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Q&A for Economic Webinar of April 20, 2011

The following are questions that were sent in during the webinar but were not answered at that time.

By Dr. Joe Webb
Published: April 21, 2011

The following are questions that were sent in during the webinar but were not answered at that time. Q: How can we juxtapose these dismal earnings with the buoyancy of the current stock market? A: Corporate earnings are generally doing fine, mainly because the publicly traded companies are multinationals, and have transactions both sides of the dollar. The low value of the dollar attracts money from overseas for all dollar-denominated assets, especially the ownership of companies. Things are even more confusing because of the historical status of the dollar in all trade, even in trade that does not involve US companies. I wouldn't call the stock market bouyant: Ben Bernanke's goal was to make stock prices rise by increasing the money supply, and he certainly kept his word. Remember: the stock market rose in the 1980s and 1990s during a period of a strong dollar. Printing industry earnings are improving because weak companies have exited and the slow consolidation of the industry, combined with cost-cutting, have been increasing industry profits. Those profits are nothing like what we had even back in 2005, but they are at least heading in the right direction. Q: To what extent do you believe that the hedging market influences the price and therefore importing of non-manufacturing commodities as opposed to our ability or economic strength to purchase these commodities? A: It cannot be denied that there is a speculative nature to the rise in commodities, but we always need to remember that at the same time there is a speculative group on the other side of the transaction. Investors who have short positions need someone in a long position in order to make the trade possible. Commodities are purchased only when it is believed that there will be value in holding them, or those commodities can be transformed into goods with higher value than the commodities themselves. Wheat, for example, is a commodity, but breakfast cereal is something of higher value than the raw wheat itself. The belief is that the rise in the supply of dollars, and all currencies, for that matter, is outstripping demand. That means that the excess supply of dollars alone can cause prices to rise as goods absorb all of those excess dollars. It's a real problem, and price collapses can cause such havoc that one needs to be cautious as the prices rise. Keep 2008's collapses in mind, but be aware that the money supply expansion that caused it is being touted as the cure for the very collapse it eventually created, so we may be on the way to another one. Q: How can there be such differing opinions on inflation, as Bernanke and others continue to maintain that inflation isn't a major concern? A: They keep looking at core CPI, which excludes food and energy, and that has been somewhat tame until recently. I believe that they see all the inflation around them and are putting up a good front. I really believe that they are afraid of acting against it for fear that they will create an economic collapse similar to what they believe they rescued us from. Instead, they are only perpetuating the problem. They've boxed themselves into a corner of the room, yet they're afraid to climb out the window that's within inches of their reach. We've had exceptionally bad economic management for five or six years now, and these cycles typically run 16 years (the last long one was Johnson-Nixon-Ford-Carter), so we all have to navigate it as best we can, and offer ways of navigation to our clients. Q: What is the government doing to respond to all time high gas prices? What impact is increasing energy costs having on recovering economy? A: High gas prices are being portrayed as the product of evil speculators and greedy oil companies, and at the same time, being offered as a means of dealing with our selfish and foolish reliance on fossil fuels. Therefore, higher prices are pleasing to enough constituencies that they will be tolerated. I am one of the few believers that the cost of energy is overblown for most industries. Since the late 1970s and early 1980s, energy as a portion of GDP has dropped from 14% to 7%, and its long-term outlook is to keep dropping. Remember what I mentioned in the webinar: the inflation- and efficiency-adjusted cost of energy is half of what it was in 1980. Energy costs make great headlines until you look at the data. Some will say that “energy prices are in everything” but everything else is in everything, too. The biggest cost component in all goods are the wages and benefits paid to employees, almost 10x what the costs of energy are. Taxes are about 2x-3x the share of GDP that energy has. Energy prices will retreat when the monetary expansion ends. Until then, keep your tires properly inflated. Q: Weakness of a currency is always relative to a strength of other currencies. With the debt crisis in Europe widening, where do you see the value of the US Dollar longer term? What do you expect China to do in order to stabilize the value of the debt they hold in US currency? A: It looked like Europe was really going to falter, but it seems that cooler heads have prevailed in a monetary sense. That doesn't mean the ECB isn't doing things that they shouldn't, but it seems they are being far more cautious in their decisions. I look for the Euro to keep rising against the dollar. Who is the biggest holder of US Treasury securities? No, it's not China, it's the Federal Reserve. We have a lot more to worry about from that than China. If anything, China should worry about the value of the securities they are holding. I believe they are on a quiet spending spree for other US assets, like US companies. For now, the dollar continues to be on a planned decline that will continue until further notice. Q: What forecast is there for the weak companies decline? A: We don't have immediate data on this, but the employment data implies continuing decline in the number of establishments. Prior to the recession, about 3,000 establishments closed every year, replaced by 2,000 establishments (often with the same owners) for a net -1,000 decline. Those figures were probably doubled over the past two years. Q: How do US print realities compare with what is happening world-wide? Other opportunities there? A: This is very important to keep in perspective. The rest of the world, especially emerging economies, never had large commercial printing industries the way they were formed in the US and Canada. Emerging economies now have rising communications markets of all media, and any traditional relationships of print with other media do not apply. The opportunities are probably best for digital printing technologies in those markets because electronic media are starting at the same time and there are no commercial print markets to displace or fight back of significant proportion as there was here. Q: As commerical printers act to mitigate conventional business decline, part of the expressed solution is to continue to diversify. Do we have a sense whether there is enough diversified business available to create a meaningful opportunity? Or is this only for a few progressive shops to take advantage of? A: This all depends on the creativity of the executive team and their ability to manage their legacy business in a manner that allows new initiatives that have little comparability to grow and thrive. It's not for everyone. I discuss this rather extensively in Renewing the Prining Industry and it's also covered in Disrupting the Future. Both can be downloaded for free. Q: What is the effect of trades-only mega-printers on the industry? A: For those not familiar with the concept, these are print businesses that have no direct clients, but sell their output only to other printing companies. This is an important part of our industry history and economic structure that may unfortunately not be as familiar as it used to be. I mentioned my first book earlier, Renewing the Printing Industry, and in that text I describe this as “commodity printing,” detailing why it can be an important strategy for print businesses under some very specific circumstances. Like it was for pre-press services on a local and regional basis prior to the integration of desktop publishing, these kinds of print businesses are wise use of our industry's capital base, and shift the capital investment risks of many individual to a different entity that is best-equipped to absorb them. It also means that technologies of high costs or specialization are made available to smaller print businesses that could otherwise not afford them or be able to properly staff their businesses to do so. Q: What effect will 2012 election have on economy? A: I'm not optimistic; there is a chance things could be rudderless, and that the Fed actually becomes the only institution that takes any meaningful action during that period. I generally don't like the elections because both parties make mockery and distortions of the workings of economics. I have always remembered something I heard satirist Mort Sahl say in the 1970s when he was talking about the presidential primaries and election of 1968. That was a very difficult year, with the announcement that President Johnson would not run, the shootings of Martin Luther King and Robert F. Kennedy, and the continuing national debate about US engagement in Viet Nam. The presidential hopefuls that came forward for the parties were Hubert Humphrey, Gene McCarthy, George McGovern, George Wallace, Richard Nixon, Ronald Reagan, George Romney, Nelson Rockefeller, and many, many others in primaries and on state ballots. Sahl's comment about the primaries and elections was: “Darwin was wrong.” ###  

Dr. Joe Webb is one of the graphic arts industry's best-known consultants, forecasters, and commentators. He is the director of WhatTheyThink's Economics and Research Center.



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