Tough Times or No? Who to believe?

We have always known that there are two sides to every story. Even so, we often forget that the 'news' is just another story with two sides.

The 'news' is that import prices are killing the US economy. The 'other side of the news' is US exports are expanding more rapidly than imports. Part of the underlying story is that export prices are saving the US economy and slowing the 'other economies'.


Take soybeans and corn as examples. The USA exports billions of dollars of these commodities each year. During the first three months of 2008, we exported 89% more dollars worth of Soybeans and 52% more dollars worth of corn; about 5 billion dollars worth of each. The real volume probably did not change very much, indeed it probably went down. The sharp increase in prices caused the sharp increase in exports. As common sense and the basic laws of economics tell us, since the total revenue of a product is equal to the quantity sold times the price and since the higher the price the lower the demand, the total quantity sold probably went down.

The revenue increases are in US dollar terms. The US dollar price is very low, making our exports all the more attractive. This week, the US dollar is on track to have its biggest weekly gain in over three years but the price of food in dollar terms went up before the bounce back in the dollar. The bounce in the dollar is only a couple of percent. Nothing compared to the doubling in the price of corn.

A Hungry World

Data from a hungry world takes time to gather but data from the USA can be used as a proxy to demonstrate what is happening today. The poor people of the world are getting slammed by high food and energy prices.

In the USA millions of people from Montana to New Mexico and from New Mexico to Georgia are now paying from 10 to 16% of their income for gasoline. The people in the big cities of the Northeast and on the West Coast are not getting slammed so hard; spending less than 2% of their income on gasoline. Even so, the poorest of US citizens, are in great shape compared to the majority of the worlds citizens. As Walt Williams likes to say, if you are poor, you want to be poor in America. The people who earn minimum wage in America earn more than 87% of all the people in the world.

The Insult to the Injury

It is no sin to be poor. It is no fun either. The insult to the injury is committed by the US Congress, time and time again. This week, the congress has voted overwhelmingly to subsidize Amtrak to the tune of 15 Billion Dollars. Like rich Iowa corn farmers, the rich city dweller is being subsidized by the poor. Why should a family in Mississippi pay 16% of its income to buy gas and then pay taxes so a Wall Street Banker can travel to work for half price?

There is a bit of hyperbole in the above because the poorest of folk in America pay no income tax. The real result is that the poor pay 10 to 16% of income for gas and the the middle class pay 6 to 10% of their income for gas and they subsidizes the politically powerful Amtrak and subway systems.

Who to Believe?

George Bush has been demonized by left wing politicians and press. By repeating the statement that he lied about weapons of mass destruction in Iraq, the 'story' has become the 'truth'. After spending years analyzing the data, democrats on the Senate Intelligence Committee keep trying to have it both ways. The Senators voted for the invasion of Iraq based on the intelligence available but George Bush lied when he used the same data. The 'rest of the story' is that the Bush side of the story keeps turning out to be the closest to the truth.

The trail of weapons from Iraq to Syria has led the Israelis and the US to find nuclear facilities in Syria. A captured notebook computer has shown us that Iran was working on nuclear missiles right up to the day the US invaded Iraq. A war with Iraq or with Iran was necessary and Bush chose the least costly war. North Korea, Syria nor Iran have been willing to fess up clean but there has been progress in eliminating the nuclear threat from all three countries. The willingness of each to provide arms to others is well documented.

This Weekend

This weekend, Javier Solana, the chief negotiator for the '5+1', will take another offer to Iran. The offer will once again offer Iran incentives to join the rest of the world in peace or to be isolated from the rest of the world in defiance. The Iranians have made strong arguments that have caused many observers to conclude that bombing Iran will be necessary to stop their progress toward acquiring nuclear weapons.

Iran is putting on a big show by flying fighter planes near tankers loaded with oil. As of June 8, Iran still had 30 million barrels of sour crude loaded aboard oil tanker ships but going nowhere. The new oil minister, Khatibi, says the sour oil from the Soroush and Nowrouz fields has always been stored on ships prior to delivery. He says that Iran is not willing to deeply discount the price of this oil to move it because it is pledged under long term contracts. His reason for the back up is because refineries have been closed for seasonal maintenance.

Ahmadinejad goes one better than Khatibi buy implying that these oil tankers will be only the first to be sunk in the Straight of Hormuz should Iran be attacked. In other words, the talk of a surgical strike against the nuclear facilities of Iran could be countered with a surgical strike against a portion of the 17 million barrels per day that comes out of the Straight of Hormuz and immediate area. When analyst suggest that oil is going to $200, $250 or $300 per barrel, they in effect state their belief that this conflict will not be resolved without a war with Iran. I disagree.

Another argument made by Iran is that the country did well a few years ago when its oil revenue was $15 billion so, it can certainly survive sanctions when its oil revenues are over $100 billion per year. The big difference today is that Iran's cash is starting to look like the gold of King Midas. After moving the cash out of US dollar denominated deposits, Iran has since had to move it out of Euro Dollar deposits. Iran's new Secretary of Finance is at logger heads with Ahmadinejad over what to do with the cash. Having all the oil and cash in the world does one no good if there is no market for it. After all the talk about the weak dollar, would you be willing to trade any of your dollars for Iranian currency? The official inflation rate last year was around 25%. The CIA suggests that the official rate is understated by at least half. If the rate was 50% last year, what do you suppose it is now? Major Iranian projects that are currently suspended include projects with Japan, France, Russia, China, India, Pakistan and with major oil companies such as Shell. Iran's money is of no value if no one will accept it.

Stories From the Left and Right

One common story is that Bush is itching to attack Iran. Clearly the strategy, for 30 years, including the 8 Clinton years, has been to ask Iran to agree to peace or to face isolation. Another common story is that Bush wants to bind the next president to a long term commitment to Iraq, in order to provide bases for a latter invasion into Iran. Clearly the US has maintained bases at strategic locations such as Germany and Korea in order to maintain peace. Does the US want to be in position to influence policy in this volatile part of the world? Certainly! Do we want war? Absolutely not!

Which is more likely? More wars if US forces are there or if not? The history of Germany and the Soviet states for the past 60 years shows what could happen. East Germany and West Germany were reunited without a true war. The 'Cold War' was the peaceful resolution to a huge international dispute. Hundreds of Millions of people in dozens of countries were granted economic and political freedom without having to fight a 'Civil War'. Does the term Civil War not make your skin crawl? The War Between the States in the USA cost us half a million lives and it was not civil! The most important difference between the Cold War stand off and the Middle East is that Cold War combatants were generally not sneaking across borders to blow up innocent men, women and children. The 'right side of the story' is that it was the action of the terrorist who forced arm conflict not the actions of the USA.

Reality

The reality is that Iraq, Saudi Arabia and other nations in the Middle East need the US to stick around. The Middle East needs an era of stability in which to build the commercial connections that will provide long term incentives for peace. Bush has left the door open to additional talks between Iran, Iraq and the US in regard to the Iraq-US security agreement. Too much has been invested and success is too close to give up now. Now that the democratic primary is over, Obama is moving quickly from left to right but he is going to have to wiggle hard to make it close to the middle.

In the past few years, Europe has moved from left to right as evidenced by the leadership change in Germany and France. Italy is suddenly on board with support for sanctions against Iran and the development of nuclear power in Italy. Countries around the world, with the exception of India, are in a scramble to sign 'civil nuclear power agreements'. Contrary to what is being repeated daily by the left, the USA is winning back its prestige in the rest of the world.

Economic Collapse or Revival?

The combination of bursting the housing bubble and the run up in food and fuel prices has hit the world hard. At the same time, information age productivity, rapid technological innovation and expanded world trade have produced world wide economic strengths never seen before. Innovation (change) is coming hard and fast. The irony alluded to by Brian Wesbury in a Wall Street Journal article is that Obama's call for change is really a cry out for the 'good old days' when change did not come at us so fast. Obama wants to go backwards to more 'simple times'. Thomas Wolf correctly said we can't go 'back home". Every generation pines for the 'good old days'. We naturally remember the good times or romanticize the tough times as if we were heroes for having survived them.

Cell phones, at once a great convenience and a pain in the butt, are here to stay. Life expectancy in the USA just hit 78 years. Those who have made it through to adulthood should expect to live much longer. Healthy 55 year old women should plan to live 40 more years, at least. We do not want to put the 'health genie' back in the bottle, but we certainly cannot let the budget for health care run wild. When millions of 90 year old people are consuming massive quantities of health care, who wants the government to decide who will receive funding and who will not? Europeans who receive 'free heath care' are currently stopping cars and trucks in the middle of streets to protest $10 per gallon fuel costs.

The good news is that the cycle for food and fuel prices is run up and collapse. Once there is one extra bushel of corn or one extra barrel of oil, the auction price of all corn and oil will fall rapidly. What we have been experiencing is an economic slow down in a number of sectors. Slowdowns are accompanied by inflation. When the slowdown is over, the inflation miraculously goes away. Some argue that inflation did not go away so easily in the 1970's but there were a lot of contributing factors present back then that we should be able to avoid this time around. For example, we added pollution control costs and a wind fall profits tax at just the wrong time in the 70's. This time democrats talk about pollution controls (they now call it global warming) and wind fall profits taxes but the congress just showed it has no stomach for adding to the pain at the pump. Any new pollution controls should be staged in and CO2 is not a pollutant.

Art Laffer has written a book in which the last chapter talks about the demise of prosperity. The premise of the chapter is that taxes will go up in 2010 because a vote is not even required by congress. I maintain that the congress will have to do something about the AMT. The American public will not permit the congress to raise taxes by such massive amounts. There will be compromise. The nature of this new competitive world requires US tax decreases. McCain and Charlie Wrangle, democrat leader of the powerful House Ways and Means committee, agree that US corporate tax rates need to go down. The adoption of the flat tax is causing a boom in many countries. The US needs to join the boom. The time is ripe for US technology to be exported around the world.

Strongest of Buy Signals

The cumulative sum of buy signals is as strong as it gets. Public sentiment is about as negative as it gets, monetary policy is about as stimulative as it gets and US stocks are about as cheap as they get. You will never see a time when all three are at the highest extremes at the same time but, again, the sum of the three is currently screaming buy. A bursting of the oil bubble will set the market on fire. The market has been waiting for an oil price break for a long time. OPEC just lowered its demand forecast for 2008 for the third time in recent months. Oil is down $3 this morning. The estimates for new reserves in Brazil have reached 100 billion barrels! Enough said!