Friday, November 14, 2008

Will Obama be another Roosevelt, Carter or Clinton?

Brian Wesbury, one of my favorite economists, has nailed our current political situation. Politics and economics are like Siamese Twins who somehow temporary get unhitched, they must reconnect or they die. Here is a link to his article.,_carter,_or_clinton?

What Brian did not mention is the irony of the "union election win". Obama, Pelosi, Reid and others received millions of dollars from auto workers and other union members. It is only common sense for auto workers, whose total compensation is about $73 per hour, to protect their gravy train. Factory work is hard and the average factory worker in the USA makes $58,000 annually, all-in. Auto workers have a sweet deal at an average all-in pay of $151,000 per year. Obama was careful to make his attack the rich taxes neutral for his highly paid union friends. The socialist-democrat ideal would be for all citizens to make $151,000 per year. Yeah, right!

The irony is that the auto workers won the election too late to save their collective skins. The American people are simply no longer willing to buy a car with $1,500 worth of worker health care benefits added-on when they can buy an American made Honda, Nissan or Toyota with only $110 of auto worker heath care benefits added-on. The auto health worker accessory is one that many had just as soon leave off, since it is not as efficient as simply paying a fair wage. Those who think they want government mandated health care are (unconsciously?) at least partially rebelling against the unfairness created by our unwillingness to let the free market be free.

A coalition of west coast and east coast liberals, environmental extremist, union members, trial lawyers and minorities have taken the great majority of white voters out to the wood shed. According to George Will, 90% of voters in the Jimmy Carter election were white. The percentage of white voters has fallen in each election since. Bush won the support of more blacks than the average republican and he did very well with Hispanic voters. In the most recent election, something like 76% of voters were white and, if I recall correctly, McCain won a majority of them. It has been estimated that as early as 2042 whites will be in the minority. The next coalition of politically successful conservatives will have to adhere to principle, for example it must not spend money like drunken sailors on leave, and it must include conservative members of minority groups.

My point is not a racist point. I, like Brian, voted for Jimmy Carter. I, like Brian, was quickly disillusioned by the ineffectiveness of Carter. Reagan was such a relief because he attacked problems with force. Reagan opened the flood gates to let the free market do what it does best.

The bail out bill passed by congress does not give Hank Paulson a mandate to bail out the auto sector. Hank and Bush have properly thrown the auto mess back into the lap of congress. If there is to be a government bail out of private manufacturing businesses, there must be a vote to do so. Congress does not have the votes. The previously authorized $25 Billion Dollar loan might be reallocated but a new bail out bill is not likely.

Again, the unions won the election but the people are tired of paying aircraft pilot wages to assembly line workers. In the old days, many people bought American name plates out of loyalty. Today much of the content of all brands is foreign made. Few Americans are willing to discriminate against Honda, Nissan and Toyota because most of these "foreign cars" are made in America. Today, when an American buys an imported car, there is no stigma, very few people know the difference. This is as it should be. American consumers should get the benefit of buying from low cost producers and American producers should get the benefit of large world markets.

The logical way to "fix" GM and Ford is to allow them, if necessary, to file bankruptcy. Thousands of outdated rules and restrictions, yes laws, can be legally nullified through bankruptcy. GM and Ford have already negotiated dramatic reductions in employee count. It is totally false that the bankruptcy of these companies will reduce employment in America. Just as an artificially high minimum wage reduces jobs, an artificially high auto worker wage reduces jobs. The total number of Americans working will increase when American businesses are allowed to pay fair wages.

A couple of years ago, Ford built the most highly automated auto plant in the history of the world. It built the plant in Brazil. Like agricultural jobs, manufacturing jobs have been on the decline and they will continue to decline as a percentage of total jobs. The real inflation adjusted price of an auto is at its all time record low price because competition has crept back into this market. The people of the world benefit when there is productivity growth. Union rules hampered US auto company productivity growth for too long, now the piper has to be paid. To survive, US companies must be freed.


The sound of the bugle blows from across the big pond. The yield on 5-year British Guilts are as low as they have been since the great depression --- and still not low enough! The British Pound has fallen 29% against the US dollar in just a few months and, even now, 5-year rates in England have not been reduced below 5-year rates in America.

The whole of Europe does not appear to be falling into as deep a recession as is the UK but Euro Bund rates are following UK rates down. Average rates today are close to where they were at the stock market jump off in late 2002.

The number one indicator of future growth, the yield curve, is as steep in the UK for as far back as my records go! While my foreign yield curve charts do not go as far back as my American charts, the current curve is very steep and probably at a new post depression high.


Back in 2007, I was "too busy" to keep my eye on the yield curve. The world came though a mild 2001 recession, one in which three of the big four English speaking countries, Canada, UK and Australia, stayed strong. I was lulled to sleep and my focus wandered. In hind sight, it is very easy to see that month after month, from June of 2006 until July of 2007, the yield curve was forecasting a recession. The longer the curve stayed tight, the bigger the recession forecasted.

Starting in July of 2007 and moving with pace by August of 2007, the yield curve began to reverse itself. By January of 2008, the US had reached a very positive curve. The longer the curve stays so positive, the greater the rebound will be.

The US yield curve said a year ago; US growth is going to pick up. Sure enough, it did, largely because of dramatic export growth. The US GDP was weak the first quarter this year but it bounced up by the second quarter. The US has been dealing with two big problems: 1) US growth had to drag a dramatically over built housing market along for the ride and 2) yield curves in Australia, India, China, the UK, the EU and many other nations were holding back demand for US goods.

Of course, the prospects for faster growth in the US caused the US dollar to do a 180. The US dollar has soared. The Japanese, who rely even more heavily on imported oil than does the US, has seen the Yen soar even faster than the dollar. As a result, US markets and Japanese markets are showing great strength relative to emerging markets; markets that depend on the sale of commodities or on the conversion of commodities into low priced goods for their incomes. In other words, be thankful that you have not been invested heavily in the BRICs, Brazil, Russia, India or China.

It is going to take great skill for Obama to succeed. He must walk a narrow path. I wish him the best.

To succeed, he must be pragmatic. He was elected by ideologues, but he must govern as a centrist (to the left of center perhaps, but a long way to the right of congressional leaders). He needs a strong economy to support his desired spending programs. Most of his big programs will require the support of Mitch McConnell and friends.

In 2001, US markets were rapidly healing themselves when we were attacked on 9/11. It took a year for US markets to absorb the hit. Yield curves were forecasting strong growth when the attack was made. Today, yield curves are forecasting strong growth and clearly public sentiment is at market bottom levels. Consumers who are holding off on the purchase of new cars are seeing rapid improvements to their balance sheets. Those who were living beyond their means by using expanding home equity lines to occasionally pay down credit card debt are caught in a squeeze; they are, per force, living a more frugal life while paying down old debts. When that old five year old car is paid off, that money can go to pay off other debts.

This process has been going on for about three years. Stocks will go up before the process is over. Millions of people, those who were highly levered and those who were not, are enjoying the lowest real prices in years. The affordability of almost any good has changed dramatically over the past couple of years. The price of the average home has fallen, the interest cost to buy a house has fallen and the average income has risen. Homes are the most affordable they have been in many years.

The great majority of Americans believe Obama's planned economic policies will hurt rich US businesses. Our economy has prepared for the worst. The reality is that Obama has the option to pull another Roosevelt and prolong the tough times for over a decade, to pull a Jimmy Carter and do little to help cure what ails us or he can do a Clinton 180 and support sound economic policies. Obama cannot do a 180 the first week in office but he does not have to kill the US to save it.

Conditions are ripe for a dramatic move into early cycle stocks. Companies which provide services to or that make or sell goods to consumers (including home town banks that make loans to consumers) will do very well. If the Obama $1,000 checks from the sky program materializes, it will add a little to the consumer boom while taking away a little due to slightly higher interest rates. It will not hold a candle to stimulus provided by declining real prices of goods.

Everyone is convinced that it will take at least another year before the economy recovers and thus it is too early to buy stocks. A TV pundit yesterday suggested that all seniors should sell all stocks. He was pushing the sale of high fee insurance annuities. Yes, the market move will catch us by surprise. Yesterday, just as it looked like the bottom of the water bucket had been breached, there was a dramatic recovery. Was it because Paulson has given credit card debtors hope of relief? Maybe. Was it part of the bottoming process? Yes. Because energy stocks jumped 11% in one day, those hoping for a return to $147 per barrel of oil have found temporary reason for optimism.

Finally, the last irony I will throw out this morning is that the 30-year inflation protected yields spiked last week and they have since fallen rapidly. This means that instead of heading to zero inflation, the bond market is now projecting a little inflation. This is the best dose of medicine we have had in some time. The world is returning to normal!