ChristianBusiness.com had done us all a favour by publishing Marilyn Barnewall's article of December 4, 2006. The article is concerned with economic problem of the American dollar, about which there has been much commentary in recent months. The USA dollar is of the h+iest order of world-economic significance, and a fundamental crisis of the dollar affects all national economies--beginning with the monetary values of imports, exports, and foreign aid. Perhaps the last term "foreign aid" underscores the strong American orientation of Barnewall's piece. But she has a wider range of concern, even perhaps of nostalgia for an age where a different ethos made economic nationalism a definite force for American prosperity that benefitted the working class and the smallfarm owner-worker. The article is digitally republished here with the permissions of the author herself and of the editor of the original publisher,ChristianBusiness.com, Chris Rowley.
The Drama of the Dollar
by Marilyn Barnewall
Here we are entering 2007 on what looks like a very strong economy. Everyone who is supposed to know says it is a very strong economy.
Maybe someone can explain to me why on December 1, 2000 Ford Motor Company stock was selling for $24.19 per share and on December 1, 2006 it is selling for $8.04 per share. The dollar took a beating this week. It deserved it. I believe it is priced from 40 to 50 percent too high and foreigners are tired of holding dollar debt on our international trade imbalance while watching the dollar depreciate.
Housing sales and re-sales are down at record levels across the country. I don’t give investment advice and am not an investment advisor, but if I owned Fannie Mae or Freddie Mac stock, I’d find another investment. People have forgotten the warnings of Alan Greenspan last summer. He said neither entity should be carrying loan portfolios in excess of 300 to 400 billion dollars… both carry mortgage portfolios of close to a trillion dollars.
During Thanksgiving week, the dollar lost three percent against the Swiss franc, 2.2 percent against the euro, 2 percent against British Pound Sterling, and 1.8 percent against the Japanese yen.
What does it mean?
I think it means, as Congressman Ron Paul said in a recent press released, “There are quite a few reasons a relatively free country allows itself to fall into such an ethical and financial mess.” I think it means we are reaching the end of the 200 year cycle democracies usually have before failing. Remember, our founding fathers hated the concept of democracy and even avoided use of the word. America was founded as a republic, not a democracy.
Why do democracies fail every 200 years? Because they evolve into a form of government wherein the wolves outnumber the sheep and everyone is about to vote on what will be served for dinner. Guess what’s going to be on the menu?
When people find they can gain access to the public treasury by voting for this party or that, and one party makes bigger and better promises as to what give-aways will be to this group or that, the most “generous” party (wolves) gains the votes of those (sheep) who view government as Big Daddy with Big Pockets.
One of the free Internet newsletters to which I subscribe is Bull (Not Bull). It is written by Michael Nystrom. In his October 3, 2006 issue, he discusses the Dow’s new high… he says it is phony high. It is a very thought-provoking article and I recommend it.
Basically, Nystrom points out that an average – like the Dow Jones average – only has value when placed in some kind of historic context. For example, when we speak of the average temperature this winter, we need to run a comparison with temperatures from past winters for the statistic to have any meaning.
The stock market deals in dollar values, but does not take into consideration the value of the dollar – the temperature of the dollar, if you will – over a period of years. Nystrom did a study based on a comparison of the value of the dollar and the impact it has on the wonderful new records being set by the Dow Jones.
The Dow Jones Industrial Average is composed of thirty stocks. When a new high of 11,754 was reached on October 3, 2006, Nystrom says it was a phony high. No consideration was given to the value of the dollar or inflation… and he is right. Both do impact the value of everything… not just the actual, real value of stock, but bacon and gasoline and housing, too.
In his article, Nystrom points out that of the thirty Dow Jones Industrial stocks, one-third of them posted their all time highs in the last century… before 2000 Another ten stocks achieved their all-time highs in 2000. Only seven stocks made their new high in 2006. Of those, only three were within five percent of their 2006 high on October 3rd., the day the new Dow Jones record was set. To make a long story short, 70 percent of the Dow Jones stocks used to calculate this average are down by 20 percent – or, more. So, how can Dow Jones set a new record?
Using the Federal Reserve’s own Consumer Price Index Inflation calculator, to equal the 11,750 Dow of 2000, the Dow Jones average would have to attain a high of 13,817.
Nystrom also draws a comparison of actual Dow Jones value by utilizing gold as a comparative. Gold has always reflected actual economic value of all assets. Nystrom says: “Measured in gold, today’s Dow is equivalent to only about 5,100! Using an average gold price of $275 in 2000, we establish our year 2000 benchmark: 10,750/275=39. Using today’s gold price of $580, we have 10,750/580=18.5. From 39 to 18.5 is a 52.5 percent drop, which is equivalent to only Dow 5,000.”
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Why is Ford stock at $8.04 today when it was at $24.19 six years ago? Will Ford be able to turn the company around in the current economic climate?
Any one of the automobile manufacturing companies could turn their companies around very quickly with one simple change in the way they do business and in the way they advertise it. How many of us would buy nothing but a Ford product if we heard the following message:
“The Ford Motor Company announced today that it is going back to the Model T roots created by the company’s founder, Henry Ford. The company will be putting out for bid only to American-owned companies the purchase of all parts used in its automobiles. According to the company, Ford will once again be a car made in America for Americans and by Americans and with American materials. Contracts will be awarded on the basis of hard costs – no consideration will be given as to whether the provider is a union or a non-union shop.”
I have said in prior articles about the airline industry that the management capabilities at our largest companies are non-existent. The guy or gal with the best educational pedigree is recruited for senior and executive management positions. If you graduate from Harvard or Yale or Stanford or Wellesley or some other expensive university, you are viewed by major corporations as the cream of the crop.
The problem with that logic is, the costly universities and colleges are all run by “educators” I have in prior articles termed “passive/market investors.” They are usually liberal, secular and progressive. Their primary motivator in life is security -- that is why they become tenured professors. The twenty-year research project I did on these groups prove they are security-driven people. Thus, our corporate leaders were taught and are being taught theories of business by education leaders who have no understanding of risk management.
Guess what? The success of free enterprise is dependent upon managing risk. The success at the Ford Motor Company is dependent upon good risk management. The company’s leaders just don’t know how to do it… and, like those who educated them, are probably risk-averse.
And that’s what is wrong with the Fortune 500 companies in America. They would be better off finding bright, innovative risk managers among the labor pool and giving them the necessary management training to lead their organizations. Those people currently sitting in executive management offices have not been trained in how to manage risk in a free enterprise environment.
But there is a down-side to that concept. Labor unions do not allow innovative risk managers to emerge from the labor pool.
If the government wants to stimulate industrial production in America, let them pass legislation that rewards companies for creating more jobs in this country for (proven) American citizens. Reward them how? Remove any capital gains tax penalties for the stockholders of companies who create more jobs in America for Americans rather than non-Americans. The investment in such a company’s stock would immediately soar out of sight (as would the price per share).
The truth is, there are a number of things that could be done to straighten out the financial mess in which we find ourselves. All that is required is a little risk management skill and an understanding of the American marketplace… two skills being bred out of our young people who attend university and who are told throughout their lives they should depend on Big Daddy government to do things rather than take control of their own lives.
Pogo was right. “I have seen the enemy and it is us.”
Author's Bio:
Marilyn Barnewall, in 1978, was the first female to be named vice president in charge of a major loan and deposit portfolio at Denver's largest bank. She started the nation's first private bank, resigned to start her own firm and consulted for banks of all sizes in America and other countries. In June 1992, Forbes dubbed Barnewall "the dean of American private banking."
Author of several banking texts, she has written extensively for the American Banker, Bank Marketing Magazine, and was U.S. consulting editor for Private Banker International (Lafferty Publications, London/Dublin).
Marilyn can be reached at marilynmacg "at" juno "dot" com.
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