Thursday, February 14, 2008


It has been reported that the big European Carrier, Air France-KLM will invest in the DAL-NWA merger in exchange for a seat on the board. DAL already has a marketing agreement with Air France-KLM. Since the big boom is in international travel, such mash ups will be common over the next several years.

When I was a kid, a major event was when my family went to Disney Land. It was a very long drive too. My wife and I took our kids to Disney World several times. Over the next several years, it will be the fast growing middle class of the rest of the world that will decide to visit the US. The extremely low relative value of the US dollar has already sparked a travel boom. The flood of traffic from Euro-Land to the US is so big that retailers in New York have posted signs, "Euro's Accepted".

Democrats have spoken loud and long against the free trade agreement that was passed during the Clinton administration, but the legislation still stands and other free trade agreements have been passed. This is good. The economic law of comparative advantage tells us that even if China could make every thing we make cheaper, it would still make sense for the Chinese to focus on their most productive skills and trade with us. The Chinese and many other nations now sit on a pile of dollars and our products are very cheap.

International trade is "on a roll". The growth in US manufactured goods is shooting off the charts. The reason DAL is likely to choose NWA as its merger partner is because NWA has a strong Pacific route structure and DAL has a strong Atlantic route structure. Some say that the deal will not pass the anti-trust busters, however, there is overlap in only 10 city pairs out of the 1,200 or so city pairs to which the carriers fly. This is one of the reasons that the DAL-NWA merger needs to go first. The overlap between CAL and UAUA is a little higher but it will be difficult for the trust busters to turn down a CAL-UAUA mash-up after letting the DAL-NWA deal through.


Australia just hit its all time record low unemployment rate. Scotland is sitting on record low unemployment for as far back as the records go. Japan just surprised by announcing 3.2% GDP growth. In the USA retail sales announced today were extra strong. The interesting thing about retail sales in America was that prices were down about 2% with sales up almost 4%, which means the amount of goods sold increased by a huge 6%. THERE IS NO US RECESSION!

There is a recession in Michigan and there is a recession in the home building industry but there is no US recession. With mortgage rates near record lows, investors with good credit should snap up selected houses. The price of many homes will pop several percent as soon as sentiment turns. A house bought with a 20% down payment might give a 50% return on investment in a year or less.


The Iraqi government just passed three major bills: 1) a $48 Billion Budget, 2) an amnesty bill for low and mid level Bathist Party members, and 3) provincial elections to be held on October 1. Democracy is taking hold! While there has been a bit of a counter surge in recent weeks, there is great peace relative to a year ago. Allowing Bathist to return to government jobs is another step in the healing process. The talks between Iran and Iraq are being held to show that the nations are cooperating to end suicide bombings. With oil production set to increase by 400,000 barrels per day this year, Iraq is going to see an increase in daily cash flow of about 28 Million Dollars per day, more than 10 Billion Extra Dollars per year. A wealthy and peaceful democracy in the middle of the Middle East has the potential to bring revolutionary change to a region that has been beset by wars for centuries.


I wrote the other day that the policies of the Nordic Welfare States have resulted in lower standards of living, high prices for goods and high taxes that are reallocated inefficiently. I also wrote that my daughter sees the daily tragedy of seeing kids come to school at the age of 5 or 6 without the benefit of pre-school classes. These kids are sometimes not even potty trained. Finally, I wrote about how John McCain supports school choice, whereby the government funding goes to the school chosen by the parents.

Sweden started a school choice program in 1992. It has been very successful. The program barely passed the legislature but it is now supported by the great majority of citizens. The reason is that the quality of education has improved dramatically. The system does not discriminate between public and private schools. If a private school wants to be eligible for public funding, it only has to agree to a few principles. The school must accept any student on a first-come-first-served basis, it must not charge any additional fees above what is paid by the state and it must meet certain educational standards.

The growth of independent schools has been steady but not huge. About 8% of students now attend independent schools. The key point is that innovations have occurred at both public and private schools. Many kids have stayed in their local public schools while seeing significant new opportunities. One very successful program has encouraged individual lesson plans and tutors such that a lot of kids learn a number of subjects at their own pace. It is amazing to remember that Thomas Jefferson learned at his own pace which included 15 hours per day of volunteer studying. People who are allowed to learn on their own, often discover just how much fun learning is. Ben Franklin, like Thomas Jefferson, was a polymath. These guys learned all that was know in certain subjects and proceeded to invent stuff for others to learn about.

Swedish kids must go to school until they are 16. If they want to continue for 4 additional years, they may do so at state expense. Only those that want to study for advanced degrees attend. I would like to see the USA pay for school starting at the age of 2 but then make school optional for the 16 year olds. It would be best for a lot of 16 year olds to go get a job as part of their learning experience. After working in a low skill, low pay environment, many would be ready to come back to school.

Internet connected computers should be used to assist with the concept of individualized learning. There needs to be a careful blend of student interaction with one another but with the ability to go through a math coarse just as fast as one can.


One of the injustices of our current health care system is that the upper income worker gets maybe a $3,000 tax break and the lower income worker gets a $1,000 tax break for health care. The health care cost of the upper and lower income family is the same. Yesterday, I wrote about how only 15% of health care expenditures are controlled by the patients, which has lead to exorbitant increases in charges by almost all who bill for third party payments. The USA needs to do away with the corporate tax break for providing heath insurance and give an equal credit to all citizens. Furthermore, good health habits must be the emphasis of our health care plan. It is good policy to offer incentives to those who exercise regularly, eat and drink responsibly, avoid debilitating drugs and practice preventive care.


There is a definite rub between private and public health policy. The truth of the ages is that the best government is the least government. The Roman Government would probably still be around today had it not tried too hard to take care of the "social welfare". Today, I was surprised by the distance Obama is willing to travel to "buy votes". In Wisconsin, he proposed a 200 Billion Dollar government spending program accompanied by such wonderful "no cost" regulations such as a tripling of the minimum wage! How soon we forget! After the run up in the minimum wage in the late 60's and early 70's, unemployment rates and interest rates hit record levels. Ronald Reagan was able to run against the "misery index" which was the sum of the unemployment rate and short term interest rates.

The stimulus package just signed into law by Bush is at least relatively harmless. It does little good to borrow and spend $150 Billion in the short run just to have to pay it back over the next several years but a tripling of the minimum wage would knock a lot of people out of work, raise interest rates and send a lot of factories over seas.


In Economics there is a hypothetical situation that is called the broken window fallacy. The story goes as follows: a store owners son throws a baseball and inadvertently breaks the big front display window. Needless to say, the store owner is upset. He hires a glass company to replace the window for $200 and docks his sons part-time pay to recover the funds. The politician witnesses the whole affair and is a happy man. He notes that the economy has been stimulated. The glass company just did $200 worth of business, the son learned a lesson and the store owner was repaid. All is well that ends well!

What do you suppose the son thinks? It turns out that he had planned to take his girlfriend to prom. He was going to rent a tux, buy a corsage, spring for a couple of shakes and fries and buy gasoline to make the trip. The glass company is happy but how about the tux rental shop, the flower shop, the shake shop and the gasoline dealer? The politician saw the broken window and said it was good for business but he did not see the damage to the others.

The stimulus package just passed is the equivalent of the broken window. Some tax payers will get back a tiny portion of what they paid last year in taxes. Others who paid no income taxes will get back checks of the same amount. Twenty million people that paid no income tax will need to file a return or they will be skipped over. Others, who live on investment income and pay tax on that investment income, will not get a check. The incumbent politicians may win a few votes but sooner or later the bill will come due for the broken window. American tax payers will foot the bill but once again Americans will have received positive reinforcement for supporting the broken income tax system. Nope, the stimulus package is not really a stimulus package, however, the FOMC made its first interest rate cut some 7 months ago and history tells us that the stock market goes up an average of 19% within a year of the first cut. In other words, if history repeats, the market must recover the losses of the past 7 months and then go up another 19% within the next 5 months! WOW! If the pattern is going to hold, we are going to have to have a huge rally over then next 5 months.

It is not the time to own slow moving defensive issues such as consumer staples or utilities. In a bull market move of 20%, the high beta stocks might easily move 50% or more.


By the way, many folk have put Obama into the win category. Hillary has a lock on Texas because she carries the Hispanic vote. She is also polling strong in Ohio and Pennsylvania. These big states and decent showings in a few others could put Hillary back into the lead without the support of the supper delegates. She also won in Florida and these votes might ultimately be counted. This one is not over. Independents and switch over republicans are voting for Obama. The problem for democrats is that a large number of single women or a large number of blacks may be upset enough to stay home on election day! Republicans have a similar problem but conservatives are likely to come out to vote against Hillary or Obama.