TURN! TURN! TURN!

Big turns are being made! Major, significant, long lasting turns!

All last year, I wrote about how a major decline in fuel and other commodity prices would feed the worlds economy. Despite solid economic arguments, very few people believed me and some almost attacked me for being so wrong. Now even after the "food" of declining prices is being delivered daily, few people believe that the "big turn is here". Some of my readers site the negative attitude of the people as the reason that the delivery of low, low prices will do no good. The delivery of low prices is already "feeding" the worlds economy and, now that the turn has been made, lower prices will be around for several years. People don't believe, because they do not want to believe. If they wanted to believe, they would open their eyes.

REZ is the symbol for a broad based housing real estate investment trust, it is up 58% in value in less than 2 months. Making an even more vicious turn is SRZ, Sunrise Nursing Homes, which is up 485% in a few weeks. The turn that is taking place in real estate, the biggest asset class is powerful and, yet, several of my readers have called the bottom, by selling out, or moving their accounts to a "safer situation".


Since the "turn in airlines", call it July 14, 2008, UAUA is up 233%, CAL is up 133% and AMR is up 113%, all while the S&P 500 is down 21%!

The "up sectors" have started to trump the down sectors. Since November 20, CAL is up 50%, AMR is up 48%, UAUA is up 41% and the S&P is up 13%.

MONEY MONEY MONEY

REAL MONEY is flowing into the hands of consumers like seldom if ever seen before. Sure, a lot of people have lost a job or have seen their work hours or pay cut. At the same time, the 93% of the labor force is working and, the great majority of the "other people", most of whom are receiving retirement checks, have seen a massive blood transfusion of REAL money. The fellow drawing social security got several "raises" recently. His cost of heating, gasoline and corn flakes all went down. His cost of living is going down. Yesterday, Intel announced a minor little break through that will reduce the cost of one "chip" by 95%. The average fellow will never knowingly buy one of these chips but as a result of this and other developments, the average fellow will be able to check the price of corn flakes at Lowes and Food Lion with his pocket computer.

GEORGE FREDERIC HANDEL

Handel was born to wealth. His father tried to force him to study law but, fortunately, his mother encouraged him to continue his musical pursuits. As a young man, he was well known enough to gain the patronage of Prince George, later to become King George of England. By 1737, at the age of 52, Handel had already lived the good life, just when disaster struck. He had a stroke, lost the use of his left arm and had recurring vision problems for the rest of his life. By 1740, a series of failed productions cost him his fortune. He was barely able to hold onto his rented house and he literally went hungry for days at a time. He suffered from the same type of despair that is prevalent today; he lived during an age of economic revolution but it seemed as if the world was coming to an end.

Fortunately a friend left a manuscript about the life of Jesus for Handel to read. Actually, much of the text was a redaction of sections of Isaiah, Haggai and Malachi which foretold the coming of a great Messiah. Like they say, "the rest is history".

Handel read the manuscript and "made the turn" immediately. He worked feverishly for the next 24 days, surviving on little sleep and little to eat. His "first draft" was completed in the summer of 1741. On April 13, 1742 (at Easter), Handel's Messiah was first performed. Needless to say, it was a great success. No one knows which was the original composition because Handel modified it to suit the orchestra that was assembled at each new presentation. Later, Mozart added numerous other scores. While Handel continued to have health problems for the 18 years after he penned his master piece, he died as a highly respected and very wealthy man. He received full state honors and more than 3,000 mourners attended his funeral.

HISTORY RHYMES

History does not exactly repeat itself but it does make beautiful rhymes. The financial V-turn made by Handle has been made in centuries past and will be made in centuries future. You are living during historic times, time that are similar to the industrial revolution during which Handel lived. This time, the air is full of stories about nearly bankrupted auto companies and of massive levels of real estate foreclosing, but also a time when the average person can better afford the average car or the average home THAN EVER BEFORE! Handel died with an estate of over 20,000 pounds but he lived when there was no air conditioning and when underclothes were a luxury and clean underclothes were the height of luxury.

The contrast between perception and reality is incredible. I have used the Dickens line, "It was the best of times, it was the worst of times" before, to describe the situation and here again we have a rhyme of history. Now-a-days, help for the needy is much more available, so the "times" are not nearly as bad as in the days of Dickens, but the contrast between perception and reality is just as great. Today, people literally think we are in the early days of a "great depression" when we are indeed in the middle of a long-term economic boom. One of the amazing numbers is that productivity growth has continued to stay strong throughout the recession.

The other day at Cosco a stranger and I were checking out a display of Acer NetBook Computers, 10 inch portable and WiFi connected $349 computers. These small laptop machines and their cousins will soon be everywhere. For example, today, my church is a WiFi hotspot but few people use the Internet there. Soon, the Sunday School Classrooms will NetBook Computers. If you have ever performed the task of collecting the roll and offering from Sunday School classrooms, you will immediately appreciate the idea of having the roll input directly from the classroom. If you have ever tried to maintain a church directory, you know how nice it would be if members were easily able to input changes to their personal profile, changes that would automatically be available to all other church members. Taking the roll is just the beginning of an Internet connected church (society). Video conference bible studies and educational forums will become common.

The stranger at Costco told me about how he travels the world as a consultant who helps companies "lean out". This fellow appreciates the importance of productivity. He makes better than $300,000 per year teaching others how to be efficient. To the worker at a factor, the word productivity is often a frightening word. Wile it means producing more product while using less labor, the definition for the factory worker is more likely to be doing more work for lower pay, not true, but when most people believe something the perception becomes reality. For the factory workers who have been seeing their "real" numbers decline dramatically, productivity stands for the loss of jobs. As usual, the common belief is upside down. By doing more with less labor, we are financially able to afford many more workers doing many more things. The average person, today, receives the equivalent work of 58 slaves just through the use of massive amounts of electricity. Most of this electricity is use to produce things that were considered luxuries 50 years ago. The dramatic growth in jobs today is in areas that did not exist 20 years ago.

EUGENICS

Some of the new "stuff" is scary, incredible and life changing. For example, the world is about to be transformed by the science of Eugenics, "the self direction of human evolution". You may not like the sound of eugenics; you may be morally opposed; you may especially dislike the "new direction of abortion"; but, you nor I nor any government is in control of science.

One likely direction is that couples who desire children will more and more often in vitro fertilize multiple eggs, genetically screen and select the "best" fertilized egg and implant the selected egg in the womb. DNA chips can already test a fertilized egg for 270 known genetic "problems". In Denmark, where testing is done for Downs Syndrome, there has been a dramatic drop in Downs Syndrome births. Societies around the world will grapple with the moral questions of: What happens to the other fertilized eggs? and, Is it moral to not screen for Downs Syndrome when we can?

In a few years, parents will be able to select for strength, intelligence, wit, size, hair color and thousands of other traits. Wow, talk about productivity! How often does a gifted genius such as Handel come along? How often would such a genius be born if one could select from a dozen "optional children"? What if one could combine the best of several embryos?

Few would argue that the work done to genetically modify rice has been an evil committed. As a result of improvements 1,000 percent improvements in the production of rice, billions of people are fed. Moral questions will never be fully sorted out by man but a new age is here. Genetically modified bacteria will digest coal and gooey oil into clean burning "natural gas" and genetically selected and ultimately modified human embryos will be vastly superior, in certain ways, than would be their unselected brethren.

TURN! TURN! TURN!

The here and now is the future. We do not know what will happen tomorrow but the indications are that the resource rich countries have had a good long run toward prosperity but now it is the consumer countries' turn. Nations such as Japan and the USA where we import and use the cheapest resources we can find are having a field day. Suddenly, to sell their goods to the USA, the Saudi Arabians and the Chinese must cut their prices to the bone. Americans are enjoying the turn in the dollar. US Businesses are buying raw materials at the lowest prices in 5 years and they are taking as much time as they can before lowering prices to consumers. When the PPI declines faster than the CPI, businesses get very healthy indeed. A few thousand dollars invested in US equities (stocks or real estate) will likely be many thousands of dollars in just a few years.

One does not need to take the high risk of investing in genetics projects that are not currently producing products for sale. One of the major benefits of eugenics will be dramatically more healthy people. The avoidance of cancer and other diseases will make for long lives during which assets will see many more years of compounding. We are going to see a period of great wealth and we are just in the early stages. In the meantime, the public will spend money on everything from bicycles to fruit cakes. It is an easy time to make big money, you simply must not cower in fear in "balanced mutual funds", bonds (buy JNK or HYG), CDs and money market accounts. Now is not the time to bury your talents. It is an age where the adventurous will see great things.

ADD UP THE NUMBERS AND GET EXCITED!

Ninety-three percent of Americans who want to work have steady jobs and most of the rest are drawing unemployment pay. The typical family drives two cars 1,000 miles per month each. At 20 miles per gallon, they buy 100 gallons of gasoline per month and they will soon be saving $2.60 per gallon, or $260 per month, over the peak prices of last summer. The typical family is saving at least as much in lower heating and cooling costs and double as much on the price of other goods. The average family is saving $1,040 per month, not counting any reductions in interest costs!


HOMES MORE AFFORDABLE THAN EVER!


The home affordability index just hit an all time high! The average family has 141% of the income needed to buy the average home. The all time high was reached before the latest sharp decline in mortgage rates. Long term interest rates are very low.


THE MARKET IS NO LONGER PREDICTION DEFLATION!


A few weeks ago, treasury market interest spreads were prediction deflation for the next year or more. Those spreads have rapidly faded. Central bankers are stimulating like never seen before. Certain markets are turning, while the relief of lower fuel prices continues. Last summer, very few believed me when I said that oil would ultimately trade back down to at least $35 per barrel. My calculation was based on the cost of production from some of the most expensive oil fields. Yesterday, a major firm lowered its bottom estimate to $25. That is possible, if lower demand means that the $35 oil fields are closed.


Add up all the numbers and you will find that consumers are getting healthy very quickly. One thing that you can count on in America is that financially healthy consumers will spend their money. In the short run, a lot of people have cut back. They are paying off old debts and waiting to buy an electric car. They will soon discover that high mileage cars are available and cheap. The long term growth trend of owning a home and a second home is set to resume. The extra low price of real estate is huge. Trillions of dollars of real estate is available at the lowest prices ever. Many a family can afford five homes is they wish.


The average family will actually save more than $1,400 in lower costs in 2009. The bulk of this money will be spent on other things.


Unemployment is a lagging indicator. This morning, much was made about job losses. The fact is that in recession after recession, the highest job losses show up just when the worst of the recession is over.


My family has a 20% share of a beach condo available. We do not want to sell at current prices but, like so many people, we need to lighten our load. Let me know if you want to enjoy visiting the beach for the next fifteen years while watching the value of your investment soar!

JUST BOUGHT SHARES

I just bought a few shares of the I Shares Junk Bond Fund, symbol HYG. The current yield is 12.9%.

HUGE SALE: EVERYTHING IN THE STORE 65% OFF

Consumers and businesses are getting the break of a life time. Central governments around the world are pumping money into the world economy like never before. Earlier today, England and Sweden cut their interest rates, yesterday, it was Australia and China. The cut by England, of one full percent, took rates to levels not seen since 1951! There is talk that the FOMC will set a 4.5% target on 30 year home mortgages and start buying those next!


The 1% cut by England was a huge price decrease. When my wife finds a big discount advertised in the newspaper, she will often ask me a question like, "what is 25% off on top of 50% off"? The uneducated are sometimes fooled into thinking the discount is 75%. Of course, the second 25% discount is only a 12.5% discount on the original price and the monster discounts are on a few "come on" items. This is not what just happened in England. The price of money in England was cut and cut and cut from 5.75% down to 5% and then the bank got serious. On October 8 the bank cut from 5% to 4.5%, on November 6 the bank cut from 4.5% to 3%! and on December 4 the bank cut from 3% to 2%!. The total cut from 5.75% to 2% is a huge money sale. The total discount is 65% and it is on "every item in the store". In other words, the cost of any good or service in the entire country has been reduced by the lower cost of money.


HUGE, HUGE SALE!


Folks, it does not get any better than this! In the summer of 2007, I misread the situation and believed that we were only having a mid cycle correction. I cried wolf and lost my money and my credibility. Had Hank Paulson and Ben Bernanke used all the tools they had available in 2007 they could have flooded the banking system with money back then and avoided the worst of the real estate crisis. I made the mistake of believing that reelecting a republican to the White House was more important to the "old money crowd" than making a killing in stocks, bonds and real estate.


As a result, Hank proposed a new method of relief to banks. He chose a method that was a very public, drawn out and divisive. A program that had to be passed by congress. Over the past few weeks, central bankers have flooded banks with money by using "standard methodology". Sure, the FOMC has purchased an unusual array of paper but the methods being used were in place before the vote by congress. Only half of the money voted by congress has been used and it went to the selected few. The current public display over the potential auto bailout is accomplishing the same purpose as the banking bailouts. The investing public is confused, angry and not willing to participate. The public could not buy enough real estate or stocks from 2004 to 2007 when prices were high, but they have been scared into selling or holding off on purchases for the past 6 months while prices have been extremely low.


There is a huge sale on equity prices, equity in real estate is especially cheap and equity in stock prices has not been this cheap since at least 1982. In addition there is a huge sale on money. The present value of assets is discounted by the rates on long bonds and long bonds have not offered such low yields since the 1940's.


Today, you have the opportunity of a life time.


A friend wrote a week or two ago to ask if he should lock into a 30 year mortgage. I pointed out that mortgage rates do not normally hit bottom until 2 years after the end of real estate recessions. I noted that spreads between the 30 year mortgage rate and the 30 year bond are still extremely high but that spreads are gradually narrowing. Since I wrote him, the 30 year bond rate has fallen and fallen again and spreads are still too wide. My youngest daughter has a variable rate first mortgage that is down to 4%. Chances are good that I will recommend that she "lock-in" sometime in the months ahead, but not yet. In the mean time, she will enjoy the lower mortgage payment. She will also enjoy significant appreciation in the value of her house.


The payment on a $240,000 loan at 6% is $1,438. The payment on a $240,000 loan at 4% is $1,145. The difference of $293 per month is a 20% cut in the cost of the house. When pent up demand from the public surfaces, the value of a $300,000 house will jump by $60,000 quickly. Her home is within walking distance to a major medical center. The demand for homes in her area will grow for years to come.


Beach condos and houses, that had very little rental value this past summer when gasoline went for over $4 will see a massive increase in rental value by the summer of 2009 and again in 2010. The sale on money and gas is a powerful combination. Beach homes will bounce in value by surprising amounts.


Everything in the store is on sale! Some are much better bargains than others. The price of copper has fallen from around $4.25 per pound to $1.55 per pound. However, there is still little demand for new homes and little demand for new cars and little demand for other capital goods that contain copper. The price of copper was below 50 cents when this cycle got started and it will return to about that price before this cycle is over. The price of copper and the price of a 30 year home mortgage will not reach bottom until about 2 years after the recession is over.


Yesterday, Al expressed concern that the public will gradually return to their excessive use of energy. He is right but it will take a very long time. When CAFE standards were introduced way back when, the pressure to build more fuel efficient cars grew each year that the standards tightened. This time the standards jump in 2010 and then go up each year for many more years. The next bottom in gasoline prices will be after 2020. The advent of nuclear power assembly lines (I know of two so far) will also decrease the demand for petroleum for the next 20 years or more. Furthermore, this time, the only way to meet the CAFE standards is to veer away from reliance on the internal combustion engine. The key proven technology to date is the hybrid vehicle. While there is much talk about the all electric vehicle, battery performance and costs have a long way to go before all electrics are competitive. On the other hand, the latest hybrids have come close to being economically worth buying and relative costs continue to fall. Early adopters almost always pay too much but when new technology reaches economies of scale, the reason to buy switches from being the proud owner of the latest and greatest to practical, economic reasons. Al is right that the hybrid technology will give Americans the ability to stay in big comfortable cars but I still see a continuation of the 40 year suburb to city cycle. In about 30 years, there will be a surprising number of people who have opted to live in town or close to town. Many of them will commute without cranking a car engine.


Many an American is making the smart decision not to buy a new car right now. Why buy a new car when highly profitable assets are on sale for deep discounts. The person who puts $20,000 into a new car will own a 5 year old significantly outdated car in 5 years that is worth less than half of what he paid for it. On the other hand, the person who takes over the payments on a beach property, to help the seller keep a good credit rating, might put in $20,000 more than the rent over the next 5 years but then have ownership of a property that is producing positive cash flow; his equity might be over $200,000. In relative terms, the fellow with the 5 year old car has paid more than $200,000 for it.


Assets are on sale and money is on sale, at levels not seen in 50 or more years. Buy now!

Re: Abundant and Great Investment Opportunities

Al and All,


For a long time, I have been supportive of a revenue neutral tax increase on oil. While I believe Al Gore is way off the reservation in regard to global warming (carbon dioxide concentrations have hit record levels over the past 10 years while the globe has cooled), I have said that I could support his plan to raise taxes on fuel and to offset the tax increase with a tax exemption on the first so many thousands of dollars of payroll tax. One idea batted around has been a $15,000 exemption.


The economic idea is straight forward; raise taxes on fuel and we will use less; lower taxes on labor and we will hire more. The first two principles of good tax policy are 1) to raise taxes as efficiently as possible and 2) to avoid using taxes to socially engineer as unintended consequences are the result of poorly planned tax schemes. The unintended consequences of our current system have gotten way out of hand.


The adjustment needed is to go to the Fair Tax, which is a tax on consumption rather than a tax on income. It should be obvious to all that it makes sense to encourage income growth and to discourage excessive spending. It is painfully obvious that Americans engage in wasteful spending; we buy huge houses in the suburbs and we get to and from them in gasoline guzzling monster cars. If we were to eliminate the tax on saving, there would be less spending, more saving and a lower risk economy. The business cycle would be tamed by the end of crazy swings in tax policies. We need to stop handcuffing the invisible hand of Adam Smith.


The vested interest in the income tax system is huge, so, the fair tax is not likely to pass soon; eventually, good ideas keep coming back until they are adopted. In the mean time, we must take baby steps in the right direction. Economically, it would be better to offset a new carbon tax with reductions in income taxes, but the reduction to the payroll tax is the thing that could get passed by a democratic congress. The other thing positive thing that has democratic and republican support is a lowering of the corporate tax rate accompanied with a reduction in loopholes.


As far as stimulus packages go, not much is needed. Low interest rates and low prices are having an effect which will gather momentum in the months ahead.


As far as infrastructure is concerned, we simply need to use available technology to put the money where it needs to go. We now have the ability to count the traffic on every road in America. This means we can stop building roads and bridges to nowhere and paving rural highways to senators barns. Under the current system, revenues derived from heavily used highways, many of them interstate highways, is siphoned off and spent on boondoggles. Projects have included everything from subways to skateboard parks. Worthy projects, perhaps, but not the responsibility of the highway trust fund. Many four lane interstate highways would already be six lane highways if the income derived from these roads had been used to fund and maintain these roads. Interstate highways have been very profitable for governments but over the past 20 plus years the funds have been siphoned off to Amtrak, bus stations and child care facilities. If the count shows that 5.5% of all miles driven last year were driven in South Carolina, then South Carolina should receive 5.5% of all federal gasoline tax revenues the following year. The building of a monster bridge to Charleston would automatically result in tightness in the building of other roads in South Carolina. Most importantly, the people of South Carolina would not be taxed to build monster bridges in California.


The adoption of a carbon tax on all fuels would discourage the purchase of super charged or monster vehicles while encouraging all sorts of fuel saving techniques. We do not need empty buses being driven around town, but the number of bus routes would increase if the price of fuel was increased. Using the money to replace the payroll tax on the first $15,000 worth of income, would have a significant impact on job growth. This is the kind of tax that will more than pay for itself. Our country would see tax revenue increases as a result of job and income growth. Upon the success of this first step, it might be easy to "do it again". The second go round could totally end the payroll tax with the end of the income tax thrown in for good measure.


Al, the problem is in the timing. Right now we are suffering from the "Paradox of Saving"; the economy is being hurt in the short run by excessive savings, while setting up for a tremendous and long run of prosperity. Consumers are spending less than they normally would, which is a reduction in demand and a decline in GNP. Gradually, consumer balance sheets are improving and lower real estate prices and interest rates are making the buying power of consumers soar.


Raising taxes during a recession would be counter productive, as is clearly evidenced by the tax increases Roosevelt put through during the early years of the great depression. It was republican government policy that got the recession going and democratic policy that converted a tough recession into a great depression. The following is the way to accomplish what needs to be done:


The congress should pass an exemption to the first $15,000 of payroll, giving every working American and every business an immediate tax cut. The law should include a delayed offsetting carbon and gasoline tax. The carbon tax and the gasoline tax should be phased in 20% per year at the end of the next 5 years. The carbon tax should be on the order of $50 per tonne and the gasoline tax should be about 50 cents per gallon. Consumers having benefited by about $1,100 in higher income would hardly notice the 10 cents per gallon increase at the end of the year.


A separate law should be passed to lower the tax rates on corporations. This law should immediately close loopholes so that all corporations have to pay taxes. The new corporate rate should be determined by calculating the revenues to offset the planned increase in carbon taxes to be paid by corporations. A lot of dirty industrial burning would be eliminated and a lot of jobs would be created.


One beauty of this plan is that the precise amount needed to be raised from the fuel tax would be known. The tax cut to consumers would amount to about the sum of 7.5% (or whatever the precise payroll tax) times $15,000 for each person employed in America. The last increase in the fuel tax could be required to bring the fuel tax increase into line with the payroll tax savings. The calculations for corporations would be a bit more complicated but it should be easy to come close to approximate neutrality. This revenue neutral concept is the assurance that would attract the few moderate-conservative votes needed.


Under the above plan, the private sector would spend far more than $150 Billion on alternative energy research. Mass transit usage would grow. Miles driven would be reduced. Subsidies for corn fuel could be ended. Windmills, solar, nuclear and other low carbon producers would be more competitive. Battery research would be expanded.


As noted, I think Al Gore is full of hot air, but taxing consumption, rather than income is the key. In the short run, the cost of electricity would be higher than otherwise but, in the long run, more efficient means of production would win out. The earth is not likely to ever run out of oil, however, we have millions of years supply of thorium that is cost competitive with coal fired electricity. Indeed, thorium plants generate the high heat that can be used to extract tar sands and oil shale and to convert coal into clean liquid fuel.


It is time to tell the auto companies to tighten their belts, sell Volvo and Saturn to independents to survive or to enter Chapter 11 bankruptcy. A few years ago, a clearing price was reached. Once auto workers started making around $90 per hour in total compensation, the hand writing was on the wall. America needs millions of new jobs, not just a few hundred thousand $90 per hour jobs.


Obama is steering hard toward the middle. He has removed his windfall profits tax plan from his web site. While he has consistently advocated tax cuts for the middle class, he has backed off on the massive tax increases he earlier proposed. A tax cut on the first $15,000 of payroll income would be a progressive tax cut consistent with his campaign pledges. The high income worker and the low income worker would get the same dollar benefit but the low income worker would see a dramatically higher tax cut percentage. When the fuel tax kicked-in, the low income bus rider would have his cake and eat it too.

On Wed, Dec 3, 2008 at 10:56 AM, Al wrote:

Is it time to put a floor under liquid fuel energy prices? The additional taxes would pay for much needed infrastructure improvements and stabilize our use of oil, allowing us to develope a long term total energy policy. Even as the big three ask the government for money (loans to be paid back), the price continues to fall at the pump, assuring that bigger vehicles will again become popular. Detroit will be back in business and the trend of bigger imported vehicles will continue. For those of us who have seen three major energy chrisis, the results are always the same, a return to larger, abet somewhat more efficient vehicles followed by another oil spike. As soon as the good times return, which will be long before the current high priests of gloom and doom predict, most of our old consumption habits will return. The free market will quickly stop investing large sums in alternative energy sources, as it will no longer offer large profit potentials. Just this week we officially found out that we have been in a recession for a year. Jack is right, the good times are at hand. The next oil price spike is only as far away as the limits of our energy conservation policy.

Maybe not all tax increases are bad?
Al

Abundant and Great Investment Opportunities

Rare investment opportunities are available every where one looks. The invisible hand of Adam Smith and the heavy hand of Ben Bernanke are powerful. While Big Ben has pumped about 1 Trillion Dollars into the US economy, it is the invisible hand that is most powerful. The invisible hand has brought long term Treasury Bonds to a 60 year low yield of 3.19%! The willingness of "savers" to lock-in 3.19% for 30 years on Trillions of Dollars of assets is powerful economic medicine. The US population continues to grow and households continue to form and grow. The demand for housing is growing faster than the available supply of housing is growing. Low interest rates offer incredible investment opportunities. Today, an investor only needs to believe that the combination of rental income and capital appreciation on real estate will exceed an average of 3.19% to convince himself to buy aggressively.


The US economy today is being compared with the Japanese economy of 1989 and to the US economy of the great depression. These comparisons are way off the mark. The monetary policy of Hoover was the opposite of the Ben Bernanke policy and Roosevelt raised every tax he could find. Marginal tax rates went from something like 20% to 74% during the great depression. Japan's biggest problem has been a declining population. The US population continues to grow.


Two great friends and frequent blog readers have put in to adopt a child from Bulgaria. Adopting a child is an act of love if there ever was one. In recent years, there has been a dramatically adoption change in that Asian children, like domestic children, are in scarce supply. The odds of successfully adopting a US baby are slim to none and it will take my friends about 18 months to adopt a child from Bulgaria. The wait for a Chinese baby has increased to 4 years. The scarcity of children to adopt is great news for children. The treatment of children is improved as a result of relative scarcity. Economically, the thousands of adopted children in America are adding to economic growth here.


Adam Smith, an Oxford University professor of "moral philosophy", was the father of modern economic theory. The science of economics is about cold hard numbers but it is also about doing what is right. The game of politics, which should be to find the moral and economic answers to public issues, is, unfortunately, the game of satisfying the irrational expectations of voters.


DUMB BRIDGES AND BROKEN WINDOWS


When a dumb bridge is built, the effect is the same as when one of Henry Haslett's windows are broken. Henry noted that you can stimulate an economy by breaking shop keepers windows. Back in the days of riots in the Watts section of Los Angeles, it was reported and ultimately true that the local economy would be stimulated by the burning down of homes and stores. The nationwide economy would have been stimulated if the burning had not taken place. When government money was used to rebuild Los Angeles neighborhoods, money was taken from other deserving areas.


Yesterday, at a governors meeting, Obama pledged to assist republican and democratic governors to stimulate their local economies by supporting a massive bridge building scheme. The political timing is correct but the action is wrong; let the people decide what to build! Let them cast economic votes for what is best.


Is it not ironic that just after the largest decline in auto driving in history that the US government would borrow heavily to build more roads and bridges! Where roads and bridges are needed, they should be built but a massive road building project is not the moral and economic answer to the current economic downturn; one that will be over by the time construction starts.


To pay for these roads and bridges, taxes will have to be raised to pay for the interest on the borrowed money, even if the principle debt is never repaid. Talk is of a $600 Billion Dollar Stimulus Bill. About $2,000 per person, man, women and child. How would your family like to spend your share? I doubt that you would volunteer to spend your share to bailout California, where the government has spent itself into the poor house. Four hundred million dollars to build a bridge in California should be a local decision; the public has thousands of opportunities that 400 million dollars would satisfy. The US economy is already being stimulated, is our first priority more bridges?


In spite of the current economic recession, we live in the best of times. In a Google-tech-talk video, a nuclear engineer points out that each American has the equivalent of 58 slaves working for them full time. The average American uses electricity that corresponds to the work produced by 58 hard workers. Daily, we decide how to use that electricity and much of it is wasted. Governments are more wasteful than individuals. We do not get rid of waste by combining our resources to waste them in bigger chunks.


I am not opposed to building bridges, but bridges should be built based on economic need, not on political whim. As Governor Sanford of South Carolina pointed out in an Wall Street Journal article yesterday, we face the risk of becoming a politically driven economy instead of a market based economy. The example of Russia shows how that might work out.


Just because a board of directors has the votes, it does not make it morally or economically correct to pay a CEO $50,000,000 per year. Just because democrats have the votes does not make it morally or economically correct to spend $600,000,000,000 on California bridges and other political favors. Just because a particular congressional representative opposes this "California bailout" should not mean that his district gets punished in the final bill. Today, we have the technology to constantly "meter" highway traffic and to allocate fuel tax dollars to where they are economically needed. The rebuttal that the bailout dollars will be fairly allocated is bunk. You cannot fairly allocate federal dollars that should have been spent on other uses. It is not fair to force a shopkeeper to send money he planed to use to repair a broken window to a state government to build bridges. Why should the tax payer in any other state subsidize California roads?


THE GOOD NEWS TRUMPS THE BAD NEWS


The good news is that even another government $600 Billion Boondoggle is small compared to what is going on in the "real economy". Real estate prices, as estimated by Doug Katz, have been lowered by 18 Trillion Dollars. If the government wanted to get a high return on a $600 Billion Dollar investment, it could buy homes at the lowest real prices seen in years.


The average price of oil in 2008 will be about $105. The current price is about $45. If the price were to average $45 in 2009, US consumers would save about $450 Billion Dollars. The savings from other lower prices, everything from corn syrup to batteries, will be 6 times as great as the savings on oil. Americans will save more than 2.5 Trillion Dollars in 2009. It will be a shame if our government spends $600 Billion of our 2.5 Trillion Savings on bridges but even if it does, the net savings will still be massive.


CONSUMER SPENDING READY TO SOAR


On the biggest shopping day of the year, traffic was up 7% over last year. In the midst of gloom and doom, Americans are living well. The gloom and doom press locates pockets of trouble and ignores the broad based benefits reaching consumers everywhere. The process is the inverse of government spending where relatively small amounts are confiscated from lots of people to focus spending on a relatively few major projects. Well before the economic recovery is fully underway, consumer stocks will soar.


Last night I reviewed the IBM annual list of 5 disruptive technologies. The third item on the list, computers that talk, should be first on the list. Your life is going to change when you are able to ask your constant companion for information. In some cases, this information will be "scheduled releases", such as reminders of calendar events. Some of it will be in response to events triggered by other people, such as the movement of a spouse from a car to a grocery store. Much of it will be "spontaneous conversation". A user might say, "Hal, help me remember to stop for milk on the way home." The later in the day response might be, "Dave, no need to stop for milk, your wife purchased a gallon at Wal-Mart". "Hal, it is my birthday, what else did she buy?" "Sorry, Dave, she put a block on that information". "Hal, check the bank account to see how much she spent". "Dave, apparently the purchase was made on her 'private' account".


One item, left off IBM's list this year, was social networks. A tremendous amount of productivity is being achieved through the use of social networks. Like everything new, there is a learning curve. It takes time to sort out the productive uses from the wasteful uses. Those who have "played around" with FaceBook know that lots of time can be wasted, however, the power of networks is huge. The value grows exponentially as "nodes" are added. If only a few friends and a few business associates are linked to you, you don't accomplish a great feat when you make a change to your profile, such as a change in your cell phone number, however, if all of your friends, family and associates are linked to your profile, then one minor change is the equivalent to a tsunami of information. Change your cell phone number in one place and the whole world "knows". Have you ever wondered how much business has been lost due to out dated phone numbers?


Like everyone else, IBM has overstated the effects of solar power. IBM has solar power first on its list. Continued progress on thin film technology keeps lowering the cost of photo voltaic power cells. The entire glass sides of buildings might be built with photo cells "printed" on the glass. The IBM list was probably developed before the price of oil dropped from $147 to $45. Solar power has a great future but much more cost savings must be achieved to make the technology competitive. Furthermore, even IBM seems to have missed the order of magnitude of energy use. In 2006 there were 97.1 Quads of energy produced on planet earth. A Quad is 10 to the 15th power BTUs. One BTU is equal to 1054 Joules of Energy. The numbers are mind boggling. Forty percent of this energy is produced from oil.


Currently, only a very tiny fraction, .04% as I recall, of our electricity is produced by solar panels. That number will rise but thorium power plants will likely be the rage long before solar energy gains a major market share. Thorium is a cheap and abundant natural resource that can be used to build efficient nuclear power plants without producing the plutonium that is used in nuclear bombs. The USA owns about 25% of the known thorium reserves. India is rich in thorium and poor in uranium. India is leading the charge to build thorium plants that burn 100% of the fuel, compared to current nuclear plants that burn only 4 to 6% of their fuel. Thorium the size of a softball packs the same amount of power as about 200 freight train loads of coal. The marginal cost of producing electricity is likely to fall in real terms by 40% over then next 10 years. Japan and the USA, heavy users of electricity will be among the major beneficiaries. If you don't believe me look at the jump in the value of the Yen and the Dollar in recent weeks.


The second item on the IBM list is a game changer. Low priced DNA mapping will soon allow people to dramatically lengthen their lives. Disease will be cured before they arrive! Science fiction is no longer fiction. We see through a mirror dimly but we know that dramatic change is on the way. There is a reasonable chance that you will be around 100 years from now when we will know much more than we know now.


Very deep recessions in countries such as Argentina and Venezuela are also game changers. The see-saw effect is real. When one economy goes down, another rises. Venezuela is a fine example of spending ones 7 years of surplus. The next 7 years of drought is going to force major changes in Venezuela. Chavez has gone from King of the World to frighting for his political life.


It is not a gloat but a fact that the average citizen in the USA enjoys a purchasing power income of $44,000 per year. Millions of Chinese who went from a purchasing power income of $300 per year to $2,000 per year are at risk of going back to $300. To avoid such disaster, export prices are being cut to the bone. People in Viet Nam live off an average of about $3,000 per year, up from around $1,000 just a decade ago. They too are anxious to replace lost work. Export prices are being cut to the bone. Marginal producers are going out of business and the flight to quality (including the flight to the USA) continues. US consumers are seeing the benefits.


Take a look at the specs on the new Nokia "super phone" that is coming on the market soon. This $600 device ($200 with a two year $70 per month phone and broadband Internet contract) is many times more powerful than the average desktop computer in service today. This year, people will carry in their pockets computing power that would not have fit in an 18 wheel tractor trailer rig about 10 years ago.


A lot of $600 phones will not be bought because the government will use "phone money" to build bridges in California and Illinois (most favored state status has switched from the home of Bush (Texas) to the home of Obama (Illinois)). Even so, before 10% of the construction has been done, these $600 phones will have been replaced by $300 phones that are twice as powerful. These phones will listen and they will talk back! Current computer speech skills are poor but they will rapidly get better.


Yes, we are living during a time when we should be and are finding ways to reduce the amount of driving that is done. Yes, we are living during a time when our government will use federal dollars to build more local roads and bridges. Yes, this policy is misguided. No, it will not prevent the US economy from a full and dramatic recovery.


This whole crisis was "engineered" with the chief engineer being Hank Paulson. The FOMC is finally doing what it should have done long before the bailouts started. Trillions of dollars of assets have changed hands at low prices due to the actions of Hank. You should go out of your way to pick up as many of these assets as you can. The next opportunity as big as this one is likely to be more than 30 years from now!

The Massive Charge of the Bull Continues!

Several Big Bond Bulls continue to charge. These "Treasury Bond Bulls" are winning against all opponents. In less than 3 months, the Euro 30-year bond has soared 26% in price! The yield on the 5 year went from 4.75% 6 months ago to the current rate of 2.65% a 44% move! The five year in England was at 5.8% in June 2007 and at 3.2% today! The US 30-year and 10-year are at levels not reached in at least 50 years! BOND BULLS are CHARGING! All the while, corporate bonds, commodities, real estate, most stocks and central bankers are getting their fannies whacked. Or are they? The REZ REIT, after falling from 53 to 20, has bounced.


Thirty years ago, as General Manager of the Wake Forest University Credit Union, I helped a number of people who were head over heels in debt. One learns much by working closely with those who are financially upside down. I went against conventional wisdom and used debt to assist these folks to get out of debt while helping them learn that you cannot borrow your way out of debt? The conventional wisdom is that if you are in a hole, stop digging. I don't believe in giving up.


I was not able to help everyone but I'll never forget helping a lady who repeatedly pawned her wedding ring mid month. She raised a little cash to buy groceries and bought her ring back on payday. In six months she paid enough interest and fees to buy three wedding rings but this one was hers. She and her husband had good jobs, but neither understood why they were always broke.


The Credit Union was able to replace a lot of bad debt with better debt and ultimately with good debt. It took five years but ultimately, instead of paying the interest on her ring, a beat up old car and several credit cards, she and her husband bought a house and set up automatic deposits into 401-K retirement plans. Ten years latter their kids were in college and they were on top of the world.


There has been a lot of talk that the "next tool" of central bankers will be "quantitative easing". The idea is for central banks to make targeted asset buys, instead of just flooding the market with extra reserves. The US FOMC and other central bankers have been making such buys for weeks. The Fed has dramatically increased its balance sheet. It is helping banks replace bad debts with good. The Fed is temporarily "holding" the bad loans and replacing them with "good loans". Banks are enjoying extra interest earnings while they wait to get back the "cheap rings" they have hocked. The FOMC is acting as a benevolent pawn shop owner. The pawn shop charged my lady friend about 40% in interest and fees while the FOMC is paying banks to "take the money". The FOMC is paying banks interest on their reserves while making swaps to give them extra reserves. Yes, the whole deal is so complicated that you will hear three newscasters offer 7 opinions about what is going on, but after being such a mean old grumpy uncle for months on end, our Uncle Sam has turned into the best friend the banks have ever had.


REMEMBER THE CYCLE!


Using Marty Pring's methodology, there are six phases to the commodity,bond, stocks cycle. He gets to six by including overlaps; the times when one move is in full swing and the next move is just starting. Today, we are seeing a continuation of the commodities bust even though the bond market rally is in full bloom. It took 17 interest rate increases in China to pop the commodities bubble. Since the bubble has popped, there has been a dramatic turn in interest rates around the world. Short term interest rates take hikes with commodities. In the short term, long bonds rates trade down with the decline in short rates and commodity prices but, the lower the price of commodities, the more the economy is stimulated, the greater the GDP, the greater corporate profits and, ultimately, the higher the long rates will go.


Today, we are in a period of deflation. Commodities, including money, are in abundant supply. Bond rates are going down at the same time that commodity prices are falling. Each of these represent a decline in input costs to businesses. Put another way, last year when the PPI grew at a much higher rate than the CPI, businesses were squeezed, but now the squeeze has lifted. Consumer prices are not rising fast but they are rising much faster than input prices. As businesses, including banks, "process" lower input prices, profits will rise. Banks are enjoying the receipt of money at very low rates and, as is evidenced by numbers available from the St. Louis Federal Reserve, banks are lending this money at very substantial spreads. Lending has not died, some lenders are contracting their loan portfolios rapidly but others are growing theirs. It is a myth that lending has died.


Commodities down, Bonds Up and then Stocks Up is the cycle and we have seen the momentum of the commodities move die and the momentum of the bond move accelerate. In July the bubble was in commodities; now, the bubble is in bonds. The spreads between government bonds and corporate bonds is huge. As the input costs flow through the product cycle, corporations are going to be rapidly nursed back to health. Banks and corporations are going to report huge profit jumps by late 2009. Many a company has recently thrown every loss into the mix they can possible justify. When the profits turn hits, it will continue for several years.


It is time for the Stock Bulls to Charge. The significant stock market rally of last week did not corral the Bond Bulls. Huge chunks of real estate are being absorbed. Many a property is underwater but in a holding pattern. Again, the monthly payment to buy the average home is at or near a record low. Houses are very affordable. The Bond Bulls are feeding the Real Estate Bulls!