GROH ASSET MANAGEMENT

(Why You Never Want) WAGE AND PRICE CONTROLS

Remember back in the 1970’s when the government imposed price controls on fuel and other items?  Then you also remember what happened when the caps were removed.  Prices zoomed, inflation took off and it cumulated in the early 1980’s horrible recession.  30 year Treasury Notes yields hit 14.68%.  Unemployment was 11%.  All caused by the foolhardy political notion that prices could be controlled.

Politicians with short memories forgot the 1970’s lessons.  Several years ago the U.S. imposed price controls on interest rates.  That is why treasuries yield next to nothing.  Investors seeking yield and growth, with little risk tolerance, have been forced to put their money in, much more volatile, asset classes like real estate and the stock market.

Last year the Congressional Budget Office (very accurate, non partisan financial forecasting arm of the U.S. Govt.) published a note about what would the (then) pending U.S. spending cuts mean to overall growth.  The forecast: growth would slow to around zero economic growth for a year, followed by above average growth. The cuts started in March and so far the forecast seems accurate.

If the economy grows as forecast by next spring GDP could be growing at a 4% maybe 5% rate. A hint of even 1% growth would likely cause the interest rate price controls to be removed.  Interest rates would instantly rise from near zero to a normal 5%-8% range.  And all those people who really did not want to own volatile investments will turn into wildly stampeding sellers. 

When the interest rate caps will be lifted is unknown.  Could be tomorrow or year end, but soon.  Lifting all controls at once would create unnecessary chaos and hardship.  I have become a noisy Bush era ex Federal Reserve Board Official arguing lifting them now sector by sector is the best approach to a problem with no good answers. Begin the cap exit today by permitting mortgage rates to rise now and follow with other sectors in the fall.

So, you want to make money? You could short real estate,  short bonds and short the U.S. equity market.  There is significant risk in that approach.  However betting interest rates will rise over the next year seems reasonable. Go long interest rate futures with a portion of your investments.  We can help you make those investments.  Make your plans now, not later.  Decide what stocks and real estate you can emotionally and financially handle owning at less than half of todays price.  Sell the rest now, put it in boring guaranteed money market accounts or short term treasury issues.  The waiting is going to be hard especially if prices going up and you are not invested.  Be patient.  I might be wrong but my thoughts echo Buffett, Goldman, Gross and a host of other very smart investors saying watch out.

Roger O. Groh