What a century, and it is only
seven and a half years old. We started this century with the
mother of all stock market bubbles, followed by a recession;
then we had record low interest rates, followed by a housing
bubble which led to a financial crisis, both of which are
still ongoing. In between, we had (have) a strong economic
recovery with the Dow Jones Industrial Average making new
all time highs. Subsequently, the stock market has reversed
course and is now down about 20% which by technical standards
is a bear market. This has been brought about primarily by
the crisis in the housing market and the financial sector.
We have talked in the past about the media’s role in
the current malaise hanging over the country. Someone once
said that a recession is when your neighbor doesn’t
have a job, and a depression is when you don’t have
a job. Part of the reason for all the negativity in the news
may be due to the upheaval in the way news is presented today.
The younger generation is more and more tech savvy and turns
to the Internet for news. As a result, many newspapers are
folding, and reporters are looking for opportunities elsewhere.
If your world is crumbling, it seems like the rest of the
world is also. However, that’s not the case. Joseph
Schumpeter, a Czech economist, popularized the term creative
destruction. In Schumpeter’s view, creative capitalism
was the force that sustained long-term growth even as it destroyed
the values of existing companies through improved designs
or efficiencies. The industrial revolution is the classic
example, and a more specific example would be Polaroid or
Xerox. Because of our tech savvy young population, these changes
are occurring more rapidly.
Yes, some areas of the economy could be considered to be
in a recession (housing, finance and autos), but we are a
$14 trillion dollar economy, and most sectors are doing fine.
We are not in a recession. Consider that 9.3 million net new
jobs have been created since the end of the last recession
(2001). Unemployment is 5.5%, and that is below the average
of 6.1% since 1980. The economy in general has grown at an
average rate of 2.7% from 2001 to 2007. We may have slowed
down from that rate, but we are still growing. The media recently
reported that Americans’ net worth dropped $2 trillion
in the first quarter (what they owned less what they owed).
What they didn’t tell you is that total wealth was $55.97
trillion, down from a peak of $58.20 trillion in the third
quarter of 2007. It was still $15.3 trillion above where it
was seven years ago (Investors Business Daily, June 30, 2008).
Further good news that you probably haven’t seen or
heard in the American media comes from London. Writing on
the defeat of Al Qaeda in Iraq, the London Sunday Times called
it “the culmination of one of the most spectacular victories
of the war on terror.” A terrorist force that once numbered
more than 12,000 with strongholds in the west and central
regions of Iraq has over two years been reduced to a mere
1,200 fighters backed against the wall in the northern city
of Mosul. This is important for obvious reason. It gives us
a strong ally in a troubled part of the world. Surrounding
countries should like how democracy and capitalism can improve
their lives. Then of course, there is oil. Iraq probably has
the second largest oil reserves after Saudi Arabia (we could
actually be the largest producer of oil if Congress would
wake up). The revenue from this oil could build a vibrant
economy. According to T. Boone Pickens, Chairman and CEO of
BP Capital, Iraq could double oil production to 5 million
barrels a day in coming years. This would be a start to reducing
oil prices.
As expected, the Fed left interest rates unchanged at their
last meeting. Bernanke apparently wants to focus more on growing
the economy at this point and trying to talk tough on inflation.
It’s hard to trust economic numbers coming out of Washington,
and there is usually a delay coming through the pipeline,
but we suspect inflation is actually higher than the 4.3%
annual rate being reported. Food and energy are of course
the biggest factor in rising inflation. China is now a big
factor also. For years, China has been exporting deflation
to the US as their production costs were low compared to the
rest of the world. Now, however, the rising cost of raw materials
plus rising labor costs in China and the rising concern over
the quality of their manufactured products has forced them
to raise prices, and they are now exporting inflation. So
we would expect prices to rise on manufactured goods thus
increasing our core Consumer Price Index (CPI)—consumer
prices minus food and energy. At some point, products manufactured
in the US become competitive on a price and quality basis.
So, we expect inflation to continue to advance, but not meaningfully,
and the economy will continue to grow.
Random thought for July 2008:
"Never be afraid to try something new. Remember that
a lone amateur built the Ark. A large group of professionals
built the Titanic."
- Dave Barry
Nationally Syndicated Columnist
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