"STORM OF THE CENTURY"
PETROLEUM EQUIPMENT INSTITUTE GENERAL SESSION
LAS VEGAS CONVENTION CENTER, LAS VEGAS, NEVADA, OCTOBER 22, 2009

Where we are going is clearly a function of the economic politics of the Bush Administration and the Clinton Administration. It's my opinion that both parties can do right and both can do wrong and they do frequently.

Our bias is we are not Keynesian. We don't believe unbridled spending will save us.

We are at our lowest productivity since 1947. It's moving up. This is good news.

We are looking at a long, slow recovery. It's going to be a long, rocky bottom. We don't feel that upside momentum for a long time.

I think most of known recessions are normal. We've gotten to a risk-free society. Recessions are as normal as breathing. If we can see recessions coming, we can prepare for them. There is a next time.

90% of people can actually take numbers, compute a rate of change and find leading indicators. They can find the direction their business will be heading.

Unemployment rate today is brushing up against 10% Unemployment will be high for many months to come. Don't worry about it. It lags the economy. It is normal for it to be high in this situation. You are going to find more people losing their jobs this Christmas season. You're going to find businesses closing and more people out of work. This is normal. It is the last gasp.

Do not use unemployment as an economic indicator. It is like driving by looking in the rear view mirror.

The policies put in place for the last 1 1/2 years have dulled the economic power of the U.S. This means we will not see economic growth until sometime after 2012. Until that point, we'll be in a recovery.

The credit crunch will begin to dissipate in Summer 2010. It will have lasting impact. Businesses will find bankers will not be interested in loaning them money. Businesses will find bankers will not be interested in loaning based on property as collateral. They already own so much property they don't know what to do with it. They'll be looking for other assets. Cash is good. It's like the old adage: if you don't need the money, you can get some.

There are two types of banks in the this world: poor banks and rich banks. Which do we want? Rich banks because they lend money to people.

We are looking at inflation. Increase the money supply and inflation follows. Everyone knows this. Every undergraduate economics student in the country knows this. Everyone knows this except the government which says it isn't going to happen.

Inflation in 2011 will take away our purchasing power and the purchasing power of the people who work for us. That's why I don't think there will be a lot of growth in spending in 2012 and 2013.

There will be increased demand for oil around the world in 2010 and more in 2011. Demand in 2011 will be much strong and in conjunction with the dollar being weaker, I would expect to see oil substantially higher in 2011 and by substantially, I mean over $120 per barrel.

Three things to do:

1. Hedge vs. inflation. Buy ahead. Lock in long-term services you can by mid-2010. Accountants, lawyers, leases. You'll look like a genius. Buy assets that will help you deal with inflation: systems, computer systems, training, whatever helps you become more efficient because increasing efficiency is a hedge against inflation.

2. Look at commercial property. Commercial property is going to crater next year. You want to take advantage of that. You'll have an asset that will be inflation adjusted over time. With long inflation, you'll see an increase in value.

3. Buy residential property. You don't get a better deal than this in your life — or, at least, the next 20-35 years. Buy it to use or to rent out. If you want to make real wealth for yourself, buy in Florida, Arizona, not in California, not in Michigan. Buy it where you live if prices are beginning to stabilize. Ask yourself: will demographics help me? If you live in Texas, demographics will help you. Taxes, weather, guns — they all work for you. California will come back. It's just not time yet. California is still struggling. More businesses will leave the state and people will sell their houses. Ft. Myers is the foreclosure capital of the world. There are some great deals there.

We're already the 13th worst debtor nation in the world. Right now we have a deficit of $1,752 trillion. The burden of this is going to be all of us as taxpayers. It's going to take 34% of the total budget just to pay the debt service.

They're going to have to do one of two things: cut spending and raise taxes. We're betting they're going to raise taxes.

Right now 5% of the people are already paying 60% of the taxes.

In 2011 the middle class and upper class are going to see tax increases. There's no way to avoid it because the world is very worried because they don't think we're going to be able to pay the debt and they'll stop buying t-bills.

China has already said that they're worried about the ability to pay our debt. They're worried about the collapse of the dollar. And if the dollar collapses, it's game over. We're in a depression.

We manufacture all kinds of things here and export them around the world. If we take just manufacturing, it's as big as the whole Chinese economy. Our manufacturing is not dying. We have not given up our base. What's happening with manufacturing is it's changing. We are the largest exporter of goods and services in the world, the US of A.

There's a lot of money flown out of money markets because they're no longer guaranteed by the government and it's parked in the stock market temporarily. I don't believe that the market will be at the level it was at in December 2007 at its peak until 2020.

The largest segment of investors — baby boomers — are leaving the market. They're using the money to live and pay medical bills. It won't come back. It'll be spent.

Buy:
GE because they fit the sectors that will be doing well. They're into energy, military, food — safe food and transport of food.
Medical needs: MRIs, glasses, footwear, anything making seniors live better and stay mobile.
Infrastructure around the world: copper, steel, concrete.
Your own business.
Financials because of bargain prices.

Demand is coming back but it's going to be a slow turn. It's slow but it's moving in the right direction.

We're saving money in this century. We cut back on spending, we're saving money and we're reducing our debt. Given this, there's an inescapable conclusion: we will spend again. It will happen slowly. But we will spend again.

Pessimism is something you can use going forward. Look at people and make sure they're properly trained before you get busy. Look at marketing programs and start spending money to advertise and spend money to push yourself into new areas. Make acquisitions of other companies from people who are tired or don't think the economy will change. Your people will be afraid. Lead in a positive manner and let people know they'll be okay. The economy will be challenging but we can handle it. We can lead people through difficult times. Take responsibility for yourselves and push forward.

We forgot who we are. You and I are market capitalists. We helped people grow food on Plymouth Plantation because when they tried to do it as a joint effort they starved.

We can be proud of who we are instead of feeling we have to hide. We are capitalists. We are market capitalists. And we are the people who make it work.

Congress needs to understand this is not an election cycle thing. They are geared to two-year election cycles.

I believe they will do the right thing eventually because there will be enough political pressure to do the right thing.

If you think the dollar is at risk, buy gold. Gold moves on the fear of the dollar. If you think inflation is going to be 12-15%, buy gold. I don't like gold because gold is an emotional thing.