The Barnard Observer
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Home Vault Misc Contact c2003-10 Thomas Barnard
Drooping Economy
Economic Drivers
In 1914 automobiles were in 10% of households. By 1921, autos were in 50% of households, and by 1928, cars were in 90% of households. Shortly after this saturation level was reached auto production and auto stocks plummeted. (Data: The Next Great Bubble Boom, Harry S. Dent, Jr.)
This was true not only of autos, but there was a technology explosion - refrigerators, toasters, radios. Not surprisingly, consumer finance also surfaced around this time.
Okay, now lets take that auto-in-households graph (in our minds) and overlay it on the current situation. In 1980, there were zero personal computers in homes, but by 2000, we were up to 99%. Same for cell phones, next to zero in 1980, but by 2000 there in 99% of homes. Same for the internet. I am speculating on the data, but I don't see how I can be far wrong.
On top of this technology saturation, we had a government that took a laissez faire attitude towards home building and finance, and we know how that turned out. Very badly indeed. If this weren't enough, Bush cut taxes which superheated the economy, and now: we're in the soup. No demand.
So, it would be foolhardy to think we will experience anything like a robust recovery. From where would it come? Home building? Autos? Not likely. Happily, technology is still doing okay, but understand, the iPad is not another new invention like the personal computer. Barring brilliant public policy, we are certainly in for a Japanese style decade.
There will be some movement towards solar and wind power, but the government has not yet powered up anything meaningful.
Soap Box Stuff
My take is that tax cuts for individuals will not create sufficient demand. Rich folks have stopped their ostentatious ways for the moment. If all they do is sock it away, it won't do anything to power up the economy.
Tax cuts for housing have run down, and housing starts stink. When cash for clunkers ended, car sales collapsed. These props will not work because there is no real pent-up demand. All the tax cuts do is create fake demand. It was as I have said before (coming from Seth Glickenhaus), Allen Greenspan's low interest rates stole demand from future years for both housing and autos. We are here.
Obama and the Democrats had the right idea with the Stimulus Bill, but I rate it a fiasco. For it to have worked, Obama needed to declare a war on oil. He still has a chance to do this, but the window is narrow, November is near, and my take is that he blew his wad on health care. Which I think was badly timed (but not a bad idea. Republicans did nothing about protecting individuals from going bankrupt from spiraling health costs.) Obama tried to do too much. He propped up state governments, but ultimately, this comes down to propping up untenable public defined benefit plans. States and municipalities need to deal with the ugly realities of promising far more than they could reasonably deliver. They need to end the defined benefit plans, and probably cut the benefits, and begin anew with contributions-only to pension plans.
If it were me, I would put a tax on gasoline and forget about complicated carbon schemes, and use the money to fund solar research and, yes, really substantial tax credits on solar panels and wind turbines much as they have done in Germany. I would favor made in the U.S.A. for now.
And if it were me, I would explain it by saying, we will be phasing out of the Middle East, and we need to phase out of oil, and spend less on the military. We have seen the possible disasters that come with tapping ever more remote locations for oil with the BP spill. We will never be able to change over to alternative energy over night, it will take decades. But we start now and in a big way.
We need to create jobs. As Ford used to say, this should be Job #1. This is the way to do it: $500 billion or a trillion on alternative energy. Okay spend a little on nuclear if you want, but for me the take away from the Gulf of Mexico disaster is that distributed engineering solutions should be favored over centralized engineering solutions. Three Mile Island was a near disaster of the like of which Chernobyl was the real thing.
Andy Grove argues in Bloomberg Businessweek (July 5, 2010) that maybe it is time to be a bit protectionist. He makes a good point. We make no TVs in the U.S. anymore, and now we have lost the knowledge to make any TVs. He says, "An industry needs an effective ecosystem in which technology knowhow accumulates, experience builds on experience, and close relationships develop between supplier and customer." Groves suggests we may need to engage in selective protectionism with new industries - like solar, wind power and batteries, so our workers are not left out of the equation.
I have seen for myself what happens when the middle class gets crushed in my travels to Argentina, and what it meant was that I personally witnessed pretty young women sorting through garbage. They're called cartoneras, they go through the cartons. I saw a news piece last time I was there. One of the girls was pretty enough to have won a beauty contest. She complained about her fingernails, all raggedy from going through the trash. We need some good manufacturing jobs.
My father has argued to me that American auto makers were hampered by overpaid workers, but I'm not sure about that, here are 2009 auto wage cost/hour (Bloomberg BW July 12, 2010):
$58.50 Germany
$47.81 France
$41.73 Sweden
$38.63 Japan
$33.00 USA
$31.62 Spain
$21.10 South Korea
Germany has the highest pay workers and makes the best cars, which confirms my contention that the US has had horrible leadership, and that many American jobs have been lost because of arrogant management. Management that was not even smart enough to copy cat the competition. Making one wonder what the hell is taught at: Sloan, Stanford, Wharton, Kellogg, U of C, Harvard, and so on. Signing Bonuses 101, Golden Parachutes 220, Options 343, Deferred Compensation 400, honestly, I mean, what goes on there?
Where to Look
Biotech. Yes, Virginia, health costs look poised to come down, but not necessarily because of government edicts. What I mean is that open heart surgeries are down. Doctors have found that drugs deal with these things much more effectively. And doesn't it make sense? It's a cardiovascular system you are dealing with, not a local problem with the heart. I have friends who have had one, two, three bypass surgeries. Why? Because the veins clog up again. It is a systemic problem, and drugs are a systemic solution.
There is a lot more technology can do. Vaccines have shown they are still a valuable tool, and the action in Dendreon, which got approval for a prostate cancer vaccine, shows that there is a lot of investor interest in this.
And I think there is still a lot of stuff to be done with the internet. Television is going to move to the internet. This may not be a happy thing for the cable TV companies. But these things move slowly. I thought Blockbuster was history a decade ago, but it still lumbers on. I've watched episodes of Family Guy on Hulu. I have bookmarked Charlie Rose's website. I like watching the interviews with James Watson and Michael Crichton, among others. There must be a way to play this, but it hasn't occurred to me yet. (But sometimes there isn't a way to play something obviously changing things. I never found a good way to play ATM machines when they were coming along. There wasn't one.)
Telephone will be moving entirely to the internet. Verizon announced that in a few years all of its calls will be routed through the internet. Good news certainly for Cisco. Eventually, all telecom companies will be routing their calls through the internet. I've used Comcast's VOIP (voice over internet protocol) for a year, and the sound quality was perfect. Now I'm using Vonage because it includes in its basic monthly charge not only long distance for all of the U.S., but other places I'm likely to call - the UK, France, and Argentina. Amazing. There has to be a play in there somewhere.
Further out, we will all take to the air. The airplane/auto is coming. Probably still decades away, but imagine how this would change the country. GM needs to start thinking about this now. It will only come because electronic chips and engineering will make them very safe to operate. I mention this because people seem to be in the dumps and don't realize things can still change dramatically.
Citibank
The earnings report came out, and well, it's going to take a while. In the meantime, Vikram Pandit won an award for managing, and he's a strong reason to stay with it. Sandy Weill was a pompous, narcissistic egomaniac. He created the monster from which Pandit must now fashion a lean customer-directed twenty-first century bank. I've seen interviews with him. He is completely focused, and he has the training to do the job. He has my confidence. But it will take a few years. And so what if he bought a $350 bottle of wine. The press is ridiculous.
What's on the Horizon
China's Housing Crash. There are empty apartment buildings in Beijing, a crisis is in the making. When it will hit is unknown, but late 2010, early 2011 is best guess.
Top Tax Rate Hike - top rate on individuals rises from 35% to 39.5% with the falling off of the Bush tax cuts beginning in 2012. The wealthy will shift income into this year. Next year will not look good, but I'm not persuaded it will necessarily be the disaster than Arthur Laffer thinks it will be.
But This is Not the Scenario of a Big Decline
Well, the market open a couple of hundred points higher today, July 22. But the graph of the Dow doesn't look that good. It does look like it might go down further. My view is the investor sentiment view. So, even though stocks could easily be re-priced to a PE of 10 or less (and I would not be surprised), and even though Robert Prechter is talking about a Dow Jones of less than 1,000, and even though rich folk are not spending, I'm a little skeptical that things will go just that way. Almost to a man, intelligent people are telling me that they are moving their investments to cash. This is not the typical formula for a stock market decline. Yes, if enough people do it, prices will come down. Okay.
But typically, stock prices come down when the little guy has finally invested his last dime. That is not the situation we are experiencing today. The little guy, so the pundits say, has not re-entered the market since the crash. Stocks could easily climb that wall of worry even if the economy is drifting. And there are enormous vats of money sloshing around. Nevertheless, shorting may be one way to make some money if things do go down. I'm not doing as of yet, but I'm rolling the idea around.
Investors Intelligence July 13, 2010 reading has bulls at 32.6% and bears at 34.8%. Remember this is a reverse indicator, a bullish reading below the bearish one is basically constructive. And the market did bounce. But I'm not expecting much. Summer doldrums.
July 22, 2010
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Sponsors
I'm elephant hunting. I'm only interested in game changers and truly unusual opportunities. My father has told me many times that what made the difference in his stock market investments were the elephants, the stocks that went up multiple times. Much harder to pick those now than 15 years ago when all you had to do was mention the internet. And you better believe it, I'm saving my best ideas for my partners.
Stock Recommendation Partnerships. Presently, I have two such recommendations. These are stocks I just can't get enough of for my own account. You own the stock in your account, but a percentage of the winnings go to Thomas Barnard for his recommendations.
Here is the agreement: Stock Recommendation Partnership Agreement. No agreement no matter how well drawn is sufficient. If I don't know you personally, don't bother. If I do know you, now is a good time to check this out.
These are stocks of unusual potential. But the risk is always bigger with nascent companies. One of the stocks has recently run-up more than 100%, the other one has gone down 30%. Never mind, I love them both still. The one that has gone up, has only just begun to go up. The one that has gone down has one of the most compelling stories I have ever come across. There is so much compression, these both have a long way to go on the upside.
Email: tbbarnard@yahoo.com
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M.E. Reiss Ltd. Select investment management. Email: mereiss@yahoo.com
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