Thursday, July 2, 2009

Hunker and Bunker Economy

Everyone seems to be so concerned with inflation right now, because of the government's monetary policy. There is no need to worry about inflation right now. There is not going to be any inflation when people are losing their jobs. As we approach the 10% job loss figure, keep in mind that we are still climbing the mountain of job losses. Inflation usually rears its ugly head when we have a strong job market. Today, we obviously are not looking at anything near a strong job market. As a result, do not short Treasuries just yet.

As a mentioned in my book, Keep Your Assets Take My Advice, there is a business cycle and there always has been a business cycle. There are periods of time when people forget about the business cycle. Major corporations have begun the process of reducing inventory, downsizing their operations and laying people off. They will continue to do so until they reach a point where they have no inventory, they cannot close any more operations and they have no further need to lay people off from their jobs. We are in the middle of this process right now. We still have farther to go.

I heard that GM had more than 365 days of Pontiac G6's in inventory. All you have to do is to think about how many Pontiac G6's are driving around in your neighborhood, then you will realize that GM is probably going to have to give those cars away to get rid of them. The problem is exasperated by the fact that the Pontiac brand is being sold or discontinued. My guess is that this will make it even harder to sell those G6's.

Guess what? GM is getting yet more money from the government as announced in today's news.

My son, Marshall is headed off to Florida State University to major in mechanical engineering. His goal is to help turnaround GM. You ought to hear the confidence in him when he says that goal. He is one example of the many great young Americans rising up to save our future. They do not think they can make a difference. They know they can make a difference. The size of the problem is not a concern. I do not know about you, but I am glad we have young people with confidence like my son's.

This is an economy where businesses are hunkering down and consumers are building a bunker of cash right now. Businesses that are savvy enough to survive will emerge stronger than ever, because several of their competitors will be gone. A case in point. Whenever I needed some new technology, I would go to Best Buy, Circuit City and CompUSA to see who had the best offering. Today, there is no Circuit City. CompUSA was purchased by Tiger Direct. They have changed their offering of computers to older technology. As a result, they have carved out a market for themselves selling slightly older technology.

Best Buy remains in the latest and greatest technology category. They have the latest gadgets, gizmos and TV's. This is the change that has come to my market. I suspect that Best Buy will come out as an extremely strong brand when consumers begin to spend again. Consumers will start spending again when they feel that their savings level is replenished, their debt is reduced significantly and they can feel secure about their jobs again. Are we there yet? I do not think so.

Keep the faith. We will get there. The business cycle is a cycle with both recessions and expansions. The changes going on today will set the stage for a stronger economy later. You will be out of your bunker before you know it.