Views
from the Bottom Looking Up
Dear Paul: It's very early Thanksgiving morning. I just finished your latest article and found it refreshing as always. I am feeling idle and pensive. Thus, I present to you Views from the Bottom Looking Up... As the mainstream sees rising asset-based wealth and resilient consumers, "I see dead people" [to use the line from that late nineties sci-fi thriller.] What really jumps off the page is your focus on wealth creation -- a concept that is almost non-existent in other contemporaneous treatments. As I'm sure I've noted to you before, "You cannot print, borrow, or spend your way to prosperity." I am sure this is a truism. In fact, it is really just a subtle variation on the old maxim, "you make it, mine it, or grow it". Nevertheless, it ‘s from the long-since-forgotten ancient writings of the twentieth century. I watch the privatization of social security debates rage, and I am left with mixed emotions. As a fiscal conservative recently sent hurdling toward libertarianism, the idea of privatizing social security has its appeals. I am struck, however, by the "pie metaphor": You don't get more pie by slicing it into more pieces. The model includes no provisions for wealth creation. Of course, there's also that nasty problem that there really is no money to be invested anyway. Reminds me of the story of two farmers who keep selling the same pig back and forth, each time for a 5% profit. Finally, one farmer slaughters the pig. The other says, "Why did you go do that? We were getting rich from that pig." You couldn't feed more people with that pig just like [as you noted] you can't house more people in an expensive house. The average person doesn't understand this stuff at all. They think that finding a billion dollars of Saddam’s in a hole in Iraq makes us a billion dollars richer. My theory is that Bernanke snuck over there and buried it. There's a subtle divide between "unconventional measures" and "unnatural acts" that has been blurred by the Fed's [Federal Reserve’] resident "inflationist." [There's a title that must make his dad proud.] I find the inflation tax so insidious because very few Americans walking around in a Fog, even realize that it is a pre-meditated tax on your savings. Speaking of disingenuous central bankers, did you happen to catch Robert McTeer's departing comments, as he heads off to his job in Texas [presumably having been told there's no way he will get Greenspan's job]? He sounded like James Grant, noting that we were in deep trouble and [paraphrased slightly], "I do not know what we should do." Now THERE's a two-faced weasel. McTeer should read recent books by Kotlikoff [The Coming Generational Storm] and Peterson [Running on Empty] for some ideas. Although Kotlikoff's and Peterson's solutions are politically untenable in the absence of a profound crisis, they are a start. In fact, maybe Robert should have pondered this question on the way in the door of the FOMC rather than on the way out. Nothing like entering through Exit Only! Speaking of two-faced weasels, I wonder how much they pay Snow to stand up there and say those things about the dollar. He makes Harvey Pitt and Dick Grasso look good. [Do you miss the days, like I do, when James Watt was a lightening rod in Washington?] I love the "tame inflation" chorus, also. Even better, however, is the "it's not inflation, it's a weaker dollar" crowd. We must look very stupid. My capacity to pimp myself to industry means that I make a lot of money by professorial standards. I save a lot, too. Nonetheless, I can feel the inflation noose tightening. I am keenly aware that global currency flows are sufficiently complex that I could imagine [although do not believe] that my concerns about the trade deficit are overblown. Contrast this with consumer debt. I know -- I KNOW -- that these highly indebted folks -- millions of the so-called “resilient consumers” -- are going to go through their own personal recessions. There was an article this week describing one poor soul who's interest rate on his credit card nearly doubled for no identifiable reason. Ouch! Now his monthly payments are $850 rather than $500. Ouch again. I hadn't thought about the legality of that, but the implications are enormous. Major ouch. From a book by Stephen Ambrose on the Lewis and Clark expedition, I learned that Jefferson had an interesting strategy for getting the lands from the Indians without having to conquer them: Get them into debt and then foreclose on the land. You think the founding father was on to something? Gross domestic product continues to amaze me. How can 75% of the GDP be due to consumption? How does one equate “consumption” with "product"? Seems to me the GDP is simply a velocity measurement, and the percentage attributable to consumption is an excellent measure of non-productive spending. Imagine we carve a bunch of stone heads. Since this would be funded by the ruling government just like on Easter Island, we could call this a stimulus package. [Actually, we would outsource this job to China, but stay with me here.] The GDP would soar with the eagles! That explains how the Easter Islanders got so wealthy. You say they starved to death in the throes of cannibalism? I guess you can learn from history after all. Ok, so history doesn’t replicate itself, but Mark Twain got it right when it said it sure rhymes a lot. Speaking of the Chinese, even they don't create wealth as I define it. Remember in the olden days when our parents used to slowly accumulate appliances and other durable goods. You could actually see the wealth of the family grow in units of new color TV’s, blenders, and dishwashers. Nowadays you find your house is filled with stuff that has an inordinately short replacement cycle. It’s a financial hamster wheel. The rarely used concept of NDP -- net domestic product -- should be championed [maybe by you]. NDP reflects the production after replacement has been subtracted [hopefully with minimal hedonic adjustments]. As we buy a new blender every two years [which is geologic time scales compared to software], our GDP soars whereas our NDP limps. Depreciation is another hidden tax that receives inadequate press. [Note Added in Proof: My microwave oven just died. It served me faithfully for four years...after gluing the handle back on several times.] I've read a number of books by folks who are close to Greenspan. They all give him A+ grades. That's curious. I give him a big fat F. Rubin [In an Uncertain World] opens with a discussion of Greenspan's fantastic efforts to help save us from the Tequilla crisis in the mid-90's. [Of course, Rubin wore a red cape, too.] What Rubin overlooks is the cause of the crisis in the first place -- reckless lending practices stemming from loose monetary policy. Even O’Neill likes Greenspan. I don’t get it. Speaking of horrendous monetary policy, an article last week did the math: A senior citizen living off money market interest has lost 84% of his income due to Greenspan's efforts. It’s like that old sci-fi thriller Soylent Green, except in this sequel Greenspan runs an organization that feeds the speculators with the corpses of the savers. Nice policy, Al! Some day the world will figure out that, when it comes to monetary policy, less is more. I've now joined the ranks of those who believe that adjustments in the money supply are just mechanisms to achieve wealth transfers by shoving the market away from equilibrium. In fact, I could have done a better job. I’d pull in a panel of experts like you and pick a decent rate [possibly even get the FED out of the lending game altogether]. Whatever we decided isn’t that critical The important step is that once we made the call, we would all go home. No more whiplash from monetary policy. No more incessant perturbations from equilibrium. We would simply stop screwing around. The free market -- the what? -- the free market would take care of the rest. I am struck by the dominance of technical language in the markets. Whether it's "money on the sidelines" [freshly printed, of course], "negative sentiment" [supposedly better than no sentiment at all?], “blood in the streets” [how about Blood and Sand?], or "Hey. Now there's a nice chart, Bob." It is the linguistic analog of Gresham's law: "bad language pushes out good." I heard a guy at 4 AM today talking about the dollar. Now there’s a topic ripe for fundamental analysis. The supply-demand curve is so lopsided toward supply because “fundamentally” reckless people are printing way too many causing their value to head down. So this nitwit lets the lob pitch float by. He declares that the dollar has disconnected from fundamentals because of the rumors that the Asians are going to "diversify out of dollar assets." Call me silly, but I would say that such moves represent a distinct connecting rather than disconnecting with fundamentals. I am struck by the degree of market correlation. You can superimpose the Nikkei on the DAX and pretty much get the same chart. It's worse than that. You can superimpose Newmont mining on top of some internet index and see large correlations. This has LTCM-quality implications. I’m guessing that guys like me who think they are so smart [because they are have the vision to see that we are toast] will soon discover that, indeed, we are toast. I have been critical of the Roth IRA since its inception [uniquely so, best I can tell], and I have been thankful that my ineligibility removed the decision process. By pulling tax revenues forward, we have found yet another way to mortgage the future. The Clinton administration even hastened the process by allowing the rollover from a conventional IRA to a Roth as long as it was done almost immediately. Nice play, Shakespeare. Crank up the tax revenues just in time to help generate the appearance of a balanced budget and let future generations rot in a tax-revenue-free world. Treasuries… Now there is an interesting topic. Nobody should buy treasuries [not even Asian central banks]. The compensation for the risk is pathetic. A recent poll showed that 69% of long-dated bond-holders believed that they will become wealthier from their bonds when interest rates rise. As Lewis said to Clark said during a skirmish with a grizzly bear, "This is going to get interesting." I got too smart for my own good and in March I actually took a position in one of the only funds that shorts treasuries (RYJUX). This short term approach is very rare for me. Bad idea. I am convinced that the long end of the yield curve is as hospitable as the Venusian surface on a hot day. I was soon reminded, however, that little panics can be stemmed quite effectively by determined central bankers [until that fateful day when they cannot]. Further, I discovered that this fund has a knack for tracking the treasuries to the penny on the way down [Read: while RYJUX owners are losing money] and, shockingly, somehow manage to lag them on the way up. The pinhead on the phone at Rydex was evasive on this point. Eliot Spitzer still has work ahead of him. I am stunned that the era of bad numbers and cooked books is alive and well. The inflation numbers look nuts, whether measured as changes in money supplies or prices of stuff that make life more expensive. It is stunning to me that anybody believes them at all. So one of the most credible guys on the planet, Bill Gross, finally comes out and attacks the numbers as nuts -- a "con job” foisted upon us by the Federal Government. He implies that Greenspan is part of the con. (Go Bill!) Next thing I see is John Berry of Bloomberg news attacking Bill Gross. What a FED patsy. So I get cranky and write a web article attacking John Berry (for the sole purpose of venting.) All five people who read my article seemed to like it [four if you exclude my mother]. My counter-attack was certainly better than Bill Gross’s: He can't match my venom for the FOMC crowd. I sympathize with guys in your shoes, mainstream economists, who have to write articles about inflation. Should you declare a disbelief in the official numbers? Do you simply refer to "tame inflation," cross your fingers behind your back, and stare at your shoes? And then there’s the earnings. The books are still totally cooked. How is this still happening? Companies are supposedly earning lots of money, but, curiously, they aren’t paying out dividends and their book values are not increasing. [Peter Bernstein finally pointed this out in a recent article. He’s another of the good guys.] Where does all that "cash" go? Answer: Look for those bright orange, high denomination bills tucked the four edges of the Monopoly board. [By the way, Monopoly is an excellent example of hyperinflation -- four hours into the game and $100 no longer buys you squat!] And, of course, the stock options and share buybacks are outlandish. The historians are going to look back at this period and wonder how we got suckered so many times in a row. I've become a gold bug and energy bull. I’m not very happy about this turn of events. The gold bug makes me feel like a loser -- a fringe member of society. I'd defend against inflation with real estate instead if Greenspan hadn't totally whacked out the real estate market. Negative interest rates? Pervasive ARMS with full endorsement by the FED? Forty percent of one's gross pay per month? If Greenspan can't see this bubble, then he's a moron. My own belief is that he's just a liar. As to energy, I've read a ton on oil output and estimable reserves. The concept of "peak oil" is unquestionably real; we’re only unsure about the timing. I think it could come at us real soon. As a physical scientist, this is the scariest of all. I know enough about the energy content of fossil fuels to know that there is no obvious replacement for them. Solar energy isn’t even energy positive: It takes more energy to make a cell than it gives back in its lifetime. Biological sources of energy (gasohol) are profoundly net energy negative. Most of the ideas that are popular appear to ignore the most fundamental principles of physics. To quote some assistant director of something out of the White House who I had the pleasure of spending an hour with, “We are in a mess and nobody is paying attention.” Bottom line is that we may be within a decade (even less) of geophysically dictated reductions in production. We lived without fossil fuels in the past, but not 6 billion of us. As George Carlin said in a recent monologue, "The world will heal itself just like it always has. We may not be there to see it, however." I am constantly pondering such things as what allows a person to be a contrarian. A key feature is arrogance. You must be able to look at a bunch of famous guys with curriculum vitae as long as their arms and say, "You are wrong.” When asked by a colleague why I thought I was smarter than them, it came to me as an epiphany: "Because they are idiots!" [which takes us right back to the arrogance theme]. I agree with John Mauldin when he says we will "muddle through." It’s not like we have a choice. Unfortunately, history shows [Mark Twain; vide supra] that muddling can be a miserable experience. In the spirit of Thanksgiving, however, we should be thankful that the muddle phase has been deferred to the future. It is time to complete what I would call a 20th Century comeback to the caveman, pondering the ominous and complex world around him, attempting to mitigate risk and make some sense of it all. It is not clear that there is sufficient information available or even if our brains have enough lobes to handle the complexity, but we must try. Maybe it’s just entertainment, so throw me a loaf of bread and get on with the circus. Warmest Regards, Thomas ©
2004 Thomas |
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