I will start this month’s important message on the economy with a story. It is about a farmer who desperately needed a good farmhand to help with the harvest. One young man came and interviewed for the job. The farmer asked, “What are your qualifications?” The shy young man quietly answered, “I can sleep when the cold wind blows.” The farmer didn’t know what to make of the young man’s curious reply, but since the farmer had no other options, the young man was hired.
Throughout the harvest season the farmer was puzzled by his worker’s answer on that first day they met. Nevertheless, the young man worked hard and that was enough for the farmer.
Unexpectedly, one evening when the Autumn leaves were falling, a cold northerly wild began to blow. It came suddenly, the first major winter storm. The farmer had been in town and as he rushed back to the farm the harsh winds were starting to howl. The farmer was in a panic. He quickly pulled on his heavy boots, grabbed his work coat and, as he rushed out the door, called to the young man, who was already in bed and fast asleep. As the farmer ran to the field where the tractor had been left to rust, it angered him that his young farmhand would sleep when there was so much to be done and so little time to do it.
The farmer cursed himself for not fixing the hole in the barn’s roof, knowing full well the rain and snow would soon come. He wished he had called ahead to tell his young worker to herd the animals into the barn when it was still light. On he trudged, in the dark with his coat pulled tightly and his head bowed into the wind.
Not finding the tractor in the field where he had last seen it, the farmer slogged his way to the barn. There he found inside, the animals all safe and secure. He found each stall supplied with clean hay; the leaky roof had been patched. In the shed was parked the tractor, dry and protected from the elements.
The farmer took off his hat and scratched his head in amazement. “Who could have done it?” Then, in an instant, he understood the young man’s curious answer, “I can sleep when the cold winds blow.”
The winter winds of America’s economy are blowing. On Friday, March 14, 2008, Bear Stearns, one of the largest stock and securities companies in America announced it was essentially insolvent. The stage was set for a stock market sell-off the following Monday that could have escalated into a panic not witnessed since the crash of 1929. Over the week-end, while Wall Street insiders held their breath, the Federal Reserve arranged for JPMorgan, Chase & Co., the U.S. banking giant, to offer a token $2 per share for Bear Stearns stock that would be paid in the form of a stock transfer–thus, JPMorgan would assume Bear Stearns, at a fraction of its book value, and for no cash. To enable JPMorgan to rescue Bear Stearns, a huge line of credit ($30 Billion), was promised by the Fed. and backed indirectly by U.S. taxpayers. JPMorgan accepted the week-end deal, and, after the take-over announcement was made, government economists joined the Wall Street insiders in holding their breath to see how the market would react on Monday’s opening.
When the opening bell rang on Monday morning, the Dow Jones Industrials quickly dropped 155 points; later, with the realization that the Federal Reserve and the federal government had no intention of allowing the sub-prime fiasco to take down the U.S. economy, the market rallied, and by the end of the day, instead of a crash, the Dow closed up 21.16 points. The following day, Tuesday March 18, 2008, the Fed primed the credit-availability pump by lowering its lending rates to banks by a whopping 3/4% (to 2.25%, which is 3 full percentage points lower than it was only seven months earlier). The stock market reacted by skyrocketing upwards by more than 420 points in one day.
To me the Federal Reserve’s aggressiveness in propping up Bear Stearns and knocking down interest rates confirms that the private bankers and economists who control the Federal Reserve System, in concert with the federal government, are determined to allocate any amount of money and do everything in their power to avoid a threatened economic crash and a worldwide Depression (with a capital “D”). Their quick thinking–by arranging the JPMorgan assumption of Bear Stearns–showed investors the federal government was willing to spend whatever it takes to keep the house-of-cards from collapsing. Investors rewarded such actions with the largest jump in the Dow in five years. Whether or not such inflationary strategies will work long term remains to be seen. It would be wise to remember, although the government and the Federal Reserve can react to economic situations they cannot always orchestrate them.
When the stock market opens on one day with a 155 point drop and closes the next day with a 420 point spike, and when Gold has soared to an all-time intra-day high of $1,033 per ounce on Monday, then drops $113 to $920 by Thursday, investors are frenetic and the markets are unpredictable.
Now is the time for fact-based analysis, not rumor-based investing. As I stated in last month’s newsletter “Oregon, like the rest of America, is in a recession.” Housing, credit availability and auto sales are down, unemployment and the costs of gas, food and utilities are up. We all know how much gasoline has climbed in the past year, but think what it means worldwide for poor families around the globe to have grains increase 42%, oils increase 50% and dairy products increase 80% in just one year. As you read this newsletter hungry workers are rioting over food price increases. Millions of people are desperate for meager supplies of food that can no longer be afforded, and there is no end in sight. With India and China’s growing appetites and economies bidding up the price of most commodities, and with biofuel subsidization resulting in the loss of thousands of acres of American corn and grains from food production, it will take years for the markets to adjust.
What does all this mean for Oregon and for America? For one thing, the affects of declining investment returns, increasing credit costs and overly-generous annuity calculations will likely result in another PERS crisis. For another, I believe we will see severe ramifications from the drastic and unexpected price increases for gasoline, food and utilities. The Fed may have, at least temporarily saved the stock market, but most of us are more concerned about price increases that have drained each of our budgets. These price increases have impacted our budgets like sudden tax increases, yet, American consumers, in a stunned state of sticker-shock, have remained paralyzed like deer caught in the headlights. I believe that is about to change.
For instance, on March 24th, a breaking story brings to light the desperation of America’s independent long-haul truckers who are being bankrupted by escalating fuel costs. It is naÃ¯ve to think America’s truckers will merely sit back and watch their incomes burned up with $4.00 a gallon diesel. Plans for a nationwide trucker’s strike are spreading across the country. Using the Internet and their C.B. radio network more than a thousand truckers, so far, have vowed to shut down their rigs on April 1st for a week-long wildcat truckers’ strike. If the idea of a national truckers’ strike catches on, there is no telling what the consequences will be to our fragile economy””including the stock market. With so much uncertainty, the economy’s future is precarious at best. The difference between a Recession and a Depression is the magnitude of economic decline. Whether we are heading into a deeper Recession or a Depression, one thing is certain, we would all be wise to assess our own situations, and lessen our personal vulnerabilities in case things get really ugly. This is a great time to (1.) stop incurring additional consumer debt, and pay off credit cards (when in a hole, stop digging), (2.) set aside a personal cache of cash (preferably 1-3 months of living expenses), (3.) store at least a 72 hour kit of food and water for every family member (preferably a 3 month supply or more). Now is the time to open our eyes, reassess our spending habits and, like the farmhand, learn how to sleep when the cold winds blow.