Tuesday, January 15, 2008


The boy scouts have stacked up the wood for tonights campfire and soaked it with kerosene. Who or what will light the match?

At a good boy scout campfire it is an Indian flaming arrow shot from great distance that lights the fire. In the case of the US economy the death of inflation accompanied by a Ben Bernanke rate cut that will start the flame.

The futures market is betting that Ben will lower rates about .75% this month. Low interest rates have started some big fires in the past. Conditions are ripe for a soaring business economy.

Conditions are ripe for a big stock market move. The BPSPX index currently "trades" at .25 or 25%. This is the lowest it has been in a long while and the kind of reading that preceded big multi-year moves in the past. Another index that is hitting extreme lows is the $SOX/$SPX ratio. Semiconductors are in abundant supply just before the massive build-out of the "Internet Super Highway". Once this highway is in place, there will be a reason for billions of people portable "Internet Cars". On this new highway, downloads of information that currently take 8 hours to complete will take 3 minutes and 15 seconds! This speed increase is like a Model T going from 3 miles an hour to 330 miles an hour.

The new "Internet Super Highway" is going to do the same thing that Eisenhower's Interstate Highways did. Those businesses that took advantage made out extremely well, however, a number of small businesses got crushed by new competition. When the cost to ship goods from California to North Carolina dropped, the little farmer in North Carolina was forced to compete with the incredibly efficient farms of California. It really is true that more nuts are grown in California than in the rest of the world combined. The lower cost of nuts and other crops was great news to the many but of course the "little farmers" had to find some other way to make a living. Today, we see the same events taking place. The obvious ones include the closing of one video rental store after another. This trend will accelerate as more content finds its way onto the "Super Internet".

Since I seem to be a lonely voice in the wilderness in talking about the "dis-inflation" of the massive substitutions being made daily, I must SHOUT IT OUT AGAIN, EACH INTERNET TRANSACTION THAT REPLACES A PHYSICAL ACTIVITY IS DIS-INFLATIONARY. A TRIP TO THE BANK IS EXTREMELY EXPENSIVE RELATIVE TO AN ONLINE DEPOSIT OR WITHDRAWAL.


China has finally raised short rates and currency enough for the "world wide slowdown" to be felt in China. When the strongest shows signs of being hit, it is time for the rest of the central bankers in the world to take their feet off the brakes. The much talked about RECESSION is still a figment of imaginations. A recession is certainly possible but the most recent economic numbers show that we are not even close to one now. Besides, the economy is the middle car or a three car train. By the time the middle car hits the worst of the bottom, the front or stock market car is already coming out the other end. The last car, which is the inflation and interest rate car, does not even get to the big hole before the stock market car is on the way out. In case you have not noticed, the third car, which carries interest rates and inflation is headed down now.


A reader wants to know why not a flat tax instead of Huckabee's FairTax. The answer is interesting from the standpoint that a flat tax combined with an unlimited deduction for savings would be almost the same as the FairTax. (I will show how this works below.) Some try to say that a flat tax combined with no limits on IRA contributions would be the same. The big difference is that the flat tax would not close down the IRS. Another big difference is that sooner or later there would be yet another reason given why some extra deduction should be added to the income tax and thus restart the complication cycle. The current IRS code is tens of thousands of pages. We do not need such a complicated structure.


To keep the comparison simple, lets presume a flat income tax of 20% versus a FairTax of 20% on all income or expenditures. In other words, a family that makes $100,000 in a year would pay 20% or $20,000 in taxes. Under the FairTax, if the family earned $100,000 and spent it, the total tax owed would also be $20,000. Add the complication of a $1,000 deduction to the flat tax and assume this family makes the maximum contribution and you get a net income of $99,000, a saving of $1,000 and a tax of $19,800. Under the FairTax plan, this family already had the option to save as much as they wanted but lets now assume they save $1,000. This family would have spent $99,000 saved $1,000 and paid taxes of $19,800. However, the flat tax family would have its money tied up in a restricted account that requires fees and administration. The second family might invest in real estate, stocks, bonds, college tuition or any other investment. The second family would owe no tax on this $1,000 until this money was spent. If they compound this money in a beach house or other investment would mean no taxes due until spent. Wrapped up in this would be the ability to pass the beach house on to children with no taxes being due.

Note the difference in the paperwork. Under the flat tax, each family would still have to file income tax returns, they would still pay up front through with holding and they would still have to maintain basis for purposes of inheritance, capital gains and maintain records of IRA accounts. Under the FairTax, the family draws their full paycheck with no deductions taken for Social Security, Medicare or Income Tax. In addition, each family would receive their pre-bate check to cover there taxes owed on necessities.

While I have been writing this message, there was a "debate" about the FairTax on CNBC. It is interesting that even the proponent of the plan was not well informed about it. The opponent pulled out the regressive word and used it at every opportunity. The fact is that the FairTax is less regressive than the current system. The opponent incorrectly believed that the pre-bate would be given out only to the needy and thus he saw it as an administrative nightmare. The truth is that all citizens would get the pre-bate and making these deposits would be done as easily and quickly as 40 million social security checks are issued each month. It is a real joke for this to be considered a paper work nightmare.

In regard to the potential for fraud, I dare anyone to tell me that fraud is not rampant in the current income tax system. The national income accounts show that only about 80% of all income taxes owed are collected and this does not include the underground economy. It is likely that less than 75% of all income taxes owed are collected. Under the fair tax, about 80% of the taxes would be collected by large retail establishments and there would be super strong incentive for the other 20% to be reported. Under the income tax system, one liar can get away with a lot but under the FairTax system the liar would need the support of another liar to stay out of trouble.

Again, a 20% FairTax is the same as a 20% FlatTax for those who spend all they make. The FairTax is the most conservative. I love the word conservative as it relates to economics. Economics is the science of distributing scarce resources. Our current system encourages us to waste resources. The FairTax would make conservation a good word again. The environmentalist is someone who says that we should wash out a glass jar instead of sending it to the landfill. This person does not seem to care if the cost in heat, water and time are greater than the cost of sending the jar to the landfill. Of course, once the jar is washed, it must be transported to the right place to be useful again. The conservationist understands that if the cost to was and "save" the jar is greater than the cost of sending it to the landfill then it should be sent to the landfill. This morning I read some screams about building too many buildings in America and using up all the land. The fact is that 90% of America is open and 45% of America is covered with forest.

If you want to conserve resources, tax the use of them. The FairTax would do more for the environment than can hardly be imagined. Under the FairTax, only new goods are taxed. A person who buys a used chair would pay no tax. A chair with a broken spindle might suddenly be worth repairing since it could be sold at a price closer to the price of a similar new chair on which taxes would be due.


With the "big money" crowd willing to support anti Huck advertising and willing to subsidize opposition candidates, it remains to be seen if Huck can win the nomination. He has a royal battle in front of him. The old money crowd is well entrenched. They don't like McCain but they would accept him over Huckabee. It is my belief that Huck has the best chance against whoever is the democratic nominee. Huck is the only republican candidate that can run a stronger environmental platform. He is also the strongest candidate for pulling in the lower middle class. He is the only candidate that would greatly simplify the lives of the average person. He and McCain are men of principle. Others may be but Huck and McCain have demonstrated their willingness to speak the truth. McCain is a military student. He understands the rules of power and war. Huck understands that our military needs to be grown in order to continue to safeguard us from Islamic Terrorist. McCain was runner up against Bush 8 years ago. So far the delegate count is something like Romney 38, Huckabee 30 and McCain 3. Michigan is a big state and Romney and McCain are neck and neck but Huck should grab a strong third. Huck has been slammed repeatedly by Thompson in South Carolina. Still I do not believe Thompson can pass Huck. Huck, John and Mitt have risen against Rudy in Nevada and Florida. It appears that there will be a three way statistical tie leading into the big prize of Florida. It will take a big win by Rudy in Florida to knock out any of these three. Perhaps after Super Tuesday, February 5, it will be a little more clear as to who is in the lead!


When under pressure from Bush to lower the price of oil, the King of Saudi Arabia responded with readiness to increase supply as needed but he said that the market is currently well supplied. He said that speculators are holding up the price by about $20 per barrel. The markets have responded. Oil is down $2.56 per barrel as of 2:15. In the mean time, merger negotiations have started between DAL and other airlines. CAL will announce earnings on January 17 and despite super high oil prices and this being one of the weak quarters, CAL should announce surprising earnings.


The TV pundits continue to make misleading statements about consumer spending. The history of the American consumers is that he spends what he makes. Consumer spending does not run up and down as is implied by the pundits. The fact is that we have moved into the "strong business half" of the economic cycle. During this half, scores of power plants will be built and scores of airplanes will be bought and scores of networks will be built and scores of highways will be built. The consumer will go along for the ride. The consumer will have more to spend because wages will rise and employment will stay strong. McDonald's will have a hard time keeping workers because the roadway flagman gets paid as much as 5 times the wage of a hamburger man.

Got to run. I hope you are honoring our deal and occasionally forwarding to others.