Thursday, March 06, 2008


The cost for local governments to borrow in the "Muni Market" has come back to planet earth. This is one more sign that the credit markets are "getting over" the "sub-prime poison".


Once again, the good congress in its attempts to "protect the public", has shot the public in the foot. Millions of dollars have been lost due to the excessive write downs in the credit markets. The big companies that have written assets down to cents on the dollar will recover. Those people who sold assets at depressed prices are victims of over government regulation. Company management simply cannot risk jail time for making improper estimates. As a result, they are missing badly on the "conservative side". The good news is that the write up of these assets over the months and years ahead will yield steady earnings increases for the firms that hold these assets.


Rare times indeed! There were a few months soon after the recession of 90-91when real interest rates were in negative territory. Prior to that, one has to go back to the inflation days of 79 to find negative interest rates. Investors should remember the "unknown truth" that inflation, which is partly a response to fewer goods being produced during a slowdown, is a late cycle phenomenon. The boost in inflation that comes along just as the economy is in a slow down is a sigh that the worst is over, the turn is here. Stocks will increase in value long before the numbers show the economy has turned. Commodity prices normally turn down with interest rates but, my contention is that gold and oil are being held up by geopolitical tensions. Core inflation rates are as high as they have been in some time but even the core rate will fall once the froth comes off the headline numbers.


When asked to rank the GDP of the European Union, the USA, Japan Germany and China, the public misses badly. They list China, the USA, European Union, Japan and Germany (which is part of the European Union). The correct ranking is: 1) European Union, 2) USA, 3) Japan, 4) Germany, 5) China, 6) UK, 7) France. The problem is the hysteria about China and India. The common belief is that these countries are going to "take over the world". The USA is going to lose its place as number one. It is a real shame for a country known as the melting pot of the world to be Xenophobic. "Those people are ...." is the refrain we hear. America is rich because of the input of peoples from all corners of the globe. The more we observe, the more clear it becomes that the education of children in the USA leaves a lot to be desired. I believe that China could easily pass the US and the EU to become the "biggest economy" with the next 50 years. I hope the USA never has as many people as are currently living in China but I hope the people in China enjoy a standard of living that is on a par with ours. In 50 years, I expect to see people of all nations working less time to acquire all the comforts we enjoy today.


One can be a Patriotic American without believing America is perfect. America is a land with serious problems that need solutions. We simply need to be careful not to create big problems out of solutions.

Greg Mankiw has blogged about the "three strikes and out law" in California. Before getting to Greg's point let me note that America has a much higher percentage of our population in prison than does the average nation by far. We treat our prisoners better than most other nations. Under these "favorable conditions", doing a "hitch in jail" is not such a terrible thing. Those who struggle to live a decent life "on the outside" may even feel comfortable and safe in jail. Greg notes that the three strikes law in California definitely influences the behavior of two time offenders. One of the ways is that the third offense is "ratcheted up". The attitude of some is, "if I am going away for a long time, I might as well 'get my money's worth'". Armed robbery or even murder rates are higher as the third offense. Another fact is that California "exports" two time offenders to other states. In other words, criminals shop for the lowest jail to crime ratio. The purse snatcher who faces a long mandatory sentence for the third offense might move to another state where the risk/reward ratio is not so harsh.

Yes, America as a land individual responsibility grants to its citizens great freedoms. What a blessing?! We have much to say grace over! At the same time, our nation takes away freedoms in order to make us socially responsible for one another and our freedoms are in a constant state of flux. The wisdom of the framers of our constitution never fades. The framers designed a federalist system of government and would certainly be amazed to see the power accumulated in Washington but, the system works. There are far too many people feeding off government, democrats and republicans, rich and poor, young and old. In this election year, it is my hope that Americans will study the issues and vote their convictions. We live in a great country and have the responsibility to do our part to keep it great.


My oldest turned 30 yesterday, my youngest is engaged to be married in October and my grand daughter will be two on the 25th. It is time for a family celebration at the beach. The reports that DAL pilots are in talks with NWA pilots and that Iranian officials are in talks with US officials give me hope that good news will hit while I'm gone. Again, we live in a great country and there are many reasons for us to be optimistic. Have a great week end!