Thursday, September 25, 2008


There is talk that a bail-out deal is all but done. It is ironic that the move by McCain to grab headlines, to suspend his campaign and to ride into Washington on his white horse in order to prepare a competing bill, might have been the pressure that pushed house democrats to go along with the administrations deal. The dems certainly do not want McCain to get credit for an alternative solution.

Again, I think there are better solutions but I learned about the concept of "muddle through democracy" a long time ago. Democracy is an ugly form of government; it zigs and zags all over the place but it is beautiful when compared to other forms of government.

George Will wrote about Gresham's Law of Political Discourse yesterday. Gresham's law says that bad money will always drive out the good. For example, back in the 1960's silver dimes and quarters were gradually replaced by copper/zinc clad coins. It did not take long to happen because I and thousands of others grabbed all the silver coins we could, as they were worth more than their face value.

Will's use of Gresham's Law as a political term was delightful. It is so true, loud political noise is heard round the world while it crowds out reasoned discourse and good news. I've been busy and distracted, so maybe I missed the news that the Iraqis have voted to move forward with providential elections. I've lost count but I believe the Iraqis have now completed 16 of the 18 political objectives requested by the USA. The evidence of political reconciliation can be seen in violence reports; violence on the Ramadan Holiday was down 87% from a year ago.

Given the political progress in Iraq, the USA, in cooperation with the UN, is preparing to assist in the buildup of a powerful national defense. The new Iraqi military will be much more than a bunch of guys with assault rifles. It will take years to equip and train them. When done, they could eventually join Turkey as the second predominately Islamic country to join NATO. The world is becoming a safer place, even while wars are being fought in at least a half dozen countries.

In Iraq, at least 25% of the provincial leaders will be women. The status of women and children is quite different in Iraq than in most of the Islamic world. Students in Iran who wear western neckties are beaten in the public square. Repeat offenders have been hanged.

There are still many questions to be answered in Iraq, such as parliamentary representation for minorities such as Christians. For the benefit of the global warming crowd, it is worth noting that for the first time, methane gas from Iraqi oil wells is going to be captured for use instead of flared into the atmosphere. Methane is one of the most abundant gases in our atmosphere and it is environmentally 10 times as powerful as CO2. If man is responsible for global warming, we can fix it!

We are in a period of relative quiet in regard to Iran, Afghanistan and Pakistan. After the bombing of Islamabad, the Pakistani government made a ferocious attack on several Taliban/al Qaeda locations. The enemy has been put on notice, the relationship between the Pakistani government and the USA will only be strengthened by attacks on the government. Iran certainly does not want to be fully surrounded by US troops.


Ireland is the first European country to have had two consecutive negative quarters. Investors should always remember that the best time to invest is during recessions. Recessions bring down business costs, including the cost of oil and the cost of money.

There is talk of a deal, but a deal will not result in a quick rebound of slowing economies around the world. After a deal, a number of banks will still be in "trouble", many a troubled bank will see its share price increase as the sharks prepare for takeover. The war chests accumulated by companies such as Goldman and Morgan Stanley are for buying weak banks at fire sale prices, but the sweetest meat will be devoured quickly.

As is always the case, the economic slowdown will continue until well after the rally in financial stocks has run a good distance. Long bond rates will not hit bottom until the economic recovery is underway. Long bonds are likely to appreciate during the next several months but stocks are the investment of choice. Big cap basic material and resource companies will drag the broad averages down even during the price run up in bank stocks.

If there is not a deal already "done", one should be worked out by Monday. US markets have opened strong with financial stocks and utilities leading the way. Utilities are still being juiced in the short run by the fact that the congress has voted to spend 68 billion dollars to subsidize solar panels and wind mills. The American tax payer will pay for 30% of windmills whether he wants them or not. Large utilities will see their profits enhanced by tax credits for building expensive solar plants.

The Senate passed the bill with 92 votes. Republicans were eager to support "clean alternative and wasteful energy" once it was determined that the moratorium on drilling would be allowed to expire. The good news is that the private sector will ultimately spend many times the 68 Billion to develop our real energy alternatives.

The house bill is different but the differences should be reconciled quickly. As always, those last minute adjustments will not even be read by most representatives. The law that needs to be passed is a law that requires a 30 day delay between the construction of the final bill and the final vote. Both the representatives and the American people should know in advance what is being included in these monstrosities.