in industries the government vilifies, what do you do? How do you opt out of this crazy economic system?

Well, you need an asset that isn’t dependent on the government’s favour. One that can’t be influenced by the government – so can’t be controlled, tracked or diluted.

Historically, there’s only one kind of asset that achieves this – precious metals. Not the exchange traded fund type, or ‘paper investments’. You need the real stuff – physical gold and silver.

But that’s not a complete solution. You can’t put all your financial wealth into a single asset class. But you can make changes to the rest of your wealth to protect it from the manipulated world we live in.

For example, you might want to invest for income instead of capital gains, or diversify part of your life overseas. These are two of the ideas regularly explored in the Money for Life Letter. You can find out more here.

Over at Diggers and Drillers, Dr. Alex Cowie believes in changing the type of shares you invest in. His recent video features two shares that could take off if governments continue to trash their currencies to goose economic data and statistics.

By owning precious metals and making changes to your wealth that protect you from what Hayek called Scientism, you stand to weather whatever happens over the next few years much better than those who rely on the government’s manipulation.

Have a great weekend.

Nickolai Hubble
Markets and Money Weekend Edition

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