Oct. 24, 2022

The Return Of The Central Planners

There have been many efforts to correlate peoples' behavior with the economy. In the 1960s and 70s, we thought there was a correlation between the length of women's dresses and the market. As skirts got lower and lower, so did the stock market.

There was also a correlation between the color of automobiles and the stock market. Bright, happy colors correlated with lively bull markets. But look out when the every-other car is black!

An entire field of study called Behavioral Economics focuses on this sort of thing.

We are transitioning as our behaviors are changing to meet changing economic conditions. The last time we had high energy prices, as we do today, was back in the 1970s. Then the auto markers' reaction was to build smaller cars.

Of course, car companies still make small cars, like the Prius by Toyota and the Smart Car, but I expect that sales of these tiny automobiles will explode if the high gasoline prices continue. Of course, our government is pushing the sales of electric vehicles as a reaction to high gas prices.

Not only are cars getting smaller, but many of my readers/listeners have also pointed out the smaller and smaller portions at the grocery store, as everything from packaged goods to fresh vegetables seems to come in smaller packages.

One of the significant areas of downsizing has been in the service sector, where utilities encourage their customers to consume less and less. It is a trend that has been going on for a long time. But each month, in addition to my electric and gas bill, I get a "report card" outlining how my energy consumption compares to my neighbors.

Suppose I use less energy than the homes around me. It is assumed that I'm more environmentally responsible by keeping my home darker and using less electric power. By keeping my home colder and using less gas for heat, I also keep up my conservation of bona fides. That is a good thing, as I"m "saving the planet."

Setting aside the Green Argument here, there can be little doubt that this move to less and less consumption has profound economic ramifications. And sometimes, it's difficult to determine whether all this downsizing is the reaction or the cause.

There has been a long-term trend toward lower energy consumption. Per capita energy consumption in this country has been steadily declining for nearly a generation. And the result has been that little capital investment has gone toward electric and gas utilities.

In general, utilities are older and less capable than they could have been had energy markets been allowed to expand. We have been able to go along for many years without seriously upgrading our utilities, but one day it will catch up with us.

There is a fundamental principle at work here. One that we all need to recognize. And that principle is this: there are a series of incentives and disincentives at work here, and most of these are purely political. At the same time, we assumed we were living in a free market. The reality is that, increasingly, we live in an economic world created by Washington. With political leaders making the decisions that will guide our financial future.

Few Presidents have been more instrumental in changing our economic outlook than President Biden. Our economic outlook is today's focus.

In looking at that future, you may want to get side-tracked on various "value propositions." Some you'll no doubt agree with, and some you won't. But today, we will focus just on the dollars and cents of these actions.

This President's first significant and costly economic move was the over-the-top stimulus program. The President's approach to bailing out the economy after the Covid Pandemic was excessive. They were expanding the nation's debt beyond any prudent level. The President's Stimulus program kicked off the current bout of inflation.

The next major economic program of the Biden Administration has been the Great Transition. It's transitioning toward "greener," more environmentally friendly energy sources, principally renewable sources such as wind and solar. But in essence, it has been the continuation of candidate Biden's war on fossil fuel. His effort to outlaw oil and gas. And the direct result has been the higher prices we've experienced at the gas pump. And the single major contributor toward inflation.

Finally, the President's initiatives have been to convert all the country's vehicles to electric. He has mandated that most government vehicles become electric, from post office vans to army tanks, by 2030. It is a stunning transformation. And although it has had a limited impact on today's economy, its ramifications are dire.

All of these initiatives rest on the concept that our leaders in Washington know what's best. That they, and they alone, should guide the economy and the country in the directions they deem the best. The actual "transition" has been from a government representing "we the people" to a government that now directs the people.

In economics, we call this a "Command Economy." And it's the same as the old Soviet Union. One that saw failure after failure as their five and ten-year programs, all of which began with great hoopla, ultimately were quietly abandoned. Soviet leaders tried to direct their economy but failed.

We can expect the same result here. By allowing today's Washington planners to direct our economy, we can expect the same dismal results as the old USSR.

Econ Briefs


It's a massive week for economic data, with lots of MACRO data and earnings from around the globe.

Leading off this morning has been the first report for the Chinese GDP. The good news for the Chinese is that economic growth accelerated to 3.9% for the third quarter. The positive GDP number indicates that the CCP is losing its financial lockdown. You'll recall that in Q2, the Authorities imposed a zero Covid policy that had the country back in social distancing and self-quarantine conditions.

Overnight, Ursula van der Leyen, EU Commission President, just pledged to give Ukraine 1.5 Billion Euros per month next year. That's the expense side. Then on Friday, we will look at how the income side of that equation is doing as France, Germany, and Spain will announce their latest GDP reading. All three are expected to show declining economic growth. An indication that Ukraine is becoming a growing burden for the Europeans.

Thursday, the United States will report on our Third Quarter GDP. We anticipate this report will be positive for the first time in three quarters. An indication that the American economy is starting to come back to life. This report will undoubtedly be a significant talking point in the last two weeks leading to the mid-term elections.

We expect positive results when S&P announces their first flash estimate for the Purchasing Managers for October.

In today's earnings, all reporting after markets close will be IT company Cadence Design Systems, followed by Discover Financial Services, and a couple of specialty insurance companies: Brown and Brown and WR Berkley.