LilBob

Marc Faber Doesn't Think Gold Will Go Below $1,000

"Never" is a very strong word to use, and one that I'm skeptical of in any discussion of valuation. It is undisputable that given recent increases in the money supply we will see significant inflation of prices if the money supply isn't reined in significantly once unemployment returns to a "normal" range of 5 to 7%. That being said, if we do see massive economic policy blunders resulting in a failure to adequately rein in the money supply for fear of slowing down the economy too much as employment picks up then Faber may in fact be correct-but the real issue is if we were to use inflation adjusted dollars does that $1000+ price point still translate into a worthwhile asset vehicle.

I'm also convinced that the increasing stock market is largely a result of millions of retail investors who've cut back on personal spending and-having few other options-are sinking a greater portion of their income into equities based retirement plans. I predict limited growth in equities value as growth in employment and consumer-spending is complemented by an increased willingness by consumers to spend a little more freely. With a bit of luck there is the possibility that recent growth will plateau rather than fall as this phenomenon occurs.

Is Jeff Matthews' Call for a Growth Surprise Mistaken or Early?

I side with those saying that Buffet is looking at the long term. There's an ad running right now for one of the railroads (I honestly forget which one right at the moment) which touts their ability to move 1 ton of freight 120 miles on one gallon of fuel. That kind of efficiency makes a fleet of semis look like hopeless gas guzzlers. Buffet is betting on a return to rail traffic as the potential for a falling dollar and rising fuel prices imperil future growth in the fuel-hungry air and highway shipping sectors.

Time for the U.S. Economy to Reindustrialize

You are spot on in stating that the US needs to reindustrialize. The out-sourcing of production in this country was basically a gravy train that brought about the opportunity to sell to developed world consumers without having to pay developed world wage rates. Unfortunately, once the wealth that had accumulated over the years in the bank accounts of the WWII generation was largely spent, the method resorted to for continued economic growth was to pretend that credit was a creator of economic demand-rather than a vehicle of existing and pending economic demand-and to leverage away. The end result is an economy that is not sustainable in the long term because those "higher paying and more productive jobs" that were promised via various media outlets when out-sourcing began turned out to be imaginary and you can't continue to increase consumer spending when growing numbers of Americans are being transitioned out of "Old Economy" union jobs that payed living wages into service and retail sector jobs that rarely pay more than ten dollars an hour.

The Real Reasons Behind Our 'Stupidity Economy'

Spot on Kimball. I've been getting a lot of "thumbs down" lately for suggesting in my comments that the real problem with our economy is a deterioration of the consumer base and suggesting that what really brought the US out of the Depression was not WWII itself but GI Pay, Rosie the Riveter wages and interest on War Bonds. Unfortunately, with this recession we don't have those functions to provide some opportunity for recovery.

The real source of this recession-as I see it-is (as you mention) the concentration of wealth in the hands of too few families; and this is largely a result of too many Americans buying into the "be a team player" and "keeping up with the Joneses" mentalities that have permeated American culture for years. We have been trained as a subservient people and are instructed to think that American Business is all-knowing and all powerful and you shouldn't worry too much about starting your own business because "anything you can think of "The big guys" have already thought of and if they aren't doing it there's probably no money there anyways."

We in this nation are going to have to pull ourselves out of this recession by our boot-straps. If the government were really interested in fixing our economy we'd see a lot more anti-trust legislation aimed at fostering free-market competition, and a lot less of these massive government programs that appear to do little but provide an excuse for distributing more tax money to institutional interests.

What we really need at this point is a modern day version of the French Revolution, only this time we'll do it with sustainable business practices and free-market competition rather than angry mobs and guillotines.

Japan Parallels Are Too Close for Comfort

I actually see this article as a positive sign. For some time we've seen a lot of resistance to the notion of a long slow "L" shaped recovery; with the most ridiculous being prections of a euphoric snap-back "V" shaped "jobless" recovery (which is basically a prediction of a "W" shaped recovery with a healthy dose of denial regarding unemployment and missed earnings projections thrown in).

Entrepreneurs are needed to bring us out of our current economic malaise. And until there is a general understanding that the bearers of the status quo probably aren't the ones we should be looking to for guidance then we aren't going to see any real change or improvement. Alternative energy has the potential to bring us a good ways towards prosperity but until we start to see more (like myself) who are assembling business plans and working through those SBA tutorials and less of existing corporate entities whining to the government for corporate welfare subsidies we aren't likely to see any real or permanent improvement.

Consumer Sentiment Continues to Falter

On Nov 13 04:59 PM robert.b.ferguson wrote:

> While I'm as baffled as David Fry is about consumer indexes the Dollar
> General (DG) and Rue21 (RUE) IPOs from Friday are up 6% and 26% respectively.
> Consumer discretionary any one?

I'm surprised those IPO figures aren't the other way around RBF. The Dollar General near me is second only to the Dollar Tree and Salvation Army stores in customer traffic.

Analyzing U.S. Economy in Terms of Housing

I still feel part of the problem with real estate is that there is too much talk of the market as a whole, without a lot of real focus on what types of homes are selling. Very small homes in the sub 150k market are selling well right now-especially homes which have had significant energy efficiency upgrades and are relatively cheap to heat and cool; prices have stabilized and the first time home-buyers tax credit appears to have pushed prices up considerably in this portion of the market.

It also appears that the top of the real estate market-homes over 1 million are beginning to stabilize. Buyers of these homes are obviously wealthier individuals who are seeing some of the value returning to their investment portfolios, although many homes in this part of the market have lost hundreds of thousands and sometimes even millions in market value over the course of the last three years.

The big losers right now are those stuck with suburban McMansions which originally sold for anywhere from $350k to 600k. Literally thousands of homes in this price range were thrown up during the real estate boom and purchased by individuals who didn't seem to realize that they were buying more home than they could afford. Add to that, many of these homes were built by unscrupulous developers and it's not uncommon in neighborhoods in this price range to see literally pathetic examples of poor quality materials and workmanship on full display. There are some neighborhoods right near where I live and it's not uncommon to see paint falling off of homes in large flakes because boards weren't properly primed, sides of homes being dug up because basement walls have collapsed or improperly placed landscaping has caused foundation problems, sagging and cracking brickwork, etc. There is no bottom for many of these homes which were built by fly-by-night developers with no sense of integrity or quality. These homes will likely end up being purchased by the municipalities where they reside and bulldozed.

Don't Believe Long-Term Oil Forecasts: Part II

I agree with all here regarding energy efficiency and alternative energy sources. As with all things, market prices will eventually dictate when Americans begin conserving energy and looking for alternative energy sources. In the summer of 2008 we observed that the Threshold of Elasticity for 87 octane unleaded was around $3.85 USD/gallon. National oil consumption dropped by around 4% and pump prices fell by almost a dollar a gallon before they started inching back up again. With the economy being so weak there appears to be a "Burnt Finger Effect" which is a lingering consumer resentment that results in a decline in the Threshold of Elasticity price point at the pump. As pump prices and the monthly utility bill begin going higher we'll see increased sales of small and hybrid vehicles, more car-pooling and bus-riding, and greater interest in renewable energy sources. Unfortunately, as we all know, American consumers have to get burned pretty badly, then work through the five stages of grief with Media encouragement and support before they'll actually do anything.

U.S. Wages Are Out of Balance, As We Well Know

I agree with Tom's comment, and I'll also note that part of the problem with wages and retail sales growth in this country was that outsourcing of jobs was used as a means of selling to developed world consumers without having to pay developed world wage rates.

Right now there seems to be a growing mass of business leaders and investors out there who are convinced that we need to do two things to get the economy on track:

1. Get American consumers to start spending again.

2. Get American workers to accept lower wages-including elimination of the minimum wage laws.

We all know that Wall Street and Political types are perfectly willing to enage in a seperation from reality when it suits their political or financial interests, but to anyone who lives on planet earth, it should be obvious that trying to reconcile the two goals listed above makes about as much sense as trying to take the cure by having a shot of whiskey with your bowl of bran flakes every morning.

The real solution to America's competitiveness problem is to have a greater number of entrepreneurs to challenge the oligopolistic market structures of the US and eat the lunch of the overgrown, over-leveraged corporate dinosaurs that have bought up lobbyists and Congressman and are dragging this country into the gutter.

Bonds Signal Inflation Is Coming

On Nov 10 01:32 AM Northern Dancer wrote:

>
> LilBob, I have to respectfully disagree with you about inflation
> being "ultimately a consumer driven phenomena". That isn't the case
> at all, although it appears to be. Inflation is caused by too many
> dollars chasing too few goods. Let's take grains for example. When
> the price of grains is driven up by too many dollars chasing too
> little grain, the price of flour is going to rise whether the baker
> likes it or not...

We seem to be arguing both sides of the same coin Dancer. You are absolutely right about too many dollars chasing too few goods. But also, any good ultimately has to have a consumer to purchase it, or that good is inherently worthless. The use of aggressive leveraging of capital to drive up futures shares can temporarily increase costs, but if consumers revolt and reduce their consumption of goods significantly then prices will eventually fall back down again. That's why I often mention the (much hated by some) Threshold of Elasticity concept-which refers to the price point at which a good which was initially thought to have inelastic demand characteristics begins to show significant signs of increased demand elasticity. Just look at what happened to gas prices in the summer of 2008, after pump prices reached a nationwide average of around 3.85 a gallon, consumers turned to car-pooling and park and ride lots and nationwide fuel consumption dropped by around 4%-which eventually resulted in gas prices falling by around a dollar a gallon. Aggressive leveraging and futures-trading can only push prices up for so long before customer revolt annihilates asset values. We also have to contend with what I call the "Burnt-Finger Effect", which refers to when a run up in prices leads to lingering consumer resentments agains producers that results in a steady decline of the Threshold of Elasticity price point for a given good. American consumers are angry right now and we really are living in an age which bears significant similarities to the "Trust-Busting" age of the early 20th century and the first Roosevelt administration. The notion that market prices are independent of consumer behavior is a potentially dangerous one, and contributes to the formation, and spectacular destruction of market bubbles.

Bonds Signal Inflation Is Coming

I have to side with WD regarding inflation. Inflation is ultimately a consumer driven phenomena. If consumers are not willing or able to pay higher prices for goods, then the cost/price/return structures based on hopes and expectations of those higher prices simply collapse, and you have goods sitting on retailers' shelves, and service sector employees getting laid off for lack of work. I don't believe we are likely to see significant inflation in the CPI until unemployment returns to the 5 to 7% range. What you're describing in bond market prices is basically just a by-product of the cost of economic stimulus efforts and an attempt to extend the repayment period for those new debts to a point in the future when Obama-if he is reelected-will be a lame duck president in the latter half of his second term.

Today in Commodities: Strength vs. Dollar Weakness

With unemployment being so high and pump prices hedging the $3.00/gallon mark I expect to start seeing Threshold of Elasticity and Burnt Finger Effects coming into play again. Consumers are still harboring resentments about the run up in gas prices in the summer of '08 and we're likely to see the mainstream media jump on the "use less gas" band-wagon again. Expect sidebars in the newspaper on car-pooling and Park and Ride programs. I'm actually a little more bearish than Big Bear as I believe weak employment will lead to a progressive decline in the Threshold for 87 octane unleaded.

I'm also very skeptical of metals right now. We're seeing a lot of "Bubble-Style" pro-gold jingoism in the investment presses right now and that to me is a sure-fire sign of an impending and massive price crash.

Unemployment, Retail Numbers Don't Add Up

I would interpret this graph to mean that the period of rapid decline in retail spending represents a period of rapid deleveraging on the part of consumers. Consumers sought to pay off their credit cards and live within their means. The steady rise we are seeing now may be the result of consumers having largely dug themselves out of debt. They are finding they have more disposable income because they have minimized their balances and are paying less out of pocket for interest. This graph is actually in line with what one would expect if you had a large group of consumers actively seeking to deleverage themselves, then resorting to a "cash and carry" mentality regarding retail purchases.

I don't wish to sound like one of those overly optimistic perma-bull types but this phenomenon is actually a very positive trend because as employment does eventually start to pick up a retail economy that is based more on cash and less on credit cards will result in less money in the hands of Too Big To Fail banks and more money for providers of goods and services.

Consumer Credit: Dreadful

On Nov 07 03:29 PM neontyper wrote:

> Most of the people you know are maxed out? Most of the people I know are not. So neither is a norm then.

I have to side with Neon here. Most of the people that I talk to are in nearly the exact same spot that I am personally-having either recently paid off, or nearing the point of paying off all of their credit cards and minimizing other expenses, they are trying to hustle second jobs or contract work on the side and are talking about trying to use cash more and only use the credit card for things like plane tickets, where using cash involves a huge last minute premium penalty.

Consumer Credit: Dreadful

double typo-other way around