Benson's Economic &
Market Trends
Government Gifts &
Monty Hall Paradox
Richard Benson
Archives
October 12, 2004
Years ago there was a controversy with respect to a game show
where the host offers you the opportunity to win what is behind
one of three doors. Typically there was a really nice prize (i.e.
a car) behind one of the doors and a not-so-nice prize (i.e.
a goat) behind the other two. After selecting a door, the host
would then proceed to open one of the doors you didn't select.
It is important to note that the host would NOT open the door
that concealed the car. At this point, he would then ask you
if you wanted to switch to the other door before revealing what
you had won.
Apparently, in response to a newspaper column written about the
show, a reader posed the following question: "Is it to your
advantage to take the switch?"
This problem was given the name The Monty Hall Paradox in honor
of the long time host of the television game show "Let's
Make a Deal." The reporter's answer to the reader was that
the contestant should switch doors and she received nearly 10,000
responses from readers, most of them disagreeing with her. Several
were from mathematicians and scientists whose responses ranged
from hostility to disappointment at the nation's lack of mathematical
skills.
In the real world, of course, the Monty Hall Paradox is even
worse because while behind one door there is nothing, and behind
another door there is a nice prize, behind the final door is
an absolute ogre who will devour both you and your investments.
If our nation's lack of mathematical skills were evident back
then, why should it not surprise us that behind today's Door
#1, Gift Giving by the Government, it's hard to resist as policy
even though the "gift" comes from taxpayer money. An
example would be when the government pays farmers not to grow
crops and the farmers choose to take the government gift (in
the form of a farm subsidy) rather than plant or harvest. Farm
Subsidies, Tax Rebates and FEMA Aid are examples of small government
gifts paid for by you and me, the taxpayers, with, of course,
our own money.
However, the really big money gifts, behind Door #2, are handed
out by the world's central banks. In the financial markets, this
money is gifted to those participants who are bright enough to
take it when it is offered (savvy investors don't bother to listen
to Wall Street in its relentless efforts to get people to buy
stocks and bonds at inflated prices). With this really big money
behind Door #2, individual investors should take the money, lock
Door #3, and run for their lives. In other words, selling
your stock and bond portfolios and getting out is a wise thing
to do. Opening Door #3 is what will happen when the foreign central
banks stop buying dollar denominated assets. Behind that door
is a crash, not a gift. As a prudent investor, opening the right
door is as vitally important as not opening the wrong door.
It's a fact that in order to keep the United States' economy
moving, the Federal Reserve has cut short-term interest rates
to 46-year lows. In order to facilitate the continued buying
by American consumers of imports, Asian central banks have financed
most of our country's budget deficit. These foreign central
banks have subsidized the dollar to keep it stronger and lowered
our longer term interest rates, making sure that our country's
budget deficit caused no pain. Normally, a $450+ billion U.S.
Treasury deficit - for a country like America that has no savings
would have sucked all the liquidity out of the money market and
forced up longer term interest rates. But this hasn't happened.
Why?
Over the past few years, foreign central banks have spent $700
billion to keep the dollar strong and our interest rates low.
(The foreign central bank subsidy - to the dollar and U.S. interest
rates - now totals over $1.3 Trillion). This foreign central
bank gift is targeted directly at the financial markets, causing
a stronger than deserved dollar and much lower than justified
market interest rates. Major corporations and institutional investors,
like Warren Buffet, have used the central bank gift as an opportunity
to take massive short positions on the dollar. Moreover, major
corporations have remained active borrowers in the bond market
at current subsidized interest rates and built up strong liquidity
positions.
Serious professional investors understand that if the cost of
borrowing is subsidized, the subsidy goes to those who borrow.
(Since the way corporations borrow is to sell bonds, selling
bonds looks like the smart thing to do.) Because interest
rates have been subsidized down, bond prices are artificially
pushed up, and if bond prices are artificially high, it is certain
that stock prices are also inflated.
Clearly, the subsidies to the financial markets are so big this
just can't go on forever. Savers in America are paying a horrible
price by receiving inadequate yields on their savings and over-paying
for stocks and bonds. In China, the dollar subsidy is causing
unwanted inflation and robbing the Chinese consumer.
When it comes to the timing on selling your gift to get the maximum
benefit, it would be nice to know when the subsidies will end.
A telltale sign of this beginning to happen would be the recent
rise in short-term interest rates with more rate increases to
come by an accommodative Fed. The Fed's gifts are slowly being
removed 1/4% at a time. The foreign central bank gifts for the
dollar and interest rates will disappear when the world recognizes
that America's trade deficit is an international threat and the
dollar must be devalued.
Ah, life was indeed much simpler when investing offered a prize
behind a door, and no loss behind the other two doors. Today,
your Monty Hall choices are: Door #1 - Stocks and Bonds that
will give you a big loss; Door #2 - Cash which looks like it
won't give you a loss but actually will, as the dollar devalues,
and Door #3 - Foreign currency, precious metals and short positions
in bonds and stocks that can offer large gains.
Listen to Monty Hall but watch the activity of the world's central
banks carefully before contemplating which door to pick.
October 12, 2004
Richard Benson
Archives
President
Specialty
Finance Group, LLC
Member NASD/SIPC
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eMail: rbenson@sfgroup.org
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