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Why Investors Should Fear America's "Sputnik Moment"

Stock-Markets / US Stock Markets Jan 26, 2011 - 06:17 AM GMT

By: Money_Morning

Stock-Markets

Best Financial Markets Analysis ArticleMartin Hutchinson writes: In his State of the Union Address yesterday (Tuesday) evening, U.S. President Barack Obama said the United States is experiencing another "Sputnik moment."

For a free marketer like myself, that's deeply depressing rhetoric: It reflects the reality that President Obama believes that this crisis - like others that came before it - is best solved by still more government action.


In short, while President Obama employed the language of bi-partisanship, the picture he painted was that of Big Government digging in. Just like at the time of Sputnik.

A Trip Up Into Space ... And Back Into History

As Americans reflect upon Sputnik, they're likely to recall the "Space Race" of the late 1950s and most of the 1960s - and President John F. Kennedy's challenge for the United States to put a man on the moon before the end of the 1960s. They remember that we won that race, and beat the Soviets to the moon.

Trouble is, that much-romanticized result came much later. And the reality is that the initial U.S response to Sputnik was not one of this country's finest hours of statesmanship.

While President Dwight D. Eisenhower attempted to calm the rhetoric, Congress, led by Senate Majority Leader Lyndon B. Johnson, embarked upon an orgy of public spending. At a time of zero inflation, the federal spending total for the fiscal year that ended in June 1959 was a staggering 11.7% above that of 1958, the highest peacetime increase between 1949 and the inflationary year of 1976.

The money fueled an expansion of education, entirely in the public sector, which within about five years produced the beginning of an inexorable 30 point to 40 point decline in SAT scores that was finally arrested around 1990. It also produced the "space race" that culminated with the Apollo lunar landings.

The U.S. lunar program remains a major source of national pride, to be sure. But as a former merchant banker who believes that capital is virtually always better used by the private sector than by government, the moon-landing program is also one whose actual economic worth would be easy for me to debate. (For instance, the political influence that Texas enjoys is one big reason that the U.S. Sputnik response produced a giant helping of pork in the form of the Manned Spaceflight Center - later the Johnson Space Center - which was placed in Houston, 1,000 miles from where space launches actually took place.)

Why Government-Directed Innovation Doesn't Work
President Obama's fascination with the "Sputnik moment" goes way beyond rhetoric. Just as the nation saw after Sputnik, President Obama wants to "invest" more taxpayer money in research, hoping to find a new industry or two.

Unfortunately, we don't need to go back as far as Sputnik to see that such government-directed innovation does not work: For one thing, true innovators are the least likely of all people to work well within a government bureaucracy. If you doubt this, just consider:

•The enormous waste of "green" initiatives pursued in the last five years in this country.
•The experience of Spain (pushed to the brink of bankruptcy by a national "green" strategy.
•The closure of U.S. incandescent light bulb capacity and the move of the lighting industry to China.
•And the enormous cost of ethanol subsidies.
These programs, all created by government whim, combine to show definitively that government is incapable of producing innovation.

What you get instead is politically directed expense, fueled by fashionable nostrums like energy independence and global warming. President Obama doubled down on his dedication to the latter concept last night by eliminating oil industry subsidies, and by promising fatuously that, by 2035, 80% of U.S. electricity will come from "clean" sources.

That's an amazing promise for a country that hasn't started construction on a nuclear power plant - realistically the only reliable large-scale source of new "clean" energy - in more than 30 years.

Apart from funding "innovation," President Obama wants to further increase spending on infrastructure. The problem here is that U.S. infrastructure is at least five times as expensive as it should be. You can see this from the $8.7 billion cost of the Hudson road tunnel recently cancelled by New Jersey Gov. Chris Christie.

That tunnel was the largest public-works project underway in the United States. From a functional standpoint, however, that tunnel would have been identical to the existing Holland Tunnel, completed in 1927 at a cost of $48 million - equal to $660 million today.

You can argue for a tunnel cost today of somewhat over $1 billion, as construction workers have better living standards than 1927. But much more than that is sheer waste. Comparing the projected costs of "high speed rail" projects - the $117 billion projected Amtrak Boston-Washington system, for example - with overseas equivalents shows the same differential. Until over-bureaucratic permitting procedures, union featherbedding and other factors bloating the cost of U.S. infrastructure have been eliminated, spending more on infrastructure is like pouring money down a rathole.

President Obama's proposal to freeze domestic spending for the next five years is equally flawed. To calculate the spending freeze, he's relying as a baseline on the grotesquely bloated budgets of 2010-11, which are literally stuffed full of useless "stimulus" spending and other waste.

As the U.S. economy recovers and unemployment declines, domestic spending can be expected to decline naturally, so President Obama is truly offering nothing useful here. In any case, a five-year freeze is as meaningless as his 2035 energy commitment. Spending can only be cut by reforming entitlements and closing government departments now, as is being done in Britain. President Obama offers none of this, giving only windy rhetorical support to the recommendations of his deficit commission.

There were a few positive notes in President Obama's speech.

He expressed a desire for simplification of the tax system and of the government bureaucracy. Those are both worthy aspirations, though they were also vague in detail. He called for signature of the South Korea trade agreement, which he tweaked in December. But, alas, he did not do the same for the agreements reached with Colombia and Panama, which have languished in a protectionist Congress since 2007.

And President Obama's rhetoric and delivery were - as always - beautiful and in a true sense inspiring.

President Obama is good at rhetoric - it's that Ivy League education, as well as his very clear natural ability. But one can only wish he had majored in economics (at a free-market-oriented university), or in a hard science, or had run a business for a few years. Without those qualifications, President Obama must too often fall back on a messianic faith in government.

In last night's State of the Union address, he told America that "we can't win the future with a government of the past." Unfortunately, with his "Sputnik moment" analogy, that's precisely what he's proposing.

Action to Take: U.S. government strategies like the ones that President Barack Obama outlined in last night's State of the Union address virtually guarantee that we'll see $150-a-barrel oil - perhaps as soon as mid-summer. A price increase of that magnitude could result in $5 a gallon gasoline. But here's the thing ...

You don't have to be a victim.

If you follow our lead, you'll be among the small group of investors who make a great deal of money in the crude-oil market this year. You'll have to learn the "new lay of the land," and learn to invest wisely in the face of potential whipsaw volatility. But a balanced approach of exchange-traded funds (ETFs) and individual company shares will enable you to navigate this storm - to find the welcome port on the other side.

To find out more about this opportunity, check out the "2011 Investor's Forecast" issue published by our monthly affiliate newsletter, The Money Map Report. The article, titled "$150 Oil: It's Coming. So Here's How to Make the Most Money," was written by global-energy guru Dr. Kent Moors and containsa number of specific stock and ETF recommendations.

If you are already an MMRsubscriber, you already have this issue in hand, and can access this report by Dr. Moors by clicking here and then using your password. The begins on Page 11 of the "Forecast" issue.

Money Morning readers who are interested in finding out more about our forecast issue can do so by clicking here.

Look at it this way: With oil at $150 a barrel and gasoline at better than $5 a gallon, the profit potential is immense. Just one winning profit play will offset the cost of the subscription - many times over.

Source : http://moneymorning.com/2011/01/26/...

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