My Two Cents - "Mid-Year Roundup"

07/03/2008

Action, not words

2008 may well go down in history as the year of hot air. It doesn’t matter if you’re listening to Washington or Wall Street, there has been plenty to go around. Let me remind you of something said in a column that now seems to be an eternity ago “The bigger the fraud, the more people you will have telling you there isn’t one”. 2008 so far has been a tale of two cities. The first quarter saw the government and media focusing on economic growth as GDP readings teetered on the brink of recession. During this same time the Dollar plumbed new depths almost weekly as the former long-term support line at 80 on the Index was forgotten and observers began to wonder when we might break down through 70. Despite the worries about economic growth, absolutely nothing was done to stimulate “growth” other than Congress authorizing the borrowing/creation of $168 Billion to hand out in the form of an economic stimulus package.  We have been regaled in headlines of increases in consumer spending and personal incomes as the stimulus checks hit mailboxes and bank accounts from sea to shining sea. The only problem is that once the money is spent, that’s it. By summer’s end, I would imagine we will hear talk of “Economic Stimulus – The Sequel” as Congress revs up the pandering press (aka the printing press) in time for the elections.  To date, we still have not seen any serious growth initiatives discussed.

The second quarter featured a notable shift in rhetoric, to a focus on inflation. The Fed and the media are now worried about inflation. They know that Main Street has figured out that inflation is here to say and they’re here to tell us it just isn’t so. The Fed’s governors became pre-occupied with inflation in the beginning of April and we smelled an attempt to throw a floor under the sagging Dollar. Depending on how success is measured, this campaign has worked in that the Dollar’s fall has been arrested. There have been a few rather weak attempts at a move to the upside, but none have been successful. Here’s the real deal on the talking you’ve heard. The Fed knows that it has created and injected massive amounts of fiat money and credit into the system over the past year for the benefit of the banking system. The Fed also knows that eventually that money will work its way into consumer prices in a manner that will be impossible to ignore. By getting out on the stump now and talking tough on inflation, the Fed is telling us that it is about to get a whole lot worse. Remember, fiat currencies live and die on perception since there is no real value behind them. The Fed knows it dealt the Dollar a series of mortal blows over the past 12 months and now it is left with the reality of dealing with the fallout. It cannot withdraw the money from the system because the financial infrastructure is far too weak to withstand such an action. In all likelihood, there will need to be more injections. In fact, just this week, the Fed gave away another $75 Billion through its auction facilities. This latest giveaway came directly on the heels of a $75 Billion infusion in mid June. The bottom line is that if the Fed was really worried about inflation, interest rates would be raised and money withdrawn from the system. Unfortunately, these actions are incompatible with the continued survival of our debt-ridden economy.

Oil, oil and more oil

In my firm’s monthly premium newsletter, it has become a running joke with some of our subscribers that every time I write, there is another record high in oil to talk about. While we are still early in July, it would appear as if that trend will continue. The prices of both oil and gasoline have grabbed headlines across the nation this year as they have rocketed to record highs with no end in sight. However, if we had as much oil as we do talk, we’d be in great shape. The past few months have also seen a rapid acceleration in the rhetoric surrounding oil prices and pledge after pledge from Saudi Arabia to pump more and more oil to satisfy what they themselves referred to as a ‘well supplied market’ just 6 weeks ago. Couple that with the head of OPEC telling consuming nations to ‘get used to it’ and it is easy to see why there is so much confusion mixed in with the consternation regarding oil prices. Oil is a very political commodity and the fact that we’re just 4 months away from the general election here in the US means it is safe to say that pretty much anything goes from here forward. My advice? Be nimble. While energy prices continue to explode upward, the stock market has a full head of steam heading 180 degrees in the opposite direction. The past few days in particular have sported a serious divergence between the action in the oil and energy markets and that of their related stocks. As selling pressure and margin calls mount, the tendency is to sell winners to cover margin calls on the losers. So we may see the continued selling of high-performing energy related issues to cover the Citigroups, WaMu’s, Lehmans and OTC derivatives of the universe.

A New Paradigm

Since it was discussed at length in the last edition I am not going to rehash it all here, but it is imperative that the investing public and anyone who has savings understands the nature of negative yields. Simply stated, traditional savings vehicles such as CD’s, government bonds and other fixed income investments are now GUARANTEED to lose your purchasing power as inflation accelerates. Those who have realized this have frantically looked for hiding places to weather out this storm. It must be realized that a single strategy is not the solution, but rather a comprehensive approach to the protection of wealth is necessary.

What lies ahead as we enter into the second half of 2008 will in a large way define the direction for our country moving forward. Will we take the steps necessary to begin to correct some of the massive imbalances or will we be greeted with more talk? With our nation’s debt approaching $10 Trillion, rising unemployment, slowing growth, accelerating inflation, and a middle class in severe distress, it is imperative that we get well thought out, meaningful action. Even though talk is cheap, we simply cannot afford it any longer.

Graham Mehl is a pseudonym. He is not an ‘insider’. He is required to use a pseudonym by the policies of his firm when releasing written work for public consumption. Although not an insider, he is astonishingly bright, having received an MBA with highest honors from the Wharton Business School at the University of Pennsylvania. He has also worked as an analyst for hedge funds and one G7 level central bank.

Andy Sutton is a research and freelance Economist. He received international honors for his work in economics at the graduate level and currently teaches high school business. Among his current research work is identifying the line in the sand where economies crumble due to extraneous debt through the use of economic modelling. His focus is also educating young people about the science of Economics using an evidence-based approach.