I believe the answer is nobody, including me. Especially not the financial pundits in the media. One day oil is supposed to rise, and it falls; the next day the opposite happens. A month ago, BofA and Citigroup were going to be okay with the massive bailouts proffered then, weeks later we learn that both need tens of billions more to survive. A month ago GM said it could survive on the money already transferred and the additional sums that were promised. This week, their CFO says that unless they get even more money soon, they are toast by 3/31/09. One day the market is supposed to go up because we have a new messiah in the White House. The markets crashed in a record on Inaguration Day, picked up a little the next and are in a crash-cycle again. One day it's okay to massively pump (fake) money into the system and the next day the pundits warn that we face massive deflationary-inflation in the not-too-distant future.
Why is all this opinion-oscillation happening, I ask myself? And I believe that I have come up with an albeit simplistic, theory. Economists, pundits, government types and the like, adore "top-down" analysis because it is SO much easier than to revert to basic principles and to try to figure, at the core, what is really happening. Top-downers bombard us with so called facts and figures, that may express some information, but do nothing to illuminate root causes.
At the base of our "bottom up" pyramid, we have people, jobs and their basic human needs. I don't think anyone will question my assertion that job losses across the world have begun to reach breathtaking proportions...just today, New Jersey, famous for it's low unemployment rate crossed above 7%...and for reasons that we won't get into here, all these unemployment numbers are deliberately calculated to be lower than the real unemployment rate. I wonder if the nice lady that I give two dollars to each day on the streets of New York City is counted as unemployed or just, "not working." From a mathematical perspective this makes a huge difference and I don't care a whit about whether this nice lady would work if given the chance...she remains a burden on society nonetheless. Incidentally, China is even more concerned about this problem than we are because they have closed 10s of thousands of factories and sent the workers back to their original provinces. The Chinese government is extremely worried about social unrest to the extent that they have publically so stated. In what is a huge and sad irony, it appears that it may be better for someone to have never worked, than to have worked productively then subsequently lost that opportunity. Other countries may behave more civily for a while, but social stability depends on an employed and productive work force.
Let's move up a bit the pyramid to the consumer who is in a relatively affluent position thus far. Everyone I read seems to think that if we can get consumer spending restarted again, all will be well. I happen to disagree. First, as history has taught us, unemployed people don't buy things other than bare necessities. We can also factor in that in nearly every developed country, we have been through decades of prosperity, so we have already bought a lot of stuff. For example, when I was feeling flush, I purchased no less than 4 high-definition TVs for my various residences. I do not NEED another HDTV and I won't buy one at any price. Other signals for this abound across the world. Because we have had so many prosperous years, we have achieved sufficiency with respect to luxury goods, and we don't need the next greatest, newest thing; in fact, given the new economic realities, it might very well become chic to adopt a minimalist approach. Sony, arguably the most respected consumer-electronics company in the world (I'm writing this on a Sony computer now) has announced massive retrenchments.
Will consumers buy new cars, ergo, from anyone? Now we're into the manufacturing tier of the pyramid. My answer is no...there is no price dependency here. If you want a car, you can find ample examples of new or nearly new vehicles that are being sold at dirt cheap prices. But if you can fix your existing conveyance (I might want to invest in auto repair facilities) then why not go ahead and do so. A new car is as much a vanity item as anything else; those elements tend to fall away when the economy struggles. So I think there will be a worldwide shakeup among automakers that makes what the banks are going through right now look like a walk in the park. Already Chrysler (and I love my Chrysler products (a Dodge Charger SRT-8, et al)) is attempting to joint-venture with Fiat, of all companies. I am selling my pristine SRT-8 not because I don't like it, but because I don't drive much any more...anyone interested can send me an email.
Moving to the next level, people (and companies) need a place to live, but the real cost of ownership has grown so high, and credit availability is so low, that there exists the potential for decades worth of disruption. There is nothing worse than an empty house, retail store or factory. Yet that is what we are faced with and policy changes in this area will be important, which is to say, we must get back to the point where it is affordable to rent and in some cases, re-purpose these areas. When malls lose their anchor tennants, and if you've been reading Mr. Chilleri's reports, they most certainly are, then what happens to all the little boutiques that depend on that foot traffic?
Let's keep peeling this onion. The stock market, as an indicator for anything is a joke. Speculators, acting as "mini-hedge-funds" are distorting the fundamental market behavior. I hope and think these guys are making money in 10ths and 16ths, but stock market performance is in NO WAY a proxy for what is happening in America and abroad. Let's face it, compared with job availability, the stock markets do not affect the world's middle class as some would proclaim they do.
Ah, oil prices...we're near the tippy-top now. Pundits don't seem to want to accept that if the major users (manufacturing, the consumer, etc.) don't want oil, then oil won't be worth much. Well the manufacturers (as previously discussed) aren't making what they were, Americans at least, are driving a few billion miles less per year (AND unsold cars are more efficient, purportedly.) There are tankers with more than a hundred million barrels each that are out at sea waiting for demand in order to have them land. The major oil producing nations have for years held the world hostage to their output, and some have built virtual Shangri-Las with this capital. That era, in my opinion is permanently over and the oil producers will just have to live with it. Here's a good example. Southwest Airlines, for decades the most profitable (perhaps the only consistently profitable one) has lost money only in two quarters, the latest being the most recent. Airlines are supposed to make money when fuel prices are low and passenger count is high. Fuel prices are low now so what must that imply about passenger demand? With alternative energy on the rise (I personally find wind-power the most promising) I do not believe that we will ever see high oil prices again...just a guess, but it's my guess.
Let's move on to rampant deflationary-inflation. Anyone who dismisses this as a possibility is innumerate. We are rolling the printing presses like crazy, with nothing to back it. This is as if Saks or Macy's (or whoever is left) gave you an unlimited credit card, and you maxed it out. Either they would have to reduce the value of the goods they sold you, forgive your debt, or go bankrupt in light of the bad obligation. It sounds trivial, but that is what we are all doing in the world today. Without further innovation, improved productivity and an ability to forge new lifestyles using these tools, we are doomed for years to mediocrity. There is no "deus ex machina" operating here.
At the very top is leadership. I welcome the new administration but I pity their plight. In an environment such as we face, there are so many opinions, and it's hard to know which one, if any, to follow. And crises erupt so quickly and with such frequency that even the mythical HAL-9000 computer from the movie 2001 would have difficulty dealing with this. Ultimately, it's going to be "every person (family)" for themselves, and maybe that will turn out to be a good thing.