Let’s start with an analogy. Then, I will tell you about when gas will be 65 cents per gallon again and when the US economy will recover. Okay?
Do you know how much the speed limit is for a school zone? Many school zones have speed limits around 25 miles per hour, but they can even be as low as 15. Imagine, however, that someone was driving through a school zone at about 50 miles per hour. This was during school hours, but there all that happened in this case was that the driver hit a speed bump pretty hard and was startled to notice that there was a bump there and only then noticed that the speed limit was 25.
Now, I do not know how many of you know any 84 year-old women. However, some 84 year-old women do not like the idea of speed bumps. Some of them say things like “I am concerned that this speed bump could damage my car.”
I might say, “the speed bumps are not likely to damage your car if you drive over them at 15 miles per hour instead of, for instance, 50 miles per hour.” She might say, “yeah, but I do not appreciate those people trying to damage my car like that. It’s just not right!”
So, this is how I found out about the 50 mile per hour race through the school zone and her startling discovery of a speed bump right there in the middle of the school zone. I said to her “wow, you know that driving 50 miles per hour over a speed bump can damage your car, right?”
She said, “Yes, but I do not appreciate your negativity about the subject. Think positive.”
I said, “I am thinking positive. I am thinking that because you like to stay out of jail, then you can observe the speed limit, especially in the school zones, and make sure to slow down before you drive over those speed bumps. It’s just not safe to drive that fast in a school zone.”
“So what you are saying is that should I buckle my seat belt? You always say that and it is so annoying!” she said.
“Didn’t you have it on?” I replied.
“No, I don’t like how they feel. You know that the strap just bothers my neck,” She said.
So, that is sometimes how conversations go. People may categorize as negative something that they would prefer to dismiss.
Categorizing something as negative- other than a negative number or a negative ion- can actually be a process of dismissing it or negating it. The so-called negativity of a recommendation to slow down before driving over a speed bump is not inherent in the recommendation or the speed bump. The label of negativity implies a contrast between positive reinforcement or encouragement and negative reinforcement or discouragement.
Now let’s talk about gas prices. Gas prices used to be 65 cents in the United States. That was many decades ago, but many people remember when prices were around 65 cents or even lower.
Imagine that someone asked in 1980, “when are gas prices in the US going to recover to their prior level of 65 cents?” I might say, “never.” They might say, “do not be so negative. Think positive!”
Next, imagine that someone asked in 1990, when are gas prices in the US going to recover to their prior level of 65 cents? I might say, “never.” Again they might say, “do not be so negative. Think positive!”
In the year 2000 or 2010 or 2020 or 2030, someone might keep asking me when gas prices will recover to their prior levels. I may keep answering the same answer. They may keep dismissing my answer as negative.
Next, let’s talk about stock market prices in Japan. We could be talking about real estate prices in Japan, but let’s talk about stock market prices in Japan.
In 1990, someone might have asked when are stock prices in Japan going to recover to their 1989 high. Someone might answer, “they might not ever recover to that level.” That might be called “negative,” right?
In 2000, someone might have asked again when are stock prices in Japan going to recover to their 1989 high. Someone might answer again, “they might not ever recover to that level.” That still might be called “negative,” right?
In 2010 or 2020 or 2030, someone might continue to ask when will the Japanese economy recover, when will stock prices recover, or when will real estate prices recover. The answer may still be “maybe never.” That answer still may be dismissed as negative.
Consider that one factor in the Japanese economy is the cost of fuel, which was recently over 7 dollars per gallon when priced in US Dollars. As fuel prices rose there, that effected the spending and borrowing behaviors of businesses and individuals. Their economy slowed down, kind of like an 84 year-old woman who was already startled by a speed bump the last time that she drove through that particular school zone. High fuel prices were like a speed bump interrupting the prior economic patterns from when gasoline was 65 cents a gallon.
In 2008, prices of diesel briefly exceeded $11 per gallon in the UK. As fuel prices rose since 1999, the economy of the UK hit a speed bump. People bought less stocks and sold more stocks. Stock prices came down since 1999. Real estate prices came down, too.
Many people asked when would the UK recover. Other people said “maybe never.” Some people dismissed that answer as negative.
(UK stock market prices 1984-2011):
Now, let’s talk about a few price forecasts. In 2004, I published a forecast of rising prices for fuel worldwide and a series of predictable consequences on prices of other things, such as US real estate and US stocks.
These forecasts were based in part on the observation of prior developments such as in Japan or the UK. Even moreso, these forecasts were also based on reports from oil geologists going back to the 1950s.
I first published a warning about a decline in US real estate prices in 2003. I saw the change in lending behavior (in credit markets) and deduced the eventual consequences of it. At the time, I did not connect the change in lending behavior to the change in fuel prices. That was in 2004.
Many people have called my forecasts “negative.” In fact, my forecasts of a drop in price in various markets were forecasts of negative price change for those markets. My forecasts for rising prices for oil and gasoline (when that was my current forecast at the time) were forecasts of positive percent increases as in rising price change.
In my 2003 publication, I featured a US stock sector that was doing much better than the rest of the US stock market at that time. By 2010, the stock prices of that group of US stocks was up over 1600%. That would be a positive change in price. Prices of other things decreased or changed at a negative rate. Some forecasts are negative and some are positive.
Right now, I also forecast that driving over speed bumps at 50 miles per hour can damage a car. We could call that a forecast of a negative consequence. It is not positive thinking to talk about how driving over a speed bump can damage a car. Positive thinking would be something else entirely, like thinking positively of driving 25 miles per hour in a school zone while actually driving 50 miles per hour in a school zone.
So, when will the economy of Japan recover to what it was when gas was 65 cents per gallon? It might not. When will driving over a speed bump at 50 miles per hour be safe? It might not.
“Yeah, but when is someone going to remove that horrible speed bump from that annoying school zone?” They might. However, now the speed bump is there.
“Yeah, but when will gasoline be 65 cents per gallon again?” It might. However, it isn’t that now. It is something else.
In fact, gasoline prices are not the same everywhere. We mentioned that gas prices in Japan and the UK were higher than some other places. There is a table of prices here: http://en.wikipedia.org/wiki/Gasoline_and_diesel_usage_and_pricing
For instance, in Saudi Arabia or Iran or Libya, gasoline prices have recently been about 65 cents per gallon (with prices converted to US Dollars). Those places have a lot of oil and not so much demand from cars. You can imagine how people in Japan or the UK feel about gasoline prices that are less than ten percent of what the Japanese and British pay in those places with high demand for auto fuel and little or no crude oil.
In Venezuela, gas prices have been about 10 cents per gallon for many years (with prices converted to US Dollars). Again, you can probably imagine how jealous the people in Arabia or Libya feel about gas prices of only 10 cents per gallon.
Someone recently asked me “when are prices of gasoline going to be 10 cents again in Saudi Arabia? They are all the way up to 65 cents per gallon now- isn’t that just horrible?” Can you guess what I told them?
Naturally, what I told them is that gasoline prices will only recover after people stop driving 50 miles per hour over speed bumps. Further, US economic growth will not recover to come close to what it was when gasoline here was 65 cents per gallon unless it does. It might. It might not. It hasn’t yet.
It is interesting to note that, in Kuwait, the net trade surplus from oil is over $33,000 per year per person. That is an unusually large transfer of wealth from other nations to that one, like for an infant who happens to be born there.
My forecast continues to be that oil-rich regions like Alaska, Arabia, and Alberta will continue to experience profound economic growth relative to places like the UK or Japan or Nevada. I might be wrong, though. After all, the Soviet Union dissolved even though it was one of the most oil-rich regions of the planet (but not per capita- just overall).
Eventually, one of my forecasts will probably be wrong- even inevitably. So far though, there has been a distinctively positive correlation between my forecasts and actual developments. Many other people have made alternate forecasts based on such methodologies as “positive thinking” and “hope for change” and “irrational exuberance,” but there has been a negative correlation between their declared forecasts and the actual reality that emerged.
Now, I have a few more questions for you. If a person has $50,000 of cash and then they make a new promise to pay $500,000 on a mortgage, then how much additional cash do they have after making that new promise and spending $5,000 as a down payment on their real estate speculation? Did you notice that the question itself reveals a lack of comprehension of the subject matter?
Next, if an insurance company has $50 million dollars and then they make new promises to pay up to $500 million dollars in policy claims, then how much additional cash do they have after making all those new promises and spending $5 million in paying out prior debts? Again, did you notice that the question itself reveals a lack of comprehension of the subject matter?
If a bunch of naive stock market speculators pour millions of dollars in to trading the stocks of various companies, such as AIG (pictured above) how much does that increase the profitability of those companies? In other words, how much does it increase net profits of a company when investors buy and sell stocks of a company? It doesn’t.
Similarly, when investors buy and sell stocks of other companies, driving up those share prices, does that really have any lasting effect on the tangible book value of other companies who also own sharing of, for instance, Enron or AIG or FNMA? How do fluctuations in the market pricing of the stocks for a company filing bankruptcy effect the debt to asset ratio of the company (their solvency)? It doesn’t.
To compute the book value of one thing off of the market pricing and recent comps of another thing is one method of computing a book value figure. However, to do so reflects some fundamental presumptions about prices, the stability of prices, and, in particular, the risk of the sudden deflating of credit bubbles (as in bubbles of legally valid promises for future performance which may or may not actually occur in the future as promised).
I assert that most people are not related realistically to the reality of prices (or speculative bubble of credit promises). For instance, they may not be related to the reality of how gasoline prices vary from place to place and from time to time. They may even call such variations in pricing unpredictable or incomprehensible or horrible or negative or unfair.
Similarly, most people may not be related to a realistic future cash value of their insurance policies or their real estate or their stocks. They may be surprised by future variations in pricing.
Accountants may know the term “Tangible Book Value Per Share.”
That is a computation of the value of a business based in large part on current assessed value of current assets. Some companies may have a negative “book value,” such as insurance companies who regularly make promises far in excess of their current capacity to pay.
Again, those computations are based on current assessments, including current assessed value of their stock holdings in other companies and current assessed value of their real estate holdings. But that is a problem. “Book values” are being computed based on other assessed values (current market pricing), not on other “book values.”
Accountants may also recognize other ratios such as Price to Book Value. That means a ratio of the difference between the market pricing or assessed value and the book value, which is computed off of other market pricing or assess values. Again, do you notice the irony in this?
How much additional cash does an insurance company have after making new promises totaling $500 million in debt? They might not have any new cash based on taking on new debt.
How much additional cash does a real estate borrower have after making new promises totaling $500,000 in debt? They might not have any new cash based on taking on new debt.
Finally, how much additional tangible book value does a company have if the market pricing of it’s own assets rises by 100%? If those assets with rising market prices are just inflated real estate mortgage contracts or inflated stock prices or inflated promises from insurance policies, there might not be any new tangible value in that company.
New promises do not in themselves produce new tangible value. New debts do not equal new net profits.
Call this comment negative if you like, but going 50 miles per hour does not remove the speed bump from the road ahead or convert the school zone into an abandoned highway. Consider also that there is an immense opportunity present, but it is not available by presuming first that prices never change, and second that when they do, those changes are totally unpredictable.