Tuesday, March 11, 2008


The war of words and no words continues in regard to Iran. Moderates in Iran continue to suggest that it is time for Iran to come to the bargaining table, while the actual negotiators talk and then shush, shush and then talk. The dance between the US and Iran continues to be a hurky-jerky two step. One of the latest actions of psychologically defiance by Iran was to issue a commemorative stamp for a fallen Hezbollah terrorist. Last month, Imad Mughniyeah, implicated in a dozen or more terrorist plots over a long career, was killed by a car bomb in Syria. The Iranian stamp once again shows the support Iran gives to terrorist. Clearly the gold and oil markets fear that the war of words is going to escalate into something much larger.


The FED is priming the pump. In the old days, priming the pump was the commonly used analogy for the actions of the FED to put new money into the banking system. If you have ever pumped water by hand, you know that the pump must be "charged", a bucket of water had to be poured into the pump to provide the "downside weight" for pushing the fresh water out of the well. The FED has primed the pump again and again in recent days and the "big news" this morning is that the FED has doubled the amount of money it is moving through the discount window and it is offering longer term lending. By force feeding primary lenders, the FED is increasing the cash available up and down the line. Banks are flush with money and ready and willing to lend.


If one ignores the financial press and instead takes a good look at the financial numbers, some show that the US is in an economic boom. Total loan growth in the US is running at 10% above last year. Business and commercial loans are up 21%! Even consumers, "who have lost confidence in the system", are spending money. Again, what would you expect to see during a time when the FOMC has expanded the monetary base by more than 20%! This 20% plus growth rate was prior to the most recent actions. The sad news is that the very crowd that created the financial crisis is benefiting first from the new liquidity.


The big irony is that while the financial press is focused on the problems in the credit markets, of which there are many, the real problem for some time has been excessive savings and how to manage excessive savings. The reason home prices in the US soared was because excessive savings pushed interest rates down to record lows. The failure of developing people to spend their new wealth left the money available to Americans at extremely attractive rates. Money is once again available at very low rates and indeed we are living in a very rare time when real interest rates are negative!

The world is producing goods like never before while using fewer people. In the US, the total number of people employed in manufacturing climbed for a couple of hundred years or so until 1980. Since 1980, the number of people employed in manufacturing has fallen and the rate of decline has increased in recent years. This is not a bad thing, it is called productivity. In the long term it is always a good thing to do more work with less effort. History tells us that increased productivity does cause short term problems. The easy example is the time of the Luddites. This group attacked and destroyed water wheel powered looms in Britain because these efficient devices replaced the "home work" of millions of women. Weaving cloth on a hand loom was a labor intensive task. Suddenly, water powered looms, could do the work of tens of thousands of women and the world changed for the better. Today, we are handling the increased productivity better, the unemployment rates around the world are going down at the same time that manufacturing employment is going down. We live in a better world! For example, Canada is currently enjoying its lowest unemployment rate in 33 years.

Keep in mind that in the last century the US went from a nation of 70% farmers to 2% farmers. The disappearance of millions of farm jobs was not a bad thing in the long run. In the last 20 years, millions of manufacturing jobs have been eliminated. While the press decries the loss of manufacturing jobs in the USA, the reality is that China has eliminated more manufacturing jobs than any other nation. During the republican primary in Michigan, Mitt Romney talked about bringing the jobs back to Michigan while John McCain "talked straight" about the fact that those "old jobs" were never coming back. The good news is that we now have resources available to perform more important work. For example, the number of jobs in research labs is expanding quickly.

Again, it is a good thing that goods continue to be made more and more efficiently. The prosperity provided by more efficient production is also a good thing. The short term problem is for the new holders of wealth to learn that sitting on piles of cash is not the most economically rational act. US citizens can buy only so many goods, including elective surgeries and second homes, before the rest of the world must learn to use "trade their cash" for goods and services. When they learn, we will all see a real economic boom.


Today, both the short term and long term buy signals are screaming. I don't like short term signals because they are not as reliable as long term signals. Still, it is good that both are screaming BUY!

Again, we are seeing "smart money" buying and "dumb money 'panic' selling". The level of buying by insiders has seldom been as strong or as sustained. Each time the market makes a significant dip, volume increases. The pessimist looks at this as selling but for each sell trade there is an equal and opposite buy trade. The smart money is on the buy side.


The media hype about resource stocks has not been sufficient to prevent the turn and even though it is camouflaged well, the turn is here. One can see the turn in stocks such as Freeport McMoran (FCX). This gold and copper mining stock traded at 120 in October but has fallen to 96. No, this is not the worst performance in the market but it shows that price is at a level that threatens to cure price. The boom will mean that Chinese and others increase their use of commodities but stock prices look ahead to a future time of excess commodities. The actions of the FOMC to inject funds without lowing interest rates shows that the FOMC is prepared to dig deeper into its tool bag to solve the liquidity problem without abandoning the fight against inflation. By the way, despite what you hear, inflation is still pretty moderate. The GDP deflator is lower today than it was in 2005 and 2006. The blow off in oil is no fun to live through but the forces of supply and demand will eventually trump the forces of fear and greed.


When the going gets tough, the tough get going.