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Is There Really a Free Lunch Out There?

My Granny came from the old country (a terribly cold part of Russia) and although she never received a formal education, and didn’t even read much, she seemed to possess an amazing innate intelligence.  Since her passing more than 22 years ago, I occasionally reflect upon my time with her and some of her more memorable teachings.  I’ll paraphrase one of her favorites as “You get what you pay for,” which I’ve taken to mean that there are no free lunches in life. 

I think that many who believe in that axiom also expected that in these past few years the dollar would have collapsed or that other terrible things would have befallen America as a result of the Bernanke Fed having printed more than $3 Trillion, the Paulson and then Geithner Treasury bailing out first the banks then the auto industry, and then FNMA and FHLMC.  Yet, so far these concerns seem to have proven completely off base.  The dollar is steady, inflation indexes reflect negligible inflation, and interest rates remain historically low seemingly vexing all the doomsayers who were certain that the opposite would have occurred and we would have witnessed rampant inflation as a result of this ultra loose monetary policy.  The Fed and other economists are actually now most concerned that inflation is too low.  The car companies, the big banks, and even FNMA and FHLMC all appear reasonably sturdy, minting profits like never before.  And, as if that weren’t good enough, stocks are at all-time highs, home values have largely rebounded towards pre-crisis highs, and interest rates remain very low which helps make everyone’s debt more manageable.  The government tells us that the unemployment rate is shrinking too.  Could Granny have been wrong?  Could there really be a free lunch after all?

While my granny’s teachings run deep in me, I believe that the cautious or concerned perspective that I have held during this recent period, and that many others seem to share, deserves some re-examining.  Things today seem to be in an historic position in many parts of the globe brought about by a variety of unique and largely unprecedented circumstances, including:  all developed country balance sheets are heavily indebted which naturally stifles growth, Europe is in the midst of an attempt to consolidate itself like never before, China is in the midst of a social and economic experiment towards urbanization and modernization the scope of which the world has never seen, Japan faces a severe demographic crisis (on top of their indebtedness problem) and is desperately trying to reverse decades of moribund economic activity, export-dependent nations are facing a reduced level of global purchasing power, the combination of a lack of global economic growth and the awareness and recruitment potential that is fostered by the internet is creating increasing frustration and social unrest around the world, and spending on security as a result of a world at war with terrorists is sucking a meaningful amount of productivity from the global economy.

All of these issues seem to be negative, and yet somehow there has been a lot of good news on the financial front.  As we begin the New Year 2014 what can we reasonably expect?  Let me know you’re predictions on the following, for year-end 2014 and I will share the results with you in a week along with my forecasts and analysis for the coming year.  To help you out I’ve included year-end 2013 numbers in parentheses.

S&P 500 (1,848), yield on the UST 10 Year Note (3.03%), Case Schiller National Home Price Index (180), yield on Spanish 10 year paper (4.15%), Nikkei 225, dollar/euro (1.38), dollar/yen(1.05), the price of an ounce of gold (1,209).

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