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Now that the 2008 election season and the immediate aftermath have come to a close it is time to
focus on the actions required to deal with our country's major issues. President Elect Obama is moving quickly
to appoint his cabinet and other key advisers.
Our nations financial/economic crisis continues to evolve.
Unemployment continues to rise, The CPI was negative last month. Gasoline at the retail level is selling around
$2.00 per gallon or less in many parts of the country down from a peak in excess of $4.00. I paid $2.01 a
couple of days ago. The big three US auto manufacturers are running out of cash and may face bankruptcy.
Many financial organizations continue to fail or require federal government support to stay viable. Obama has stated
publicly that he will have a fiscal stimulus package developed and ready to be implemented as soon as he takes office in January
2009.
Virtually everyone in government, the Federal Reserve and the informed public believes that it
is not acceptable for the US government to allow the current economic crisis to evolve into a modern day depression.
Every politician knows that a very deep recession or depression will create incredible unrest among the American people and
their political careers are at stake.
Ben Bernanke, the Chairman of the Federal Reserve, is an expert on the history
of the Great Depression. He is known as "Helicopter Ben" for his statements several years ago that the
Federal Reserve should distribute cash from helicopters if it must to keep Americans financially solvent.
The incredible growth of the money supply during the past few months tells us that Helicopter Ben is in action pushing
huge amounts of cash into the financial system. History has shown that it takes some time for huge increases in
the money supply to impact the broader economy.
The combination of Obama's fiscal stimulus and Helicopter
Ben's increases in the money supply will inject a massive amount of fiscal stimulus into our financial sysem that
will likely have a material impact on the economy sometime in the second half of 2009. There are different
opinions as to what may happen as a result. Some experts believe the combination of actions will eventually
produce hyper inflation in the US similar to what happened in Germany in the 1930s. Other experts believe the stimulus
will produce mild inflation that can be easily managed by the Federal Reserve once the economy recovers and the financial
system is more stable. Others believe that the stimulus will fail to have any material impact and another great
depression is unavoidable. The last group believes a depression is eventually required to correct over
50 years of poor fiscal management by the US government and the excessive use of credit in the US economy.
I
don't pretend to have a crystal ball that tells me exactly what will happen. However, I believe that extremely well
defined long term economic/financial cycles are real as they reflect changes in the actions and emotions of large populations of
human beings interacting with one another over long time frames. It appears that human beings are not capable of
permanently learning economic lessons as their environment changes through decades of generational change. We always
hear the classic phrase "This time its different." The reality is that the world environment is different
but the fundamental principles are not. Fundamental principles always rule in the end.
One
of the major issues we all face when we look at the long term value or buying power of our assets is maintaining
the economic value of those assets over time. Our government and many other organizations use the Consumer Price Index
(CPI) to determine buying power adjustments. The CPI has become an unusable adjustment mechanism in the past two decades
because it has been politicized and no longer truly reflects changes in consumer buying power.
I believe
the the spot price of gold is the best mechanism to truly make value comparisons over decades or a century. Gold has
served as a currency since the beginning of trading in ancient times. Virtually every person in the world from the most
sophisticated investors to those that are dirt poor understands that gold represents wealth and value.
The US dollar could be exchanged for gold on demand with the US Treasury as recently as the Nixon administration in the
early 1970's.
There are many ways to measure the overall financial health of the US and the buying power
of financial assets. The Dow Jones Industrial Average (DJIA) has been used a measuring stick for our economic health for
about a century. Therefore, I think the DJIA can be used as a simple proxy for overall national financial health.
The most meaningful financial cycle to me is the long term ratio of the DJIA to the price of one ounce of Gold.
This ratio allows one to assess the fundamental buying power of financial assets in terms of a standard of
wealth that has stood the test of time. If you look at the long term chart of this ratio going back to the late 1800s
through today it reveals an incredible ride. The ratio rose from around 2 in the early 1900s, peaked in August
1929 at 18, and then declined to 1.5 in February 1933. The next peak was a ratio of 28 in February 1966 and then
a decline to 1.2 in January 1980. The most recent peak was at 42 in May 2001. As of today the ratio is 10.
You need to look at this chart to get a full appreciation of its powerful message. If you send me an email request
I will send it to you. The big question is "Where is this ratio heading?" Is it heading down to the
1 to 2 range like the prior bottoms in the 1930s or 1980s or is it heading higher?
For those of us that
are trying to manage our personal assets in the current environment the answer to the question regarding the destiny
of the DJIA to Gold ratio is critical. How can we protect the buying power of our assets in the current
economic conditions? Are we destined to complete the historical cycle or is it different this time? What does
it mean to the economic health of our nation if we return to a ratio of 1 to 2 in the years ahead?
More to come
on this subject from TPM.
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