Those Who Don't Learn From History...

...Are doomed to repeat it! Unfortunately, there is so much "noise" out there - from geopolitics to macroeconomics - that it is difficult for the average person (who is simply trying to make ends meet and secure a reasonable financial future) to make sense of it all.

Yesterday, we were treated to some happy numbers from the Congressional Budget Office regarding the 2005 deficit. From the CBO's report:

"CBO now expects the 2005 deficit to total $331 billion—an $81 billion decline from the deficit recorded for2004 (see Summary Table 1). Relative to the size of the economy, the deficit this year is expected to equal 2.7 percent of gross domestic product (GDP), down from 3.6 percent in 2004."

Budgets are calculated and extrapolated based on current trends. The government had projected surpluses as far as the eye can see leading up to the technology-led bust of 2000. We all know how that ended.

The deficit is indeed closing at the moment, but consider that all of the revenue growth that is the basis of the projections is from a most unsustainable source. Yes, that old bugaboo, inflation. Inflation of Federal Reserve Notes, inflation of credit, inflation finding its way into every corner of the economy, from bonds (the very fact that the bond market is "not concerned" about inflation is inflationary) to real estate to stocks. It is all being monetized and carried forward as if it is viable. Crude oil is going along for the ride as well. What the heck, it's just the cost of doing business in the inflation economy.

I learned my lesson in 2000 and vowed never again to get caught up in Ponzi-dynamic fantasies. I will trade and play short and intermediate trends as readily as the next guy, but the true secular trend remains unchanged; our seed corn is all used up and we became too lazy to do the work of replanting year in and year out. We used credit instead, as it has been as abundant as the seeds of productivity once were. This is going to end and it is going to end painfully one day.

Meanwhile, I am sure there will be continued bull horning of everything from an ephemeral budget deficit reduction to the fact that a rampaging crude price has not slowed the economy (good thing the bond market has not put the kybosh on those home refi ATM machines). It is ironic that at the same time a glimmer of good news about government debt reduction hit the wire, the public is sliding ever more deeply into debt, which of course will one day send those inflatable chickens home to roost and land right back on the government's doorstep in the form of gaping new deficits.

It is advised to seek out havens where you may preserve capital first, and perhaps sensibly make some return. I, along with the other usual economic suspects (said with respect, as I have learned a lot from many of them) have taken pains to come up with ideas for safety, capital preservation and generally side-stepping the worst of the storm that will one day land on the shores of the US and much of the rest of the world.

Despite my über-bearish macro bias, I have been bullish on the stock market when warranted and bearish as well. It is only price. Price is price and value is value. This was taught to me by John Mackenzie, who is now probably putting more energy into sustainable living than worrying about every twist and turn of the "mess" we call a market and economy. Debt can only provide value when it is used as a leverage tool for building sustainable growth and gainful productivity. For too long now, debt has been used as THE economic fundamental, in and of itself creating a boom with no hope of payback.

Like I said, those who don't learn from history are doomed to repeat it. You don't have to take the way-back machine too far until you get to the early 1930's and the 1920's boom that preceded it.

Enjoy the current economic boomlet for what it is. Truth be told, I am.

But be safe.

Biiwii Letter #2 is currently available for free. Simply email me a request and it will be sent ASAP (PDF format).