Wednesday, August 09, 2006

Today's myth-busting post ... i.e. free the bears

Yesterday, the Federal Open Market Committee decided to pause after raising the Fed Funds rate a record 17 consecutive times, from 1% to 5.25%. But the market sold off a little after the announcement, to the delight of the bears.

Now being a bear can be profitable, 3 months per year and 2 years per decade, on average. We just need to know which months and years. On the other hand, being a perpetual bear is dangerous, given the growth potential (and track record) of the US economy. I've previously posted a warning on how being short $1,000 of the Dow Jones Industrial Avg 90 years ago would result in a loss of an adjusted $2 million today. I post these warnings because some of my good friends are perpetually bearish, and I just hate seeing them losing their money while retaining their stubbornness--I would be happier if they could reverse those. Today's lesson is from a great communicator, Steve Conover:

In short, the knowledge content of the assets we hold abroad has to be yielding a much higher return to us than we pay on foreign-owned assets in the US, in order to explain the fact that we are still earning $30 billion (net) as we were in 1980. In other words, our assets abroad must be worth a lot more than the books would indicate, because there aren't many other ways to explain why we are earning (net) $30 billion today on foreign direct investment, instead of paying out (net) $210 billion that the books would suggest should be the case. For a good illustration of that key point, read the Euro Disney example in the paper.

We're running a trade surplus? Hmm, how long do you think it will take the mainstream media to catch on to that new point of view? (My guess: Not until after the next presidential election. If ever.)

Read the whole thing. If you have a few minutes, check out the site; he's also got great instructional graphics on scary things like debt and deficit; hopefully, the truth will set the systemic bears free, and they can hibernate with peace in their hearts.

UPDATE: Another nice take from Bryan Caplan, here, who says "The upshot: The dollar is not going to collapse. In fact, it looks like we should expect the dollar to slightly appreciate. As Neo says, "Woh." If only Warren Buffett and Bill Gates had read that Harvard paper last year, they would have more billions to help the poor now. And George Soros could have gotten some more Ned Lamonts prepositioned.

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