interesting reply to query on oil and deflation

[David Farber <dave () farber net>]

-----Original Message-----
From: David Farber [mailto:dave () farber net]
Sent: Thursday, August 25, 2005 4:08 PM
To: robertslee () verizon net
Subject: Re: [IP] more on Lauren Weinstein's Blog Update: CNN Dropped  
From
U.S. Naval Academy Video Network

say more


On Aug 25, 2005, at 3:43 PM, Robert Lee wrote:

The rise in oil is perhaps the most deflationary event of the last two
years.  The higher it goes the more deflationary it will be.  We are
approaching straw that breaks the camel's back territory.





Begin forwarded message:

From: Robert Lee <robertslee () verizon net>
Date: August 25, 2005 5:26:38 PM EDT
To: 'David Farber' <dave () farber net>
Subject: RE: [IP] more on Lauren Weinstein's Blog Update: CNN Dropped  
From U.S. Naval Academy Video Network
Reply-To: robertslee () verizon net


The price of petroleum is a huge stress on the consumer.  First,  
gasoline.
The cost to drive your car.  My wife's car now takes $75 to fill.    
My first
car cost $73.  My first Subaru cost $1,907.40 and cost $2.80 to fill.

The cost to heat your house is soaring.  The cost to light your house is
soaring.   The only mitigating situation is if your local electric  
company
was long, rather than short, in the petroleum market.

People are more indebted than ever before but their balance sheets  
look good
for one reason only:  their houses.  Once the value of their houses  
declines
their balance sheets go in to the crapper.

So on the one hand the consumer who supports the economy, the Kmart  
shopper,
the Walmart shopper, the person who spends 100% of their income, is  
fading
pricing pressures for gasoline and utilities.

His house price will come under pressure.  Right now the inventory of  
new
and secondary houses is rising and the prices are abating, even  
coming down
a tad.  The sales by units are not mitigating---they are rising---,  
but the
secondary signs---number of units available, price, number of days on
market, are worsening.

Oil then increases the costs of myriad other products.  Or it increases
profit pressures on the manufacturing sector.  In either case it creates
more pressure to find gains in productivity.

Another front is approaching:

Business/government relationships go though well known phases.   
Governments
are set up to represent people.  People start businesses.  The  
businesses
grow.  Over the course of a couple hundred years the business input to
government surpasses that of the people (customers) and the government
begins to represent the businesses.

Bush represents big business.  To the hilt.  Everything he has done  
has been
good for business and bad for the citizen.  He let Microsoft go, even  
after
they were convicted.  There has been no meaningful anti trust  
prosecution
since he began.

The most outrageous mergers and consolidations have been allowed  
using the
excuse of economies of scale.  What do economies of scale mean in
broadcasting?  Well, naturally it means that there will be less  
programming
per listener and viewer.  In other words, distribute the same content to
more people.  In point of fact, there are almost no economies of  
scale in
business.  Only in two businesses can you even make a reasonable
argument---manufacturing and distribution.

In every field companies have been merging and acquiring.  Cisco, a few
years ago, acquired 75 companies in one year.  What is the core  
growth of
companies today?  We are not allowed to know.  The company that  
bought mine,
WebMD, has had NO core growth in six years. All the growth has been from
acquisitions.  Acquisitions are done for dishonest reasons.  It  
enables you
to capitalize what would normally be expensed.  So you can show  
profits that
you don't have.  If a company bought Brazil, the company could put  
out a P&L
with expanded revenues for sure.  But is that growth?  You have  
Brazil.  Is
that a good business to have?  Was it good for Brazil?  Then why  
should it
be good for you?

How many router companies do we need?  Who cares what kind of router you
have?  Who is going to pay for telecommunications services in the future
when every kid knows that telecommunications is simply a  
characteristic of
the network, that there is no such thing as a telecommunications  
service,
there is only an application that can be shared among consenting  
persons?

Cars used to last two years before they started to fall apart.  Now they
last the better part of ten.  And more.  Cars have never been cheaper in
adjusted dollars.

All over the world there is a glut of goods.  Commoditization is  
subsuming
brand.  Where is there a "Pontiac man", a "Chevrolet man"?  Who among  
us is
a "Nokia man"?  We buy the best deal, we often buy with little regard  
for
brand.   Sometimes we don't even buy. We don't buy cell phones. We  
get them
for free. Each time a different one.

I just bought a digital watch.  I did not go into the store and ask  
for a
certain brand. My kids bought a camera.  I am not sure they know what  
brand
it is.

Another kid just bought a dirt motorcycle.  He did not shop for brand.

All over the world there is a race among companies to achieve  
productivity
gains.

What is this process called productivity gains?  It is precisely a  
calculus
limit.  It tends toward the state where everything is produced by no  
one.

But if everything is produced and no one has a job, then who buys?

This also increases the pricing pressure on business.  Lower wages and
higher costs for heating our houses and driving our cars is a  
deflationary
perfect storm.

Finally, although the endgame is messy, we move from fascism (where the
government represents the people) to communism (where the cabal of
government and business are forced to produce according to their capital
investment ability (flip side: need) to produce...and to distribute  
to the
people according to their need (flip side: ability to absorb)).

When you employ people and you have a downturn you can fire the  
people. When
you employ capital you cannot.  Capital intensive businesses are  
routinely
driven to extremes, having way too much inventory when times are bad,  
and
not being able to gear up when times are good.  Capital intensive  
businesses
are like driving big ships and labor intensive ones are like driving  
speed
boats.  Capital intensive businesses have very low marginal costs.  Thus
they often sell for prices that merely meet the marginal costs but do  
not
share appropriately in the cost of the capital.  The businesses have no
alternative.  Productivity is the conversion from people intensive  
(labor
intensive) to capital intensive.

That is where we are going.  I cannot see a way out.  Man has no self
control.

Oil is merely a significant acute event in a terribly secular long term
unvirtuous cycle.  The increase in oil is simply going to make it  
harder for
the consumer to consume as many goods.

The impact on our culture is that we will become house-bound, become  
more
insular, live "virtually" through our computers and TV's, make fewer  
bonds
with real humans, etc.

This, in fact, may be why today there is precious little protest  
against the
Bush administration.  We are already living in a virtual TV world in  
which
we view these horrid events as entertainment.  We no longer view our  
lives
as real.  It is not happening to the real us.  There is no real us.   
Making
it easier is that the soldiers who are dying volunteered.  They are not
"us".

I used to pick up hitch hikers. I used to hitch hike.  I am still  
friendly
with people who picked me up and people I picked up. There are no hitch
hikers today.

We are furtive. We are scared.  We are quiet.  We are hoping.  I  
think we
all know something is very wrong.  But we are not sure what or how to  
fix it
and so we shut up, hoping that we will be all right, hoping the term
disintermediation does not mean us.

I don't know where to stop.  It all seems so clear to me, it all  
seems so
connected, it all seems so unstoppable.

We are nearing the end of our run.  Who says so?

The bond market is at total variance with the stock market.  Never  
has there
been such a divergence of opinion.  The stock market says we are  
headed for
growth, for better days. The bond market says we are not headed for  
growth.
Almost nobody disputes that the bond market is smarter than the stock
market.  Yet stock gurus are saying the bond market is in denial.

I cannot remember a time when the bond market was wrong.

The yield curve is familiar to many people.  An uninverted steep  
yield curve
(high long term rates, low short term rates) is a good sign for the  
stock
market and asset owners in the intermediate term.  A flat or inverted  
yield
curve is a bad sign for the stock market and asset owners.  We have a  
very
flat yield curve now.  The people who have real money are selling that
money, long term, for not a lot of interest.  Why?  Because they are not
fearing inflation.  What is inflation?  That is simply your house
appreciating!  The big money boys are betting that it will not  
appreciate.

The US government is taking advantage of the yield curve by  
refinancing its
debt into 30 year instruments, taking advantage of people's  
willingness to
take a modest return for 30 years, come what may.

In the spring of 2000 I had a long talk with the CEO of a major stock
brokerage.  I asked him what he was doing with his own considerable  
money.
He said he was buying municipal bonds.  Five years later the Nasdaq  
is less
than half of where it was and the Dow is 90% of where it was.  He is  
still
in bonds.

Sorry for the diatribe. Feel free to edit.  I am a bad organizer.

Robert Lee

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