Saturday, March 23, 2013
Navigating America's Economic Maze
Our nation's economy is a confusing and complex monster which makes it almost impossible to decipher all the many mixed signals thrown off by economic indicators. Those wizened Wall Street prognosticators do okay with predicting what the growth of Gross Domestic Product (GDP) will be this year. That's because they pore through all the numbers available only to them, then crunch em down and they spit out reasonable guesses. But figuring out the direction of the overall economy is not as easy.
For example, a profile of our current economy:
Banks aren't doing that well. They are under pressure from the Dodd-Frank regulations to operate ultra conservatively so as to pass their next scheduled Federal Reserve "stress tests". When the banks go to banking regulators to query some aspect of Dodd Frank they're given no answers since Dodd-Frank was simply an outline of what the House Banking Committee wanted. Sadly, regulations under Dodd-Frank haven't been ironed out and Congress, in their infinite wisdom, instituted the program but failed to fund a staff to administer the program. So banks are stuck in limbo, not knowing which direction to take their banking business. Shall they invest in Wall Street's recent success? Will the Feds allow them to? How much fund reserve must they set aside to comply with Dodd-Frank guidelines? If they again begin making home loans will they be accused of predatory lending?
So the banks do the conservative thing. They make few loans. They hoard their cash. They borrow from an accommodating Federal Reserve at 0 percentage interest, then buy federal 30 year bonds that yield them 3% a year. This vicious cycle leaves small businesses scrambling to find loans to start or expand a business (and keeps unemployment high, since they can't hire) and those who want to buy a home out in the cold.
Big Business is doing "just okay" and kind of stuck in the mud as well. American business is sitting on over $2 trillion dollars in cash, yet aren't investing that cash. They are fearful of Obamacare and what frightful regulation might be coming out of Washington this month. So Big Business sits on that huge cash hoard. Exxon buys Chevron corporate bonds and Chevron buys Exxon corporate bonds right back, so that their cash earns 4% but no new jobs get created and the economy continues to plod along at 2% growth. Since 6% growth signals a healthy economy our 2% growth leaves the American economy with kind of a low grade fever; you don't feel well but you're alive.
Housing is starting to show signs of life but most of the home sales continue to be short sales or foreclosures..and the housing market hasn't achieved a state of health that would allow under water home owners the flexibility to sell and move where the jobs are. It seems that, no matter how many dollars the Fed prints it does little to prime the economic pump. For nearly a year now the Federal Reserve has been pumping $85 billion dollars a month into the economy and has seen little improvement.
During the first quarter of the year Retail has hit a huge bump in the road. Obama's restoration of the payroll tax to 6% took a couple of hundred dollars a month out of the monthly paycheck and consumers slapped their wallet shut and quit buying. Walmart recently reported the worst quarter in their corporate history. Apple's stock price plunged from over $700 dollars a share to a little over $400 a share as even Iphone and Ipad worshippers quit buying. Bankruptcies in the Retail Sector are continuing to rise as 120 year old J.C. Penny clings to life and Best Buy is at death's door. The only sector of retail that continues to do well are those dollar stores.
The Leisure industry is suffering as Carnival Cruise lines can't seem to keep their generators running and their sewage confined to the septic system. Luxury hotels are offering "motel type" rates in an effort to boost occupancy. Were it not for the Obama family's rigorous vacation schedule it could be even worse.
Savers aren't doing well either as their rate of saving is less than 1%, which doesn't even keep up with a real inflation rate of 6% a year. So year after year they see the value of their savings decline by 5% a year.
Perhaps the worst of the current economy is not what is happening now, but what is to come. When one looks at the value of the American dollar, at first blush it appears we're not doing that badly. But that's only because the rest of the world's currencies are so much worse. We just have a little more rouge on the corpse. In fact, the Fed's orgasmic printing of dollars and the huge amount of American I.O.U's they've issued, and the staggering interest we are currently paying on nearly $17 trillion dollars of national debt, it leaves the American monetary system tighter than the tightest rubber band. Eventually the tension has to be relieved, and every time that tension goes we begin to experience sky high interest rates and runaway inflation, just as we experienced during the Carter years.
But, thankfully, there is some bottom line rationality to be gleaned here: Do like Warren. If you had invested $1,000 dollars with Warren Buffett in 1965 you'd be a millionaire several times over now.
What is Warren buying? He's buying companies that have some dominance over commodities. Railroads, coal, solar energy plants (and he's careful to say away from those solar execs who donated to the Obama campaign), steel plants, etc.
And Warren is right. If you follow only the federal statistics you would think our annual inflation rates are 2% a year. Yet the price of gold continues to rise, as does oil and coal and iron and aluminum and fertilizers and lumber. And you need not be a Harvard educated economist to see that we are suffering from 6% inflation. Every housewife knows it when she walks into Safeway to buy a loaf of bread and a pound of hamburger.
So save your copper pots, your silver dinnerware and your gold jewelry. If you have anything left after paying 25% higher Obamacare premiums and after paying higher taxes, invest in silver and gold and the hard commodity industries like oil and coal and steel.
Buy what Warren's buying and you just might survive the great Obama economic comeback!