Thursday, January 03, 2008


My Mom has driven Cadillacs and trucks for the past 25 years. Last week she purchased a Honda CR-V. Her gas mileage will jump from 12 to 14 to 24 to 30. This is the story of gas prices being elastic in the long run. Car dealers report that there has been no panic buying of high mileage cars. I don't expect panic buying but I do expect the truck to become "uncool". The steady switch has been to dump the SUV and to replace it with a cross over. The difference in mileage is not nearly as dramatic as Mom's switch but the effect will be cumulative. US miles driven in trucks have declined for two years running. Many families own a low mileage SUV and a higher mileage sedan. The sedan is getting a work out and the truck is spending a lot of time in the garage.

Alarmist note that gasoline sold for over $3 per gallon back when the price of crude was trading at $65 per barrel. That was back in the spring right at the peak demand season for gasoline. Refineries are currently set to produce two barrels of heating oil and only one barrel of gasoline from less than 3 barrels of crude. The extra production comes partly from the addition of ethanol to the gasoline.

The election year is here but the election is still 10 months away. I am confident that the price of oil will be well off the peak prices by the time the public is called to vote for or against the incumbents in congress. The average car stays on the road 17 years, a turnover rate of less than 6%. However, the mileage turnover is higher than the vehicle turnover. Again, many of those who have a choice are leaving the truck in park. The mileage turnover might be as high as 8% this year for a savings of fuel in the 3% area. Such a decline in demand could easily be the straw that breaks the oil camels back. IT IS NORMAL FOR COMMODITY PRICES TO RISE IN THE EARLY TIME OF A SLOWDOWN BUT TO BREAK TO THE DOWN SIDE AT ABOUT THE SAME TIME AS THE FINAL BIG DROP IN FED FUNDS RATES. IN THE NEXT FEW WEEKS WE WILL SEE A DECLINE IN SHORT INTEREST RATES AND A DECLINE IN COMMODITY PRICES. THE WAR ON INFLATION WILL BE DECLARED WON AND THE ECONOMY WILL MOVE AHEAD RAPIDLY.


Big money is being spent, in thousands of labs around the world, on one gene therapy or another. Hope for major disease "cures" is flourishing. Mice have been cured of every thing from diabetes, to Parkinson, to cycle cell anemia. Believe it or not, the US has moved into the prosperity phase of the business cycle. During this time of solid wage growth, the public will be willing to spend what ever the cost of the latest innovations. I believe the big discoveries over the next few years will be in the area of health. Some scientist believe that a child born today will live on average to 135 years of age. What a paradigm shift?


The substitution of the "mouse click or the cell phone call" for much more expensive actions will continue to be the fuel of rapid world wide low inflationary growth. The current situation is much like the "build out phase" of the auto. The auto had been around for a very long time before the interstate highways were built. Autos in combination with super highways were the tools that allowed businesses to relocate to lower cost areas. In the same way that the highways permitted non inflationary growth in the 50's and 60's, the next several years will see non inflationary growth as more and more people take advantage of electronic movement of information.


2008 has gotten off to a slow start but the pressure for boom times is building. Even lagging inflation numbers have started rolling over. The excuse for the FOMC to hold short rates at high levels is about to disappear.

None of us have the patience of Job but hopefully we can all benefit from his story. In up move in 2007 was concentrated. The NASDAQ 100 was the big winner at up about 16%. In 2008 the winners will be more spread out but as the end of the business cycle approaches the move will be concentrated mostly in the big cap stocks. Time is on the side of the patient.