Lemonjello's intermittent skullduggery

[lemonjello]

August 22, 2006

There are still a lot of nasty suprises left out there particulary related to the middle east situation and terrorists. Recently significant, Israel did not defeat Hezbullah and Iraq is in a low grade civil war. Based on that example Syria is supposedly building a Hezbullah-like guerilla group of its own and Iran is now in the Middle Eastern cat bird seat. The US military is overextended and will have problems intimidating Iran at this point. Iran can shut down oil shipping out of the Gulf with a few indefensible missile strikes against tankers in the Straight of Hormuz (notice you never hear this mentioned on the news) which would bring the world economy to a grinding halt. The $ is weakening. Late August is when Iran is supposed to give its reply on nukes. Something tells me the answer is not what the US wants to hear.

-----------------------------------------------------------------

WSJ.com

August 22
By BERNARD LEWIS
August 8, 2006; Page A10

During the Cold War, both sides possessed weapons of mass destruction, but neither side used them, deterred by what was known as MAD, mutual assured destruction. Similar constraints have no doubt prevented their use in the confrontation between India and Pakistan. In our own day a new such confrontation seems to be looming between a nuclear-armed Iran and its favorite enemies, named by the late Ayatollah Khomeini as the Great Satan and the Little Satan, i.e., the United States and Israel. Against the U.S. the bombs might be delivered by terrorists, a method having the advantage of bearing no return address. Against Israel, the target is small enough to attempt obliteration by direct bombardment.

It seems increasingly likely that the Iranians either have or very soon will have nuclear weapons at their disposal, thanks to their own researches (which began some 15 years ago), to some of their obliging neighbors, and to the ever-helpful rulers of North Korea. The language used by Iranian President Ahmadinejad would seem to indicate the reality and indeed the imminence of this threat.

Would the same constraints, the same fear of mutual assured destruction, restrain a nuclear-armed Iran from using such weapons against the U.S. or against Israel?
* * *

There is a radical difference between the Islamic Republic of Iran and other governments with nuclear weapons. This difference is expressed in what can only be described as the apocalyptic worldview of Iran's present rulers. This worldview and expectation, vividly expressed in speeches, articles and even schoolbooks, clearly shape the perception and therefore the policies of Ahmadinejad and his disciples.

Even in the past it was clear that terrorists claiming to act in the name of Islam had no compunction in slaughtering large numbers of fellow Muslims. A notable example was the blowing up of the American embassies in East Africa in 1998, killing a few American diplomats and a much larger number of uninvolved local passersby, many of them Muslims. There were numerous other Muslim victims in the various terrorist attacks of the last 15 years.

The phrase "Allah will know his own" is usually used to explain such apparently callous unconcern; it means that while infidel, i.e., non-Muslim, victims will go to a well-deserved punishment in hell, Muslims will be sent straight to heaven. According to this view, the bombers are in fact doing their Muslim victims a favor by giving them a quick pass to heaven and its delights -- the rewards without the struggles of martyrdom. School textbooks tell young Iranians to be ready for a final global struggle against an evil enemy, named as the U.S., and to prepare themselves for the privileges of martyrdom.

A direct attack on the U.S., though possible, is less likely in the immediate future. Israel is a nearer and easier target, and Mr. Ahmadinejad has given indication of thinking along these lines. The Western observer would immediately think of two possible deterrents. The first is that an attack that wipes out Israel would almost certainly wipe out the Palestinians too. The second is that such an attack would evoke a devastating reprisal from Israel against Iran, since one may surely assume that the Israelis have made the necessary arrangements for a counterstrike even after a nuclear holocaust in Israel.

The first of these possible deterrents might well be of concern to the Palestinians -- but not apparently to their fanatical champions in the Iranian government. The second deterrent -- the threat of direct retaliation on Iran -- is, as noted, already weakened by the suicide or martyrdom complex that plagues parts of the Islamic world today, without parallel in other religions, or for that matter in the Islamic past. This complex has become even more important at the present day, because of this new apocalyptic vision.

In Islam, as in Judaism and Christianity, there are certain beliefs concerning the cosmic struggle at the end of time -- Gog and Magog, anti-Christ, Armageddon, and for Shiite Muslims, the long awaited return of the Hidden Imam, ending in the final victory of the forces of good over evil, however these may be defined. Mr. Ahmadinejad and his followers clearly believe that this time is now, and that the terminal struggle has already begun and is indeed well advanced. It may even have a date, indicated by several references by the Iranian president to giving his final answer to the U.S. about nuclear development by Aug. 22. This was at first reported as "by the end of August," but Mr. Ahmadinejad's statement was more precise.

What is the significance of Aug. 22? This year, Aug. 22 corresponds, in the Islamic calendar, to the 27th day of the month of Rajab of the year 1427. This, by tradition, is the night when many Muslims commemorate the night flight of the prophet Muhammad on the winged horse Buraq, first to "the farthest mosque," usually identified with Jerusalem, and then to heaven and back (c.f., Koran XVII.1). This might well be deemed an appropriate date for the apocalyptic ending of Israel and if necessary of the world. It is far from certain that Mr. Ahmadinejad plans any such cataclysmic events precisely for Aug. 22. But it would be wise to bear the possibility in mind.

A passage from the Ayatollah Khomeini, quoted in an 11th-grade Iranian schoolbook, is revealing. "I am decisively announcing to the whole world that if the world-devourers [i.e., the infidel powers] wish to stand against our religion, we will stand against their whole world and will not cease until the annihilation of all them. Either we all become free, or we will go to the greater freedom which is martyrdom. Either we shake one another's hands in joy at the victory of Islam in the world, or all of us will turn to eternal life and martyrdom. In both cases, victory and success are ours."

In this context, mutual assured destruction, the deterrent that worked so well during the Cold War, would have no meaning. At the end of time, there will be general destruction anyway. What will matter will be the final destination of the dead -- hell for the infidels, and heaven for the believers. For people with this mindset, MAD is not a constraint; it is an inducement.

How then can one confront such an enemy, with such a view of life and death? Some immediate precautions are obviously possible and necessary. In the long term, it would seem that the best, perhaps the only hope is to appeal to those Muslims, Iranians, Arabs and others who do not share these apocalyptic perceptions and aspirations, and feel as much threatened, indeed even more threatened, than we are. There must be many such, probably even a majority in the lands of Islam. Now is the time for them to save their countries, their societies and their religion from the madness of MAD.

Mr. Lewis, professor emeritus at Princeton, is the author, most recently, of "From Babel to Dragomans: Interpreting the Middle East" (Oxford University Press, 2004).

[lemonjello]

Core inflation, schmore inflation

smartmoney.com

Some recent comments from Don Luskin -

IT'S NOT AS BAD as forgetting your wedding anniversary, but this Tuesday I forgot to celebrate the 35th anniversary of that horrific milestone in the history of economics — when President Richard M. Nixon imposed emergency wage and price controls on the U.S. economy.

He took this extraordinary measure because, in August 1971, inflation was seen as a national crisis. Prices of everything consumers buy were spinning out of control.

What horrific rate of inflation triggered a national panic, and Nixon's draconian response? Get ready for a surprise. The inflation rate then was a mere 4.4%, based on the Consumer Price Index.

That's essentially the same inflation rate as today. Based on this week's CPI report, inflation is now running at 4.2%.
...
But today we still remember the hyper-inflation that peaked in 1980 at over 14%. So in that context maybe 4.2% is considered trivial nowadays.

But I don't think 4.2% is trivial. The yield on a 10-year Treasury bond is now about 4.9%. That trivial 4.2% inflation takes away almost seven-eighths of your interest income.
...

How do they know the economy is slowing? They're guessing. How do they know a slowing economy will cause inflation to fall? They're guessing.

But right now guesses are good enough for the markets. This week's lower-than-expected reports of the Producer Price Index and the Consumer Price Index are being treated as an "all clear" signal on inflation.

Never mind that the lower-than-expected PPI was due entirely to an unanticipated drop in the prices of autos and trucks, and for the CPI it was entirely due to a similar effect in apparel. These reports will surely be enough to keep the Fed from raising interest rates at the next FOMC meeting in late September.

Nobody is panicking now, but they will be.
...

One thing I know is that statistical measures of inflation — like the CPI — are very slow to react. They reflect average prices across the whole economy. When there is inflation, many prices don't adjust right away — such as wages for union workers who are under long-term contracts.

So even though the CPI's current 4.2% ought to be alarming in and of itself, it actually underestimates the inflation that is currently building, but which has yet to infect the entire price structure of the economy.

That's why I like to look at instantaneous measures of inflation, things that register price pressures very quickly.

One such measure is the value of the U.S. dollar on foreign-exchange markets. Throughout history, when the dollar falls, it's a precursor of inflation to come. Right now the dollar has fallen 30% over the last five years. Today it's almost as low as at any time in the last decade.

Another measure is the price of commodities, especially gold. My historical studies show that gold is very highly correlated with future inflation, as measured by the CPI. At today's gold price — which has more than doubled from its lows about five years ago — CPI can be expected to start running between 5% and 7%.

And even that's an optimistic estimate, because in that study I used so-called "core" CPI, which strips out the effects of energy and food prices. Put those back in — especially energy — and you've got a panic-inspiring inflation rate.

Please don't tell me that all that historical evidence is contradicted by the bond market. Don't tell me that today's low Treasury yields mean that inflation is no problem.

Let's learn from history. Throughout most of the 1970s, when inflation was turning into hyper-inflation, 10-year Treasury bond yields never correctly anticipated the inflation to come. Yields were consistently below what would turn out to be the inflation rate over the coming decade, so bond investors consistently lost money.

[lemonjello]

Feldstein on inflation

Hope this economic stuff isn't too boring - I find it fascinating. Can you tell?


WSJ.com before last fed meeting


By MARTIN FELDSTEIN
August 7, 2006; Page A13

A soft landing is a natural aspiration for any central bank confronting an unacceptably high rate of inflation. For today's Federal Reserve, that means bringing inflation down to less than 2% without the fall in output and employment that would constitute a recession.

The Fed governors and Reserve Bank presidents appear to believe this will happen. Their "central tendency" economic projections, summarized in the July Monetary Policy Report, state that the Fed's favored measure of inflation, the PCE price index excluding food and energy, will decline from the 2.9% rate in the most recent quarter to between 2% and 2.25% in 2007, presumably on its way to Ben Bernanke's "comfort zone" of 1% to 2% in 2008. They project this to occur with real GDP growing above 3% and the unemployment rate remaining under 5%. Indeed, not a single one of the 19 FOMC members projected growth of less than 2.5% in 2007 or an unemployment rate above 5.25%.

Although this optimistic outlook is possible, experience suggests that it is unlikely. A mild slowing of economic growth is generally not sufficient to reverse rising inflation. That generally requires a sustained period of excess capacity in product and labor markets, with GDP growth falling significantly or even turning negative.

The Fed's projected combination of strong growth and declining inflation requires either a rise in the rate of productivity growth that slows the rise in unit labor costs, or some favorable spontaneous decline of the external drivers of inflation that is unrelated to unit labor costs. Neither seems likely. Productivity growth appears to be slowing, and external drivers are pointing to a continuation of high or rising inflation.

The official estimates of productivity growth showed a gradual decline of productivity growth in the nonfarm business sector from 3.9% in 2003 to 3.4% in 2004 and 2.7% in 2005. The result of the slower productivity growth and rising compensation per hour (from a 4% rate in 2003 to 5.1% in 2005) caused the increase in unit labor costs to accelerate from 1.3% in 2003 to 2.1% in 2004 and 2.8% in 2005. Taking the new GDP estimates into account is likely to lower the calculated productivity growth rates and cause estimated unit labor costs to have risen faster than 3% in the most recent quarter. There is no reason to anticipate a favorable productivity surprise of the type that contained inflation in the 1990s.

The rapid rise in the overall cost of living creates wage pressures that make it harder to limit the rise in unit labor costs. The CPI in June was 4.3% higher than a year ago. Since wages and salaries have not kept pace, real wages were actually declining over the past year. That came to an abrupt end in June when they jumped at a 5.7% rate.

The external drivers of inflation imply that actual inflation is likely to rise even more rapidly than the unit labor cost numbers would otherwise imply. The doubling of the price of oil is being reflected in transportation costs and in the costs of goods that use petrochemical inputs. The gap between the sharp rise in real-estate prices over the past few years and the much smaller rise in rents is now causing a catch-up in rents, and in the implicit rental prices that the government statisticians impute to owner-occupied housing. The decline of the dollar in the past year, and its likely further decline in the year ahead, will boost the prices of imports and of domestic goods that compete in global markets. The expected rate of inflation implied by comparing the yields on Treasury Inflation Protected Securities and ordinary Treasury bonds has increased during the year to 2.6%.

...

The consequences of the past interest rate hikes are difficult to predict. The fall in the real level of house prices has caused residential construction to plummet, with housing starts off 14% from 12 months ago. The combination of lower housing wealth and a sharp fall in mortgage refinancing may cause the household saving rate to return to a positive level, bringing down consumer spending. Business expenditures on equipment and software slowed sharply in the most recent quarter. So a much sharper slowdown than the central tendency forecasts is certainly possible
...
In assessing the current interest rate decision, the FOMC members should recall that during the Volcker and Greenspan years the Fed pushed the fed funds rate to 8% above the concurrent rate of CPI inflation in the early 1980s, to 4% in 1989 and to almost 3% in 2000. That measure of the real fed funds rate is now less than 1%.

The Federal Reserve has a difficult task ahead. It is understandable that it would like to achieve the soft landing of low inflation with continued solid growth. But that may not be possible. And if the Fed wants to convince the markets that inflation will be contained in the future, it must show that it is willing to take the risk of tightening too much.

Mr. Feldstein, professor of economics at Harvard, was chairman of the Council of Economic Advisers under Reagan.

[lemonjello]

More Fed stuff

By Greg Robb, MarketWatch
Last Update: 4:53 PM ET Aug 16, 2006

WASHINGTON (MarketWatch) -- The economy and interest rate policy are at a crossroads and any Fed watcher who is certain about which road the central bank will pick should be taken with a grain of salt, said Dallas Fed president Richard Fisher on Wednesday.
...
"If anybody tells you with absolute conviction that the Fed is done raising interest rates or with equal conviction that they have only paused and will raise rates more starting in September or October, remind yourself that at best -- and I'm being generous here -- they are only guessing," Fisher said in a luncheon speech to a real estate trade group in Dallas.
...
Fisher said there were signs of higher wage growth emerging and many of his business contacts report a new ability to pass on their higher costs to consumers.
If these pressures continue to build, the Fed will not hesitate to hike rates again, Fisher said.
"If we see, after this pause, that inflation is beginning to threaten economic prosperity, we will take deliberate....measures to counter it, so that the U.S. economy will continue to prosper," Fisher said. End of Story

[lemonjello]

You are here

[New-born baby]

Not sure about that

Lemon:
Not sure that dollar falls too much lower. First of all, charts shows that dollar could be forming an inverted head and shoulders (bullish). Secondly, gold busted support on Thursday and is headed lower. If oil continues its contraction (a thing that I think will happen provided no Arab war arises), then the dollar strengthens and gold falls.

I don't think the FED has any ability to defend the dollar. All the money in the US Treasury only amounts to 5 minutes worth of trading on the FOREX. "It is what it is."

[lemonjello]

Nice to see this econ discussion isn't boring everyone.

I'm not saying it's a given, just posing the question. You may be correct on the inverted HS, other people are saying the same thing. The fed and other central banks usually defend their currency by raising interest rates even tho defending the $ isn't a stated goal of the fed, it turns out it's a consequence of one of their stated goals of holding down inflation. For currencies its usually a battle of which currency sucks least. So even if the US monetary and fiscal policy management is bad, it may still be better than all the rest. Some of the other countries like Japan and China, for instance, often try to manipulate their currencies down against the $ for mercantilist reasons. That said it would be nice to see everything turn out rosy with a soft landing.

Lemon:
Not sure that dollar falls too much lower. First of all, charts shows that dollar could be forming an inverted head and shoulders (bullish). Secondly, gold busted support on Thursday and is headed lower. If oil continues its contraction (a thing that I think will happen provided no Arab war arises), then the dollar strengthens and gold falls.

I don't think the FED has any ability to defend the dollar. All the money in the US Treasury only amounts to 5 minutes worth of trading on the FOREX. "It is what it is."

[lemonjello]

Wuh Woh

nytimes.com

TEHRAN, Aug. 20 — As Iran fired 10 short-range missiles on the second day of a large-scale military maneuver, officials on Sunday reiterated Iran’s stance that it did not intend to halt its uranium enrichment program.

The statement comes two days before Iran’s self-imposed deadline of Aug. 22 for responding to a package of incentives offered by six Western nations in return for halting the program. The United Nations Security Council has set a deadline of Aug. 31 for Ian to suspend the program or face the possibility of economic sanctions. Statements by officials so far suggest that Iran will neither agree to the incentives deal nor yield to the Security Council.

A Foreign Ministry spokesman, Hamidreza Assefi, said during a weekly news conference on Sunday that Iran would not suspend the program.

“The issue of suspension means returning to the past,” he said. “Suspension is not on our agenda.’’

The missiles fired on Sunday, called Saegheh — thunder in Persian — had ranges of 50 and 150 miles, the official ISNA news agency reported. In April, Iran unveiled new weaponry, including radar-evading missiles and high-speed torpedoes.

The war games started in the southern province of Sistan-Baluchestan on Saturday and are expected to continue along the eastern and western borders of the country in 14 provinces. The games are named after Zolfaghar, the sword of Ali, the son-in-law of the Prophet Muhammad. Ali is revered by Shiites as Muhammad’s successor.

[lemonjello]

We should know something soon.

[lemonjello]

barrons.com 8/21/06

The No-Money-Down Disaster
By LON WITTER

A HOUSING CRISIS APPROACHES: According to the Commerce Department's estimates, the national median price of new homes has dropped almost 3% since January. New-home inventories hit a record in April and are only slightly off those all-time highs. Existing-home inventories are 39% higher than they were just one year ago. Meanwhile, sales are down more than 10%.

Although the stocks of new-home builders are down substantially, the stock market and many analysts are ignoring other implications of the housing news. In the latest Barron's Big Money Poll of institutional investors, not a single money manager ranked problems in the housing market among the factors likely to lead to a sharp selloff in stocks in the next 12 months (see "Headed for Dow 12,0001," May 1, 2006). Most experts still predict a 2%-6% rise in housing prices for the year.

These experts and analysts are basing their predictions on a possible increase in wages, inflation and GDP growth. They are overlooking the fact that by any rational valuation there has been no support for the run-up in housing prices since 2001, when the wealth of the middle class was battered by a bear market. Since then, inflation has been low, and wages practically stagnant. Housing prices, on the other hand, are through the roof.

Extrapolating housing prices from their current level based on wages and inflation is like saying a $100 Internet stock with no cash flow and negative earnings will rise as long as it is able to narrow the loss. The analysis ignores the fact that the stock never should have been trading at $100 in the first place.

By any traditional valuation, housing prices at the end of 2005 were 30% to 50% too high. Others have pointed this out, but few have had the nerve to state the obvious: Even if wages and GDP grow, the national median price of housing will probably fall by close to 30% in the next three years. That's simple reversion to the mean.

A careful look at the reasons for the rise in housing will give a good indication of the impact this drop will have on the stock market. They include, in chronological order: The collapse of the Internet bubble, which chased hot money out of the stock market; rock-bottom interest rates; 50 years of economic history that suggested housing never goes down, and creative financing.

The first three factors might not be enough to cause a crash, except that together they led to the fourth factor. Irresponsible financing causes bubbles. It causes individuals to buy houses they can't afford. It causes speculation to run wild by lowering the bar to entry. Finally, it leads individuals who bought houses years ago at reasonable prices into the speculative borrowing trap. The home-equity credit line has supported American consumer spending, but at a steep price: Families that tapped into their home equity with creative loans are now in the same trap as those who bought homes they couldn't afford at the top of the market.

The cost and risk of adjustable-rate financing can be devastating. Consider a typical $250,000 three-year adjustable-rate mortgage with a 2% rate-hike cap. If the monthly payment now is $1,123, after the first adjustment, the monthly payment is $1,419. After the second adjustment, the monthly payment is $1,748, a $625-per-month increase. That's $7,500 more per year just to maintain the same mortgage. If you think high gas prices are biting the consumer, consider the cost of mortgage adjustments.

Some more numbers:
• 32.6% of new mortgages and home-equity loans in 2005 were interest only, up from 0.6% in 2000

• 43% of first-time home buyers in 2005 put no money down

• 15.2% of 2005 buyers owe at least 10% more than their home is worth

• 10% of all home owners with mortgages have no equity in their homes

• $2.7 trillion dollars in loans will adjust to higher rates in 2006 and 2007.


These numbers sound preposterous, but the reasoning behind them is worse. Lenders have encouraged people to use the appreciation in value of their houses as collateral for an unaffordable loan, an idea similar to the junk bonds being pushed in the late 1980s. The concept was to use the company you were taking over as collateral for the loan you needed to take over the company in the first place. The implosion of that idea caused the 1989 mini-crash.

Now the house is the bank's collateral for the questionable loan. But what happens if the value of the house starts to drop?

The answer, at least from banks, is already clear: Float the loans. The following figures are from Washington Mutual's annual report: At the end of 2003, 1% of WaMu's option ARMS were in negative amortization (payments were not covering interest charges, so the shortfall was added to principal). At the end of 2004, the percentage jumped to 21%. At the end of 2005, the percentage jumped again to 47%. By value of the loans, the percentage was 55%.

Every month, these borrowers' debt increases; most of them probably don't know it. There is no strict disclosure requirement for negative amortization.

This financial system cannot work; houses are not credit cards. But WaMu's situation is the norm, not the exception. The financial rules encourage lenders to play this aggressive game by allowing them to book negative amortization as earnings. In January-March 2005, WaMu booked $25 million of negative amortization as earnings; in the same period for 2006 the number was $203 million.

Negative amortization and other short-term loans on long-term assets don't work because eventually too many borrowers are unable to pay the loans down -- or unwilling to keep paying for an asset that has declined in value relative to their outstanding balance. Even a relatively brief period of rising mortgage payments, rising debt and falling home values will collapse the system. And when the housing-finance system goes, the rest of the economy will go with it.

By the release of the August housing numbers, it should become clear that the housing market is beginning a significant decline. When this realization hits home, investors will finally have to confront the fact that they are gambling on people who took out no-money-down, interest-only, adjustable-rate mortgages at the top of the market and the financial institutions that made those loans. The stock market should then begin a 25%-30% decline. If the market ignores the warning signs until fall, the decline could occur in a single week.

There are other possibilities: The housing market could strengthen; consumers could shrug off higher loan payments and declining housing values; the financial system may have anticipated a collateral disaster (though with banks holding a record 43% of total assets in direct mortgage loans that seems unlikely); the rest of the world could carry the United States for a change. But these are difficult bets to place. Anyone holding stocks, futures or stock-index funds in this environment is taking a tremendous risk.

What happens after the decline depends on our financial policies. When Japan went through a similar situation in the early 1990s, the right advice was clear: Bite the bullet and get the bad loans off the books. Eventually the Japanese acted, but it took them 15 years of trying everything else first.

If we have the courage to take the right medicine right away, the effect of a market collapse could be very sharp and painful, but relatively short-lived. If, like Japan, we fail to act, the coming decade could be very bleak indeed.

[lemonjello]

The inimitable Mr. Glickenhaus

Barrons.com

Seth Glickenhaus, Founder, Glickenhaus & Co.
By SANDRA WARD

WE DON'T KNOW ABOUT YOU, but our summer wouldn't be complete without checking in with one of the investing world's giants, a 92-year-old who's still got what it takes to steer the $1.3 billion under management at Glickenhaus & Co. to success. The Dorchester Fund managed by Glickenhaus has delivered 16.5%, net of fees, on average each year since its 1961 launch, compared with an average 12.4% gain in the Standard & Poor's 500 index. It's been 45 years since he founded the New York-based firm -- yet he's always made time for his other life's work as a socially-conscious scold. Armed with stock ideas and fighting words, here's Seth Glickenhaus telling it like it is.

Barron's: What are your thoughts on the stock market?

Glickenhaus: The stock market is in a world of its own. It is not a stock market; it is a market of stocks.

That could be said at any point and time.

That is perfectly true, but it is truer today than ever before. It is very difficult to tell what the overall stock market will do. If I have to make a prediction, neither the bulls nor bears are going to be happy.

Are you having trouble finding stocks in this market of stocks?

I'm having more trouble than normal finding them.

What makes it harder to find? Valuations? Poor prospects?

Certain groups are doing poorly, such as auto stocks and airline stocks, which are beginning to do a little better than they were but nonetheless are still losing money. Certain stocks within the energy group are still very good. Overall, though, you have to be extremely selective and concentrated. The greatest error made on Wall Street is diversification. Diversification inevitably leads to mediocrity and average performance.
...

What else are you interested in, given your grim outlook?

Well, one reason for my grim outlook is federal spending. Federal spending is so dismally distorted toward the military that it is unbelievable.

It isn't only that we're spending money for Iraq and Afghanistan, but the peacetime budget is an absurdity. We are spending $65 billion for an F22 fighter plane, for example, which is way over cost estimates. The paradox is that the plane cannot be used in combat -- because the ratio of the engine, the amount of fuel consumed is so great, that a pilot will only have five minutes in combat zones before he has to get back to the base.

If you look at the overall federal budget and see the huge percentage going to the military and what is left for medical research, education, the environment and housing, you can't believe it. They talk of reducing the federal deficit, but it is an absurdity.

What if the Democrats win back Congress in the fall?

They will rectify the deficit to a minor degree, but they also are great military spenders. [New York] Senators Clinton and Schumer voted for the Iraq war.

What is your sense of what will happen in the elections and what it means for the economy?

I think the public is completely fed up with George W. Bush and the Republicans and their incredible mismanagement of the country, and there'll be a sweep by the Democrats. That's a positive. At least the Democrats have some heart. They are sympathetic to the downtrodden. The huge disparity of income that has occurred in this country is one of the great negatives and one of the reasons that I'm pessimistic about the economy.
...
What's your view of the global picture?

I've noticed interest rates are going down in Japan, and this is a symptom of less demand. And the European market is not going anywhere from here, I think. But India and China will continue to grow, and that's a great plus. The unknown factor is if they keep growing as much as they have, whether the stock market -- despite our weaknesses in the United States -- will hold up.

Are you worried about inflation?

No, I'm more worried about the possibility of deflation than of inflation.

How's that?

We don't believe what we read in the papers. The price of homes is going to come down and auto competition is tremendous, and they are giving all types of incentives that lower prices further.

There is tremendous public sentiment against the Iraqi war, and while there is a feeling we will be pulling the troops out sooner rather than later or at least reducing them, it is wise to remember we still have troops in Germany and we have troops in Japan. We'll never give up completely in Iraq. They'll be there for 50 years. The military doesn't give up and they control this country, because they get the following of the Congress and the president.

The military-industrial complex?

Eisenhower warned us, and it has happened. Don't forget, the nature of warfare has changed. There is not going to be a war like World War I or II again. The Third World War has begun. It is a war in Haiti, where they are fighting the government. It is a war in Colombia, where there are three groups fighting, and Sri Lanka, where you have the Tamil Tigers. In Nepal, the Maoists are fighting the king. It is all over the world. In Africa, there are five different countries fighting in the Congo. Not to mention Iraq, Iran or Israel or the Palestinians.

It is a war of terrorism. And you might be interested to know, there is no defense against the terrorists. There is no defense militarily. That is the big unpublished secret of modern warfare: The offensive weapons have no defense. You say, why do you have so much to say about war? War has a negative affect because the spending involved takes monies away from more constructive parts in the market.

What's your opinion of the Israel-Lebanon war?

We created it. We pushed Israel into doing what they did. Israel would never have gone on without the consent of the United States. They would never have attacked Lebanon as they did. They don't go to the john without Bush's consent.

Well, that's a scary thought.

I'm exaggerating to make a point.

What else concerns you, Seth?

I think I've given you enough for the time being.

Have you had a birthday yet this year?

Yes, I had one on March 12. I'm approaching middle age. I'm 92.

[billyjoe]

Lemon,
He's a sharp dude for any age.

-----------billyjoe

[lemonjello]

Not someone to take lightly.

His comments about the F-22 not being able to be used in combat were interesting. I'd like to see his source for that statement about fuel and range. Is that common knowledge found in Jane's, or is it just word of mouth info being passed around certain circles? The F-22 seems impressive in other aspects like supposedly being able to engage and "kill" five F-16's simultaneously in combat simulations.

I'm sure a lot of people in the military/industrial complex will have their hackles raised when they read that. Then again, the general public will probably never know the difference; how many voters read Barrons?

Lemon,
He's a sharp dude for any age.

-----------billyjoe

[ParkTwain]

Then again, the general public will probably never know the difference; how many voters read Barrons?

I would say: wrong question. Rather, how many BUYERS OF VOTERS (i.e., campaign contributors) read Barron's? Answer: plenty!

[lemonjello]

Trudat

...and that government of the corporations, by the corporations, for the corporations, shall not perish from the earth.

Abe Lincoln (updated)

I would say: wrong question. Rather, how many BUYERS OF VOTERS (i.e., campaign contributors) read Barron's? Answer: plenty!