“In just one month, I have virtually turned bankrupt, the entire country has gone bankrupt,” one worker told the Associated Press this week. “I fought my bank to close my account and get 5 million rubles ($1,000) in cash, and I want to buy at least something before my money turns into dust,” said another, who found many supermarket shelves already cleaned out by consumers. From Germany in the 1920s to Argentina in early 2000 to Zimbabwe just a few years back, the scene is always the same: prices skyrocket as personal savings are destroyed. In Belarus, the prices of apples and diapers have already more than doubled; gas (if it can be found at all) is up 25%.

The cause of the collapse wasn’t profit-hungry speculators or nefarious free-market bankers, but a highly authoritarian government beset by massive regulation,intervention, state-ownership of businesses and spending. Government-controlled entities generate 70% of gross-domestic-product; inflation is conservatively running at 16% a year.

You can read his entire article here. This is a taste of what USA has coming if the Fed doesn’t precisely time its reductions in the printed money inserted into the system by actions such as QE2. Do think they will get it right?

She has made this report available on various web sites, such as

www.businessweek.com/go/11/usainc

www.kpcb.comusainc

We provide it here for your convenience:

Mary Meeker’s Brilliant Analysis of USA’s Financial Condition

This is worth reading and thinking about, and then engaging in informed conversations with folks you know—or even with unwashed media reporters.

In our Humble Opinion, this is a masterful work explaining some hard and unpleasant truths.

Most current market analyses and commentary fail to take this huge fact into account in any serious way.

I believe the idea of a “new normal”, meaning a very slowly growing US economy, will be valid for many years to come. Unfortunately, the current pack of malignant bureaucrats and politicians always choose pandering or ideology over actual problem solving, so the exactly wrong regulatory frameworks are usually installed (e.g., “healthcare reform” laws, “financial reform” laws, “net neutrality”, making Fannie/Freddie even more supportive of people who cannot afford to buy a house, …). Thus, we will be stuck with the New Normal or a similar scenario, unless at least one or both of these possible events occur:

1. The current Regime becomes paralyzed and unable to pass any more dangerous laws affecting the economy, e.g., after 2 NOV 10 (an obvious speculation is available around this idea!)
2. Technology proceeds apace and radical innovations take hold….but this is a 5 to 10 year event horizon before the economy could be affected (consider the WWW was launched c1993 by Netscape and while its future impact was widely acknowledged then, it’s taken until roughly 2003 to become transformative in the economy).

Budgeting skills are as important as what your portfolio is doing—probably, more important really, because budgeting is an everyday issue. If a person can scale back appropriately so that they can actually survive on a 4 percent withdrawal rate, they’re good. Any reasonably designed retirement portfolio will last with a 4 percent withdrawal rate. Eight percent? You’re going to have to get really lucky in your investments.

We love reading his work and he’s a very sharp, knowledgeable finance maven. But his claim about the 4 percent withdrawal rate seems a tad glib–there are many assumptions built-in to this claim that need explanation. Would you really like to bet on such a simple number for your retirement? We think not.

Intuitively, at 4% withdrawal rate,  if your return is 4%/YR and inflation is nil, then in fact you can simply withdraw the gain each year and never deplete the principal. But if, for example, inflation is 2%/YR and your return is 4%/YR, then we can show 4% withdrawal rate would last you 34 years. Not bad. But if your return is 3%/YR and inflation is 4%/YR, then this account will deplete after 22 years if withdrawals are at 4%/YR.  That’s probably a big difference. We show you how to handle all these “What Ifs”.

This post introduces the idea of the Safe Withdrawal Rate (SWR), a concept that has recently captured the attention of many investment advisors and publications. We introduce our own focus on this topic now. We announce two initiatives. First, we published a descriptive piece in Advisor Perspectives, a highly respected and popular website for investment professionals. This piece explains SWR ideas without math for the average investor. Second, we published our full research results in detail here, in our permanent pages (see Investing Tools drop-menu above, or click this link):

Investing Tools> Safe Withdrawal Rate

This page introduces our technical analysis and methodology to determinine your own, personal SWR. Our innovation: we capture each individual’s beliefs about his own future returns and inflation to find the expected value of his SWR, irrespective of market history. Ultimately, your personal beliefs about how future returns and inflation evolve is all that matters for your planning purposes.

I grant that low long-term interest rates could continue for months, or even well into next year. But just as easily, long-term rate increases can emerge with unexpected suddenness. Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points.

He generally warned us that

The United States, and most of the rest of the developed world, is in need of a tectonic shift in fiscal policy. Incremental change will not be adequate.

Do you believe the curent regime has any political courage, let alone sufficient to change course?

Today, Bloomberg News makes a very strong and creatively presented case for deflation. We now have some serious validation….but no joy.

www.defeatthedebt.com

“There is the strong possibility that policy makers in the US and UK will not time the transition from the current quantitative easing to a more tightened monetary policy. That is not because they are no competent. It is because the task is very tricky and there is no play book outlining the steps. This is not Tom Landry (former Dallas Cowboy coach) pacing the field with a play for every situation already planned and practiced well in advance.

The odds favor they will either be too late or too early. Getting it “just right.” The Goldilocks play, would be more than fortunate. In fact, there may be no right play to call. They may be forced to choose between a slower economy and/or inflation/deflation. And as this week’s Outside the Box authors note, there is also the possibility of yet another asset bubble, making the choices even more risky.”

See full text here

Of course, we have written about this looming disaster, and proposed some specific ways investors can prepare for it. See, for example:

http://www.rocketcap.com/portfolios-for-deflation-inflation-and-good-luck/

(Please keep in mind all information and ideas presented on this web site are subject to our Terms of Use. We also remind you that nothing written here can be a recommendation for any particular person to invest. Please consult your own financial or investment advisor before you make any investments.)

Can the Fed Control the Money Supply?

The problem is this: Given the enormous amount of money Bernanke’s Fed has “printed” to restart the credit markets, there now is a substantial danger the Fed will not successfully retrieve that money. Bernanke needs to use all the Fed’s tools to raise interest rates sufficiently for banks to place money on deposit with the Fed, and out of the economy. The Fed must start, at a crucial time we’ll label TIME, a control policy of raising rates fast enough and high enough to attract money. This is a tricky balancing act. When the Fed pays interest, the amount and timing must not be so high or fast as to slow the economy into recession again and deflation, or be so low and slow as to enable inflationary expectations to squirt loose. There are thus three huge unknowns in this problem and all of them are beyond investor influence: TIME, interest rate level, and speed of change in interest rates. Perfection happens when Ben gets it exactly right, and the economy washes the excess money supply back with minimal impact on prices. But being wrong will launch deflation or inflation.

Under these conditions, how best to invest? We take a scenario approach. There are three main future economic conditions (Deflation, Perfection, Inflation) and four main investable asset classes to choose from. We need to pick the amount to invest from each class, depending on our beliefs about the future.

Main Investable Asset Classes

The main asset classes are roughly described this way, considering the variations within each class. First, cash. This ranges from cash in mattress, to money market funds and extremely short term T-Bills. Second, Fixed Income comprises all forms of bonds and ETFs/Mutual Funds based on bonds, both corporate and municipal, and various Treasury offerings, most particularly Treasury Inflation Protected Securities (TIPS). Third are corporate equities and ETFs/Mutual Funds based on them. Finally, we have hard assets. These consist of commodities (metals, precious metals, food products, animal products,…) and real estate (land, buildings, and Real Estate Investment Trusts (REITs)). REITs enable liquidity in real estate purchases, since one trades shares of corporations whose assets are interests in real property. Note that more esoteric asset classes, such as hedge funds and derivatives all can be fit into these categories, if you are willing to sit on top of the bag to close the zipper.

Model Portfolios

Let’s look at a straightforward way to invest for each scenario. Consider this table, which shows the amount of your investable assets to invest in each class, given the scenario.

These amounts were intuitively chosen. By applying the Markowitz portfolio optimation algorithm, one can create an optimal portfolio for all three cases based on one’s own specific ROI and risk assumptions.

Perfection

Under the Perfection scenario, the economy percolates along without undue influence of the money supply, and is what we call “normal”. Our nominal portfolio for Perfection consists of equal amounts of equity and fixed income, with lesser equal amounts of cash and real assets. Again, we note the specific assets in each class are chosen by the individual investor.

Inflation

With inflation, one wants to hold hard assets and inflation protected securities. The two most often named are gold and TIPS. Commodities generally gain in price with overall inflation. Stocks vary with inflation. Empirically, the equities evidence is mixed. Some firms win due to having price increases masked by inflation, while others lose since their purhases also rise with inflation. Surprisingly, cash tends to track inflation. So, compared to Perfection, the model portfolio has more cash and fixed income, with an increased dose of TIPS, less equities, and much more Real Assets.

Deflation

Under deflation, cash is king, and the model portfolio shows this bias compared to the Perfection condition.

Combination

Of course, these scenarios are mutually exclusive, and we can build only one portfolio of all our assets. To build the final portfolio, we have to assign a probability to each scenario, and then combine the asset classes according to the scenario weights.

Bernanke Article in WSJ, 7-21-09

He concludes by saying:

Overall, the Federal Reserve has many effective tools to tighten monetary policy when the economic outlook requires us to do so. As my colleagues and I have stated, however, economic conditions are not likely to warrant tighter monetary policy for an extended period. We will calibrate the timing and pace of any future tightening, together with the mix of tools to best foster our dual objectives of maximum employment and price stability.

The only problem with all this is what he failed to address: how to get the timing right. All his tools are good ones, but the entire challenge is to start using them at best time. He can err by starting too soon, and slow growth, or too late, and enable inflation to squirt loose.

How can he get it right?

No answer. So in self-defense, take anti-inflation positions, while their prices are relatively low.