Friday, April 18, 2008


Those who have been adding to their accounts are starting to make back their losses. This morning, the dollar has once again bounced. Could this be the bounce that cures?

I cannot recall the USA having ever gone through a cycle like the one we have just seen. The USA has been dependent upon the rest of the world to avoid falling into an economic abyss. Today, the rest of the world is the engine that is supplying the profits to American Business. The good news is that the rest of the world is stronger than the USA is weak and that the US has stepped around the abyss. As a result, the US dollar and markets are turning to the upside. The demand for US capital goods is soaring and is prepared to soar some more.

The next number of years will see the construction of more power plants and energy facilities than ever before and at the same time huge investments will be made in US computing technology in order to reduce the need for even more energy development. Again, it is the rest of the world that is needing the new energy and the new computer equipment more so than the USA. The latest computer chips, the ones that consume only a tiny fraction of previous chips, will make computer substitution all the more powerful.

While I have railed against the silly practice of growing corn for the purpose of fueling cars, the practice has had an important consequence. Economics in general and the economics of energy are now much better understood by the majority of the people. Many of us must experience an economic cycle before we can appreciate even the basic concepts of economics. The person sold on doing everything possible to prevent global warming may now think twice about the trade off between food and fuel.

As a result of the obvious costs to burning up food for fuel, coal power plants are being built, nuclear power plants are being built and drilling is taking place in more areas. The environmental arguments against energy development have been diffused as it has become more clear that producing food and fuel must be higher priorities than attempting to solve problems that might exist 50 or 100 years from now. The fact that there has been no global warming for six years makes the "oh my God" folks think twice when seeing food riots take place around the world.

Business is moving forward. Markets must continue to find the lowest cost way to produce the goods that fill the needs of consumers. Among the erroneous arguments made in recent years has been that trade is damaging. The implication has been that trade is done for the benefit of big business and for the detriment of the "worker". The reality is that trade benefits the consumer first, the worker second and it adds both new markets and competitive threats to businesses. We all know that competition reduces profits and product costs but consumers are a very large and totally unorganized political group, whereas the industry that has been insulated in the past from free trade is one where the owners and workers are apt to raise the loud noise of protest.

During the first half or so of the American experiment, we must remember that it was the "big business wealthy" who fought against free trade. President Lincoln, for example, was a "big business republican". He slapped 54% tariffs on imported goods to "protect" the political friends who had put him in office. This included the rail road barons and the big time farm holders. The "little man consumer" paid a dear price while the rail road barons made out like bandits.

Many a time in the past 6 years, I have written about how David Ricardo, a London stock broker, taught us how it makes sense to do what we do best. David came up with the "Law of Comparative Advantage". I have used the example of Michael Jordon, one of the top 1% of all time base ball players to show that even if you are in the top 1% of baseball players, you should stick to the game of basketball if that is where your biggest advantage lies. Jordon did not make it to the "big show" which was a blessing for him. His "failure" (many a guy would love to have made it to the professional minor leagues), caused him to return to basketball where he won another three national championships.

Last week, I read an article by Don Boudreaux that reminded me that Adam Smith wrote the Wealth of Nations (in 1776) some years before Ricardo discovered the Law of Comparative Advantage. In other words, even if there were no comparative advantage, free trade would still be a good thing. For the consumer, free trade offers greater selection at lower prices. What free trade does more than anything else is to allow the Law of Substitution to work. Consumers in America have been able to purchase tons of bananas and oranges in substitution of home grown fruits. We are healthier and wealthier for the experience. By necessity, the sellers of the bananas and oranges have used the dollars earned to buy goods from American businesses. For the worker, free trade allows the "rest of the world" to see the goods he can make. The larger market makes it all the more likely that he can devote his time to producing the goods that he is a specialist at making. A specialist learns how to make better goods with less work and thus enjoys higher returns for his efforts.

The trade bottom line is that the consumer buys better goods for less and the maker sells more goods at higher profits. Like I always say, trade would not happen if both sides did not agree that it is in their own best interest.


Google has joined a growing list of companies that have put out super strong numbers. There is no recession, the contraction is mild and profits are moving back up.

The contraction has performed a cleansing function. A lot of silly practices have fallen by the wayside. No longer can a person borrow 105% of the value of a home on terms that count on dramatic price appreciation. No more will countries cavalierly mandate the use of food in gas tanks and no longer will airlines sell $10 tickets that consumer $150 of fuel.

Skype added 33 million users in the first quarter. The total number of registered Skype users is now over 309 million people, more than any other EBAY business. Truphone, a mobil VOIP provider, gets rave review over on the GigaOM site. We know that Google is trying to use white space spectrum in order to dramatically reduce the cost of wireless Internet access. The mobile Internet is now in the similar position to the time when AOL announced it would offer unlimited hours of use for $14.95 as opposed to its 5 hours for $9.95 and about $4 more for each additional hour. The phone companies are now offering unlimited cell phone use for under $100 per month. The mobile Internet is set to explode!

Please remember the difference in this cycle to what happened in the second half of the 1990's. In that cycle, the providers of the Internet services were the ones who benefited the most. This time, the benefits have already been spread out to all the users. I very much like EBAY as a long term investment, but my point is that the free phone service will increase the productivity of billions of workers in millions of businesses and thus increase the wealth of those workers and businesses.


It has been tough living through the pain of the recent down turn. I made several bad decisions as did the government. I can't turn the clock backwards. I can only hope readers are able to "buy at the bottom". A lot of money is going to be made over the next several years. It will take only modest regular additions to accounts to build significant wealth.

In the USA, the demand for jet fuel is down 3% year over year and the demand for gas is down 1.6%. The trips being cut out are those that were not as "necessary" as the others. The savings achieved by replacing wing tips or by driving the small sedan in place of the big truck should continue to bear cumulative fruit for years to come. Unprofitable business and wasteful personal use is starting to be eliminated.

The world has suffered more than my family and friends. US law required the following production of ethanol, in 2005 through 2011 respectively, in billions of gallons, 1.8, 2.1, 3.2 4.1, 4.3, 4.6, and 4.9. The mandates continue and by 2016, US producers are required to mix in 5.6 billion gallons per year. As you can see, the big increases hit from 2006 to 2008 when the average increase was almost 1 billion gallons per year. The percentage of the corn grown that went into ethanol was 13% in 2005, 20% in 2006, 25% in 2007 and 31% in 2008. The production of corn has increased but putting 31% of corn into gasoline tanks during a time of food shortages has been a painful event to behold. Hungry children around the world have paid a terrible price.

Again, the good news is that now is a time of healing. The number of nuclear power plants planned has grow rapidly while there has been little protest. China will increase coal usage this year by 19% while the whining about global warming is muted in the background. The market will work its magic and even out the disruptions. Obama voted for the latest government mandates that will require even more ethanol while Hillary and McCain were wise enough to vote no. Since these latest mandates focus on the use of non food products, they will not be as harmful to the economy as the prior mandates. Since the bulk of the required increases do not hit for 7 more years, there is hope that technology will help us meet the challenge with the least amount of pain. Theres is now a good chance that these mandates will be scraped, once other more efficient means of production come on line.


Up 90 days are when the market goes up on extremely strong volume. Up 90 days of course are positive in and of themselves, but they are also indications of good things ahead.