Dear Reader,
On Friday we talked about how troubling the debt situation is here in the U.S. based on the federal government’s own reporting and forecasting. Well today I’d like to start with a chart, posted on economicedge.blogspot.com a few days ago, with a different angle on the debt situation.. (Thanks to Ed Steer’s Gold & Silver Daily for alerting us to the chart.)
Here’s the author’s explanation of what we see in the chart:
This is a very simple chart. It takes the change in GDP and divides it by the change in Debt. What it shows is how much productivity is gained by infusing $1 of debt into our debt backed money system.
Back in the early 1960s a dollar of new debt added almost a dollar to the nation’s output of goods and services. As more debt enters the system the productivity gained by new debt diminishes. This produced a path that was following a diminishing line targeting ZERO in the year 2015. This meant that we could expect that each new dollar of debt added in the year 2015 would add NOTHING to our productivity.
Then a funny thing happened along the way. Macroeconomic DEBT SATURATION occurred causing a phase transition with our debt relationship. This is because total income can no longer support total debt. In the third quarter of 2009 each dollar of debt added produced NEGATIVE 15 cents of productivity, and at the end of 2009, each dollar of new debt now SUBTRACTS 45 cents from GDP!
Although the chart only tracks back to 1966 and the way the government calculates and reports GDP is far from perfect, it’s pretty strong evidence that we’ve reached a situation of debt saturation. And ladling more debt into the fully saturated system can only make things worse.
Speaking of only making things worse, the Commerce Department reported today that consumers boosted their spending by 0.3% in February while income remained flat and savings rates fell to the lowest level since October of 2008.
We’ve said it time and again, the way to get the economy back on track is by producing more than we consume. And when consumer spending grows in the face of stagnant income and lower savings rates, that’s exactly the opposite of what will help things improve. Now that I feel somewhat like (or exactly like) a broken record, let’s move on.
The Treasury Department announced today that it plans to sell its 7.7 billion common shares of Citigroup (C) stock this year. In case you don’t recall, the Treasury acquired the stake last year after swapping $25 billion worth of preferred shares obtained during its $45 billion bailout of the troubled bank for common shares that were trading at $3.25 at the time.
Details of the sale are scant, however. The government said it could not provide any information on the timing of the sale(s), adding only that it would take place this year “in an orderly and measured fashion” and that it would be subject to the health of the market.
If the sale of the Treasury’s entire stake took place today at the current stock price of $4.18 per share, it would generate a paper profit for the government of about $7.2 billion.
It’s nice to hear that the government will decrease its stake in Citigroup. The Treasury has no business owning shares of any publicly-traded company. But what sours the news a great deal is the fact that the government will still control warrants in the company and has the “right” to purchase more shares at a future date. Also, it’s not very cool that the Treasury took $45 billion in taxpayer money for the bailout of Citigroup; you can bet the farm that no taxpayer will see any of that money back if the Treasury profits from the sale of the company’s stock.
Now, since my creative juices are far from flowing today (it happens), I’d like to turn it over to Vedran Vuk for an article on the politics of investing, and then to Alex Daley for a fun article on a new technology.
By Vedran Vuk
Some Casey Research readers don’t enjoy our politics despite being happy with our investment picks. They would appreciate a politically toned-down version of the newsletter. We’re always open to suggestions from readers, but this one request is impossible to fulfill.
For example, the other day, I was analyzing an energy company. The stock was priced well, but had some drawbacks. Particularly, it was located in a state with strict environmental laws that resembled the proposed nationwide cap and trade legislation. The local legislation had cost the company over one billion dollars, a major setback.
My job as a research analyst requires me to inform subscribers about risks on the horizon. If our investments or the entire economy are endangered by something like cap and trade, it would be unethical to not let investors know about the risks ahead.
Politics are particularly important to resource and energy stocks. Without an expert on resource politics at your side, you might as well be choosing stocks with a dartboard. We have excellent team members like Louis James evaluating mineral deposits on the ground and financial analysts looking over every detail on the books. But, understanding the politics combines with these factors to make Casey’s International Speculator and Casey’s Gold and Resource Report valuable assets. Essentially, it doesn’t matter if the company’s P/E ratio is 2 and the mineral deposits are through the roof when Chavez is nationalizing the company on Monday.
There’s something more that upsets people about investment and politics. Primarily, individuals rarely face consequences for uninformed political ideas. Investment forces them to do so. Naturally, this makes a lot of people uncomfortable.
For example, suppose a doctor believes that labor unions are great for the country. In fact, he believes that they deserve higher pay, because the workers are in fact more productive. Without the labor union, the higher wages would simply have been transferred to management.Plenty of evidence shows that entrenched unions are wasteful drags on a company. Despite this, the doctor can hold his view for his whole life. The doctor will never face any negative consequences for his beliefs.
Similarly, I could have all kinds of crazy beliefs about heart attacks. Maybe, I’m dead set on the idea that a heart attack can be cured by spinning around in a circle seven times while waving a lucky rabbit’s foot in one hand and twirling a blue feather in the other. Despite the idea’s apparent idiocy, I can continue to believe it my entire life. Further, if someone tells me differently, I can just ignore them at no loss. Since I’m not a heart doctor, I will never face the negative consequences of my extremely silly idea.
Investment breaks down silly ideas and political ideologies. It finally brings consequences to our beliefs. When the doctor must invest his own money into a failing unionized company, then frustration necessarily arises as ideological beliefs fail to deliver investment results.
Rather than being a weakness, our political perspective and honesty are some of our greatest assets. These days, it’s so hard to get a straight opinion from investment leaders. Often, they provide one craftily prepared statement for the news while doing the exact opposite. This occurs constantly with financial regulations. A CEO will tell the media about the urgent need for more stringent financial regulation. However, threats of regulation immediately plummet his company’s stock price. These same CEOs may even be funding anti-regulation campaigns in Washington. Political correctness does not belong in financial markets. It’s the one place where absolute honesty is a must. Unfortunately, straight talk is becoming harder and harder to find.
Investment forces us to question the world around us. Once money is on the line, we must face facts –not opinions. A conversation over beer with friends about universal healthcare is not the same as a conversation over investing in a medical company. Failure to keep an open mind in the former may cause tempers to flare. Failure to keep an open mind in the latter will cause your bank account to disintegrate.
By Alex Daley, Senior Editor, Casey’s Extraordinary Technology
Manufacturing has always been a costly business to get into. Before now, there was no affordable way to build one or a few of anything. Rather, you had to go through the expensive process of creating molds and masters, stop an assembly line and retool it for your specific design, and then spit out thousands or hundreds of thousands of your design before the cost per unit became reasonable – and good luck getting a manufacturer to even consider running a small test batch for you. Not to mention that was true for each and every little part. Sure, shops specializing in prototyping will gladly build you a few one-offs, but it is a costly manual process.
However, thanks to your inkjet printer, the future looks a lot brighter for custom manufacturing and prototyping.
Specialized manufacturers have been offering the ability to “print” simple 3D models for a few years now. Just upload your model to a website (or plunk down 20K for your very own printer), and for only a few dollars, you can have any quantity of your design created on demand and shipped right to you. The printer works by laying down a thin layer of a polymer, then a thin layer of glue, then another thin layer of polymer, ad infinitum, in a technique borrowed from the conventional inkjet printer – it is akin to printing image on top of image until the ink begins to build up into three dimensions. Until recently, though, the technique has only worked with plastics, and so there were real limits to its applicability.
However, recently Shapeways.com announced the availability of stainless steel printing, opening up the possibility of creating countless useful and not-so-useful things. Today the technique is ideal for prototyping new mechanical parts, building one-of-a-kind art or jewelry projects, or even selling small quantities of such items manufactured on demand.
But the long-term implications are endless. Imagine a long tail of manufacturing, where you can just print yourself a new flywheel for that 1964 E-type you’ve been building from parts, where every part coming off a manufacturing line is different and yet the line never skips a beat. It is a world where there is no such thing as a discontinued part. A world where the barriers of entry to a new manufacturing startup just got much lower.
Chris again. Thanks, Vedran and Alex. And thank you, dear reader, for reading and subscribing to a Casey Research service! Until tomorrow…
Chris Wood
Casey Research, LLC