Follow Up on FJ Prediction from February 11th, 2008

Back on February 11th, I predicted that we would be seeing $4 gas by Memorial Day. Here's a link to the previous post.


http://www.blogger.com/post-edit.g?blogID=1336300683106618557&postID=2190842543631246914

BTW, the picture above is from a local gas station here in Santa Fe. As you can see, I was damn close in my prediction! Of course, at the rate oil is going up right now, I'm probably a week early on my prediction. But $4 gas is a reality now in many parts of the country.

Saudi Arabia and OPEC have us literally over a barrel right now. Poor pathetic Bush went to Saudi Arabia begging them to pump more oil, but why would they do that? Of course they said no, and they also told him that they don't like us devaluing our dollars like we've been doing.

They've told us they are going to raise the price of oil $4 (or 3%) for every 1% the dollar goes down in value. That's a pretty steep penalty but I'm still not sure that our leaders get it, yet.

Well, they get it, but they're doing the wrong thing. Congress is talking about suing OPEC, like that's going to help us get more oil. We've also got Hillary and Obama wanting to increase taxes to oil producers (which I think is a big mistake).

The biggest impact our Government could have on energy prices right now is to support the dollar. Just think what would happen if Bernake on Tuesday made a surprise 1% rate increase to the Fed Funds rate. Immediately, you'd have a flood of money move out of the commodity market and into dollars. Likewise, ending the war in Iraq and bringing the troops home would also be a big support to the dollar. Pipe dreams like a balanced budget would also work, but I'm not counting on that happening until China and Saudi Arabia decide they don't want to loan us money anymore.

In the meantime, the best way we can fight back is to use less oil. That means driving less, being more strategic with your errands so you can combine trips helps. Keep your car tuned properly and make sure the tires are properly inflated. If you're in the market for a new car, buy a more fuel efficient vehicle.

Oh yeah, call your congressmen and women and tell them you're not going to vote for them in November unless they do something to strengthen the dollar!

More predictions coming soon! They will be doozies!

Masking a lousy market with a declining dollar

So, what do you think of the bull market in stocks that we've been in since 2003? In 2002 the Dow bottomed out at 7701. It recently closed at about 13,000, and has been as high as 14,000. That means the market has gone up about 81% during that time.

The S&P also doesn't look that bad. It bottomed out at 800 in late 2002. It currently sits at about 1423, which is about 78% higher.

However, during most of this time, the dollar index has been declining against most other major currencies in the world. In 2002 the dollar index topped out at about 120, today it sits at 73, which is a decline of 39%. That means that the dollars you hold can purchase, on average, 40% less than they could just 5 short years ago.

So what, you say? After all, if your investments are up 80% and the dollar is down 40%, then that means you are still up 40%, right? Actually that's wrong. Losses are magnified on the way down. A 50% decline wipes out a 100% gain.

It's important to view our market from a foreigners perspective. After all, they have lots of money and they choose where they want to invest it. Many foreigners like to invest in the United States and our stock market because it has been such a good place to keep their money for many years. That is, until this latest bull market.

From 2002 to 2004, the stock market was in major rally mode. Aggressive rate cutting by the Federal Reserve (down to 1% on the Fed funds rate) gave the stock market a reason to rally. The market jumped up 33% during this time, but to foreigners the rate was not that great because the dollar declined 30% during this time. So all the gains in the market were not realized by foreigners, they essentially broke even on a nominal basis.

2005 was a more interesting year. The Federal Reserve decided to start raising interest rates again. They steadily moved the Federal Funds rate up from 1% in mid 2004 to 5.25% in early 2006. During this time the dollar rallied 10%. However, on the stock market side, it was the weakest year of the rally. The stock market went up about 5% in 2005. For American investors, this was a so-so year. Foreigners, on the other hand, had their best year of the current market because the 10% gain in the dollar juiced their 5% market gains to give them a 15% return for the year.

Then, starting in 2006, the dollar resumed it's slide down from 90 all the way down to where it currently sits at 73. That's a 19% decline in the value of the dollar. However, on the stock market side, the S&P 500 went from 1285 to it's current value at 1423, that's only a 10.7% gain. This means the market has been declining for foreigners during this time, they're down 8% even if nominally the market is higher.

So, over the past 5 years the average foreign investor has not made any money in the stock market. I could make the argument that it's the same for American investors because our dollars buy so much less than they did back in 2002 (thank you inflation).

I have talked in the past how dependent we are on foreigners to fund our excesses. If you were from France, or China or Saudi Arabia, how much longer would you have patience in the American stock market if it's earned you a big fat goose egg for 5 years running? I've got a feeling that their patience is wearing thin and they're looking for any excuse to pull their dollars out of our market and go invest it in something else.

Of course, everyone is talking about how the dollar is set to rally right now. After hitting an all time low of below 71 in March, it has moved up to 73 currently. However, what is going to cause foreigners to want to buy more dollars (more demand for dollars will cause the dollar to rally)? I don't see any rally in the dollar until Ben Bernake grows a pair and starts to raise interest rates.

Despite the tepid rally in the dollar right now, I think it's setting itself up for another 10% plunge before the end of the year, maybe more. In the meantime, any rally in the stock market will be completely offset by declines in the dollar.

There is no new wealth being generated in our country, there hasn't been for a long time.

Meat!

With all the bad news about inflation going on right now, especially regarding food and energy prices, there is some good news out there.





The price of meat is going down. Way down.





In fact, last week I picked up some 85% lean hamburger meat for $1.65/pound. I also picked up boneless, skinless chicken breasts at $1.88/pound.





This week in my Albertsons circular they are advertising USDA Choice Top Sirloin or Petite Sirloin steaks at $2.99/lb. Roast beef is only $6.99/lb. These prices have to be about 30% lower than they were a few months ago!





Are you ready for the horrible reason why these prices are going down? The herds are being culled. Feed and grain has gotten so expensive that many ranchers are killing off a big portion of their herds to save money. This has created a temporary glut of meat in the marketplace. Therefore prices are going down!





It is time to go to your local grocery store and stock up! Fill your freezer to the brim with as much as you can now, because in a few months the glut will be over and prices are going to rise in a dramatic fashion.





A typical frost free refrigerator can keep meat fresh for about 6 months. A deep freezer can keep meat fresh for years. I recommend you try to estimate how much meat you will eat during the next 6 months to a year and go out and purchase it now!





Likewise, look to milk, eggs and other dairy products to keep going up (hens and dairy cows are getting slaughtered, too).

An Inflation First

Sorry I haven't posted in a while, it's been a busy few weeks. Last weekend I drove up to Denver from Santa Fe and I got my first real inflation shock.

For the first time ever I spent $100 on gas in one day.

I did two fillups and that's all it took to put me over that limit. I also had to fill up twice on the way back and again on Wednesday.So, since last Thursday, I've spent close to $250 on gasoline.

Holy crap that's a lot!

Also, since last Thursday when I filled up in Santa Fe, gas has gone from $3.39/gallon to $3.65/gallon. Again, this is in one week.

I'm pretty confident that my $4/gallon prediction will happen in the next month.

Once again, I just wanted to thank our illustrious leaders for leading us down this path of inflation hell. How are those rate cuts working for you?

So, Ben Bernake and the Feds have desperately and recklessly cut the Fed funds rate to save the banks and the housing market. They have failed miserably because housing is still imploding and the banks are still insolvent (for making too many bad loans to jerkoffs that could never afford them).

Now the value of the dollar is imploding (it's fallen from 82.5 down to 72.5 since they started cutting rates last August). Energy and food prices are exploding (now we have rice rationing at Sam's Club and Costco). Rates on money market funds are in the 1 - 1.5% range - well below the current rate of inflation.

This is the Fed solution, blow another bubble to bail out the housing bubble. Only this time we get a commodity bubble and people are going to starve to death! Right now, people in Haiti are eating DIRT because they can't afford food anymore!

We are being led by failures who don't know when to stop making bad decisions. I urge you to call your Senators and Represenatives and tell them to stop bailing out the morons who caused this mess. Tell them to stop spending money we don't have and tell them to stop destroying the dollar and the economy!

Do something, or else you'll be left with nothing.

FJ Quote of the Week

This goes right back to my previous post about 3rd Generation Wealth. I encourage you to read the whole post. "Market Ticker" is one of my links and I encourage you to check out his blog. I may not agree with everything this guy says, but he is right way more than he's wrong.

America simply will not stop being foolish. We have no leaders in this nation who will tell it like it is, and give it to us hard and straight, even when that is exactly what we need. Stocks are always supposed to go up, even when there is no consumer income growth to support rising sales. Home prices never go down. Incomes never decline and people never get laid off and businesses never fail.This is the fantasy land that America lives in, and it sucks.

I fight the outrageous consumerism that is drilled into my daughter's head by everyone she comes in contact with each and every day. No, you cannot have a $500 cell phone, and I don't care if your friend has one. No, you don't need a $100 pair of jeans; the $20 pair is just fine. No, you don't need three more swimming suits; you have two that fit. No, you don't need a new IPOD, you have an MP3 player and it works perfectly well.

This is not an accident. It is a matter of ingraining greed into our youth and ultimately into us, and it will destroy us. When times are good its fine to spend on vacations and toys, but not beyond what you can afford, because times are not always good.

Yet we never seem to remember that, or if we do, we don't care. We continue to believe that we can have something for nothing, whether its "free" health care, "free" prescription drugs, "free" retirement money or "free" digital music. When we don't get what we want we either whine to our government and demand it or, in some cases, we just steal it.

I'm tired of it folks. I see it every single day, all around me. Kids who think they are entitled to cars when they turn 16. No, they don't need to go get a job and buy one, they deserve that car and Daddy must buy it for them. Kids that once they get that car, don't need to buy their own insurance or gas - that's the parent's problem too. They won't ride the bus to school because its
"beneath them", and insist on driving the day they turn 16 - but they won't work to earn the money necessary to make that happen.

Here's the link to his post

http://market-ticker.denninger.net/2008/04/unbelieveable-stupidity-whiffs-abound.html

We Are All Paris Hilton

Bleech! I can't believe I'm putting a picture of this spoiled, brainless princess (with the dead eyes) on my blog, but I need to in order to make a point.

When it comes to family wealth, it typically follows this path.

Generation 1 is hard working and earns the wealth.

Generation 2 inherits the wealth and feels guilty about it, so they try to compensate by spoiling their children excessively.

Generation 3 is the most entitled and lazy generation and they usually end up pissing the family wealth away and end up broke.

Guess which generation Paris Hilton belongs to? Here's another one to ponder... guess which one George W. Bush belongs to?

Even though I am a member of Generation X, I feel that we are that Third Generation. And even though my generation is bad, Generation Y and the Millennials are even a more amplified version of spoiled and entitled.

We are constantly told that we are the richest and most powerful nation in the world, but if you look at the facts it speaks otherwise.

Americans have had a declining savings rate for decades and for the past 3 years we have had a negative savings rate.

Americans equity in their homes has hit it's lowest point since since the 1940s.

One of the biggest issues in this presidential campaign is National Healthcare. But, like the Medicare Prescription Drug Plan from a few years ago, no one is talking about how to pay for it. The Prescription Drug Plan added $9 trillion in unfunded liabilities for our government. The fact is there is no way it could have passed if the Medicare tax had been increased to pay for it. I feel it's the same for National Health Care, there is no way it will pass if it requires a tax increase because everyone is broke and the voters expect something for nothing.

Here's more insanity. The big $600 tax rebates everyone is going to be getting in a few months is being 100% financed by debt. We are borrowing money from the Chinese so we can go out to Wal Mart and buy some Chinese crap!

The Iraq war is also being 100% financed by China and the Middle Eastern nations buying our debt. If you think the war is unpopular now, just wait until they pass some kind of "war tax" or "gas tax" to help pay for it!

Big American corporations like Citibank, Merrill Lynch and Washington Mutual have had to go begging sovereign wealth funds (again owned by China and Middle Eastern Nations) and hedge funds to give them a cash infusion or else they'll implode. The concessions that the corporations are giving these entities are obscene and essentially loot the companies and screw the shareholders!

Our country requires $2 billion/day in foreign capital inflows in order to function.

Look at the proliferation of gambling in our country over the past 30 years. The poor play the lottery and gamble at the local Indian Casino. The middle class gamble in the stock market and in Las Vegas. The upper class have their hedge funds and gamble in Monte Carlo. The problem with this is that none of this actually creates "wealth", it's all just pushing dollars around while the dealers (the casino, Wall Street and hedge fund managers) skim a percentage off the top.

We actually spent through all our wealth years ago. The past 12 years we've been living in a bubble economy (first tech and then the housing bubble) which gives us the illusion of wealth and allows us to borrow money in order to maintain that illusion. However, like spoiled, 3rd generation heiresses, there will come a time when the banks say "no mas" when you call to get another increase in your credit limit.

We'll kick and scream and cry. We'll say "Do you know who my daddy is?!?" We'll threaten them with lawsuits or worse. However, in the end it won't matter. We'll have to reap what we have sown. It won't be pretty, but it will be necessary.

Maybe our country will learn a very valuable lesson. Nobody owes us a living. We're going to have to figure that out for ourselves the hard way.

Who knows, maybe the next generation (post-Millenials) will know how to build real wealth again.

Excess Capacity

A few years ago I read the following article.

http://dir.salon.com/story/tech/wire/2003/08/29/cars_and_drivers/index.html

In 2003, our country had a major turning point. For the first time in history, there were more automobiles in the United States than there were DRIVERS! What did I read into this article? I read that used car prices were going to plunge. Why? Because in a supply and demand model, if there is more supply than demand – prices go down!

In fact, this past week Yahoo had an article on the fastest depreciating automobiles. One item that stuck out on me was they were talking about the Kio Optima Minivan. This is a car that retails in the Mid $20k range if you buy new. It’s also one of the fastest depreciating autos in the country, losing more than 80% of it’s value over 5 years!!! To put it another way, the driver of the Kia Optima is paying about $416/month in depreciation costs just to drive that vehicle (that's on top of fuel, insurance and maintenance costs).

Even the "best" vehicles that maintain the highest resale value (think Honda and Toyota) lose approximate half their value in 5 years. That is a huge cost incurred by drivers of new cars, but if you are a buyer of used cars - this is to your advantage because you are able to keep more of your wealth.

I talked about autos in detail in my post “The Depreciation Monster” back in December (check it out).

I don’t want to sound like a broken record, but excess capacity is the problem with housing right now. There are simply too many houses/condos/lofts out there when compared to current demand.

It is very, very hard for me to pay full price for anything anymore. The big reason is that I know there are hundreds, if not thousands of people who I know bought something at full price, have never used it (or used it once or twice), and now want to sell it for pennies on the dollar.

Here’s another example. I am currently renting a house (I sold my house last year) which has a very dated kitchen. When we moved in, both the dishwasher and the refrigerator were original appliances and somewhere near 30 years old. Our landlord, who is a very old gentleman, was very resistant to replacing these artifacts. So my wife and I took it upon ourselves to find suitable replacements. Last year we found a 10 year old dishwasher in great shape at a garage sale. What did we pay for this dishwasher? It only cost us $25. We then went to our landlord and said we would give them the dishwasher if they would pay to install it. It was a done deal.

Then we set our sites on the refrigerator. Our landlord didn’t want to buy a new one. So we negotiated that we would replace the refrigerator if he gave us a break on the rent. He agreed, so this past weekend we finally found a suitable replacement. Someone in our neighborhood was selling their 5 year old refrigerator for $200. I went to see it and it was in great shape, I offered $175 and he accepted. This is a fridge that would easily cost about $600 if it was bought new.

Did you know that most retailers do have a policy that allow you to negotiate on the prices of what you purchase? Even big national chains like Best Buy allow it!

http://www.nytimes.com/2008/03/23/business/23haggle.html?ref=todayspaper
Excess capacity is everywhere. Remember how hard you work for your money and use every tool at your disposal to get the best price.