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.

Financial Collapse Continued

I hope this doesn't become a 'cry in your beer blog' but i can't ignore the bad financial news. There is almost literally a story every day about a major financial institution getting the smack down. Here are the latest and greatest.

Freddie Mac- $2 billion dollar loss for the third quarter

H&R Block - Chairman and Chief Executive Mark Ernst resigned today because of subprime exposure through Block's subsidiary Option One Mortgage Company

The Freddie Mac news may be the worse yet because investors may lose confidence in the governments will to bail out financial institutions. I don't think the government should do anything (after all they got us into this mess in the first place) but investors have held somewhat steady because the fed had already opened up the vault to be raided once. With inflation fears growing it is doubtful they will do the same again. Combine that with continued weakness in the overall housing market, retail weakness (Target's weak earnings), and weakened dollar (gold spiked about $20 an ounce today/yesterday), and you have the makings of a recession.

Buckle up.

Tough Primary Decisions

This morning I was swayed to support Mike Huckabee. There is now no choice based on this video.



Then I came to my senses. I am going to be voting for Ike based simply on his ad (via TruthCaucus).

Vote Ike 2008.

Financial Collapse Continued

About a week ago i wrote a post about how the subprime crisis is going to tighten capital markets. I provided a list of real estate failures that painted a stark picture. Little did I know that there would be more evidence in the coming days.

Barclays Capital - Announced write-downs totaling 2.67 billion

HSBC - $1 billion more in write-downs

As I said in the last post about this issue, the danger is not that these companies are going to go under. In fact, Barclays still turned a profit (amazingly). The problem is that capital markets are going to tighten. Lending institutions are going to make it harder to lend money. Less money means less investment. Less investment means less jobs.

Buckle in because its going to get bumpy.

Fred Thompson is the Heir Apparent to W

Fred Thompson seems to be the heir apparent to W. Why? Because Freddy has been light on the details and heavy on talking to the 'folks' its tough to know if he matches W in the policy realm, but phonetically he appears to be a perfect match. Here is an excerpt from his Meet the Press interview yesterday regarding a drug dealer friend of his (Los Angeles Times here),

"I'm not going to throw my friend under the bus for something he did, you know, 25 years ago if he's OK now," Thompson said. "On the other hand, I'm running for president. I've got, you know, to do the right thing, you know, and problems occur, and I'll just have to figure it out."

He manages to say 'you know' 3 times in 3 sentences. One word comes to mind: amateur. When a speaker feels nervous they tend to fill in the gaps with 'um' and 'you know' etc. A good speaker, when hit with a tough question as Thompson was, will pause. It is amazingly difficult to pause and collect your thoughts when eyes (and in this case cameras) are glaring, but is essential in public speaking. While it is true that he was hit with a very difficult question that he did not expect, it is also true that he normally speaks poorly. It is why he seems uninterested and bored.

At least George W. was animated when he would jump off the grammatical cliff. Maybe Thompson should take a page from W's book.

Quote of the Day

It is remarkable how many political "solutions" today are dealing with problems created by previous political "solutions."

Thomas Sowell

Party like it's 2004

Sweet

Random Rumination

I have been steeped in thought for some time. I have been thinking about the Civil War and its affects and the Federalist papers (don't ask, i have an odd mind) lately and have come up with a conclusion: the defeat of the south has extinguished the check on government power intended by Madison and the founders.

It is normally apostate to say anything negative about the south losing the civil war but stick with me here. In Federalist 10 Madison wrote about faction. He basically explained his plan to stop the hording masses (factions) from using the democratic system to take peoples private property. He first explains that we cannot extinguish the fire that is faction. Faction is to democracy what air is to fire (rough paraphrase). To outlaw faction would be to enact a cure that would be worse than the disease (rough paraphrase again). His plan was instead to widely distribute power. Have each state act as a sovereign entity with all powers not enumerated to the federal government. Therefore, the competing interests of sovereign states would prevent a metaphorically huddled mass of poor voters with pitchforks.

This seems to make a lot of sense. But there is one problem: states are no longer sovereign entities. Not since the Civil War. States lost sovereignty rights at Appomattox court house. North and South.

So if states are no longer sovereign then what is preventing the masses armed with pitchforks and ballots from seizing the property of the minority? Not much. We have seen the power of the federal government increase in all areas of life and there seems to be no brake peddle. The middle class acted as the stopper in the past but they have realized that there is no need to get screwed. Just join the party. Get tax cuts without sacrificing government insurance or things like corporate welfare, and continue to demand more services.

I guess Madison's brilliant architecture couldn't last forever.

Economic Outlook...Dim Government's Response....Worse

American's seem to have an amazingly tiny attention span. When the "subprime" mortgage problems began to bubble up people were worried. Now? Most people don't seem to care. That's unfortunate because the hammer hasn't fallen yet. It takes time but it will trickle down. Buckle up.
Merrill Lynch - $8 billion in write offs for bad debt. They went from a profit of $3 billion to a net loss of $2.3 billion.

Bank of America - 32% drop in 2007 Q3 profits. Net income fell 1.72 billion dollars.

Bear Stearns - 61% drop in 2007 Q3 profits. Total revenue fell 38%.

Countrywide Financial - 37% drop in Q1 2007 profits. Net income fell 249.5 million.

Citigroup - 57% drop in Q3 2007 profits. $6.5 billion in pretax losses and write downs.

I could go on, but these are the best examples. The bigger question is what does this mean? The drop in profits alone is irrelevant for the wider economy. What is relevant is how these loses have tightened equity markets. Less capital leads to less investment which leads to fewer jobs. It is a very simple equation. The fed has bailed out the banks with bundles of cheap cash (notice the dollar's value falling hourly?), but banks will still tighten their lending practices.

What is the government proposing to do? Exacerbate the problem of course. Congressman Barney Frank is proposing to...

"require all mortgage originators to present consumers with loan products appropriate to their current circumstances, ban prepayment penalties for sub-prime mortgages and forbid incentive payments to lenders who steer borrowers into higher-cost loans" (from The Hill)

Imagine if we instituted such rules for restaurants. What would happen? The menu would change for most people depending on who decides the definition of "appropriate", the restaurant wouldn't be able to punish you if you walked out on your check, and waiters would not be allowed to encourage you to buy the extras (desserts, appetizers, drinks). Does not sound like a desirable economic situation for either the buyer or the seller. Essentially the same will happen in the real estate market. There will be a capital crunch.

I'm no historian but this is eerily similar to what happened in the great depression.

Some Common Sense On Iran

For some time I have been frustrated over the inevitable war coming with Iran. The administration has made it abundantly clear that Iran is the center of all the worlds ills. This should come as no surprise. Along with being a convenient diversion from the failures in Iraq, it is a great way to coalesce the American people against a common enemy. It worked wonderfully for so many years so why abandon the formula?

The only problem is that it is divorced from reality. Fareed Zakaria tosses a dash of common sense over the issue below...

Here is the reality. Iran has an economy the size of Finland's and an annual defense budget of around $4.8 billion. It has not invaded a country since the late 18th century. The United States has a GDP that is 68 times larger and defense expenditures that are 110 times greater. Israel and every Arab country (except Syria and Iraq) are quietly or actively allied against Iran. And yet we are to believe that Tehran is about to overturn the international system and replace it with an Islamo-fascist order? What planet are we on?

The only advice i can give is to hold onto your oil stocks and wait for the war.

Midterms

Midterms killing me at this time. Check back for a pulse.

Notice a Trend?

From Slate.

State Secrets?

What information can be considered a "state secret"?

Here, the Supreme Court refused to hear a case in which a German man was mistakenly abducted in Albania and tortured in a secret Afghanistan prison. Khaled el-Masri's lawsuit was tossed out of federal court and the 4th circuit court of appeals before being turned down by the supremes because the government claimed the case would compromise national security. The precedence for the case in the article below....

The Supreme Court created the doctrine in a 1953 decision, United States v. Reynolds, which began as a lawsuit by survivors of three civilians who had died in the crash of a military aircraft. In pretrial discovery, the plaintiffs sought the official accident report.

But the government, asserting that the report included information about the plane’s secret mission and the equipment that it was testing, refused to reveal it. The Supreme Court upheld the government, ruling that evidence should not be disclosed when “there is a reasonable danger that compulsion of the evidence will expose military matters which, in the interest of national security, should not be divulged.”

It appears that there may be some risk involved in revealing the location of secret prisons, but what is the criteria? I am not a lawyer (I only play one on the Internet), but it seems the government has a free hand to define "state secret".

There is no burden to prove that a fact must remain secret beyond merely stating so. Is what happened to Pat Tillman a state secret? It is if they want it to be. Also, what does the term "national security" encompass? That is potentially a very large field. According to the presidential candidates regulating the Internet and global warming are "national security" issues.

I can only hope the judiciary would not allow such a wild expansion.