Tuesday, August 05, 2008



Change has happened and is happening fast. A slooooow cycle up a hill has turned into a fast downward grade trip and new gear after new gear is having to be hit just to keep up.

The financial news shows continue to give primary credit for the big drop in oil to the change in attitude that is going on in regard to drilling for oil. A couple of months ago, McCain came out in favor of OCS drilling. A couple of weeks weeks ago, Bush removed the executive branch moratorium on OCS drilling. Congress adjourned Friday but 30 republicans are "still in session". They stand on the house floor and make drilling speeches to visitors. They are demonstrating that they are ready to do their jobs and to vote on a drilling bill. The Senate gang of 10 came up with a plan that includes too much pork but it is a drilling compromise bill that could become the vehicle of CHANGE. Meantime, the Nancy Pelosi freight train is racing toward a cliff.

Nancy says the house will not vote on drilling. There are more than one, not so minor problems, with her stance. The key problem for her is that the congressional moratorium on drilling is a part of the congressional budget. In the past, this was not a problem: who would dare to cut off funding for the entire government over OCS drilling? This year, a number of republicans stand ready to pass a continuing resolution, only after a vote on drilling. Should the congress not pass a continuing resolution by October 1, the US government will be partially shut down. Emergency services will be maintained but many employees will be put on furlough. Government shut downs are risky business. They make voters mad. Voters are already mad about $4 gasoline.

The good news is that the hand writing is on the wall for all to see. Smart politicians move in advance of events so they can take credit. Obama, who is running a campaign of CHANGE, has gone from flat out opposition to any drilling to conditional support. He is now in favor of drilling, provided certain other things happen. Kind of like my wife saying she will cook dinner tonight if I agree to take her on a round the world cruise (one that I would greatly enjoy). Should we compromise on a cruise to Alaska, should I eat another Big Mac for dinner or should I bargain for 500 dinners? Obama wants the 500 dinners and the cruise. The situation is comical. We can all save thousands of dollars per year on our fuel bill by increasing the supply of energy but only if we agree to pay off owners of wind mill farms and only if we increase income taxes on Exxon. Exxon, the company that pays more in taxes than 150 million Americans combined.


Thomas Friedman is a liberal with a streak of common sense, a rare combination. He is a New York Times, Pulitzer Prize winning author. His book, "The World is Flat", helped us understand the significance of globalization (should I say, of global CHANGE). So far, Obama and most other democrats running for office, are not willing to accept that the war in Iraq has been an important part of the war on terror or that the surge has worked. Obama has tried to throw off the electorate by elevating the importance of the war in Afghanistan and by making it seem that killing Osama bin Laden should be the primary objective. Sunday, Friedman wrote, "I think Barack Obama needs to ask himself honestly" 'Am I for sending more troops to Afghanistan because I really think we can win there, because I really think that will bring an end to terrorism, or am I doing it ..to get elected..'" He goes on, "The truth is that Iraq, Afghanistan, Saudi Arabia, Lebanon and Pakistan are just different fronts in the same war on terror."

Friedman understands what many Americans and Obama need to understand. Killing a man hiding in a remote cave in the high mountains of Pakistan will not change the attitude of the millions who believe it is acceptable to try to force the Islamic religion on others; the millions who support blowing up innocents to make "progress". Friedman also understands that the terror will not end unless the male dominated fiefdoms of the Middle East are brought into the modern age. (The Saudis have made plans to let women drive.)

Iraq is setting an example for the rest of the Middle East. Rapid changes are taking place. Now that the great majority of the terrorist have been banished, there is a "democratic awakening". Sunnis have rejoined the government, a political deal has been reached in regard to Kirkuk. Voting is back on the schedule for October 1. A deal has been reached in regard to US troop presence. Power and clean water are being "turned on". Male and female children attend school. The Iraqi Army has made great strides, many soldiers have quickly become professionals. The US has agreed to sell 10.8 Billion Dollars worth of arms to Iraq. Contracts are about to be let on drilling in a 5 Billion Barrel oil reserve, in East Baghdad, that has had no production for years. Basra, run by militia just a few months ago, is rapidly becoming a great place to live, and yes, the province is producing more oil, more income for the country.

The above mentioned deal for US troop presence has not been officially announced or even signed off at the top, but the list of arms being sold to Iraq has been made public. It includes 24 helicopters, about 400 light, armored vehicles and 140 tanks. I assure you that the agreement to sale these arms will not be executed until other agreements are executed. The old military rule, understood by McCain but not by Obama is that Iraq must stand-up before the USA can stand-down.

There have been other interesting developments and a number of exciting rumors. One rumor is in regard to the visit of Assad of Syria with Amadinejhad on Sunday. It has been said that Assad gave Amadinejhad the bad news that Syria is ready to agree to the negotiated peace deal with Israel. This deal will include Syria's responsibility of pulling back from "engagement" with Iran. Today, Assad is back in Turkey, whose leaders have been mediating the negotiations. At the least, it appears that Assad is engaged in "shuttle diplomacy".

In Iran, workers at a tire plant set fire to stacks of old tires. They protest not being paid for four months. Protests are spreading across the land. Yesterday, thirty male university students wore neckties to class. The implication being that it is time for Iran to join the modern world. Five students were severely beaten in the public square. The hangings and beatings in the public square will not put food on the shelves. Gasoline, in particular, is in short supply. The people are rightfully angry.

The UN 5+1 continues to wait patiently for a formal response to its latest offers. The deadline passed but there is no rush to add more sanctions. It is clear that the third round of sanctions are biting hard. The fourth round of sanctions will be negotiated between the 5+1 and proposed to the UN at a September meeting. Ouch! Most victims of death by 1,000 cuts, "ling chi" or "lingering death", do not make it to 1,000 before they end their own lives. The leaders of Iran are protesting their treatment after each cut, while they gradually bleed. The people, domiciled and exiled, are agitating for CHANGE, CHANGE, CHANGE.

Various pieces of this puzzle keep getting close to coming together. The PM of Israel, Olmert, met with Palestinians again today. Olmert, whose resignation takes effect in a couple of months, is eager to sign peace agreements with Lebanon, Syria and Palestinians, before he leaves office. A tall order but conditions are ripe.


Yesterday's numbers showed a significant upturn in the US economy. Just as high interest rates are finally biting into the strength of the worlds economies, low interest rates in America are starting to revive the US economy, just as the price of fuel is starting to give us all a "tax cut". Brian Wesbury made a key point yesterday.

Before getting to Brian's point, let me say again that pundits like to yell and scream about the phony inflation rates reported by the US Government. Inflation is a complicated beast to understand or to measure. If a sick person visits one of the new health clinics, located at places from J.C.Penny to Walgreen's to Wal-Mart, and if he pays $49 for services that would have cost him $89 at his local doctors office, what was the inflation rate? Was the visit the same? The doctor might say that he got an inferior product. The well patient may be in awe of the $40 in his pocket.

Brian notes that part of the confusion is in regard to the difference in price indexes and deflators. The GDP deflator is a measure of price changes in goods produced in the USA. The CPI index is a tricky measure of what we buy, including foreign goods. Since America imports much of the oil we use, the recent huge run up in the price is not captured in the deflator but it is captured in the CPI. However, this does not mean that the CPI should be used to adjust the CPI. It takes a horse and a donkey to make a mule but only the truly stubborn will insist that any of the three is the best animal. The right animal should be used for the right purpose. It is wrong to suggest that the economy did not grow as fast as reported due to improperly reported inflation numbers. Unit labor cost increases which averaged around 12% in 1980 was at 2% in May. Inflation is seen in the eyes of the beholder.

It is true that inflation has risen in recent weeks. The reason for economic slow downs is to cure inflation, therefore, there is nothing unusual about high inflation rates after an economic slowdown is underway, central banks do not always wait until inflation is out of hand to react. Plus, economic slowdowns cause a reduction of production of the least demanded goods while the price of the most demanded are often increased. In the current cycle, high interest rates around the globe are going to force the price of commodities down, giving the citizens of the world a "tax break" just as low rates in America are stimulating our economy. The pundits complain about the lack of available credit but the new covered bonds will gradually re-liquefy the mortgage market just as the energy "tax cut" begins to be realized. Some rocky times are still ahead in the markets as the rotation out of resource stocks and into "early cycle" stocks progresses. Buy the right stuff now and you will make very high returns!

The bottom lines are that Personal Income is up at the annual rate of 5.7%, personal consumption up 5.3% (consumers are spending a lot of money but saving a .4% of their income). After tax income is even better at 7.6% growth! Times are good. We do not need the wrong kind of CHANGE!