No one knows the diameter of the Hurricane's Eye yet.
With the official Atlantic Hurricane Season starting on Tuesday, growing uncertainty about the oil leak disaster in the Gulf and the potential effect of a hurricane coming through the area, weather experts claiming a very active season with up to 23 storms, you would think we have our plate full.
But no we don’t have that choice. Because we are already in the middle of the eye of the storm when it comes to the global economy and financial reform. That’s why it’s critical to have an understanding of economics, politics, and the technical details of various businesses; only then can you hope to be immune from the blather you’ll hear on TV and read in the popular press.
In spite of all the government induced good news consumers say that it just doesn’t feel much like a recovery to many people.
Unemployment is stubbornly high — 9.9 percent. The jobless face fierce competition for work. Those with a job are watching their paychecks shrink. A growing number of people are at risk of falling into foreclosure, and only those with the most stellar credit can get a loan.
Hurricane Season is in the Cross Hairs
Contemplating a long Holiday Weekend (Memorial Day) and several discussions over the past week, I decided to clear my mind on what the economy in my opinion really is doing and the inevitable comparison to the hurricane’s Eye and the Storm season ahead of us became a given based on the following observations:
1. The volatility in the markets of the world economy underlines that we are in a calm between a credit crisis turning into a currency crisis as the collapse of the private debt bubble is replaced by a government debt bubble that will also collapse.
2. The world is at a point of no return for government debt as debt-to-GDP approaches 100%. When debt becomes too big, governments cannot control the interest rates and currency. The availability of investor money will largely depend on the willingness to pay interest. The lead warning is Greece, Dubai is feeling its second strain, all much in the same manner as Lehman Brothers and Bear Stearns were announcements in the credit bubble crisis.
3. Oil will go to a peak and not only because of the disastrous effects of the Gulf Crisis. The recent wealth of humanity has been built on energy. More than half the world’s conventional oil supply is already used. That means that the quantity of oil produced each year will not increase much from the current level even as demand from developing countries like India and China increases substantial. Wars over oil have already started. Energy prices will rise. We will see a substantial rise in the cost of food, as food production requires energy.
4. The U.S. can prosper and keep a leading position in the world by developing and investing in three forms of technology—the Internet and mobile technology, new medicines through biological breakthroughs and new sources of energy. All are good investment opportunities and are necessary for human expansion. The other good thing for the US economy is that we still know how to produce food in large and exportable quantities, which will become an important negotiable resource.
Data are important and we need to learn how to read them
What we need to do is start to understand and accept the stories the DATA tell us.
We have currently a sort of a hazy blue sky overhead, with Washington and the main media trying to convince us that things are improving and blue skies are in the forecast. But I think we’re in the eye of the storm. We went through the initial eyewall of heavy winds blowing from the credit crisis and we now know what happened. As dictated by Keynesian economics in a recession, the governments came along to bailout the problems and purchase all the toxic waste of sub-prime mortgages and bad debt from too much private lending.
How many storms does it take for us to change course out of harm's way?
Governments now have a huge credit bubble, just like we had with the housing mortgage bubble. So the economy slowly or rapidly, depending on which side you operate (public or private) moves from a credit crisis to a currency crisis. I think that in many countries the government debt bubble will burst and that will be the other side of the hurricane, as the winds swirl around and hit us from the other direction in terms of a currency crisis and government debt collapse.
So the question in this scenario becomes: Is the strategy the U.S. government is using to stave off the recession, the correct one? And the answer is NO
Building a few roads, some bridges, some hand outs for basketball programs or high speed rail or even nuclear power won’t have achieved much.
Look at it this way: Last year, the government spent about $1.5 trillion more than it collected in taxes. The Federal Reserve also spent $1.5 trillion buying mortgage debt to keep that market from further collapse and is on the hook for another $400 billion or so for Freddie and Fannie. So the government spent $3 trillion dollars to give us the current blue sky of a small recovery.
The current blue sky is approximately measured as 3% of Gross Domestic Product. The US GDP is about $14 trillion, so at 3% that’s about $400 billion of economic growth. Well, $3 trillion spent for $400 billion of economic growth is a pretty bad return on your investment, even when there are long term considerations of improvement. Add to that several trillions of guarantees and future government obligations for Fannie, Freddie, FDIC, PBGC, Social Security for the large group of boomers etc., and I have the basis for believing that these obligations are big enough to cause the collapse of the sovereign debt of the United States.
We’re not Alone!
And what’s worse, I don’t think it’s just the U.S.; I think it’s worldwide. In other words, we’re going to have debt crisis in the U.S. and Europe and other countries that have expanded their government debt too.
As Greece is being bailed out by other governments, pretty soon the question is going to be who’s going to bailout whom? The U.S. debt is getting out of control at a spending rate approximately equal to Greece’s (in terms of percentage of GDP per year.) I think we’re in a far more precarious position than most people are willing to realize.
And that all has brought us collectively in the eye of the storm, where government debt has gotten so big that it can never be paid off. That’s the problem that happened in Greece. Government debt is so big that the other countries of the European Union have had to come in with a $110 billion bailout, which is probably not enough, over a three-year period, to try to put the Greece situation back on track. What happens when Spain, Portugal, Italy and Ireland are added to Greece is a valid question?
One scenario here is that all these countries are going to be dropped from the Eurozone and left to fend for themselves and the Euro goes back to the handful of original strong economies in Germany, the Netherlands, Belgium etc.
They can do that over there and put the dream of One Single Euro on ice for another generation or so.
But here in the U.S. we obviously don’t have that option!
In the U.S. we are looking at the massive southern eyewall of the storm and we are starting to realize that the government debt and obligations for retirees from the baby boomer generation equals some $75 trillion dollars, which cannot be paid off with dollars that are now denominated at the value that most people think they should be.
In other words, we’re heading toward government devaluing the dollar to decrease its intrinsic debt in order to survive. And that means people and businesses need to protect themselves. A savings accounts paying no interest while the purchasing power of the dollar is rapidly declining, you need a diversification plan that includes metals (gold, silver,copper), solid real estate (land) in high quality supply and demand areas, cash to operate and benefit from deals and most importantly you need to understand the essence of energy in the Growth of Humanity’ Wealth.
The explosion of the offshore oil rig in Louisiana and the obvious inability to stop the leak is much like what Three Mile Island in 1979 was for nuclear energy. This kind of deep water oil drilling is potentially far more dangerous than we were made to believe; not only dangerous in the short term for the investors who build rigs and spend hundreds of millions of dollars putting these things together, but now for the environment and people’s livelihoods.
And it’s going to majorly affect our ability to do offshore drilling, which we had hoped could be one of the new sources of oil to keep the wealth of the planet and humanity growing.
Oil and Wealth Go Hand in Hand
Because of the availability of cheap energy the planet has grown to 6.8 billion people from 1.5 billion people over the last century. Because we could take the work off the backs of men and animals and put it onto machines. We created electronics, computers, medicine and so forth to improve our lifestyle. We have lived truly in the most abundant time for part of humanity, but we have used up half of the oil that fueled this abundance.
We cannot increase energy production at the level that Asia and India would like right now in order to have the kind of widespread lifestyle we have here in the West. So big price and supply changes are on the horizon. No and, ifs or buts!
I told my friend Ric (Market Man) a long time ago while standing in the surf off the island of St.Croix in the Caribbean, that when the Chinese and the Indians were ready to take their position in global wealth building, we’d better have a solution for energy supply and refrigerator gases killing our ozone layers. That was 1989 before Hurricane Hugo paid the island a destructive visit.
Now I think that moment has come and some 2.5 billion people are getting ready to claim their rights and that is a worrisome situation politically because it can lead to wars over resources. It could also lead to starvation because the production of food is dependent on energy. Energy is used to provide everything from fertilizer to diesel fuel to food storage to transportation. Energy has allowed America to move away from the farmlands when 50% of the U.S. population used to pull food out of the surface of the earth, to only 3% of the US population producing food, much of which the country exports.
We are in the Eye and have little time to waste on futilities that distract from the future. The dollar may be doomed as the global reserve currency, as is the Euro as back up in its current configuration.
We will enter a time of positioning strength against strength and weakness against weakness from manufacturing to technology and from resources to food supply.
One of the most important things to think about and invest in is the future of technology. In many ways, technology is the savior for mankind. It’s brought us this great abundance and I think can continue to do so and responsibly expand to the rest of the world.
We really need to find new sources of energy as well. Maybe wind, water and nuclear are not as “easy” as oil, but applying technology to the availability may just get us the technological answers on the demand side, just as much as the fuel injector was a savings over the carburetor.
Humanity needs a huge poke to come off its fat ass and become inquisitive and pro-active again, instead of accepting that past accomplishments are good enough.
We’re still trying to support retarded giants surviving on past laurels as if it were life support with a future. Manufacturing giants like GM, Ford and Chrysler are trying to buy time to survive on government bail outs, while looking to outsource production to other countries in a variety of ways.
But that’s not where the answers are
One of the nice things about technology is that Apple, Microsoft, Google and Intel all have substantial cash in the bank, even after the worst recession since the Depression. They have no debt. Apple just blasted through to being the third-largest company in the U.S. in market cap. I’m not making Apple a recommendation for investment as it is already high, but did so to many people several years ago when its common stock was less than 100; at almost 257 at last Friday’s closing, I wonder how many people listened.
I predict however that it still has a long way up, because the company understands and practices constant innovation. It just shows how important technology is with new iPads and so forth.
And just to be clear on this: there is no production of anything done in Silicon Valley; all the plants for semiconductors and so forth are in Asia. Yet there will be competition for intellectual resources in the future. America has an edge on the front end of the invention of technology. Meaning technological advancements are initiated here, because as a final consumer market the US is the most advanced data gathering market on the planet, which is why there are plenty of Indians and Chinese in Silicon Valley starting their own companies. While the US still has the leading edge in education and development of new things, these values should be emphasized and supported.
Other technology driven industries the US leads in are aeronautics, space exploration, transportation and distribution logistics, software development, biotech, nanotech, medical applications and other areas where technology is the leading guide to solutions and improvements.
If government is so inclined to support growth with financial hand-outs, I’m willing to go against my beliefs here by suggesting government support US invention and creativity as a very good investment. If we don’t, they’ll figure out how to do things on their own as in fact, they are doing.
For those of us willing to see a bigger picture than only their street sign, we realize that one of the reasons for China’s great leap forward was active participation in new technologies. China moved from being the low-cost producer to doing their own offshoring and outsourcing to Indonesia where they get cheaper labor for certain production. They’re trying to move up the food chain to the more complex things like electronics rather than cheap consumer goods as we watch the sweep of anointed society moving from the West toward the East. Some call it Natural Progression.
Another area where technology is key and America still leads is bio-technology? Cracking the genome means that we have figured out how to use biological methods so that people can repair parts of their bodies with living tissue rather than pills. Pills are based on chemistry that, hopefully, has some kind of molecule that makes us feel better. There is a whole new trajectory for the biological sciences that can be used to improve the human condition, next to obviously all tendencies of natural healing and prevention methods.
You can see an overwhelming need for new energy sources. We need new ways to absorb the sun’s energy to extend humanity’s position on this planet.
The U.S. is in the best shape technologically to prevail and keep its empire from collapsing in the way so many large and successful collections of society and empires have in the past. I’m not sure we will, but I think that’s the best opportunity for us both as a nation and as individuals. If we invest in finding the right technologies, we will all do better and the looming eye wall may weaken or dissipate over time.
As it stands currently in Washington and on Wall Street however, we better prepare for the next part of the storm.