Tuesday, April 01, 2008


A lot of attitudes are turning now that there is clear weakness in the price of commodities; the price of gold and oil have dropped 10%. The turn in the dollar has been less but, after dropping to extreme lows, the price of American assets and goods are very cheap. Government officials are talking about all sorts of "recommended repairs" but the big drop in interest rates from 5.25% to 2.25% is the very powerful stimulus.


We live under the best system of government. We elect leaders but we handcuff them to their opponents so that they cannot run too far in any one direction. This system of checks and balances prohibits the violent power grabs seen throughout history. The thirst for power is a trait seen in leaders in all systems of government. Ironically, communist countries, set up on the theory of trying to make all people economically, socially and politically equal, have been the worst offenders. Millions and millions of communist have been killed by the politically powerful. Powerful vicious dictators have surfaced from the ranks of kings and peasants alike but they have lived in fear. Most have been fearful of violent overthrow to the point of paranoia. King Herod the Great was not the only King to have executed his own sons in order to lessen the likelihood of a palace coup. He killed his wife and sons and at least 11 of his closest relatives to protect his power.

One of the reasons the US government is among the best is because our constitution granted the freedom of speech. This "fourth branch of government" in many cases holds politicians feet to the fire. On other occasions, the press supports the worst of the worst ideas and people. This support and non support can be for or against the congress, the president, the judiciary and even for or against the press. When the bias of the media is easily discernible, such as CNN versus FOX, we benefit by checking one against the other, the bigger problem is when our most trusted elected officials sell a bill of goods to our "main stream media" and suddenly the people believe in the falsehoods of the day.

Yesterday was the 141st anniversary of "Seward's Folly". The purchase of Alaska from Russia in 1867 was ridiculed by the press as Seward's Icebox and as Andrew Jackson's Polar Bear Garden. Horace Greeley was one of several "news paper men" who lambasted the administration for making the purchase. So much "stink was raised" that it took the congress more than a year to vote to appropriate the money for the purchase. Looking back with hindsight, we say, "What a deal?". We bought Alaska for 1.9 cents per acre. The total price was $7.2 million dollars. Adjusted for inflation, our cost was less than a day or two's production of oil. The "newspapers" said that there is nothing of value in Alaska but fur bearing animals. Sometimes the government makes the right decision. In recent years, politicians from both parties have cooperated with the "news media" to promote the belief that corn oil as fuel is the solution to our "environmental problem". As a result, billions of barrels of oil lie dormant in underground storage in Alaska while 100 million acres of rich topsoil is sprayed with fertilize and pesticide to such an extreme that millions of acres of Gulf coast waters have been poisoned. Today's folly is in not using the oil purchased by Seward some 141 years ago.


Secretary Paulson's call for new bank regulation will not earn a place in history on par with Seward's purchase of Alaska. Government officials, from the house, senate and executive branch are making speeches and proposing new laws to "fix our problems". While there are certainly good reasons to reform the US banking laws, most of what is being proposed now is for the purpose of providing political cover. The fact is that Paulson does not expect any of his recommendations to be passed this year, if ever. The fact is that the congress is not ready to give any more power to the FOMC and the FOMC did not even use its power to open the discount window to the investment banks for 9 years. Indeed, the FOMC waited until after Bear Sterns was in deep trouble before the window was opened.

Thomas Jefferson, among the most learned of men, was not a fan of "news papers". This man was know to study an average of 15 hours per day but he felt that reading "newspapers" was a waste of time. In his political battle with Alexander Hamilton, he fought to limit the power of the federal government. Jefferson was one of the all time great fans of liberty. Another great fan of liberty, Milton Friedman, gave us the truth that the free market should be the provider of first resort and that the government should be the provider of last resort. Yesterday, I was asked what I thought about Paulson's proposed reforms. I hope it is clear from the above comments that I do not wish for any branch of the government to become too powerful. I also hope it is clear that the current "news about this problem and that problem" should not be the focus of the investor. Games will be played in the months ahead to determine if new banking regulations will be passed. However, over the past two months, the FOMC has dramatically lowered the cost of trillions of dollars of financing. This lower cost is like the building of a fire in a steam train boiler. It takes a while for the fire to heat the water, for the water to turn to steam and for the steam to drive the train wheels, but, once that train starts moving, it is hard to stop. The government will send out about 140 million $600 checks over the next couple of months to make sure the train engine gathers quick momentum as it rolls out of the station.


As Charles Dickens taught us, a man with a few extra coins in his pocket is a much happier person than the man who owes a few coins and has none in his pockets. The US central bank has put the US economy through a roller coaster ride. While our roller coaster is gathering speed down the interest rate hill, other economies are facing very different circumstances. For example, the Australian central bank has been raising rates while the European Central Bank has been holding steady. The growth rate in the US is ready to soar relative to these economies and the US Dollar is going to climb the next step mountain.


The TV pundits have it all wrong. Last night on Kudlow and Company, Joe Lavorgna tried to protest when the other guests agreed that a capital flight from America is causing the US Dollar to fall. Joe's voice on this point was drowned out. The numbers support his point of view even though the voices of the crowd said the opposite. Direct investment is flowing into the USA, more than two to one over China and India. The numbers are showing up in stock prices even while the relative strength of US stocks is being hidden by the downturn. The fact is that for several months, US stocks are going "up" relative to most foreign stocks. When this steam train gathers momentum, the trickle will become the flood. Hold on to your hat because GOOD TIMES ARE HERE!