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Tracking

The Middle East and Us

Almost 3 months into the wave of unrest in the Middle East and we’re staring at events like a deer in headlights. It might be a good time to take stock of how events might play out.

The best case scenario for an American economic recovery, avoidance of inflation, and $6 gasoline?
Moderation. Ghadifi quietly leaves Libya. A compromise between the separatists and the former cabinet and military. Eqypt remains somewhat quiet and their military fulfills promises of Mubarak crony removals and elections.

But those two possibilities are far less than certain. I’d give them less than 40% probability right now. Libya’s important production of light sweet crude oil will come offline for some time. Today I passed my first sign for $5.00 gasoline in San Diego, CA.

The more troubling events could occur in Saudi Arabia. The mere fact that government troops are firing rubber bullets at crowds is chilling. Despite the royal family throwing billions at the less advantaged citizens the groundswell from the educated population could destabilize the largest exporter of oil in the world. Crux facts: there is a huge concentration of the Shia minority around the Saudi’s oil production and shipping locations. Just like Benghazi in Libya, it’s strategic.

So what?

Think
1979.

Oil prices spike to $200 or perhaps beyond.

Oh yeah, you might not have been born then or you are too young to remember. Lines around blocks at gas stations (and there were almost 3 times as many as we have today with a population half the size). Declaration of a national crisis. Rationing. Price controls. Gas cans in auto trunks. Third world stuff.

Then, in the years that followed, runaway inflation coupled with a recession and double-digit interest rates. I was running a business in a market with real resistance to price increases when my operating line of credit went to 22%. It’s one reason I never, ever again want to make payroll for more than 40 people.

Worse, the US government can’t absorb a huge spike in what it pays to service the debt. The dollar will be wiped away as the world’s reserve currency, capital will leave the country, and the 1930’s will repeat and potentially be even more catastrophic.

I’m not saying the scenario is likely. I think it is still less than 30% probable but that probability increases daily to the point where we want to think through implications and actions.

In a recent Twitter post I pointed out a NY Times article on a fellow who’s gone “off the grid” in Texas by living in the desert on solar and wind power and capturing rainfall for water. Funny thing is that it’s both one of the most read and most e-mailed articles on the publication at this writing.

More in the days and weeks ahead. Hope for moderation in the Middle East and some leadership in our country. This could become a perfect catalyst for us to take steps to begin resolving our financial, energy, and world dominance issues.

Tracking, January 2011

A new year and new blips on the radar screen in our practice. I post items here from time to time that we’re watching because of our scanning, clients, or upcoming engagements.

Food Prices - for well over two years we’ve tracked a steady uptick in worldwide food prices. One visual element in our briefings and conference presentations is the UN’s index of world prices which shows a steady climb that now has exceeded the “trigger point” of 2007-08.

What do we mean by “trigger point?” When riots occur in less developed nations over food. Large portions of the population in these countries spend 50% or more of their incomes on food. This is a ticking time bomb that has been known to overthrow governments and even cause wars.

The
“North Atlantic Recession” - come on, it is no longer a global recession or even the “Great Recession” when you view it from Brazil, India, or China. It’s the recession that still either cripples or impedes the US and the EU. Even Canada is out and expanding.

The
“Employment Follies” - how badly can a government manipulate statistics? Just look at the jobless in America. OK, every governing administration wants to make the news better but creating 65,000 jobs in a month when it’s going to take over a quarter million new jobs every 30 days to get back to something like 5% unemployment is not good news. Especially when most of the jobs are in hotels, restaurant kitchens, or temporary services. Employment is a key trend for America’s return to economic health. We should be realistic about it.

The Consumer Christmas 2010

I spent time at the epicenter of American spending over the past few days. The Christmas shopping at Macy’s flagship store in Manhattan was, in a word, tepid.

Don’t get me wrong. The store was busy but large areas were deserted. A store that stays open 24 hours a day is a phenomenon in itself but those wandering the aisles were being attracted to sale racks and less-spendy areas of the store.

It was interesting that many of the fur-bedecked matriarchs leading families very slowly and deliberately through the store’s luxury departments were speaking other languages. A lot of Russian and many Asian languages filled the air as we steered around them.

It’s not surprising. Almost all surveys of consumer behavior in the U.S. show a concentration on reducing debt that is unprecedented. Spenders are coming to grips with the fact that jobs are not multiplying, they’ve got to make do with what they have, and the smartest thing they can do is get out from under credit card and other debt as quickly as possible.

Where was shopping intense in Manhattan? Jack’s Dollar Store located just a few blocks from our hotel. Wall to wall shoppers all the way up to the closing hour.

The most likely scenario for the economy, in my opinion, is a long slow recovery. What I observed falls in line with that. I think a GDP growth near 3% in 2011 will enable the unemployment rate to drop below 9%. Spending will return cautiously. It won’t be for big-ticket items but will begin to bolster support for more indulgent food, some travel, culture, entertainment, and family involvement.

We attended sold-out Broadway shows but there were half-priced tickets available up to curtain time at almost all shows. Movies that you would have to buy tickets for days in advance at prime viewing times were walk-up purchases. Top-rated restaurants were busy but not overwhelmed. On the eve of the Christmas rush I’ve been getting discount and free-shipping (even of the rapid variety) offers on a regular basis.

We’ve moved into an era of moderation and introspection. May we emerge more sober and wiser.