FED FUNDS 3.5% 2 YEAR NOTE 2.2%

The spread between the Fed Funds Rate and the 2 Year Treasury rate is as tall as it has been since the market bottom in 1991. The futures markets expect that the FOMC will cut the Fed Funds Rate by .5% today. Such action is a very powerful stimulus to the economy, much more so than the silly fiscal stimulus package where the people will receive the grand sum of $150 Billion now and have to pay it back in the future. The package is about the same as coming home to find out that your spouse has borrowed $1,200 on the family credit card to buy a new sofa, the sofa sits fine but the new payments seem to last longer than the sofa. The fiscal stimulus will rob about two points of GDP growth from future quarters and pack it all into the third quarter just before the elections take place.

Unfortunately, the Bush administration and the congress is engaged in "market timing". Bush 41 lost the White House after only one term because his timing was off just a little. The big cuts in the Fed Funds Rate, piled on top of the fiscal stimulus will do wonders between now and the elections. The problem is that neither action will solve the problem of an economy overly burdened with rules, regulations and taxes. The US has the highest corporate tax rates of all major countries with the exception of Japan and Japan is suffering from a 10 year economic slow down. What is not appreciated by the public is that corporations pay no tax but only pass along the tax in the form of higher prices or reduced wages.


The most efficient poverty program is to reduce taxes on capital and labor but critics are apt to attack such policies as being "trickle down economics". The temptation is to believe that governments should actively confiscate money from the "rich to give to the poor". This romantic notion goes back at least a couple of thousand years beyond the tales of Robin Hood. The problem of oppressive government should not be fixed by oppressing others.

The good news is that ordinary investors can take advantage of the political games being played. Investors simply need to be aggressive buyers during the "goose the economy times". Investors must remember that the "goosing" is not produce a precise response. The market is still worried that tax rates will climb if nothing is done. However, as the democrats point out, taxes were raised at the start of the prosperity phase in the 1990's and the economy boomed anyway. Indeed, many a dollar will be pulled out of 401-k accounts and many a capital asset will be sold in order to get the lower tax rates available for the next two years. The activity created prior to the tax law change will serve to stimulate the economy. This period will not be the first in our history where it made sense for one to sell a capital asset and then buy it back just to establish gains at the lower rate.

SWEET SWEET SWEET

The "disbanding" of al Qaeda in Iraq is about to offer up a "sweet peace dividend". Iran no longer has the support of al Qaeda in Iraq as a reason to resist a deal. George Freeman says that Bush is a lame duck president but he still has a year to push Iran toward a deal. With relative peace in Iraq, the government is boosting oil revenue which is being shared with the various parties. The government expects to boost production by 400,000 barrels per day this year and by 5 to 7 million barrels per day over the next decade. The relative peace will allow US troop levels to be reduced in Iraq, while they will be increased by a smaller figure in Afghanistan.

Unfortunately, in politics, solving a problem is often a mistake. After Bush 41 won the Gulf War, the public voted swallowed the saying, "its the economy stupid", hook line and sinker. It may be that leaving Osama bin Laden isolated in the mountains of Pakistan is a "crazy like a fox move". The American people need a reminder that there are "bad guys" who would harm us if we let down our guard. History has shown us time and again that war after war could have been prevented. The usual antidote to war is to remain so militarily strong that others know it would be suicide to attack.

Had the world not let down its guard, WWII would have never been fought. Hitler was able to dream of world domination only because the rest of the world cut back on defense.

According to people in the know, from US oil producers to Saudi Sheiks, the current price of oil includes a $20 "global risk premium". There has not been much news about Iran lately but that does not mean progress is not being made. A deal will come as a surprise. In the mean time, steady progress is being made in other Middle Eastern Countries. Countries such as Jordan and Libya continue to move in the direction of "modern societies". The millions of people of Iran are growing jealous of the prosperity of their neighbors. Good things are happening in this part of the world, even while the AP focuses its daily report on the number killed in the area.

POLITICS, ECONOMICS AND RELIGION

The law of the land calls for the separation of Church and State. The law of the land prohibits the free exercise of religion. It is impossible to separate politics from religion or economics from politics or any other combination of the three. Huckabee is seen as liberal by some conservatives because he believes in helping those who need help. McCain is seen as a maverick republican because he has reached across the political isle for compromise with democrats. McCain just won a major victory if not the republican nomination in Florida. He lost among those who consider themselves to be very conservative. The good news for republican chances in the fall is that he won handily among those who consider themselves somewhat conservative or moderate. It is hard to imagine seeing large numbers not voting as a protest when the opposing candidate will be Hillary or Obama. When I do online test to see which candidates I am most like, McCain does not show up as being most like me on social or economic policy but Obama consistently comes up as being the least like me.

Hillary is actually much closer to the center than is Obama, but that does not mean that I would vote for her. While I know it is impossible to call short term market action, I am willing to bet that late today the market will be quite strong. Part of this is based on my belief that the FOMC will cut fed funds by 50 basis points. The other part is based on the improved chance republicans in the presidential race. Now that al Qaeda is melting into the fabric of a democratic nation, the Obama -- Clinton positions on international affairs will look worse and worse as the election nears.

Romney just spent a huge amount of money in Florida. He ran about 10 times as many TV ads as did McCain. The irony is that McCain has benefited from the fact that money is not the key to the nomination of candidates. The McCain-Feingold legislation has proven to be a joke but it did not matter partly because Americans like to vote for the under dog who does not have so much money. If you don't believe me look at the total $ per vote totals of Huckabee versus Romney. Democrats find themselves flush with money. The bulk has come from the far left and the party has been pulled so far away from the middle that their chances of winning are falling. It is surreal to see Ted Kennedy endorse Obama while remembering John Kennedy. President Kennedy was strong on defense and strong on the economy. If he were alive today, I cannot imagine him voting for Hillary or Obama.

THE ROBOTS ARE COMING!

Democrats complain because of the loss of manufacturing jobs in America. Many like to believe that government can wave a magic wand and bring those jobs back. Well government could bring those jobs back if it really wanted. Indeed, government could bring back the millions of farming jobs that have been lost over the past 100 years. For example, the government could prohibit the use of tractors on farms. Today it would take several 100 if not 1,000 or more mules to substitute for the work being performed by one monster GPS guided John Deere. In regard to manufacturing jobs, there are about 1.1 million industrial robots doing work that would take a few hundred million people to do. In the same way that it makes no sense to farm by mule, it makes no sense to produce by hand.

The interesting thing is that the growth in the number of industrial robots has slowed. The fact is that the world is flush with goods, more stuff is being made than ever before. While inflation is defined as too much money chasing too few goods, a part of today's conundrum is that we have more goods than can be used. In the past 10 days, my wife and daughter have "free cycled" hundreds of items that Marilyn and I will not need in our new "down sized" house. In 36 years of marriage, we accumulated a lot of "stuff". We build huge landfills to hold the "stuff" we no longer "need".

NEW ROBOTS

The new robots are service robots. Just like in real life, it typically takes more intelligence to do a "service job" than to do a manufacturing job. Service robots are more difficult to program because they must know how to do a broader range of skills. A big game changer in new robots is speech recognition. A handicapped person gets great comfort from knowing that he will be understood when he says bring me the phone or take me to the bath room. Bill Gates says that service robots are at the level of personal computers in the early 1980's. Back then, we thought we had something when we got our dual floppy drive 256K machines.

In the early days, the personal computer was more of a novelty than a truly efficient way to perform a task. I for one spent countless hours inputting list of sales leads when I could have been making calls. The service robots of today are just becoming cost efficient for specialized applications. The power of the voice recognition will change the way we use computers. Nuance and other companies are taking advantage of this power now. Productivity is going to continue to be a strong number. The jobs of mule driver or auto welder will not come back but the jobs of building and servicing robots is going to be in high demand--until the robots take over :)

NO MORE PASSWORDS!

A programmer has invented an algorithm that recognizes faces. For a very long time, I have wanted my computer to recognize me and to allow me access without my having to input a password. The implications for security are great. While there will be "big brother concerns" that must be worked out, it will be wonderful to quickly get on an airplane after walking past a security camera. It will be comforting to know that should a known criminal or terrorist walk past a security camera that he will be identified as such.

Stephen R. Covey, who wrote "The Speed of Trust" says the whole world will speed up when we are able to trust more. Checking out at the grocery store would not require the input of a pin code should credit card scanners be converted to security cameras.

Last week, lockers were broken into at the local YWCA and I was frustrated to learn that there were no pictures taken at the entrance to the building. It is said that the people of London are photographed over 400 times per day. The people do not feel like their personal space has been violated as the photos are put to good use to prevent terrorism. Yes, it is a shame that such protections are necessary but, again, a strong defense is the heart of prevention. The fact is that people become more honest as the probability that dishonest actions will be penalized. NO MORE PASSWORDS--make our lives easier through the use of technology!

THE UNDERLYING THEME

The underlying theme in the above post about robots and other new technologies is that technology will continue to allow us to do more while using fewer resources. Some very old ideas are "in the news" because they achieve more while using less. For example, I mentioned Dover Elevator a few times in recent days because the worlds population continues to move to the city where transportation by elevator is many times more efficient than transportation by auto. Sure enough, Dover reported strong earnings and the stock has risen. Big money is going to be spent on other high efficiency products over the next several years. One of the "robots" on the way is vehicles that transport people from and to tightly defined areas. For example, massive airport parking lots will be accessed by self driving golf cart sized vehicles. Combine the face recognition software with the self driving vehicle and you will not even need to remember where your car is parked.

More efficiency means low inflation. Low inflation means low interest rates. Low interest rates means high asset prices. The FOMC is likely to cut rates today. BOOM, BOOM, BOOM!