Central Banks Following The Friedman-Schwartz Plan… But Is It Enough?
Wednesday, February 4, 2009
by Martin Denholm, Managing Editor, Smart Profits Report
“I would like to say to Milton and Anna: Regarding the Great Depression, you’re right - we did it. We’re very sorry. But thanks to you, we won’t do it again.”
So said Federal Reserve chairman Ben Bernanke to Milton Friedman at the legendary economist’s 90th birthday.
A mere Fed governor at the time, Bernanke was referring to the fact that Friedman, along with his colleague Anna Schwartz, had blamed the Great Depression on the Fed’s failure to load the financial system with enough cash.
And true to his pledge, Bernanke and his fellow Fed bankers are plowing as much cash into the system as they possibly can. Several other central banks around the world have followed suit, determined not to repeat what Friedman and Schwartz argue was a mistake back in 1930.
The Bank of England, for example, is expected to hack the base interest rate from 1.5% to 1% tomorrow. It will do so in the face of opposition from the respected National Institute of Economic and Social Research (NIESR), who state that, “… the last interest rate cut had not very much point to it.”
In forecasting a 2.7% contraction for the British economy this year - the worst performance in 60 years - it suggests buying corporate bonds would be a better way out of the mire. With credit having dried up, it argues that loosening monetary policy is now ineffective.
I wonder what Friedman and Schwartz would make of that…
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Titans Of The Tracks
File this one under the “Gee, what a surprise” section…
Quarterly earnings reports are bad. Really bad.
As I scan the newswires today, I see ugly headlines like:
“Disney (NYSE:DIS) 1Q Profits Drop 32%… Shares Slide”
“Panasonic Warns Of $4.2 Billion Loss… To Cut 15,000 Jobs”
“Costco Wholesale (Nasdaq: COST) Sees 2Q Profit Below Estimates.”
Others reporting grim earnings news today include Time-Warner (NYSE: TWX) and Kraft Foods (NYSE: KFT).
But there’s at least one area faring well: The railroad industry - as I noted here back in May 2008.
Yes, it’s the railroad industry.
When I wrote that column last May, U.S. gasoline prices were shooting towards $4 a gallon, severely impacting cash-strapped, inflation-weary businesses and consumers.
In response, consumers scaled back their driving and many companies turned to the railroads to ship their freight, given that rail is more cost-effective and you can transport more goods in one shipment than by truck if you wish. It’s also a more environmentally friendly way to haul goods, with one gallon of fuel able to take one rail car more than 430 miles, with less carbon dioxide pollution.
And a look at the results of the major players tells the story…
- Burlington Northern Santa Fe Corporation (NYSE: BNI) - earnings up 19%
- CSX (NYSE: CSX) - earnings up 16%
- And Union Pacific (NYSE: UNP) saw fourth-quarter earnings blast higher by 35%
Yes, rail companies took a leaf out of the airlines’ book and raised their fuel surcharges, due to the sharp upturn in gasoline prices. And with gasoline now back down to around $1.87 a gallon (national average) and America in recession, it’s possible that future earnings might decline. But at least they’ll still be profitable! And in this climate, that’s worth the ticket.
Along with several other sectors at the moment, the railroad industry represents good value. And when it comes to recognizing value, the king is Warren Buffett. His Berkshire Hathaway company just gobbled up another 2.3 million shares of Burlington Northern, taking its stake to a total of 76 million shares, or just over 20% of the firm.
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A Glimmer Of Service Sector Strength
There’s more than enough doom and gloom hanging in the air at the moment, so we wrap up today on a good note…
The Institute for Supply Management released its report of U.S. service sector activity in January - one that showed America’s beleaguered services starting 2009 on an upbeat note.
The trade group said its index rose from December’s 40.1 point level to 42.9 points last month. While that’s still well below the 50-point line that separates growth from contraction, it’s an encouraging start to the year for a sector that represents about two-thirds of the U.S. economy, and trumped Thomson Reuters analysts’ estimates for a 39-point reading.
However, in order for the economy to truly get back on track, Americans are going to have to start spending again. Right now, they’re not… they’re actually saving it. According to the Fed, the national savings rate rose to 2.9% during the fourth quarter of 2008, as spending slumped by 9%.
America saving money, not spending it? Now there’s change.
Best regards,
Martin Denholm
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