GO GO GO - THE END OF SOCIAL SECURITY -- SUCKING THE AIR OUT

Before last night, Obama's numbers did not add up. Now, the numbers are goofy but they come closer to adding up.

Last night an Obama spokesperson explained that the $1,000 rebate, for those people who do not pay income taxes, will come out of Social Security. He further explained that the people who earn from $150,000 to $250,000 will see stable income tax rates. Obama has repeated the $250,000 cut off while implying that families earning less $250,000 would see income tax cuts.


In the 1960's, when my Dad, earned the much higher than average income of $7,000 per year, he maxed out his Social Security Contribution by April or May. Back then, a family income of $10,000 was big. My Mother earned better than $3,000 per year and our family was "wealthy". We spent long hours growing and canning vegetables, we seldom ate away from home, we vacationed in a tent and we wore out our jeans and our one pair of week day shoes before we got more, but we were wealthy. It was clear to our neighbors that we were wealthy because we were one of few families to own two cars. $100,000 of income and $150,000 of family income sounds large but it will soon be small. Those who see the government as the source of economic strength can never get enough from it.

Under Obama's first plan, no one would ever max out Social Security payments. To wiggle out of criticism and to make the numbers sound better, under his latest plan, his Social Security tax increase would not start until 2019 and the increase would start with a "dough nut hole". By waiting to increase the Social Security tax for 10 years, he avoids having to count it at all.

If Social Security contributions were cut by $1,000 per year times millions of payers, Social Security would be in dire straights by the time Obama's "taxes on the rich" "saved the system". In other words, Obama would make a bad situation worse with a promise to "sock it to the rich" later. He has to play these games in order to make his misleading political statements fly.

Social Security has been a "bad investment" for a long time. Those who pay the maximum, receive returns of less than 2%. Obviously not a great retirement plan, but the hurt to 100's of millions of people has been offset by the help provided to a few million people. Social Security has been collected by a lot of children, whose parent(s) suffered early death(s), and by people who suffered disabilities. My grandmother was one of the lucky ones who made one small payment into the system and received 40 years of monthly checks, even though she was healthy and financially "well-off". Who can blame anyone of accepting gifts offered by the government? Warren Buffet has said he is willing to pay ordinary rates on his capital gains but, to my knowledge, he has not written the check. In truth, the government, all the people, are better off to allow Warren to invest the money and take just 20% of his profits.

While the original purpose was a forced retirement savings plan, most people are not extremely upset by the significant "leakage" in assistance to the unfortunate. The changes promised by Obama would convert SSN into a welfare system. We already know how that will work out.

In the short run, Obama's tax plan has been all over the map. His proposal has gone from dramatically increasing the tax on individuals who make $100,000 to miraculously coming up with billions of dollars to finance $1,000 reductions in contributions by middle and lower wage people. His program is a bit like the earned income tax credit on steroids. It is a rehashing of George McGovern's plan for government to guarantee all Americans a $40,500 per year income. McGovern's figure was $10,000, but my $40,500 includes an inflation adjustment of 3.5% per year. The main difference is that McGovern was upfront about the $10,000 payment whereas Obama hides his tax increases behind the rhetoric of $1,000 tax rebates. Fortunately the public was not fooled into believing McGovern could give every family a $40k income (without massive inflation or massive tax increases).

One of the problems with Obama's plan is that he does not use dynamic scoring. He avoids mentioning that raising the taxes US businesses pay on wages would send jobs to foreign countries. As marginal production costs increase, businesses would be forced to seek lower costs elsewhere. Obama also avoids the fact that higher taxes on businesses would be paid by higher prices of goods to consumers.

Obama is in love with the "European or Japanese Model". The following numbers show what his plan would achieve.

Recent per person GDP numbers are as follows:

USA $41,800
Japan $30,300
Germany $30,500
UK $31,500

The numbers include health care and all other benefits. Are Americans willing to see a an average income cut of 27% just to tighten the spread between the rich and the poor? (Besides, the spread between rich and poor is already lower in free enterprise countries.) Do we really want to go to a system where the incentive to work is diminished? Will government receipts really go up, just because tax rates go up? Has Obama ever looked at the Laffer Curve?

The 2007 figures show that new records have been set. Even during an economic downturn, personal wealth and income in the USA has set new records. A significant percentage of our population has been hurt by the downturn and particularly by high oil prices. Lower oil prices will give consumers much more than the $1,000 rebate checks offered by Obama, without raiding the SSN trust fund. The decline in fuel costs will boost the economy and further increase the wealth of the average American (only a few small places, such as Luxembourg, has a higher per capita income).

Other large countries have higher minimum wages, longer unemployment benefits and state sponsored health care but their unemployment rates average 3.6% more than US rates. In the USA, jobs are plentiful. Even during an economic slowdown, unemployment rates are less than 6%. The USA has a very dynamic economy. Jobs are constantly lost, but new jobs are constantly created. The best part of the story is that most of the new jobs are better than the old jobs.

PROGRESS IN IRAN

The risk of conflict with Iran continues to abate. Talks with Syria are set to continue, Sunday. Sarkozy, President of France, has publicly implied that additional progress has been made in talks with Iran. In the meantime, the USS Roosevelt, with its complement of 5,600 marines and sailors is now on a pleasure cruise. The ship will visit South Africa, while US negotiators go head to head with Iranian negotiators. This pleasure cruise is much closer to Iran than it was last week and it can change its mission if conditions change.

PELOSI, REID AND OBAMA

How sad? On national television, Pelosi, Reid and Obama have shown how partisanship can confuse, distort and destroy. Pelosi is now for building the new natural gas pipeline from Alaska but she is still opposed to drilling! She notes that natural gas is clean relative to fossil fuels! This was not a slip of the tongue, because she said it more than once.

Just in case some readers don't know, natural gas is a fossil fuel and it is found by drilling. Why would the USA build a 40 billion dollar gas pipeline, but not drill for gas? And, just in case some readers do not know, most of the gas found in Alaska is a byproduct of oil production. Oil and gas production go hand in hand.

Natural gas is the result of methanogen (tiny carbon eating bugs) digestion. Even when a well is drilled just to capture natural gas, the reality is that there is oil feeding the gas down there somewhere. Recently, Statoil was seeking a new place to drill when an employee said why don't we drill in one of our biggest and oldest gas fields? The field had produced gas for 30 years, but where did the gas come from? The company decided to increase the depth of some of the old gas wells. They struck 250 million barrels of oil. Coal bed methane is captured because there are similar bugs eating away at the coal.

Right now, the most productive oil wells in Alaska have up to 6 GE Aircraft Jet Engines attached, to pump natural gas back into each well. Some of the gas is used just to run the jet engines. This existing production will be sent through the new pipeline but it is not enough to justify the 40 billion dollar expenditure. Unfortunately, our speaker of the house does not have a clue. She and her friends in California have let millions of barrels of oil and trillions of feet of natural gas spew into the ocean just to prevent the "evil oil companies" to profit from it.

Last year, Harry Reid went on national TV to declare that the war in Iraq was lost. How sad?

Obama has been on national TV dozens of times with statements all over the map. He has wavered all the way from accepting defeat in Iraq to starting a new war with Pakistan. He says he would prevent Iran from acquiring nuclear arms without showing an understanding of how that can be accomplished. His solution is to talk the leaders into reason.

THE 25% -- 3%, LARGEST TRANSFER OF WEALTH IN HISTORY LIE

For commercial reasons, T. Boone Pickens, and for political reasons, democrats, keep repeating misleading statements. One is the 25%, 3% "lie". Another is the largest transfer of wealth in history lie.

There is at least an element of truth in the first "lie". The USA does consume about 25% of the oil annually consumed by the world and our stated reserves are about 3% of the worlds stated reserves. These reserves do not include oil in ANWR, oil in the National Strategic Petroleum Reserve, off shore oil that is legally off limits, and oil in numerous shale formations. It is commonly known that the USA has at least 3 trillion barrels of "non-reserve reserves". It is commonly known that at least 2 trillion barrels of these reserves can be recovered.

In addition to massive shale reserves in Wyoming, Colorado, etc. that are off limits, the Barnett reserves in Texas and the Bakken reserves in Montana, North Dakota and Canada and other massive shale reserves in Pennsylvania and West Virginia are being tapped. The US Geological Survey estimates the Bakken holds somewhere between 300 billion and 500 billion barrels of "oil equivalents". For the past 6 months or so, the increase in production from the Bakken has been about 10,000 barrels per month. The total production is up to around 200,000 barrels per day, still a very small number relative to 300 billion barrels.

There is no question, this "oil" is hard to extract. This oil was discovered in 1952. Just a few years ago, the cost of extracting this oil was greater than the cost of the oil produced. As a result, none of this oil was counted as reserves. Back when the price of a barrel of oil reached $60, the US Geological Survey for economically recoverable reserves in the Bakken to 3.4 billion barrels. Less than 1% of the oil in the Bakken is counted as reserves. Zero percent of the 2 trillion barrels in Wyoming and Colorado are counted.

We cannot count 2 trillion barrels of "rocky mountain shale" and additional billions of barrels off our coasts because the congress has declared it to be off limits. By the stroke of a pen and just a little exploration, we can dramatically change the 3% figure.

The transfer of 700 billion dollars of wealth is a total lie. We buy the oil the same way we buy building lumber to build houses. We only buy when the value of the oil is worth more to us than other goods or our paper money. I bought my house but I did not give away my money when I bought it and I do not give away my money when I fill my gas tank. I am just as wealthy after filling my tank. If I waste the tank of gas, I decrease my wealth. If I put it to good use, I will increase my wealth.

GO, GO, GO

The massive rotation continues. The US 10 year bond rate continues to fall, it just traded at 3.67%. The short term fly in the ointment is a bounce in guilt and bund rates. When the fall in rates resumes, mortgage rates and commercial bond rates will join the fall. Forget about any economic forecast you have seen, the power of the bond market is real.

The bond market knows that inflation is waning. As bond rates fall, many a bank balance sheet will see leveraged improvements to capital ratios. Junk bonds have already begun to rally. Financial stocks have rallied while gold prices have collapsed. Even utility stocks have been rolling over.

Utilities are tricky beast. As consumers of energy, the first instinct is to believe that they would increase in value when energy prices fall. As highly regulated industries, utilities are not allowed to make "excessive returns". As companies of extreme operating leverage, they cannot make money unless they can run flat out at high operating rates.

With the public and businesses doing all they can to conserve, utility operating rates are apt to fall just a little. With energy costs coming down, politicians are apt to demand utility rate reductions. All the while, the massive investments utilities have been forced to make, by congress, are about to turn into massive waste.

Think of all the solar panels being installed by utilities, not because they make economic sense, but because renewable fuel production has been mandated. To paraphrase Professor Don Boudreaux, a mandate is when the government makes someone spend money to do something stupid. If it made sense to do the thing, it would not require a government mandate. The total cost of the electricity produced by solar panels is many times the price of the energy being produced by fossil fuels.

The point for investors is that we have reached the late contraction phase of the economic cycle. During this phase, bond rates go down and financial stocks go up while the broad market averages are dragged down by declining resource stocks. Consumer cyclical stocks begin to rise well before the end of the contraction. This is also the point when real estate prices begin to rise and when companies that use lots of energy enjoy lower costs.

Yesterday, when explaining to a friend the reasons paper stocks have bounced, I suggested that he look at a long term plot of Louisiana Pacific relative to Exxon Mobile. The see-saw action is obvious. Still, we are fortunate in that we are not locked into resource sectors. Resource mutual funds are pulling out of energy as fast as they can and buying paper because, by charter, they are required to remain in the sector. Individuals can move into financial stocks, consumer stocks and consumer of energy stocks.

THE KNEE JERK AND THE SUCKING SOUND

The short run decision of the ECB and the BoE to hold short rates steady has resulted in the typical knee jerk reaction. Even long rates in the EU have bounced up.

The "big boys" with the aid of the "TV pundits" have taught the world to react to interest rate moves in exactly the wrong direction. The falsehood is that an increase in short term rates results in an increase in long term rates. The reality is that an increase in short rates in and of itself results in a reduction of economic activity, lower long term inflation and lower long term rates. Of course, rates are raised (or in this case held steady) based on the belief that they need to be high to combat inflation. Traders typically accept that the central bankers must know some secrets when they fail to lower rates when the economy seems soft. The reaction is knee jerk but it fades.

The collapse of the GBP (British Pound) has been temporarily arrested. The higher than expected short rate has resulted in a bounce in the GBP (a fall back in the dollar) and a bounce in long guilt rates. This bounce will prove temporary, unless the worlds economies are starting to fire on all 8 cylinders. The US economy is starting to hum along, but not on all 8 cylinders and many nations are approaching recession. Australia finally cut rates by .25% last week. Short rates there are still at 7%. The decision to hold EU rates steady is the decision to keep pressure on the brakes. This means the price decline of gold and oil is not over but it also means stock markets will temporarily struggle against the air sucking bonds. The US 10-year is down to 3.67% this morning. How low will rates go? The wind is being sucked out of the stock market by the bond market, but there is a stampede developing in the early cycle stocks, buy, buy, BUY!

THE RUDY AND SARAH SHOW

Last night, Rudy and Sarah were exceptionally good at contrasting Obama to McCain. Huckabee did a good job of warming up the crowd but Rudy was hot and Sarah was the hottest. Sometime ago, I predicted a 2% McCain win. I was out on a limb for awhile, but now I feel secure. By next week, I predict the daily tracking polls will put McCain in the lead. I predict that a number of swing states will swing by next week. The election is still two months away and the polls will continue to wiggle, but McCain should take a significant lead by next week, just about the time the congress comes back to discuss drilling and just about the time retail gasoline prices hit $3.33.