Monday, September 08, 2008


The recent fear has been that the government is about to get much bigger and much more involved in our daily lives. The price of health care has zoomed upward as a result of Medicare and Medicaid. For more than a year, many if not most people have believed that the next president, Hillary or Barry, will nationalize the health care system and raise taxes to pay for health care and other government programs.

The reality has once again taken a different tact than the fear. This weekend, Hank Paulson put an end to the competition of government in the mortgage market. Ironically, the government will make big profits by "buying-in". The buy-in comes with the mandate that Fannie and Freddie slim down dramatically over the next many months.

As part of the "bail-out", the government will buy mortgage backed securities. The government will also make a profit off its ownership of Fannie and Freddie. Again, this will be a temporary arrangement as the deal requires Fannie and Freddie to sell off a huge portion of their holdings.

Another test is just around the corner. The government has meddled in free markets by picking winners and losers in the energy markets. If Jim Demint and his friends find two more votes, the government is going to allow the market to decide which resources to develop. The government will still auction leases, collect royalties and have a lot of influence, but it will not keep paying one system pork dollars while taking from the most efficient producers.

If McCain is true to his word, then he will vote against the pork barrel plans that are likely to be offered as compromises between now and October 1. McCain is for wind mills and solar and switch grass, as am I. The trouble is that McCain has show a willingness for the government purse to be used in distortive ways. For example, he has proposed a $300 million prize for the inventor of a "super battery". With no prize in place, billions of dollars are being spent to solve this riddle. Great progress is being made. The company that patents the solution will make a lot more than $300 million.

I am for alternative fuels but I trust the invisible hand of Adam Smith and I do not trust the heavy hand of government. In like manner, the company that develops the bacteria that will chew up coal, shale or switch grass and give off natural gas will have hit the mother lode. The average person does not realize just how incredible the science of genetics has become. There are many astounding examples of what is going to happen, but, the one I like to repeat is the 5 second 100 meter dash. A professor at SMU says he expects to live to see the 5 second dash.

Some immediately respond to such assertions as incredulous. The fact of the matter is that Gorillas have upper arms strength that is 10 times that of man and animals such as Chimpanzees can do things that man cannot. However, they prove the possibility. Who would have believed that mice can be caused to build muscle strength through gene therapy. Some of the science done with mice has already been shown to work on primates. We need government to set some rules, but not to over regulate this incredible new industry.


The London market, especially the bank stocks, shot up like a rocket this morning. It soared until the market closed early, "due to connectivity issues". I don't think the world is prepared for the dramatic recovery that is in progress. Leveraged paper is cheap and now being bought by the US government. Financial stocks are behaving like they did near the end of the 1990-91 real estate recession; they are sky rocketing.

The weakest of the weak are making the biggest moves. ETFC, for example, is up more than 12% this morning. I hope you are catching as much of the ride as you can.