Many Americans are doing just
that. Over 92% of the labor market is showing up for work
every day. Business owners are finding creative ways to stay
afloat and even increase their business. Some small businesses
are even going door to door soliciting business, and others
are providing extra services like pick-up and delivery dry
cleaning. Even larger corporations are exploring new business
opportunities; Proctor & Gamble recently announced that
they are looking to expand into the car-wash business (Mr.
Clean Car Wash). We have been on the gravy train since the
last economic slump (early 1980s) with booms in hi-tech, bio-tech,
real estate and business in general. Perhaps we became too
complacent and took too much risk, thinking the ride would
go on forever. Well, nothing goes on forever and now America
is retrenching and setting up for the next economic recovery.
We have always been impressed with the resiliency of the American
people and their ability to make lemonade when life gives
them lemons. It is a huge ship ($12 trillion GDP), and it
cannot turn on a dime, but it will turn.
One man’s pork is another man’s steak. Yes,
we feel the need to weigh in on the stimulus plan. The House
and Senate have both passed bills but now have to come together
and work out a compromise. More and more Americans are voicing
their displeasure with this pork-laden plan. The Rasmussen
tracking poll shows support for the plan dropping from 45%
two weeks ago to 37% this week. The Congressional Budget Office
estimates that just $29 billion, or 8%, of the $356 billion
in discretionary spending under the plan will be spent this
year; another $116 billion, or 41%, will be spent in 2010.
This is just the discretionary portion of the plan. Looked
at another way, $170 billion of the total plan will be spent
in fiscal 2009, $356 billion in fiscal 2010 and $293 billion
in fiscal 2011 and beyond. We confess to not having read all
680 pages of the stimulus plan, but you can look at the entire
plan by logging on to stimuluswatch.org. We do not believe
that we can spend our way out of this recession. The good
news, however, is that three key factors for the recovery
are in place. Number one, the Fed has injected billions of
dollars into the money supply. Since September of last year,
money supply has been increasing at an estimated annual rate
of 20%. It normally takes six to twelve months for the benefits
of this increase to take effect (do the math). Number two,
it looks as if the tax cuts put in place by the previous administration
will remain, and number three, interest rates are low and
will probably remain so until the Fed is convinced that a
recovery is underway. In short, we already have a stimulus
plan in effect. Now if Congress would only reduce the corporate
tax rate from 35% (second highest in the free world after
Japan) to at least 25% we would see corporate and new business
spending escalate. That would be a real and immediate stimulus.
Recessions occur several times over each investor’s
lifetime. We generally work through these periods quickly
and resume our previous investment strategies. Less frequently,
and maybe only once over each investor’s lifetime, do
we have an event that brings about a major change in investment
strategies. We are witnessing one of those once in a lifetime
experiences now. The last occurred in the 1930s, and there
are few investors around today who remember that time period.
Now, we are not saying that we are entering a depression.
We are saying that the current crisis will bring about change
in our economic system and the manner in which we invest.
This is not bad. In fact, it is healthy as we learn from the
mistakes of the last twenty-five years in particular. We can
then build a more solid economic foundation for the investment
strategies of the future. We are in the process of accomplishing
that now.
Human nature dictates that greed and fear will always be
with us. It is the former that drove asset prices to unsustainable
levels, and it is the latter that is now building the framework
for the next recovery. Investments in fixed and financial
assets will still be with us, but the manner in which they
are analyzed will be re-evaluated. There will also be new
and more sophisticated investment vehicles originated. We
suggest you may want to read Extraordinary Popular Delusions
and the Madness of Crowds by Charles Mackay, first printed
in 1841.
Random thought for February 2009:
“Internal improvements were the pork of the day.”
Van Buren watched with bemusement as Congressmen “brought
forward under captivating disguises the thousand local improvements
with which they designed to dazzle and seduce their constituents.”
American Lion: Andrew Jackson in the White House
John Meacham, Random House 2008
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