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December 11, 2014


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TODAY--Market up 421 !!!! Oil down. Putin his ugly self. North Korea use threats and black mail from hacking to cancel SONY's movie. As I hear it the movie might have ended in poor judgment for a comedy, but North Korea has opened a new era of cyber bullying by a Nuclear country. China and Russia also have nuclear weapons and conduct cyber raids on us assets but so far they have not used threats to force actions. Given the Russian dilemma it is a scary thought that perhaps a hacker from a nuclear country gets into the power grid and threatens to shut us down unless we act in some dictated way. Our financial system, defenses and satellite surveillance are also potential targets of mass attacks. Sony backed down--would the US? Food for thought.

CUBA--big news? Not really--just a big political flap. Cuban's make $19 a month. Can you blame it on the US embargo--hardly. The rest of the world has not embargoed Cuba. Tourists from the world can go there. They have hotels, beaches and a talented medical industry. The problem with Cuba is Cuban. It is a virtual socialist/communist prison. People are basically slaves to the government and not allowed to leave the country, assemble or interact with the world through the internet. It was in many ways the Western hemisphere's North Korea--perhaps not as brutal but that remains to be seen.

So, for 50 years or so the US has tried to wall them off to attain change in political leadership. Castro has outlived the US political will. So, we will now use Nixon's China model--invade them with capitalism and liberate the masses economically. It certainly can't hurt. But, one only has to look to the people of Haiti, Jamaica and other Caribbean nations to see that freedom alone does not guarantee prosperity. Cuba will, like China, be a welcome home to US cigar companies, sugar companies and hotels.

I bet if the Cuban government allows Cubans to become world tourists the requests for asylum will be prolific as the US President opens our immigration system to take them in. And, why would they not? More Democrat votes to Florida. Socialists have a progressive, invasive strategy to gain control world wide and like the Mexican invasion of the US, the Muslim invasion of EU, immigration from Cuba will add to the Democratic base in Florida. A key swing state in elections. Once the relatives have come to the US protectorate--the Republican Cubans will become Democrats. As I listened to his speech I was once again impressed to see that the "I" man is back. His new role of using Executive Power reminds me of the behavior of Putin. Executive power is the way Monarchs and Dictators rule. Food for thought.

CAREFUL WHAT YOU ASK FOR PART II: As I have said many times since 1972 there is more oil on earth than anything except salt water. The price of oil is therefore controlled by the lowest cost producer. Now, the lowest cost producer is Saudi Arabia at about $10/barrel. However, in the short term the lowest cost producer is in actuality any producing wells that are capitalized and carrying no debt. So for the most part the world’s largest oil companies control most of those assets. And, they can create cash flow for a long time without drilling more wells and expending cash to do so. Those with debt to service have more problems. But production is not the only consideration: the next factor is the transportation costs of the oil to market. Saudi’s have to transport a lot of their oil by ship to get it to market. that’s cheaper than train but more expensive than existing pipelines. The US being a huge consumer of oil is in a good position as long as it is willing to trade domestic production for Saudi production as it means that it can continue to lower it’s imports. It is a huge advantage to be the US with both high consumption and high,growing production. Versus countries in which the government gets its revenues from their production and has little internal consumption. This has happened before in the 80’s. In that situation the price of oil fell into the $30 range. It created a recession in the 5 major producing states. The rest of the country enjoyed a major economic boom. Those who point to that example try to make the point that this is good for America. Maybe long term but short term there are differences and potential pitfalls. For one the last 6 years most of the millions of jobs created in US (and claimed by the President) were the result of the oil shale boom in 27 states. Those jobs are currently in jeopardy, growth has slowed and budgets are being slashed for 2015. So, the gains in employment are likely to slow if not reverse if oil stays down too long. Unlike the 1980’s oil is now a big industry in 27 states not 5. A recession in oil is likely to be more dramatic than just 10% of the states. It is said that $1 Trillon in capital investment has already been put on hold. In most economic systems lower prices increases demand. That may happen in oil as well for a while, but if we get a recession in 20+ states it will not. And, in fact if the demand for oil produces only 50% of the revenue to oil producers then it stands to reason that they are not going to invest in local economies at the same rate they are now. That means the surrounding companies will slow down. Recessionary pressure will occur. Texas, Oklahoma, Dakotas, Pennsylvania, California, etc will feel it and even tax revenues may go down.

The dollar will continue to strengthen and that means lower exports and reduced manufacturing. Outside the US slowing growth in the short term will put more pressure on governments and 3rd world economies. That could further reduce export demand and create manufacturing problems. On balance the imports may cheapen and competition with US products may increase creating more pressure on US manufacturing. Overseas this is likely to put more and more pressure on central banks to stimulate economies following the lead of Bernanke and print money devaluing more currencies making the dollar stronger yet.

The Saudi’s will likely keep this up until they have taken out the high cost producers—namely the shale companies and the highly leveraged drillers. They will also put pressure on the LNG exporters, They have no need to produce LNG with $10 oil for another 50 years. Indirectly this move is going to put a lot of pressure on electric cars, solar companies, wind farm development and slow the economics of alternative energy.

Russia is just the first of a lot of countries who will react one way or another to this situation. In the end the ones with governments that derive their budgets from oil will be under the most pressure. Dramatic events could occur.

Long term if we do not have a world crisis then the Saudi’s will slowly take oil back up. The lower oil prices will help the US, European, Japanese and Chinese economies. Once that happens then the world economic cycle will return to normal with US/EU consumers driving the economy up followed by the 3rd world returning to better times. How long? It really depends on what the objectives of the Saudi’s really are? Are they doing this to protect their markets? Are they doing this to punish OPEC members? Are they doing this to punish and control Russia and Iran? Or are they doing it to stimulate the economies of the US,EU and China? Each one is possible and has different time frames.

One thing I would not do if I were the US is allow the Saudi’s to destroy the shale industry. But, I suspect the US knows exactly what the Saudi’s are up to. And, I would not be surprised if the large oil companies are not involved in the game as well as the Saudi’s. If they end up buying a lot of the assets of the shale industry then it will be evidence they might be. Or it is just a lucky windfall for them.

There is more and more evidence that the US and world economy is not as good as the Fed would like us to believe: Virtually all of the Fortune 500 continue to accelerate their increase in dividends and share buybacks. If they had better things to do with their money in terms of investment for growth they would do it. They would create jobs and production of goods and services to grow. Not shrink their capital base.
With baby boomers retiring at record rates there is little replacement hiring going on. That is the reason the labor market seems to be OK but wages shrink and the labor force does not grow. In the meantime the new world of mandated benefits is producing a world of temporary, contract employees who have no protection from layoffs and no benefits. Obamacare has it’s unintended consequences and so do regulations.

Food for thought.

Correction to previous post: 90% of republicans vote Republican most of the time.

THE TRUTH is always in the eyes of the beholder. Unfortunately, in our world of freedom of speech the truth is told to us through the interpretation of those with the influences of bias or perhaps more often agenda. Even with the truth known it does not change things very often. Thus, 90% of Democrats vote Democratic and 90% of Republicans vote Democratic virtually every election. This leaves about 20% of the electorate to be swayed by the facts/arguments/truth and decide the elections unless emotions are so enflamed as to drive one side to turnout at a far greater pace than the other. In this case the decision is made by those who normally don't care enough to listen to the truth.

A couple months ago the press wanted us to believe that the most important events in the world were the potential spread of Ebola, Russia-Ukraine warfare, and ISIS advances/atrocities. Now, these stories are hard to find even if you Google them to try and keep up.

They have been replaced by the current search for the truth in Ferguson, Staten Island and the CIA interrogation techniques.
But, who is really searching for the truth? Only those who want to use their version of the truth to justify their beliefs and actions. Democrats are in full panic mode as they lose power and Republicans are in full "far Right" mode as they take power. Both are convinced they know the truth but as Bill so rightly points out in this article what they really know is what they believe and they mold the truth to justify it. Most of us are no different. My next door neighbor and I disagree on a lot of issues even though both of us are well educated, intelligent and well meaning. For the most part we both work to observe the facts/information on many events and issues to assess the truth. Then we debate what the truth is and action should be. At that point truth is lost to beliefs and we shake our heads, then hands and agree a glass of wine would be a better use of our time. Every 2 years we meet in the driveway and head off to cancel each others vote for the good of the country. NEVER do we say an unkind word, say the other doesn't understand the facts, or put a torch to the others house or throw a brick through the others window. We, like Archie Bunker and Meat Head, understand differences of opinion and bias. So, it should be.

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