Forewarned is Forearmed

We are an amazing bunch of 'sheeple', as Michael Savage would say. Warn us enough about something bad happening that then doesn't happen, and presto, subsequent warnings are completely disregarded. Unbeknownst to us, and most gamblers, the odds of rolling seven with 2 dice each roll stands on its own, with no relation to what has happened previously. That's what odds are. They are not contingent on the fact that you rolled a 7 one, two, or twenty times in a row. Each roll stands on its own, independently of any history. So does the latest terror alert, which was received with an almost unanimous "not again" being thought by the collective American public, stand on its own.

This warning seems to come with some additional supportive "chatter", details, corroboration, credibility, and even some wanted photos of potential terrorists who might be setting up the attacks, but once again, no specifics on type of attack, time, or place. Just that it will be BIG. They have warned that the crazies may decide to make it a fairly large scale attack and may in fact use chemical, biological, or g-d forbid, nuclear type of weapon. AWww...Shucks, maybe one day the terrorists will slip up and give us the place and time as well. Another twist, is that even with all the extra information, the newly irrelevant Department of Homeland Security has decided that it is not necessary to raise the nursery school modeled, color coded Threat Level, from the everyday yellow or "elevated" level, to the more exciting orange or "high" level, which would trigger all sorts of extra security and precauctions, even though the Department of Homeland Security has assured the public that they will be stepping up security and alert levels nationwide.

Funny thing is, we just had all these congressional hearings about how our leaders and government agencies fouled up intelligence prior to the 9/11 attacks, yet now we have all this information, and we seem to be basically ignoring it. Go figure. As I watch all the news coming out, I can't help but ask myself what would I have been doing if I had very credible, corroborated, & kind of specific, information that terrorist were 90% prepared to attack our country in a BIG way?

Well, now we have that heads up...so do whatever you would have done now. After the attack, it will be too late.

My Wife Told Me Gas Is $2 a gallon

This past weekend, during one of our quite moments, when the children were asleep, my wife curled up next to me and said, "honey, do you know gas is $2.00 a gallon for regular?" I almost fell out of bed. I have been married for 17 years and my wife has never said anything to me about gas, except to ask me to fill her car up with it. The high cost of oil is catching the attention of everybody, including my wife, which is a sign that either the top is in, or our economy is about to stress under the weight of permanently high oil prices.

Over the past few months OIL has been expensive and recently, it has reached prices not seen since, EVER! Recent prices have never been seen, and many things are signaling that these prices are not going to recede in the near term, and maybe not for the intermediate, or long term either.

OPEC says that they are close to maxing out there production capacity, and many of the OPEC Ministers say that its not the supply of oil that is the problem. The Qatari minister also said even maximum OPEC oil production output wouldn't solve the problem of record-high oil prices. Political and psychological factors weighing on global oil markets were behind high crude futures prices. "OPEC can't solve these issues," he said, repeating that there is no shortage of supply in today's oil markets.

In fact, OPEC stated today that "inadequate refining capacity in the U.S. and multiple specifications for gasoline in its different states are some of the reasons behind the current high global oil prices." The causes for high OIL prices are many...geopolitical tension, high demand (caused by many things, not just a strong global economy), low refining capacity, and maybe most concerning the hubbert index that says that oil production is peaking and will begin to decline over the next decade.

Over the past decade, OIL use and supply complacency has risen and currently, we are mired in a dangerous and debilitating OIL dependency, much like a drug addict. Regardless of cost or consequences, our nation continues to consume oil at the the highest rate in our history and we have failed to invest in any significant "treatment" program to alleviate this problem.

OIL is not just used to power our vehicles. As important as gasoline is to our cars, it is only a small part of our nations OIL consumption. OIL and its many by products are used in almost every industry and is a key raw material in many products, most which we do not consider as an "oil related" product. Some examples of this is carpeting, paint & coatings, plastics, adhesives, rubber, and many synthetic materials used to make fabrics & clothing.

Our homes are heated and cooled with either oil or electricity generated by oil. Our boats, planes, trucks and factories use oil to operate. Chemical companies, hotels, manufacturing, construction, food service, transportation, etc. all require oil to operate and run their businesses. And last but clearly not least, we need huge amounts of oil to keep our military and national defense functioning.

With OIL being a key ingredient to the fundamental operation of our economy, it is remarkable that the consistently high price has not had a more detrimental effect on the economic recovery. How long that can last is yet to be seen, but as the price of oil remains high or if it presses higher, for what ever reason, it cannot remain benign and will not be able to be ignored. Most recently, John Snow, Secretary of the Treasury, said in a way only he can, "the high price of oil is not helpful, but should not halt our country's economic recovery."

The truth of the matter is that high oil prices are much more than "not helpful" to the US and global economy. The implications are way to far reaching to get into in this blog, but the repercussions of expensive oil will show up in every industry and affect every person, everyday.

In previous periods of high OIL/energy prices, economic slowdowns or RECESSIONS always occur...normally about 6 months later. Being that high prices have been upon us for sometime now, going back almost one year, if prices do not recede in short order, economic strain caused by high OIL prices should show up in the coming months. And the only reason it hasn't yet is that borrowing has been so inexpensive, that the high cost of oil has only been background noise, especially since we are continuosly told by the BUsh administration that oil prices will come down as we secure Iraq...NOT!

If my wife can't ignore the high price of gas any longer, then neither can the economy.

And as a footnote, having nothing to do with oil...

If the FED decides to move from its overly accomodative monetary policy in the coming months, that will add a new dynamic to the high energy prices. "Money" is a large component to the workings of the economy, so if the FED makes it more expensive to borrow it, at the same time as consumers and businesses are facing consistently high OIL prices, the combination will be powerful and unique to this business cycle. The combination of expensive OIL and more expensive borrowing costs could be a combination of forces that hit corporations and consumers in a way not seen before. The economic drugs we are addicted to are cheap money and oil...wait till the hangover from these two kick in.

SELF INFLICTED WOUND

After all the inquiries, investigations, and court martials are done, what will be left of the Iraqi prisoner abuse scandal? According to the Vatican spokesman, the damage done to American-Islam relations will be substantial and by their estimation, will hurt America worse than the attacks of 9/11. The statement read as follows...ROME - The scandal of prisoner abuses by U.S. soldiers in Iraq has dealt a bigger blow to the United States than the Sept. 11 attacks, the Vatican foreign minister told an Italian newspaper. In an interview published Wednesday in the Rome daily La Repubblica, Archbishop Giovanni Lajolo described the abuses as "a tragic episode in the relationship with Islam" and said the scandal would fuel hatred for the West and for Christianity.

"The torture? A more serious blow to the United States than Sept. 11. Except that the blow was not inflicted by terrorists but by Americans against themselves," Lajolo was quoted as saying in La Repubblica. Lajolo said that "intelligent people in Arab countries understand that in a democracy such episodes are not hidden and are punished ... Still the vast mass of people — under the influence of Arab media — cannot but feel aversion and hate for the West growing inside themselves." And, he added, "the West is often identified with Christianity."

The repair stragtegy currently underway will do nothing to repair the public perception in the Muslim world or to change the feelings towards the west or the disdain they have for the American occupation of Iraq. The fuel is on the fire, and the people who hated us hate us more, and now the people who didn't hate us are reconsidering how they feel.

The Cold War has turned into a Hot War, some are calling it WW III, and it seems that it will be with us for quite some time. Like the terrorists that seem small in numbers, yet so effective when they strike, the few soldiers that violated the Iraqi prisoners and took pictures of what they were doing, the few will affect many for a very long time.

GRACEFULLY FALLING ON YOUR M-16

Dear Mr. President,

For the good of the troops and as a show of loyalty to you, my Commander in Chief, I hereby submit my letter of resignation as Secretary of Defense of the United States. I have tried to faithfully serve the American people using my experience and military expertise, yet I have failed in so many ways. I was wrong when I recommended invading Iraq prior to completing the War in Afghanistan. I was wrong on the level of troops necessary to successfully secure Iraq. I was wrong about how much it would cost to fight the war and secure the country. I was wrong about what would happen in the aftermath of a successful military invasion of Iraq. I was wrong about how the capture of Saddam Hussien would effect the Iraqi people. I was wrong to not more thoroughly investigate the prison abuse scandal, and I was deficient when I chose not to bring the situation to your immediate attention. I have been wrong about many things and it would be wrong if I didn't resign.

Thanks you for supporting me up until the end.

Your loyal friend,

Donald Rumsfeld

The Bears That Cried CRASH

We all know the story of the Boy That Cried Wolf. A little boy looking for some attention from the people around him made up a story about a Wolf. After a few 'false alarms' the people stopped paying attention. Just then a Wolf did show up and attacked the people even as the boy warned them that now there really was a Wolf. A famous fairy tale that is used by all of us with our own children to prevent them from telling stories or outright lying, so that when there is real trouble or a problem, we believe them and don't ignore something that truly needs our attention.

For the past year, the well known perma-bears and some other less reviled strategists, have been 'crying' about an economic environment that is unstable and off balance due to many things, which I will not list here, as they are just plain old depressing and have been discussed ad-nauseum in my previous writings. Yet, as the market has been rewarding ignorance and denial of these well known economic issues, investors have been disregarding them. Some very smart investors such as George Soros, Warren Buffet, Sir John Templeton, Robert Rubin, Bill Gross, and other previously well followed market mavens have sounded warning bells, yet investors continue to ignore the warnings. Now, when the proverbial Wolf may very well be upon us, clearly noone is listening.

So far, the market action makes their warnings seem senseless and unwarranted, but that is not because they are not valid. It is because the collective investment community, aided and abetted by the FED and the Bush administration continue to pull increasingly more dangerous economic maneuvers to keep the economic data 'plates' spinning. Hopefully, the analogy is clear. In a circus we watch the juggler put 1 plate up on a stick, then the next and the next until he has 7,8,9, even 10 plates spinning. It is amazing and the crowd ohh's and ahh's with each additional plate. It takes some time to get them all up and going, but at the end of the performance, the plates come crashing down all at once. The show is terrific and the ending is a mess.

Back to the bears and the Wolf, even though the Wolf is clearly knocking on the door, the Bulls don't care and continue to ignore the warnings. The only ending can be a horrible mess for all involved.

PATIENCE WEARING THIN

The FED has all but run out of verbiage to use in its famous FED statements. It is the most widely read government agency press release and its probably the most difficult to interpret, even though its only 2 paragraphs long and contains a mere 143 words. The FED has couched its policy moves in a few of those words. Specifically, "considerable period", "patience", and now, "measured". My guess, along with everybody else's, is that the next statement contains the word "raise" prior to the words "federal funds rate". That would be the signal, that in fact, the FED would be raising rates. Until then, we all wait.

What is very interesting in the recent statements, is the fact that the FED still says that "the committee continues to believe that an accommodative stance of monetary policy...is providing important ongoing support to economic activity." That implies that the recovery and subsequent strength in the economic data is NOT self-sustaining. Clearly, the FED still believes that after three quarters of what normally would be considered healthy growth the economy still has not entered an economic cycle that is powering itself. And thus, still needs historic low interest rates to keep the economy supported. Interest rates that in fact, were put in place specifically to counter the effects of the terrorist attack on 9/11/01, the subsequent war on terror, and the ongoing recessionary environment which followed the bear market in stocks. Most of which is far behind us.

Why would the economy still need that "important ongoing support"? How can that be explained and why haven't they explained it more thoroughly? Slack resource use is the verbiage used, but why would that be? Hasn't the excess capacity been absorbed yet? Haven't companies started to rehire all the laid off workers? If not now, when?? What does that say about the health of the economy? What does that show about the FED's policy up until now? Has all the "easy money" been used to just to keep us from falling apart? And how does the FED unwind the situation without slamming all the borrowers on the head? They just told us to get adjustable rate mortgages. Revolving credit is "revolving" faster than ever. Auto loans at 0% are critical to the auto industry, and 35% of automobiles on the road are 'upside-down'.

Many well known and well respected pundits, strategists and economists have been calling for the FED to start raising rates to begin the unwind and to head off inflation. They are reading the same data as the FED, yet they have a different interpretation of the data. These people must see more strength than the FED. The FED has resisted and has in fact disregarded many suggestions, jawboning and signs that they should be moving rates higher to get ahead of the so called curve. Nonetheless, the FED did nothing. It seems they are either scared or confused, or maybe they know something that everybody else doesn't. They certainly are not showing leadership or insight, as many of their strongest supporters are saying that they don't understand what the FED is waiting for. Even Larry Kudlow called out Mr. Greenspan to get moving on rates.

Now we will patiently remain patient as the FED does its calculations and data collection. August is the next FOMC meeting, and they will have lots to digest between now and then. I can't wait to see the next statement, if only for the fact that there will be some different words in it.