Safe growth:  Less consumption than income, and invest the savings.

Risky growth:  Borrow to invest, betting that the investment return is greater than the cost of servicing the debt.

Safe haven:  Store savings in sound money.

Running your personal finance is in many ways similar to running a company or an economy.

For individuals:  You sell your time, skills, and energy to cover your needs and wants, hoping to have some savings at the end of day for emergency or investment.

For companies:  You sell a product or service to cover your costs of producing it, hoping to generate some profit to give back to shareholders or to invest for future growth.

For economies:  You produce to satisfy the needs and wants of your citizens, hoping to generate some surpluses to support innovative ventures.

1.  High Taxes and Labor Unions are making manufacturing uncompetitive in the global market, resulting in a shift of the economy towards more driven by service & consumption.   Engineering jobs are now replaced with sales and customer service agents, making science, math, and engineering unattractive subjects in college.

2. Stringent immigration laws are driving science, math, and engineering foreigners trained in U.S. universities (often on a full scholarship) back to where they come from, helping those emerging economies to compete with the U.S. economy.

3. Loose & government rigged monetary policies fuels high profits in the financial industry.   Attracting the best minds in the country to the business of money shuffling and casino banking.

4. Expansion of government and government sponsored industries are crowding out talents, credit, and profits for the private sector.

In fact, we can generalize the above conclusions to all human organization.   And such tendency is what drives big companies to failure.  These companies once had all the resources to maintain their market dominance.  Unfortunately, sooner or later the succumb to the “law of socialistic tendency” and gradually loses to more efficient competitors.

At the core of the “law of socialistic tendency” is the sense of entitlement based of seniority.  People who served the company well ages ago but failed to keep up with technological innovations are kept and often promoted to high posts, crowding out opportunities for smart, motivated, and more efficient new-comers.   Therefore gradually the company would be full of inefficient, inflexible, and over-paid employees or bureaucrats, whose skills and knowledge are outdated, while expert in playing politics.

In a slowly changing technological landscape, the company might survive longer as the inefficiency gradually grows in comparison to young competition.  However, as technological innovations grow at rapid pace, the company would find its workforce grossly inefficient.  Failure to re-structure and fire the dead-weights in the workforce due to the culture of entitlement would result in a slow death for the company and all its stakeholders.

I often wonder, “how can big companies with vast resources and an absolutely advantageous market position slowly let itself overtaken by small competitors?”  Today I found the answer from Milton Friedman.

If you think of a bubble being the consequence of inefficiencies in the market, then we can examine how the two premise of efficient market theory can be broken:

1. Misinformation. Academics assumes perfect information to make their models work. In reality, misinformation is everywhere. To be more precise, misinformation is greatest when something is new. That’s why bubbles are always associated with innovation or “new concept”. The fact that no one can accurately value “new paradigms” (ie. dot-com technologies, sub-prime derivatives, etc) leads to bad investment decisions.

2. Irrationality. Academics assume people to make rational decisions based on perfect information. The perfect information part is addressed above. Rationality is also challenged when misinformation is rampant, because now people have to rely more on “gut feelings”. When emotion becomes the vehicle for decision making due to the lack of predictability of “new paradigms”, greed and fear lose balance. The imbalances are small at the beginning, and often go away as more accurate information unravels. In rare cases, the misinformation persists because innovations become more complicated, and rising asset prices reinforce the greed, then people start attributing their success on their own intellect … and a real bubble is born. Self-proclaimed “Experts” would start to write books and show on TV to “teach” others how to get rich, effectively worsening the misinformation. Then you have the academic bunch who believe that “the market is always right” writes papers about “how this time is different”. The politicians cheer at their success of creating “prosperity”.

It’s about time when envy kicks in and everyone becomes invested.

When everyone wants to invest becomes invested, the prices start to go down ….. and BOOM !

Several scenarios are possible that would strengthen the dollar and depress asset markets:

1. Another financial crisis, may it be commercial real estate or credit cards defaulting. This would cause another liquidity crunch. (very likely to happen).

2. Global economies fail to recover. This would cause “flight-to-safety” and all the hot money flown to emerging markets will come back. (fairly unlikely)

3. Increasing opposition to Obama’s spending spree. The failure to pass healthcare and cap-and-trade would mean less money printing and less deficit, which are the causes for the dollar devaluation. This might actually be bullish for stocks. (fairly likely)

4. the Fed shows plans to raise interest rates and signals monetary discipline. In my opinion this won’t happen until employment starts to recover. (fairly unlikely)

If your investment has a long term horizon, then don’t worry too much about the coming correction. With all the structural problems of the U.S. economy, dollar is destined to fall much lower in the long term and stocks would be a fairly good hedge. Though as to diversify, it would be wise to own some gold and foreign stocks and bonds.