Thursday, January 31, 2008


Did you ever see a pig being lead around with a ring through its nose? Our wonderful politicians clearly know they can take the public where ever the politicians decide is best. In the latest game of silliness, the senate is writing all sorts of new complications into the tax law as a part of the bill to "give back" Americans some of their tax dollars. As we all know, the congress will borrow the dollars to send us so that they can be paid back later, after the election is over.

Writing more tax rules is the "big game" in Washington. Tax rules, some 59,000 pages of IRS code, are written and re-written because these lawyers enjoy the benefits of the 250 Billion Dollars spent each year by tax payers to file the complicated forms. Other billions of dollars are directed toward certain investments in order for the public to jump through the hoops provided.

There are a dozen ways that the congress could stimulate the economy without adding more "junk" to the IRS code. One of the simple solutions would have been to permanently lower taxes on corporations. Corporations pay zero taxes as the tax bills are passed on to employees in the form of lower wages, to customers in the form of higher prices and to a very minor way to share holders. As we all know, the stimulus package is not about helping consumers but about helping voters feel more positive toward incumbent politicians. The noise from the senate is all about giving tax breaks to more people while excluding illegal immigrants. The reality is that the senate has great power and it likes to strut its stuff while giving a long list of insiders the benefit of even more complicated tax forms. Again, the winners in these bills are the lawyers, accountants, lobbyist, investment advisors, brokerages and legislators. There is a good chance that a filibuster will stop the senate bill in its tracks and force the senate to accept the more streamlined house bill. Such a result, the least bad result, is all the hope the common man can have when watching the congress at "work".


The antitrust investigation in regard to the merger of Midwest Airlines has been called off. The chair of one house committee, who has his states interest in mind, has said that he will fight any and all mergers of major carriers. While Midwest is a small deal, its success suggest that other deals might be acceptable to the Bush Administration. AMR has increased its free cash hoard to 5.2 Billion Dollars and is rumored to be ready to outbid DAL for NWA. I still believe CAL and NWA would make a nice match. In any event, airline mergers are tough. It takes time to realize significant savings. I continue to be happy for the majors to remain independent. As was just proven again, the majors are in the position to raise fares as necessary to cover high fuel costs. The $20 per ticket increase that just went through on about 2/3rds of all flights represents a major increase in revenues. 2008 will see higher profits than are currently predicted by airline analyst.

Last year, there was fear that Chuck Shummer and Lindsay Graham would lead the US into a trade war. The fact is that Americans have benefited enormously from free trade. The public does not fully appreciate the benefits received from free trade. With the US economy at the trough of a mid cycle correction, times are relatively tough in the short run and the public lives in the short run. Still the folly of the Shummer-Graham tirade ended quickly and there is no end in sight to continued strong growth in trade. Democrats made a lot of noise but voted for the new trade deal with Peru and are likely to pass the deal with Columbia this year. US exports are at record levels and growing rapidly. With the cost of labor in American running at around 15 to 25 times the cost in developing countries, the sense of sending labor intensive activities to developing nations is a win-win for us all. Now that the US has moved into the prosperity phase of the business cycle, complaints about jobs moving overseas will fall because plenty of high paying jobs will "bubble up" in America.

The bottom line is that the growth in international air traffic will continue for many years to come and that these flights are not the price sensitive tourist class flights. Business traffic is the source of airline profits and business is booming. The GNP numbers for the 4th quarter showed economic growth of only .6% but business strength was hidden by the decline in home construction and inventory adjustments. The first quarter will see growth of around 3% and the "temporary stimulus" will boost the second quarter to well above trend. International traffic growth will hit double digits year after year. Traffic growth within the US will not be as robust but price competition will be deemphasized in this market. The highest profit growth will be on routes that connect hubs to international locations.


With today's .5% cut by the FOMC, for the first time in 19 months, the Fed Funds Rate is below the 10 year rate. My guesstimate is that the 10 year rate has been above the Fed Funds Rate more than 95% of the time over the past 50 years. The Bush Administration has had its foot on the economic brakes for 19 months in a row. The political timing looks just right. Yes, it is impossible to separate politics, economics and religion but it is a shame to see the power of government used for the political and economic gain of those in charge. The public has sold billions of dollars worth of securities because they have "bought the risk of recession" while insiders have bought billions of dollars worth at low prices. In just a few months, the public will vote for one establishment candidate or the other. No mater which party wins, the new congress will continue to fight the same old battles to raise or lower taxes and complicate our lives in order for the insiders to "earn" their fees.


None of the prospective nominees are economic conservatives. McCain is famous for reaching compromise. Some would say that compromising to "get something done" is a good thing but driving the bus into the ditch just so you can say you moved it is not a good thing. McCain, like Clinton and Obama are for a new tax hidden in sheep's clothing. They all believe in the "cap and trade system" of polluting rights. Once again, the educational system in America has failed us. Politicians can get away with building yet another power base because they can euphemistically call a tax increase a strange name and sell it to the people as the way to "save the world from global warming". The difference between a carbon tax and a cap and trade system is that the cap and trade system promotes corporate payments to the highest priced Washington Law Firms and the subsequent courting of congress members.

With the "big guns" now lining up behind McCain, the republican race is over. Huck will stay in to win a few southern states and Romney will pick up delegates in Utah and others here and there but the republican race is over. Huck has a good shot at the VP slot as he can help pull in the southern vote, the evangelicals and even the Regan Democrats.

Based on the real estate cycle that typically last 17 to 22 years, it is past time for another big tax simplification bill like the one that was passed in 1986. McCain has said that he is for tax simplification. He has even asked Huck, during one of the debates, to explain the FairTax. Still, the odds that he make the support of the FairTax part of his platform in the general election seem slim. I hope I am wrong on this point because otherwise there is not a great deal of difference between Hillary and McCain.

Huck is truly believes he could make the US energy independent within 10 years because the replacement of the income tax with a consumption tax would give all Americans great incentive to reduce energy consumption. Take away the disincentives of the current tax code and all sorts of possibilities would easily become realities.


The scale of nuclear power is simply too big to be easily understood. The temptation for the average man is to believe that windmills can take the place of power plants. While I grant that we have more "stuff" than we need and while I grant that one of the reasons to support the FairTax is to reduce the proliferation of too much "stuff", windmills are not the solution to all our energy needs. Nuclear power is not the total answer either but the contribution from nuclear is going to grow dramatically over the next 20 years.

Right now there are 439 nuclear power plants in opperation. They produce 372,059 billion kilo watt hours of electricity per year. To replace this production with 10 foot diameter windmills, we would need to construct about 161 Billion windmills. The fact of the matter is that there are currently 33 new nuclear power plants under construction, 94 more planned and 222 more proposed. Those that are under construction and planned should all be operating within 8 years. The new plants will produce about 125,000 billion kilowatt hours. Some of the 439 will be decommissioned or retrofitted. Once a few more of the new plants are completed on time and under budget, many more of these plants will be planned.

Warren Buffet has purchased millions of shares of coal trains. Somewhere in the world, there is at least one new coal fired electrical plant starting up almost every day. While the media goes on and on about alternative energy, coal is being consumed like never before. Solar cells are in the news but they generate .04% of the electricity consumed. All the while huge amounts of natural gas is being used to make fertilizer which is used to grow corn which will never come close to replacing other sources of energy.

Combination battery-capacitors have been developed that are ideal for electric vehicles. These batteries hold twice the power of the best on the market today while they cost 30% less and offer much improved performance characteristics.

Electric motors are several times more efficient than internal combustion engines. Politician need to forget about cap and trade systems. They need to tax consumption and let the market figure out which fuel should be used. A tax on consumption would do far more to save the environment than the piece meal results produced by a cap and trade system.


Professor Michael Shermer says that if one were to visit the Yanamomon tribe down by the Amazon river, one would see the way people lived hundreds of years ago. If you were to count all the different "products", such as flint arrows, baskets and clay pots, used by this tribe the number might reach 300. He goes on to say that if you were to visit the Manhattan Tribe along the Hudson River and you were to count all the products used by these people the number would reach about 10 Billion!

I am sure that people "need" these products. I am not a "minimalist" who believes that mankind must live like privative men or perish. However, I submit that we have fallen into the habit of consuming more than we need.

Many Haitians are eating mud cakes because they cannot afford a cup of rice. The world's policy of converting food to fuel is morally wrong. I hope you will support the FairTax. We all deserve savings incentives. One does not need to falsely believe that the world is about to run out of resources in order to believe that waste is wrong. Many of us enjoy telling about how we were taught to clean our plates because Chinese children were going hungry. As children we could not see how cleaning our plates helped a hungry child on the other side of the world. Today, we take the food those children would like to have and put it in our gasoline tanks.


James Williams, who writes an oil newsletter, and Phil Flynn, who is an oil trader and TV pundit say that oil is headed toward $70. The IEA has cut 2008 energy demand by another 100,000 barrels per day. Another $20 Billion investment in Canadian Tar Sands has been announced. Canadian production from tar sands is expected to grow rapidly for the next 5 years. Wayne Angel, former member of the FOMC, says that interest rates will stay low for a long time because commodity prices are apt to fall. Lower prices are the equivalent to a consumer tax cut. STIMULUS FROM THE FED, STIMULUS FROM THE CONGRESS, STIMULUS FROM THE OIL MARKET--BOOM, BOOM, BOOM!


It is rumored that Apple is about to slash the price of the iPhone and it is rumored that Dell Computer and Google are ready to announce a GPhone, similar to the iPhone. Nokia, the company that has set all kinds of records for selling consumer products, is opening up its software. The competition for hand held computer-phones is going to be brutal for the companies but a windfall for consumers. Billions of hand held computers will be sold in just a few years. Wireless connectivity and voice recognition capacity is going to make these devices the most powerful computers ever built!

No more rings in our noses. FREEDOM!