Those of you who read my blog may not know that I do all
of my own investing and have done so since 1995. One of my favorite people who
I have had the good fortune to meet, Chris from the mid-lands of the UK (and
whom I don’t get to visit with often enough) took me to task for not sharing my
“macro views” lately. I have penned three “My View of
America” letters and this will be my forth and it is dedicated to Chris
for “kicking” me into action.
However there will be a price to pay and that is on my next trip to
Leeds Chris you must promise to join us for Indian food on my last night (now a
long-standing tradition at Sweet Manor)!
I am truly perplexed as to where to begin this letter. If
I look around my micro-climate, things actually appear (at first blush) to be
“normal”. My friends have adjusted to whatever life style
modifications were necessary as a result of the tumultuous events of 2008-2009.
There is a good lesson here: no matter how dark the sky gets, calm will
eventually reappear and “things will go back to normal”, even if
normal is a bit different. Linda and I
have gone through the same process and we plow through every day with
optimistic energy, adjustments and all.
I believe one needs to periodically look past the obvious
and take a deeper look. I have been
doing a lot of that lately. When I drive
through a shopping center or retail strip mall, I take notice of how many
spaces are empty…and there are many. In most cases I can’t remember what used
to be in those spaces, but there used to be real businesses with employed
people paying rent checks and selling their wares. Empty means none of these things are
occurring. This really causes pause for
me and it does not indicate that things are getting better.
Linda and I were at a dinner party recently and two of my
favorite couples were there. One of them
is in the commercial infrastructure business. When I asked him how business
was, he replied it was not good and had not been since early 2009 (in the
building infrastructure business there is a lag between when the general
economy weakens and when it gets hit). At that time he had 35 employees…he
now has 5 and isn’t sure how much longer he will keep the doors open. His
outlook is negative for the next 12-24 months. My other friend is the John
Elway of residential real estate developers (sorry, but I am a Denver Bronco
fan!). He is one of the few who had the
guts to launch some new projects during the last two years. I called him John Elway for a good
reason: they sold everything they built,
which is a serious accomplishment, but not much above break-even. His outlook is very cautious and he doesn’t
see much of a recovery in the housing market until 2012 at the earliest and
maybe past that. This does not suggest things are getting better.
As I mentioned at the start, I do my own investing. I
love equities both long and short (short means I make money if the equity price
goes down), it’s a comfort zone. Occasionally I’ll do bonds. Bottom-line: I love investing. When I say the
current valuation of the S&P 500 has me absolutely stumped, I mean out of
my mind absolutely stumped. Most people get very bored with the “stats”,
so I won’t go into a dissertation on the metrics that concern me, I’ll just
Unemployment at around 9.0%. U6 unemployment at around 16%
Producer Price Index at +5.5%
Consumer Price Index at 2.5% (this includes those pesky things like food and
energy that the fed thinks shouldn’t count in their calculations!).
Federal budget deficit of 1.5 Trillion dollars for this fiscal year
Trade deficit of 350 billion this fiscal year.
Crude oil at $110 per barrel. Gasoline at $4.00 per gallon.
Since the last part of 2008, the Federal Reserve has
added about 2.5 Trillion to our monetary base…and the above statistics are
what we have received for this investment??? I do not think these figures are indicative of things are getting better.
There is a term that over 90% of the US adult population
is not aware of and don’t really care about:
The US dollar is the world’s reserve currency. But trust me when I say
you will learn about this and it won’t be pleasant when you do. I won’t go into the complex and technical explanation of the logistics of being a world reserve currency (I couldn’t
explain it anyway!). What is helpful to know is that nearly all of the world’s
commodities are priced in US dollars. When a producer of one, say Saudi Arabia’s sells its crude oil , it’s priced in our dollar. When the sale is complete, those dollars will be converted to SA’s local currency. If the dollar depreciates, they will need to charge more dollars to get the same local currency equivalent. When the dollar fluctuates in a normal range, the impact on pricing is negligible. But when it has big moves up or down, the impact can be significant.
The sad fact is that the dollar has been falling by a
large amount…almost at all time lows against many of the major world currencies.
In my opinion the fall is a direct result of the unprecedented
“Quantitative easing” by the US Federal Reserve. In simple terms they are printing new money out of thin air to fund the new debt our Treasury is issuing to cover the massive budget deficit. The increase in dollars flowing through the world economy chasing the
same amount of goods has the natural effect of lowering the value of the
dollar. The lower dollar is translating to higher prices for anything that is a
physical good. Think gasoline, milk, bread, anything with corn etc. However our
fearless leaders in Washington tell us that inflation is contained and the
uptick in the prices of stuff we buy is “transitory”. Really? They print 1.5 TRILLION new dollars and tell
us not to worry? Sorry, but I am
worried. The price increases of everyday necessities hits the middle and lower
classes like a hammer over their heads…it’s truly a terrible situation. I’m
afraid it’s going to get a lot worse.
Now for the really scary part. The Fed has announced the end of QE 2,
meaning they will no longer be buying new Treasury debt (they have been buying
at a clip of 90 Billion per month since October). Who will step up and buy this
new debt? I am convinced that the banker boys have had some back room talks with folks like China, Russia, England and some others to cover the first few months of purchases. They will loudly proclaim success in their efforts to turn the economy around, tell everybody to go home and join the celebration. And then…..all hell is going to break loose. There will not be enough buyers unless interest rates go up. If rates go up, lots of bad things will happen, which I will cover in my next letter.
What does all of this mean? For Linda and I, it means we continue to cut costs
out of our expenses. In our investments we are taking the road of caution,
carrying far more cash than normal. We are also steering clear of anything
risky. We are investing in ourselves through our own business in an industry we understand and enjoy. I believe we are in for some more interesting
and challenging times ahead.
It’s not all bad news (it never is!). We are on our way
back from Florida…all of the flights have been full. When we went shopping to
the mall with our daughter Carli, the place was mobbed and business was
brisk We are fortunate to work in the
professional beauty industry, which tends to be resistant (not immune) from the
economy and the folks we talk to generally seem to be doing well. We were told
in Boca Raton that the convention business is coming back. So it’s not all
negative…just be careful, we live in interesting times. What else would you expect from the baby boom generation? We have never done anything the quiet or easy way and we are not about to stop!
One more note: When we landed in San Diego, we heard the OBL news…good ridence. It was a very expensive ten-year man hunt. We added more jobs than expected, but the unemployment rate went up. 30 days treasuries yield an annualized 0.01% (yes, 1/10th of one penny for each dollar invested for a year!!!). It’s truly an amazing time….
Until next time….