June 12, 2008 by TMO
By Bob Wood, MMNS
As I write this column, the stock market is getting hammered, due to three other items in the news: remarks made by a central banker in another country, a bad report regarding new job creation, and a record-setting day in the energy markets, with the price of a barrel of oil rising faster than ever before. Just as a farmer looks forward to reaping what he has sown, we are now reaping what our leaders have planted for us, economically and fiscally speaking. And the harvest doesn’t look good!
If a farmer plants corn, corn will grow. If our fiscal and monetary policy makers plant the seeds of the dollar’s destruction, prices will grow. And if they continually plant for short term results, longer term results will pay the price. Or, in other words, we all pay the price.
The rise in energy prices owes much to our long running energy policy – and, to counter today’s critics of our leaders, yes, we do have – and have long had — a working energy policy. But that policy centers on consumption. Basically, we have been encouraged to use as much energy as we wanted — and waste a little for good measure.
When Jimmy Carter was president, he wore his cardigan sweater and asked us to reduce consumption of imported oil. He was succeeded by Ronald Reagan, who made us all feel better by saying we didn’t need to worry about conservation. We are the mightiest country on earth, he explained, so we’ll just go out and get all the oil we need, by force if need be. And we loved it!
Our current president, at this very moment, is calling for Congress to avoid laws that encourage conservation, which may be our best hope. Instead, he wants to allow more drilling in environmentally sensitive areas. Yes, the beat goes on, blind to the reality of how we got ourselves into this energy mess.
One scenario might be a soccer mom picking up the kids in her Hummer and driving them back to their 4,000-square-foot home. If that home is in Florida, where I sit, mom most likely uses the air conditioner year-round. And if she’s had a stressful day, she may head for the back-yard hot tub, which she heats all day to have it ready on demand for her 15 minutes of use.
But it’s not just that U.S. citizens waste energy like no other country on earth. The fiscal policies of the Federal Reserve have long been biased towards what it calls ‘’growth oriented policies.’’ This policy implicitly implies that rising prices signal a healthy economy. If demand from the consumer sector falls for any reason, the Fed simply prints more money to stimulate more spending.
The biggest problem with this policy is that no upper limit has been set regarding how much money can be printed to keep prices rising and growth ongoing. But we all know that limits to the value of everything exist, and we may now be seeing a vivid example of a Fed policy that has surpassed any rational boundary or limit.
But it isn’t just the price of oil that is raging. Food prices are causing unrest here and in dozens of countries around the world. That situation has spiked inflation in dozens of countries and motivated European Central Bank president Jean-Claude Trichet to hint at interest rate hikes. What horrifying news this is to U.S. financial pundits and stock market promoters who know that our own economy cannot afford rate hikes. Their best hope is for a coordinated interest rate policy in Europe, allowing for stimulus measures here without the potential for further destruction to the value of the dollar.
With European leaders more concerned about their economies than ours, we find ourselves “on our own,” a position we are not well trained to manage, since we have long dictated fiscal policy to others. Should the European central bank raise rates while the U.S.does not, look for even higher energy prices followed by rising prices for imports of all kinds — and falling standards of living for most of us.
Falling interest rates are typically a good thing during recessionary times, but there are limits. Caving in to the massive pressure he feels from market promoters calling for rate cuts in recent months, Fed Chairman Ben Bernanke now sees that limits may have been breached. At the same time the Fed began cutting rates, the U.S. was running massive deficits, and the prices of oil and other commodities began rocketing higher.
But we are in the midst of an election year, when political considerations often trump good sense. Republicans are in a dire position, facing possible big losses in November. Periods of difficult economics usually encourage voters to ‘’throw the bums out.’’ And never have we had so many bums to toss into the streets!
Recently, perhaps in an effort to create the appearance that they’re doing their jobs, Congress and the Bush team agreed to activate a fiscal stimulus package which sends rebate checks to taxpayers meeting certain income qualifications. Am I the only one thinking this a stupid thing to do? Or does adding money to our economy solely to encourage more spending have economic leaders the world over laughing at us? Meanwhile, those same leaders are now arguing for yet another round of stimulus money! One nasty detail questions whether, since we are already running massive budget deficits, additional stimulus money will have to be borrowed!
How sustainable does this action look to you? Isn’t it another short-term band-aid that will end up costing much more than we can afford. The Fed can print still more money, and we can all look forward to paying $5/gallon for gas.
In this election year, the current administration, as the leader of its party, is working harder than ever to make our economy look healthy and still growing — ‘’the envy of the developed world.’’ Manipulating economic data is becoming a full time chore, as shown by the job creation report for May.
The latest report shows that the economy suffered a loss of 49,000 jobs last month. Some annoying details buried in the report — and not widely mentioned — deserve notice. One reveals that the job losses would have been much higher without manipulation by the Bureau of Labor Statistics. Using its ‘’birth/death model,’’ the BLS presumes the creation of 217,000 jobs — jobs that can’t actually be documented but are “assumed” to have been created — and will show up later.
Among the sectors of the job market assumed to see gains in job creation are the construction sector, with 42,000 new jobs, and manufacturing, with 9,000 new jobs. How realistic does that assumption look given the state of the housing and car building industries? But then, how could the BLS possibly report that our economy shed 266,000 jobs in one month — in an election year?
That wouldn’t help the party’s cause come November. Many well connected corporations rely on the Bush administration’s friendly tax and monetary policy, not to mention the regulatory agencies that do their best to deliver whatever the corporations, which they supposedly regulate, want.
Our economy is in dreadful shape, and, with the seeds that have been planted, the worst is yet to come. Most terrible of all is that we did it to ourselves! And most amazing is that we keep doing what we have done previously to get us into this mess, thinking that repeating our mistakes is the smart thing to do.
If a driver is trying to drive off a cliff, then yes, speeding up in the direction of the precipice would be the correct decision. If that is what our drivers are determined to do, the best we passengers can do is jump out while we can. Get out of the domestic stock and bond markets now. Good markets are always available for investing. But that won’t be in our home markets — for a very long time.
Have a great week.
Bob Wood ChFC, CLU Yusuf Kadiwala. Registered Investment Advisors, KMA, Inc., firstname.lastname@example.org.