My Two Cents - "One Year of Two Cents"

5/25/2007 - Anniversary Edition

It has been a year now. I started this writing campaign a year ago with a set of lofty goals in mind, namely distilling scant and confusing information into a format the average person could easily sink their teeth into. The goal was also to present this information in a column that could easily be read in under 10 minutes' time. There are hundreds of financial newsletters out there that people subscribe to, receive, and rarely read because they are so long. I wanted My Two Cents to be the weekly that everyone DID read. It has been a pretty successful year. I've seen this column posted on countless websites, blogs and forums. I've gotten to talk to intelligent people from all over the world. I've picked up a handful of contributors who add insight and perspective, and perhaps most importantly I found that while I may be in the minority in terms of my thinking, I am certainly not alone.

Being the reflective person I am, I want to spend this week's effort looking back on the past year. Much has changed in our world, yet it appears even more has remained the same.

The Fed goes on 'pause' after 17 interest rate increases...

The much awaited pause finally came this past summer. Markets used this meaningless event as a reason to pursue new nominal highs. These rate hikes, even in their totality have failed to stamp out either the supply or demand for new credit. The credit pump is running full bore. If they were really serious about inflation (which they aren't - inflation is the central banker's best friend), then we'd see interest rates well North of 5.25%. 5.25% may well be the launching pad for the next inflation as it appears that Bernanke and Co. are chomping at the bit to cut rates and kick on the monetary afterburners.

Henry Paulson wants the Chinese to allow the Yuan to float higher...

Well Hank, which is it? Out of one side of your face you utter the totally insipid line "A strong dollar is in the national interests of the United States", yet out of the other side, you parade to Beijing and literally demand that the Chinese allow their currency to rise (which means a weaker dollar). You can't have it both ways and this Hanky-panky (no pun intended) is getting old. What game are you really playing here? Not sure I want the answer to that one.

The trade deficit continues to be a problem despite the weaker dollar...

Conventional wisdom dictates that a devalued currency is good for exports because it makes them cheaper. It also serves to make imported goods more expensive. Theory has it that we should have seen some diminution of the trade deficit by now. We haven't. The weaker dollar has driven up the cost of our imports for sure, and with virtually nonexistent domestic alternatives, we've continued to import these now more expensive goods. So much for that one..

Peak 'Cheap' Oil...

I think that many years from now when we look back with a fistful of rear-view mirror knowledge that we will see that cheap oil peaked somewhere between 2005 and 2007. There is plenty of oil. There may even be some countries that are sand-bagging in order to hold out until the bitter end when they can name their price for the oil in the ground. That notwithstanding, much of the oil that is obtainable right now seems to come at a hefty premium. That premium is a combination of inflation, logistical difficulties, extraction costs and geopolitical issues. Translation - It isn't going to get any cheaper; the argument that these high price levels are transitory no longer holds any water. Holding this data out of price computations such as the CPI is intellectually dishonest at a bare minimum.

New 'Records' on the DOW...

Of all the events of the past year, this may be the most meaningless of all, yet I feel compelled to beat this expired equine just one more time. When the DOW matched its 2000 nominal high last fall, I thought we were going to see a good old fashioned ticker tape parade. However, we don't have much ticker tape anymore. I thought we might shred the Economics books and use that instead since obviously today's brave new world knows nothing of nor has any use for Economics. Mark Hulbert topped this one off by making the completely ridiculous assertion that for the Proletariat that had invested his money in the DOW in 2000 that he finally broke even. Are you kidding me, Mark? Those dollars buy a heck of a lot less now than they did then. This massive misunderstanding illustrates ideally the difference between nominal and real. Read my column on 1/12/2007 "Nominal Bulls vs. Real Bears" for more insight on this.

Consumers continue to be under pressure...

Look at any number, even the nonsense-numbers provided by Washington and Wall Street and it is obvious that the consumer is choking on debt. His ability to withdraw money based on the equity of his home has been curtailed to some degree, and with the price of virtually everything on the rise, he is now falling back on the lender of last resort: Mastercard. Consumer revolving debt is at near record levels as we approach summer and frankly the outlook is not good.

Rest assured that we will continue to be alongside you throughout this mess because we are just like you. We are not wealthy. We buy the same products you buy, we see the same things you see and we wonder the same things you do about the future. We hope that you have found the efforts of the past year useful and informative and we look forward to providing you with timely analysis in the coming year.

Sincerely,
The My Two Cents Team

Andy Sutton holds a MBA with Honors in Economics from Moravian College and is a member of Omicron Delta Epsilon International Honor Society in Economics. This article and other information is located at http://www.my2centsonline.com Please feel free to distribute, copy or otherwise disseminate this information.