Asset Returns Show the Obvious Problems

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Includes: DIA, FCAU, FSYS, GLD, QQQ, SPY, TM, UDN, USO, UUP
by: Michael Fitzsimmons
Here is a table listing asset returns for the last 1 and 10 years (data from the Wall Street Journal):
ASSET RETURNS
1 YR
10 YR
OIL
78.00%
210%
Gold
23.90%
280%
S&P
23.50%
-24.1%
DJIA
18.80%
-9.3%
NASDAQ
43.90%
-44.2%
US Dollar
-5.20%
-12.8%
Click to enlarge
Despite all the rhetoric coming out of the Federal Reserve, Congress, and economists, this chart points out some very obvious problems:
1) The 210% in oil prices over the past 10 years means we have an oil crisis. Note the 210% gain in oil is based on the 2009 year end price of near $80/barrel oil, and does not reflect the economic distortion caused by 2008’s $150/barrel oil.
2) The 280% rise in gold prices over the past decade, the best return of all asset classes shown in the table, means we have financial and monetary crisis.
3) The -24.1 10 year return of the S&P500 means the US economy is sick.
4) The -12.8% decline in the value of the US dollar means Federal Reserve “policy” is abysmal and the wealth of the US is deteriorating at a very rapid pace.
The last two problems are actually a direct result of the first two.
The returns of the S&P500 are so terrible and the US economy is so sick because of the rapid increase in oil prices. This has been devastating to the US because it imports 65% of its oil.
Similarly, the rise in gold prices and fall in the US dollar are a direct result of failed Federal Reserve and US monetary and fiscal policy.
So, we know the problems:
1) US reliance on oil
2) Federal Reserve and US monetary and fiscal policy.
I actually think US fiscal and monetary policy is so terrible because of US reliance on foreign oil. That is, US economic policy is attempting to fix a commodity related problem (oil) with fiscal policy. This is a failed strategy and is skin to building a house on a foundation of quicksand.
Not one to complain without giving solutions, here are my suggestions going forward in 2010. These of course are the same solutions we needed in 2009, 2008, 2007….
To solve the oil import crisis, the US needs to adopt a strategic, long-term, comprehensive energy policy like this one.
The core of any such energy policy must be a transition away from imported foreign oil and reliance on America’s greatest energy resource: its abundant, clean, and cheap natural gas reserves. Since the US consumes 70% of its oil usage in the transportation sector, it is clear that it must adopt natural gas transportation on a broad scale. Although I applaud Boone Pickens’ plan to jump-start this effort by focusing on the trucking industry, this alone will not reduce foreign oil imports as much as is needed. Therefore, we must push NGVs and natural gas / electric hybrid vehicles into the consumer sector and into the garages of middle class Americans. The best technology available is the natural gas/electric hybrid vehicle Toyota (NYSE:TM) unveiled at the 2008 LA auto show.

Think a Prius with the internal combustion engine powered by natural gas instead of gasoline derived by foreign oil. This vehicle has the same range as today’s gasoline powered cars, does not rely on electricity derived from dirty coal to charge its batteries, and does not need the huge battery packs needed by 100% fully electric vehicles. It is therefore much less expensive than are electric vehicles. At the end of the day much cleaner as well. You can read more about this car here.
Although this technology has been available for two years now, and despite Toyota's recent financial woes, the company does not seem motivated to cash in on such an obvious jewel. Our best bet for this technology may indeed be Fiat (FIATY). I hear rumors that Fuel Systems Solutions (NASDAQ:FSYS) may be starting a new assembly line in Italy to produce the home garage natural gas refueling appliance shown below (the “Phill”):

Were Fiat and FSYS to package a natural gas/electric vehicle together with the “Phill”, not only would I buy the pair, I’d buy stock in both companies as well. Assuming the two products were high quality and economical, they would clean up in America once people realized how much money they could save by filling up in their own garage with natural gas.
Expect pushback from the coal and oil industries on any such plan. The powerful coal interests are backed into a corner. The word is out that coal is inefficient, dirty, has (and is) causing massive water pollution around the country and is spewing all kind of toxic particulates into the atmosphere. The oil companies still don’t want to acknowledge the natural gas transportation solution as they make more of their profits by drilling and refining oil. One can only hope that ExxonMobil’s (NYSE:XOM) purchase of XTO will mean that company will begin to throw its weight around to support natural gas, at least in power generation if not nat gas transportation.
The cynic in me says XOM’s purchase was more about protecting their LNG investments in Qatar. Those billions of investment dollars were spent prior to the advent of shale gas in the US. Today, I can’t see how it makes sense to send Qatari LNG to the US when cheap and abundant US natural gas supplies are a light switch away. Perhaps by buying the largest producer of natural gas in the US, XOM was thinking it could affect US nat gas prices. This may be true, but I doubt it. Natural gas production is dominated by small independent producers. XOM will find it much harder to corner this market as a way to boost profits. That said, natural gas transportation would support decent natural gas prices for decades into the future. So, XOM has a choice: watch the US go down the tubes depending on foreign oil, or, support natural gas transportation and help usher in decades of prosperity in America.
Solving the second issue may well be more difficult than solving the imported oil crisis (as if that wasn’t a big enough mountain to climb). The Federal Reserve has become an entrenched institution controlled by a very small group of people. Allowing this small highly connected group to print massive amounts of money out of thin air, distribute it to its friends and cohorts, and absolutely control interest rates and credit, all in complete secrecy with no Congressional oversight, is an American travesty.
The US dollar has been devalued by 95% since the inception of the Federal Reserve. Add to the Greenspan/Bernanke problem regulators such as Mary Shapiro at the SEC (a “dear friend” of Bernie Madoff), “pay czar” Kenneth Feinberg (who decides how much money is given to Lloyd Blankfein at Goldman Sachs, Jamie Diamond at JP Morgan, Robert BenMosche at AIG, etc. etc), and others such as Barney Frank, Larry Summers, Jared Bernstein, Peter Orszag, Timothy Geitner, Stephen Freidman,and what have you got? Well, the entire American financial, monetary, and policy apparatus has been hijacked by a very small group of well connected people. These bureaucrats profit greatly from their control while contributing nothing real to the American economy.
This country needs to get away from paper illusions and begin to manufacture high quality goods again. Instead the system is totally geared to rewarding those who make nothing, and suck the lifeblood out of the economy.
The solution to this problem is as follows:
1) audit the Federal Reserve by supporting Ron Paul’s legislation
2) the audit will expose the fraud, eventually leading to abolishing the Fed
3) transition the US dollar from fiat money to money required by US Constitution: hard money backed by gold, silver, platinum, and palladium
It’s that simple. If we don’t do this, expect the world to transistion rather rapidly to a reserve currency in which the US dollar role will be much diminished. This means much higher borrowing cost. Those higher borrowing cost, coupled with the energy and housing crisis, could spell the end of the great US experiment.
What does all this mean for the US investor? Well, that too is simple. Your investment choices are very limited given the unsound energy and monetary/fiscal foundation of America today and for the foreseeable future: gold, silver, and energy stocks. Some good investment choices are GLD,SLV, gold and silver bullion, [[BP,]] COP, CVX, PBR, XOM, and a plethora of energy service companies favoring deep water drilling technology.
I continue to like StatOil (NYSE:STO) because of its prudent executive compensation plans, corporate governance, and dividend policies. I know I know - same old same old. I am boring. That said, anyone who listened to my advice years ago and got out of the S&P 500 has benefitted from this advice. Likewise, Vanguard Energy has returned 16.3% annualized over the last 10 years. And gold, well, gold performance speaks for itself. Since gold is priced in US dollars, gold prices also say much about the current state of US economic and fiscal policy. Expect these trends to continue. Perhaps the next decade will be different, but don’t hold your breath.

Disclosure: Long gold, silver, and energy stocks.