This from Investment U:

“Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.” ~John Maynard Keynes, 1936

When it comes to the best strategy to use during a treacherous bear market, I turn to advice from my favorite guru. The British economist, John Maynard Keynes (1883-1946), made a ton of money during the Great Depression.

It was he who turned the world upside down in the late 1930s when he advocated that the government should counter the Depression by deliberately cutting interest rates, inflating the money supply, and run huge deficits. And during this year’s financial panic, Keynes (his name rhymes with “brains”) is back in vogue.

Today, both Republicans (George Bush) and Democrats (Barack Obama) are joining the Keynesian bandwagon in favor of bailouts, injecting liquidity in the markets, and cutting interest rates. Not surprisingly, this year the Nobel Prize in economics went to Paul Krugman, an outspoken “big government” Keynesian.

As a free-market economist, I am not a big fan of Keynesian prescriptions of inflation and progressive taxation as a cure for depression. I prefer tax cuts, privatization and a stable monetary policy.

While the Keynesian policies of reinflation and deficit spending may avert another Great Depression, it threatens to reignite price inflation and another dollar crisis down the road.

Making Money With John Maynard Keynes

But when it comes to making money, nobody can beat John Maynard Keynes. In 1927, he was appointed manager of the “Chest Fund” at King’s College in Cambridge. As the chart shows below, he was extremely successful as a money manager during a time of unprecedented deflation, depression, bear markets and world war. His fund was up an average annualized return of 9.1% compared to -1% of UK stocks.

Chest Fund Performance 1927 to 1946

John Maynard Keynes’s investment strategy is, in many respects, similar to Warren Buffett’s investment strategy. And even he is impressed. In his 1991 shareholder’s report, Buffett has acknowledged Keynes’s influence on him. Keynes was a man “whose brilliance as a practicing investor matched his brilliance in thought.”

John Maynard Keynes’s Contrarian Investment Strategy

How did John Maynard Keynes achieve such a remarkable success? Years later, he revealed his technique: “My central principle of investment is to go contrary to general opinion, on the ground that, if everyone is agreed about its merits, the investment is inevitably too dear and therefore unattractive.”

In 1933, at the depth of the Great Depression, Keynes took a contrarian position by acquiring the preferred shares of big-utility holding companies in the United States. “They are now hopelessly out of favor with American investors and deeply depressed below their real value,” he said.

He bought, amongst others, National Power & Light Preferred, which he noted yielded 15%, was awash with cash and whose earnings were rising again. He even bought these and other high dividend-paying stocks on margin.

His bet proved to be highly profitable, as his preferred stocks doubled and tripled in value over the next few years. But, I should also emphasize that Keynes was no trader. He bought and held these stocks through thick and thin. He even held good-quality stocks during the 1929-33 bear market, and he was almost wiped out.

Thus, Keynes, like most of us, lost big money during the 1929 crash and subsequent bear market. But surprisingly he didn’t see this as a weakness. He took a positive attitude about bear markets:

“I feel no shame at being found still owning a share when the bottom of the market comes… I would go much further than that. I should say that it is from time to time the duty of a serious investor to accept the depreciation of his holdings with equanimity and without reproaching himself. Any other policy is anti-social, destructive of confidence and incompatible with the working of the economic system. An investor… should be aiming primarily at long-period results, and should be solely judged by these.”

John Maynard Keynes’s Strategy Still Works Today

I recommend John Maynard Keynes’s strategy today: Buy quality companies that are paying consistently high dividends, and hold through thick and thin during the coming years.

If you want to follow Keynes’s idea of buying preferred stocks, consider buying the John Hancock Preferred Income Fund (NYSE:HPI), a closed-end fund that uses a value-oriented approach to invest in preferred stocks and other fixed-income securities rated “investment grade” by Moody’s or S&P.

Currently it pays a monthly income of 15.5 cents a share, for a current yield of 17.5%. It’s selling for an 11.6% discount from its Net Asset Value ($11.86). You could make a substantial capital gain plus the 17.5% dividend yield – almost 30%.

As the economy recovers, and I expect it will in 2009, undervalued companies with strong yields are one of the best ways to land big gains.

Source: John Maynard Keynes: How to Make 30% From an 80-Year-Old Investment Strategy

This from Fleet Street Invest:

As investors, we must take a step back from the spectacle of this historic event and ask a more pressing question. What does this mean for the world economy and the world’s stock markets?

First the economy…

Almost 70 per cent of Americans named the economy as the number one motivation behind their vote.

A vote for a man that has so much influence on us all.

After all, when America sneezes, the rest of the world catches a cold. And when the US subprime bubble burst, we caught pneumonia. We are caught in a storm of macro crises: the credit crunch, housing slumps, recessions and bear markets across the globe. The responses by the world’s leaders affect all of the above and all of us.

As leader of the free world at such a low ebb, Barack Obama’s next move is so important.

President Obama wasted no time, addressing the economy in his acceptance speech:

“Even as we celebrate tonight, we know the challenges that tomorrow will bring are the greatest of our lifetime — two wars, a planet in peril, the worst financial crisis in a century.

“There is new energy to harness and new jobs to be created; new schools to build and threats to meet and alliances to repair.”

The President must, in the coming weeks, outline a convincing plan of action to help the world’s biggest economy get back on its feet.

What’s next for the economy?

A big recession bailout.

The last intervention by the US was the $700 billion bank bailout. That was about the financial system, not the recession.

The last recession bailout was the $150 billion of rebate cheques handed out to ordinary Americans. This fiscal injection was a bad call, one that the new President-elect opposed, and it had an artificial effect on the economy.

The money could have been much better spent and the next round of monies will be better spent.

How much money?

$300 – $500 billion is being touted as the size of the next injection. That’s what is estimated as necessary for America to spend to offset the downturn of the private sector.

- $300 billion is equivalent to a 2% boost to GDP.
- $500 billion is equivalent to a 3.4% boost to GDP.

The expectation is that rather than give everyone $600 to fritter away, they’ll put the money into big infrastructure projects to spur “job creation.”

Digging holes in the ground, building bridges… the Keynesian approach.

The good news is that it should all now happen a lot faster.

We have a Democratic President and a Democratic Congress. That means that we are unlikely to face the same sentiment-crushing political hurdles that we encountered with the $700 billion bailout.

SocGen Cross Asset Research

The bad news is that it only delays the inevitable. The US, the world’s largest recession and an economy that affects the UK heavily, is still going into recession. Even a supersized deal would not prevent recession in the US and, if anything, will probably push debt levels over 50% of GDP.

It’s a bad move in the long term, but having led his campaign on the economy, Barack Obama has no choice but to spend, spend, spend.

Source: Even Obama Can’t Fix The Economy

I did my best to explain American mercantilism in the April 26 issue of “Gary North’s Reality Check.” There, I explained modern Keynesian economics as the American version of mercantilism.

My article, “Climbing of China’s Paper Money Tiger,” warned that the United States has adopted the Keynesian version of mercantilism: national consumption without production. It is a perfect match for China’s more traditional mercantilism, national production without consumption.

You can read my analysis here: http://www.garynorth.com/members/3433.cfm

While I do my best to make economics clear, I am no match for America’s most beloved retired humorist, Dave Barry. Breaking his book royalty-based silence, he has offered a stunningly brilliant insight into the likely economic effects of the 2008 tax rebate, which is called an Economic Stimulus Payment. I can do no better than to quote him verbatim.

Q. What is an Economic Stimulus Payment?

A. It is money that the federal government will
send to taxpayers.

Q. Where will the government get this money?

A. From taxpayers.

Q. So the government is giving me back my own
money?

A. Only a smidgen.

Q. What is the purpose of this payment?

A. The plan is that you will use the money to
purchase a high-definition TV set, thus
stimulating the economy.

Q. But isn’t that stimulating the economy of
China?

A. Shut up.

http://www.garynorth.com/snip/547.htm

In presenting this analysis, he offered neither a graph nor an equation. He will therefore not receive the 2009 Nobel Prize in Economic Science and the $1.6 million economic stimulus payment it brings. But his analysis, I predict, will turn out to be far more relevant and unquestionably more coherent than any analysis ever offered by next year’s prize winner.

GOOD NEWS AND BAD NEWS

The good news is that the Federal government is sending a little tax-free money back to us. Never look a gift horse in the mouth, especially when it’s coming from the horse thief who stole it from you.

The bad news is that this money will be borrowed. Every penny will be added to the on-budget debt of the United States government.

What is the estimated deficit today for fiscal 2008? This figure is buried in the recently released report, “The Cyclically Adjusted and Standardized Budget Estimates” (April 2008). The figure is $361 billion. A year ago, it was $162 billion (Table 1, p. 3). http://www.garynorth.com/snip/548.htm

Next year, the CBO estimates, the deficit will be a mere $133 billion. Write that figure down in your diary of accounting illusions. (The phrase “Arthur Andersen” comes to mind.)

On March 12, the Treasury made its estimate: $410 billion. This was the same as in February. http://www.garynorth.com/snip/549.htm

These are large figures. We are only in the early stage of a recession. It has barely begun to raise the unemployment rate. Yet consumer confidence is at the lowest level since the recession of 1982 (Reuters/University of Michigan Surveys of Consumers). Recall that 1982 was the year of the low point of the Dow: 777 (August).

Today’s loss of confidence has not yet affected the stock market significantly. Optimism still reigns among most stock market investors.

As the deficit soars, which it will, the government will absorb more resources that would have gone into the private sector. This is denied by Keynesians and some monetarists, but this process is obvious. In a recession, investors seek safety. They want to protect themselves against falling stocks and bankrupt corporations. They buy Federal government-issued debt on the assumption that the Federal government will not default in a recession. This money does not go to fund private capital.

This is bad for the economy but good — in the short run — for investors. Because the government is involved, we get the reverse of Bernard Mandeville’s path breaking book and poem, “Fable of the Bees: Private Vices, Public Benefits” (1714). We get private benefits and public vices.

PRIVATE SPENDING

I am in favor of tax-free rebates from the Federal government — any time, any place, any amount. Just send out the checks. The taxpayers can do better things with their money than the Federal government can.

So, I am in favor of Federal deficits, if the alternative is higher taxes. I am in favor of lower taxes, even if these lead to higher deficits. I think the Federal government will not cut spending for any reason but one: bankruptcy. So, as long as the beast is going to spend money, it might as well raise it by borrowing. Let the people who trust the government wind up as creditors to the government.