I don't know how many of you remember the terrific comic Gilda Radner, but she was one I really liked on the old "Saturday Night Live" TV show. The reason she comes to mind is a line one of her characters said when things seemed to go a bit awry. It was: "It's always something."
Of course, it was said in the context of a usually very funny skit and always brought down the house, as they say. But, Gilda comes to mind today as I write this column because for the last six months or so it seems it has been just one thing after another. First, it was subprime, then bond insurers, then housing prices, then a liquidity crisis — it always seemed to be something.
What I want to talk about today is another one of those "somethings" that just makes the list longer — the recent inflation numbers that were announced last Tuesday. I know, I know, nobody believes those numbers, anyway. But, they are troubling to me because of the raft of analysts all harping on the same note: "The dollar took a nose dive. We let it happen and now we are getting what we deserve!" But, that story line, frankly, misses the real story by a mile — maybe even more!
You see, as I view the problem, this current wave of inflation does not have its roots in the dollar decline at all. In fact, by historical standards, the dollar is finally closer to being on a nearly level playing field when it is compared to other currencies — closer than it has been for nearly 25-30 years. But, that's another story.
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What I want you to do today is look back with me to the 1970s and follow the long, narrow trail that unfolds and leads to what I believe is the real origin of this current wave of inflation.
It all really began when a rather obscure OPEC oil group announced, "No more Mr. Nice Guy." OPEC told the western world that it wanted more for its oil and if you didn't pay its price, then buddy, no oil! Well, the shock to the western nations is still talked about, written about, and analyzed in every way imaginable. But, the bottom line was that the battle for the world's resources began with that shot across the bow of the world's resource-short countries.
I don't know if you remember the kinds of adjustments made in the U.S., but the long lines at the gas pump are still the poster child for what it was all about. For the first time in modern society, people began to seriously think of what it might be like to not have enough oil.
It was still a number of years before that thought expanded to other commodities, but eventually it did. Gold comes to mind as one of the earlier major events that grew out of that oil pronouncement. Another was the hyperinflation that finally brought one Paul Volcker to the Fed to stop runaway inflation problems. But we will talk about Mr. Volcker another day.
During the 10-15 years following the oil proclamation, somehow the world seemed to make adjustments to the new reality of higher raw material prices and even seemed to forget the fright of the 1970s oil shortages. Part of that fading memory was fostered by the Middle East governments that seemed to be "trying to work" with the oil-poor nations to adjust things to everyone's benefit.
Now, I am not one to get into the politics of all this. After all, I am a financial observer and my focus is on the money. My work is to "follow the money," as the saying goes. And it was easy to see where the money was going in those days.
It was going to the countries rich in raw materials in big huge, huge bags. Now, there is nothing wrong with paying "guys" for their "stuff," of course, but the problems arise when it becomes evident, after a time, that the "guys" you are dealing with often turn out to be quite undemocratic in their ways and quite serious about changing history with their money.
Again, no politics here, just the observation that once huge amounts of money began to accumulate in the hands of autocratic or dictatorial "guys," problems began to mount. Among them, in this case, a battle emerged within oil-rich governments about who should get all that money and what should be done with it. It is so true that money can corrupt and huge amounts of money can corrupt hugely and absolutely. And herein our story begins to get to the point of what all the recent inflation is about.
[Editor's Note: Why the Fed Interest Rate Cuts Won`t Work]
The very rich oil nations were beginning to color much of the world's financial activity by the late 1980s and early 1990s. And it was just about this time that a new word began to find its way into the everyday conversations of many countries. It was the word "globalization."
Again, one more time, no politics here, but the motive for this movement was pretty much the same as it was to the OPEC crowd, except this movement was endorsed by the western world nations hoping it would act as a counter-weight to the power of the well-heeled oil nations. The justification went something like, "Get enough people involved in commerce and even the raw material rich countries would have to be more civil and fair." Right.
Whether the western nations were right in fostering this process, which they did with zeal, is beside the point. The point is that the two biggest and most populated nations in the world liked the idea — a lot! China adopted the earlier Japanese model that had worked so well in the 1960-1980 period — to capture certain industries and be the maker to the world for those products. Only China decided to be the maker of just about everything for just about everybody, and they had 1.3 billion pairs of hands to get the job done!
India decided it would be the service provider to just about every nation in the world, using the giant leaps in communication technology as their tool to get it done. For both countries, the model worked quite well. There were, of course, upheavals in the western world as all this took place, but by and large the old Japanese model worked for China and India.
But, as in so many things, there are unintended consequences. It was first noticed in the late 1990s. Workers in China and India were becoming restless. They wanted more of the good life they were seeing their bosses live and they began to let them know it — in spades!
It did not take long for the bosses to see that if they wanted to perpetuate the dynasties they had built to serve the world's masses, they needed a steady, educated, energized, and satisfied supply of workers. And that only happens one way — make their lives better by building infrastructure, providing a good education, and supplying goods and services that met their demands.
I think you have it figured out already. That kind of goal requires huge levels of raw material, and neither India nor China can supply these needs from their own lands, at least not in the near term. So, off went teams of their planners to remote parts of the earth to secure all the raw materials they needed. From South America, to Africa, the South Pacific, and anywhere else valuable and scarce raw materials are found, you found their money chasing it. In some cases, even the chase fostered unintended consequences, for example, some really unwanted local ruler's behavior, such as in Venezuela and Niger. But, that too is material for another day.
[Editor's Note: Newsmax`s Intelligent Options Performance Red Hot in 2008.]
Okay, let's get to the bottom line here. I posit the theory that the battle begun in the 1970s is now a full scale war for raw materials. I further state that all raw material-short countries are now going to have to look to their own devices and raw materials to meet needs that will not easily be acquired from the "old" sources. Innovation, ingenuity, and invention are the key words of the day.
Just follow the money and look at any commodity price chart, food included, covering the last 15 years — huge increases! And with such huge sums of money in the hands of these ready buyers, I see this "war" as a hot one lasting for at least four to six years.
Yes, in the end I am sure a balance of sorts will be reasonably restored, just as it was following the hard times of the 1970s. But, in the meantime, you had better be investing in companies on the cutting edge of innovation, ingenuity, and invention in using recycled materials, developing new ways to generate power, producing foodstuffs more efficiently and in greater abundance and companies that are raw material rich, for they are all entering their golden era for the next four to six years.
And one last note. Yes, I have over-simplified this complex story to a degree, but I want you to clearly understand what its real origins are and to be aware that there will be little any of us can do until the demand and supply balance in this "war" is somewhat restored through time. And remember, while there will be all sorts of finger pointing going on, it is not the dollar, not even the Federal Reserve, or any other government agency that is to blame here. The history of all this is in the age old desire for a better life.
The answer you have to think about today is how do we as a country work harder and smarter to fill the gap of material shortages until that world-wide balance can be restored. Does recycling, lifting too restrictive environmental rules, and a fast track for hydrogen and ethanol energy technology ring a bell for starters?
Well, I suppose it will always be something, like Gilda said, even after all this current fuss is long gone and forgotten like the 1970s oil fuss. But, I hope you found some food for thought here (no pun intended). And I hope my words will encourage you to give some very serious thought as to how you will invest and generally cope with this situation for the next few years.
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As always, I do hope your coming investment week is a good one. In the meantime, you keep in touch. I do! See you next week.
Editor's note:
Dollar Slammed Again. What To Do Now.
What the Mainstream Media is NOT Telling You About The Economy
Recession Warning: Irrefutable Evidence of the "R" Word Just Released
