Posted On: 2006-07-26
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Alright, well welcome to the third edition of the Vigilant American, Talk Shoe live Podcast. Maybe we'll get a few people to tune in today live as we go forward, developing, hopefully, you know, good, live listenership. But, in any event, today's show title is Wal Mart, Villain or Scapegoat? From that, what we're trying to do a little bit today is take a subject that I think is highly politicized in a lot of ways. You know Wal Mart is one of those topics when people mention, well you know, oh, there's Wal Mart out there. Either you like Wal Mart a lot or you hate Wal Mart a lot. And, public opinion has definitely been shifting against Wal Mart largely in, I think, the media you see a lot of commentary how Wal Mart basically is not treating its own employees as some people think they ought to. And, Wal Mart also absorbs a lot of blame for the phenomenon of a lot of manufacturing jobs going abroad. And, well I mean if you've seen any of the articles out there that talk about the negative side of that and I recall not to [...] on PBS I think it was a front line special on Wal Mart, which, you know, came across I think on a lot of levels came across fairly even handed, but also kind of had a lot of critical comments about Wal Mart as well. The impression you get about Wal Mart is that its sole purpose is its own interests and to heck with anybody whose jobs might get in the way or anything else. Well, on some levels that's true, there's no doubt about it, Wal Mart is an entity out there to be as profitable as it can be for its shareholders, its owners and so forth. Which includes a lot of people out there who are investing in Wal Mart via their 401Ks, through mutual funds and so forth. But, at the same time it also delivers a heck of a value proposition to a lot of consumers. And, I think sometimes that gets lost in the mix [...] benefit side of things. People are always focusing on the negative. But, all that aside, you know, is Wal Mart a villain or is it a scapegoat? I think that what is missed from the conversation generally is that Wal Mart really is not in itself the problem as I see it; or, represents a symptom of a much, much deeper problem in the United States. And just because Wal Mart happens to be the most successful dealer out there in the U.S., it's catching a lot of flack. But, in my opinion, what we're seeing is the most efficient model for doing business in the U.S. today as demanded by the U.S. slated environment, created by your politicians, on a local level, on a state level and especially on a federal level, Congress has done nothing over the past 75, 100 years other than make an environment in the United States where the Wal Mart model is what works. It's what works best; it's what delivers what any business' job is supposed to be, which is value to the consumer at the best possible price. That is the purpose of being in business. From the consumer standpoint, you or I always want to go out there and find a product that is going to be made of quality that we think is of fair value, that we're willing to give up whatever dollar amount it is. And, to the extent that a product gets better in quality and is lower in price is better for us because, we, as the consumers are able to spend more money on other things. And, stretch our pocketbooks further, whether that be for acquiring other good and services or, whether it be saving for retirement, and, for the future. That very premise in any economy, is what makes a nation wealthier across the board. Not just on an individual basis, but as an economy, as a country as a whole. But, we're going to get into that a little bit and talk about some of the things that are going on with Wal Mart, and why it's efficient. And maybe even try to pull in some of the local examples we have here in Pittsburgh. And, for those of you who have been able to listen from elsewhere outside of the country, Pittsburgh is a pretty interesting situation. I often times write in our blog, at the vigilantinvestor.com as well as another blog that we run over at, it's called the Three Rivers Post and Standard and it's more of a regional commentary on local government in the region of western Pennsylvania. And, as well a s Pennsylvania as a whole, some of the things that go on in this area. But, I've long said that Pittsburgh in many ways, that, similar that California is maybe the leader and sort of gives an indication of the direction that the United States might be going as a whole. And maybe in the same way that they used to say in as far as the markets go, you know, GM goes for example, General Motors, so goes the U.S. stock market or the U.S. economy. Pittsburgh has kind of an interesting position, I think, in that it definitely has not had some of the boom times some of the other areas in the country have had over the last 20 years. Not to say it has done terribly bad, but by the same token it has slowly been losing population, it slowly has been losing jobs and went from being one of the nation's leading corporate headquarters back in the 80's, even in the wake of the steel mills closing down and you know [...] to a place now where the city really struggles with budgetary problems - not that that is necessarily unique, but it struggles with maintaining its own population and it struggles maintaining jobs. Often times we're losing businesses, not just to the foreign competition, but just simply to greener pastures in other states and other cities elsewhere. And, a lot of that is similar to I think where the U.S. is heading, and the U.S. phenomenon is as a whole, where jobs are slowly leaking abroad, actually slowly maybe not even describes it as well as it ought to. It definitely picked up the momentum of it over the last 10 years, where we began losing our manufacturing base and so forth. Tying that back together, I think Wal Mart is the great example of being blamed for driving those jobs abroad. But, you know is there something else that we should be taking a look at? Outside of the subject of Wal Mart, let's hit on a couple of other things that are going on right now in the news, kind of dominating I guess the economic front today. Boy oh boy, article after article today and the past couple of days have been talking about what's happening in the real-estate market in the United States. And, for those of you who are regular readers of Vigilant Investor, you know we often times comment on the credit bubble, and for those of you who don't know the term, the credit bubble basically is, it describes the fact that the United States over the past decade has largely created a credit bubble throughout the Federal Reserve system, banking system. And, really what it amounts to is that the economy now has gotten itself kind of in a fiction relationship with [...] that credit bubble has exploded itself into the housing market in the United States. How that has happened is through the mortgage [...] credit system where a tremendous of equity created by the Federal Reserve [...] the money supply circulating around the economy and I don't want to get too much in depth, you can listen to [...] up on some of this. But, that money sloshes around out there in the economy [...] trade deficit comes back into the banking system [...] comes back to the U.S. in the form of a [...] market [...] basically providing so much liquidity, so much supply of money in purchasing [...] purchase U.S. debt that U.S debt rates that we have to [...] finance things are well below market; and that shifts into the U.S. mortgage market. [...] haven't been paying attention to it, you will be [...] slow down in the housing market. And just to give you a sense of some of these articles that I have come across [...] Washington Post talks about after 5 years of growth in the region, home [...] steadily [...] take a look at [...] sales [...] falling generally across the country, price gains have been slowing [...] declining -
Caller: Hey Johannes, Dave here on the talk cast here just listening along, you're coming in and out a little bit, I don't know, I'm losing a few words. Is it the volume on your phone or not sure what?
I'm not sure, is this any better?
Caller: Well, keep going with a bit more volume, we'll see how it goes.
Maybe it's just the phone that I'm using, we'll have to, have to see...
Caller: Interesting conversation by the way, I'm really enjoying listening along.
Great, great. The mortgage rates have hit four years high. The average 30-year mortgage, fixed rate has jumped to 6.8 percent. And that's according to Freddie Mac. The 6.8 percent is up from 6.74 percent just last week. And what we're seeing in the housing market is of course as the rates rise the demand for new purchases is going to be slowing down because this translates into higher monthly payments. And, what we've experienced over the last 5 years, very much so since the recession in 2001, the small recession, post the stock market, the equity market bubble bursting, we saw the federal reserve crank down interest rates, and at the same time when that's happening, the money supply really starts getting cranked up. That money sloshes around as I said and it ends up getting into the banking system with fraction reserve banking which enables the money supply to really increase, because with every dollar you deposit in the bank you can lend out 90 cents. And that means the depositor has a dollar and the borrower has 90 cents. And that basically increases the money supply. The bottom line is that, you know, basic supply and demand 101, you go into economics 101, you learn about supply and demand. With all that supply of money out there and low interest rates being available through the borrowing markets and the credit markets we've seen borrowers basically going and taking mortgages at a cheaper rate and be willing to with that money at hand pay more for a house. That's simply because when your mortgage rates drop, your monthly payments drop so you have a choice when you refinance or when you refinance a home to either keep a home the same price and just have a lower monthly payment or what a lot of people decided to do was take advantage of a similar monthly payment, and get themselves into a larger home. Well, that phenomenon with just the vast amount of liquidity sloshing around out there, reverberating around for a number of years has meant that housing prices are started getting bid up. The function of basic inflation that things that are very popular and of high interest or if people are willing to spend their money, the prices will go up over time. And that, you know, it simply is a function of people borrowing, looking at the monthly payment and driving prices up. After a while -
Caller: Do you think, by the way, that that helped keep us out of the last recession, you know people going to this cheap home equity, and therefore it bolstered consumer spending?
Absolutely it did, and in a lot of ways, we saw, you know, if you look at the home equity withdrawals for example, that was one of the biggest contributors to the economy in 2004, 2005, I think the numbers for each year successively were 670 billion dollars [...] and spent into the economy -2004, 2005 about 650 billion. You can't discount the impact of all that money getting injected into the system. By the same token, all that borrowing has also affected, where we've seen job growth. The mortgage market has just been on fire. And, it's gone into the real-estate area, all that money. So, of course I've seen figures ranging anywhere from 25 to 50 percent depending on the source. Let's just, you know, go with the low number. 25 percent of all new jobs created since 2001 have been related to housing and real estate. Whether they be mortgage brokers and you know, I personally know of a lot of people who have left their old job and hopped into real estate related stuff. You know, mortgage brokerages, or getting into real-estate brokers, whatever you might be. And you've also seen a huge expansion in the construction area where there's been a lot of hiring there, you've seen a lot of investment into new machinery for contractors and so forth. And, there's no doubt that's really helped the economy. The trade off however, is that by staving off that recession in 2001, what you end up getting really is not the ordinary cleansing that goes on through recession of previous misallocation of capital. And without getting too technical, this really is the function, the artificial function of interest rates being dropped down to 50 year lows. These are literally emergency rates from the Federal Reserve. When they drop the interest rates down to 1 percent and start cranking up the money supply, yeah, that's definitely going to create a lot of activity, but the reality of, you know, increasing the money supply, inflating the money supply is that you are not creating any wealth though that action. You're merely fractionalizing the existing wealth held in existing dollars. So, we compare that to organic growth in the economy, where people actually save and then they invest and they create something from nothing. And there's wealth to show, there's wealth actually backing that economic growth.
Caller: So with that sort of 'clean out' in the last recession, you're implying that we'll pay the piper at some point once we can no longer use this mechanism to avoid the tough times.
Exactly. And you can see that same function in each round of trying re-inflate the economy. This is not the first time we've tried it. And one of the mistakes I think a lot of people tend to make relative to assessing the, sort of the macro picture is looking at still, too short of a cycle, too short of a time period from recession to recession. And you got to go back and look at some of the broader cycles that may include you know, 4 or 5 recessionary cycles in one longer-term cycle. And, if we go back to, you know the early 60's, for every dollar of debt, and credit, you know, though the money supply mechanism that was created, we would get pretty much a one for one trade off. A dollar of debt translated into a dollar of economic growth in GDP, the Growth Domestic Product, which is our growth measure in the economy. By the 1980's that number had turned to about, needing about 2 dollars of debt, and credit, to create 1 dollar of GDP. By the 90's it was up to about 3.2 and now in 2006, it's taking about 4.4 dollars of debt and credit just to generate 1 dollar of GDP growth. So, you can see, I always use the analogy of an addiction, because there's a direct parallel because you get addicted to something that isn't natural and each time, just like and addict, you know, an addict on heroin or whatever it might be, he's always going to need more to get his fix, to get that same high. For a while that's all fine and dandy, but progressively, the body of an addict, it begins to deteriorate and the addict turns from somebody who can function regardless of the substance to somebody who is so dependant that they can't function without whatever it is that they're using. Our economy is heavily addicted to credit and money supply expansion -
Caller: So like the addict to eventually ends up in the rehab facility drying out, sooner or later, we're going to have the same effect with our economy, no?
Well, yeah. The addict either wakes up and says, "I've got to suffer the symptoms of withdrawal." And those are painful. And it's why most, you know, a lot of addicts don't, don't bother to get into it, and you see a lot of guys crash and burn and even kill themselves, because eventually it just takes its toll, maybe you don't die from an overdose but something else gets you because your system gets to be so unhealthy. We're at a point now where its tough to say, I don't think anybody has a crystal ball, just how far along we are in that cycle. But, it suffices to say that this time around, we are, you know, we're definitely getting close to junkie status here with the amount of credit it's taking. And if you look at the balance sheet in the U.S. economy, personal savings down to negative 2 to 3 percent. You look at the federal deficit side of things. I was just reading a report this morning, re-reading a report from the NF2 of 2005 on the U.S. deficit. Everybody's familiar with the numbers that are often publicized by the government when people in congress talk about, you know, what the deficit is, they always refer to a number that's somewhere around 350 billion I think in 2005 it was 318 billion was the federal deficit. But, believe it or not, the finance report from the U.S. government, you know this is the one that's signed off by the U.S. treasury, the secretary, you know, John Snow signs off on this thing, actually began doing, and I think it was 2001, and what they call 'gap accounting.' That's general accepted accounting principals that, you know, anybody who is in business is perfectly familiar with them. But, when you get outside of, when you get in the government, they have a real knack for just [...] what it is they're doing. And I think, I can't remember who I think it was Arthur Anderson years ago who tried to audit the government and just threw their hands up and had to walk away. But it was a 30 year process, they started back in the 70's and finally they were able to get gap accounting out of the U.S. treasury and, when they do that, they have the formal gap accounting is about 760 billion dollars was the official number in 2005. So, you look at, you know, when you actually account for things the way any ordinary business is actually required to, your deficit is double what the official public number that they talk about. And these are published in the footnotes of the treasury report, as opposed to the main section of the report, which talks about the deficit being the official 318.5 billion, which is what, you know, when the treasury secretary or you know, President Bush, or anybody that, or any President for that matter is going to be using that figure all the time. But even that 760 billion-gap number, that was up from 23 percent from 2004's number, it doesn't take into account the off balance sheet stuff that Johnson started doing back in the 60's. And, he was having problems getting the budget balanced and anything through congress because of the Vietnam war, and his great society kind of stuff that was, you know, just costing an arm and a leg. So his conclusion was, okay, we'll just simply move an off balance sheet. Things like Social Security, Medicare and Medicaid. When you begin to, and again, these are the government's own numbers in the footnotes, when you move those numbers back on to the balance sheet, you're talking about, you know, not 760 billion, or, you know, you're talking about, I think it's like what, 3.5 trillion dollars? I mean, that number is massive, it's 11 times the official number that they talk about, you know in the government. And that number, again, it is signed off by treasury secretary, John Snow. And, I think anybody who looks at the deficit area in the government and thinks of it as, oh, we can just grow ourselves out of, 350 billion, well, think about doing 10 times that number.
Caller: What by the way, what would you say is like the net worth of the United States, so what would be the debt to equity ratio here?
The number that I find interesting, I don't have a net worth figure here, but I've been looking a lot -
Caller: It's a funny one to use, by the way, I mean I use that just because I think about my own personal net worth, if you will, and how much debt I've got...
Yeah. I look at you know, the debt to GDP, and the ratio is well above its historic average. It's gone nearly parabolic, we're at about 318 percent I think it is now of debt to GDP. And, it's the, you look at -
Caller: Wait, wait, wait, our debt is more than 3 times our GDP?
The national debt, when you consider all sources, I think [...] pull up a chart but there is a, you consider all debt, private and government.
Caller: Oh, okay, I see, wrap it all in...so we got to, we've got to work 3 and a half years as a country and not spend a penny in order to get back to even.
Yeah. I look at even, you know, just the federal deficit at you know, the 3.5 trillion. And the number, even the debt to GDP ratio, I'm not even sure that includes the [...] deficit that, you know, this is just now getting publicized this 3.5 trillion figure. [...] all the promises, each year that that doesn't get resolved, each year Congress talks about working on the fringes of Social Security, Medicare funding and actually putting some money aside. Because to this day they're still spending, you know, every dollar that comes into Medicare/Medicaid they spend, and at the moment, like for example, Social Security, they don't need all the taxes they collect for Social Security. But, do they set it aside? No, they go off and spend it and then they put IOU's, they put U.S. treasuries into an account, that, sort of as a placeholder for future Social Security recipients. But if you think about it, I mean, that's like, you know, heck I'm in the investment business, if you came to me and said, " okay, will you invest my money for me?" and I said, "sure I'll take it for you and I'll invest it." And I go in and take that money, say it's a hundred thousand dollars, I go off and spend that money, and in that account for you I put an IOU into it. Okay, which is functionally going back to the example of Social Security as a U.S. treasury, and then you as the investor, have to begin paying taxes in order, so that I can put interest into your account.
Caller: Interesting. [laughs]
You have to pay me a fee, so that I can put interest into your account, all I'll also accrue some on the side so I can pay you your full amount of your bond that, you get your hundred thousand dollars back at the end as well.
Caller: Yes, no - intriguing...
What a racket! And yet that's exactly what it's been [...] And we've done a little bit of a generational shift so that you know, we don't look at it that way. But, I mean anybody in my business who does that goes to jail!
Caller: Hey Johannes, can I ask you a question, this is Dave...
Caller: So what do you think the end game of this is? Do you think that at some point when the Medicaid, Medicare expenses get to be so high that the government will just nationalize the health care industry a la banana republic style or something?
Well, you know, it's hard to say exactly how things would shake out in the long run, but you know, going back to that 3.5 trillion dollar number, you can tax 100 percent of all personal income in the U.S. and you are not going to have 3.5 trillion dollars. So, looking at a political solution, what's going to be from a populous standpoint palpable for the voting public to actually tolerate? You know it's, I'm a big fan, one of my favorite quotes is from H.L. Mankin, who was a bit of a sun of a gun in his day back in the 20's. But, his comment was, "democracy is the theory that the people deserve to get what they want and good in heart." And precisely why I get all riled up when I hear these politicians talking about us being a democracy. Because, technically we're not a democracy, we're a republic. And yet, we're operating more and more so that you know, whatever the voters want we will give them And less so concerned about protecting people's private property and their right to consent or not. I mean that was the core of our country. But, you know, that said and that aside, and you can get into a philosophical debate over that, but I think that the end result is that politicians will do whatever it takes to get re-elected and punt the problem into the future. I doubt any politician is going to run on cutting Social Security. Especially when you got the boomers that are, you know, in the ARP out there recruiting everybody. And it's very unlikely that you're going to be able to raise taxes a whole lot because, I mean, already the economy is slowing down into a situation where the tax environment here is so complex and convoluted and then cumbersome and burdensome that people are shifting their business abroad and so forth. So there are some end games there that you know, or definitive points which you can't go any further. My guess is, we'll it's not so much a guess, but if you look at historically what governments have always done whenever you get into this problem, is just inflate your way out of the problem. And if you look at the inflation figures, and inflation using the traditional term which is, you know, increasing your money supply, we have been doing it at a break neck speed over the past 10 years. I mean from 2005 to - or excuse me from 1995 to 2002 we've doubled the money supply alone. And since then, have even increased that pace higher. So, you know, what we're getting now, and again, I mentioned this in last week's show that a lot of that's been hidden through the trade deficit. Because all that money, if we were force to spend it in the U.S., God almighty, prices would be going through the roof, but we're able to vent a lot of that loss of purchasing power, if you will, abroad and it's come back to us, actually, in the form of cheaper goods. Because we've basically built infrastructure in China and in, throughout the Pacific Rim, to supply us with these really cheap goods. You know, that trend cannot continue indefinitely, and we're basically seeing now that we've built all that infrastructure and we have that emerging middle class in China that is you know, now has it's own demand issues. We're seeing oil go up to 70 dollars, 75 dollars a barrel now. Of course some of that rise is related to the tension in the mid-east and you know, all that garbage going on. But, you cannot attribute that exclusively to it. You know, oil was at 10 dollars, or 13 dollars a barrel just as recently as 1998. And, you know, that's largely you know the way inflation works. That, which is most in demand, is where you'll see the prices rise up the fastest. And, you know what, we did a post a couple of days ago, on... you know, commenting on an article that I came across; talking about how the cost of education is burdening people. You know, you graduate from college these days and everybody is saddled with all this debt. And, you know follow the money supply. Where are people, how are people paying for college? Parents are taking out home equity loans; parents are getting into debt. Kids are taking out loans. Loans that they are taking out are well below market rate, so you know, where they're in supply, there is going to be demand. With you know, credit relating, and this is tied into that credit bubble... but, if you can borrow really cheap money, you've got virtually guaranteed borrowed money as a student, you know and people scratch their heads and wonder why education costs are increasing nationally for colleges at university at 8, 9 percent each year, even higher at some years. Because the money supply is there. We're cranking it up and it's very easy and anybody can pretty much do it, and they're doing it at the cheapest rates in 50 years. So, there you go. So, again, going back to answering the question, you know I think the end game, I don't think anybody has a crystal ball that they can say exactly, you know exactly how it's going to play out, but my guess would be that, you know, this day and age, you're not going to see like a Paul Volker show up like he had in the early 80's, where you know, Paul Volker was the Federal Reserve chairman who inherited the problems of, you know, JFK, Johnson and Nixon's Federal Reserve, where they had basically had to go off the gold standard because they were printing so much money. And, you know, effectively default on the dollar, and then all of the sudden you had a hyperinflation in the U.S. He basically came in and went heart nosed by cranking up interest rates and contracting the money supply. And, we went through a very severe recession. But, back then the balance sheet of the country was pristine compared to today. You do that same thing today, which is what frankly you need to do, you're going to have a much, much, much deeper recession. My guess is something in between, you know, what happened in the 70's and what happened in the 30's. And who knows how that is actually going to evolve because just, you know, there's nothing to compare in history to our balance sheet today. The promises, the amount of debt, the thing is, as well as the complexity of the financial markets and the speed of the financial markets, I mean who knows how it's all going to unwind. But there definitely is going to have to be a re-balancing in my opinion.
Caller: Do you think the holders of our massive amount of treasury debt will start dumping it before we can effectively inflate ourselves out of the problem?
Well, you know there's a bit of a [...] there. The holders of the debt, they start unloading it and believe me, I mean we're close to what 50 percent of U.S treasuries for example being held by foreigners, and that's primarily by foreign central banks. That's, you know, if they start dumping on the market, what happens to their remaining holdings is that they begin losing value. So, there is an element where they don't necessarily want to, you know [...] their own holdings. Although they also have a, you know, they've got the U.S. economy by the, you know, the scruff of the neck if they wanted to really mess with it. But that would be you know, down the pike if there was ever any kind of global conflict. You know, the foreigners can control our financial markets just to the extent that we've, you know, become totally dependent on them financing our day to day activities. I mean that's you know, we talk about the federal deficit from a household standpoint. You know, look at it, if you spend 7 percent more than you earn, you got to borrow the difference. And the minute somebody cuts off that difference, you got some, you know, some "splainin' to do." You know, you better really start cleaning up the household and that's a painful process. So, on that level I think there is some risk as well. But my thinking is that what you're going to see is what you are seeing already, which is a diversification in the face of new purchases to start things off. And, you know, what [...] begin to dump their treasuries in the market, who knows. I mean there's still a lot, you know, even though, you know what I'm talking about here is pretty dire on some levels there's still a lot of good things about the U.S. economy as a whole. So, I don't thing that necessarily you're going to see a fire sale. It doesn't take a whole lot for foreigners to back off the rate at which they are lending to us. Or, our economy still has to get snapped around and clean itself up. You know they don't have to go into fire sale mode for us to have to account for our, you know, what I would say is complete fiscal irresponsibility. Look at the average, you know, people who come across these days the balance sheet of the average consumer, I mean the amount of debt that they're holding relative to their income, and it's all entirely dependent on you know, this low interest rate environment. So, does that answer the question?
Caller: Oh, yeah. yeah. That's a...because one of the reasons that I think about that is because, it's pretty "conspiracy theoryish" but you know, there's, on some levels it makes a little bit of sense that one of the reasons perhaps that we were so gangbusters after Iraq and Iran was that they had threatened to start trading oil in euros, and that the currency wars, of you know, if they did indeed start, you know, if we didn't have the dollar as the world's currency, reserve currency for the oil trading bit, you know that could be a huge slant to our economy -
Well, I mean, it doesn't take a lot. I mean, when you talk about trillions and trillions of dollars, you know, sloshing around out there and the whole oil wars thing in Iran has been, I mean it's a fact, Iran has talked about switching over to the Euro. Their attitude is, you know, the heck with the U.S. I mean, why do they want to help the U.S.? The, it is a fact also that Saddam Hussein was planning on doing the same thing prior to our invasion. There were rumors that Venezuelan president, Chavez was going to, he was talking with Putin about doing something similar, you know getting off the U.S. dollar standard. And he alleges that therefore the CIA tried to initiate that coup that happened, the failed coup a couple of years back. So, you know -
Caller: Sorry I got disconnected, I had to rejoin the thing...
No problem. The issue was, if you look at the facts, you know that definitely Saddam Hussein was planning on doing that. You look at Iran and Iran is talking about doing it, they delayed it, they were going to do it in March, and they have decided to delay it for whatever reason - the switch to using euros instead of the dollar. For those of you listening who don't know it, the U.S. dollar is the currency that is more or less mandated or, mandated is the wrong word, it's generally -
Caller: defacto -
- proves that it's the best currency to use to trade in oil. And that's where the term petro-dollar comes from. If you have ever heard anybody talking about petro-dollars it's basically, you've got to have dollars to buy oil. And that keeps a floor beneath the price of dollars and the exchange rate verses other currencies and other hard assets, commodities and so forth. We're the, you know, 5 percent of the world's oil to be traded on the euro, you'd see a definite revaluation of the U.S. dollar, just because you wouldn't need as much demand. You know on the back side of that, I mean, whether or not, you were, again, you were tuned out, I was mentioning also that Chavez down in Venezuela, he alleges that, you know the rumor was that he was talking with Putin about doing similar things, shifting over the euro. And you know Russia and Venezuela control a lot of the world's oil, between the two of them. And there was a coup a couple of years ago which he alleges was backed by the CIA. And, you know the writing between the lines there is that, you know, based on his intent to switch away from the euro, or the dollar to the euro, they wanted to get him out. You know, that could be fully conspiratorial for all we know. And as to whether that's why we decided to go into, back when we did or did we, were we behind, who really knows. I think there are a lot of other explanations for Iraq that you have to kind of balance out as well [...] policy, we don't need to get into. But the bottom line is that were they to do that, no doubt it would cause a revaluation of the dollar. And that would be painful for the U.S. economy, it would cause a problem. Now, to where I was going with the other comment on the backside of these transactions, you got to look at the mid-east and current countries that are, you know basically accepting payment for their natural resource in the U.S dollar, what do they do with all these dollars? The focus largely up until recently has been you know, deficit dollars being spent into China and what's the Chinese government going to do with all those dollars they hold, and we're, you know beholding China's central bank and you know [...] Just the same, we've got to start paying attention with 75 dollar a barrel oil, you know, what are the middle easterners going to do with all these dollars? What is Chavez going to do with all these dollars? And, you know they are kind of hard pressed. I mean they have a lot of U.S. debt at 50-year lows, do they want more 30-year treasuries paying, you know, well below average rates? That's what we're seeing with the bond market adjusting over the past couple of months. For a while there, the 30 year was up to 5, you know, 5.3 off of its 50 year lows and that really was starting the, between the 10 year and the 30 year treasury, that's what drives the mortgage market and that ties right back to where I was going with the home prices in the mortgage market. You know mortgage rates are going up. Just because foreigners are getting tired of that. But, middle easterners, we had what was it, Dubai, trying to buy a company an international global company that managed some ports in the U.S. And they were told no, they can't do it. China wanted to diversify into, I think it was Conoco, one of the major oil companies out there, and kind of get some diversification with it's own national oil company, that does a lot of its work there, and you know a lot of it's quasi nationalized companies that run their energy there. And they were told, no you can't do it, by the United States. So, that sent a big signal to the global markets, that you know what, the U.S. dollar ain't what it used to be. It used to be if you wanted to do something with the U.S. dollar, you could do it. And that's why it was the currency of choice. And now people are being told, well, you can't buy this and you can't buy that...it also sends a message to, you know, I think a negative message that said, you know our ally in the mid east was you know, you're a good ally, but we still don't trust you, and you're not so good that we, you know want to have you owning anything remotely...you know, to do with our port infrastructure. And just really, I don't know where that kind of stuff goes, but it send a signal to others that, you know, we don't necessarily, you know, want you to do what you want to do. And we're going to tell you what you have to do with your money.
Caller: Well it's pretty protectionist...
Well, yeah, it is. And I think it's just the beginning of it too and you know to tie back into the theme of Wal Mart, you know, Wal Mart is venting a lot of these jobs and you see a protectionist sentiment, it will come up you know, through Congress as to you know, we need to stop with these jobs from being lost and [...] you know, calls for Wal Mart to do all these different things, you know to basically keep jobs in the U.S. to prevent Wal Mart from having those efficiencies. But, I think it distracts from even broader problems. We can get you know, lets step aside you know, for a moment from the issue of currency and money supply and so forth and take a look at the regulatory environment in the U.S. I mean what Wal Mart has basically laid out is the blueprint for doing efficient business in retailing based on all these rules. And, you know, God, I mean I have a small company that [...] we had about 25 people, and I've now brought it down to 10 simply because of the hassles of running a business and all the regulation. And, not necessarily purely on the employment side, but also just because [...] regulatory side of what I'm required to do day to day to be in the investment industry for example. Paperwork, the amount of garbage we have to do to prove that we're basically abiding by the rules and regulations of, you know that are out there. It's largely a guilty until proven innocent kind of approach where you have to just go through the exercises, have everything documented every day, you know to the nth degree, and you know you can be charged with a violation of simply lack of documentation even if there was no [...] victim of a crime anywhere, it's purely regulatory. And I think that you take a look at that kind of stuff permeating throughout the [...] think you know, on one hand you want to have some regulation there maybe that [...] gives consumers confidence perhaps. You know I can understand even though [...] you obviously can't totally wrap it all together, but we're going the other direction where every year it gets more and more [...] to just start a business today you need a fleet of attorneys and a fleet of [...] Yesterday I was having lunch with you know, with a client who is going to be acquiring a business [...] for example the investment banking side of things. Just, you start listening to all the garbage that people have to go through, that are just brutal related to proper tax accounting and what's the best tax strategy to use [...] These are just things that slow down business in the U.S. [...] you could literally write books you know for [...] day after day, year after year they are 1000 pages long, all about the facets of the U.S. tax code and the U.S regulatory code, basically make business just a real pain in the butt in the U.S. And you know, the American dream was supposed to be that you could just kind of you know, put up a shingle and get the work, nowadays there are all these toll collectors, you know and [...] accountants [...] attorneys to actuaries to compliance, experts and so on and so forth. Getting back to Wal Mart, Wal Mart basically has the critical mass to compete [...] The average mom and pop shop, you know, cannot navigate the tax code anywhere remotely as efficiently as a Wal Mart. The average mom and pop shop, or local grocer or whatever it might be cannot, you know, it does not have the critical mass to be able to get a lot of the efficiencies in terms of being able to work globally as opposed to just in the U.S. And, by that I don't mean you know, [...] to work an international relationship should be a lot easier than it is but for the fact that you now need to have 5000 attorneys to understand international global trade laws. [...] further compounded with the [...] how everything now is further regulated and so forth. So, you know the option for the mom and pop shop is well, I can you know basically spend millions of dollars and still not have the economy to scale to compete with a Wal Mart. [...] be able to at least have the technological know how to deal with the legislation in the U.S. to [...] all these hurdles there. And I think that's a large reason why we're seeing a lot of business go [...] You know labor law as well has a lot to do with it, and that's not to say that, you know, odyssey labor environment in the U.S. [...] but it is to say that [...] happens to be in the U.S. You know, why do they command arbitrary minimum wage for unskilled labor. I mean that [...] we could do a whole show on minimum wage, we could do a whole show on you know, union [...] skills and so forth [...] Bottom line is that sends jobs abroad. And you know the response politically is always let's put up trade barriers and prevent people from shopping abroad. And, all you're doing then is, you know, you're screwing the consumer. Forcing them to pay more than they would be able to otherwise and we're so far down the cycle now where the average consumer does not have a lot of headroom on their paycheck to all the sudden see a, the consequence, 10, 15, 20 percent rise in prices that would go hand in hand with forcing people to buy exclusively from U.S. companies or a law that would force Wal Mart to buy exclusively from U.S. manufactures or something like that. [...] Alright, the, well we kind of shifted around, we've got about 15 minutes left in today's discussion slash show. Any other questions before we kind of move on there? A few things I wanted to hit on, and I guess I'll leave that for Wal Mart alone right now. Although I guess, one other thing with Wal Mart, you know, we see the whole labor issue and that people are complaining that Wal Mart doesn't do enough to contribute to health care, it dumps on the taxpayers. Go to our Vigilant Investor site because we've written a bit about the Wal Mart situation. Take a look at the actual numbers. A lot of that is politicized, Wal Mart does a pretty decent job, I mean it is a low cost retailer, it is, you know has a lot of part time people and so forth. But, when you actually look at the figures that Wal Mart is doing, they're not necessarily dumping on their employees. And moreover, I mean it's, employment relationship is between a business and its employees. So, you know I don't have a problem with an employer doing what they want relative to their employment base. But, we also had a study in there I don't recall the exact figures, but it was published to show what actual burden does Wal Mart place on the U.S. tax payer who therefore has to supposedly pay for all the Medicare/ Medicaid. It is a sham argument. You'll find that there's really not a whole lot there. Makes for great sound bites, but from what I can tell Wal Mart is getting largely skewered here. And on the flip side, I think Wal Mart also, you know these major corporations, you know I do have a problem with them, because there is a bit of a sort of mercantilistic you know, corporatist relationship between big business and major, big government. I mean the lobbies they have to influence legislation this way or that definitely put huge advantages in the hands of big, major businesses. They can afford to deal with all the extra new compliance or this or that. Whereas a small business, the mom and pop shops, they just get strangled. It's like throwing someone who is you know trying to swim out there in the ocean and compete, throw them an anchor and help them out. I think that when you dig down through a lot of legislation you see that behind it sometimes, there really are some anti-competitive interests from major lobbying firms that are supported by you know big businesses. And I can't say that Wal Mart for certain is behind a lot of that themselves, but if they're like most big businesses, they tend to look out for their own interests and push that kind of stuff. Alright, getting back to today's subject matter, you know some of the other things I wanted to talk about. We talked about the housing slow down. You know basically the long and short here is that, just to wrap that issue because we kind of got off the tangent, is that we're seeing now housing prices beginning to slow down. And I think that's going to cause a problem for the economy as a whole because so much of the economic growth numbers over the past couple of years have been related to the housing market. And so much of the liquidity that is the spending dollars that have been circulating out in the economy, have come through the mortgage market either through home equity loans or directly through the cost, or through the process of acquiring homes and that money getting circulated back into the economy. If that slows down you're going to see a gap in new spending. And moreover the big question I have related to the whole housing boom is that it really encouraged a lot of people to get more heavily into debt. And now they've really got that debt level up to a new level. If home prices don't keep increasing, at the pace they were, a lot of people expected them to. So, you know, if you were going to assume so much debt, knowing that, or under the impression that your house, as an asset, as an investment if you will, was going to increase at 10 percent per year, or 8 percent per year you'd feel a lot better than it just all the sudden going flat. You still have your monthly payments, you still have that kind of obligation, but there's not guarantee that you're able to then turn around and refinance a few years later or sell it for a profit like you maybe thought. More alarming in the housing market also is the adjustable rate mortgage environment The housing market got so hot in some areas that you saw two phenomenons. One was sort of the speculation side of things, where everybody thought they could be a home investor, flip their home, or their condo, or convert their condo into this or that, or turn some old piece of property into some huge rental property, and turn it for sale for a big profit. People are using the adjustable rate mortgage for that. Just the same, also in areas like L.A. and Boston and Florida. The only way some people could fit in to the average home price since it was driven up I mean over a couple of years, a hundred percent was to get into these adjustable rate mortgages with the hope that they would earn more money down the road and be able to afford higher interest payment if they came or that the cost of having a re-fi, once you had to re-fi into a 30 year mortgage. What you're seeing now is those adjustable rate mortgages are all coming due. At least a large portion of them, I think about 1.2 trillion this year, and about 1.4 trillion next year. That represents 12 percent, 12 or 13 percent of the market each year. Basically adjustable rate mortgages come in to the point where they are going to adjust upward to the new interest rate environment. And, what that translates into is you know massive increases in payments. So what you have to see then is that people will begin refinancing; a lot of those people are going to try to get into 30 years, but if they couldn't afford a 30 year before, they're definitely not going to be able to afford a 30 year now. So the best that we're seeing in some situations out there is where people take an interest only 30 year or what they will do is re-fi into a new adjustable rate mortgage that has maybe a higher rate than their old one, but it's still a whole heck of a lot more affordable than a 30 year. And you're pretty much, your interest only 30 year, you're renting your home from the bank. It's just like, you know, no different. If you're just playing the arm roulette, the adjustable rate mortgage roulette where you just re-fi and do an adjustable rate. There's a point at which even that can catch up with you in a rising interest rate environment where at what point can't you afford the new arm? So, a lot of tension there that we have yet to see how it's going to resolve. But with the balance sheet where it is overall for a lot of consumers, I think the housing market, I think the big question is, is it going to be a hard landing or a soft landing? I tend to be somewhere in between in my opinion of where it's going to go, but we shall see. The big issue there is that usually when housing markets slow down and say, they do have a crash, that really reverberates to the economy much more severely than a stock market crash. And what people also need to understand is that home markets, when they do crash, they crash much slower than the stock market. The stock market's going to happen you know very quickly, where you start seeing the price adjustments and granted our last bare market was prolonged over a couple of years with a couple of run ups and then further, you know, new lows. Housing markets, you know, typically the bares tend to last about 8 years to recycle, and they can even last a whole heck of a lot longer than that. So we shall see where it goes, but I don't think it bodes well for the economy. Again, getting back to the addiction analogy, we're so dependent on new money, you know flooding into those markets, you know, where's that next fix going to come from and even if they do get it in there, then what? We just basically have give the addict another dose when what they really needed is treatment. And that's just not healthy. Alright, moving on to a couple of final subject that we wanted to hit today, we've got about 5 minutes left. Senate's debating an energy bill, I saw that out in the news today, I think that's important if only because what we're seeing with 75 dollar oil is, you know on one hand inflationary tension with the dollar losing it's purchasing power relative to the modern type assets -
Hello? The other thing, someone's in the background there, sorry. The other thing is also that we've seen this problem relative to the development of new resources over the past couple of years. And one of the huge issues in the U.S. is that a lack of refinery expansion, I don't think a new refinery has been built in the United States in about thirty-some years. You know whey you have that kind of thing going on, your existing infrastructures at maximum capacity and it's aging, and you know when we went through that Katrina problem, last year with the big hurricane, we lost some of that refinery capacity and we had a lot of oil that was floating around that we couldn't refine. And what that meant was that we had to go abroad and actually buy refined gasoline from Europe and other area, and that was part of the issue. So, when I look at the energy bill that's going through there, and you're going to see a lot of politicization there, I think people need to really keep in mind that, now, the concerns about the environment need to be kept in balance with economic reality and that you know we all want to be able to drink the water from the rivers out there, but at the same time if your economy is in the tank, you go in the middle of Africa where the economic environment's terrible or in emerging markets, where people who cannot afford even the most basic luxury of environmental standards and has everything to do with the fact that the economy has been hampered so badly, they can't generate it. And the last thing we want to do is hamstring our energy industry so badly that is non-competitive to the point where we start causing further structural problems. Separately we're also starting to see Congress doing a little bit of pandering to voters regarding the economy, and I think that's going to be one of the interesting things that develops over the, you know this is an election year of course, and then of course we have the presidential election coming down the pike a couple of years down from now. Monitoring that will be interesting because usually when the economy gets into a slow down, politicians start grand standing and heck, I mean relating to energy we already saw these Congress men and women drag in front of a special committee, all the oil executives, Exxon, Mobil and so forth to get some great sound bites to blame, you know, Exxon for the rising prices, being you know, unfair profits. And the reality is that there's not a whole lot you can do, not to get back on the oil thing, but when your supply of oil is constricted, demand is high, and the money supply is basically [...] purchasing power. And all those other things that I talked about, yet, you know because of the economic pandering element of it, you've see already, the state of Hawaii has put on price controls. That kind of sentiment goes forward where you see price controls and capital controls coming out of an economic slowdown. Something to monitor because those sorts of things they tried in the 70's, they sound really good to the population that really doesn't have an economic understanding at any level beyond balancing their own checkbook, and some of them aren't that good at that if you look at the amount of debt that people have. You know to expect that voters will somehow become economic geniuses and be able to discern good economic policy from bad economic policy. I think it's just crazy, you know it's, it's like Churchill once said, you know, "the best argument against that kind of democracy is a five minute conversation with the average voter." That may sound really, really, really smug, but the average person is not remotely, you know, most people are economically illiterate. And yet, Congress is first and foremost looking to get elected at the next election, and they will sell whatever it takes to get elected. And that's a dangerous thing. So as we see, you know talked about tax cuts or not or you know what's...I've been reading an article earlier about Hillary Clinton doing some grandstanding and trying to get some good points, how the democrats are focusing on the middle class now and you know, with tuition help and tax breaks and so forth. It's just, keep that in mind that whatever is very populous is probably going to hurt the economy more than anything because most populous types of things are free lunches. And you know the only places that free lunches get floated indefinitely is in government, but even that can't go on indefinitely. The, well, we're pretty much wrapping up on time here, so I'm just going to cut the show here and open it up to any more questions that are out there. Anybody out there have another question? We had a couple of good conversations earlier. Alright, well on that front we'll pick up where we left off next week where we left off today and do a little more of a market recap next week for some people. And I want to also, maybe touch on, again some of the things I alluded to, you know, maybe discuss a little about the Pittsburgh region, but obviously too much on the plate for just one short hour. But in the mean time, thanks for listening folks and lets, definitely let your friends and colleagues know about the show and have them call in. You know, I like the open question format, for people just to pipe in and go from there. So again I appreciate everybody who is tuned in on the show today, and the good questions and I look forward to