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Monday, February 27, 2012

$2.50 a gallon gas

The Republican contenders are promising $2.50 a gallon gasoline, often included with the statement “My first day in office I will sign…” This follows the playbook How to Win Elections, the first rule is promise everyone everything. Politicians Explain that this will be accomplished with “Drill baby, drill” following the second rule of How to Win Elections which is to surround yourself with rabid supporters. Using rabid supporters insures that no realistic questions will be tolerated. In current parlance this is called “giving red meat to the base”. In truth I would like gas at $2.50 a gallon. My first question is, if this is possible for politicians then why hasn’t it been done? The answer of “the socialist destroying America” is more of the rabid supporter rule. In reality any politician that could get credit for lower gasoline prices would have an easy walk to election, and winning election is every politician’s first priority, regardless of party or ideology.
Why are gasoline prices increasing? Currently there is a glut of unrefined oil and falling demand due to the general world economic conditions. Simple supply and demand would predict lower gasoline prices, not higher prices. The reason for the break in the laws of supply and demand is explained, by the oil companies, as a refining constraint. Further online research shows that there is more profit in exporting American oil than selling it domestically. In this explanation the price of a barrel of oil places a floor for the price of gasoline, crude oil supply is not the final determination of the cost of a gallon of gas. Additional internet reading allows for multiple conspiracy theories, there may be some market manipulation but the international fungible nature of the oil market makes conspiracy difficult. Claims of speculation by dark hearted investors are hard to support due to the size of the market and the relative insignificance of the speculators. The international market is in the trillions, having a few billion sloshing around due to speculation will not make that much difference.
The oil refining constraint is another political talking point. One side blaming the overreaching government and burdensome EPA regulations, this is countered by the environmentalist demanding clean water, clean air, or whatever. With rabid group against rabid group an excellent opportunity for a day of free entertainment becomes available. You could spend the first half of the day in one rabid group and then slip into the other rabid group for the second half. With clever wording for signs and reversible dress the same signage could be used dressed first as an angry racist redneck then as a dirty stoner hippy. The facts about oil refining are rather boring; the change in the mix of oil grades from light sweet oil to heavy crude oil requires redesign of the chemical cracking units. Economics not regulation makes this a nonstarter. If regulation was the only problem the international oil companies would just move refining to a country that has no regulation, maybe Nigeria.
I’m going with the price of a barrel of oil places a floor for the price of a gallon of gasoline. This of course is complicated by the type of oil. We will use the light sweet crude standard (also know as West Texas Intermediate or WTI), this is what most of the American refiners are designed to use as feed stock. For gasoline to have floor price of $2.50 per gallon, the WTI needs to be about $60 per barrel. With the “drill baby drill” approach we open deep water Gulf of Mexico tracts for exploration. The cost of a barrel of oil delivered to the refinery from deep water wells is about $80 per barrel or more. Shale oil deposits run about $95 per barrel. Using new technologies to recover additional oil from fields that no longer have free flowing oil wells exceed the $60 per barrel threshold. The problem is where do we find $60 per barrel oil in sufficient quantities?
I have to grade this Republican promise as “Promise them anything” and “just win baby, win” election campaigning in the finest classical mode. It would be nice to have an honest, well thought out energy policy, every President since Richard Nixon has promised one. Special interest groups and back room political deals have prevented any progress. Maybe after the drop of gasoline prices following summer we could all contribute 25 cents per gallon and buy our own lobbyist to create legislation that actually helps the middle class.

Fun reading for this blog topic.
How to Win an Election: An Ancient Guide for Modern Politicians by Quintus Tullius Cicero, written in Latin in 64 BC, currently available only in terrible translations.
The Prince by Niccolo Machiavelli, written about 1505 AD, excellent translations available.

Sunday, February 26, 2012

An Organic Breakfast Midnight Snack.

I really like breakfast, the menu selection is wide enough to allow for meals 24 hours a day. My wife, daughters and sister-in-laws all had this organic, healthy food awakening. They have been captured, converted, subliminally brainwashed, by Austin Texas and Whole Foods grocery. I don’t know what organic healthy food is, I do know what taste good, at least to me. Breakfast has all the food groups, you know, eggs, biscuits, gravy, pancakes, potatoes, bacon, donuts and coffee. I think that covers everything, right? Eggs have to be organic, they come from chickens, and chickens are organic. Pancakes? Take a cake and beat it flat with an iron pan, cake is organic bakery and beating something with an iron pan is perfectly natural. Breakfast is fully organic health food, although I’m not so sure about that fake sugar in the little pink packages.
As a child I was a ‘WonderKid”, a child raised on Wonder Bread. Wonder Bread has gone into chapter 11 bankruptcy taking Twinkies out of distribution. Not a big problem, Twinkies was a substitute for dunking in coffee but I can survive with the original donuts. Losing the white bread produced by Wonder Bread is a bigger problem, now I get these brown biscuits and bread made with wheat. Milk used to be milk, and then there was 2%, followed by 1% then the lactose free milk. If it is 1% milk what is the other 99%? What kind of lazy cow produces 2% milk? I don’t think milk is milk anymore. It is like sugar free syrup, caffeine free coffee or gravy without bacon grease. I am told this is organic and healthy. Apparently over the last few generations we moved from natural organic small farm produce food to mega-corporation mass produced cost optimized artificially colored tasty made-man chemicals, and Wonder Bread’s management didn’t keep up with the competition. So now Wonder Bread is gone and I am no longer the “WonderKid”.
Well, time for my late night breakfast snack and I’ll be having eggs over easy from free range chickens with whole wheat biscuits and flax gravy made with not-milk and some decaffeinated coffee. It’ll still taste pretty good.

Friday, February 24, 2012

$200 an ounce silver

What is a future options contract? It is a contract to buy or sell a specific quantity at a specific price at a specific date. If you are a farmer that grows potatoes you can sell $10 of potatoes to McDonalds to be delivered on the 3th Friday of June 2012. McDonalds will pay a fee for this contract, maybe $1. The farmer gets the $1 now and then $10 in June for a total of $11. In June the open market price of potatoes may be more or less than $10 but the contract will be met with the physical delivery of potatoes at the agreed price. This allows both the farmer and McDonalds to plan June with certainty, and certainty is of great value for all kinds of industries, ranging from jet fuel to raw materials. Individual speculators, such as me, can buy or sell these future contracts. I have no interest in taking physical delivery of 10,000 gallons of jet fuel. I will close the contract before the delivery date, hopefully for a profit. That is a properly functioning market serving a legitimate business purpose, speculators take their chances, I can win or I can lose.
The options market for gold and silver do not work this way. The market in gold and silver is manipulated by a small group of the largest banks for huge profits. This is commonly know and has been the standard practice for decades. These corporations have established a monopoly on the market for gold and silver. The banks make profits in the hundreds of millions, sometimes in a single day, by selling options contracts and then forcing the price to their advantage. They operate the ETFs of gold and silver by generating paper contracts that are backed by very little of the actual metal. The actual amount of metal in reserve ranges from 10% to 20% of the contracts that have been issued, it is estimated that if only 5% of the contract holders asked for the physical delivery of gold or silver the ETFs would go bankrupt. None of the ETFs will allow redemption in the physical metal. Why would governments allow this to continue? Why hasn’t the American government, the British government or the German government stopped this practice? Because the governments are principle beneficiaries of the monopoly, the corporations operate with governments in the gold carry trade. Governments lease their gold reserves to the corporations who trade the gold and buy government bonds, making a guaranteed profit. A nice scam in which the only loser is the tax payer, to be fair this system does maintain fiat currencies and the American dollar as the world’s reserve currency.
Now the system is being challenged. The Chinese have created the Pan Asia Gold Exchange (PAGE), this is not a member of the monopoly and has no plans to join. PAGE backs every contract 100% with physical gold, and will soon add silver contracts. Contracts can be redeemed for physical gold at participating Chinese banks. PAGE is being expanded to a worldwide basis with a 90-day International Spot Contract, the PAGE’s gold (in 10 ounce bars) can be delivered to the customer with little effort. This is a serious threat to the unsecured contracts currently offered and will make manipulation of gold price difficult, I hope impossible. The easiest proof of manipulation is the complete disconnect between price and any form of supply and demand. With the introduction of PAGE the normal mechanisms of supply and demand should start to operate. A note of caution, this involves billions of dollars and can change the international monetary system. The current monopolies are threatened and will not just roll over. There are many scams and misinformation.
 I do not know what the price of silver should be or will be. Given the increasing industrial demand for silver and the decreasing production of silver by mining companies a price of $200 per ounce is possible. Gold is much more difficult for me, as there is very little industrial demand, while gold production is mostly a by-product of other mining activities. Demand is set by the “Gold Bugs” who are looking for a safe hedge against fiat currencies. For gold there is too much human psychology for me. I’ll be keeping about 5% gold in the portfolio because I am just as crazy as everyone else.

Addendum: It has been pointed out that I do not provide links for additional reading. This is intentional; I do not wish to pick your reading material. Many blogs I read the authors cherry pick references that support their thesis, I find this useless as the links just repeat the blog. I hope that people will use the internet to complete their own research and reach their own conclusions. As an experiment I have added some links to help get you started without directing you to a foregone conclusion. I appreciate all feedback and comments.

NYMEX/CME/COMEX/CBOT http://www.cmegroup.com/

Wednesday, February 22, 2012

I am a demographically perfect model of a republican activist

As a registered republican I get a lot of republican solicitations, request for money that will be used to save America from Socialist-Nazi-Muslim-Democrats. I have trouble making those words fit together but I’m not a republican politician. I’m not any kind of politician, I’m simply a voter. The Republican Party I joined no longer exists, and I left the party in 2005. I am a financial conservative. There is no longer any segment of the Republican Party that is financially conservative. I once contributed to the Republican Party, had yard signs, that kind of stuff. When I left the party I expressed my views to the local party chair clearly stating that I was leaving. I guess you can’t quit the Republican Party since they still send me personal mail. I received a letter claiming “After compiling and modeling demographic information for the thousands of activists in our database, you were selected to represent voters in your area in the OFFICAL 2012 Presidential Platform Survey.” Really? I also received a letter from the “2012 Congressional District Census” claiming “Your registered census is one of the select few being mailed into Texas’ 8th Congressional District”. Really? I am the demographically perfect model of a republican activist?
I am a financial conservative. Republican financial conservatives of old were serious people that understood the meaning and importance of a national balanced account. They understood the meaning of “The full faith and credit of the United States of America”. Today’s definition of a fiscal conservative is a politician that will not pay the governments bills, I call that a dead beat. Listening to today’s republican politicians’ speeches they do not even know the difference between fiscal policy and monetary policy. Listening to my Republican representative in Congress he does not know the difference between the Federal Reserve and the Treasury Department. He says he will stop the Federal Reserve from printing money. The Fed does not print money. The Treasury Department is the only organization that can legally print money. The Federal Reserve is not a government department, while the Treasury Department is part of the federal government. I am paying my Republican representative $200,000 a year (plus benefits) and he doesn’t even understand how our government works.

Since the right is always right (just ask them) I must be the demographically perfect model of a republican activist, I enjoy reading the mail outs, the push polls can be entertaining as there is a live person calling. But I’m not answering any of the solicitations, the Presidential Platform Survey had a $35 minimum and the District Census had a $25 minimum, my church will do better work with the money.

Friday, February 17, 2012

Stop Double Taxation of My Wages

The taxes on corporate dividends should not be raised because of double taxation. The profit of the corporation was taxed, and then when the corporation pays dividends to shareholders it is taxed again! Oh the greedy, cruel, unfair IRS. However this is true for every dollar that moves. My wages were taxed as profit before the company wrote my paycheck, more double taxation! Furthermore the income received by the company was taxed at that exchange, now we have triple taxation! This continues all the way back to the original creation of that specific dollar. Now we have infinite taxation! This is how the tax system works in all economies, every since taxation was first discovered by governments.
The corporate lobbyists are busy making this double taxation argument in Washington and on any cable show available. Fox business channel has made it a jihad with continuous reporting about double taxation. Why are they not fighting against the double taxation of my wages or social security? This argument adds the tax rates together; corporate income tax of 35% plus dividend tax rate of 15% equals 50% taxation. Using this same mathematical logic the tax rate on my wages is well over 1,000%! Those who understand the math of percentages will notice that this is really bad math, but it does make for a good strong emotional argument.
I want to see a campaign to stop double taxation on wages for the exact same reason we want to stop double taxation of dividends and capital gains. The Laffer curve theory presented by Jude Wanniski (a writer for The Wall Street Journal) clearly proves that a lower tax rate generates greater tax income for the government. Certainly if we reduce taxes to zero the government will have an infinite amount of money, everybody wins, so stop taxes on my wages.

Wednesday, February 15, 2012

Breakfast in Austin Texas

I enjoyed some great breakfast meals in Austin but four days is just not enough time to sample even a small part of the restaurants. My theory is that Austin is different than most other American cosmopolitan areas and has a greater selection of 24/7 eateries offering reasonably priced high quality breakfast selections. This is my breakfast adventure road trip report and here is link to the pictures.
We got a late start on Saturday and stopped at Chappell Hill Bakery and Deli, about half way between Houston and Austin on Hwy 290. They have built a new, bigger bakery with a wide choice of kolaches and pies supplemented with breakfast meats. It was crowded when I arrived with a short waiting line to purchase your breakfast snack. Nonetheless the employees were friendly and very helpful as I reviewed the large selection of kolaches. They have internal seating which is in the style of an old time kick-backed kitchen, no table cloths, and wooden benches. I found it comforting and inviting. We decided to eat while driving then drove onto Brenham where we picked up a Starbucks latte.
Arriving in Austin I enjoyed one of my favorite activities, the classic nonstop, frantic, high energy interaction with grandchildren. This of course made me hungry. We decided on Austin Java  located at The Oasis.  Unfortunately,  Austin Java does not offer a menu at this location, this is not apparent from their web site. The latte was good but I was disappointed to not have a hot breakfast available. We retired to my daughter’s home and I was treated to an outstanding home cooked omelet prepared by my son-in law. He is one of those super geeks with a deep understanding and command of computer technology and  he also has excellent talents as a chef.
The next morning we had brunch at ZTejas. I had a new menu item of biscuits and gravy with eggs over easy and French toast.  On the 5 star rating system ZTejas rates six stars. As we left ZTejas it started to snow, a rare event in central Texas and this created a magical moment. All of this cemented my belief that Austin is a city of great breakfasts. Houston simply has no comparable establishments. Houston has Denny’s.
My last sampling was Kirbey Lane Café. This is an Austin classic. Kirbey Lane may have been the restaurant that established the standard for great Austin breakfast eateries. Since the original Kirbey Lane café in located on Kirbey Lane, the owners are not very clever at naming their restaurant but the menu is superb, the cooking excellent and the service top notch.  They call dinner for breakfast “Brinner”.
Austin being weird, while we hopped between breakfast locations, we engaged in an extensive discussion of the problems with the American political system and all adults contributed. We fell into the graduate school standard of a brutal intellectual honesty, allowing no claim to go unchallenged. All assumptions had to be defended and consistent. This kept the debate from becoming ideological and silly. The debate was civil and highly enjoyable. Breakfast and coffee with a political debate, it just doesn’t get any better.
It almost, but not quite, made me miss my own graduate school experience. In graduate school BS is not allowed, an assumption is not allowed, an unsupported claim is not allowed. In politics crazy claims based on false assumptions is standard operating procedure. After graduate school we slip back into believing stereotypes, accepting the easy (but wrong) explanation. A good orator with a well tested marketing plan can talk us into insane collective actions.
The grandchildren would love ice cream for breakfast but we waited until after Brinner.  We  stopped at Amy’s Ice creams and the grandchildren used the kids play ground to the full extent. Just spinning them on the rides made me dizzy, the energy level at that age is invigorating for us old guys. As a grandparent I can fade into the background to catch my breath and just watch, but I really want to play.
I will be returning to Austin next month and will continue my mission and search for the top Austin breakfast joints.  Stay tuned.

Monday, February 13, 2012

Monetizing human misery

Wealth based on human misery cannot last. It cannot create a system that will last. Basing a financial system on monetizing human misery places a cap on economic productivity. Slavery as practiced by America before the civil war was the monetization of human misery. There are revisionist history books claiming the American civil war was because of wealth differences between the south and the north, these histories miss the point. The wealth of the south was based on slavery (human misery) and because of that the south was limited and smaller than the north’s wealth and potential. Others claim state’s rights, what state’s right is that? The state’s right to legalize slavery, monetizing human misery. The South had less wealth because it was built on human misery, the institution of slavery placed a cap on the maximum wealth that could be created.
Another example is the medieval system of feudalism was based on monetizing human misery. The few lived in great wealth and the many lived in great misery. Pillaged by their leaders, life was short and brutal for the mass of the population. A system with little potential, little advancement and little growth, for generation after generation nothing changed. Thomas Malthus described the feudal system and the limits of this system in An Essay on the Principle of Population, about the same time Thomas Hobbs coined the phrase “solitary, poor, nasty, brutish and short” to describe life in Europe under feudalism. The writings of these two describe the 10,000 years of human economic history from the beginnings of agriculture to the start of capitalism. Initially capitalism continued the practice of monetizing human misery, this lead to the observations and predictions of Karl Marx. Fortunately Karl Marx got it wrong. What all of them missed is that one possible form of capitalism allows the gains to be widely shared and this collective improvement produces better results for the rich, the middle and the poor. It is more profitable for the rich to take a little of a lot than to take all of very little, and very little is what is produced when the economic basis is human misery.
We have learned and for an example from the twenty first century, the current state of the art for industrial engineering is based on improving work through efforts by the worker, allowing the individual worker to improve their personal well being. The term of art is Lean Six Sigma. Using this approach a $40 per hour employee in one of the advanced economies can produce lower cost, higher quality products than a $1 a day forced laborer. Allowing the worker to participate in the monetary gains vastly improves the total monetary gains. Henry Ford understood this and changed industry, today’s Private Equity investors do not understand this. The Private Equity (PE) investor, previously known as the Leveraged Buy-Out (LBO) investor is based on monetizing human misery. The business plan is simple, buy it, strip it, dump it. Private Equity cannot build anything that will last. The PE investor reaps great personal wealth and leaves behind zombie companies, unemployment, wrecked pension funds, and more private and public debt. The beneficiaries of the LBO practices have plenty of money to mount a public relations program, their victims do not. They point to the few private equity investors that assume risk, work hard and do create. This is like saying that some illness is good for you.
The LBO folks talk of “Creative Destruction”. Originally used by Karl Marx “Creative Destruction” was updated in the 1950s by Joseph Schumpeter to an economic theory that describes economic innovation. An example of Schumpeter’s “Creative Destruction” is Apple, Steve Jobs created the IPod which destroyed the walkman. In the process Mr. Jobs created more jobs, a larger market and greater wealth. For the private equity investors the “Creative Destruction” of Karl Marx is the best description. What has private equity used their vast money to accomplish? They used it to hire lobbyist and reduce their personal tax rates. They use their wealth to buy legislation making their risk-free high-return business practices legally protected and shifting all the risk to tax payers. We now have an economic system busy destroying itself, and as a tax payer I’m getting the bill.
The extremely short-term activities of private equity are destructive to capitalism and society. They are not clearing markets, creating general wealth, and building strong companies, correcting market inefficiencies or creating new technologies or productivity advances. The business model contains no risk to the private equity investor while creating high risk for tax payers and banks. A small group of individuals with the power to control our entire government, the local government, the state government and the federal government for their short-term narrow interest. People who answer to no one, that are unaccountable and above the law. If there is a law that threatens them, they have it changed. There is no balance of power between citizen, corporations and government. The citizen has been stripped of all power and left with no representation. This is a system that will collapse, creating social and economic chaos which can force a great leader to emerge. The other possibility is a populist demagogue that would destroy what little is left. So far America has been blessed to find the historical leader when most needed, a Lincoln or an FDR. Both of which were widely hated during their Presidencies, men of great compassion and unprecedented political skill.
Can our current political system identify such an individual? The evidence is not encouraging. I don’t see any attempts to change the system to produce better electoral options for voters. The problem seems to be that the people who could change the system are happy and satisfied with the current system.

Wednesday, February 8, 2012

Looking for a great Austin breakfast

I’m spending Christmas in Austin this year and plan to visit as many breakfast restaurants as I can fit in. This year Christmas comes on February 11th. Christmas is sometimes a fluid date for me, and this year it is definitely off date. While many have already entered the post holiday funk with New Year’s resolutions long broken. For me the Christmas tree is still blinking multicolor lights, presents are wrapped, the IPOD singing my Christmas favorites, and the season’s joy still fills my heart.
This year I’m adding the hunt for a great breakfast, breakfast for morning, noon and night, Friday, Saturday and Sunday. Maybe a couple of brunches, Christmas should be good for at least 5 extra pounds on the waist, right? I’ll just make a New Year’s resolution to drop 5 pounds and all will be good.
Breakfast is not just the first meal, it is the best meal. Start the day with coffee and donuts, breakfast tacos for an afternoon break, biscuits and gravy before bed, with the classic ham and eggs anytime. Pancakes for lunch, Kolaches as a snack, the amassing thing is that my diabetes is under control with excellent short term and long term readings.
I should, if all goes well, be able to report some fantastic breakfast locations and menu selections.
I hope to get a few suggestions before leaving Saturday morning for Austin.