Welcome Back Stagflation.

The market never seems to make sense. The fed cuts rates, it goes down, companies come in with good earnings its down, bad news about employment and its up. Most of the time the underlying news is not the driver. Market moves can be as mysterious as the lockness monster or a UFO sighting. Everybody things they can explain the unexplainable. In the case of the stock market people get paid big money to explain the unexplainable.

Today there is a very rational explanation. Because economists still have two hands, to the dismay of Harry Truman, there are differing opinions. On the one hand economists/traders are saying its because people are putting money on the sidelines until the bigger rate cuts predicted within the week. On the other hand, this is a major sign of deep fundamental problems with the economy.

Not surprisingly I am siding with the latter. If you have read this blog in the last month you know i have been predicting doom and gloom for the economy. Why? Because of a contracted capital market. Lenders are squeezing the amount of money their willing to lend basically because they just got burned and they are low on reserves. This course was headed straight to a recession (don't pass go), but what is happening now is leading us to stagflation scenario.

At the same time companies are spending and hiring less,and financial institutions are lending less, the federal government is going to try and flood the market again with worthless dollars. The fed wants to continue to cut rates that are still historically low, and the geniuses on the hill want to send people checks indiscriminately. The result is economic slowdown combined with worthless dollars let loose: stagflation. Its not like im the only one out there saying this, but too many pundits act like reality isn't reality or they believe that the liberal media is just making this all up.

For those of us in fairyland (otherwise known as DC) it probably wont hurt too bad. For the rest of you...

New Hampshire Predictions

Republican:
1. McCain
2. Willard
3. Giuliani
4. Paul
5. Huckabee
6. Thompson

Democrat:
1. Obama
2. Clinton
3. Is there any other Democrats still in the race?

Rational:
I think a similar type of scenario will play out in both the Republican and Democratic primaries. The front runners (Willard and Hillary) were stung hard in Iowa and will lose in New Hampshire.

On the Republican side, Willard went from front runner in Iowa to losing badly against a guy with no money and a tiny organization. It's tough to pull out of that especially considering McCain's strength in New Hampshire. With that said, he may still take it if Obama pulls enough independents over to vote on the D side then Willard can win. That analysis goes against my belief about independents (the vast majority of them are partisans who enjoy the distinction of independence), but the landscape in New Hampshire is rapidly shifting left. In recent history it has been somewhat of a swing state but in the coming years it will become solidly blue (thanks W). Advantage: McCain. My Paul prediction this time may be wishful thinking (slightly) but I have a hard time seeing the non-existent evangelical vote in New Hampshire showing up to pull Huckabee over Paul. This may be a bad prediction because the dead have turned out in many past elections so don't discount them.

On the Democratic side, it is not momentum that will kill Hillary. She can withstand an onslaught. The problem is the exit polls from Iowa. Obama won the female vote. If Hillary, the first real chance for a woman to be President of the United States ever, can't win the female vote then she is done. Second, voters seemed to favor change over experience. Although that only captures the sentiment of Democratic voters in Iowa, it is probably not much different from New Hampshire. If the sentiment is even remotely similar, then it is too late for her to change the entire rational for her candidacy.

Overall Picture:
The winners of New Hampshire on both sides will go on to take their parties nomination. To me, this is much clearer on the Republican side. If McCain wins New Hampshire, he will win Michigan next (He and Willard are close in the polls there) which will provide the necessary boost for South Carolina. This will kill Rudy for good and finish Thompson and Huckabee. Replace the name McCain with Willard and the same analysis holds true (especially considering Willard will probably also win Nevada). It isn't as clear on the Democratic side, but I can't see how Hillary can take South Carolina, a state with a black Democratic base, away from a surging black man. Sounds simplistic, but such is life. If she loses all of the early states then she will be done. Her money and organization will mean nothing on February 5th because Obama has tons of money himself.


Note: Considering I F-ed up the Iowa predictions these thoughts may be useful inverse.

Iowa Predictions

I have been away for the holidays but I must put in my picks before its too late.

Republican:
1. Romney
2. Huckabee
3. Paul
4. McCain
5. Thompson
6. Rudy who?

Democrat:
1. Hilary
2. Obama
3. Edwards

Rational:
Having Ron Paul in the third spot is more than wishful thinking. In multiple polls he has double digit support among likely caucus goers in Iowa. A double digit number for Ron Paul is a much larger statement than any of the other candidates. If you say your for Ron Paul your not saying it because you kinda-sorta like him. You say it because you are solidly in his corner. That isn't true of the others.

On the Democratic side I am predicting Hillary because the candidates who do not have enough caucus supporters at any given polling station will lose them to the front runner: Hillary. I thought twice about predicting this because Kucinich has instructed his supporters to support Obama when they are outnumbered, but the remainder should go to Hillary.

Paul Krugman: Socialism Tastes Good - ala Mode

I usually will skip over the New York Times editorials but this one caught my eye. I wanted to read about why Paul Marx Krugman thinks Obama is the "anti-change candidate" but instead was treated to a warm piece of socialism ala mode.

"Mr. Obama who’s being unrealistic here, believing that the insurance and drug industries — which are, in large part, the cause of our health care problems — will be willing to play a constructive role in health reform. The fact is that there’s no way to reduce the gross wastefulness of our health system without also reducing the profits of the industries that generate the waste."

This is so crazy coming from an "economist". Profits are the problem? Profits cause waste? What economics theory produced such nonsense.

Reduced profits = less research and development

If a reduction in research is what the desired outcome is then using government to take away profits is probably a good idea. I'm going to assume that Krugman doesn't want that to happen. Using that assumption im not sure what he thinks is going to happen. Does he think that companies are going to make large quantities of high quality pills if there is no profit incentive? Interesting. Maybe he knows something that the economics field does not already know.

The real problem is collectivist health care systems around the world. Essentially, American health care consumers subsidize health care costs for the advanced nations. How? Because they cap prices and have collective bargaining schemes to drive down prices. Where do pharmaceutical companies make up the lost revenue? From us. That is one of the fundamental problems and it has no logical solution.

Taking away profits away from pharmaceutical companies will not improve health care quality any more than taking profits away from Intel will improve processor speed.

Currently Being Crushed

The weight of finals etc is heavy.

No postings until next week unless something exceptional happens.

Muhammad Teddy Bear Story Goes from Abnormal to Unbelievable

I usually don't write about stories like the Muhammad teddy bear because it is a better fit for alarmist talk radio, but this is too crazy not to write about.

As you probably already know, an English teacher was sentenced to jail (a lesser punishment considering she escaped 40 lashes) in the Sudan for allowing (encouraging?) her students to name a teddy bear Muhammad.

This story didn't surprise me in any way. That society has decided that they want some form of theocracy. Fine. Let them have it. I don't live there and never will. My knowledge of Sudan's legal system is not up to par, but if they had a clearly stated law against naming animals Muhammad then I don't know what all the fuss is about.

The problem is this. These people are rallying in the streets with clubs and axes demanding that the teacher be executed.

I think I am speechless. Not exactly, but nearly.

Mostly, I think this is a control issue. Muslims feel dominated and disgraced by their lack of economic and military progress in the last 500 years so they show their superiority where they can. I do not think there is any coincidence that the teacher is British. The Islamic state of Sudan was originally created after the original expulsion of the British under the leadership of Muhammad ibn Abdalla. Abdalla fought for the return to a more pure form of Islam; a fight that continues today.

In short: the people rallying are saying we want a return to a pure form of Islam and we don't want to be walked dominated by Western powers. They picked an absurd event to make their statement, but they are Abdalla's hordes.

Pelosi Strikes Again

Common sense? Who needs no stinkin common sense!

This appears to be the motto of Speaker Nancy Pelosi. Why?

She is holding up the $53 billion dollar Commerce, Justice, and Science (CJS) budget because she thinks employers should be allowed to have English only policies in the workplace. Senator Alexander's amendment to the CJS appropriations bill (the source of her angst) strips EEOC funding for lawsuits against English in the work place policies.

Beyond objections from the Hispanic caucus and ACLU types there is no reasonable objection. The employers who were being sued were not impinging on any rights because they did not dictate which language employees spoke on their free time. I could probably make an argument for the employers about efficiency, but what about common sense? If an employer can't dictate how an employee acts at work then what can they dictate? Maybe disgruntled employees should get the EEOC to start suing employers who mandate culturally insensitive uniforms etc.?

I'm not sure how or why the Hispanic caucus in Congress got so powerful, but she must find a backbone. I'm not holding my breath while i wait.

Thanks to John Fund at the Wall St. Journal.