Economic normalcy headed for a tumble?

'May you live in interesting times.' - A Chinese blessing or curse By Brian Ochsner (baochsner@aol.com)

I’ve taken a good look and carefully analyzed American and international economic trends, and have a vision of what I think will happen in America’s economic future. What you’ll read in the next few minutes may be very different from past ‘normal’ financial and economic conditions. As an American, this may be a huge paradigm shift and a different type of ‘normal’ you’ll have to adjust to in the future. That’s why I’ve coined this post “The New Normal.”

Here are several financial and economic trends that I see over the next decade or two, and what you may need to prepare for them:

First, I see the transfer of economic power from West to East. The US is too heavily laden with debt, and has shipped off a good chunk of its manufacturing base. Europe has stagnated due to socialist economic policies in Germany, France and other countries, and faces the same challenge that American workers do: Competition with workers from China and India who will do the same jobs for 10-20 percent of the dollar of a European or American employee.

Some people believe that it’s their birthright as an American to have a high-paying job, high standard of living, and two SUVs in their garage fueled with cheap, plentiful gasoline. I grew up on a Kansas farm and ranch, and loved driving tractors, trucks and big cars that sucked down gasoline like I guzzle iced tea on a 100-degree day. Unfortunately, I don’t envision the return to these good old energy days, which leads to my next point.

I see the end of cheap petroleum-based energy sources in America and around the world. The concept of Peak Oil – where worldwide supplies of easily accessible crude are declining instead of increasing – may be closer than Americans think. Increased demand from China and India and a declining US dollar are two main reasons for higher prices at the pump. We also have a US Congress that has refused to allow drilling for new oil and gas sources off-shore, in the Arctic National Wildlife Refuge (ANWR), or anywhere else – at least until recently.

The American economy is heavily dependent on the free flow of affordable oil and gas. If – and probably when – oil and gas prices continue to go higher, the US will need to develop a “Plan B” for our national energy policy. Industries that are heavily dependent on fossil fuels, such as production agriculture, long-haul trucking will have to adjust accordingly.

There are some alternatives available, such as corn-based ethanol for gasoline and oil trapped in shale rock, primarily in Colorado and Utah. However, they’re not very energy-efficient, and won’t be available in large enough quantities to make a difference in the US energy supply for at least 5-10 years.

Third, I see the decline of the US dollar as the world’s reserve currency, where almost all of today’s transactions for crude oil and other commodities are done in greenbacks. Countries such as Russia, China and Sweden are diversifying their currency reserves out of the US Dollar, because they don’t like the high amounts of debt on America’s balance sheet due to large trade and federal budget deficits.

Some people – including Senators Chuck Schumer and Lindsay Graham – have said that the Chinese need to revalue their currency to a more ‘fair’ level, and the sooner the better. The senators and other Americans should be careful what they wish for. Current currency valuations allow Americans to import and buy plenty of cheap Chinese goods. If – and probably when – the Chinese currency strengthens against the US dollar, this will make these goods more expensive, reduce American consumer’s purchasing power and slow down a consumption-driven US economy.

Even if the Chinese yuan and US dollar were even in purchasing power, this wouldn’t make up the disparity in wages between what American and Chinese workers are paid. Most S&P 500 corporations are multi-national and not just American anymore. If these companies can make more profits due to cheaper labor and/or better currency valuations in another country, they’ll do it. That’s why I’m skeptical that America’s manufacturing base will come back anytime soon.

This leads me to another point, the decline of the safe, secure, high-paying American job. Our public and private education systems are based on the 20th Century Industrial Age, where students were taught to be good employees in what were new urban factories. Today we’re in the Information Age, where companies are in transition quicker, jobs are less stable, and your own security is based more and more on your ability to produce.

The US economy has transitioned from a manufacturing economy in the '70s and '80s, to a service economy in the '90s, now to a hybrid service/financial economy in the 2000s. A good number of jobs and wealth have been created in real estate, namely in construction, and with mortgage and real estate brokers. Americans seem to have forgotten that a country can only prosper financially when you make and sell a sufficient amount of goods to other nations, along with your own.

Thus I also see investors making a shift from financial paper assets to tangible assets, with the exclusion of real estate. This is because financial ‘assets’ (such as bonds and mortgages) have made it cheap for homeowners to borrow and buy bigger homes – known as ‘Garage Mahals’ and ‘McMansions.’

Because of America’s declining balance sheet, long-term interest rates on 10-year Treasury notes (which a lot of mortgage loans are based upon) are almost certain to increase. Quite a few homeowners will be shocked to discover that their home is their biggest liability, not their biggest asset. The lending sector can find creative ways to keep house payments lower. Specifically the new 40 and 50 year fixed-rate mortgages you hear advertised.

I believe that gold and silver will be excellent hedges against inflation and solid wealth preservers for the next 10-20 years, and my opinion is based on the analysis of economic and financial experts that are more experienced and savvy than I am -- folks such as Richard Russell (www.DowTheoryLetters.com), Jim Rogers (www.JimRogers.com), Robert Kiyosaki (http://finance.yahoo.com/columnist/article/richricher/2987), Marc Faber (www.GloomBoomDoom.com), and the best Austrian economist you’ve never heard of, Kurt Richebacher (www.Richebacher.com).

More Americans need to be financially and economically literate. They need to understand how to invest wisely, and how to sell and market so they can create income sources other than working for somebody else. You can still try to locate the almost-mythical “safe, secure job” to attain financial security. However, you may be looking for it for the rest of your life.

The best and simplest place to learn financial literacy is to read the best-selling book Rich Dad, Poor Dad -- or listen to the audio version (http://tinyurl.com/ndj5t). I’d also recommend playing a fun board game called Cashflow 101 (http://tinyurl.com/oepz8). It’s similar to Monopoly, and a very realistic game that shows you how certain financial decisions affect your financial condition.

Once you’ve learned the basics of financial literacy, then you’re better able to be economically literate. I recommend you read several websites daily to learn economic issues from an Austrian economic perspective:

www.DailyReckoning.com www.321Gold.com www.InvestmentRarities.com www.FinancialSense.com

We’re coming upon some very ‘interesting’ economic and financial times. If you understand the economic conditions, learn how they’ll affect you, and take action to protect and profit from them, you’ll be in good financial shape. If you stick with the old paradigms that don’t work anymore, well… you’re on your own.

Having said that, I still believe that Americans should hold fast to Judeo-Christian values and ethics, while making these prudent adjustments to changing economic times. In closing, I’ll leave you with the quote from the wise sage in the Indiana Jones movie Raiders of the Lost Ark, which is my advice to you: “Choose, but choose wisely.”

The downfall of General Motors

By Brian Ochsner baochsner@aol.com The mainstream media was like a bird dog chasing its tail covering the “Huntergate” story; then the “Portgate” story broke, and that became the frenzy of the week. Meanwhile the business press stayed focused on a more important matter: the struggle of one of America’s largest manufacturers and automakers, General Motors.

During most of the 20th century, GM was one of America and Wall Street’s ‘blue-chip’ companies that were good investments. However, if you examine their financial statements today like a doctor looks at a patient, you’d see a company with financial ‘cancer’ that’s bordering on being terminal. In business terms, they’re not far from declaring Chapter 11 bankruptcy, with Moody’s having cut their bond rating yet again. Here are a few reasons why GM is in such bad shape today.

Over the past few decades, GM management has bowed to the United Auto Workers’ demands for more-than-generous salaries and benefits. As a capitalist, I’m not against anyone making as much money as possible. However, when it puts your employer in financial jeopardy, you should probably think twice about it. The UAW has made some recent minor concessions, but hasn’t taken the strong medicine needed to help cure GM’s financial woes.

The biggest piece of pork that needs to be cut is the GM Job Bank. According to Jim Puplava of Financial Sense.com, that’s where 5,200 laid off workers receive full salary and benefits of over $100,000 annually, along with training for a new job. Along with this, GM still has the large defined-benefit pension liability on its books. It’s a huge cash drain both now and in the future.

With GM currently losing $15.14/share, it’s crazy to keep any such corporate entitlement program going. I’ve followed the stock and commodity markets almost daily since 2000, and the company that most closely resembles GM’s situation is United Airlines.

In 2001, UAL (a formerly blue-chip company with a good business reputation) had a stock price of $30, while losing $10/share. Eventually it went into bankruptcy, the stock became worthless, then UAL finally emerged from Chapter 11 earlier this year. However, it’s still losing money to the tune of $182 a share -- not exactly the peak of financial health.

Until GM management gets some backbone to stand up to the union bosses, I don’t see conditions improving for the automaker. But that’s not all GM needs to do. At the recent Auto Show in January, GM was trumpeting their great line of SUVs.

That’s great if it was 1999, gasoline was still cheap, and consumers were flush with cash from trading dot-com stocks. That’s not the case in 2006. Especially when the era of cheap energy is over, and folks are being squeezed in a financial vise: higher taxes from government on one side, and the not-so-hidden tax of inflation on the other.

Stevie Wonder must be in charge of the Vision Department at GM. How you can fail to see the market and world changing in front of you, and thus shift your manufacturing (quickly) to more fuel-efficient cars, is beyond me. From an accounting standpoint, the profit margins from SUVs are the biggest of any vehicle that GM makes. But if consumers don’t want to buy these vehicles as much as they used to, it doesn’t really matter or make any business sense.

How can GM regain its competitiveness? First, they need to stand up to the UAW, get significant reductions in salary and benefits, and address the defined-benefit pension plans – which are similar to Social (In)Security and Colorado’s PERA plan. It also needs to eliminate the welfare program called the GM Job Bank – which will save them a decent chunk of cash annually. Then it needs to radically shift its product line to meet market demand, similar to what Toyota is doing.

Even if GM could wave a magic wand and do all these things tomorrow, it still might not be enough. That’s because of the crushing debt load it carries: $330 billion in long-term and other liabilities, compared with $35 billion in cash.

You may be thinking, “Couldn’t GM just declare Chapter 11 Bankruptcy, and get a helping hand from Uncle Sam – a la Chrysler under Lee Iacocca in the early 80s?” Yes to the first part of the question, and no to the second.

I believe GM will file for bankruptcy protection in the next 12 to 24 months, because they’ve simply dug themselves too big of a financial hole. Present and future pension liabilities, above-average salaries and benefits, combined with declining overall sales and market share are the reasons I believe this will happen.

The UAW seems perfectly content not to give any significant ground to ‘the man,’ just like they always have. GM will have a showdown at the OK Corral when its current UAW contract expires in September 2007. I’m not sure the company can hold off Chapter 11 that long if current trends continue.

But a '70s-style rescue from Uncle is unlikely. President Bush has already hinted that Ford and GM won’t get bailed out by the feds if they go into bankruptcy.

The main reason the government can’t step in like it used to, is because of the huge federal budget and trade deficits. Some foreign central banks (such as China and Russia) have hinted they don’t want to hold any more American dollars or US Treasury Notes than absolutely necessary.

Savvy foreign leaders and financiers see the handwriting on the wall: With the world awash in a huge supply of US dollars and dollar-denominated debt, the value of these paper assets will eventually decline. They don’t want to be caught holding any more of these declining-value ‘assets’ than absolutely necessary. This means some of our major foreign lenders won’t lend us the money for more credit craziness down the road. (The best book available on this topic is by NY Times best-selling authors Bill Bonner and Addison Wiggin, titled Empire of Debt.)

General Motors is currently Number 3 on the Fortune 500 list of America’s largest publicly-traded companies. It’s a travesty that management and the UAW fiddled for decades while GM was financially burning. Time will tell if they can put out this financial fire. In the meantime, this story offers some valuable lessons for investors, workers and future retirees.