Tuesday, November 11, 2008

"It was the best of times, it was the worst of times..."

It was the best of times, it was the worst of times, it was the age of wisdom, it was the age of foolishness, it was the epoch of belief, it was the epoch of incredulity, it was the season of Light, it was the season of Darkness, it was the spring of hope, it was the winter of despair, we had everything before us, we had nothing before us, we were all going direct to heaven, we were all going direct the other way - in short, the period was so far like the present period, that some of its noisiest authorities insisted on its being received, for good or for evil, in the superlative degree of comparison only.

Charles Dickens, A Tale of Two Cities
English novelist (1812 - 1870)

Dickens noted the hype in his day; it is equally present today. I have been justifiably accused of hype and of wearing rose colored glasses. I often see the glass as being half full and I am excited about the wonderful innovations coming that will make life easier and longer.

Besides, the current economic conditions are absolutely great for a very large number of people. Those who have steady incomes through pension and social security checks and those with job security. Under the current circumstances these folk are enjoying the best of times. If these same folk have a lot of assets, such as real estate and stocks, they have suffered severe financial hits to their net worth but on a cash flow basis they are most likely starting to have the time of their life. The cost of most everything is falling fast.

The people of Japan are enjoying the decline the most, because they are seeing an even bigger decline than the people of the US. The people of Europe are seeing a smaller decline in prices. Of course, there are people in Saudi Arabia, Brazil and Russia who are not enjoying the massive price declines in the goods they produce.

From the peak, crude oil has declined 40% in AU Dollars, 49% in Euros, 54% in SDRs, 58.5% in US Dollars and 61% in Japanese Yen. From the peak, the price of copper has fallen 51% in AU Dollars, 57% in Euros, 56% in SDRs, 62% in US Dollars and 63% in Yen. From the peak, 30-year Treasury Bond Yields have fallen 12.5% in AU Dollars, 17.5% in Euros, 19% in SDRs, 22% in US Dollars and 24% in Japanese Yen. All numbers are approximations made by eyeballing charts posted at ShareLynx.

Prices have fallen the most in countries that are most developed and the most resource import dependent. I used Australia as the best proxy available for Saudi Arabia, Russia and Brazil; obviously these countries have "enjoyed" the price declines much less than Australia.

Prices are coming down and the cycle is rolling forward. As expected, commodities show a greater fall than bond yields but the study above was of US 30-year rates. In recent days there have been huge declines in bond rates around the world. The momentum is shifting. Oil prices were in free fall from $147 to $60 but there has been support at $60 and the price has bounced back to the $70's more than once. This does not mean that the decline in oil prices is over but that the cycle is moving forward. The overlapping declines will continue but the bond rates will fall relatively more than commodities as the cycle moves forward and the rise in bond values will be accompanied by a rise in stock prices. The cycle has the look of backing up when oil prices bounce but this is way the big money has to trade. All the worlds commodities cannot trade hands at the very top or the very bottom.

It is the best of times for a young working couple to buy a home, buy a car, or buy a stock. It just does not get a lot better than this. Times are good.


A few decades ago, the railroads in the USA were generally broke or close to it. They were burdened with ridiculous rules and regulations. Many of the rules had been negotiated by very powerful unions. Coal trains that needed only an engineer to operate were required by union rules to be staffed with four people. In the old days, going 100 miles in a day by train was an accomplishment. Trains stopped at every small station along the way, often dictated by rules imposed by politicians. By the 60's, freight trains were rationally allowed express status. Trains loaded with crops from Florida traveled to New York overnight. The employees made a full days pay for each 100 miles traveled. Similar situations existed up and down the Mississippi river, out of coal mines in Wyoming and to, from and through California. On the route from Florida to New York, the employees made about 12 days pay each way. A three day trip cost the railroad and the consumers of vegetables 24 days pay for several workers.

Anyone could see that the system had gotten out of whack but special interest voted against change until the railroads were all but busted. When a couple of big rails failed, congress was forced to act. Special interest agreed to rules changes, if and only the government would operate a new company called Amtrak. Amtrak was supposed to become self sufficient but last year the budgeted US subsidy was 1.3 Billion Dollars. The total subsidy was more. Cities and states also subsidize Amtrak. Little old ladies surviving off social security are subsidizing the transportation expenses of New York Investment Brokers who earn millions annually.

The good news is that the rest of the railroad industry was released from the prison of goofy regulation. As a result, investors have made billions and consumers have saved trillions. Many Trillions of Dollars worth of goods have moved to markets as a result of deregulation, producers of goods have seen the size of their markets expand and consumers of goods have paid significantly lower prices.

Woe is me! The total compensation for the average auto worker is $73.20 per hour. The average for all goods producing workers $31.59 per hour and the average for all workers is $28.48 (numbers provided by Carpe Diem). The average auto worker is making about the same as the average airline pilot. He is making 257% of the wages of average workers.

Back in the days when railroads were being rationalized, the congress bailed out Chrysler. Dumb! Dumb! Dumb! Instead of forcing Chrysler to "take the cure" in 1982, Americans paid a very steep price. Today, thousands of auto workers receive $73.20 per hour even though their jobs have been eliminated and the "middle class" keeps paying through the nose to own a decent auto. Nancy Pelosi, Harry Reid and Barak Obama have no interest in learning from history, but only want to payoff their union friends; the ones who routinely spend millions to elect their friends every two years.

During a time when consumers across America and around the world are hurting, how does it make you feel for the US government to spend more and more of your dollars so that union workers can keep "earning" $73.20 per hour? Consumers who purchase a $20,000 car are paying $3,000 or so too much. Each time an American buys a car from GM, Ford or Chrysler, he is paying these salaries and sending a significant check to the campaign coffers of various politicians. These are the worst of times, because the people have not learned from the mistakes made in the past.

The important thing for investors to understand is that the negative effects are very long, unintended consequences, effects. The economic cycle is going forward and several great years await. The silly stuff passed during the late 60's under Johnson did not hit us really hard until the Carter years.

During the great depression, FDR raised taxes several times in order to finance all the more government programs. The people loved FDR and re-elected him 3 times because they saw the short term benefits of the government programs, however, the economic downturn was extended again and again by the actions of the government. Ironically, economically, we must be thankful for WWII when billions of dollars worth of goods were produced just so they could be blown to kingdom come.

Obama is not likely to make all the same mistakes as FDR, at least in the next couple of years. Obama has already implied that he will not go through with his massive tax increase package while the economy is hurting. Any fool should know that it is not wise to raise taxes during a recession. Obama has indicated that he wants to go forward with the his Keynesian $1,000 cuts to "the middle class". The key is for the government not to do too much as market rebates will be much, much larger than the governments rebate. The average savings per household will be an almost unbelievable $12,000 in 2009. In other ways the markets are quickly starting to get over the shocks they have received. Houses were over built due to government mandate and subsidy but the excess is being absorbed. Substitutions are being found for overpriced goods. Innovations after innovations are coming to market.

The most recent spike in the unemployment rate is another government creation. By extending unemployment benefits, 13 weeks once and another 13 weeks latter, a large number of retired folk are still "looking for work". Having taught a few classes in recent months, I have been tempted to file for unemployment. I could probably "look for work" for the next 6 months and collect a lot of benefits. It is the worst of times.

It is politically necessary to extend benefits during this recession and it is important to help those in true need. Those given an easy way to take advantage are being taught damaging lessons for themselves and for the rest of us, but we have to weigh the good and the bad and do the best we can.

Is it the best of times or the worst of times? It all depends on your attitude. There is pain in our midst but there are certainly huge opportunities available!