Before I talk about the future I’ll spend a moment on the present.
Last year if you had enough breath to fog a mirror you could get a home loan. Anyone who is over 30 knew last year when they saw the TV ads “will loan you 100 per cent of the price of your new home with no income verification,” there was going to be a problem. Now all of a sudden sub prime has turned into submerged prime. It’s moved from contained to contaminated. People traded houses like crazy uncle Fred traded pork bellies until he lost the farm. CNBS, the financial marketing show is learning the difference between liquidity and leverage. Four years of recklessness will not be cleaned up in 4 weeks. Hedge fund guys are learning you can’t sell to the model. The model has no money. To big to fail is turning into to big to bail. The markets are doing what the FED refused to do – tighten.
The more leverage you use and the higher your IQ, the more likely you are in trouble. The latest treasury plan operated by Goldman, I mean Paulson, for the S.I.V.’s saves Citi and the large banks, but the dollar falls through the holes in the SIV.
The latest brokerage firm reports are like mushrooms. Keep them in the dark and cover them with manure. But the Bernanke Fed has caved into the Banks and Wall streets demand to bail them out of bad loans, increased inflation will be the result on Thursday, October 11, 2007. The New York Stock Exchange hung a 30 by 40 foot sign on the building – “Wall Street, You Rule.”. Possibly the top.
God gave me the ability to recognize the obvious, some common sense and a sense of humor to stand the first two.
The one trend in place is the overall advance of mankind. It began when we emerged from the cave.
The world is going through a dramatic change. The world has discovered capitalism. China and India are transforming their economies from poor agrarian economies to industrial powers. The effect of these changes will be felt for years.
One of my favorite quotes is, “Give a man a fish and you feed him for a day. Teach a man to fish and you feed him for life.” Today in order to teach a man to fish, you need two fishing licenses, a state boat sticker, OSHA approved life jackets, EPA approved weights and hooks, you pay a park fee, obtain a fire permit to cook the fish and an EPA permit to dispose of the waste. Thanks to the government, fish you catch costs 8 times as much as the fish you purchase in the supermarket, caught overseas.
We have reached a point where you need Government permission or a permit to do anything, including to your own property or with your own family. What happened to freedom and liberty?
When I started in the investment business 39 years ago, the Golden Rule was “Do unto others as you would have them do unto you.” In a few years it was corrupted to, “He who has the gold makes the rules.” Today it has been totally corrupted to, “He who makes the rules gets the gold.”
Our educational system is failing the students. US high school graduates do not have the knowledge to pay teachers pensions.
Students in the 3rd grade test 3rd in the world for knowledge. Upon high school graduation, they test 70th in the world.
The moral values they are taught are: diversity, tolerance and respect for the environment. Jefferson said “without an educated voter, the republic will not stand.”
What’s the latest suggestion from the national education association? It is to grade papers with purple pencils instead of red because red hurts the students’ feelings and to ban the game of tag at recess, because it is too aggressive. These graduates are not prepared to compete in the world labor market. Congress uses the act of helping children as a ploy to gain more power. The most threatening disease to our children is the national education association. Congress’s reaction: it sells out the children’s future every election cycle for a check from the NEA.
Governments in most cases and most places make things worse. George Washington said “Government is not eloquence, it is not justice; it is force. Like fire, it is a dangerous servant and a fearsome master.”
The definition of politics is the advance auction of goods that have not yet been stolen.
Whenever a government does something for someone, it must do something to someone. If expanding government were the solution, Russia would have been paradise.
In the US, we have a two party system and what a party they are giving themselves. Since 1960 government spending has grown 8 times as fast as the GNP.
Republicrats borrow and spend. Democins tax and spend. From 2000 to 2005, federal spending increased 38.2%. Federal debt increased 40.5%.
The government taxes and regulates success and subsidizes failure. The Government’s motto, “If it ain’t broke, fix it until it is.” .
Today lawyers run the government. Seventy-three percent of the cabinet are lawyers. Eighty-five percent of the gang of 535, the Congress are lawyers. Lawyers train on the principle that when there’s a solution to a problem, they stop making money. You know the system is corrupt when Congressmen spend 6 million to get a job that pays $178,000 per year. The donors of the 6 million are expecting a 10,000 per cent return from the tax payer - just like Hillary was able to make with a little help from her friends trading commodities.
In 1987 the US signed a treaty allowing Japanese lawyers to practice in the US and US lawyers to practice in Japan. At the signing there were a total of 14,000 lawyers in Japan and 650,000 in the US. Two years later, Japan entered a depression. It is just starting to recover. Just coincidence? Maybe.
Consider the following:
The Lord’s Prayer: 66 Words;
The 10 Commandments: 179 Words;
The Declaration of Independence: 1300 Words;
U.S. Government Regulations on the Sale of Cabbage: 26,911 Words; and
U.S. Income Tax Code - simplified: 1,607,000 Words.
It would be a great improvement if the government respected individual’s rights as much as they respect the rights of the caribous.
The government is already too large and too expensive.
The only thing Washington with the help of the legal system seems capable of doing, is elevating the plight of the victim.
A recent poll stated 14 per cent of those surveyed thought congress was doing a good job. I immediately wondered “who are these 14%?” Don’t they have any access to information, no TV, no newspapers, not even a radio? Then it dawned on me. 19 percent of the people work for the government and at least another 10 percent receive direct payments from the government. So the real results of the survey are 100 percent of those in private industry think the congress sucks and half of those who work for the government or receive direct payments from the government think congress sucks.
Where has government been effective? The war on poverty. 2 trillion spent to eliminate poverty completely. The war on drugs, 400 billion spent, 2.5 million in jail, eliminating illegal drugs everywhere.
Border control securing our borders keeping out all shady characters.
Some years back, people came to America for the opportunity, today they come for the benefits.
In New Orleans $127 billion wasted to date. $420,000 per family that lived in New Orleans prior to Katrina flushed down the FEMA toilet.
With all these great successes, it’s no wonder some people want government to take over the rest of health care, the part they haven’t already screwed up.
But some good will come from this. Social security might be saved because baby boomers will die waiting in line for health care. Social security tries not to send checks to dead people – so, there’s a chance it will remain solvent.
Bush Sr. simplified taxes.
Now we only tax the living and the dead. Clinton promised to tax only the rich. Once in office, he defined rich as, “Those Americans with Indoor Plumbing.” Bush Jr. said he cut taxes but the tremendous increase in spending and debt means W just delayed tax increases.
God, who created everything only wants 10%!
The demands of the majority are always greater than taxation alone can provide and
that’s where the FED comes in.
Between 1800 and 1913, the value of the dollar was more or less constant.
Since the Feds creation in 1914, the value of the dollar has dropped 97%.
During Allen Greenspan’s term, the dollar lost 37% of it’s value.
The 1% Fed funds rate moved the savings rate to between zero and zip, while mortgage debt increased 62%.
The last central banker to get it right was Joseph, in the Bible. Seven good years followed by 7 bad years. The Fed is like the Post Office giving out money instead of stamps. Faith in the Fed is based on elaborate mathematical models relying on the breathtakingly faulty assumption that human beings behave rationally.
The FED’s invisible hand of intervention is trying to keep interest rates as low as the world will allow. But the world is becoming a bit nervous. The US has borrowed over $4 trillion from overseas. Some day it will be repatriated. The exchange of IOU’s for wealth will go into reverse. We will get our paper back and have to return real wealth.
Japan and China have purchased massive amounts of US treasuries to stem their decline. They loan us money to buy their products because they need the US as a customer. When will this end? It will end when the Asian Tigers develop a consumer credit system and their three billion plus citizens become the customer. At that point we will no longer be able to live beyond our means - the dollar decline will accelerate and interest rates will rise dramatically.
The dollar bears the legend on it, “In God We Trust.” Placing your faith in the Fed could be a dangerous plan. Someday, the dollar could fall to its intrinsic value. Denial is not just a river in Egypt.
Currencies do not float, they sink at different rates. Currencies are abstractions not redeemable in any specific amount of anything, they are an I owe you nothing certificate.
Foreigners currently own 45% of US treasuries. The FED can create $30 billion of paper in a week. They can lower rates, but it won’t create one drop of oil, one pound of copper or one bushel of rice.
Now we have Bernanke as the new head of the FED. Bernanke has studied the depression and deflation at great length. He has stated the FED has many options to avoid deflation including dropping dollars from helicopters if necessary, earning him the nick name “Helicopter Ben.”
The FED is attempting a neutral interest rate policy. Neutral for the FED is like pornography to the Supreme Court. They can’t define it, but they will know it when they see it.
We all work for something. Our government manufactures with no sweat, no work, no creativity – just turn on a computer and create more dollars.
Today there is a disconnect between the man on the street and how he feels and how the government tells him he should feel.
The Bureau of Labor Statistics over time has made tiny incremental changes in the way they manipulate the statistics.
In a bipartisan effort, presidents and the FED chairman have tried to make the news just a little better. Over time, these tiny changes have begun to add up.
If we just go back 20 years and remove these changes. Unemployment today would be about 8%, the CPI would be about 7% and the GNP growth would be 0.
On the unemployment front, if you were a discouraged worker, you were counted until the Clinton administration. During Clinton’s reign, workers who were discouraged for over a year were taken out of the number. That knocked 5 million off the broader unemployment report. U-3 is now the reported number of 4.6 but if you look in the footnotes, U-6, the old number is over 8%.
The real degeneration over time is the CPI. In the 90’s, Michael Boskin at the council of economic advisors and Greenscam at the FED wanted to fix the CPI simply stating that it was overstating inflation. They created substitution assuming that if the price of steak went up, the public would substitute hamburger. The CPI was originally designed to measure a fixed basket of goods for a constant standard of living. Today it has changed to a basket of survival. By the ounce, Wheaties now cost more than steak.
If inflation is understated then reported real growth (the GNP) will be overstated.
Bob Reich, in his memoirs wrote that they found in their polling that if you could overstate economic growth, understate inflation, tell people things were are better than they really are. It could help you win a tight election. That was their conclusion, so of course the numbers were adjusted.
Last year if you didn’t eat, didn’t drive to work, didn’t heat your home, didn’t visit a doctor, didn’t buy a house, didn’t buy insurance of any kind, didn’t have a child in college and didn’t pay state or property taxes, your cost of living agrees with the governments. The dollar has declined 4.8% per year for the last 7 years, that’s the deflation of the currency, the real inflation number.
If your using government statistics for your investment decisions, you’ll substitute cat food for hamburger when you retire.
Since the Feds creation there has been deflation – deflation of the currency. It shrinks on average 2.5% to 3% per year.
Prices will be lower for every thing that can be manufactured in China or serviced in India.
Prices will be much higher for what can only be made in the US; medical care, insurance, plumbers, trash collection, raw materials, real estate, and government.
In the next 10 years, the government will lie about the deflation of the currency so, (when the baby boomers retire) their social security check will be worth half of what they anticipated in real terms.
When the Fed fine-tunes, the orchestra gets fired. All soft landings by the FED have resulted in thousands of casualties. Ever since the earth was cooling the Fed was headed by a banker. Greenscam was the first economist. Carl Marx was an economist! Now we have Bernanke a professor. He knows what’s in a book, but he doesn’t know the real world.
If you believe the Fed guides the economy you must also believe the twelve birds sitting atop the rhinoceros guide him through the jungle.
What investments will benefit from the major changes occurring in the world?
Long term interest rates are low. The FED is proposing dropping cash from helicopters if necessary. History suggests this might be a good time to be a borrower or at least have a short duration to your interest bearing investments.
The equity market now has 84 million individual investors. Over 50% of these investors liquid assets are in the equities, the historical average is 25%. Using the rules outlined by Graham and Dodd such as dividend yield, PE Ratio, price to sales ratio and price to assets, stocks are very expensive. They are over owned and over priced – a dangerous combination.
Who’s recommending increasing equity exposure? Kudlow and Cramer –
which is a marketing program. It should be listed in the TV guide as paid programming like George Forman’s cooker. CNBS is yor direct line to dumb money.
Who’s recommending caution and much lower returns from stocks going forward? John Templeton, Carl Icahn, Allen Abelson, Mark Faber, Bill Gross and Warren Buffet to name a few. Buffet currently holds $45 billion in cash. He must be having a tough time finding those bargains from Omaha.
I expect a moose market, not a bull or a bear but a moose, rhyming with the period of ’66 to ’82 where the market went nowhere.
I believe the paper bill market has ended and the stuff bull market has begun.
Between 1966 and 1982 equities gained nothing while the GNP gained 330%. The DOW went from 1000 to 875. From 1982 to 2000 the GNP gained 170% and the DOW rallied from 875 to 11,700. Currently the DOW is trading over 13,000, about a 25 PE. Between now and 2015 if the GNP gains 100% and earnings gain 100% the DOW could be at 10,000, trading at 10 times earnings. During the past 7 years the S&P is up a total 5%. And at that rate of compounding, you will have to work till you die.
During the last stuff cycle equity mutual funds were in a dead zone while stuff; raw materials, art and real estate had super returns.
In 1966 oil was $2.90/barrel and rallied to $28/barrel. Gold was at $35/oz and rallied to $850/oz. The average price of a home increased 180%.
In 1982 the stuff cycle ended and the great paper cycle began. In 1982, the public had 14% of their liquid assets in equities. The Business Week Magazine cover reported “The Death of Equities”. The PE ratio was 7. Stocks were dirt-cheap and stuff was very expensive. Brokerage firms were selling real estate and oil and gas partnerships. 1982 was the beginning of a great bull market in paper.
By 2007 the DOW was up over 14 fold. The cost of one dollars worth of earnings (the PE ratio) has risen from 7 to 25, and the public had 57% of their liquid assets in equities. The Time Magazine cover featured “The Committee To Save The World: Greenscam, Summers and Ruben”. Brokerage firms were selling tech and dot coms with no earnings. The paper bull market was ending. Paper was very overpriced and over owned. The Dow could be in a trading range, just keeping up with the real rate of inflation for the next 10 years.
Stuff, from 1982 to 2000, was in the dead zone. Oil went from $28/barrel to $26/barrel. Gold went from $850/oz to $280/oz. The average price of a house had increased 1.2% per year by ‘2000. Stuff was a bargain.
Since 2000, the S&P is up 16.4% adjusted for government reported inflation, it’s down 2.4%.
In the next 10 years paper could be a trading market while stuff is in a bull or buy and hold market.
Change is a way of life. You either accept changes or make changes.
Capitalism is sweeping the world.
Capitalism is easy to understand. It’s nature with a balance sheet. If you’re wrong, you go broke instead of being eaten.
Three basic things make up an economy; labor, natural resources, and capital. There is a surplus of well educated labor and paper currencies.
30 years of restrained and neglected natural resource supply is being overwhelmed by demand.
The longer things remain stable, the more likely they become unstable.
Where might the best investments be in the future?
After 30 years of trading equities, I changed my career. Why? Creating the best stuff fund.
Today, China is booming. They have declared the national bird to be the construction crane. In the last five years china went from exporting oil to the second largest importer in the world. The emerging market countries will go from walking to bikes, to motorcycles and to autos. They will need oil and gas, chemicals, forest products and metals. At $1.00 per hour they are deflating manufacturing costs, but as they become more successful, they will throw away their bicycles and buy motorcycles and eat better, increasing the demand for raw materials.
China and India are transforming their economies from poor agrarian nations to the newest industrial powers, replete with heavy industries, mass transportation and higher education. Rising from these giant new economies will come millions of new consumers, the very people who are already straining the natural resources of the earth.
In 1900, the US started to industrialize. We were using one barrel of oil per person per year. By 1970, we were using 27 barrels per person. In 1950, Japan started to industrialize, they were using 1 barrel per person. By 1970, they were using 17. In 1965, South Korea started to industrialize. They were using one barrel per person per year. By 2000 they were using 17. Today, China uses 1.3 barrel per person per year and India uses .7. China currently has 168 power plants under construction. Copper probably won’t go down much.
In 1950, Japan per capita income was 18% of the US, today it’s 96%. In 1965, South Korea’s per capita income was 16% of the US, today it’s 56%. India and China have 2.5 billion consumers, 9 times the US. The US uses 25% of the world’s energy, China and India use 4%. India and China have 280 people per car. The US has 2 people per car. Last year, China produced and sold the same number of autos as the US. Eighty percent were purchased with cash.
Real incomes are just beginning to rise to levels that create large demands for consumer goods. Between 1950 and 1970, Japan’s urban population increased 70%. Personal consumption increased 600%.
China currently is 40% urban, 60% rural. The US is 97% urban and 3% rural.
China has 20% of the world’s population and 7% of the world’s land. China’s grain imports will grow from 14 million tones today to 57 million tones in 2020.
Today, 1 billion people consume two thirds of the world’s raw materials. 5.6 billion people consume the other third and they are becoming more successful. The industrial revolution involved 300 million people. The emerging nation revolution involves 3 billion.
There is no need to connect the dots, they over lap.
Lead times to create raw materials are measured in years. In Canada $80 billion in infrastructure has been committed to production of the tar sands. The goal is to produce 3 million barrels a day by 2015. At $75, oil is a bargain liquid. It costs 10% less than bottled water, it’s one third the cost of milk, one fifth the cost of beer and only 2% of the cost of Jack Daniels.
Phelps Dodge is planning to open a new copper mine in 2007. It took 12 years of paper work to receive federal approval.
Company - “we found copper.”
Government - “start digging. What can we do to help?”
Company – “We need a road.”
Government – “You got it.”
China’s growing at 10%, the US at 2%. Money goes where it’s treated well.
Currently oil companies who search for oil at great risk earn 9 cents per gallon. Government, at no risk takes 51 cents per gallon.
In the US, half of our energy problem is government regulations. The only place oil companies are allowed to drill for oil is next to a dry hole. The only place you can build a refinery is no where.
The political systems of G-7 are at a great disadvantage, stuck with unfunded liabilities and debt. Current politicians are unwilling to cut spending growth. If your rich in G-7 you are attacked. In china to be rich is glorious. The Chinese have a 40 percent savings rate and 1.2 trillion US dollars to purchase assets with. 1.2 trillion is 12,000 billion dollars, IOU’s to purchase real assets with.
Demand for raw materials has increased. In many cases, the capacity to produce raw materials has declined dramatically in the last 20 years. Tops and bottoms are creatures of extreme. Markets rise above all expectation and then go higher and then fall further than common sense suggests. The most desirable investments for the future might not be in cyber space but back to the basics.
I believe we are only at the start of the largest bull market in history for raw materials.
By the end of this bull market, there will be a bounty on caribou, you will be able to see an oil rig from every beach and they will be digging a coal mine in Al Gore’s yard.
As you climb the ladder of financial success, check to make sure it’s leaning on the right wall. I believe raw materials will be one of the best investments for the next 10 to 15 years.
Long-term- the future is very bright because man has been succeeding in bringing about change for the better since he or she first emerged from the cave. Big problems usually disguise big opportunities.
Governments and central banks are completely incapable of keeping tomorrow from coming.
In the next 12 months, let the winds of change fill your sails. Don’t just look at the stars – be one.