Connecting the Dots

Enjoying a typical East Coast humid August morning, I noticed three disparate stories in the news today.

• The price of gasoline in nearly every section of the U.S. is on the rise
  

• The Dow Jones Industrial Average, which is the best leading economic indicator we have, fell by more than 186 points Monday
  

• The Wall Street Journal reports this morning that the Obama administration is lending Brazil $2 billion for new oil and gas exploration off its coast
  

Although these stories are unrelated, they are connected. The Dow lost about 2% of its value yesterday on a realization by Wall Street that, unlike in the past, consumers will probably not be able to spend the nation out of this recession. Consumers remain edgy about spending because of the uncertainty coming from Washington. How to pay for a deficit projected at $17 trillion by 2019, the ultimate shape and cost of healthcare "reform," and an unemployment rate that continues to rise, although more slowly, are all weighing on consumers minds as they make spending choices.

Part of that consumer uncertainty and pessimism is the cost of gasoline. Gasoline is a recurring expense. Every time you fill up you're reminded that prices continue to rise all over. This makes consumers wary of spending. For a consumer-driven economy, that's deadly. Our economy booms when consumers are optimistic, buying everything from durable goods to fishing tackle. When consumers pull back, there are fewer jobs that involve manufacturing, distributing and selling consumer goods. That means less tax revenue and even bigger deficits, which have to be filled by--you guessed it--higher taxes. And the spiral goes downward from there.

Which brings us to Brazil. Now, it might sound odd that a government which is on the verge of having to hold a telethon to raise money to pay its bills is lending a third world country cash to drill for oil off of its coast. Especially when that country has thousand of miles of coastline of its own that hold oil and gas deposits that could greatly lessen our energy dependence on countries like Brazil, Venezuela and the Arab states. In 2007 Enviro-kooks went to court to stop planned oil and gas exploration in Alaska. The Court has said that the ruling just applied to Alaska waters, not the remainder of the Pacific Coast. But the Obama Administration continues to slow walk plans for offshore exploration, in deference to its environmental masters. Meanwhile, we continue to inch back up to $3.00 a gallon.

So if we connect the dots this morning we have consumers voting with their pocketbooks on the economic recovery and the result isn't good. Consumers still don't believe the economic babble coming from Washington about prosperity being just around the corner. One reason is that the volatility of gasoline prices continues to remind us all how fragile our family finances are. And with a chance to encourage optimism, this Administration continues to demonstrate how tone deaf it is to how the American people really feel. Pres. Obama continues to pay homage to the environmental lobby and refuses to do something simple but concrete that will encourage optimism, get people spending again, and achieve real energy independence. 

Just thought you might like to know.

The Long Road Home

Stocks plummeted again today. The Dow Jones Industrial Average sank over 200 points to finish at 6600. That's its lowest close since April 15, 1997. 15 months of recession and no bottom yet.

Wait--I'm not even to the bad news yet. The bad news, as Jason Zweig wrote in last week's Wall Street Journal, is that the road back from a calamitous recession like this can be long and filled with potholes.

In his piece, Zweig describes the work of finance guru Elroy Dimson of the London School of Economics. Professor Dimson and two colleagues studied 17 stock markets from around the world, going all the way back to 1900. Their takeaway: We'll have to wait another 9 years before the Dow has even a 50/50 chance of getting back to where it was two years ago.

If you're looking for some advice on what to do in this market, good luck. Prof. Dimson's conclusion: It's pretty much hopeless.

A double whammy awaits your IRA or 401(k). First, stocks have lost a great deal of their value. Some portfolios are down 30% or more. But second, when stocks to begin to appreciate, don't look for the tremendous increases of the past decade. Having suffered third degree burns on equities in this recession, investors will be leery of stocks. The result: slow appreciation of value.

Let's add a third whammy. As you read this, the government is inking the presses, printing banknotes to cover the record spending spree that the President and the mob in Congress are engaged in. The result will certainly be rampant inflation. So those stocks you bought with 1988 dollars, believing that they always appreciate in value? They'll be worth a lot less in 2009 or 2010 dollars. If you try to cash out of the market, the value each dollar you receive will be less than the real value of each dollar you paid.

Nobody here gets off without blame. Not the Republican president who presided over the biggest growth of entitlement spending in the history of the Republic. Not the Republican Congress who squandered the trust of a nation on an orgy of earmarks and corruption. Certainly not the Democrat Congress which has seen the economy tank virtually since the day it reclaimed the legislative branch from the Republicans. And most of all the current president who hijacked his party's nomination as an English speaking Hugo Chavez populist, then masqueraded as a somber, statesman-like centrist to win the presidency, and now presides over the country's rapid decline, which he has neither the experience to the aptitude to stop.

Just thought you might like to know.

The Real Confidence Game

The Dow Jones Industrial Average fell today below 6800.


That might not mean much to readers who are not that familiar with the stock market. So think of it this way. There are two reliable indicator's of the country's economic health: the unemployment rate and the Dow. The unemployment rate is a "trailing" indicator. That is, the unemployment data trails by several weeks the employment picture at the current time. That's because it takes a while to collect and report the data



The Dow, on the other hand is a "leading" indicator. That means that the data is current. With the Internet we can actually follow the Dow all day in real time. The Dow is important because it gives us a current picture of economic activity of the 30 "component" companies that make up the index. These are companies whose reach and breadth are so big that they are felt in all corners of the country and in all sectors of the economy. They employ many people and purchase billions of dollars of goods from other companies who employ thousands more.



Why should we be concerned? Well, because most of us: 1) work for one of the components, or 2) work for a company that does business with one of the components, own stock in any of those companies, or 3) own shares of a mutual fund that owns shares of any of these companies, or 4) some combination of all of these. Plainly put, the Dow touches most of us, not just the Wall Street swells.


So when the Dow free falls through 6800 it's big news. How big? This big:

• To get below 6800 points today the Dow dropped 300 points in a single day


• It had not closed this low in 12 years--when Bill Clinton was still president


• The overall stock market has fallen 4 straight days now


• The market has fallen in 10 of the last 12 sessions shedding 15% of its value along the way


• Today's trainwreck was universal--the share prices of all 30 component companies fell

Why the drop? Joe Battipaglia who works for financial company Stifel Nicolas, says the big money men have finally concluded that this recession is the real deal and won't improve anytime soon. Most troubling is his conclusion that people are starting to realize that the government doesn't have a clue how to fix things.

Doreen Mogavero, principal of the only all women-owned brokerage on the floor of the New York Stock Exchange is even more bleak in her assessment: The financial bleeding will only stop when people run out of stocks to sell, she tells the Wall Street Journal.

Those enormous political rallies from last summer and fall--the ones where America drank the Kool Aide of "change we can believe in" seem light years ago. Despite the President's attempts to look presidential, and the Congress' attempt to take over vast sectors of our economy, no one really has a lot of confidence in them. Period.

Despite the President's continued popularity, polls show that nearly two-thirds of the country still thinks we're in a canoe going backwards over the falls. And, while the President has been in office less than a month, neither his enormous stimulus plan, his enormous budget, or his immodest plan to change the role of American government forever, has moved the needle one bit on the confidence of the American people.

I don't think most people signed up for this when they pulled the lever in November.

Just thought you might like to know.

The Great Depression Revisited?

While there are some similarities to the Great Depression of the 1930s and our current economic problems, there are also some significant differences. [For a good understanding of the economic policies that contributed to and helped prolong the Great Depression, see Amity Shlaes' "The Forgotten Man," published by HarperCollins in 2007].


A previous post discussed some of the similarities. But here are some of the signal differences that make the two events quite dissimilar:

1. Unemployment in October 1929, the start of the Depression, stood at 5%. Within five years the unemployment rate was 23.2%. A staggering 364% increase in joblessness. We've not seen anything to even suggest we're in for that kind of job loss.


2. In October 1929, the Dow Jones Industrial Average was 343. By November 1934 it closed at 93--a long, precipitous 73% drop. Free markets will periodically reset and correct themselves. But a confluence of events during the Great Depression put the economy into a free falling death spiral from which it took years to recover.


3. In 1929 the Federal Reserve System was still in its infancy and its eventual role in managing the nation's money supply was yet to be defined. Today, the Fed has significant experience as a central bank and money manager, and has played a key role in stopping the bleeding in the current recession.


4. The government's answer to the Great Depression was the New Deal--public policy that combined central economic planning, government largesse, and massive government public works spending. Currently, the government's response has been largely to intervene in the financial and industrial sectors but only for the purpose of maintaining the viability of those sectors as free enterprise. One of the things that helped prolong the Depression was the government's direct intervention in the industrial sector, competing for capital with private enterprise and further weakening job growth and productivity.

There are also many misconceptions that remain about the Great Depression. One is that President Herber Hoover was a laissez-faire Republican who tried nothing to slow the Depression. Although he was not the interventionist that FDR proved to be, Hoover was the consummate technocrat who believed that the federal government had a role to play assisting "Main Street." His earlier accomplishments included spearheading successful federal flood relief efforts in the South and water projects in the West. As U.S. Commerce Secretary he oversaw the expansion of the Department.

Actually, Hoover did attempt to intervene in the economy. He raised taxes and signed the disasterous Smoot-Hawley Tariff Act--both very un-Republican things to do. Raising taxes confiscated valuable capital at the time the private sector needed it most to pay bills, hire labor and invest. Smoot Hawley ignited a global trade war that closed foreign markets to U.S. manufacturers, putting yet more people out of work. But a case can be made that much of FDR's New Deal, rather than solving the Depression, actually prolonged it.

Another misconception is that World War II pulled the nation out of the Depression. Actually, two reliable economic indicators, the Dow Jones Industrial Average and the unemployment rate never returned to pre-Depression levels until 1953--20 years after the inauguration of President Roosevelt.

Just thought you might like to know.