PROTECTIONISM----A REAL THREAT

After hearing the political rhetoric of the Presidential election, one would think that protectionism is of only our doing. It is not. According to an article in Investors Business Daily, Argentina, Brazil, and Indonesia are considering import taxes/restrictions. Not to mention Russia and all of their saber rattling. China keeping their currency undervalued does not help as it makes a political target in slowing times. Yes we have heard some protectionist rhetoric (the steelmakers have asked that recipients of government bailout money be forced to buy American) but the real danger may rest with many other countries as they consider tariffs on our goods. This could magnify problems as the dollar falls. If we get into a situation where the dollar falls (and we believe that we will) we will need the boost from exports. If the dollar falls and we don't get that boost, we could be in real trouble. We would most likely respond with new tariffs of our own--can you say hyperinflationary depression?

Lets hope that our trading partners realize the value of free trade and allow us to sell our goods abroad as the dollar falls. If they don't we could find ourselves in a very bad predicament.

We saw nice action in natural gas today. Oil was up as well and I will say that I was very surprised--even shocked that the dollar held up as well as it did in the face of increasing oil prices. Many pundits are taking a strong position that many of our counterparts have further rate cuts to go and that should bode very well for the dollar. I can't totally disagree--but again that is only a short-term situation. Over the long haul the dollar is headed down. I bought UDN a couple of days ago and plan to hold it for a while.

Was the action in today's market a signal of what is to come? I don't think so. I think the light volume speaks for itself and many traders were still on their extended holiday. I am anxious to see what happens on Monday. I do think the move up in oil and natural gas was for real. With tensions escalating in the Middle East, I can't see oil going down much further. The situation with Isreal and Hamas is getting worse by the day. The energy complex had a stellar day today. KOL did well as did many of the individual producers of coal. The consumer is going to take advantage of falling gasoline prices and I don't buy that many are going to save more. I think they will take their savings at the pump and spend it elsewhere---just like the money is burning a hole in their pocket. Call me skeptical, but I am definitely not convinced that the consumer has learned their lesson. People tend to make the same mistakes over and over again.

FCX had an excellent day today. I think more people are turning to gold as a store of value and FCX will benefit from that trend. Last night we had several interesting comments in opposition to our inflation position. Many are arguing that we are only seeing reflation and the banks have used the TARP funds to rebuild their balance sheets and they are still not loaning money. I will stipulate to the fact that they have used the money to rebuild their balance sheets, but as things improve in the job market---they WILL BEGIN TO LOAN MONEY. THEY MUST HAVE LOANS TO HAVE FUTURE EARNINGS GROWTH. The credit spread argument is a valid one. Many companies are going to have a very difficult time refinancing. I am looking for companies that have the worst balance sheets and am preparing to short them as access to capital may prove difficult for many of these companies. I think this could contribute to more price declines over the course of the coming year. I still believe that there are more factors that point to inflation in the next 12-18 months. I have also heard many arguments on the destruction of credit and it is a valid argument. Many are even arguing that we should subtract the reduction of available credit from M3. It is hard to argue that point in the short run---but as we see normalization we will see the effects evaporate. We will explore these ideas in more detail later this weekend.

I believe that we are in a quagmire here. No doubt we are seeing pricing pressures--and many are terming it deflation. But there is also no doubt that we are setting the stage for inflation---you cannot deny the eventual effects of the printing presses. The great unknown is TIME. How long will prices fall and when will the economy start to grow again. I think we will start to see real inflation pressures within the next 12-18 months. Shadowstats.com is forecasting that real problems will begin as early as 2010. We will have their founder John Williams on in a couple of weeks and will really try to drill down and get his perspectives on the timing.

Let me comment on the ridiculous gas tax proposals that we have been hearing about lately. This is a terrible idea with worse timing. Gasoline is not something that should be hit with a "sin" tax similar to the taxes on alcohol and cigarettes. A reduction in alcohol and cigarette consumption does not slow the country down. Higher gasoline prices impact people trying to get to work and will take money away from retailers and fast food restaurants as people will have less discretionary income. I would love to see us begin to build the infrastructure to allow us to convert our vehicles to natural gas, but until that infrastructure is ready---we should not punish the American Consumer and further hamper our already crippled economy. We have bailed out those who behaved irresponsibly so we should be able to front the money to change our energy consumption habits without punishing the consumer. I live close to the Haynesville and Barnette Shale Natural Gas finds and it would be an economic boom to the people in this part of OUR COUNTRY if we could convert to natural gas and pay AMERICAN LANDOWNERS as opposed to exporting our dollars to the Middle East. But lets do it without hurting the consumer in the interim. As much "pork" as we have seen in the past, surely we can afford to fix this problem without taxing the consumer.