Another example of my theory of power groups

The strength of a country depends on the number of competing power groups. As soon as a power group increases its reach, the country starts slowing down with rising social discontent. One or more of the four pillars for growth -- property rights, transportation, financial system, and education – are likely to suffer.

The book by T. Sowell – Housing Boom and Bust – gave me further insight on how to look at what happened.

My idea of power groups is useful in this context.

- The Fed sets the stage -- interest rates close to 0%, steep yield curve, and rapidly growing money supply, and lack of supervision.
- Ginnie Mae and Freddie Mac had the job to buy the mortgages from the banks, repackaging them, and reselling them.
- The building industry was in favor of any program, social or otherwise, that gave them more business.
- Congress passed the Community Re-investment Act of 1977 so that every American should own a home.
- Congress passed the American Dream Down Payment Act in 2002 subsidizing down payments of prospective buyers whose income was below a certain level.
- The press (NY Times 2002 editorial) endorsed and encouraged the government’s social engineering.
- Banking did its usual job of being the intermediary between financial transactions and trying to maximize profits by inventing new products.
- All of us tried to take advantage of the government’s largesse by investing, flipping, and speculating.

Put all these power groups in a big caldron and look at the fighting, pushing, scrambling, and you get the mess we are in. This is the dynamics of life. The main issue is that the same power groups/people who got us in this mess are trying to find a solution.

The solution will benefit some of them of course, not some of us. So, what are we going to do? We will have to play the game the best we can and survive by taking advantage of what is happening -- as Goldman Sachs did. There is no other alternative because, as suggested by N. Taleb – author of The Black Swan –, current solutions will cause even greater instability.

To find out more about my in depth view of the markets and my strategy just visit our website https://www.peterdag.com/ where you can review The Peter Dag Portfolio. You can also call me at 1-800-833-2782 to discuss your specific money management needs.

I will be happy to speak to your investment group on how the business cycle impacts investment strategies and the choice of asset classes.

George Dagnino, PhD
Editor, since 1977