THE BIG MONEY TURN CONTINUES

For more than 6 months, high short rates in countries such as England and Australia have caused long rates to fall. These countries are walking like men carrying 200 pound sacks on their shoulders. The USA carried the load for 19 months but is now letting others do the heavy lifting. Inflation is being fought far and near. In many a developing nation, (including Russia), short rates are above 10% and long rates are higher than short rates.

Under the situation, home builders, who use short term construction loans, find money to be scarce and expensive. When the price of any commodity goes up (money is a commodity), the quantity consumed goes down. Fewer homes are being built. This does not cause the price of homes to go up, in the short run, because there are more than plenty houses on the market. The supply of new homes is reduced but the total supply of available homes remains high. The whole process creates the opposite of inflation, which is too much money chasing too few goods. Suddenly, there is reduced demand for everything from bulldozers to roofing nails. There are suddenly too many goods chasing too little money. Under the situation inflation is falling, long rates are falling and houses are becoming more affordable.


Most countries have carried their inverted curve for more than a year. Short rates have been pushing down hard and the results are real. The interest rate on long term treasury securities has been falling for at least 6 months, in most countries, including the USA (the USA 10 year is down to 3.77, it reached a 60 year low at 3.33% a few months after the end of the 2001 recession). The demand for many goods has fallen. Gold and oil have held onto high prices because of geopolitical risks, but both have fallen sharply from their peaks.

The turn of long interest rates from up to down happened months ago but it is gradually causing a turn in houses from down to up. Last month, in the USA, according to the OFHEO index, 30 out of 50 states saw rising home prices. Only Florida, California and Nevada saw big drops, last month. Even the Case-Schiller Index, that includes big coastal cities such as San Fran and Miami saw increases in 10 of 20 markets.

Lower short rates in the USA are spurring business investment. The market was surprised yesterday by strong numbers. The final numbers for GDP last quarter will be revised up.

The rally in bond markets from Australia to England can only go so far. Lower long rates are encouraging all sorts of long term investment projects, all around the world. The financing for a refinery and a home are similar, the borrowers generally base their decisions on long term rates.

The pace of development in nuclear power is going to surprise the public. The big turn in construction of nuclear power is a virtually untold story. The news media is very selective about what it covers. The incredible example is the lack of coverage in regard to the Armada headed toward Iran. I checked with a few non readers last night and the average man is totally unaware that three aircraft carrier battle groups will soon be at Iran's door step.

I learned about the construction of the Chinese Nuclear Power Plant assembly line from the web site, Next Big Future, which had learned about it by constantly monitoring numerous industrial technical journals. The factory only took 11 months to build and it is up and running. Now, a letter of intent has been issued to build a similar plant in Louisiana. Westinghouse and Shaw Group are forming a joint venture. The shares of Shaw Group were showing strength several days before I found the notice. In the next 12 years, China will build more nuclear power production capacity than the total of the USA's current capacity!

Chevron has followed Exxon's lead. Both big oil companies are selling their retail gasoline stations. This does not mean that the "future car" will be here next week but it shows that long term investors feel the winds of change.

What is it that they know? It could be any sort of thing. The rapid developments occurring in carbon nanotubes is just one example of significant change underway. Carbon nanotubes have an incredible length to diameter ratio of a million to one! They enable the construction of the strongest and stiffest materials ever known. Many uses will develop in the coming years. Wires made of these materials carry 1,000 times the amount of electricity carried by copper. They carry 15 times the heat of copper. Cars will soon go the way of the new Boeing Dreamliner, a much stronger airplane that weighs 15% less.

The process of substitution is barely underway. The Dreamliner was made lighter by replacing aluminum panels and steel rivets with graphite sheets. Given time for development, everything from turbine blades to wheels to coffee cups will be converted. Imagine the weight difference in an armored personnel carrier!

The high electrical density of the materials are likely to dramatically improve the efficiency of batteries. Researchers have already improved batteries in the lab. Internal combustion engines lose about 2 thirds of their power to wasted heat. New materials will capture the heat and turn it into electricity. Better still, super electro magnets will allow light weight electric wheel motors to replace internal combustion engines.

The above is nothing but a mini history of natural resources. The Mongolian Empire was one of the largest ever built. It would never have happened had the Mongols not developed technology. They learned how to attach a sharpened stone to a stick, attach feathers to the other end and use a piece of animal gut and a bowed stick to propel this arrow a considerable distance. Like the oil sheik said, the stone age did not end because man ran out of rocks.

SHORT TERM: low interest rates are stimulating capital markets.

SHORT TERM: new oil and natural gas supplies are coming on line while demand is falling, the big drop in gasoline prices is yet to come

LONG TERM: construction of nuclear power plants, wind mills, efficient cars, and more will lower the relative use of oil.

LONG TERM: share prices on many stocks will benefit from lower costs of money and resources.

SHORT TERM: Congress must pass a bill to fund the operations of the government by September 30, Senator Jim Demint says he has the 41 votes needed to stop passage if it has a drilling moratorium attached.

SHORT TERM: A couple of months ago, against 70:30 odds, I bet on a McCain win. Since then the democratic message has been mixed at best. Last night, I could hardly believe my ears when democrats cheered sending 10's of thousands of US troops to Afghanistan. I am certain that scores of MoveOn.org supports upchucked their lunch. After democrats got us into the Vietnam War, they became gun shy in the extreme. McCain now faces the possibility of winning going away, by 2, maybe 3 points.

It will be all the more interesting if he chooses a woman as VP. Fifty-two percent of voters are women and women start twice as many small businesses than men. Women want low taxes on businesses and low fuel costs. Soccer Mom's certainly want lower gasoline prices. Democrats are on the wrong side of the energy and the terrorism issues.

Republicans continue to catch much of the blame for the weak economy, but Jerry Boyer is correct. Bush won lower tax rates and the business economy is strong. Democrats won in areas such as forcing banks to lend for houses in the poorest communities to the least credit worthy customers. Democrats won in the area of restricting drilling for oil and natural gas. Democrats won in discouraging the construction of nuclear power plants. Democrats won in stopping free trade agreements to go through. The weakness in the US and world economies are related to the areas of congressional meddling in markets.

Democrats think they can win by being against the Iraq war while supporting a bigger war in Afghanistan? One of the many troubles with this strategy is that the terrorist training camps were built in Afghanistan during the Clinton presidency. Terrorist activities were growing before the Clinton term but he did almost nothing to counter the trend.

THE BIG MONEY TURN CONTINUES

The political winds represent a major big money turn. Instead of spending huge sums to subsidize corn oil, wind mills and CO2 capturing schemes, huge sums are going to be allocated by the market to the most efficient production of energy. The more efficient the production, the less CO2 produced. Nuclear power uses tiny amounts of inputs and produces very little CO2.

Low interest rates, as the temporary result of high short rates is stimulating huge capital projects. The great "news" is that construction has already started. The bad "news" is that most of the construction is happening outside the USA.

The nuclear power plant assembly line in China will soon bring the cost of manufacturing goods down. Will the environmentalist dare attempting to stop the Louisiana plant? Not likely, the winds of sentiment have changed.