“Recession, and its vicious-cycle effect on employment and consumer spending, remains a threat,” says Bill Gross of PIMCO. “This recession, though currently mild, and, as of yet, not even officially validated, may not be your garden-variety, father’s-Oldsmobile type of downturn.”
Has the Dow seen its lows for the year, as Richard Russell says? Is the housing crisis over, as the Wall Street Journal says? Is the credit crunch over, as Warren Buffett says?
As the song says, “it ain’t necessarily so.”
House prices are going down. They’ll take the American consumer down with them. The “crises” may be over… but the long, slow, slump is still ahead.
We left Paris this morning on the 6:43 train. The train glides out of the Gare du Nord… then eases its way out of the city. Once clear of the suburbs, the Eurostar’s Casey Jones opens up the throttle… pretty soon, the train is traveling at more than 200 mph… so fast that if you try to look at something out of the window, it is gone before you have a chance to study it.
Arnold Schwarzenegger came over to France recently. He took a little train ride with France’s president, Nicolas Sarkozy, and had the same experience.
“Wow… ” or words to that effect, he is reported to have said, “I didn’t know trains went so fast.”
Americans ought to get out more. We’ve been living and traveling outside the United States for the last 14 years. It’s a big world… there’s a lot to see. And what we see is a world that is changing fast… growing… evolving… experimenting…
… and leaving America behind.
We don’t know whether high speed trains are a good idea or not, from an investment standpoint that is, but American infrastructure seems to be on “a pot-holed highway to hell,” as an English writer put it in the Financial Times last week. In the Eisenhower years, the interstate highway system was the envy of the world. Now, foreigners laugh at U.S. infrastructure.
“While the U.S. real estate market cools, India, Singapore, Korea, Malaysia are all building like mad,” Free Market Investor ‘s Christopher Hancock tells us. “And demanding dazzling amounts of concrete and steel to make it happen. China alone plans to add another 1,000 skyscrapers to the Shanghai skyline by 2011… and to double its demand for steel by 2031.
“That’s equal to using all the steel sold in the West today!
“For the entire steel industry, it’s nothing short of a ‘second coming’… and a huge opportunity for in-the-know investors, if you move on this while there’s still time.”
The lack of high-speed trains is just emblematic of a deeper problem in the United Sates – a lack of savings and investment for the future.
Markets and Money doesn’t pussyfoot around the implications of it. Sell America, sell its money, sell its property, sell its shares, sell its foreign policy, sell its bonds. Yahoos and members of Congress will say we are ‘unpatriotic.’ Investment pundits will say we are stupid. Selling America is not a smart thing to do, as the greatest investor of all time, Warren Buffett, reminds us.
But as to these charges, we deny the first and await the market’s judgment on the second. America needs a correction; it would be unpatriotic to deny it to her. Besides she will be a better, strong, more decent and civilised place when people stop spending more than they afford… start saving again… and return to minding their own business. And Buffett, himself, is now coming to Europe looking for places to put his money.
In the short run, we could see a revival of the dollar. European interest rates held steady – with the key lending rate of the European Central Bank at 4% – while Bernanke cut the Fed’s rate seven times. Under those conditions, it’s amazing that the dollar didn’t fall more.
Now, inflation has dipped down in Europe… allowing the ECB to cut, if it chooses… while the Fed’s rate cuts seem to have come to an end. With no more obvious reasons for the dollar to fall… it has stabilised. Next, it will fall for reasons that are less obvious and more important. But our view on America is long term… and it comes tethered to our views on inflation and oil… and practically everything else. So let us begin by looking at Philadelphia. The City of Brotherly Love used to make things and sell them at a profit. From this healthy exchange, Philadelphians, like so many other Americans, were able to raise their own wages and living standards to not only the highest levels in the world… but the highest levels the world had ever seen. Never before in human history were ordinary people so rich.
Naturally, this led to a certain amount of self-satisfaction… which led to complacency… which led people to think they’d be all right no matter what they did. Then came a series of events and trends that seemed to prove they were right. China began making things at much lower cost. Wal-Mart distributed these things to Americans at low prices. Instead of keeping merchandise in inventory, retailers switched to “just-in-time” systems, which further allowed them to cut costs. In real terms, prices of raw materials plummeted too.
Then, the Fed lent money below the rate of inflation. Normally, the Fed’s easy money policies – in addition to lending at 1%, it has been increasing the money supply twice as fast as GDP for 20 years – would cause consumer prices to soar. But after Paul Volcker wrung inflation out of the system in the ’80s, China helped keep the squeeze on – holding prices down despite a huge increase in the supply of dollars.
Wall Street played an important role too. It came up with innovative ways to pass the Fed’s money along to American households – allowing them to spend money they never earned.
The whole thing was almost too wonderful. No matter how much Americans spent… it seemed as though there was always more where that came from.
From 1980 to the present, the savings rate fell from over 10% to under 1%. Debt grew twice as fast as incomes – except for financial debt, which grew three times as fast.
Now, the factory jobs have packed up and moved to Asia… there are few left in the Philly area. In their place, are jobs in health, education and finance… that is to say, in the service industry. And today, we get word from Philadelphia that inflation-adjusted wages are down from $17.25 per hour in 2001 to only $16.59 today. More people are forced to take part-time work – because they can’t find fulltime jobs. And the number of hours worked by Americans is falling nationwide.
In Europe, wages are substantially higher – in part because the euro is high (EUR)… and in part because unemployment is high (fewer low-wage jobs exist). Not only that, Europeans work fewer hours. As reported in this space, the average salary in America is now about $38,000… compared to $42,000 in France. But the typical American also only gets two weeks off, whereas the typical Frenchman gets five weeks of holiday. Doing the math crudely, which is the only way we do math, we find an hourly average wage in France of $25.50!
Today’s Financial Times mentions a 36-year-old man in Philadelphia who has had to take a job at a deli counter, earning only $7 an hour. Our two daughters, meanwhile, both hold unskilled, part-time jobs in London – working at a pub and a health food store – where they both earn $12 an hour. And both are eligible for free public health care.
Markets and Money