Vigilant Investor

Tom Friedman’s “The World is Flat” has caught the attention of the business community in the U.S., hanging on the number five spot in the New York Times hardcover nonfiction list.

Stephen Roach, just back from a few trips around the world, including a stop at Layford Cay for the Global Investment Roundtable, has some thoughts on how the overall theme of integrated harmony implied in Freidman’s thesis may not be the reality we are dealing with. If you read between the lines, the lesson from Roach: hold on to your hats and don’t bet on the popular wisdom on this issue.

A recent AP article questions the power fo the Federal Reserve (How powerful is the Federal Reserve?Nov 26, 2005)

We couldn’t help note the fallacies that this article perpetuates. For example:

The Fed has two missions, said Quincy Krosby, chief investment strategist at The Hartford, the Connecticut-based insurance company. Its primary mandate is price stability, keeping inflation at bay.

Let’s stop right there. Its primary mandate is “price stability, keeping inflation at bay”??? Well — that is about as solid an example of misleading Orwellian Newspeak as you’ll find since the Federal Reserve exists with the primary purpose of creating inflation.

Long ago dropped down the memory hole, the original definition of inflation has been lost and replaced with the consequences of inflation. Hence, today if you check for the definition of inflation, you’ll find today it will say something about the rate of increase in the general price level of all goods and services over time. Inversely, this is a loss of purchasing power of money.
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Gold was trading today at over $500 an ounce (Bloomberg notes it at $502.80 5:00 Eastern) … part of what we believe will be a longer general trend. Meanwhile, platinum is now at a 25-year high, above $1,000 an ounce….

Meanwhile, U.S. Stocks gave back a touch of their 4-year highs.

We pose the question: Historically equities and precious metals — and even commodities in general — tend to move in opposite directions. With both gold and U.S. equities rallying, who is right?

If you don’t have an understanding of the overall discussion about precious metals’ prices, you are walking blind in the new economic paradigm. But don’t feel too bad… As we reported a few days ago, even some of the world’s best investment minds seem to not be paying proper attention to the serious tension in the global economy, confirmed first hand by Morgan Stanley’s Stephen Roach.

Bloomberg is reporting what a few of us predicted long ago would hit the fan. In the summer we saw homebuilder’s shares fall… and now we learn from the Bloomberg headline: U.S. Home Sales Fall More Than Forecast; Unsold Homes Reach 18-Year High.

One of those key dominos appears to be wobbling. Will it fall? What next?

Well… A USB Analyst is predicting Google at $500. Now, this could mean a few things, but our guess is that retrospectively we’ll find it was an early sell signal.

Of course, this sort of jungle fever over a single stock always seems to go higher than anyone expects.. but that’s also why the peak sucks in so many folks in what inevitably is a game of musical chairs. In our opinion, we’d rather be a bit early than greedy.

If the news reports are to be believed, Black Friday came in flatter than hoped… Well, at least when compared to 2004, which was no barn burner itself.

While most analysts and commentators will suggest only the negatives related to this, we are hopeful this is an indicator that the consumer is attempting to be slightly more prudent.

Obviously, though, one day does not a trend make. And there is always cyber Monday.

• Humbled Detroit: ‘We’re all worried’
• Winter, High Oil Costs Cause Global Chills
• Holiday sales off to a lukewarm start
• Local firms feel inflation’s bite: Costs rising, they attempt to pass price hikes along
• US dollar reaches 27-month high against yen
• Nation’s spending out of line
• Housing speculators retreat

Our first hand experience with friends and colleagues in the retail automotive industry tells us that domestic manufacturers are in a bind beyond just the financial elements we’ve talked about in the past week, ala GM’s flirting with bankruptcy.

Overall, Detroit’s major worries are making the news; and after The Big Three announced 60,000 job cuts in a week’s time, the nation should be watching automakers as a bellwether for the Great Society format U.S. economy as a whole.

More specifically, we should all note the various parts of the failing business model:

• Decades of overgenerous concessions / demands for organized labor.
• Benefit legacy costs consuming operating capital
• Short-term personal gain mentality from both management and labor, at the expense of long term reality
• Longer term models based on expectations that the pinnacle of economic cycles will last forever

Meanwhile, most government models, from the Federal down to municipal, tend to have operated with all these non-sustainable features — along with a whole host of others that are plain outlandish. From this, you’ll never be able to cut jobs or programs — even the most wasteful pork… And, don’t expect to union-bust anytime in order to get labor costs in line with reality. Plus, you can’t forget the addicted voter-citizen, who views the power of Congress to confiscate other’s property as his own check book / benefits provider — promises that grow and grow and grow, but remain largely unfunded and impossible to conceive how they will ever be long-term feasible.

There is little you can do — Except plan around it!

We hope everyone has a wonderful Thanksgiving!

As a follow up to yesterday’s comments on national debt, I find this doozie:

The federal government’s gross debt was about $7 trillion last September, which works out to about $24,000 for every man, woman, and child in this country. But that number excludes items like the gap between the government’s Social Security and Medicare commitments and the money put aside to pay for them. If these items are factored in, the burden for every American rises to well over $100,000.

David M. Walker, Comptroller General of the United States

Wow.

But that’s not as amazing as the frank indifference — often defiant — most Americans have to this reality. As authors Addison Wiggin and Bill Bonner note about this and the general invincible attitude of most Americans:

“The U.S. economy is still the most dynamic and flexible in the world,” they tell each other. “We’re the most creative, inventive people on the planet,” they congratulate themselves. “We’ll invent new business. We’ll think of something!”

Well, you have choices. You can play ostrich like most people. Or, you can plan around possible contingencies.

Both quotes are referenced from their recent book, Empire of Debt — a good read on U.S. financial malfeasance.

We often knock the premises of The Fed (and central banking), fiat currency, and legalized counterfeiting – also known as our formalized policy of monetary inflation. In this , a time of “new eras of economics” and Ph.D. nuclear finance, we seem to have lost sight of the forest from the trees.

Lew Rockwell comments nicely on this subject, and rightly calls for their end. While his goal is extremely unlikely, the frame of reference he provides is invaluable to anyone managing his own finances — personal, family, or business.

It happened some time during October, but the national debt crossed the $ 8 Trillion mark, standing on November 11 at $8.083 trillion. Divide that number by 2004 U.S. census population estimates, that’s a total of $27,526.73 per U.S. citizen, elderly and children included.

If it makes you feel any better, that’s $56,667.38 per employed individual as of October 2005. (What? It doesn’t??)

Yet there are those who dismiss any worries about the U.S. debt situation, noting that the National Debt to GDP ratio is in line…

If only the GDP was not so much of an indicator of the willingness of U.S. consumers to pile up debt and consume beyond their means.

“Whether we like it or not, we now find ourselves in the unenviable position of holding a substantial part of our savings in the financial liabilities of an economy that does not save, fearing that a diversification of a small part of such holdings might lead to a sharp fall in the value of the rest, thus shooting ourselves in the foot.

We also find ourselves somewhat stuck with recycling a large part of our savings through the developed markets back into the region in a much more volatile form, occasionally creating havoc in our monetary and financial systems.”

– Hong Kong Monetary Authority Chief Executive Joseph Yam, Speaking about Asias Economy.

Ongoing losses. Overwhelming pension promises. Crippling healthcare costs. Non-competitive union contracts. Slackening demand for SUVs and other vehicles in the midst of a rising PPI (Producer Price Index) driving up input costs. All in the midst of foreign competition producing products with substantial domestic demand.

Indeed, U.S. automakers have had their backs against the wall for more than a few years now.

So, in deference to the unavoidable realities of economic gravity, GM officials today announced that they would close four plants and cut at least 25,000 manufacturing jobs as part of a broader restructuring plan. Details are to be disclosed by the end of 2005, and CEO Rick Wagner has committed to eliminating nearly a quarter of GM’s factory work force through 2008. GM already closed three plants this year as part of its earlier announced $2.5 billion cost cutting program, but many analysts pointed out that the cuts themselves could cost nearly $2 billion to cover employee relocation and early retirement.

We’ve been arguing for a while that GM is representative of larger U.S. problems that we will have to tend with on both the private and government levels, especially when it comes to our politician’s tendency to promise health and retirement benefits that simply are unaffordable in the long run.

Congress is now fomenting legislation to ease the pressure on the Pension Benefit Guarantee Corp. (PBGC) – which has been strained by several major corporations dumping their pension plans on the agency. As the Wall Street Journal reports – the initial focus will be on a fixed timetable requiring corporations to get their pension plans fully funded – along with increasing annual PBGC premiums.

The PBCG reports a $23 billion dollar shortfall for 2005.

More alarmingly though — by it’s own estimates, the defined-benefit pension plans that the agency guarantees are currently under-funded by a combined whopping $450 billion. That’s right, an existing $450 billion pension under-funding is backed by an agency already $23 billion in the red!

We believe that a taxpayer bailout is growing more and more inevitable. For pensions to overcome such a huge shortfall – their assets will have to increase dramatically due to two reasons:

1. Greatly increased pension contributions – fueled either by significantly higher corporate profits or the re-directing of corporate revenue from other vital areas such as marketing, business development, or employee salaries, benefits etc. Both highly unlikely and difficult in the increasingly competitive global business environment – and following a period of time where most companies have already “trimmed” significant amounts of “fat.”
2. Vastly improved rates of return on existing pension fund assets — via a big boost from the stock market. Far from a certainty when the manufacturing, and automotive sectors struggle – fuel prices threaten to skyrocket – and the housing bubble begins to look like it just may well pop.

The Federal Government has already taken on far more than it can afford. Facing increasing Medicare and Social Security benefit obligations, it continues to fight a costly war – all while incurring an annual budget deficit of over $300 billion.

The Pension Benefit Guarantee Corp. scenario is a critical one – and not likely remedied by a quick fix. We’ll keep you posted.