Today I had the privilege of hearing Brian Wesbury speak over lunch at the Findlay Country Club. Brian is the Chief Economist for First Trust Advisors.
Brian is advertised as one of the nation’s top 10 economic forecasters. This is interesting because all of the talk before lunch today was about how wrong Brian’s prediction was one year ago. Last year at this time Brian predicted that the Dow would end the year at 15,000. I wish he was right on with that prediction, but the fact is that today the Dow is less than half of that target.
Even though Brian was a bit off with his prediction last year, I still think he is a very thoughtful economist. I always enjoy hearing him speak. I think it’s probably because his presentations are very insightful.
Here are my notes from today’s presentation:
- Brian is convinced that the US was not in a recession until September of 2008. When he made his Dow 15,000 prediction last year at this time the economy was actually doing quite well. Excluding housing, the economy grew almost 2% during the first quarter of 2008 and nearly 4% during the second quarter. It wasn’t until the third quarter that the economy (ex-housing) stalled, and then the fourth quarter when we actually saw a decline of about 3%.
- Housing is only 5% of the whole economy.
- In the fall of 2008 we saw a textbook example of a panic. Food sales fell for the first quarter in 50 years. For the first time we collectively dug into the food pantry and grabbed that jar of Campbell’s soup that we’ve had since college.
- Every dollar that is spent changes hands about 7 times per year. In 2008 dollars only changed hands 6 times.
- We haven’t seen a panic like this since 1907. That panic lasted about a year and included runs on banks, a stock market collapse of about 50% from its peak the previous year, and a decline in business activity. Sound familiar? Read about the Panic of 1907 on Wikipedia.
- The Fed is doing the right thing by increasing money supply (printing money).
- At the current rate of economic activity it will be 25 years before we replace our cars and 280 years before we replace our houses. You can’t have activity like this forever. We have hit rock bottom!
- Dogs bark. Banks make loans. People shop. This can’t last!
- The Baltic Dry Index is up 60% from the bottom. Goods are being shipped again!
- Business is starting to pick up again. Brian got his shoes shined in Chicago last week. The shoe shiner typically averages $150 per day during normal times. He was making $40 per day a few weeks before Thanksgiving 2008. Today, he is back to making $150 per day. Another case in point: Restaurants. It’s hard to get a table on Friday or Saturday night…last November there was no problem getting a table.
- Brian thinks that 85% of today’s problems were created by Washington and 15% by Wall Street. Much of the damage was created by the Fed lowering interest rates to 1% back in 2004. This created massive demand in the housing market. The government creates excess demand and leverage in the market by moving interest rates.
- The price of oil per barrel was $2.92 in 1965, $11.00 in 1975, and $40.00 in 1980.
- Mark to market accounting rules have created a mess. These rules force every bank to take losses before they even happen. The market would rally if we suspended or terminated mark to market accounting.
- There is a lot of worry about deleveraging today. Brian made the point that deleveraging does not mean that money disappears…it just goes somewhere else. There’s no less money out there, just lower asset values.
- In the last 9 months we have seen more growth in government than any time since the Great Depression.
- The government will even make up problems. “I believe global warming is one of the biggest frauds ever perpetrated on the people of this world.” [followed by an applause]
- Brian is frustrated by how much the government is involved in the economy. He provided a chart that shows that government spending (as a % of GDP) is highly correlated with the unemployment rate. In other words, the chart proves that the more the government has spent the higher the unemployment rate.
- Here’s the problem with government spending more money to create more jobs: Every dollar that the government spends comes from the private sector (you and me) through taxes or borrowing (Treasury securities). For increased government spending to effectively create more jobs, the government would have to allocate those dollars more effectively than the private sector could. Do we really believe that the government will allocate dollars more effectively than the private sector could? If it’s as simple as spending more money, then why isn’t everybody rich? We can’t spend our way back to prosperity.
- Increasing taxes are not the answer. Think about it. We raise taxes on cigarettes because we want people to smoke less. Why do we raise taxes on income and profits? Do we want people to earn less?
- Brian is worried long-term that the increased government intervention will create even more problems.
- Brian believes we are in a V-shaped bottom of a panic that began in September of 2008. He forecasts that the next 12-18 months are gonna rock n’ roll. He predicts that we will have an opportunity to make a lot of money in the stock market and in business. He is expecting a massive rally in the stock market that will last 12-15 months.
- Brian is expecting higher inflation and higher unemployment rates in the next five years. Inflation is likely to be in the 4% to 4.5% range by 2010 or 2011.
- Commodities are cheap again. Buy a diversified basket of commodities through an ETF as a hedge against inflation.
- Someone in the audience suggested that we all turn off the TV for 60 days and see if half our problems would be solved. [Good idea!] Brian reminded us that the media is in business to make money too. News that sells is the “out of the ordinary” news. People won’t watch if the news is boring and normal.