CAPTURE THE FLAG, TIT FOR TAT, ROPE A DOPE AND BUY, BUY, BUY!

Those who are watching the nomination process carefully are witnessing a well played game of Capture the Flag. The key players have demonstrated great skill in gamesmanship. Bill and Hillary are masters at these games but the action right now is on the republican side of the isle.

One game being played is Tit for Tat. This strategy can best be illustrated by the many Prisoner's Dilemma experiments that have been performed at University Campuses for many years. Freshmen psychology students are often required to participate in a game of prisoners dilemma. The winner receives the best grade or monetary compensation. In the game, typically pairs of students are told that they are playing the role of two thieves that have robbed a convenience store. They are told that the evidence is far from air tight and it is very possible that they will win this round by going free. On the other hand, they may lose if their partner in crime "rats them out". They are then each interrogated separately and the case against them is described as being strong or not. They are told that if they rat the other guy they will earn 60% or so of the maximum game points, if neither rats the other out, they will each earn 100% of the maximum points and if they are ratted out by their partner while they rat out their partner they will get off easy and still win 40% of the maximum points but if they are ratted out while refusing to rat out their partner, they will get a zero score. The game is repeated time and time again with new partners each time.


Smart players soon learn to offer their partner a tit for tat compromise. The smart player makes the promise not to rat the other guy out on this round, however, he promises to rat him out the next round as "payback" if necessary. In other words, he gets as many players as he can to be "joint winners". Even if a player rats him out once, he must even consider making the promise again more forcefully. He says, you ratted me out last time and it cost me points, lets agree again to keep quiet but I must warn you that if you rat me out again then from now on I will always rat you out.

CAPTURE THE FLAG

The republicans and democrats are two teams playing a game of capture the flag. The problem is that only one person on each team can win the big prize. A few players might play for second place (vice president) but for most it is a win or lose game. During the first round, the game is played to be determine who will go one on one against the other teams "best player". Should one team fight it out too hard against each other, they will damage their teams chances in the final round, no matter who the winner in the first round.

Note the action on the republican side. Rudy has played a game of "rope a dope". He has stayed away from the center of the "boxing ring", hugging the ropes in the hope that a real brawl would break out between his top two contenders. For example, if he believed that Romney and McCain would emerge as leaders, he has desired for the two to spend all their war chest battling each other. By husbanding his resources, he hoped to deliver the knock out punch after the third candidate had softened up the second.

At one point, Romney thought he could spend big in the early states, steam roll to a big lead and then deliver a knockout punch to Rudy. Huckabee used game theory to change the dynamics. Huckabee worked hard in Iowa while giving only minor attention to New Hampshire. Then when Romney tried to deliver knock out advertising against Huck, Huck fought back, showing he could hurt Romney badly if necessary and then pulled back his negative Romney advertising at the last minute. As part of the process of fighting Romney, he formed a short term partnership with McCain. By supporting McCain against the negative attacks by Romney, Huck solicited McCain's help in defending the flag. It became clear to Romney that if he and Huck battled it out with negative ads in Iowa, McCain would be left to sneak off and capture the flag in New Hampshire. Sure enough, the combo partnership of Huckabee and McCain succeeded. Huckabee won Iowa, McCain won New Hampshire and Romney came in second in each.

After the New Hampshire vote it has been clear that the tables had turned. Suddenly, it was not Romney trying to beat back Huck in Iowa but Romney trying to beat back a surging McCain in Michigan and Huckabee trying to hold onto his lead over McCain in South Carolina. Suddenly, Romney pulled his ads in South Carolina and in Florida when he decided to focus his efforts on Michigan. Huck is now cooperating with both Romney and McCain against the later battle to be waged with Rudy. The day after the New Hampshire vote, Romney headed off to his home turf in Michigan to battle the surging McCain and Huck went straight to his state of strength, SC, in order to slow McCain there. This does not mean that Huck is not competing for votes in Michigan but that he is content to trade a win in South Carolina for a close second or third in Michigan. Indeed, if Huck were to try to win both states, he would be more likely to lose both.

If you watched last nights debate, you saw that neither Romney, McCain or Huck went after one another. On the other hand, Thompson slammed Huck hard as his only hope is to pull off an upset in SC. Huck went after the weak out of step Ron Paul as a way to highlight Huck's resolve in international affairs but he did not fight back against Thompson in a negative way. Again, it is clear that Huck understands that no republican will capture the flag if they fight each other unnecessarily. Now that McCain is on a surge, Rudy contrasted his positions with McCain's a couple of times but he did not get into a war.

Rudy's strategy could still work out for him but it appears not to have been a great strategy so far. Again, the big difference has been the good strategy of Huck to help steer Romney and McCain away from excessive confrontation. To put it another way, it makes more sense for Romney, McCain and Huck to enjoy an easy three way split of the Michigan delegates than to weaken one another in the coming battle with Thompson and then Rudy. With Romney spending his resources in Michigan, Huck and McCain can finish off Thompson in South Carolina without taking too many blows themselves.

Ron Paul could continue for a while as he continues to raise cash from a group that does not expect to win but that hopes to play the roll of spoiler. Still, it is just a matter of time before Paul must retire.

The other day, I wrote about a three man race in Florida but it appears that I was wrong. After the Michigan and South Carolina votes, the delegate count is likely to be close to a three way tie between Romney, Huck and McCain, in that order. McCain only picked up 3 delegates in New Hampshire so he needs a good showing to catch the lead built by Romney and Huck but the Michigan and South Carolina polls show he could win both. No matter the count, the three should all "win tickets" to Florida, where Rudy is spending time and bucks. Huck is the strong candidate in the South and Rudy is the strong candidate in the Northeast. Rudy should win in New York, New Jersey and Pennsylvania. Florida is a melting pot of southerners and retirees from the North.

The Thompson attack on Huck revolves around Huck's "populist streak". Huck and McCain have said that republicans need to rebuild the Reagan coalition. Thompson seems to forget that Reagan was able to include a large number of middle and lower middle class people in the coalition. Huck's economic policies do have a twinge of populism and therefore do appeal to this group.

At last nights debate, it was clear that McCain is the man in regard to military matters with Rudy placing second and with a rounded off tie for third going to Thompson, Huck and Romney. In the area of economic wisdom, it was clear that Rudy is the man. McCain talked only about cutting deficits without, which may have won him conservative support, but he was either unwilling to suggest that a weak economy might need fiscal stimulus or he does not understand macro economics. Huck avoids getting into the detail of the Fair Tax plan that he supports. When a couple of candidates (I think Rudy and Romney) talked about cutting the corporate tax a few percentage points, Huck did not respond that the Fair Tax would eliminate the double taxation the US puts on corporate income. Again, I think he is smartly avoiding using up ammunition that will be better spent against democrats at a latter date.

McCain gets a lot of credit as being a straight talker. He does seem to be a man of principle. So, his silly support of government regulation to solve problems is heart felt but wrong. As these elections have shown again, big money is not the key to winning elections. It makes no sense to spend not billions but trillions of dollars in attempts to change our climate. These billions could be used to solve all kinds of "known problems" that would save millions of lives and give us time to realize that even if global warming is real it will not do great damage for a hundred years or more. It has taken a long time for many people to realize that converting corn into car fuel is a waste of resources. Billions have been wasted while billions of poor have suffered hunger. It will be a mistake if the republican nominee tries to out democrat the democrats.

Just one comment on the democratic side, the Clintons avoided shooting the "big cannons" at Obama for as long as they could. Only after Obama won in Iowa did Bill bring out his line that Obama has gotten a free pass on his inconsistent statements and votes in regard to Iraq and only then did Hillary "play the woman card" by weeping about how much she wants a win for the country. Who knows how much other ammunition has been stored by the Clintons. We know that Hillary has been able to choose words very carefully in regard to a number of issues in order for her to be able to run to the right of middle after she is is the nominee. If necessary she will swing to the left to put Obama out.

BUY, BUY, BUY BAC AND OTHER SUB PRIME MORTGAGE HOLDERS

Bank America is about to swoop up Country Wide Financial for a song. We know that sub prime loans that are being paid on time have been written down sharply. We know that the FOMC is ready to lower rates again and again "if necessary". We can see that it is necessary. We know that the value of these loans will climb sharply if it becomes clear that the loans will be paid. The housing market peaked more than two years ago. A sharp drop in Fed Funds rates will lower the monthly payment on these loans. Homes that might not be worth $1,500 per month might be well worth $1,300 per month. The leverage behind a 30 year mortgage is huge. Take a look at the following example.

A mortgage of $240,000 at 6.5% requires and monthly payment of about $1500 per month. The same mortgage at a 4.5% rate requires a payment of only $1,200 per month. Three hundred per month is a hefty "raise" for a family of modest means. Put another way, a $1,500 per month payment at 4.5% will pay off a $300,000 mortgage. A two percent drop in interest rates will ultimately boost the value of a $240,000 home by about 25%.

Over the next several years, BAC will enjoy the pop of lower interest rates and it will enjoy writing up of loan values over the next several years. The stock is off almost 30% from its high, despite paying out a large dividend. The current yield is around 6.4%!

An aggressive way to play these area is to buy Country Wide. The deal is set to close in the third quarter. No one knows for sure but the deal has been made and should go through. Another play is to buy Etrade. In story after story, the sub prime loan pools have been purchased or supported in one way or another. Merrill is making headlines by suggesting that their loss will be around 15 Billion Dollars. This is stuff that creates fear in the hearts of the weak. It cost Merrill nothing to be extra liberal in its write downs. Indeed, the new CEO's of the various financial companies will benefit from write ups over the next many years and the story will become about what a turn around these "smart guys" have made.

WHAT RECESSION?

The IMF estimates that the world economy will grow at the real rate of 4.8% in 2008. Despite all the fear mongering, America is economically strong. We have suffered through a massive punch from the housing market but the rest of the world is ready and willing to pull us forward. Productivity continues to be the world wide story. How have the "big boys" been able to push the story of recession so hard? Ironically, the 4.8% growth of the US in the third quarter was probably an exaggeration of strength. This was done in two ways. The inflation numbers were pushed down and the nominal economic numbers were pushed up. As you know, real economic growth is equal to the actual growth minus the inflation rate as measured by the volatile CPI. After reporting extra high growth in the third quarter, it becomes easy to adjust the following quarters to make the economy look weaker than reality.

BUY, BUY, BUY!

The economy looks very weak in the US and the public has bought the story. The public has sold stocks that are very cheap in order to pay of debt that is very cheap. Two wrongs in one move! When debt is extra cheap, as it is now, it is time to borrow the maximum you can afford and when stocks are very cheap it is time to buy as much as you can. The ratio of stock earnings to alternative investments has never been so high! BUY, BUY, BUY!

BUY WAL-MART!

If you are not comfortable buying the high beta stocks that are near the bottom of a huge roller coaster ride, then buy the big dumb and ugly such as MSFT, GE or Wal-Mart. Have you noticed that the bashing of Wal-Mart has slowed. When the democrats captured congress, the unions thought that their day had come. The bulk of the democratic party bashed Wal-Mart relentlessly. Since that time it has become more and more clear that unjustified big wage increases cannot easily be forced on our global economy. The democrats did pass a minimum wage increase but it was a joke relative to the big push of old. I can't remember the number but the minimum goes up to something like $7.25 after the second bump. Wal-Mart receives about 20,000 applications for each 1,000 jobs it has to offer. I believe the above information came from the Carpe Diem web site. The site goes on to say that the ratio of applications per job is actually higher at Wal-Mart than the ratio of applications to openings at Ivy league Universities.

HARD TO SEE

It is hard to see that inflation is rolling over because food prices have been pushed higher by the mandated misuse of food for fuel. This too shall pass. China has been unfairly "bashed" for increasing the demand for oil but the country was one of the first to realize that it makes no sense to convert corn to fuel only to raise the price of chicken, pork, beef and other food products. Besides, the growth in fuel usage in China is much less than is stated in the media. Much of the growth in China has been the use of oil in the manufacturing of things like plastic, which had previously been made in another country. In the meantime, the government has taken extraordinary steps to use fuel more efficiently and world wide growth in oil usage has grown progressively slower. The world uses around 88 million barrels of oil daily which is only about 5 million barrels larger than what was used 3 years ago. The growth has slowed from about 2.5 million 3 years ago to 1.1 million in 2007. The fact is that production growth will exceed demand growth by several millions of barrels in 2008, 2009 and 2010, all before the big monster Brazil fields come on line. The decline in the price of oil will cause many other countries to stop using so much food for fuel and the decline in inflation will provide power fuel for the stock market. BUY, BUY, BUY!

Again, I thank you all for your prayers for Jules. It has been interesting how much relief I have felt since her mother developed the same symptoms. The only difference is that Courtney tested positive for strep throat this morning. Keep your prayers coming even though we feel good that this sickness is proving to be a normal garden variety virus. Strep can be a serious problem so we are thankful that Courtney was quick to be tested.