Problem Identification

In World War II, soldiers, sailors and airmen were trained to identify quickly what type of enemy equipment was approaching, so the correct response could be immediately made. It matters if that rumble is a Panther tank or a half-track with infantry. It matters if that silhouette is a Val bomber or a Zero. And it matters if that object in the periscope is a freighter or a destroyer. So they trained and paid attention to details like the number of engines, etc.

The modern investor doesn't seem to have or seek this skill. He seems lazy or superstitious, blaming old demons for everything. Definitions get changed to fit whatever is happening. So I thought I'd help a bit.

Inflation - a significant rise in prices of almost all goods and services beyond internal quality or technological improvements. The cause is excessive nominal demand due to prolonged excession growth in the supply of money in excess of economic growth. The cure is tight money. Significant rises in just a few groups due to supply problems is not "inflation", it's a supply problem in those groups.

Recession - A broad, prolonged DECLINE in the Gross Domestic Product. The period must be at least two quarters of NEGATIVE change in the GDP. There are multiple causes, including bubbles in major economic sectors, excessive business capital investment, excessive business inventories caused by a drop in consumer demand, government policy, etc. The cure must fit that cause. Sometimes passage of time is the only cure.

Stagnation - A broad, very prolonged period of economic growth below the long term trend capability of the economy, usually considered 2.5-3%. A mid-cycle slowdown is a short period of stagnation while an economy adjusts internally or externally from one growth sector to another. A prolonged stagnation, other that a mid-cycle slowdown, is usually caused by poor government policies that inhibit growth, excessive taxation, or pressures from overseas.

Stagflation is the simultaneous occurrence of BOTH Inflation and Stagnation. This did occur in the late 1970s as high inflation due to excessive monetary growth combined with stagnation caused by excessive taxation and multiple new regulations on business created stagnation. The Reagan Revolution cured this with some aid from Volcker's Fed. The cures weren't perfect interest rates were kept too high for too long and the initial wave of tax cuts contained too much special treatment for powerful political groups.

Standard of Living - the combination of wages and the cost of living. By "wages" I mean total compensation. A declining standard of living can occur even under GDP growth if the common man's wages are cut while the ruling classes take more of the pie. This is more painful if inflation is even small, at 2%. The combination of a 2% wage cut with a 2% inflation seems very painful at a 4% decline in the standard of living of the common man.

Recent major changes in benefits for health care, cutting retirement plans, replacement of slkilled work with high pay with low pay unskilled work have and are causing broad reductions in wages of the common man. CEO and other ruling class pay has increased the share of the pie of the ruling classes while doing nothing for overall economic growth, leaving less for the common man.

I'lll write more later or on another day. I hope this helps people identify the real "problem" which I see as a decline in the standard of living caused in the example I gave.

Markets

Mirabile Dictu !!! George Soros says that index investments by pension funds in commodities is creating a bubble in commodities. I guess George Soros reads this blog - even though I bash him often - as I wrote about that recently. From Financial Times web site this morning: "the relatively recent ability of investment institutions to invest in the futures market through index funds is exaggerating price rises and creating an oil market bubble."

Wachovia fires its CEO - good, they listened to my two letters to the lead outside director. The guy clearly was not competent to lead a major bank.

Ruling Classes

Today's WSJ contains a fine example of how the DC ruling classes loot the public funds. The WTO ruled again against US cotton subsidies. "The U.S. government was forced to overhaul federal aid to its politically powerful cotton industry after the WTO ruled in 2005 in Brazil's favor that certain payments distort trade." US govt. is subsidizing cotton growers ... think ... cotton plantations ... uh ... the rich & powerful.

If an agricultural product must be subsidized, why not fresh fruits & vegetables, which are healthy ?

I think this will be a regular part of my blog, viz., pointing out news items that show how the common man is being systematically looted by the DC ruling classes causing a decline in his standard of living.

Word of the Day

"Refractory" - adjective and noun [$10]
Refractory means (Adj.) 1. stubborn, unmanageable, rebellious; 2a. (of a wound, disease, etc.) not yielding to treatment; 2b. (of a person, etc. ) resistant to infection; 3. (of a substance) hard to fuse or work; (Noun) substance especially resistant to corrosion, heat, etc.
Sentence: To increase energy supply and hence cut the long term growth in oil prices is quite a refractory problem. There is no "silver bullet" or "quick fix" or "easy way out". All means to increase supply or find alternatives must be employed to gain a few percent from each. This means more nuclear power, more drilling, more development of oil shales, etc. All are needed.