DOOMSTER OR BOOMSTER?

After Paul Ehrlich wrote "The Population Bomb" in 1968, the New York Times called him and his new age Malthusian friends Doomsters. The Times called the optimist, Cornucopians or Boomsters. According to Ehrlich, urgent governmental action was needed to prevent the pending starvation of 10's of millions of people. The starvation could not be prevented without heavy handed population control such as the forced sterilization of Indian's and the withholding of food aid to any country not willing to severely limit births. Group think was the order of the day. Millions bought into "the end of the world as we know it". One of the great ironies is that on the scientific front, he and the others believed that "Global Cooling" would be the catalyst to massive starvation by reducing the amount of food that can be grown.

From 1875 to 1901, it has been estimated that 20 to 25 million people died from famine related causes. From 1975 to 2001, the best guess is that about 2 million people died of famine related causes. During the second episode, there was plenty of food available but the politicians in charge used food as a weapon. What a contrast to the doom predicted by Ehrlich who stated that the maximum population that the USA could support was 150 million. We have double that number and food is so plentiful that we use it to fuel our cars.

OBAMA HAS A POINT

Obama believes that people under stress look for scapegoats. He even suggests that religion, guns, and the hatred of other people are forms of "scapegoating". Looked at from the other side, he and his friends have tried to use free trade, the war in Iraq and George Bush as scapegoats for all the worlds ills. The logic of the arguments do not matter because he and his friends are emotionally vested in a mindset of looking for scapegoats. Free trade, for example, is the scapegoat for the loss of jobs and the recession even though we know that recessions were so bad that they were called depressions back in the day when trade was severely restricted. We know that free trade boost employment, boost the average wage and increases standards of living but when a scapegoat is needed, don't confuse us with the facts.

Once the game of scapegoating gets a good start, it is hard to put an end to it. The automatic feedback loops that serve to prevent natural processes from running out of control are ignored or even seen as "the problem". For example, the Carbon Dioxide that feeds our plants is seen as the reason for "global warming". After the constant drone of a few leaders, a group think hysteria takes over and billions of dollars are being spent to sequester the carbon dioxide so that it can't do its job of encouraging plant growth. We are like the kids who try to build sandcastles to keep the ocean away.

The situation in free trade is similar when some person who loves the economic freedom of living in America wants a little protection against this very same freedom for others. This is what caused the Great Depression. Representatives Smoot and Hawley proposed a bill that would protect US workers and businesses from foreign competition. Unfortunately, instead of ignoring the country that was willing to shoot itself in the foot, other countries retaliated by shooting themselves in both feet. They passed even higher tariffs against US goods. The people of the world suffered but the battle to eliminate free trade was won.

I like the analogy made by Don Boudreaux, Economics Professor. He notes that had the world protected itself from the importation of the polio vaccine, a number of industries would have continued to prosper. These included the makers of iron lung machines, sophisticated leg braces and fancy wheel chairs. The fact is that this "new technology" put a lot of companies out of business, a lot of people lost their jobs and the world is a better place.

ENVIRONMENTALIST SHOOTING THEMSELVES IN BOTH FEET

Once a person develops the mindset that all must be done to "save the world", he should stop to remember that any one action starts a chain of events. This is often spoken of in terms of the "butterfly effect", the flap of a butterfly's wing can ultimately cause a tornado, the holding open of a door for another might lead to a kind word from a spouse and another kind word to a child as opposed to a hateful word and a slap on the behind (and the kicking of the dog).

In the case of the environmental movement, hundreds of millions of acres of sedentary rock lies beneath the ocean floor just off the US coastline. This rock indicates that there are massive deposits of oil and natural gas available for the taking. The people of the USA have been talked into avoiding the recovery of this oil and natural gas in order to save the environment. As a result, trillions of tons of dirty coal have been burned, billions of people live tougher lives, wars have been fought, trillions of dollars have been wasted and millions of people have starved. If there was ever a demonstration of the "butterfly effect", the refusal to drill for known reserves of oil is it.

UPSIDE DOWN SCIENCE

The real basis for the "energy problem" starts with the false science we were all taught in elementary school. We were taught that the oil on this earth was put here by a process some millions of years ago whereby plant materials were covered over and converted to oil through decay and pressure. The fact of the matter is that oil is being "manufactured" in massive quantity, second by second, minute by minute, day and night. As Thomas Gold wrote in 1999, "Hydrocarbons are not biology reworked by geology but rather geology reworked by biology".

The number of methane producing "bugs" on this planet is estimated to be 5 x10 to the 30th power. These "bugs" are constantly at work converting plant matter to useful energy. And, by the way, many of these bugs are extremophiles. Some can work thousands of feet deep in the ocean, others can work in extreme heat, others in very salty water, others in acids, others in poisonous bases, most in the absence of oxygen. Hopanoids, "the most abundant natural product on the planet earth", which are the oils produced by ferns and lichens, were once believed to have been created by pressure and decay but it is now known that the oils produced from this plant material is the work of bacteria. OIL IS RENEWABLE ENERGY!

NATURAL ECONOMIC PROCESS

In the same way that "excessive production" of carbon dioxide stimulates plant growth and the balancing of the oxygen to carbon dioxide ratio, the price of money automatically adjusts to re-balance the economy. Without any assistance from the FOMC, the US Treasury Bill rate fell from above 5% last year to below 2% this year. Indeed, the FOMC got in the way and caused the effective T-Bill rate to be much higher than the natural rate. Lower T-Bill rates are like oxygen to people and like carbon dioxide to plants. We can all breath easier when interest costs are reduced.

The DOOMERS keep telling us what we already know, which is that the consumer accounts for better than 70% of all economic activity. The Doomers see an economy caught in a positive feedback loop. They see free trade as causing the loss of jobs, the loss of jobs as causing a cut back in spending, and the cut back in spending causing the loss of even more jobs. They see the decline in interest rates as no big deal because an unemployed person will not buy a capital good no matter how cheap it gets. Of course, if the economy really worked this way, the last 100 economic recessions would have each been the end of the world as we know it.

The reality is that economic slow downs cause interest rates to decline and the decline in interest rates cause ones dollars to go a lot further. Take a look at any long term chart in the history of economics and you will see that a sharp drop in interest rates preceded a surge in consumer spending. Take a look at the times when there was a long lag and you will find the intervention of government. For example, the Great Depression, which started as a scheme to protect jobs, was prolonged by the government intervention which included make work jobs paid for by government. Adding a tax on labor (the social security payroll tax) right in the middle of an economic downturn was the height of folly.

REAL AVERAGE WEEKLY WAGES ARE KEY

The end of recessions happen when real average weekly wages take off. This does not mean that everyone must get an raise. Real wages go up when the cost of living (including the cost of interest) goes down. The increase in wages, in the face of very cheap goods that are partially the result of lower interest costs, leads to a significant increase in personal consumption.

One of the interesting things about this "recession" is that we are still in the middle of a business investment boom. On top of that, despite what you read and hear, we are still in the middle of a second home purchase boom! One out of every three homes bought in the USA in recent months was a second home!

Doomers, such as Professor Nourial Roubini, have focused in on the decline in home construction as the cause of the coming depression. He and all others seem to be unable to appreciate how rich we are. The steady decline in the percentage of our incomes spent on food, energy and shelter insulates us from economic recession. Today we spend less than 20% of our disposable income on food and energy. Today, most people are able to retire by the age of 62 because of accumulated wealth, not because they can draw SSN. Housing construction is in a recession but it represents only a tiny portion of our economy today, less than 4%!

BANK OF ENGLAND SWAP

The "phony baloney credit crisis" is being solved. The Bank of England just announced a program of swapping mortgage notes with government bonds. This will allow banks to get back into the business of lending money for home purchases in England. They will not make 105% loan to value loans but they will make loans to thousands of people who can now afford a home as a result of the decline in interest rates.

YES, ETHANOL IS REALLY BAD

The recent doubling of the price of rice is a direct result of ethanol production. In the USA, over 600,000 acres were moved from rice production to corn production last year.

YES, ALL KINDS OF SUBSTITUTIONS ARE TAKING PLACE

Last year, the number of bus departures increased by 13%. An express bus passenger goes about 160 miles per gallon of fuel. Greyhound charges less than 25 cents per mile (12 cents for a spouse) from Raleigh to Myrtle Beach, a hybrid vehicle cost about 10 times as much, $2.50 per mile to operate.

Please remember that high inflation rates come right at the worst of a recession and that they fall during the second half of a recession and they continue to fall in the months and even years after a recession. Lower inflation rates boost personal income and personal consumption. A boom is in the works and consumers will start getting their $600 rebate checks next week. The boom will start as a trickle and it will become a flood!

S&P CUTS OPINION ON CAL

One of the questions I have been asked a few times is why did CAL, NWA and DAL not do much after the merger announcement of the merger of DAL-NWA?

I have responded to individuals with a list of ideas, including that short term buyers "bought the rumor and sold the news". Of course, the other problem has been that the price of fuel soared on the same day and has not slowed down since.

As I have pointed out time and again, the price of airplane fuel is more of a perceived problem than a real problem. We must always remember that the higher the price of fuel, the greater the relative advantage of the bus, train and airplane. A fully loaded bus and a fully loaded plan each use substantially less gas per person than the same number of people driving individual cars. The price of fuel has now risen to such levels that it cost more fuel for two people to ride in the typical car than it does for them to fly on a plane.

Many of us have a very negative attitude about bus transportation. A major reason has been because our government has tried to force buses upon us. As a result, there are a huge number of buses riding around mostly empty. This does not say that buses are inefficient but that government is. With the significant increase in the price of fuel that has occurred over the past 5 years, bus ridership has become relatively much more attractive. Again, the relative cost, including the inconvenience of mass transportation, has fallen relative to the cost of private transportation. High fuel prices are not the reason to sell airline stocks.

I have not read the S&P report yet. I am confident that the reason to lighten up, includes the mistaken reason of higher fuel costs (in the short run this is certainly a problem for those who focus on short term earnings potential). I am also confident that another reason is because of the potential that CAL will feel compelled to pay too much for a merger partner and then have to deal with the integration hassles for the next two or three years.

CAL management has written the employees to say that the game has changed. The company feels compelled to bulk up to the approximate size of the new DAL. The most obvious candidate for purchase is UAUA but if the price is not right, there are other alternatives. CAL could even agree to sell out to AMR.

CAL has 2.5 Billion in unrestricted cash and it projects to have 2.9 Billion in unrestricted cash by the end of this quarter. This cash gives CAL the flexibility to make a lot of deals and it makes CAL an attractive target for other firms. Another firm could offer a 100% premium and get back more than half its investment immediately from this cash hoard.

Yes, the high price of fuel, with the resulting increase in ticket prices, will result in lower domestic demand because the number who decide to fly instead of to drive is not going to exceed the total number who simply decide to stay home (if the economy is as weak as is commonly believed). However, CAL, DAL, AMR and other managements have already planned to adjust. This year, CAL will reduce its domestic capacity by about 5% while continuing to increase its international capacity. The reduction of domestic capacity will make ticket price increases all the more likely to stick. The point continues to be that airlines are no longer willing to fly loss leaders. Airlines will always occasionally fly a few seats at prices only slightly above variable costs but they will adjust to insure that the average ticket is a profitable sale no matter what the price of fuel.

THE CHANCE TO MAKE BACK YOUR LOSES AND THEN SOME!

Those who have been adding to their accounts are starting to make back their losses. This morning, the dollar has once again bounced. Could this be the bounce that cures?

I cannot recall the USA having ever gone through a cycle like the one we have just seen. The USA has been dependent upon the rest of the world to avoid falling into an economic abyss. Today, the rest of the world is the engine that is supplying the profits to American Business. The good news is that the rest of the world is stronger than the USA is weak and that the US has stepped around the abyss. As a result, the US dollar and markets are turning to the upside. The demand for US capital goods is soaring and is prepared to soar some more.

The next number of years will see the construction of more power plants and energy facilities than ever before and at the same time huge investments will be made in US computing technology in order to reduce the need for even more energy development. Again, it is the rest of the world that is needing the new energy and the new computer equipment more so than the USA. The latest computer chips, the ones that consume only a tiny fraction of previous chips, will make computer substitution all the more powerful.

While I have railed against the silly practice of growing corn for the purpose of fueling cars, the practice has had an important consequence. Economics in general and the economics of energy are now much better understood by the majority of the people. Many of us must experience an economic cycle before we can appreciate even the basic concepts of economics. The person sold on doing everything possible to prevent global warming may now think twice about the trade off between food and fuel.

As a result of the obvious costs to burning up food for fuel, coal power plants are being built, nuclear power plants are being built and drilling is taking place in more areas. The environmental arguments against energy development have been diffused as it has become more clear that producing food and fuel must be higher priorities than attempting to solve problems that might exist 50 or 100 years from now. The fact that there has been no global warming for six years makes the "oh my God" folks think twice when seeing food riots take place around the world.

Business is moving forward. Markets must continue to find the lowest cost way to produce the goods that fill the needs of consumers. Among the erroneous arguments made in recent years has been that trade is damaging. The implication has been that trade is done for the benefit of big business and for the detriment of the "worker". The reality is that trade benefits the consumer first, the worker second and it adds both new markets and competitive threats to businesses. We all know that competition reduces profits and product costs but consumers are a very large and totally unorganized political group, whereas the industry that has been insulated in the past from free trade is one where the owners and workers are apt to raise the loud noise of protest.

During the first half or so of the American experiment, we must remember that it was the "big business wealthy" who fought against free trade. President Lincoln, for example, was a "big business republican". He slapped 54% tariffs on imported goods to "protect" the political friends who had put him in office. This included the rail road barons and the big time farm holders. The "little man consumer" paid a dear price while the rail road barons made out like bandits.

Many a time in the past 6 years, I have written about how David Ricardo, a London stock broker, taught us how it makes sense to do what we do best. David came up with the "Law of Comparative Advantage". I have used the example of Michael Jordon, one of the top 1% of all time base ball players to show that even if you are in the top 1% of baseball players, you should stick to the game of basketball if that is where your biggest advantage lies. Jordon did not make it to the "big show" which was a blessing for him. His "failure" (many a guy would love to have made it to the professional minor leagues), caused him to return to basketball where he won another three national championships.

Last week, I read an article by Don Boudreaux that reminded me that Adam Smith wrote the Wealth of Nations (in 1776) some years before Ricardo discovered the Law of Comparative Advantage. In other words, even if there were no comparative advantage, free trade would still be a good thing. For the consumer, free trade offers greater selection at lower prices. What free trade does more than anything else is to allow the Law of Substitution to work. Consumers in America have been able to purchase tons of bananas and oranges in substitution of home grown fruits. We are healthier and wealthier for the experience. By necessity, the sellers of the bananas and oranges have used the dollars earned to buy goods from American businesses. For the worker, free trade allows the "rest of the world" to see the goods he can make. The larger market makes it all the more likely that he can devote his time to producing the goods that he is a specialist at making. A specialist learns how to make better goods with less work and thus enjoys higher returns for his efforts.

The trade bottom line is that the consumer buys better goods for less and the maker sells more goods at higher profits. Like I always say, trade would not happen if both sides did not agree that it is in their own best interest.

STRONG NUMBERS

Google has joined a growing list of companies that have put out super strong numbers. There is no recession, the contraction is mild and profits are moving back up.

The contraction has performed a cleansing function. A lot of silly practices have fallen by the wayside. No longer can a person borrow 105% of the value of a home on terms that count on dramatic price appreciation. No more will countries cavalierly mandate the use of food in gas tanks and no longer will airlines sell $10 tickets that consumer $150 of fuel.

Skype added 33 million users in the first quarter. The total number of registered Skype users is now over 309 million people, more than any other EBAY business. Truphone, a mobil VOIP provider, gets rave review over on the GigaOM site. We know that Google is trying to use white space spectrum in order to dramatically reduce the cost of wireless Internet access. The mobile Internet is now in the similar position to the time when AOL announced it would offer unlimited hours of use for $14.95 as opposed to its 5 hours for $9.95 and about $4 more for each additional hour. The phone companies are now offering unlimited cell phone use for under $100 per month. The mobile Internet is set to explode!

Please remember the difference in this cycle to what happened in the second half of the 1990's. In that cycle, the providers of the Internet services were the ones who benefited the most. This time, the benefits have already been spread out to all the users. I very much like EBAY as a long term investment, but my point is that the free phone service will increase the productivity of billions of workers in millions of businesses and thus increase the wealth of those workers and businesses.

MY FAMILY AND FRIENDS HAVE SUFFERED

It has been tough living through the pain of the recent down turn. I made several bad decisions as did the government. I can't turn the clock backwards. I can only hope readers are able to "buy at the bottom". A lot of money is going to be made over the next several years. It will take only modest regular additions to accounts to build significant wealth.

In the USA, the demand for jet fuel is down 3% year over year and the demand for gas is down 1.6%. The trips being cut out are those that were not as "necessary" as the others. The savings achieved by replacing wing tips or by driving the small sedan in place of the big truck should continue to bear cumulative fruit for years to come. Unprofitable business and wasteful personal use is starting to be eliminated.

The world has suffered more than my family and friends. US law required the following production of ethanol, in 2005 through 2011 respectively, in billions of gallons, 1.8, 2.1, 3.2 4.1, 4.3, 4.6, and 4.9. The mandates continue and by 2016, US producers are required to mix in 5.6 billion gallons per year. As you can see, the big increases hit from 2006 to 2008 when the average increase was almost 1 billion gallons per year. The percentage of the corn grown that went into ethanol was 13% in 2005, 20% in 2006, 25% in 2007 and 31% in 2008. The production of corn has increased but putting 31% of corn into gasoline tanks during a time of food shortages has been a painful event to behold. Hungry children around the world have paid a terrible price.

Again, the good news is that now is a time of healing. The number of nuclear power plants planned has grow rapidly while there has been little protest. China will increase coal usage this year by 19% while the whining about global warming is muted in the background. The market will work its magic and even out the disruptions. Obama voted for the latest government mandates that will require even more ethanol while Hillary and McCain were wise enough to vote no. Since these latest mandates focus on the use of non food products, they will not be as harmful to the economy as the prior mandates. Since the bulk of the required increases do not hit for 7 more years, there is hope that technology will help us meet the challenge with the least amount of pain. Theres is now a good chance that these mandates will be scraped, once other more efficient means of production come on line.

THE MARKET HAS HAD SEVERAL UP 90 DAYS IN RECENT WEEKS

Up 90 days are when the market goes up on extremely strong volume. Up 90 days of course are positive in and of themselves, but they are also indications of good things ahead.

THE MARKET IS ONCE AGAIN ON FIRE!

TODAY COULD EASILY BE ANOTHER UP 90 DAY! I HOPE YOU ARE READY TO ADD TO YOUR ACCOUNT IN ORDER TO TAKE ADVANTAGE!

WHAT DOES THE GOOGLE HOME RUN MEAN?

It means the game is over! It is won! The steady whine of the public investor no longer has any ground to stand on.

IBM hit a home run, a financial or two walked or singled and then Google smacked the cover off the ball. Along the way, CAL was projected to lose 93 cents due to extraordinary fuel prices and it beat the estimate by 12 cents on strong revenues.

Portfolios across the land are in a state of recovery. Those who have owned Google for a couple of years have been wondering why. The fact of the matter is that the long term growth story is still intact. Indeed, the PEG ratio of Google is extremely low.

The PEG ratio is the PE ratio divided by the projected growth rate. I do not pay a great amount of attention to PEG ratios because it is extremely hard to estimate future earnings and future growth so the computation of one estimate by another estimate is always going to be a shaky number. Still, when a stock is at an extreme level, it is worth noting. The Google PEG before the grand slam home run changed the price was .78 with anything below 1 as being very attractive.

The main Google point always must be that the company has built itself a fortress. It "owns" millions of loyal customers who "pay nothing" for its services. I think Google has the most incredible business model of all time. I continue to ask if anyone can come up with another business that is able to give its services away to its customers, provide those services at a cost that is very close to zero and charge third parties sky high fees for tagging along? Microsoft can buy Yahoo if it wants but I do not see any of these guys putting Google in the back seat any time soon.

What we have not see yet is the most interesting part of the story. As I have suggested before, in the near future, owners of portable "phones" will walk into their local grocery store and their phone will immediately pull up their grocery list on the screen with an indication of which isle for each item. The list might also display competing products, the relative cost and even complementary products that might be on sale. For example, if hot dogs are on your list, the "phone" might mention the brand of chips that you like. What do you think Food Lion would pay Google for mentioning the sale on T-Bone Steaks after your phone then communicates to the register that your cart includes a few choice cuts? No more checking out here! The phone and the Food Lion computer would communicate the balance and debit the appropriate account for you.

Who knows exactly how the future will unfold? No one does, but it is clear that the infrastructure is in place, systems are ready for change and the productivity of the systems will make them very valuable to us all.

DIG DEEP

You have to dig deep to see the progress coming out of the Middle East. In Iraq, a tentative deal for sharing the oil wealth has once again been reached. Passage appears to be a cinch this time.

Thirty-one oil companies are bidding on the rights to develop Iraqi oil fields. Since much infrastructure is in place, the development could be quick, a doubling of production in a couple of years or so.

Over in Iran, there has been a significant move toward the bargaining table. The Iranians are willing to sit at the same table with the Americans. It has always been interesting to see the dance involved in getting to the bargaining table. Some thirty years ago, it was the shape of the table that took months to negotiate. Of course, a lot of times the behind the scenes negotiating becomes very intense when the time to do the face to face, public, show meeting grows near; no need to put on the show unless you already have a deal.

China is the latest to "sweeten" the pot for Iran. China would like to buy oil and Iran would like to sell China oil, all will benefit by getting the terrorism and nuclear stuff out of the way.

COST PER MILE

The price of oil is driving up the travel cost per mile. Even a car that gets 20 miles to the gallon consumes 17 cents worth of fuel per mile at $3.40 per gallon. Of course, the 17 cents in no where near the "all in" price. The average total cost per mile is better than 50 cents now. Hybrid vehicles typically cost more than $2.30 per mile after figuring the high cost of purchase and battery replacement. The common belief that hybrids are "the solution" is only partially correct and only in the very long term.

O how great can the cost advantage of the bus and airplane get before the next man chooses to use that mode of transportation? In the last year or so, the cost per mile of a seat on a CAL plane has risen dramatically, from about 11 cents per mile to almost 12 cents! This 9% increase is substantial until compared to the cost of most other transportation cost increases (obviously buses and trains are enjoying the same relatively "progress" against their competitors).

The fact is that less than a year ago, it cost about the same to fly a mile as it did to buy gas for a mile. Today, it cost about 50% less to fly a mile. In many vehicles, those that get less than 15 miles to the gallon, it is now less expensive for two to fly than to drive together, even if the second passenger pays the same fare as the first! The travel cost advantage continues to swing to the airline (bus and train).

BIG PROFITS AHEAD!

As long as oil prices are increasing, airfares, bus fares and train tickets will lag behind. They will go up but they will not catch up until the increases are over. When the price of fuel finally does fall, the price declines in the ticket prices will once again lag behind. The time of peak profits for the planes and trains and buses will be the time when ticket prices are high but the fuel costs are falling. The public will be buyers of airline stocks at this time as they will see the big profits without understanding that the source of the big profits is finally traveling the wrong direction. Buy now, sell when the others see the huge profits and are willing to pay you 20 times these excessive profits!

RIPE HANGING FRUIT

Even after the bounce of the past couple of weeks, there is still ripe, low hanging, fruit available. Profits are coming in well above expectations. Profits will continue to exceed expectations because the sources of productivity growth are just as powerful this year as last. With the Internet and the cell phone networks already built, it is just a matter of continuing to find the best ways to exploit these tools.

The match-up between Google and Salesforce is a good example of learning how to use the Internet. The new hosting of Google Apps is another example of how cheap computing power is becoming available to all who choose to use it. A small business or individual can now host programs free of charge. It was only a few years ago when companies were spending fortunes (literally billions of dollars) to do stuff that is now available free of charge. Oops, there are still thousands of companies and millions of individuals who are paying for stuff that is now available for free!

The Schumpeter forces of creative destruction are alive and well. Extremely low cost data storage (free) and extremely low cost computing power (free) are wreaking old businesses that profited from these services. Everyone else is benefiting. We are in a time similar to the early 1960's after Interstate Highways were built. The US economy was booming like never before but suddenly, the dairy farmers in North Carolina were up against the dairy farmers of Wisconsin. The NC farmers did not stand a chance, but the consumers won big time. The price of milk and cheese to the world went down as the cost of transporting from the low cost producer fell. The average cost of producing cheese and milk also fell rapidly as the extra efficient Wisconsin Farms were expanded and as the 10 to 20 to 100 cow dairy farmer was forced to leave an unprofitable business and find other work. Today, the Wisconsin farmer is better off, the consumer is better off and chances are extremely high that the 10-20-100 cow farmer is better off. Of course, government support came to the rescue and "saved" a lot of the NC farmers. The cost of milk was fixed and billions of tons were purchased to be stored until thrown away. The total gains were reduced by the wasteful actions of the government but the psychological pain was eased. The free milk and cheese provided to the single moms was not a bad thing but simply a very expensive way to provide the aid that was given.

Talk about low hanging fruit! All kinds of stuff is still being purchased, that is available free of charge. Today, billions of people will read biased reporting in literally millions of news papers and magazines. They could get a better perspective on the "news" by reading off the Internet for free. Instead of reading a landscaping magazine that was put together by an editor in another state, the consumer can read about landscaping ideas specific to their location and interests. Instead of paying to have a couple of blueberry recipes handy, why not have a few thousand available for free? Even encyclopedias are still being purchased around the globe while the best encyclopedia Wikipedia is fast and comprehensive. Of course, one of the most powerful things about Wikipedia is the speed with which one can move to referenced materials. Even the study of the Bible has been revolutionized by the quick linkage one can follow.

VERY LOW HANGING FRUIT

Consumer sentiment is at rarely seen levels. It is below the bottom reached in the 1991 recession. It is below the bottom reached during the 1982 recession. It is approximately equal to the bottom reached in the 1980 recession and also approximately equal to the bottom reached in November of 1974. Consumer sentiment is at the approximate level that it reached at the 4 best buying opportunities in the past 34 years!

WHY IS CONSUMER SENTIMENT SO LOW?

One possible reason is that during a time of change, the consumer has been bombarded with false information. Having politicians talk constantly about the false loss of jobs due to free trade is an example. Paul Samuelson has a posting that shows that US manufacturing production over the past 40 or so years has quadrupled while the growth in manufacturing jobs has been flat. Jobs have not been lost due to free trade but jobs have been changed by automation. Politicians have used the very positive and powerful force of productivity as the wedge to suggest that America is in a state of decline, smack in the middle of an economic revolution!

Don Boudreaux talks about the pessimism bias of the American people and the news media (he notes that economist as a group tend to be the optimistic ones). People simply enjoy soaking in despair and discontent.

Yes, the "high price" of food and energy have contributed to the decline in consumer sentiment. From 1970 to 1982, personal consumption expenditures in the USA had leveled down to about 25% of total disposable income. This number was a major improvement to the days of old and only a minor percentage relative to the rest of the world but it was stagnant during that time and the stock market was as well. Then from 1982 to 2000, the US consumer enjoyed spending more and more of their income on "other stuff". By the bottom in 2000, Americans spent an average of only 17% of disposable income on food and energy. Over the past 8 years, this number has back tracked to 20%.

AIN'T IT AWFUL!

Here we are driving up the cost of food for all the people of the world by putting corn oil in our car engines while we complain about the cost of food and fuel rising to 20% of disposable income. The people who spend from 50 to 99.9% of their income on food and energy have much more to complain about, this happens to be about 3 billion people who have a reason to gripe.

Besides, the current spike in the price of food and fuel is a temporary phenomenon. As related yesterday, the production and consumption of commodities is very sensitive to the price. People enjoy eating meat but they had rather eat bread than to starve. It takes many times as much grain to make a pound of meat as it takes to make a pound of bread so at current prices the production of meat is falling. The price of meat will stay high but the total availability of food will increase when less grain is used to feed livestock. If they eat meat, it will more likely be chicken or fish that convert more grain to meat than to pigs or cows.

Same situation with energy. If you have not seen the videos of the Sunday Festival in Bogota, an idea that is spreading around the world, you should take a look. Also take a look at the BRT (bus rapid transit) systems that are being developed at a fraction of the cost of subway systems. The fact is that entire cities are cutting their fuel usage dramatically. Bike lanes are being built and used.

STOCKS ARE CHEAP

Stocks are cheap because inflation, even at the cycle peak, is still low. A lot of people argue that point but no one fully understands inflation. If you say you understand inflation, it is like you are saying you understand the price of a lap top computer. Can you imagine the results if we relied on Ben Bernanke to set the fair price for a lap top computer?

The bulk of the economic trials we have just been through boil down to relying on the government to set the price of money. The price of money in the market place (the t-bill rate) fell below the fed funds rate in July of 2006 as I recall. It took until something like August of 2007 for the FOMC to respond. The irony is that the slow response was part and parcel to the inflation that we have seen since. Since GNP (sorry, my mind is still stuck in the old days when we talked about gross national product instead of gross domestic product) is equal to the PRICE times the QUANTITY of goods, when the FOMC forced the economy to travel at a "reduced speed", it forced the quantity of goods to slow and of course business reduced the production of the "cheap goods" and raised the price on what they could sell. It is easier for a business to get away with a price increase if it is willing to sell 10% less goods. The net reduction in gross GDP has been muted by the increase in price but the real GDP has been lowered by the reduction in quantity produced. The good news is that the ultimate "cleansing" is just what is needed as far as eliminating the production of lost producing goods. That is what recessions are all about, causing businesses to stop doing stupid stuff!

GOOD NEWS ALL AROUND

As the "bad stuff is stopped" the resources will be diverted to "good stuff". Ten dollar airline seats (and the $150 worth of fuel consumed), used for the purpose of hauling a teenager to a spring break drunk fest will be diverted to a more productive use. The price of fuel to all the rest of us will be lowered at the margin by the avoidance of waisting $150 times millions of $10 trips. Have confidence, the invisible hand of Adam Smith is working things out for your benefit and mine. There is low hanging fruit all around, I hope you take the special effort to gather your share!

ALL NEWS IS BAD NEWS FOR FOOD AND ENERGY PRICES

Sentiment is so one sided that all news is now bad news for food and energy prices. For example, the fact that the US is now using less than 82% of its refining capacity to produce all the fuel we need is now the bad news! Oh My! Tigers and Lions and Bears! Two years ago, the price of gas had to go up because there was not enough refining capacity. Now the price must go up because we are not using our refining capacity? I have not seen a bread line or a gasoline line in the past two years while the evil corporations were unable to make enough or since these evil corporations have purposely stopped making enough.

While I believe inflation is a monetary phenomenon, there is truth in Keynesian Economics, an excess of capacity is normally present during a decline in prices. The Saudis say they have excess production capacity and the refiners obviously have excess refining capacity, at least in the near term. The annual switch from winter blends to summer blends does not fully account for the current rate of utilization.

REMEMBER THE SPIDER WEB OF COMMODITY SUPPLY AND DEMAND!

Food and energy prices are and always have been volatile. An event recorded in Israel some 3,000 years ago tells how the price of wheat imploded overnight. The farmer who grows too many tomatoes should not waste the energy to pick the last of them. The farmer with the last bushel at the market might easily quadruple his profit. Because of this volatility, inflation indexes have historically been calculated two ways, including food and energy and excluding food and energy. Also, it is the volatility that has lead governments to pay farmers not go grow, pay farmers to grow extra and to place exorbitant taxes on foreign production, driving up the cost of food to the public. Politicians need to stay out of the middle of healthy markets!

The problem, in the first place, is that even the cumulative total wisdom of the entire market cannot guess the future price of commodities with great precision, the guess of a bureaucrat or politician is likely to be much worse. It is hard to estimate what someone will pay for a bag of rice next year. There are too many unknowns. The game being played by the market participants is a game of "adaptive expectations". Farmer Jones grows 1,000 acres of corn and 500 acres of beans. Farmer Smith grows 800 corn and 700 beans. When the price of corn soars to record highs, Jones and Smith make a lot of money. When they plant their crops the next year, they are likely to check with the one another before planting. If a lot of farmers switch from beans to corn, the price of beans might soar and the price of corn might fall. The economic term that helps describe the relationship between the price of beans and corn is "cross elasticity of demand". Both corn and beans can be used to make fuel and both can be used as food.

Supply and demand of food and fuel jump around. Eventually, the supply demand curves look like a spiderweb. I foresee a big spiderweb in the making. The excess capacity building up in refinery capacity is a very bearish, even though the next two new refineries are months away from production. The current excess is present even though recent economic indicators show there is still underlying economic strength. GNP can rise at the same time fuel usage falls as a result of increased efficiency and substitution.

The news ain't all bad but the perception of it is terrible.