Thursday, April 17, 2008


Even after the bounce of the past couple of weeks, there is still ripe, low hanging, fruit available. Profits are coming in well above expectations. Profits will continue to exceed expectations because the sources of productivity growth are just as powerful this year as last. With the Internet and the cell phone networks already built, it is just a matter of continuing to find the best ways to exploit these tools.

The match-up between Google and Salesforce is a good example of learning how to use the Internet. The new hosting of Google Apps is another example of how cheap computing power is becoming available to all who choose to use it. A small business or individual can now host programs free of charge. It was only a few years ago when companies were spending fortunes (literally billions of dollars) to do stuff that is now available free of charge. Oops, there are still thousands of companies and millions of individuals who are paying for stuff that is now available for free!

The Schumpeter forces of creative destruction are alive and well. Extremely low cost data storage (free) and extremely low cost computing power (free) are wreaking old businesses that profited from these services. Everyone else is benefiting. We are in a time similar to the early 1960's after Interstate Highways were built. The US economy was booming like never before but suddenly, the dairy farmers in North Carolina were up against the dairy farmers of Wisconsin. The NC farmers did not stand a chance, but the consumers won big time. The price of milk and cheese to the world went down as the cost of transporting from the low cost producer fell. The average cost of producing cheese and milk also fell rapidly as the extra efficient Wisconsin Farms were expanded and as the 10 to 20 to 100 cow dairy farmer was forced to leave an unprofitable business and find other work. Today, the Wisconsin farmer is better off, the consumer is better off and chances are extremely high that the 10-20-100 cow farmer is better off. Of course, government support came to the rescue and "saved" a lot of the NC farmers. The cost of milk was fixed and billions of tons were purchased to be stored until thrown away. The total gains were reduced by the wasteful actions of the government but the psychological pain was eased. The free milk and cheese provided to the single moms was not a bad thing but simply a very expensive way to provide the aid that was given.

Talk about low hanging fruit! All kinds of stuff is still being purchased, that is available free of charge. Today, billions of people will read biased reporting in literally millions of news papers and magazines. They could get a better perspective on the "news" by reading off the Internet for free. Instead of reading a landscaping magazine that was put together by an editor in another state, the consumer can read about landscaping ideas specific to their location and interests. Instead of paying to have a couple of blueberry recipes handy, why not have a few thousand available for free? Even encyclopedias are still being purchased around the globe while the best encyclopedia Wikipedia is fast and comprehensive. Of course, one of the most powerful things about Wikipedia is the speed with which one can move to referenced materials. Even the study of the Bible has been revolutionized by the quick linkage one can follow.


Consumer sentiment is at rarely seen levels. It is below the bottom reached in the 1991 recession. It is below the bottom reached during the 1982 recession. It is approximately equal to the bottom reached in the 1980 recession and also approximately equal to the bottom reached in November of 1974. Consumer sentiment is at the approximate level that it reached at the 4 best buying opportunities in the past 34 years!


One possible reason is that during a time of change, the consumer has been bombarded with false information. Having politicians talk constantly about the false loss of jobs due to free trade is an example. Paul Samuelson has a posting that shows that US manufacturing production over the past 40 or so years has quadrupled while the growth in manufacturing jobs has been flat. Jobs have not been lost due to free trade but jobs have been changed by automation. Politicians have used the very positive and powerful force of productivity as the wedge to suggest that America is in a state of decline, smack in the middle of an economic revolution!

Don Boudreaux talks about the pessimism bias of the American people and the news media (he notes that economist as a group tend to be the optimistic ones). People simply enjoy soaking in despair and discontent.

Yes, the "high price" of food and energy have contributed to the decline in consumer sentiment. From 1970 to 1982, personal consumption expenditures in the USA had leveled down to about 25% of total disposable income. This number was a major improvement to the days of old and only a minor percentage relative to the rest of the world but it was stagnant during that time and the stock market was as well. Then from 1982 to 2000, the US consumer enjoyed spending more and more of their income on "other stuff". By the bottom in 2000, Americans spent an average of only 17% of disposable income on food and energy. Over the past 8 years, this number has back tracked to 20%.


Here we are driving up the cost of food for all the people of the world by putting corn oil in our car engines while we complain about the cost of food and fuel rising to 20% of disposable income. The people who spend from 50 to 99.9% of their income on food and energy have much more to complain about, this happens to be about 3 billion people who have a reason to gripe.

Besides, the current spike in the price of food and fuel is a temporary phenomenon. As related yesterday, the production and consumption of commodities is very sensitive to the price. People enjoy eating meat but they had rather eat bread than to starve. It takes many times as much grain to make a pound of meat as it takes to make a pound of bread so at current prices the production of meat is falling. The price of meat will stay high but the total availability of food will increase when less grain is used to feed livestock. If they eat meat, it will more likely be chicken or fish that convert more grain to meat than to pigs or cows.

Same situation with energy. If you have not seen the videos of the Sunday Festival in Bogota, an idea that is spreading around the world, you should take a look. Also take a look at the BRT (bus rapid transit) systems that are being developed at a fraction of the cost of subway systems. The fact is that entire cities are cutting their fuel usage dramatically. Bike lanes are being built and used.


Stocks are cheap because inflation, even at the cycle peak, is still low. A lot of people argue that point but no one fully understands inflation. If you say you understand inflation, it is like you are saying you understand the price of a lap top computer. Can you imagine the results if we relied on Ben Bernanke to set the fair price for a lap top computer?

The bulk of the economic trials we have just been through boil down to relying on the government to set the price of money. The price of money in the market place (the t-bill rate) fell below the fed funds rate in July of 2006 as I recall. It took until something like August of 2007 for the FOMC to respond. The irony is that the slow response was part and parcel to the inflation that we have seen since. Since GNP (sorry, my mind is still stuck in the old days when we talked about gross national product instead of gross domestic product) is equal to the PRICE times the QUANTITY of goods, when the FOMC forced the economy to travel at a "reduced speed", it forced the quantity of goods to slow and of course business reduced the production of the "cheap goods" and raised the price on what they could sell. It is easier for a business to get away with a price increase if it is willing to sell 10% less goods. The net reduction in gross GDP has been muted by the increase in price but the real GDP has been lowered by the reduction in quantity produced. The good news is that the ultimate "cleansing" is just what is needed as far as eliminating the production of lost producing goods. That is what recessions are all about, causing businesses to stop doing stupid stuff!


As the "bad stuff is stopped" the resources will be diverted to "good stuff". Ten dollar airline seats (and the $150 worth of fuel consumed), used for the purpose of hauling a teenager to a spring break drunk fest will be diverted to a more productive use. The price of fuel to all the rest of us will be lowered at the margin by the avoidance of waisting $150 times millions of $10 trips. Have confidence, the invisible hand of Adam Smith is working things out for your benefit and mine. There is low hanging fruit all around, I hope you take the special effort to gather your share!