Wednesday, October 01, 2008


A revised bail out plan is likely to pass. The reasons include: the attachment to a bill that will patch the Alternative Minimum Tax, the addition of an increase in FDIC insurance from $100,000 to $250,000 and the easing up on mark to market accounting rules.

I have not read the 107 page bill, but, reportedly, the Treasury will pay an above market price for the mortgage backed securities. I still do not know how that price will be determined. If priced correctly, the purchases will give relief to the banking system and still allow the government to collect a profit after the market recovers.

One thing that has made the whole process much more difficult has been the insistence of the congress to include warrants. The warrants are much more difficult to price than are the securities. The combination of a security and a warrant purchased from each bank is a much more complicated question than only buying the same tranche, the same security, from several different banks. It is a little bit like trying to compare the value of two cars when one has new high tech features such as a sophisticated GPS system with blue tooth phone features and the other appears to have a bent frame.

In the past 3 months, the DJ Bank Index is up 13.8% while the S&P 500 Index is down 8%. The turn is happening while the news makes it seem the wheels are falling off. The "big boys" have the ability to turn the news upside down at critical times. A few months ago, right at the bank stock bottom, the price of oil was at $147 and going to $200, $250 or $500. Today, a lot of individual investors are buying oil because it is cheap at $100. It may take a few years for oil to get back to $50 but it will get to $50 before it gets to $250. T. Boone is spending millions telling people the price is going back to $150 while he lobbies congress to pass 30 cent on the dollar wind mill subsides.

Another 500,000 barrels of oil per day just came on line in Saudi Arabia, pipelines are being considered from Russia to South Korea and from Iran to Europe and Brazil just keeps on discovering more offshore oil. The estimates of the oil in Brazil's three partially explored fields is settling in the 55 Billion to 70 Billion barrel range; another 10 fields will be explored after more is known about the first three. The US still has more than 10 thousand miles of coastal waters that have not been explored. Iraq is about to let bids on discovered but undeveloped southern fields. Iraq oil production is expected to increase from 2.5 to 6 million barrels per day within 10 years.


The pace of innovation continues to quicken. The cost of the electronics needed to fly an unmanned airplane is now below $600. The dream of airplane "taxi" service is coming close to reality. Who needs to build very expensive concrete roads if dozens of one man airplanes can fly at various heights while getting hundreds of miles to the gallon of fuel? No need to own one of these planes or to learn how to fly one. They would be robotic fee for service taxis.

Nissan is one of many firms working on robotic steering systems. One hundred thousand lives could be saved annually by computer aided auto steering. The Nissan system is built around the model of the bee. Bee's fly in swarms without bumping into one another. Electronically controlled cars and airplanes can do the same thing.

Fish farming is being taken to "the next level". In closed loop, commercial scale, systems, fish are feeding vegetable plants and plant roots are cleaning fish tanks. The benefits include saving ninety-nine percent of the water while using only 10% of the land. The placement of "farms" in or near cities is cutting transportation costs.

Innovations in nuclear technology are continuing to cause a rebirth of the industry. The largest uranium producer (located in Canada) is expanding again. There are currently 439 nuclear plants operating, 36 under construction, 97 planned and 221 proposed. This does not count the 4,000 nuclear "batteries" to be constructed by 2013. The left and profiteers such as T. Boone Pickens continue to push for wind and solar subsides. If world wide electricity production is rounded to the nearest percent, the numbers are coal 40%, hydro 19%, nuclear 16%, gas 15% and oil 10%. The amount of electricity produced by wind mills and solar do not make the list.

The GE-Hitachi nuclear plant design is being ordered in increasing numbers. It uses an innovative passive water flow design that eliminates the need for water pumps. Nuclear power had not gotten to the Ford Model T stage, but high oil prices have increased the incentive to innovate.


Warren Buffet is trusted. As a result, it took about 5 hours for Berkshire Hathaway to negotiate the bail out of Goldman Sachs. The members of congress do not trust each other or the Bush administration, thus the negotiations to bail out the rest of the banks is stuck.

Certain Americans, Russians and Iranians do not trust free markets. They would rather pay through the nose rather than take the chance that a capitalist will made an extra nickel. It is clear that large uranium processing plants, like the one in Canada, can process uranium at a tiny fraction of what it will cost Iran. It is clear that Americans would save a lot of money by trading with Colombia and others. It is clear that tax increases on businesses will cost the middle class dearly. It is clear that Russia and Iran would be better off trading with the west, rather than sparing with the west.

Now that Russia will not support new sanctions on Iran, the US has decided to sell 25 F-35 Strike Fighters to Israel along with options for 50 more. The US has also deployed the FBX-T antimissile radar system in Israel. Skeptics will say that Bush is gearing up to start a war with Iran but the real purpose is to prevent war. These additional armaments would not have been necessary had negotiations to end the production of uranium in Iran worked out. If Iran is going to be allowed to build nuclear bombs, we must build up our defense against them. Russia needs to make a deal with the US. The people of Iran would be so much better off to work with the US, but the leaders of Iran are power hungry.

Russia would also be so much better off, had it continued to work with the west instead of working against us. It appears that it will take many more years for Russia and Iran to learn how to integrate their economies into the new global system. Yesterday, Gorbachev announced the formation of a new party in Russia. He will have a difficult time of breaking Putin's grip. The irony remains that the most successful nation in the world keeps moving toward socialism while the recent success story has been that of previous socialist doing well after moves toward free enterprise.

For nearly two years, I have wagered that, when push comes to shove, the American people will back away from the move toward socialism. In the past week, my optimistic outlook has taken a blow. The risk of a three house democratic sweep has increased. In the short run, democrats will have difficulty paying for Obama's massive programs, but we are finally at the turn in the business cycle. The US should enjoy a strong dollar, strong profit growth and strong stock markets in the years ahead. With democrats pushing very close to a filibuster busting majority, I fear massive programs will be passed within 4 years. The next government induced catastrophe could make the current $700 Billion "wall street" bailout relatively tiny.