It's
very early Thanksgiving morning. I just finished your latest article and
found it refreshing as always. I am feeling idle and pensive. Thus, I
present to you
Views from the Bottom Looking Up...
As
the mainstream sees rising asset-based wealth
and resilient consumers, "I see dead people" [to use the line
from that late nineties sci-fi thriller.] What really jumps off the page
is your focus on wealth creation -- a concept that is almost
non-existent in other contemporaneous treatments. As I'm sure I've noted
to you before, "You cannot print, borrow, or spend your way to
prosperity." I am sure this is a truism. In fact, it is really just
a subtle variation on the old maxim, "you make it, mine it, or grow
it". Nevertheless, it �s from the long-since-forgotten ancient
writings of the twentieth century.
I
watch the privatization of social security debates rage, and I am left
with mixed emotions. As a fiscal conservative recently sent hurdling
toward libertarianism, the idea of privatizing social security has its
appeals. I am struck, however, by the "pie metaphor": You
don't get more pie by slicing it into more pieces. The model includes no
provisions for wealth creation. Of course, there's also that nasty
problem that there really is no money to be invested anyway. Reminds me
of the story of two farmers who keep selling the same pig back and
forth, each time for a 5% profit. Finally, one farmer slaughters the
pig. The other says, "Why did you go do that? We were getting rich
from that pig." You couldn't feed more people with that pig just
like [as you noted] you can't house more people in an expensive house.
The
average person doesn't understand this stuff at all. They think that
finding a billion dollars of Saddam�s in a hole in Iraq makes us a
billion dollars richer. My theory is that Bernanke snuck over there and
buried it. There's a subtle divide between "unconventional
measures" and "unnatural acts" that has been blurred by
the Fed's [Federal Reserve�] resident "inflationist."
[There's a that must make his dad proud.] I find the inflation tax
so insidious because very few Americans walking around in a Fog, even
realize that it is a pre-meditated tax on your savings.
Speaking
of disingenuous central bankers, did you happen to catch Robert McTeer's
departing comments, as he heads off to his job in Texas [presumably
having been told there's no way he will get Greenspan's job]? He sounded
like James Grant, noting that we were in deep trouble and [paraphrased
slightly], "I do not know what we should do." Now THERE's a
two-faced weasel. McTeer should read recent books by Kotlikoff [The
Coming Generational Storm] and Peterson [Running
on Empty] for some ideas. Although Kotlikoff's and Peterson's
solutions are politically untenable in the absence of a profound crisis,
they are a start. In fact, maybe Robert should have pondered this
question on the way in the
door of the FOMC rather than on the way
out. Nothing like entering through Exit Only!
Speaking
of two-faced weasels, I wonder how much they pay Snow to stand up there
and say those things about the dollar. He makes Harvey Pitt and Dick
Grasso look good. [Do you miss the days, like I do, when James Watt was
a lightening rod in Washington?] I love the "tame inflation"
chorus, also. Even better, however, is the "it's not inflation,
it's a weaker dollar" crowd. We must look very stupid. My capacity
to pimp myself to industry means that I make a lot of money by
professorial standards. I save a lot, too. Nonetheless, I can feel the
inflation noose tightening.
I
am keenly aware that global currency flows are sufficiently complex that
I could imagine [although do not believe] that my concerns about the
trade deficit are overblown. Contrast this with consumer debt. I know --
I KNOW -- that these highly indebted folks -- millions of the so-called
�resilient consumers� -- are going to go through their own personal
recessions. There was an article this week describing one poor soul
who's interest rate on his credit card nearly doubled for no
identifiable reason. Ouch! Now his monthly payments are $850 rather than
$500. Ouch again. I hadn't thought about the legality of that, but the
implications are enormous. Major ouch. From a book by Stephen Ambrose on
the Lewis and Clark expedition, I learned that Jefferson
had an interesting strategy for getting the lands from the Indians
without having to conquer them: Get them into debt and then foreclose on
the land. You think the founding father was on to something?
Gross
domestic product continues to amaze me. How can 75% of the GDP be due to
consumption? How does one equate �consumption� with
"product"? Seems to me the GDP is simply a velocity
measurement, and the percentage attributable to consumption is an
excellent measure of non-productive spending. Imagine we carve a bunch
of stone heads. Since this would be funded by the ruling government just
like on Easter
Island, we
could call this a stimulus package. [Actually, we would outsource this
job to China, but stay with me here.] The GDP would soar with the
eagles! That explains how the
Easter Islanders got so wealthy. You say they starved to death in the
throes of cannibalism? I guess you can learn from history after all. Ok,
so history doesn't replicate itself, but Mark Twain got it right when
it said it sure rhymes a lot.
Speaking
of the Chinese, even they don't create wealth as I define it. Remember
in the olden days when our parents used to slowly accumulate appliances
and other durable goods. You could actually see the wealth of the family
grow in units of new color TV�s, blenders, and dishwashers. Nowadays
you find your house is filled with stuff that has an inordinately short
replacement cycle. It's a financial hamster wheel. The rarely used
concept of NDP -- net domestic product -- should be championed [maybe by
you]. NDP reflects the production after replacement has been subtracted
[hopefully with minimal hedonic adjustments]. As we buy a new blender
every two years [which is geologic time scales compared to software],
our GDP soars whereas our NDP limps. Depreciation is another hidden tax
that receives inadequate press. [Note Added in Proof: My microwave oven
just died. It served me faithfully for four years...after gluing the
handle back on several times.]
I've
read a number of books by folks who are close to Greenspan. They all
give him A+ grades. That's curious. I give him a big fat F. Rubin [In
an Uncertain World] opens with a discussion of Greenspan's fantastic
efforts to help save us from the Tequilla crisis in the mid-90's. [Of
course, Rubin wore a red cape, too.] What Rubin overlooks is the cause
of the crisis in the first place -- reckless lending practices stemming
from loose monetary policy. Even O�Neill likes Greenspan.
I don't get it.
Speaking
of horrendous monetary policy, an article last week did the math: A
senior citizen living off money market interest has lost 84% of his
income due to Greenspan's efforts. It's like that old sci-fi thriller Soylent
Green, except in this sequel Greenspan runs an organization that
feeds the speculators with the corpses of the savers. Nice policy, Al!
Some day the world will figure out that, when it comes to monetary
policy, less is more. I've now joined the ranks of those who believe
that adjustments in the money supply are just mechanisms to achieve
wealth transfers by shoving the market away from equilibrium. In fact, I
could have done a better job. I'd pull in a panel of experts like you
and pick a decent rate [possibly even get the FED out of the lending
game altogether]. Whatever we decided isn't that critical The
important step is that once we made the call, we would all go home. No
more whiplash from monetary policy. No more incessant perturbations from
equilibrium. We would simply stop screwing around. The free market --
the what? -- the free market
would take care of the rest.
I
am struck by the dominance of technical language in the markets. Whether
it's "money on the sidelines" [freshly printed, of course],
"negative sentiment" [supposedly better than no sentiment at
all?], �blood in the streets� [how about Blood
and Sand?], or "Hey. Now there's
a nice chart, Bob." It is the linguistic analog of Gresham's
law: "bad language pushes out good." I heard a guy at 4
AM today
talking about the dollar. Now there's a topic ripe for fundamental
analysis. The supply-demand curve is so lopsided toward supply because
�fundamentally� reckless people are printing way too many causing
their value to head down. So this nitwit lets the lob pitch float by. He
declares that the dollar has disconnected from fundamentals because of
the rumors that the Asians are going to "diversify out of dollar
assets." Call me silly, but I would say that such moves represent a
distinct connecting rather than disconnecting with fundamentals.
I
am struck by the degree of market correlation. You can superimpose the
Nikkei on the DAX and pretty much get the same chart. It's worse than
that. You can superimpose Newmont mining on top of some internet index
and see large correlations. This has LTCM-quality
implications. I'm guessing that guys like me who think they are
so smart [because they are have the vision to see that we are toast]
will soon discover that, indeed, we
are toast.
I
have been critical of the Roth IRA since its inception [uniquely so,
best I can tell], and I have been thankful that my ineligibility removed
the decision process. By pulling tax revenues forward, we have found yet
another way to mortgage the future. The Clinton administration even
hastened the process by allowing the rollover from a conventional IRA to
a Roth as long as it was done
almost immediately. Nice play, Shakespeare. Crank up the tax
revenues just in time to help generate the appearance of a balanced
budget and let future generations rot in a tax-revenue-free world.
Treasuries�
Now there is an interesting
topic. Nobody should buy treasuries [not even Asian central banks]. The
compensation for the risk is pathetic. A recent poll showed that 69% of
long-dated bond-holders believed that they will become wealthier from
their bonds when interest rates rise. As Lewis said to Clark
said during a skirmish with a grizzly bear, "This is going to get
interesting." I got too smart for my own good and in March I
actually took a position in one of the only funds that shorts treasuries
(RYJUX). This short term approach is very rare for me. Bad idea. I am
convinced that the long end of the yield curve is as hospitable as the
Venusian surface on a hot day. I was soon reminded, however, that little
panics can be stemmed quite effectively by determined central bankers
[until that fateful day when they cannot]. Further, I discovered that
this fund has a knack for tracking the treasuries to the penny on the
way down [Read: while RYJUX owners are losing money] and, shockingly,
somehow manage to lag them on the way up. The pinhead on the phone at
Rydex was evasive on this point. Eliot Spitzer still has work ahead of
him.
I
am stunned that the era of bad numbers and cooked books is alive and
well. The inflation numbers look nuts, whether measured as changes in
money supplies or prices of stuff that make life more expensive. It is
stunning to me that anybody believes them at all. So one of the most
credible guys on the planet, Bill Gross, finally comes out and attacks
the numbers as nuts -- a "con job� foisted upon us by the Federal
Government. He implies that Greenspan is part of the con. (Go Bill!)
Next thing I see is John Berry of Bloomberg news attacking Bill Gross.
What a FED patsy. So I get cranky and write
a web article attacking John Berry (for the sole purpose of
venting.) All five people who read my article seemed to like it [four if
you exclude my mother]. My counter-attack was certainly better than Bill
Gross�s: He can't match my venom for the FOMC crowd.
I
sympathize with guys in your shoes, mainstream economists, who have to
write articles about inflation. Should you declare a disbelief in the
official numbers? Do you simply refer to "tame inflation,"
cross your fingers behind your back, and stare at your shoes? And then
there's the earnings. The books are still totally cooked. How is this
still happening? Companies are supposedly earning lots of money, but,
curiously, they aren't paying out dividends and their book values are
not increasing. [Peter Bernstein finally pointed this out in a recent
article. He�s another of the good guys.] Where does all that
"cash" go? Answer: Look for those bright orange, high
denomination bills tucked the four edges of the Monopoly board. [By the way, Monopoly
is an excellent example of hyperinflation -- four hours into the game
and $100 no longer buys you squat!] And, of course, the stock options
and share buybacks are outlandish. The historians are going to look back
at this period and wonder how we got suckered so many times in a row.
I've become a gold bug
and energy bull. I'm not very happy about this turn of events. The
gold bug makes me feel like a loser -- a fringe member of society. I'd
defend against inflation with real estate instead if Greenspan hadn't
totally whacked out the real estate market. Negative interest rates?
Pervasive ARMS with full
endorsement by the FED? Forty percent of one's gross pay per month?
If Greenspan can't see this bubble, then he's a moron. My own belief is
that he's just a liar.
As
to energy, I've read a ton on oil output and estimable reserves. The
concept of "peak oil" is unquestionably real; we're only
unsure about the timing. I think it could come at us real soon. As a
physical scientist, this is the scariest of all. I know enough about the
energy content of fossil fuels to know that there is no obvious
replacement for them. Solar energy isn't even energy positive: It
takes more energy to make a cell than it gives back in its lifetime.
Biological sources of energy (gasohol) are profoundly net energy
negative. Most of the ideas that are popular appear to ignore the most
fundamental principles of physics. To quote some assistant director of
something out of the White House who I had the pleasure of spending an
hour with, �We are in a mess and nobody is paying attention.� Bottom
line is that we may be within a decade (even less) of geophysically
dictated reductions in production. We lived without fossil fuels in the
past, but not 6 billion of us. As George Carlin said in a recent
monologue, "The world will heal itself just like it always has. We
may not be there to see it, however."
I
am constantly pondering such things as what allows a person to be a
contrarian. A key feature is arrogance. You must be able to look at a
bunch of famous guys with curriculum vitae as long as their arms and
say, "You are wrong.� When asked by a colleague why I thought I
was smarter than them, it came to me as an epiphany: "Because they
are idiots!" [which takes us right back to the arrogance theme].
I
agree with John Mauldin when he says we will "muddle through."
It's not like we have a choice. Unfortunately, history shows [Mark
Twain; vide supra] that muddling can be a miserable experience. In the
spirit of Thanksgiving, however, we should be thankful that the muddle
phase has been deferred to the future.
It
is time to complete what I would call a 20th Century comeback to the
caveman, pondering the ominous and complex world around him, attempting
to mitigate risk and make some sense of it all. It is not clear that
there is sufficient information available or even if our brains have
enough lobes to handle the complexity, but we must try.
Maybe
it's just entertainment, so throw me a loaf of bread and get on with
the circus.
GLOBAL
REAL ESTATE MARKETS FORUM