Different This Time vs. 1980

Dangerous words, right?
Does the current climate and commodity bull market resemble the 1970 decade?
To me, such a claim is really lacking in substance.
After a quick read of this brief comparative analysis, answer the question:

Most claims of decade similarities are a bit trivial, obvious, and not important. Crude oil has tripled in price, from its origin to the present. Gold has more than doubled from its origin. Stagflation threatens to grip the USEconomy. Conflicts with Persian Gulf oil producers are prevalent. These are to be sure. However, differences are profound and extremely critical to stock investments, monetary policy, pricing dynamics, and economic development. These dissimilarities are so great that the current climate differs like summer and winter. Each season has sunshine, precipitation, and winds. Summer and winter each offers sunburn (in winter, try the elevations in Colorado), offers occasional dumps in precipitation (snow blizzards versus rain floods and hail storms), and requires battening down the hatches against wind damage. The big temperature contrast, bite of the chill, withered leafy formations on trees, and frozen structures make for the profound change that keenly identifies winter. The same holds for this decade versus the 1970 decade, whose differences are so huge, so deep, so wide that it is almost tragically humorous to hear of claimed similarities.

Back then we escaped after a couple of very harsh years, conned and fleeced the Arabs who suffered erosion in the Treasury Bonds bought with recycled petroleum sales revenue. The conjob was so blatant, so shameful, like a pro dealing with a vulnerable rookie blessed with an inheritance. The US "deal" with Saudis can be compared to a Mafia don setting up shop with the high schools in suburbs where kids widely inherited parental fortunes, offering sports gambling cards to the brats. The mob offers 4-to-1 returns if a kid can select 6 winners against a point spread. By the way, that is a 64-to-1 odds event paying out 4-to-1 rewards. As interest rates rose directly from USFed decisions, Arabs lost a fortune. That is a key difference between back then and now… Arabs and Asians will not get screwed on their reserves. They will diversify more out of USTBonds and rely less on the US$-based securities. The financial world is less USTreasury centric.

The United States adapted, adjusted, and worked in the 1970 decade to become more efficient as a nation in energy usage. Tighter gasoline efficiency was legislated, along with lower speed limits. Tax credits were granted for renewable energy device deployment. Nowadays, we are not adapting to anything, but rather work to create more extreme situation. The Soviet counter-balance is gone, permitting the United States to exert its will with no resistance on a global scale, except with respect to the energy wars and its many tyrants lying on the periphery to OPEC. The lack of military balance seems to be matched by a coercion globally for foreigners to hand over savings, and to finance the $3.2 billion in daily credit requirements. Somehow the label of "international extortion" seems fitting. See "Petro-Dollar & Protection Racquet" from April 2005 for a fuller layout.

Instead of adapting to become more efficient, the USEconomy has become more pig-like with larger vehicles and SUV's, larger houses and utility requirements, larger household debts, more abuse of home equity, and no seeming regard whatsoever to direct attention nor efforts toward remedy. The entire justification of a consumer economy, hellbent on lifting the shopping mall as shrines to capitalism, building a system upon a sandy foundation, all this sounds ludicrous in the present and hardly evident in the 1970 decade. We have proceeded through at least three wondrous economic mythology exercises since that time, each more preposterous, yet accepted, than the last. Note the trickle down theory, the tech-telecom productivity miracle, and the flexible credit system, each heretical in description, fully practiced and endorsed by lunatic bankers. A system built upon inflation for wealth generation must deceive both its participants and its credit suppliers in order to continue to perpetuate itself into the future. What Bernanke needs more than ever right now is some cockeyed new economic mythology to sell to the world. Unfortunately, the US might have sold its last moronic pitch. A darker, more risk laden, more violent, less free future is what lies ahead instead.

Sorry, but claims of similarity in the decades end abruptly with rising oil and gold prices, or more generally rising commodity prices. The peering heads of those prices above the surface of trading exchange floors hide their entirely different structure under the surface. Implications to stock investments, monetary policy, pricing dynamics, and economic development are staggering. These implications are discussed and analyzed in depth in the upcoming July Hat Trick Letter issue, due out in midmonth as usual. This topic lack of parallel has been a repeated theme of mine for months on end. There is almost no similarity beyond the superficial which the naïve public might not even be capable of comprehending. In the differences lie the important meat of the matter. We are in winter, where debt deflation is a monstrous threat. Constant, even accelerating, credit supply is essential in order to maintain flat economic growth. It is at grave risk that central bankers are uniformly hiking interest rates and tightening on liquidity. This is precisely how depressions occur, misjudgments at critical decision points. Back in the 1970 decade summer, reflation was a simple breeze, as easy as a walk on the beach. Nowadays, central bankers have urged a walk by the USEconomic children along the high ledge next to the precipice with the chasm below in obscured view.

CRUDE OIL
Back then, crude oil supply was constricted by embargos, with sudden price shock hitting the USEconomy like a ton of bricks. Back then, the global economy had to adapt to an immediate triple in oil price, which took time. Now, crude oil is not in shortage, but energy deposits are in depletion in every major global production zone. Now, powerful Chinese & Indian demand is new, growing, and relentless. The oil price has risen largely due to this fresh rising demand, which is not going away. Thus the crude oil bull market will be sustained for a much longer period, my guess forever. Implications to price inflation are huge, but not being integrated like 30 years ago. We simply cannot monetize the higher energy costs without sending the USDollar to the pits.

PETRO-DOLLAR
Back then, a new petro-dollar standard was in tumultuous infancy, as it struggled mightily to become accepted and used as the world reserve currency and commercial system for settlement of international transactions. Back then, an unsigned treaty guaranteed security by the United States. It was forged in return for Arab recycled petroleum revenue. The US Congress never signed any such treaty. Israel tolerated the agreement. Nevertheless, the Saudis hired on a security force in the grand picture, and could proceed to plunder their national wealth as the standard of living declined at a horrible pace for ordinary Saudi citizens. Now, the petro-dollar standard is aging and long in the tooth, failing from its extensions, under great strain from its chronic abuse, subject to global revolt being seen widely from Russia to Norway to Venezuela to Iran. Now, numerous oil producing nations are selling in non-US$ transactions, including our friends. Thus the USDollar bear market will be sustained for a much longer period. Some claim the USDollar petro standard is dead and buried, with prospects of its resurrection demanding a total overhaul. Probably so, which is a far cry from 30 years ago.

GLOBAL ECONOMY
Back then, the USEconomy was more a closed system. Hence, reflation was a simple prospect and undertaking to execute a plan. Back then, when the USFed increased money supply, wages increased with prices in a simple dance step. My first three salary increases saw a hefty 12% pay raise in the 1981, 1982, 1983. Even nitwits who contributed nothing received the same generous pay hike, people who were in truth a detriment to progress rather than participants. Now, the USEconomy exports inflation to Asians and Arabs on a larger scale. As the oil price rises, our foreign energy bill rises. Instead of asset bubbles just in Asia, they are present now in the Persian Gulf nations. As the manufacturing sector vanishes, our foreign product bill rises. Absence of US mfg means that US retail chains are replenished by Asian producers, paid handsomely. US wages stagnate. As the service sector erodes, our foreign bill rises further. Now, China & India eliminate the easy cost-push, and impose a tight price ceiling which renders an incredibly painful squeeze on the US middle class which was nowhere to be seen 30 years ago. Thus the USEconomy cannot benefit from rising wages so as to handle higher costs. The globalization phenomenon has rendered the United States as bankrupt, unless you expect the housing boom to continue ad infinitum. Not me.

STRUCTURAL MAKEUP OF US ECONOMY
Back then, the USEconomy had positive savings, a notable trade surplus, a still vibrant mfg sector. Economists plied their trade with effective policy to counter reckless politicians who turned the budget into a military subsidy and social network safety net. Paul Volcker made difficult choices to fix problems, unlike Greenspan who made easy choices to cover up problems. Now, the US has big negative savings, big trade deficits, and almost no mfg sector remaining. These negatives are not being remedied, as foreigners are demanded to fill the gap and do the dirty work for the obsessively consuming Americans. Now, the US is vulnerable to a recession and restricted credit, as bankruptcies rise. Our wages cannot overcome the rising costs of living, as outsourcing looms constantly as a bargaining chip to labor groups. Our product prices cannot overcome the higher material costs, when in competition from Asia. Thus the USFed will have a major challenge to inflate so as to prevent a collapse.

The USFed must get with the program and realize that they cannot fight inflation when that precisely is their reason for being. My disrespectful title for the USFed Chairman is the Secretary of Inflation. Cutting off price inflation is tantamount to cutting off the foundation legs of the USEconomy, namely the housing sector on the tangible side and the stock market on the financial side. Home equity extraction is the umbilical connection between the two, now showing strain from limited credit blood flow. Inflation is all the USEconomy has left for wealth. Well, we do have intellectual property (IP), which is quickly bestowed upon Asian laborers for wage benefit. Worse, IP royalty is often not collected at all, to the tune of $60 billion per year from China, and $250 billion per year globally. The main dangerous IP trend lately is that Research & Development as a function has been increasingly been exported to Asia, in particular to Taiwan.

To address the price inflation problem is to kill the patient, which has lived for several years on an intravenous lifeline from the grand credit vat. Back off, rookie Bernanke. Treatment of the problem kills the patient, even in the early stages of treatment. By the end of 2006, the banking community and investment world will realize the USFed has no more credibility. The tragedy we face is that we have no more bubbles to erect. We have so abused the USDollar that it must be devalued to obscenely low levels. We must keep the housing bubble alive. We must keep the stock bubble alive. We must not discourage foreigners from supplying us ever increasing credit. Flat growth is all we have had, not the claimed 5% GDP. If you believe that claim, you must believe price inflation is wandering around the 3% level, and has been for several years. Robust growth and low inflation are each a lie. Such believers see only through corporate bias and political lenses, or else are avid buyers of Tennessee beach front property. We are deploying monetary restriction in the face of flat growth, a slowdown.

We cannot yet turn on the printing press as the sole source for credit supply, since the brand name on that machine bears the "WEIMAR" nameplate. The concept is worth repeating. Constant, even accelerating, credit supply is essential in order to maintain flat growth within the USEconomy.

THE HAT TRICK LETTER COMBINES MACRO ANALYSIS WITH INVESTMENTS.

From subscribers and readers:
"Your free commentaries are of a higher quality than several of the fee-based newsletters that I have subscribed to. For a statistician, you have an incredibly high quality of writing. In fact, it may be the best that I have ever read."
   (David F in North Dakota)
"You are one of the very few people I know of, who has the ability to think in a continuous, clear and analytical manner. With only one, perhaps two other 'internet advisors', your analysis is the most cogent, clear, unambiguous, and forward seeing that I have yet to encounter on the 'world wide web' after paying literally thousands upon thousands of US$ in search of someone."
   (Joe Z in New York)
"You are on my fairly short list of economic writers who actually 'have a clue' which pretty much guarantees that I will be a subscriber as long as you a writer."
   (Bob T at USArmy base in Germany)

Jim Willie CB is a statistical analyst in marketing research and retail forecasting. He holds a PhD in Statistics. His career has stretched over 24 years. He aspires to thrive in the financial editor world, unencumbered by the limitations of economic credentials. Visit his free website to find articles from topflight authors at www.GoldenJackass.com. For personal questions about subscriptions, contact him at[email protected]