A Ham Sandwich and Air Conditioning For Two Hostages

The negotiations between the USA and Iran have taken on the attributes of a hostage negotiation. The Iranian leaders are trapped inside a large bank but they have numerous assets and they hold hostages. The USA is gradually starving them out. Some of the recent negotiate trades have been the equivalent of a ham sandwich and turning on the air conditioning in a "show of good faith" in exchange for two hostages. Of course, one of the prime reasons to acquire the release of hostages is to gain additional information or just to keep a conversation going. In a hostage crisis, it is not unusual to go from talks over ham sandwiches to more important topics.

An Israel site, DEBKAfile, reports that in a recent round, the USA and Iran each agreed not to "play games" that would temporarily force oil prices above $150 per barrel. It is known that the number of VLCC tanker ships holding millions of barrels of oil off the nose of Iran, has been reduced from 13 to 11. The amount of oil in tanker storage has fallen from the 30 million barrel range to the 22 million barrel range. It appears that two shiploads of oil were part of a recent exchange. The deal to cap oil at $150 and the release of two shiploads of oil, which was probably a favor granted to Iran, may seem weird but not much different than a ham sandwich or two for a couple of hungry bank robbers.


Too prove that the bank robbers are still alive, awake and well, they just shot off their most powerful gun. The Iranians just test fired a missile capable of carrying a 1 ton nuclear bomb all the way to Israel. The missile actually has a 2,000 kilometer range. Over the protest of Russia, Czechoslovakia and Poland just signed onto an Eastern European Missile defense shield being promoted by the USA. The USA has told Russia repeatedly that the defense system is not an aggressive move against Russia but a defensive move against Iran. Russia is simply not the same power as was the Soviet Union. Ironically, this new age, in which rich Russians vacation on Mediterranean coasts, will lead Russia back to being a great power. Russia is going to make money by selling oil, nuclear power and farm goods, not by dominating poor neighbors.

OIL DOWN ON THE FARM

How much "extra" diesel fuel is stored "down on the farm"?

Every farmer worth his salt has protected himself against the possibility of a shut off of fuel. Millions of farmers and millions of other businesses have topped off their storage tanks to hedge soaring prices and in order to be prepared for the worst. A few days ago, I mentioned that China has topped off a new Strategic Petroleum Reserve, nothing like the 706 million barrels held in the US SPR but another chunk of emergency oil. A company in Amsterdam just won a contract to build yet another storage facility in China. At what point are emergency reserves more than enough? When does the cost of storage begin to bite? The answer is when the price to buy new oil is cheaper than the price of the oil in storage. If there are ample supplies of oil, then paying to store oil is nothing but extra cost.

The leak of stored oil into oil supplies is likely to start soon. As major users begin to realize that a power crunch is not in the near future, some will stop paying so much to store oil. The meeting of the G-8 has let the world know that leaders are no longer pushing for rapid reductions in CO2. Each country has been given the freedom to come up with its own plans for reducing CO2 by 50% by 2050. It is quickly becoming clear that new nuclear power will start coming on line just after new oil production comes on line from Iraq, Saudi, Brazil, Kuwait, etc. If countries must temporarily use more coal, so be it. The final deal with Iran will allow millions of additional barrels per day to be developed.

PROMPT RESPONSE?

Yesterday, Shell Oil (Royal Dutch Petroleum) announced that a 27 billion dollar refinery only recently planned for Canada has been scrubbed. One does not build a 27 Billion Dollar refinery unless one is very confident that it will be able to run at 85+ percent of capacity. Many a refinery in the world today is running at less than 85%. The world wide economic slow down is already causing major capital expenditures to be postponed or canceled. The plan to produce abundant nuclear power is also having an effect.

Since the democrats took control of congress 18 months ago, the price of gasoline at the pump has gone straight up. The response has been talk of wind fall taxes on the oil companies, investigations of traders, the threat of law suits against OPEC, derision of McCain's summer time rebate of gasoline taxes and forcing republicans to vote on an energy bill that would have tightened trading rules. Since the July 4th break, the democrats have refused to bring this energy bill back to the floor because the republicans are prepared to offer an alternative drill, drill, drill bill. Pelosi has sent the energy bill off to three committees in order to have maximum media coverage in regard to hearings and to control the timing of its return. She has also called on Bush to release oil from the SPR; Bush once again said no. Some want to make us believe that war with Iran is imminent and others want us to use up the reserves that were set aside just in case there is a war with Iran. Bush has built the reserve for its purpose and he has refused to use the reserve for short term political gain. The flip flopping from the other side is being led by Obama.

Now that Obama is running in the general election, he has been trying to move to the political middle before the conventions and debates begin. He has suddenly come out in support of faith based charities and FISA while making great strides toward the McCain positions on Iraq. Obama is starting to anger his leftist supporters but a politician has to do what a politician must do. The left sees FISA as illegally breaking the 4th amendment to the constitution. The congress just voted to give Bush all he wanted and more in a 6 year extension of this law. Obama voted for a "compromise"! Did he read the bill at all or is he trusting the liberal media to support him by not blasting him for calling capitulation compromise? Obama 's only solution to the energy crisis is the failed technologies that have been subsidized to the tune of billions of dollars in recent years. After spending billions on solar research, less than one half of one percent of our energy is produced by this shamefully expensive technique.

Obama is now talking the Bush play book in regard to Iran, he is simply calling the plays that are in progress while making them sound like they are his ideas. This morning, in response the the 2,000 KM, 1 ton payload missile test fire by Iran, Obama called on the US to tighten sanctions and to open additional channels of communication. Only yesterday, the USA added a number of important Iranian businesses and businessmen to the sanction list. Any assets these companies and owners have in the USA are now subject to seizure. The Israel site says that the recent "ad hoc deal" with Iran was made by direct negotiations between US and Iranian diplomats. Obama understands that there is a good shot at a deal with Iran, he also understands that the great majority of the American people have no idea about the extensive negotiations that have taken place. By talking the Bush play book in advance of the deal, Obama is setting himself up to take at least partial credit for the deal.

Have you seen this movie before?

In movies and in real life, bystanders stand ready to criticize the unsuccessful hostage negotiation team but ready to welcome the survivors home if there is success. In Iraq, the war is going "almost too good". In a political show worthy of a US Senator, Iraqi government officials are bravely suggesting that Iraq will not need US military support much longer. The reality is that the war has been going very well but not so great that US support is no longer needed. Both Sunnis and Shiites in Iraq support the deployment of US troops. Good news is flooding forth from all corners (even the Taliban in Pakistan have turned against one another) but the absence of US air power, in particular, could embolden the opposition. The key point is that while a lot of US troops will come home, others will stay but in a capacity similar to the troops that are stationed in Germany and South Korea. Had US troops not been stationed in Germany after WWII, the people of Berlin would have lost their freedom and the close ties between the US and Germany would never have developed.

The success of the USA in Iraq and the republican support for lower gasoline prices could turn the 4 point lead of Obama into a McCain lead. Can democrats afford to leave Washington around August 8 without having voted on an energy bill? "Blue Dog Democrats" are anxious for the opportunity to vote for drill, drill, drill. For two years, I have maintained that energy prices will fall before the election. I still expect to be correct on this point while having to admit that I did not expect the fall to be from such lofty levels.

Crazy things happen during hostage negotiations. In a successful negotiation, the opposing parties often become friends. In the old days, when a young lady had no choice but to marry the selection made by her parents, the marriages often got off to rocky starts. After a lot of hours together, a lot of marriages have gone from bad to worse to great; sometimes one has to live through worse to get to great. In a hostage crisis, those who have the power to grant ham sandwiches and air conditioning can use this power to make friends. It appears that the USA is a long way from being friends with Iran but a whole lot of talking is going on. With stored oil starting to leak back into the supply chain, any hint of an end to the Iranian crisis will result in a drop in oil prices. The test firing and the additional sanctions are a couple of steps backward but a lot of progress has been made. I reiterate that the recent addition of India to the GNEP (Global Nuclear Energy Partnership) was a major triumph for the "good guys". More than 72 nations have joined the underfunded GNEP. Once again, the democratic congress has not fully supported Bush initiatives. Iran really needs to join the world in the peaceful use of low cost, low emission, nuclear power. With Iran on board, the US Congress will be forced to proudly claim success.

New refinement facilities are being built in North Carolina and in West Virginia. Under terms of the US-Russia agreement, the US will supply nuclear materials for new "fast burn" reactors. These reactors being built in Russia will consume more fuel while reduciong waste. It is going to be interesting to see how the congress handles the upcoming adjournment. In recent times, the congress has kept congress in session for a few seconds each day during "vacations". The congress has held up hundreds of appointments and prevented recess appointments by keeping the congress in session. The 90 day clock for the 123 Agreement with Russia started on May 13. Each day that congress is in session counts. The pressure on congress and on Iran is growing by the day. How about two ham sandwiches and air conditioning in exchange for a deal?

T Boone Pickens Wind Plan

A regular reader wrote:

I recommend reading T. Boone Pickens's energy plan. We all know this guy has made alot of money with oil in the last 50 years and he openly admits he plans on making money in the wind farm business. He is putting some serious cash in this program at least from what I can tell.

I do not recall the numbers but T. Boone has won massive subsidies. Of course, if you can win enough subsidies, about any old energy system will do. T. Boone believes that he can replace 22% of US power production with wind power within 10 years. In the next 12 years, China plans to build about 130 nuclear power plants. The most recent announcement was for 100 Westinghouse Plants. By the year 2025, China will be producing much more than double the amount of nuclear power that is being produced in the USA today. This is more than double the amount of power to be produced by Pickens. It is anticipated that the construction time on the Westinghouse Plants will be reduced to 2 years each. One big difference is that the wind blows strong in the early morning but dies down during the heat of the day, when power needs are the greatest. Wind, like nuclear, is capital intensive. Add in the cost of massive storage batteries and the cost goes haywire. If one is going to spend that kind of money, one should at least get consistent results. Take away the subsidies and nuclear easily beats the price of wind. Furthermore, recent advances in nuclear have reduced the costs even more. Over the past 30 years, nuclear has gone from 1% efficiency to 4% efficiency, recent discoveries are expected to take us to 6%. It is easy to see this efficiency increase in the numbers. During a time when no new power plants have been built in the USA, the amount of nuclear power produced has steadily increased.

With financial stocks down for the "third dip", I think it would be a bad move to chase any high energy plays right now. At the least, there should be a correction as the rotation works its way through. Banks are holding mortgage backed notes that are trading for pennies on the dollar while the congress continues to work on a bail out plan. I do not support a bail out plan but I expect one to pass. Such a plan will give the banks a nice bump and there will be follow through. It will be interesting if there is some sort of grand compromise passed in congress, one in which drilling is permitted and banks are rescued. Such are the dreams of a congress that polls at 9% approval. Such are the kind of deals that can get passed just a few months before an election.

The World Has Changed -- G-8 Emissions Lower in 2050

A Regular Reader Wrote The Following:

People are slowly and surely being laid off. Many more are taking deep pay cuts. People are spending more on just the necessities. It seems even your vacation rental business is off. (Care to fill us in on how much)? Many are selling shares, mut funds, cashing in 401k's, and money put away for retirement.

All of this does not leave many left to push stock prices higher.

Due to recent earnings, or lack of them, and a serious downgrade of future outlook, and after buying at much higher prices, a major newsletter writer who specializes in value stocks, one with a very envious long term record, has just cut GM to a sell.

Caution is the word, when cash is scarce.

The reader who wrote this is an astute observer but he has fallen victim to the sirens of doom. It is a common disease. The AAII bull-bear index shows that this reader is not alone. This index is fully in the BUY, BUY, BUY zone with a majority of these "public" investors running scared. The first paragraph above is a description of what typically happens at the end of a bear market. Unemployment is the lagging indicator that typically jumps 1.2% just before the turn of a bear market to boom. Paycuts are part and parcel to the same thing. Spending more on necessities is the same as saying that core inflation has risen; again, just what happens at the end of a bear market. I retired from the vacation rental business two years ago but there is no doubt that people are cutting back on vacations, just as they did in 1981-1982, 1990-91 and 2001-2002, just before big market moves. The public has a 100% incorrect record in regard to their timing for mut funds, shares and 401k's. As far as money being available to drive stocks higher, there has never been so much money on the sidelines. US citizens hold more than 6 trillion dollars in liquid assets. As far as the track record of analysts who put sells on GM, that pitiful record has been well documented.

Today, the G-8 showed just how much the attitude of the world has changed. Had this meeting taken place two years ago, the call would have been to dramatically reduce carbon emissions in large steps, starting almost immediately. The price of fuel has changed attitudes to economy first, lower carbon emissions later.

The debate with and within Germany is telling. The previous German administration passed legislation to dismantle Germany's 17 nuclear power plants. The current administration is committed to going through with the dismantling. The plan in Germany has been to lead the world in wind, solar and other renewables. Part of the idea has been to develop new technology and to reap rewards from patent royalties. Germany operates the largest wind farm in the world. The sad thing for them is that the construction cost, including the vast transmission network turned out to be a lot more than projected. Nuclear and wind power are similar in that they are each capital intensive; the difference is that nuclear produces consistent power and wind produces sporadic power. At the G-8 meeting, Germany made the argument that nuclear should not be viewed as the only answer. This is correct but the most of the rest of the world has come down on the side of nuclear as the largest piece of the answer.

OIL FALLING

The price of oil has fallen sharply as the nuclear debate within Iran has picked up. The attitude of the world has changed. If nuclear energy is going to be a huge part of the new solution and if a consortium is going to be able to supply nuclear fuel for a very low price, then even oil rich nations had better get on board. Countries such as Saudi Arabia will no longer waste trillions of cubic feet of natural gas to produce electricity when they have nuclear power available. New pipelines will make these trillions of cubic feet of natural gas available for more valuable purposes. Iranian leaders are debating one another and rethinking their position; the price of oil has fallen more than $8 in two days.

You and I do not know all that the leaders know but we can learn from their responses. Some years ago, Italy closed down all of its nuclear plants. In recent times, the economy in Italy has been one of the weakest in Europe. A few weeks ago, Italian leaders came out in full support for the new nuclear "plan". A year ago, who would have predicted that Italy would be prepared to "go nuclear" or that the G-8 program for carbon emissions would have a 2050 goal. Of course, the fact that the scientific support for global warming is much weaker than is constantly reported or implied may have made some difference. Perhaps there are others in the world who realize that increased CO2 is like fertilizer to our food production.

Just a month or two ago, I wrote about China's plans to build 30 nuclear power plants; yesterday, I wrote about China's plans to build 100 Westinghouse plants by 2020. The speed of the move to nuclear is accelerating. A few months ago, most observers would have said it would be impossible to build 100 plants in China in only 12 years. The Westinghouse plant is basically a single design that will come in sizes ranging from 1000 to 1,700. It is believed that construction time will be cut to 2 years per plant! Steel companies that make the nuclear steel collars are expanding in at least 6 countries. The move to nuclear power is already being met with responses from power users. Renault has announced full production of a battery powered car; Sam Sung and others are building new battery plants, GM is rushing to produce an all electric, etc. How will your life change as the relative cost of electricity falls?

Do you see the paradigm shift? A few months ago, the world was quickly running out of energy; peak oil now and economic depression ahead. Today, the world is awakening to the fact that 10,000 years worth of nuclear fuel is available. Two months ago, Obama was proposing outlandish proposals to court MoveOn.org and today he is moving to the political center. Three weeks ago, McCain was talking about Cap and Trade Taxes on Energy and yesterday his 17 page economic platform included nuclear power and drilling but did not include a mention of Cap and Trade. A few months ago, major areas of Iraq were under the gun of Shiite Militias, today these areas are under control of the Iraqi government. The question today is how many of our troops will be coming home?

After agreements are signed by Lebanon and Syria, Israel will be surrounded by states that have signed peace agreements. Gaza and the west bank will both be surrounded by countries at peace with one another. Once Iran signs on, the remaining militants will be rag tag rebels in the mountains of Pakistan and Afghanistan. Now that US air power is being shifted from Iraq to Afghanistan, these rebels must go underground or die.

We have seen today's market action before but conditions are ripe for follow though. The third trip down, making a triple V bottom in financials, appears to be the last plunge. Assets that have been written down to cents on the dollar will prove to be worth many cents on the dollar.

THE AMAZING ECB ACTION

In the face of a crashing European economy, the ECB just raised interest rates to fight inflation! How silly! This action will be reversed soon. Either the economic crunch or the fall in oil prices will show the ECB that inflation is indeed a late cycle phenomenon. High oil prices and high interest rates have worked in harmony to slow the economy; ironically, the ECB's action is so late that the decline in oil prices will be accompanied by a decline in interest rates. Theoretically, the ECB should lean against the wind but in this instance the ECB is riding the curve instead of shaping the curve.

Keep in mind, the 123 Agreement with Russia was submitted to congress on May 13. The congress has 90 days to reject by majority vote. The world has changed; the clock is ticking. If the congress wants to take credit for lowering oil prices, it needs to vote to drill, drill, drill, soon, soon, soon!

No Way Out -- Doors Are Opening Wide

I'm at Myrtle Beach and the parking lot is less than half full. The energy crunch has reached a clearing price. People are staying home, rather than paying $4 for gasoline.

A lot of people can see no way out of the current energy crunch. The contrary evidence is everywhere but mostly under reported and ignored. The battering ram that is breaking down the door is the flood of announcements in regard to nuclear power.


A lot of fingers, trying to find an easy scapegoat for our energy crisis, point toward China. The pundits talk about the increase in demand coming from China without talking about the increase in supply in China. China plans to add 100 Westinghouse Nuclear plants by 2020! These are the new style plants that can be built quickly. If 100 by 2020 is not a big enough number for you, by 2025 China expects to produce more than double the amount of nuclear power currently produced by the USA!

It is well known that France produces 80% of its electricity with nuclear power but it is less well known that the USA produces more nuclear power than any other country. We currently have 104 nuclear plants. Applications are in progress for 31 more. The McCain Presidential Campaign is morphing into a referendum of producing more energy supply. For the first time in many years, the majority of the American people put new energy supply as a higher priority than the environment. Even democrats are moving toward favor for more supply.

Readers wonder why I have focused on long term solutions. Seeing that long term solutions are in progress helps us from the point of view of sentiment. A major part of the current oil price is based on the fear that the world is running out. In the same way, a major part of a stock price is its PE ratio. It cost a lot of money to store oil but there are currently more than 4 billion barrels held in national storage facilities and all sorts of businesses are "insuring" their business by storing even more. Oil will come out of storage driving prices lower and stock PE ratios will expand as the future brightens. In the short run, abundant new supplies of oil are coming on line just as a world wide economic slow down is causing demand to crash. The see -- saw of commodities and stocks is ready to tilt.

India is all set to join the new "nuclear power system". The preparation to make this move has increased the pressure on Iran to join the new system. Today, the oil market tumbled more than $5 per barrel when an Iranian spokesman said just a few moderate words. The markets are ready to go haywire as soon as it is more clear that Iran is ready to negotiate in good faith. It has been demonstrated to Iran that the world can embargo all of Iran's oil if necessary. More oil is currently stored in reserves than ever before, just as new fields are coming on. Iran needs to make its best deal while it can maintain the appearance that the country is not being forced to its knees.

The leaders of Iran have repeatedly offered counter proposals with indications that they are offering the biggest of break troughs. It is clear that the leaders want the people to know that they are working hard tooward settlement. Iran must move soon or be eclipsed by the wealth and power of Iraq. Iraq is going to see a doubling of its oil revenues in less than 5 years. Iraq will soon be behind only the Saudis in Middle Eastern production. The wealth and prosperity in Iraq is a potential great embarrassment to Iran. Time is short. The deal with India must go through several hoops. It requires votes by the IAEA, the NGS, and 90 days for review by the US Congress. With progress being made toward a deal with North Korea and Syria, Iran is at risk of being left out in the cold. A lot of doors are opening. 100 new Westinghouse Nuclear Reactors in China in 12 years!

Maximize Your Optimizim -- Wear the Shoes of John Adams

By 1754, 19 year old John Adams believed in America. He held the remarkable belief that 13 weak and defenseless British Colonies would become the greatest of empires. Twenty years later, he seconded the resolution of Richard Henry Lee to prepare for independence. He and 5 others served on the committee to write the Declaration of Independence. Thomas Jefferson, who would later deny Adams a second term as President, wrote most of the declaration but it was Adams who lead the debate. Adams was never a part of the appease England crowd, from early on he was prepared to risk life, limb and fortune in exchange for freedom. In 1775, Adams nominated George Washington to be the Commander and Chief of a new nation. A new nation that barely survived the winter of 1777.

Adams believed in government by the people and thus pushed the founders to adopt a system of separation of powers, of checks and balances. As the first Vice President and President of the Senate, he cast a record 29 tie breaking votes. As the second President, he appointed John Marshall to the Supreme Court. Marshall brought the judicial branch of government to an equal footing with the executive branch and the legislative branch. Our nation has survived 232 years because of the optimism worn by John Adams.


Warren Buffet and a number of other great investors have suggested that the time to be optimistic is when others are pessimistic. Now is that time! The children's riddle, How far can a bear go into the woods? (Half way because after he goes half way, he is on his way out.), should be restated today as, How far can a bear market go into the woods? The analogy seems to break down because the market continues to be slammed by an oil price that continues to bubble, however, there is no question that a clearing price has been reached.

At current fuel prices, truck drivers in India, Spain and the UK are parking their trucks in the middle of the roads. In American, the land of passenger trucks are parked in driveways, in garages and on new and used car lots. When oil traded at $25 per barrel, it made no sense to build coal to liquid plants that produced $45 diesel fuel. With oil at $140 per barrel, South Africa is building CTL plants as fast as they can. China has committed to spend $25 billion so that it can use some of its abundant coal resources as transportation fuel. It is no real surprise that China is willing to turn to coal but, did you know that GE just won a contract to build the first clean coal plant in Europe! GE has invented a new more efficient laser method for enriching uranium and the competition is on. Camco, the large Canadian uranium miner, just purchased a 24% stake in Global Laser Enrichment. Power companies are making substantial investments to secure the rights to uranium ore. The classic spider web supply and demand mismatch in commodities is partially due to US power companies deferring construction of coal plants while waiting for approval to build zero carbon emission nuclear plants.

The heavy investments being made now ($210 billion of OPEC projects over the next 5 years, $125 billion of Exxon projects and Shell Oil projects of more than $125 Billion and many billions more) will not contribute to the clearing of markets this year. However, investments made 3 to 7 years ago are coming on line now. Furthermore, the parking of trucks has an almost immediate effect.

The process and progress are not isolated. For example, South Koreans have cut back on miles driven more sharply than have Americans. South Korea has prepared for tighter sanctions on Iran by storing over 76 million barrels of oil as a strategic reserve. In addition, new production from Iraq is being shipped directly to storage tanks in South Korea for the benefit of other nations. With more than 4 billion barrels in strategic reserves, it has become an easy decision for nations to support the UN efforts to isolate Iran.

The threat of Iran to cut off supplies has also encouraged alternative investments. For example, the Joint Genome Institute plans to tackle 44 sequencing projects in 2009. The Lob Lolly Pine is proving to be an excellent biomass feedstock. It should be relatively easy to increase the yields just the way corn yields have been increased by more than 100 fold.

Your optimism should flow from the supply side, the demand side and from initiative after initiative. Joe Biden, a Senate Democrat Committee Chair, has already committed to pushing the US-India 123 Agreement through. Next week, the Prime Minister of India will travel to the G-8 meeting to meet with Bush. India already has over 100 billion dollars of commercial deals ready to move as soon as this deal is approved. It is my guess that the deal will be signed next week.

US manufacturers are contributing to lower energy consumption by dramatically lowering the power consumed by computers. Pat Gelsinger of Intel sees 10 nanometer chips by 2012. Last year, Intel began to mass produce 45 nanometer chips and next year Intel will begin mass production of 32 nanometer chips. Just another year later, Intel plans to mass produce 14 nanometer chips. These chips too small to use much electricity. These chips will allow many enhancements to cell/computer phones while providing extended battery life.

Deals, Deals, Deals

There have been several compromises in regard to the deal to permit US troops to stay in Iraq. This deal is getting close.

Negotiations between Syria and Israel have continued. The leaders will meet in France in 10 days.

Negotiations between Iran and the 5+1 have moved another few inches forward. It is amazing that the negotiations are down to the level of cultural exchange. The US is about to go from the perceived brink of war to having career diplomats stationed in country.

Colombian officials are calling for the release of all prisoners held by FARC. Extremist around the world are discovering their secrets have been compromised. The UK and the US are close to a new plan that will allow intelligence agencies more access while protecting the privacy of non-terrorist. Even Obama now supports US intelligence efforts.

The Senate has actually made a few compromises too. Our Senate rules need to be overhauled so that spending can be reigned in and gerrymandering needs to be reduced or eliminated so that partisanship is reduced but our constitution is strong and the checks and balances pushed by Adams are still a blessing.

Walt Williams Versus the Doomers

Walt Williams, a George Mason University Economist, just wrote a piece to debunk the Malthusian hype promoted by the extreme environmentalist crowd. It has become common for extremist to blame population density for poverty. Walt points out that the population of Hong Kong is 300 times as dense as the population of Zimbabwe. Where had you rather live? Walt says that if we were to put all of the worlds people in America that America would be much less densely populated than is Hong Kong and that he is confident that America would find the way to feed all of these people. Using my example and Walt's logic brings us to the question of where was the laser uranium refinement invention hidden? It is only by achieving weath that we can afford to employ people to bring the best to all of us.

It is perhaps Machiavellian to suggest that the world needed an energy crisis in the 70's to get nuclear energy established and in the 2000's to get nuclear energy re-established. The fact is that most people are now willing to go along with the development of nuclear power. Citizens of the world who did not study economics in school have gotten a few first hand lessons by witnessing the waste of ethanol, wind and solar subsidies. Now there are several clear paths to low cost energy. Some in congress will moan and groan about India gaining nuclear fuel and technology while they maintain their stock of nuclear bombs and some will moan and groan about trading nuclear technology with Russia, but, at the end of the day, these deals will pass.

Technology Does Not Go Backwards

The price of oil will ultimately go back to the marginal cost of production of the last barrel. Given time, $140 oil will be forced down to match $60 coal liquids and 4 cent kilowatts. However, the electricity used to cool computers certain computers will never be needed again. The knowledge gained by sequencing a Lob Loly pine tree will not be lost. Now that we know how to build a laser, we will not forget.

The great pessimism that covers the world like a thick fog is about to be vanquished. Please make sure you are fully invested when the market "space rocket" is launched.

Almost There: Dominoes to Fall

Russia has been on the edge of most favored trade status since 1995. Russia very much wants to be a member of the WTO. Europe will support its inclusion later this month. The US Congress has to get over the hump of a 1974 amendment that prohibited Russian inclusion until after it allowed the emmigration of Jews. Russia has allowed immigration since 1995 but, of course, some in congress want to change to new rules.

Russia also wants to go forward with a new nuclear power framework, as agreed by Putin and Bush, which would result in the mass production of low cost nuclear power plants. These plants use a form of nuclear fuel that is not easily converted into nuclear bombs and the plan calls for low cost fuel to be available from UN supervised facilities. China currently has a plant design that it believes is can build in 2 years. It is naive to think that no one will ever make a nuclear bomb again but why not give countries access to very low cost nuclear power without forcing them to learn how to refine nuclear fuel? Why not set up a system that will result in the conversion of 58,000 tons of nuclear waste into fuel and why not convert some of the 19,000 nuclear war heads, owned by the US and Russia, into electricity?


The economics of nuclear are compelling and the use of nuclear power dramatically reduces the geo-political risks!

Yesterday, I wrote that the world map has been relatively stable in recent years. Russians would strongly disagree. The Berlin Wall fell in 1989. The old Soviet Union collapsed. Dozens of states became independent countries. In recent times, several of these states have become more aligned with the "West" and a number of them have joined NATO. The most important fact about the map changes after the fall of the Soviet Union is that they generally occured without any military conflict.

During the past 20 and 30 years, Russia and China have each evolved into "western style economies" even while remaining under command and control political structures. Trade and international investing is flourishing. The large Russian oil company is now operating in dozens of countries and is even considering drilling in the Gulf of Mexico.

In a world economy where Russia does not need to own the Gulf of Mexico but can instead enter into lease agreements there, the risks of war are reduced. As always, opening up markets helps both the buyers and the sellers. In this case, the US taxpayer will benefited from higher lease rates produced by the competition between Russian, Brazilian, Spanish and American drilling companies. American consumers will benefit from the lower oil prices produced as a result of this competition. China is one of at least a dozen nations which are bidding on Cuban leases. The Cuban leases will also result in more oil production in the Gulf. It is important for the US to allow offshore drilling because Cuba is ready to play "the long straw drinks the milk shake game".

Iraqi officials are about to open bidding to develop 6 major oil fields. No less than 35 oil companies have signed up to bid. Production in Iraq is expected to increase 60% within 5 years. Total, Shell and others are eager to follow through on commitments to help Iran develop its fields, as soon as sanctions are lifted.

Iranian Foreign Minister, Mottaki, says that Iran is ready to negotiate. Once again, he has failed to agree to suspend nuclear fuel production but he did not rule it out this time. The latest 5+1 offer is said to offer preliminary negotiations while enrichment is maintained at current levels. I think it was an a Marty Feldstein article that said oil future prices will fall as soon as negotiations begin. After all, futures prices are a projection of the future and once Iran makes its move a lot of other dominoes will fall.

Cisco just made a deal to sell equipment to Russia. Increasingly wealthy Russians are going on holiday to resorts on Turkey's Mediterranean Coast. Here again, the rational to fight a war to win territory is diminished once people learn they can purchase a nice resort condo and visit as often as they like. The concept of renting a fellow Russians resort condo for a week first required the right to own real estate. Real estate markets in Russia and China have boomed as these states have sold more properties into public hands.

This October, Iraqi citizens will once again exercise their right to vote. It is anticipated that hundreds of thousands of Sunnis who have abstained in the past will vote this time around. The smallest taste of freedom is addicting. Human capital constantly moves to nations where the people are free. Americans should be thankful that people from around the globe would move here in a minute if they could. One way to lower the level of illegal immigration is to help other nations become better places to live. It is inconsistent to be against NAFTA and against immigration at the same time. The correct policy for America is to support free trade, including trade with Russia, and to practice selective immigration. Citizenship in America, just like any good, should be available at the market price. A company that wants to support a PhD's immigration cost should have to out bid the man who came here without his wife.

Yesterday, the EIA gave a more pessimistic view of oil supply and demand in 5 years. Among OPEC countries, it only sees significant supplies coming from Angola. It is hard for anyone to be optimistic about production from Iran but I am. I am also very optimistic about oil from Brazil. I do not believe oil companies would be making such massive investments there if the prospects were not at the high end of estimates. I even believe the US Congress will support the will of the people and allow drilling in ANWR.

Last Wednesday, the 10:30 oil report was bearish. Even so, prices held up due to threats and counter threats in regard to Iran. Today's report should be bearish again. The world wide economic slow down is bearing down hard. Even though the USA is already bouncing back from its GDP bottom, the rest of the world is showing signs of weakness. Iran's power is all about it's strangle hold on oil, but that strangle hold has been weakened considerably. Iran is under extreme pressure to make a deal. Which domino will start the run? Falling oil prices or a deal with Iran? Hank Paulson is pressuring Russia to do more to help sway Iran. Russia wants to join the WTO and it wants the 123 Agreement to go through. It is in the best interest of Iran, Russia and the USA for these deals to go forward and the clock is ticking. The Russian 123 Agreement was presented to congress on May 13. The congress has 90 days.

Talk or Progress? History in the Making!

There have been scores of headlines suggesting that it is time to talk to Iran. How uninformed and naive can these "journalist" be? Negotiators have been talking to Iran for 30 years and, besides, if you want to make a deal, you have to offer a price; if you want to buy a car, you do not need to spend a lot of time talking to the dealer about the weather. The size of the deal is not the key. Negotiating a multi-trillion dollar civil and military deal is perhaps more like negotiating a deal between the UAW and GM than to buying a car but in all three cases, talk is cheap. GM and the UAW must each be willing to close up the plants or the one that is not is going to win big. If a car buyer is not willing to buy a different brand or if a union is not willing to strike or if a country is not willing to back up its talk with action, then talk is worthless. If a car buyer comes close but fails to buy, if there is a strike or shut out, if a deal with Iran does not get done, all the parties have lost. The reason to make a deal is because a deal is a win-win for all parties.

For many months, UN negotiators have been "close" to a deal with Iran. We have offered a price, Iran has counter offered, we have counter offered and so on. Progress has been made while trillions of dollars of commerce has been put on hold, pending resolution of the "master agreement". Iran is currently "giving careful consideration" to the latest UN offer. Lives and treasure are being sacrificed by both sides and it is in the best interest of both sides to "make a deal" soon.


In recent weeks, certain Iranian groups, which had been on US and European lists of sanctioned terrorists, have been removed from these lists and frozen assets have been made available to them. These groups desire to overthrow the government of Iran. In recent days, a 2007, $400 million appropriation by the US congress, for US covert operations in Iran has been made public. I am reminded of Charlie Wilson's war, in which an initial small appropriation grew into appropriation of 100's of billions of dollars and the defeat of Russia in Afghanistan. Suddenly, there are reports coming out of Iran in regard to strange explosions. In one instance Iran reported that a gas cylinder facility had exploded but outsiders reported a military installation was bombed. Four hundred million is a small appropriation but perhaps just enough to show Iran that the terrorist tables can be turned. The evidence suggest that the UN negotiators still prefer a deal to regime change. For now, the threat of regime change is just another move to put pressure on Amadinejhad.

Talleyrand, perhaps the greatest diplomat of all time, enjoyed words, women, wine and song. Still, the key to his success was in understanding how to help both sides win. He was famous for making deals so good that all three sides won! The third side being a country estate for himself.

India: With Pakistan and Iran or With the USA, Russia and Europe?

Reports say that India is making final preparations to sign a civilian nuclear power agreement. This agreement will allow India to purchase nuclear fuel and technology from 71 nations but it will require India to allow UN-IAEA inspectors routine access to its peaceful nuclear power facilities. The decision to make this deal has been gut wrenching for the Prime Minister of India because he will possibly face elections as a result.

India is the worlds largest democracy; it maintains the third largest military force and it exerts a powerful influence on its region of the world. When India was granted independence from the British Empire, Pakistan was made a separate country and the two countries have since waged an almost constant battle over disputed territories. Pakistan is predominately Muslim and India is a mixture of Eastern Religions. There is no love lost between the countries and Pakistan is both a US ally against Iran and a sponsor of terror. If you have played the board game Diplomacy, you have gained insight into how many cross currents develop during international negotiations. A tricky business indeed. Americans remember 2001 as the year of attack on the US World Trade Center but Indian's remember 2001 as the year that Pakistani sponsored terrorists bombed Parliament. The USA is in what is called a "star position". We must be friends with Syria, Israel, Pakistan, India, Russia, France and China all at the same time. We must even demonstrate to Iran that we are willing to be their friend as will.

People have lived along the Indu river for over 9,000 years but have enjoyed democracy for only 60 years. One big change for India and the rest of the world is that borders have suddenly become relatively constant. India is a charter member of the UN. When given the choice of going for a lucrative gas pipeline with Iran and Pakistan or joining the USA, Russia, Europe et. al. in trying to make terrorism a thing of the past, the people chose wisely. Despite the frequent headlines that say America is despised by the rest of the world, the facts are that Indians and most other people hold American in high regard.

THE PHILLIPS CURVE, MAKING HISTORY AND MAKING PROFITS

"Supply Siders" often enjoy attacking Keynesian Economic thought by attacking the Phillips Curve. The Phillips Curve simply says that there is an inverse relationship between employment and inflation. The reason the concept is easily attacked is because an economic contraction often results in a time both high inflation and high unemployment. This totally logical occurrence does not in and of itself refute the Phillips Curve. When a business cuts pack production, it is likely to lay off workers on its most marginal lines of business. The remaining lines are the ones for which the company enjoys pricing power. The way to keep profits as high as possible when volume is declining is to raise prices on goods sold. As Louis Gave points out, the irony is that profits are hard to come by when every business has pricing power. The auto companies currently enjoy great margins on their economy car lines. The price of a small car has gone up dramatically relative to the price of a large truck, but auto company revenues and profits are down. There is deflation in truck prices except for the fact that few are being purchased.

Inflation has always been a problem for the stock market; the cure for inflation is often, in the short run, worst than the disease. Since last summer, the world has been drinking medicine. The FOMC had started the cure in the prior 19 months by holding short rates above long rates. By last summer, the excessive money was not withdrawn by the central bank but by the commercial banks. Banks went from lending 80% of the inflated value of a house with no income verification or 120% of the inflated value to a good credit to not wanting to make mortgage loans to anyone. Once this trend was underway, the FOMC was forced to counter balance with easier money. The net result has been a larger contraction by the banks than the stimulus by the central bank and a spike in the price of oil (and other commodities). To a large extent, the inflation in commodities was offset by deflation in home prices but eventually it was commodities that won the day. Home prices have not fallen as much as perceived and the decline is over in more than half of the markets. The huge declines happened only in the "hottest of markets" but these big declines have gotten most of the press coverage.

Today, while inflation as measured by the PCE is quite modest, those who spend a large percentage of their income on food and energy (commodities) are feeling great pain. This pain can be described as "Jacques Rueff pain". Jacques Rueff was a Keynesian who despised wasteful government spending! It seems that Supply Siders and Keynesian's agree in more ways than they care to admit. Jacques definition of inflation: a policy which substitutes expenditures that give no returns with money that does not exist. As you might guess, my favorite example of this is our governments willingness to print money for the purpose of subsidizing ethanol. The left perceives the war in Iraq as the biggest government boondoggle of all time. The massive expenditures for this war will wind down substantially and quickly upon our success.

Louis Gave is correct to note that in the past several years the world has learned to borrow money denominated in dollars in order to invest aggressively. Since the dollars keep falling in price, payback has been easy. The very process of borrowing to invest can create self fulfilling bubbles. The problem comes when the bubbles burst. The good news is that the next bubble to burst will be the commodities bubble, which will also mark the end of the inflation bubble. The see saw action will be inflation, commodities and interest rates down accompanied by stocks and real estate prices up.

Foreigners who have borrowed US dollars to invest elsewhere will suddenly find that their total interest rate to be extremely high. In addition to paying interest, they will have to pay a growing premium to pay the dollars back. As the dollar appreciates, the incentive to pay back dollar based loans will produce a positive feedback loop that will power the dollar and US stocks higher. A dollar worth of US profit will become a dollar plus appreciation for the foreign investor. In the past six months, the dollar has moved sideways in preparation for its big turn. The turn has taken longer than I thought but George Bush has been on a bigger "international elephant hunt" than I realized. George is inviting the rest of the world to join in promoting peace and the peaceful use of very low cost nuclear power.

DOCTOR GENERAL or GENERAL DOCTOR?

General David Petraeus wrote his doctoral thesis on Lessons Learned From Vietnam. It is a shame it could not have been Lessons Learned In Vietnam.

Timesonline.co.uk has posted an excellent article about Petraeus. The man has build an impressive resume. He has assembled a crew of PhD officers who understand how to win a complicated war. The key understanding they have is to use all available resources to kill the bad guys while turning on the lights for the good guys. If Iran cannot be turned, the fight in Iraq will be extended but a successful conclusion to the negotiations in Iran will mean that thousands of troops can come home. The bad guys in the mountains of Pakistan and Afghanistan and in a few other trouble spots will begin to wither on the vine once oil money support is eliminated.

4 BILLION BARRELS OF OIL IN STORAGE! THE OIL PE RATIO

Members of the IEA are required to maintain 90 days of total oil consumption in storage; a lot of oil as a 10% reduction in supply can be offset for 900 days. After hurricane Katrina, oil was released from storage in a number of countries to reduce the supply shock. Since those days in 2005, the amount of oil in storage has grown to no less than 4 billion barrels! While the US has all but capped off its SPR at 700,000 barrels, China was recently adding significant reserves to storage. Should an embargo of all oil from Iran occur, the world has more than 1,600 days of replacement capacity. The situation is a negotiation from strength. The big pressure was not applied to Iran until after the world was ready.

The fear of a closing off the Straight of Hormuz is over done. During the Iraq - Iran war of 1984 to 1987, both countries fired on ships in the channel. The flow of oil was never significantly reduced. This week the US 5th Fleet Commander said that the Straight will be kept open. Like Dennis Gartman, I say that the risk of war with Iran is over blown. Neither side has anything to gain from going to war. Even if it were true that Iran could stop the flow of oil from all the Middle Eastern Countries that use the Straight of Hormuz (and the Saudis operate a pipeline to the Red Sea), then the world still has 250 days of replacement supply!

The market has not yet made its "PE ratio adjustment". When the market is fearful, $1 worth of earnings in a growing company might sell for only $5. When the market is greedy, the same $1 of earnings might sell for $20. In comparative terms, a speculator might pay 4 times as much for a barrel of oil in the right market. When the market believes there is a chance of war, it is willing to pay a similar premium for hard assets such as gold and oil. Once it is clear that the supply is plentiful, the risk premium will go away. The price could easily fall below $70 per barrel.

It is natural for legislators, who are generally lawyers, to understand laws but not markets. The most recent democratic solutions to the energy crisis have been to sue OPEC and to jail speculators. OPEC is busy supplying the rest of the world with energy while investors continue to try to guess which investment will go up or down the most. What would a successful law suit against OPEC do for us? What would be the benefit of decreasing the liquidity of the markets?

SUMMARY

We are living during an exciting time; a time when much work is going into making major steps toward world peace; a time when innovation is dramatically reducing the labor required to produce abundance; a time of change, when the marginal cost of new fuel coming on line is dramatically lower than the average cost of fuel; a time when the marginal cost of new food coming on line is dramatically lower than the average cost of food. The results will be a decline in the rate of inflation which means an increase in the value of income from dividends, capital gains, rents and work. There is some risk that these values will be reduced by the imposition of new taxes but these risks are probably overstated. The rest of the word is reducing taxes. The rest of the world is discovering that freedom is of great value.


ADDENDUM

A drug company entrepreneur who is a regular reader note that the odds of success for the new GIFT treatment offered by WFU is only about 1 in 20. I am sure that he is on the money but I remain hopeful. Even if this method had only a 1% chance of a 100% success rate against cancer, it would be worth giving it a try.

The good life is spreading. One piece of evidence is the explosion of the music business in China. Rich people spend money on the beautiful things, every thing from clean air to ballet.