The Future, This Week and Next, as Suggested by Congress, Iran and Iraq

What we know about the future is a reflection of the past. Things have happened that we know will influence what will happen.

Housing and Banking:

The house and the senate have passed a housing bill. This bill will be signed by the President this week. This bill will help build the floor that has already been developing in the housing market. Inventories of unsold homes have reached the lowest levels in years. This low level of inventories is hiding behind the fact that sales, as a result of negative sentiment, are slow. Houses are, once again, very affordable and the price of the average home will be higher three months from now. The timing of the actions of our politicians is just as one would expect, just as the market is ready to turn and just a few months before the election, the compromise has been reached that will "solve" the housing and banking crisis. Mortgage backed securities owned by banks are set to rebound in value. The housing market appears to be much like the market that turned sharply in 1991.


The Scramble For Gasoline:

With new supplies coming on line at the fastest pace in several years, the price of gasoline is ready to take a dip. Based on wholesale prices reached last week, the retail price should be down to the $3.62 area in a few days, two weeks at the outside. On the other hand, Iran is in the hunt for gasoline supplies. The country is importing as much as it can because it has been given until August 2 to make a direct response to the peace offer on the table. Should the deal go south, the US/UN has said that the 4th round of sanctions will be a cut off in gasoline supplies. A practice naval operation to cut off supplies is in progress.

China just went through a dramatic surge in its demand for oil but the only rational explanation for the large bump was to fill storage facilities. Businesses, farmers, and governments around the world have stored large emergency supplies; the sum of these supplies is known to be well above 4 billion barrels. These supplies will "leak back into the market" as the parties gradually become aware that the short term "crisis" is over.

The Cooking Deal:

A few weeks ago, a pending cut-off of imports to Iran, in effect a naval blockade, would have caused the price of gold and crude oil to soar and the value of the US dollar to fall. This past week, the opposite happened. The cut off of gasoline to Iran will simply mean there is more for the rest of us to use. Of course, the situation will remain volatile until a deal is announced but, the deal being cooked is like twice baked potatoes; the cooking is done but there is still rehashing to be accomplished and a presentation to be made.

Iran has already agreed to suspend its production of uranium, provided one of the new international production consortium is located in Iran. At each sticking point in the negotiations, the leaders of Iran scream that they will not give up their sovereign right to enrich uranium; no matter the details of the rest of the agreement, the Iranian leaders will have "saved face" when the deal includes uranium refinement on Iranian soil.

The parties have been engaged for quite a long time. This past week, a number of forces in Iraq which have had the prior backing of Iran were "taken out". Cache after cache of Iranian weapons are being found week after week. The evidence suggests that Iran is cooperating with Iraq to "mop up" the opposing forces. The number of "incidents" happening each week has fallen from around 1,500 in the weeks soon after the surge to around 250 two weeks ago. This past week, Syria cooperated with Lebanese forces in actions against Hizbollah, a group that, in the past has received support from Iran via Syria.

Obama continues to try to divert attention from the success in the main theater to the tribes in the high mountains of Pakistan and Afghanistan. "Bandits" have lived in these high mountains for more than 1,000 years (much longer, I'm sure but one of the most famous of all "bandits" lived there about 1,000 years ago). Obama talks about strategic value. Once Iran is on board with Pakistan and Afghanistan, the "bandits" of these mountains will be of little strategic importance. The men who boarded the planes on 9-11 were not from tribal villages. They were men of the world, several with University educations. It was oil money that supported 9-11, Iran has oil money, the "bandits" of the mountains have none.

Big Troop Withdrawals in 2010:

The Iraqi government and the US government are close to reaching a deal that will call for major troop withdrawals in 2010. The deal will include terms for a long term commitment of a reduced force. As a political issue, the improvement in Iraq cannot continue to be ignored or even denied. As the "mopping up" continues over the coming weeks, unheard of things will happen. For example, embassies from Sunni states will open in Iraq and it is even possible that commercial air traffic will begin.

Big Turns Taking Place, Or Two Ships Passing in the Night:

The Russian stock market just saw a 6% dive. As expected, resource rich economies will suffer as the prices of commodities rolls over. It is interesting that the "big cloud" computer companies, such as Amazon and Google, are rumored to be ready to build data centers in Siberia. Why not? Cloud computers need cheap electricity and they produce a lot of heat. Siberia has cheap resources and it needs heat!

Google is using so much electricity that it needs its own nuclear power plant. The lifetime cost of running a Google server is now much more than the cost to buy it. The recent completion of an undersea data cable from Russia to Japan can carry 640 Gigabytes Per Second! Google has more than 30 data centers. One was recently built in Lenoir NC at a cost of 600 million bucks. Six hundred million bucks times 30 is 18 billion bucks. People keep talking about a recession while companies like Google keep building new facilities. The "recession wash tub" continues to slosh around but the US economy is not in recession. The UK is much closer to recession than is the US.

In the "old days", you probably bought software on a CD. Today, your computer is probably routinely updated by Internet download. Big companies are contracting with firms such as Amazon and Google to keep the CD and the computer and to run the companies "off site" IT department. The efficiencies are enormous. The average company has no reason to hire an IT department when it can contract for services at a fraction of the costs. In effect, Russia and the rest of the world can benefit when Russia "ships" electrons around the world by fiber optic cable instead of shipping oil around the world. The cost of shipping energy by electronic cable is a tiny fraction of the cost of shipping it any other way.

Congress, Congress, Congress:

Over the past several months congress has gone in circle after circle after circle. Harry Reid and Nancy Pelosi have, so far, been successful in not allowing congress to vote for or against off-shore drilling. Along the way, Tom Coburn, Republican Senator from Oklahoma, has insisted that the Senate stop passing multi-billion dollar bills without debate or the opportunity of amendment. Tom has made a few people mad along the way, as a lot of pork is normally passed by "unanimous consent" but, Tom has held his ground. This week, Harry Reid, having packaged up a number of "sweet deals", will try to shove 35 bills down Tom's throat. It is going to be interesting, will the pork buy the congress again or will the politicians stand their ground in an pre-election battle? Over in the house, speaker, John Boehner has asked republicans to vote against adjournment if a vote on drilling does not take place.

For the congress to take any credit for lowering oil prices, they really need to vote before the deal with Iran is concluded. It is my hope and prayer that a nasty compromise will not be reached. "Feeders" from both parties are eager for a compromise deal to include mandates for flex fuels or wind mill subsidies or other "goodies". This at a time when the public in ever greater numbers are driving past ethanol stations to get the "good stuff". Gasoline mixed with 10% ethanol is producing reductions in gasoline mileage of 3 to 4%. One can afford to pay 12 to 14 cents more for the "good stuff" to break even. Throw in long term maintenance costs and ethanol should be avoided. If the oil drilling bill includes mandates or subsides for 85% ethanol flex-fuel, no thanks!

Past, Present and Future:

Bryan Caplan's book, "The Myth of the Rational Voter" is worth another mention. I have written about how pervasive pessimism has reduced the PE ratio of stocks. Bryan writes about how pervasive pessimism produces unexpected attitudes by voters. These attitudes are wound around the tendency of voters to "over estimate the severity of economic problems and to underestimate the past, present and future performance of the economy". Sometimes, pessimism can be turned to advantage. The pessimist can easily be converted from one who believes in the coming environmental disaster to one who believes in the coming economic disaster.

The majority believes, pessimistically, that the price of oil is going to continue to soar. Many believe the situation will be one of desperation in a few years, as wars and more wars are fought over food and energy. Four dollar a gallon gasoline has swung the great middle from a focus on environmental concerns to economic concerns. The situation is beautiful for McCain and a number of republican representatives. The energy issue has turned into the key issue of the coming election. The opposition to the most economic of energy sources, by democrats, has put them on the wrong political side of the issue.

Again, it does not matter that the votes are based on false beliefs. The public believes that energy costs are at record levels. The reality is that the average person spends less on energy and food than he did at the peaks of the past. The public believes that energy supplies are running out, even when it is known that oil production will jump by more than 3 million barrels per day in both 2008 and 2009. The public believes that energy supplies will run out in the near future, even though there are virtually limitless amounts of nuclear fuel available (the sun is a nuclear power plant and there are thousands of years of uranium fuel on the earth). The already negotiated treaties between various countries, including a major treaty between Russia and the USA, is resulting in the rapid construction of scores of nuclear power plants. Nuclear electricity will be used as a substitute for other sources.

The Robotic Car:

Robotic cars have already shown the ability to navigate city streets. The next step, already planned, will be to declare 100 or so blocks of an inter-city or two off limits to all but robotic taxis. To travel within these areas, one will "call for a robo-taxi". All of these cars will be designed for fuel economy. Work out the kinks in a small area and then expand the area. Work out the kinks in an expanded area and the next thing you know cities across the country will opt for electric robotic city cars. Why would any city dweller own a car, including the obligation to insure it and to park it, when he can use one whenever he wants for a fraction of the cost? For best results, the "robotic taxi companies should be privately owned".

As always, we look at the future through a clouded glass. Getting from here to there or there or there will include some unexpected turns and a surprising final destination. However, if one knows that the cost of electricity produced by nuclear fuel is less than that produced by carbon sources and if one knows that the cost of nuclear is going down, then it is clear that abundant nuclear power is in our future.

Will the congress pack up and go home by August 8 without passing an energy bill? Will legislators with a 9% approval rating dare? How many more pieces are there to the "Middle East Piece Deal"? Another big piece of this puzzle, the deal for troops in Iraq, next to Iran, for years to come, is said to be all but agreed. Will the Iranian people, sitting on massive reserves of oil, accept being forced to live without gasoline? (Iran has a couple of small refineries but UN forces can put the hurt on the Iranian economy if necessary.) A deal will get done, which will include the responsibility of all signors to assist in the reduction of terrorism.

The future is bright. We try to make it dim but, contrary data is flying around the world at speeds thought impossible just a few years ago. We are living through wave after wave of innovation.

As a last example of these incredible times, Russia and Kazakhstan are, in partnership, sending natural gas to China! This is a win, win, win commercial transaction with a new republic connecting two emerging market based economies. When the deal is finished with Iran, Russia, Iran and the USA win, along with a few hundred other countries.

We are on the edge of great things. Pay attention. Our grandchildren will read about these times on their electronic readers in the years to come.