Market Review: What Would Jesus Drive?

About eight years ago, products started popping up – key chains, t-shirts, coffee mugs, bumper stickers – emblazed with the letters WWJD?, an acronym for "What Would Jesus Do?" Our guess is that you would sport these products as a reminder to yourself (and those around you) to think, ‘What would Jesus do if he were faced with a similar predicament?’

These religious products have (thankfully) faded to the background, but after the recent highs in gas prices, ‘WWJD?’ is showing up again on the bumpers of cars – except this time it stands for: What Would Jesus Drive? The unspoken message being – Jesus probably wouldn’t get behind the wheel of a gas-guzzling SUV.

Are SUV drivers taking notice of the scowls and shaking heads of smaller car drivers? How is gas at a nationwide average of $2.61 affecting all American drivers? Your editor posed these questions to people filling up their tanks at a local gas station…

"I have been driving less when it is convenient to do so, and doing this because the prices are so ridiculous," said one young woman, who was filling up her Honda Civic. "But it hasn’t affected my everyday life, and I haven’t changed my spending habits. If it is more convenient to drive, I will. If prices continue to rise, I would probably want to carpool more often and would think about sacrificing convenience for having more money."

This woman isn’t alone in this sentiment…a driver who was in town from Syracuse, New York had this to say:

"If I desire to rent a movie, or go to the store, I do not consider the rising gas prices and say, ‘Well, maybe I should save the 25 cents in gas and go buy myself a stick of gum.’

"As for saving money and not buying things because of the rise in the gas prices, well then I guess you’re gonna be wearing your Sunday’s Best from JCPenney’s for a while because the gas prices aren’t going down anytime soon."

Most people agreed that they wouldn’t go out of their way to not drive, but a lot spoke of getting all of their errands done in "one run."

"You know, instead of going to the bakery that has the good bread on the other side of town, I’ll pick up a loaf at Safeway while I’m getting the rest of my groceries. I’ll plan my trip so I can get everything done in one fail swoop instead of making a lot of little trips."

It’s this kind of thinking that is hurting U.S. retailers. The University of Michigan’s final consumer confidence index for August that was released on Thursday showed a larger than expected fall – down to 89.1 from 96.5 (the final reading in July).

"The obvious culprit here is gasoline prices," said Ryan Wang, an economist at HSBC. "This is a sign that the sharply higher gasoline prices in August are weighing heavily on consumer sentiment, and outweighing some of the optimism that’s starting to come from the labor market."

According to the FT, "The Dollar General and Dollar Tree chains both say their largely low-income customers were making fewer visits to their stores and spending less, as a result of having to set aside more money for fuel."

But are people driving less? Surprisingly, no. Especially not here in the Baltimore area, where people are forced into driving, due to insufficient public transportation.

"The drive to work is a killer," said one commuter.

"I travel an hour to work everyday, so there is really no way around it. The only thing the high gas price has changed is that I hate getting gas more than I used to. I try to avoid driving when I can, but it usually never works out."

And what about SUV use? Well, you wouldn’t be able to tell by looking out your window, as SUV’s still seem to dominate over the cars on the road…but according to Autotrader.com, there has been around a 50% decrease in SUV sales.

People are downsizing because it takes around $60 to fill the tank of an average SUV.

"My girlfriend and I used to drive her Jeep everywhere, but now we find ourselves leaving that at home and using my Acura because it uses less gas," quipped Cal Bowman, who works at the nearby Towson University.

"The ever increasing rise in gas prices has taken the issue of oil, international trading, the world economy, as well as the environment off the back burner and into the public conscious. Also, normally when I have to go on trips for work, I would use my car, but I now find myself using the university vehicle so that I don’t use up all the gas in my car."

So, there you have it. Americans are not going into panic mode quite yet, and seem to be taking expensive gas in stride.

"It gives me something else to complain about," said Al Maskeroni, a teacher at a nearby art school, before getting into his Subaru Outback

"As an American, it is my civic duty to complain."

Kate Incontrera
The Daily Reckoning

August 28, 2005 — Baltimore, Maryland

P.S. The price of crude oil is going to continue to rise – especially since we’ve entered hurricane season. However, you don’t have to stand by and allow for high crude prices to empty your wallet – in fact, with our commodities expert’s help, you could actually make back all the money you’re shelling out to fill up your tank – and then some

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THIS WEEK in THE DAILY RECKONING:Finally, we aren’t the only ones looked at as the economic downers…Dr. Marc Faber shares this fate. See "The Prophets of Doom and Gloom", below…

Rage Against the Machine   08/26/05
by Bill Bonner

"Departing from our premonitions of where the U.S. may be headed, we pause to wonder in what direction mankind is ‘progressing’…and why. This DR Classique was originally published on October 27, 2000…"

The Prophets of Doom and Gloom  08/25/05
by Marc Faber

"Here at The Daily Reckoning, we are often told that our outlook on the world is too pessimistic – we were called ‘sourpusses’ recently. We aren’t alone – Marc Faber shares his views on being referred to as a ‘doom and gloomer’…"

The Black Arts of Finance   08/24/05
by Chris Mayer

"Author John Brooks has observed, ‘Conglomerates, like prostitutes, had from the first a sufficiently shaky moral reputation to call for the use of euphemism.’ Chris Mayer explores this short chapter in financial history…"

The Myth of International Diversification 08/23/05
by Carl Waynberg

"The ultimate contrarian indicator: Magazine covers. For Carl Waynberg, betting against BusinessWeek cover stories is always a good bet…"

Paying More to Get Less   08/22/05
by The Mogambo Guru

"Total Fed credit fell – which can only mean one thing: in a country that thrives off of people borrowing themselves into debt, ‘free money’ is suddenly not looking so tempting to the citizens of Squanderville…"

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FLOTSAM and JETSAM: The citizens of America have had it so good for so long that they don’t sweat the small stuff…like saving, or paying off debts. Puru Saxena shows that Americans better learn how to pinch some pennies…

WINDS OF CHANGE
by Puru Saxena

I want you to imagine that you are the ruler of the world’s greatest civilization. Your empire is renowned throughout the planet and your army is present in several hundred countries. You command the best technology in the world and your military strength is second to none. For over a century, no other civilization has been able to compete with you as you have been crowned the "undisputed heavyweight champion" of the world.

Now, I also want you to imagine that due to the immense wealth and luxuries enjoyed by your people for so long, they have become complacent and used to the good times. In fact, your citizens have become so accustomed to prosperity that they live only for today without giving any regard to what tomorrow might bring. Also, your finance minister has informed you that your subjects have stopped saving, and furthermore they have taken on a record amount of debt. Moreover, your nation is engulfed in a massive consumption orgy! To add to your concerns, your nation is running low on its energy bounty. In fact, you have just realized that your nation’s energy production is in decline and it now imports two-thirds of its daily energy needs.

To complicate the situation further, let us imagine that you have just got news that another giant empire, which is 1.3 billion strong, is rising rapidly on the other side of the planet. This civilization is hungry for success while its people are hard working and frugal. In fact, their savings rate is around 30% as they believe in preparing for the proverbial rainy day. In addition, your finance minister has informed you that this empire has excellent manufacturing skills and its people are willing to work hard for a fraction of the cost when compared to your own subjects. As a matter of fact, their products are so good and cheap that your own citizens have been buying them for years now! Furthermore, this alien civilization’s energy needs are growing quickly and only recently has it started importing fuel to meet its requirements.

After listening to your confidant, you now realize that if things carry on the way they are, your empire will come under a serious threat in the future. In fact, your empire may even topple over as the other civilization destroys you economically.

In this instance, with your back against the wall, what do you do? Obviously, in order to protect your ageing empire, you turn to your strong point where you have a clear advantage – your military.

Unfortunately, the above narration is not a fantasy but a serious and grim reality, which faces all of us today. Bush is the ruler of this ageing American empire while China is the new threat. Take a look at the sobering facts provided below –

America’s economy is now worth US$ 11.2 trillion. Over the past five years only US$ 1.6 trillion was added to the economy while credit market debt rose sharply by US$ 7.6 trillion! In summary, it now takes a record amount of debt to produce one dollar of economic growth. America’s debt to GDP ratio has ballooned to over 350% when compared to "just" 120% in the 1970’s.

America faces a record-high current account deficit of $700 billion as Americans continue to consume cheap imported goods. Its savings rate is a miniscule 1%, while consumption now accounts for almost 70% of GDP growth. What will happen to the U.S. economy when consumption slows down? This is one question not many economists and analysts are willing to ask!

According to Gavekal Research, American-owned assets overseas total roughly $7 trillion. Whereas, foreign-owned assets in the U.S. equal $10 trillion. Therefore, its negative net-asset balance now comes in at around minus $3 trillion or just under 30% of GDP! Not a good sign.

Turning to the other civilization, China, we can see that it has a current account surplus as it continues to manufacture and export to the West.

The Chinese economy is growing at 9.5% per annum with nominal GDP coming in at $1.2 trillion. Although, this figure represents only 10% of the size of the American economy, adjusted for price differences between the two nations, suddenly the Chinese economy does not seem so small!

China now produces more steel and five times more cement than America! It is also the largest consumer of copper. The Middle Kingdom is already the biggest consumer nation in the world and it is getting bigger! So, you can see that over time China will become the single most important empire in the future.

Look, I am not the only analyst who knows the economic facts presented above. The Chinese leaders also know very well that America is an economic disaster waiting to happen. In the meantime, however, they continue to "buy time" or should I say "buy treasuries"! Over the past few years, China has bought around $700 billion worth of treasury and agency debt in the United States. They have done this to keep the US dollar relatively strong and long-term interest-rates artificially low in the United States.

A strong bond market (low interest-rates) has kept U.S. mortgage rates under check. This has fuelled a housing boom and allowed Americans to continue buying imported Chinese goods by refinancing their homes.

China hopes that if this game played by "Monopoly" money continues for a while longer, its own economy and domestic demand will become strong enough to withstand a recession in the United States.

In a nutshell, Asian economies are much healthier than the U.S. economy and this trend is likely to accelerate over the coming years. Impoverished for decades, Asians now work extremely hard, they export and save, while Americans import, consume and are going deeper into debt! As a result, wealth is being transferred to the emerging economies of Asia and somewhere ahead I expect the vast difference in the standard of living between the West and the East to diminish significantly.

Regards,

Puru Saxena
for The Daily Reckoning

Puru Saxena is the editor and publisher of Money Matters, an economic and financial publication soon to be available at www.purusaxena.com

An investment adviser based in Hong Kong, he is a regular guest on CNBC, BBC World, Bloomberg TV & Radio, NDTV, RTHK Radio 3 and writes for several newspapers and financial journals.