You Can Profit From the Carter Era
There are two appropriate reactions to Jimmy Carter's decisions in office. One is to sit down and cry. The other is to accept the State's expanding intrusion into private affairs and determine whether and what profitable opportunities will arise.
It appears that the increasing intervention in economic activities has changed the economy from a positive sum game into a zero sum game. And soon, like Britain and Italy, it may change into a negative sum game—total wealth in the United States will not grow or will even decline. Nevertheless, private property has not yet been abolished; profits, while taxed, still exist; and thus, while the wealth of the society as a whole may decline, certain individuals may prosper.
Eric Hoffer has proposed that the United States will have socialism without socialists. Jimmy Carter is a man in this tradition. Identifying himself as a common man and small businessman, he has to date made uniformly interventionist decisions. The winter shows his gut reactions to any circumstances out of the ordinary: for the government to intervene, to allocate, to control, to punish. His inclination is to allocate supply by fiat, rather than by price. His reaction to a higher demand for energy is to pass laws preventing certain consumption—by force. His first decisions on changes in the tax laws have been to substitute tax credits for exemptions, thus lowering the taxes of those whose income is below $16,000 and raising taxes of those whose income exceeds $16,000.
In both fiscal and monetary policy, Jimmy Carter comes across as a pure neo-Keynesian. He has increased expenditures and cut taxes—to "stimulate" the economy—increasing the budget deficit by approximately $30 billion, although during his campaign he promised to balance the budget, even criticizing Ford for the size of the Federal deficits under Ford's tenure. In addition, Mr. Carter and his advisors have repeatedly admonished Arthur Burns, president of the Federal Reserve Board, to increase the money supply more rapidly. Congress, in hearings, is already altering Carter's $30 billion proposal in the direction of even higher expenditures for Federal and state make-work jobs. It is extremely doubtful that Carter would veto this. So we can expect deficits at least as enormous as, and probably higher than, those under Ford, and a money supply increasing much more rapidly. Sooner or later, we will have an accelerating rate of inflation.
In addition, Carter's advisors have called for lower interest rates. They expect lower rates to result from an increase in the money supply, a classical Keynesian hypothesis based on the presumption that lenders are stupid and will fail to understand that inflation will reduce the buying power of the money they lend. Indeed, the last spate of rapid inflation showed interest rates skyrocketing, in 1973 and 1974, coming down only when the rate of increase in the money supply declined. Nevertheless, Carter and his advisors clearly believe in the Keynesian-leftist orthodoxy. The result can well be controls on interest rates in the future. Since Carter's assumption of power, both interest rates and the rate of increase of the Consumer Price Index have risen rapidly.
Lastly, Carter has peppered the regulatory agencies with several Naderites, including those who advocate wage and price controls, far greater use of antitrust legislation, and stronger regulations of safety, environment, advertising, and other aspects of capitalist transactions between consenting adults.
This article will not discuss buying silver, gold, and Swiss francs, all of which will be duly covered by other authors.
There are numerous methods of investing in interest rates when they are expected to increase. One, of course, is to borrow money now. If you have a productive use to which to put money or you are expecting to borrow money for consumption, it is better to do it now than to do it later, since interest rates will rise. Indeed, it is intelligent to be a borrower rather than a lender.
A more speculative method of investing in the expectation of rising interest rates is to short Treasury Bill futures. Interest rates on 90-day Treasury Bills reached bottom on December 22, 1976, at 4.28 percent. Since then they have carried higher rates—about 4.65 percent currently. The Treasury Bill futures market specifies delivery of 13-week Treasury Bills with a face value of $1 million. Trading occurs in four delivery months: March, June, September, and December; and for each delivery month, trading begins one year in advance. If you wished to buy Treasury Bills for delivery in June 1978, they would be available any time after June 1977. Treasury Bill futures are traded on the International Monetary Market of the Chicago Mercantile Exchange, and a contract can be bought through any commodity broker. As with all futures contracts. Treasury Bill contracts can be secured on margin, which currently, depending on the brokerage firm, runs about $1,500. You can secure $1 million worth of 90-day T Bills for $1,500.
Treasury Bills are quoted at 100 minus the interest rate. If the current interest rate for T Bills is five percent, then they will be quoted at 95. If the interest rate increases, the price falls. An increase from five to six percent would cause the price to fall from 95 to 94. Similarly, a decrease in the interest rate on T Bills from five to four percent would be evidenced in the quote rising from 95 to 96.
Speculators bid on the interest rates of T Bills for future delivery depending on what they expect T Bills will be carrying at the time of delivery. If they expect that interest rates will rise over time, distant deliveries of T Bills will be quoted at lower prices (higher interest rates) than nearby deliveries. This is exactly what is expected. As of February 11, 1977, for example, T Bills for March delivery were quoted at 95.24 (4.76 percent), while T Bills for December delivery were quoted at 93.70 (6.30 percent).
In January and the first week of February, price quotes for T Bill futures dropped considerably, before rallying in the later part of the month. What kind of interest rates can be expected in T Bills over the next year? This is impossible to know for sure, but there are some indicators. T Bill rates reached as high as 10 percent during the height of the 1974 inflation. As late as May 1976 T Bill futures were quoted as low as 90.5, giving an interest rate of 9.5 percent. Prices now are about as high as they have been since 1972, for nearby deliveries, and only moderate for distant deliveries.
The latest version of the Carter 1977-78 budget predicts a deficit of about $62 billion but is admittedly optimistic on the revenue side. Congress is already expanding the spending side. Other bills will be passed without a Carter veto, the final deficit being sent upward. A good guess would be at least $70 billion. In January, housing starts fell 27 percent—the economy is not strong.
It is probably very conservative to expect the inflation rate to rise 3 or 4 percent over the next year, to 10 or 11 percent. If this is the case, T Bills will yield at least 8 percent, perhaps as much as 9 percent. If the inflation rate rises even a percent or two higher than this, T Bills will yield over 10 percent.
Thus a short position in the T Bill futures market would be indicated, for those who find this scenario reasonable and who have money, and the inclination, to speculate. If one shorted a distant T Bill contract at 94, and liquidated at 92, the profit would be $5,000. (Yields in the T Bill futures market are calculated by the change in the interest rate divided by four, since they are 90-day T Bills. A two percent increase in the interest rate on a 90-day T Bill contract for $1 million face value of T Bills is equal to .02 x 1,000,000 x 1/4 = $5,000. Each percent increase is worth $2,500, so each 1/100 percent—the minimum quote change—is worth $25.00.)
If the interest rate were to climb to 10 percent, the profit would be $10,000, on a margin of $1,500 per contract. Thus a very large profit potential exists if Carter continues with the policies thus far implemented and if their consequence is the same as they always have been.
Most climatologists predict that the recent frigid winter will now be commonplace. It was caused by a severe shift in the jet stream, which in turn is influenced by sunspot activity and the earth's precession in its orbit. An American Association for the Advancement of Science panel on climate said flatly that seven such winters in a row would lift the albedo (the amount of light reflected rather than absorbed) of the earth so high that we would be in a new ice age. Lowell Ponte, in his book The Cooling, carefully analyzes all the climatic evidence and theories and concludes that the world is definitely cooling rapidly, with the chances of another ice age rather high. Recent evidence indicates that when a cooling climate comes, it happens very rapidly. Indeed, at the beginning of February 1977, 65 percent of the North American continent was covered with snow, the most recorded.
This winter Carter showed his response to the natural gas shortage caused by the cold climate. All State intervention. State allocations of natural gas. Threats of arresting individual homeowners if their thermostats were set "too" high. State allocating of heating and fuel oil. If the next winter is as cold as this, the catastrophe will be much worse, as inventories have been brought down and allocations of some substances destined for summer use have already been consumed. Next winter some actions are almost certain: gasoline rationing, heating and fuel oil rationing, price control and allocations at the refinery level of almost all petrochemical production. These are the same actions that provided misery to the American people in 1973 and 1974—but also provided enormous speculative opportunity to a few.
Heating oil can now be purchased for about 49 cents per gallon. During the 1973-74 embargo-allocation, the price rose, on the black market, to over $4 per gallon. Benzene, selling at 50 cents per gallon, also rose to $4. Anyone who has a truckload of heating oil during the next winter will reap a small fortune selling it to some homeowners in the coldest regions. It would be well worthwhile to buy a truckload and drive it north. How to arrange such a purchase requires only a little guts—talking with some suppliers now regarding a purchase next winter. Someone willing to take a little risk can easily make $5,000 to $20,000 next winter from a single truckload.
There will be even more opportunity in chemicals. If next winter is cold, controls on refinery production will be instituted. It was almost done this winter, with much better inventories. Companies will be on allocation, usually a percentage of last year's usage. This will be true for most petrochemicals, particularly those used in industrial production. Consumer products will receive priority. During the 1973-74 embargo the price of cotton skyrocketed because the allocations for synthetic fabrics were reduced. Benzene, a basic petrochemical feedstock, rose eightfold in price. Products easy to store, such as styrene chips, went from 17 cents to 55 cents per pound. Vinyl acetate went from 18 cents to $2.10 per pound. Certain solvents did even more phenomenally, acetone rising from 7 cents to 75 cents. All these products are readily available now.
Any libertarian with a few thousand dollars and some guts, willing to do the legwork, can make a small fortune next winter. It will be cold, there will be shortages of natural gas and heating oil, and consequently, there will be price controls, production controls, and distribution controls. It was Nixon's response, and it will be Carter's.
During the last oil embargo, cotton rose from 40 cents per pound to 85 cents per pound. During this winter, cotton rose from 67 cents to 78 cents per pound. This is due to lack of petrochemical-based synthetic fibers. During the next winter, it would be wise to buy cotton futures when the first layoffs occur. That is when the state will intervene, demanding the production of heating oil instead of petrochemical feedstocks.
A futures contract in cotton is 50,000 pounds, so each 1 cent/lb. increase in price is worth $500. Another cold winter with much lower inventories will send cotton prices much higher than during this past winter. Margin is $3,000, so a 10 cent or 15 cent increase in cotton prices, a conservative estimate, is worth as much as a 300 percent profit.
Most of those who profit from increases in the interest rates and distortions in the petrochemical markets will not be libertarians or fiscal conservatives. In fact, they will have little ideology at all, but rather a knack and will for quick entrepreneurial effort. The opportunity will be there, however, for those who wish to leave the world of gold, silver and Swiss francs and try their hands elsewhere.
John Dublin is a professional speculator and author of the controversial book You Can Profit From the Coming Mideast War.