THE THREESOME AT THE DANCE

Mr. Commodity tends to go to the big dance with Ms. Inflation but Mr. Interest rate is the life of the party. Mr. Interest rate can make sure everyone has a good time or not. Without intervention by controlling central bankers, Mr. Interest rate would always stay very close to Mr. C and Ms. I but Mr. Interest rate is sometimes slow to the party because he is held up by the central bankers.

GOOD NEWS

All three party goers are now dancing together. It took a long time to get to this dance but we are there now. The following table shows the average interest rate maintained by the "Big 11" Central Bankers.

end of 2005 3.10%
end of 2006 4.00%
end of Jan 4.05%
end of Feb 4.09%
end of Mar 4.20%
end of Apr 4.23%
end of May 4.27%
end of Jun 4.41%
end of Jul 4.48%
end of Aug 4.50%
end of Sep 4.55%
end of Oct 4.55%
end of Nov 4.57%
Today 4.50%


Last week it was Canada that cut rates by a quarter of 1%. Today, it was England that cut rates by a quarter of 1%. It is projected that the FOMC will cut by a quarter to one half percent on December 11. As you can see in the table, the bankers were putting the brakes on the economy for the past three years, but the increase in pressure slowed after June and actually reduced this month.

TURN TURN TURN

The turn in interest rates, inflation rates and prices of commodities is upon us. Yesterday, the revised numbers for the US economy showed a powerful dynamic at work. Brian Wesbury puts the most recent numbers in perspective. Real wages grew by 3.3% over the past year. The number may sound small but you have to remember that this is an increase over and above the inflation rate and it is a very strong number. The average annual real increase in wages over the past 20 years has been 1.3%. The average American has seen a decent rise in his standard of living over these 20 years but this year he is doing exceptionally well. The irony is that the public has been convinced that the world is falling apart during a time of great progress.

As reported yesterday, the dramatic rise in productivity reported, better than 6%, is the stuff that causes inflation to fall and real income to rise.

As you have surely noticed, the price of oil did not make it over the $100 hump. Sure it is possible that it will mount one more attempt but not likely. Even after OPEC declined to increase production yesterday and even after it was announced that inventories in the US fell, the price went down.

The most recent change in interest rates in China was up. Other countries, including Indonesia, Turkey, Brazil and the Philippines have recently lowered rates. Unfortunately, the data that is easy to find is US centric. In 2006, the "Rest of the World" (ROW) 72.6% of the total world GDP, leaving the US with 27.4%. It is estimated that in 2016 the ROW percentage will be up to 77.2%. We live in a time of dramatic global growth. Still, the "big 11" probably represents 70% or so of the world.

STOCK MARKET TURN

The stock market "croupier's" are still showing off the wares they wish to dump. As you know, the "big boys" work the market like the "stick men" on a crap table. The best bets get very little mention or they get negative attention. The stuff you want to buy right now is not the stuff being touted on the TV shows or by the bulk of the brokers. Still, the bulk of the market will do well as the market comes out of the turn.

POLITICS

Nancy Pelosi finds herself in a tight box. If the congress does not pass funding for the troops very soon, the Pentagon will send layoff notices to thousands of civilians before the Christmas Holiday (union contracts require 60 day notices". The congressional delay of not passing the AMT patch is going to cause millions of tax refunds to be delayed. If the AMT is not patched, millions of families will pay an extra $2,000 or so in taxes. If the congress does not pass the budget before going home for the holidays, the public is likely to vote "the bums out". Polls show that only 34% of Americans believe President Bush is doing a good job but he is not up for re-election. Polls show that something like 22% of Americans believe Congress is doing a good job.

Newt Gingrich showed us all how weak the hand of congress is when it comes to budget battles of this sort. Newt closed down the government but Bill Clinton won the battle. In this game, Bush has several aces he can play if needed. The majority of American do not know what the AMT is, nor do they even understand that the fiscal year started on October 1, but they will understand that it is the Democrats fault if layoff notices are sent, if taxes are increased or if the troops are not supported.

If they congress does what it needs to do and goes home, the FOMC will allow interest rates to follow the inflation rate down and we can all enjoy (or endure) the political campaign year of 2008. Which is shaping up to be a doozy.

Yesterday the New Hampshire NEA (teachers) endorsed both Clinton and Mike Huckabee for President. WOW! One of the many Huck ideas I like is his support for the arts and music in public schools. Accountants, engineers and all others need a dose of "creativity education". Music and poetry sets our hearts on fire.

DIGGING FOR DIRT

When Huck had less than 6% support, he was dismissed. Now the media and the other candidates are digging for dirt. He has been baited in attempts to get him to make off the cuff comments about the Mormon faith. While there is no perfect candidate, Huck has answered the challenge to date and the surge continues. National support for Giuliani has fallen by 9 points pronto. Huck is in the lead in Iowa and he has moved into second place in a number of states.

THANK YOU, THANK YOU, THANK YOU. Several readers have added to their accounts in recent days. It is the right thing to do. When the market is down, it is time to buy. This morning in early trading the dollar is up and the price of oil is down a dollar. A powerful combination that could be the start of something big! BUY, BUY, BUY!