After five straight days of losses, Wall Street managed to steady itself yesterday. The Dow rose only 12 measly points; but that was a relief for most investors.
Oil held steady too – at $35. And gold lost a dollar, to drop to $807.
The big question is a question of faith. How much faith do you have in the feds? They aim to get inflation fired up. They’ve got the fire-starters. They’ve got the matches. They’ve doused on the gasoline. But so far, the whole world economy is still waiting…shivering…hoping for a spark.
Yesterday, Congress released another $350 billion in bailout funds. And Barack Obama and the democrats announced their own bailout/stimulus program – with an $825 billion price tag.
Christmas is over…but the Obama plan is keeping spirits bright around the capitol. Never in history have the feds had so much in money to share out…money they haven’t even stolen yet.
The program includes “huge increases in federal spending on education, aid to states for Medicaid costs, temporary increases in unemployment benefits and a vast array of public works project to create jobs,” reports the International Herald Tribune.
In Europe, the ECB cut rates. The IHT reports on that to
“Alarmed by the rapid economic downturn, the European Central Bank on Thursday lowered its benchmark interest rate by half a point to 2%, and hinted that the rate would fall further from what is already the lowest level ever.”
“The data surprised everybody about how negative it turned out…” said an economist watching the ECB.
But will all this extra kindling be enough to get a blaze going? How much faith do you have, dear reader?
“Economic conditions around the world are horrible and will get far worse in 2009 despite all the fiscal and monetary measures that are now being implemented in order to ‘save’ the system,” writes old friend Marc Faber. “In fact, I believe that in the US and stimulus package and the various bailouts engineered by the Fed and the Treasury will make matters far worse than if the free markets had been left alone to make the necessary adjustments.”
The feds might manage to get a blaze going, but it won’t necessarily be the nice little, crackling fireplace treasure they’re hoping for. The system of debt-addled investors and homeowners is over. All the feds can do is to blow up a new bubble – in public debt.
What effect that will have on the economy…or on investment markets…no one knows. Never before has the world’s reserve currency been purely paper. And never before have its custodians been so eager to set it alight.
*** What’s normal?
Looking at the long sweep of the stock market, we notice that there’s nothing unusual about today’s prices. Au contraire, they are more ‘normal’ than prices were a year ago.
Colleague Simone Wapler handed us a chart of the French stock market going back to 1900. With prices adjusted for inflation, what we see looks like the Alps. There are peaks and valleys. The pattern is irregular…apparently unpredictable. But there’s no mountain with only one side. Every time prices went up…they went back down.
The CAC 40 rose during the boom years of the ’20s…and crashing during the ’30s. Curiously, it rose to a new peak during the German Occupation in the ’40s and fell in the ’50s. The next peak came in the de Gaulle years, in the early ’60s. Then, price fell for the next 20 years. As in the United States, the most recent bull market began in ’82 and collapsed last year. But even after the recent rout in share prices, stocks in France are only back to their average levels. The numbers show that an investor who bought shares in 1900 could have held them for the next 108 years and still not have made a penny in capital gains.
Normally, you do not make money from rising share prices. You make money from dividends.
*** Simone used to be an aeronautical engineer; she worked on the development of the Airbus – the plane that just went down in the Hudson River.
“It’s safer for them to do a crash landing on water,” she explained. “Less of a risk of fire. And it takes a while for them to sink…so you have time to get out.
“When you land or take off, there is always the risk of birds getting in your engines. When I was at Airbus, we conducted extensive tests…in which we threw chickens into the turbine engines to see how many they could take. They had to be free-range chickens…the others are too soft. Trouble with birds is that they tend to flock together… but I don’t remember how many chickens an Airbus turbine can handle before it stalls.”
*** “Ford chief doubts a return to old times,” says the Financial Times.
This week, the annual Detroit Auto show is underway. America’s automakers are sitting at the wheels of their new electric/hybrid cars…and driving into the future.
It used to be said, “What was good for GM was good for America.” Now, what is bad for GM is also bad for America.
We have vowed to focus on the bright side this year, so we will look at the half of this glass that has the water in it. There, we find an explosion of invention and innovation in the auto business.
Detroit dominated the auto world after WWII with a simple idea about what a car should be – a piston engine attached to a standard drive train. For the next 50 years, the basic plan didn’t change very much. Detroit designers added tail fins…and then withdrew them. Engineers figured out automatic transmissions, power steering and air-conditioning. The French added radial tires and front wheel drive. But neither the car not the business model was substantially altered.
But all of a sudden, America’s big automakers are going broke – and neither the auto business nor the auto is the same. Now, autos are being made with new materials…new engineering and a new power plant. Now, the key to the auto of the future is no longer the internal combustion engine; according to the press, it’s the battery.
This is what happens to any business…or any society. Detroit can make big SUVS, trucks and cars – all based on the post-war model. But what does it know about composite materials and batteries? Not that it is impossible for it to compete. But it has a huge disadvantage – while newer, lower-cost competitors start fresh and fit…Detroit enters the race with a 2-ton piece of junk on its back. It has generations of mechanical engineers for whom it must provide pensions…an army of bolt tighteners and metalworkers it must rehabilitate…acres full of manufacturing equipment suitable for making 20th century cars and trucks.
Meanwhile, a company in China is producing an electric car that it says will go 250 miles without a recharge. The company is not an automaker at all – it’s a company that makes batteries for cell phones.
Yes, dear reader, that’s the way the world works. Just when you get something figured out, the facts change. Then, you find yourself no longer at the front of the race…but dragging along at the end. All that you learned and put in place is no longer an advantage, it’s a liability.
And yes, as Detroit goes…so goes the United States of America. Cock of the walk in the 20th century, it now finds its infrastructure…its financing…and its training all inadequate or inappropriate for the challenges of the 21st century.
for The Daily Reckoning Australia