But let us take a look at what the long term trends are, and what the implications of those long term trends are. Here are the really important trends that I see, over the next 10 years:

1. Economic growth in China, India, Vietnam, Brazil and Eastern Europe.
2. Population growth in Saudi Arabia and many other oil exporting countries.
3. Gradual topping out of the world's petroleum production.
4. Reduction of U.S. trade deficit.

None of these long term trends has changed. There is a fifth trend that has changed dramatically in the last 2 years and that is a gradual decline in U.S. production of natural gas. We have now figured out how to harvest natural gas from shale deposits far more efficiently than before. This has made a huge difference to our natural gas current production and future prognosis. Could the same thing happen with petroleum? It seems unlikely.

Because the long term trends have not changed, I'm not changing my investment philosophy. I know it has been difficult. But these short term violent pull backs are very unpredictable. And they run along an unpredictable course.

I also feel that the demand for natural gas will increase, as it is substituted for expensive petroleum in a number of different areas. Also, at the current prices I would certainly not presume that production will increase. Harvesting natural gas from shale is expensive, and these prices will not support the sort of strong and dedicated effort that has caused production to rise dramatically. The rate of increase from the Barnett Shale, underneath Ft. Worth Texas, will slow. Other shales are not as good sources as the Barnett Shale is. And conventional gas production is declining. So I think the low prices will effect both the supply side and the demand side of the natural gas equation.

With respect to petroleum, give me a break. Inventories are still quite low, and they have fallen over the last year. At these prices demand will return, not only in the US, but in the areas where demand has been growing so quickly. If inventories were above the levels of last year I could see the price decline that we have seen. I don't know what tomorrow's inventory readings will show, but it just seems that there is not really that much petroleum and product in storage and this will over time, tend to support prices.

And with gold, the growing wealth of China is going to eventually cause prices to rise. We are starting the buildup to Chinese Lunar New Year. Eventually that will have an effect. I hope it is soon.

Investors' perception of the steel industry will never cease to amaze me. The level of negativity is just astounding. Nobody believes in steel. But steel production is necessary to support the production of fossil fuels and to support an American industrial resurgence that must happen if we are to reduce the trade deficit that must be reduced.

So call me stubborn, and I do regret the losses in this very, very difficult quarter. But the long term trends are on our side, and they are powerful and will make a difference.

Tim

Even taking these factors into account, however, I believe that we will see a price recovery. If the low pressure wave in the Caribbean turns into a hurricane, we will see an extraordinarily fast recovery. But even if it does not, there are many factors that point to higher natural gas prices.

First, it is important to recognize that because the readings for the government storage survey take place at 9 AM on Friday, the last week was far more affected by consumption on July 4 then July 11. And July 4 is a national holiday in which many businesses are closed and consumption of natural gas tends to be far lower than on a normal weekday. Some may be comparing the build for last week, which was the 28th week of the year, with the typical build for the 28th week of the year. But July 4 generally falls in the 27th week of the year, so this comparison is erroneous. Compared with the typical 27th week, the last week was not a particularly large build at all, being just 6 billion cubic feet above the 5-year average of 98 billion. And the week-to-week change is an inherently noisy statistic, so one week’s figure should not drive big price changes.

Between May 29 and July 3 of this year gas storage went from being 66 billion cubic feet below the 5-year-average storage to 120 billion cubic feet below the 5 year average, despite the spot price of natural gas being above $12 per million BTU for the entire period. The weather was a little warmer than usual, but taking the nation as a whole, it was not tremendously warmer. And gas at above $12 per million BTU creates a far more powerful incentive to avoid gas usage than does the current price of $10.54.

Let us imagine that I had a knob that I could turn to change the spot price of gas, and I was trying to handle that knob so that this country would end up with at least 3.2 trillion cubic feet of gas at the autumn peak, an amount generally considered adequate to get through the winter. After viewing last week’s storage figures, I would have nudged the knob a little in the “lower-price” direction and then continued to watch to see what effect the change would have and what sort of weather we would have. But the market has swung the knob a huge amount and I just do not think that it was justified. Moreover there are long term reasons to be bullish on gas.

Just as deepwater gas is being exploited; all other gas production is declining. So it is a contest between the deepwater expanding production and all other production declining to see whether production will increase or decline. Petroleum production, however, is down from last year, and this could be an indication that gas production is, too. It also seems likely that Canadian gas production is starting to decline, based on declining reserves.

Also, wind power still produces a very small percentage of U.S. electricity production. Changes must be made to the electric grid in order for wind power to become a more significant producer. This will take time. Also, although production of house building materials, such as bricks, is way down, production of goods for export is up, and some of this production is bound to use gas.

More importantly, there is a huge, growing consumption driver for natural gas, and that is tar sands production in Alberta. In a conventional mine, where the tar sands are scooped up and dumped into hot, soapy water, gas is used to heat the hot, soapy water. In steam assisted gravity drainage (SAGD) gas heats the boilers to create the steam that is pumped into the earth to heat and soften the bitumen. In either case, gas is combined with the bitumen to provide hydrogen when the bitumen is cracked into smaller molecules. With the high price of petroleum, a tremendous amount of development money has been directed toward the Alberta tar sands, meaning ever more gas consumption.

Also, the price of gas is now less than half that of petroleum, on an energy content basis (a barrel of petroleum has about 5.8 million BTU). So for any activity where there is a choice, there is now an enormous incentive to use gas to get petroleum or to use gas instead of a petroleum product. I know that in many cities where natural gas is available, some people still have heating oil furnaces. There is now a huge incentive to switch over to gas, and it would not take long to recoup the investment in a gas furnace. Some may choose to use small electric heaters to heat whichever room is occupied. These heaters are cheap and very easy to use. In today’s electricity production environment it is quite likely that much of the electricity generated to power these heaters will come from gas. We will not see much effect from this until late fall, but there are, no doubt, industrial users of petroleum products that now have a huge incentive to shift to natural gas or electricity, where we would see the difference immediately.

Finally, hurricane season has just begun. Just because we have not seen any major gas production damaging hurricanes in the last two years does not mean we won’t have one this year. Also, despite the last two years of relatively light hurricane activity, I still feel that the 2005 season was a harbinger of things to come, and that hurricane activity in general will become more of a problem in the future, as Caribbean and Gulf of Mexico waters get hotter in the summer and take longer to cool down in the fall.

There are a number of ways to make money from an increase in gas prices. There is an ETF, having the ticker symbol UNG, which tracks the price of gas. Also, energy producer XTO Energy, Inc. (XTO) is known for producing a high proportion of gas in its hydrocarbon mix and tends to be affected by changes in gas prices more than other energy producers. I would rate both of these a buy.

This is far from the first time. On June 6, 2006 the stock market tanked after some tough on inflation talk by Bernanke. And earlier, on May 2, 2006 Bernanke had made some comments to Maria Bartiromo that she announced on her news show, and which also clobbered the stock market.

OK. Now we are in a bear market for real. We are down more than 20% from the October 2007 high. Is there any chance at all that we could stop the inflation tough talk? It has been incredibly destructive. This is an economy that has already been battered raw by the sub prime crisis, the resultant fallout in financial institutions and high petroleum prices. Is there any chance that we could enter into a period of benign neglect from the Fed Chief’s statements. He can still raise interest rates. But comments that have phrases like “strongly resist” in them frighten people. They introduce uncertainty that is destructive to people’s ability to make positive decisions and commitments.

But now I’m hopeful that the stock market, this collective mouthpiece of so many, which is nothing if not 100% sincere, will have finally taught Mr. Bernanke that he could just be a little milder in his statements. Could he not simply have said something on the order of, “It looks like there might have been some mild erosion of price stability expectations and it is probably nothing, but don’t worry, if it ever became a serious concern we would take action that I feel certain would be very effective.” This is a market that needs reassurance.

Well, my gut feel is that this has happened enough times so that the stock market has now tamed Ben Bernanke, at least a little. If he does it again, his term really should not be renewed. But I would hate to see him replaced because at least now he has some experience, and some new Fed Chief would not. And it seems that being Fed Chief is a job where there is just no substitute for actually doing it for awhile to get the hang of it.

Yes, construction spending in the United States is down. And now Western Europe appears to be following suit. So Manitowoc (MTW), which gets more than 80% of its revenue from cranes, should not prosper. Except for that the United States and the European Community do not make up the whole world. There will be continuing demand for cranes in the Middle East, China, India, Latin America and Eastern Europe. And with Manitowoc down by almost half since last December, this stock looks like a bargain.

But there is another reason to buy a crane builder. With petroleum prices high and likely to go higher, the world will become more vertical. It was the automobile and the relatively low price of petroleum that allowed American cities to spread out in the first place, from 1950 through about 2005, with a thriving central city giving way to thriving suburbs and then exurbs popping up at the edges. Now the process is working in reverse, with the focus back on the center and housing in the form of multi-story buildings becoming increasingly prevalent. Cranes will be required to build the housing of the future.

Besides constructing housing, going “back to the future” will require new mass transit and commercial structures. This country, and even this world, has an immense amount of construction to do over the next 40 years as we transition from a world of relatively plentiful petroleum to a world with petroleum production that is only a fraction of what it is today.

Mass transit must work on a hub-and-spokes system. The mass transit trunk lines must be where there is a large volume of traffic, which is into and out of a central hub. So if a person wishes to go from point A in the outskirts to point B, also in the outskirts, he will likely take a train into the hub and another out of the hub to point B, as opposed to driving directly to B. Accordingly, if you live near the hub it is much easier to easily reach more places.

If one looks at how urban development in the U.S. looked in 1890, even small cities and towns had multi level structures downtown near the train station. This is the pattern of the future, and it will be built with cranes.

Terex (TEX) gets a big portion of its revenue from sales of aerial work platforms, also handy for multi-story construction, as well as making cranes. Terex has also gone down a lot since last year, and is a bargain, today.

Manitowoc has a trailing PE of 9.37, with Terex coming in at 7.23. These figures show that there is a very strong degree of skepticism on Wall Street regarding these stocks. Perhaps some view them as unexciting rust belt relics who have had their moment of excitement for the decade. But as I see it, the fundamentals are only getting stronger. At some point even a skeptical and inattentive Wall Street will have to take notice, because the money flowing in is just too good to ignore.

Both Manitowoc and Terex make and sell products other than cranes. Manitowoc also builds and sells ships and food service equipment (and has been in the news with a recently accepted bid to acquire British food service equipment maker Enodis). Terex builds and sells a wide range of construction and mining equipment. To me, it’s all good. Some might say that high tech companies are the companies of the future, but I say it is also those companies that will help us construct the fuel efficient cities of the future, namely Manitowoc and Terex.

I own Terex stock, myself, but no Manitowoc. I own both of these two stocks in my mFolio portfolio, however.

Perhaps it is this type of thinking that has caused analysts to rate AK Steel (AKS) at a collective 3.2, where 1 is a strong buy, 5 is a strong sell and the average stock is ranked at about a 2.4. AK steel has had a rating of about a 3.2 during its entire climb from a little over 2, to 72. Well, the analysts sure missed the boat on that one. You would have thought that one of them would have had the guts to issue a buy recommendation. But for the most part, not a one of them did. And this has been a fabulously lucrative stock for those who bought, despite the disapproval of the analysts.

And perhaps it is that sort of business cycle thinking that in the last few days has slammed AKS from a high of 70.54 on Monday, June 30 all the way down to a closing price of 52.79, today, July 3rd. Yes, that is a drop of 25% in a little less than four short days. The new orders information released by the Census Bureau showed a very small drop in steel orders from April to May and the auto makers announced dismal sales figures and wham, did AK steel ever get hit hard. And why not? If this the beginning of a trough in the business cycle for steel, which will represent a harrowing descent for the steel companies, it makes perfect sense.

I am convinced, however, that structural changes in the world economy will continue to boost the fortunes of AK Steel. Sure, it could go down further in this crazy, skittish environment. But, hey, although its course over the next month or two is unpredictable, eventually the fundamentals of the situations will translate to an increased stock price. And what are these structural changes? Well, I discussed four of them in my Marketscope article of April 2005. Now I can think of at least 10:

1. Fossil fuels are being depleted: This is a structural change that will not be reversed. The greater the depletion of fossil fuels the deeper we will have to go to get them out. The greater the complexity of the extraction process, the more steel typically will have to be used. Rather than just drilling down a mile or two and pumping it out, we must drill down a mile or two in a first well, and then drill a bunch of wells around it to inject water or gas or steam to get that oil out. And we must drill more wells, deeper, into smaller pockets of oil and gas. This all takes more and more steel.

2. The huge U.S. trade deficit is not sustainable. We must start to make progress at closing this massive deficit, which is running at about $2,500 per American per year. To do this the dollar must fall. Perhaps not today, or tomorrow, but eventually. As it falls, American steel producers become more competitive with foreign producers. We should also note that the domestic steel industry’s nightmare days came at a time when the dollar was worth about 20% more than the Euro. Those dark days are not coming back.

3. The high price of petroleum means that it costs more to ship steel from overseas. As the United States is a net steel importer, this benefits domestic steel producers because it drives up the price of competing imported steel.

4. The high price of petroleum means that petroleum exporting countries are going on a building spree, using a great deal of steel. The Saudis are planning huge new cities. The steel for these cities comes from all over, and it drives up the international price.

5. The high price of natural gas is making alternative means of electricity production increasingly feasible. That means steel supports for windmills and steel structure for solar facilities (a square mile of pivoting mirrors translates to a lot of steel structure).

6. The high price of petroleum creates an advantage for railroads over trucks. This means the railroads will expand their rail network, which is made of steel.

7. The Chinese government used to encourage steel exports, now they discourage them, to keep the steel in China.

8. The agricultural boom means more spending on agricultural structures, made of steel.

9. The high price of gold, silver, copper and other metals means that more steel will be needed for mining equipment, mine structural supports and processing facilities.

10. Our continuing efforts to fight pollution mean that we will use more steel for sewage treatment facilities and pollution control equipment.

So that is ten structural changes that will cause steel to continue to prosper. U.S. Steel (X) is good also, but AK Steel, with its 3.2 analyst rating and its recent 25% price plunge, is the underdog that I love. It may take another two months for it to bottom out, or it may have hit bottom already. There is just no telling with the investor psychology. But I foresee, that this stock has some more strength and will be moving back up, before too long.

Disclosure: I own AK Steel, myself, and I also own some in my mFolio portfolio.

And now for the greatest epic struggle of them all: The Federal Reserve Board Vs. Inflation

Sadly, the result is a foregone conclusion: Inflation will win. More sadly still: there will be a lot of collateral damage on the way.

I remember taking a pleasant mountain hike, and when I got to the mountain peak noticing a strange fellow there with a small bottle of olive oil, who was pouring a little out onto the ground. “What are you doing?” I asked him. “In the holy book of the Braphulthustrins it states, ‘you shall anoint the mountain peaks’” he replied, “I am following the teachings of my religion.” That was my first encounter with a Peak Oiler.

But if you think the Peak Oilers are a little strange, the Cambridge Economic Research Associates (CERA) is stranger still. And even more strange is the continuing credence given to this strange group by all sorts of folks, from the U.S. Government, to the news media. To me, CERA long ago completely annihilated any shred of credibility they may have been thought to have had. Their study deriding the peak oil theory, published November 14, 2006, was ridiculous. While roundly abusing Peak Oilers for their illogic, CERA bounded off into fantasy land itself, counting 704 billion barrels of shale oil in its projection of total global resources. This oil is in solid rock. We don’t know of any efficient way to get it out, and there is real doubt that we ever will. Also, CERA completely accepted the figure of 662 billion barrels in the OPEC Middle East, although at the time it was already clear that this figure was (and still is) entirely bogus. What is wrong with them???? In the one-and-a-half years since the report’s publication, its near-in predictions, at least, have been shown to be entirely wrong.

More recently, on November 30, 2007, CERA predicted that the 2008 WTI oil price would trade in the $70 to $90 per barrel range in 2008. At that time, I was predicting a $100 to $120 per barrel range for the year. Well, we were both wrong, but I was less wrong than they were, and I don’t have a big research budget and staff to help me out. Moreover, the report blamed the “high prices” at the time as being the result of market psychology, rather than fundamentals. But even at the prices of today, U.S. stockpiles are lower than a year ago and lower than average for this time of year. This shows that it is fundamentals that have driven the price up.

There was also an article in today’s New York Times by Jad Mouawad and some compatriot, asking why the price is so high. Can there be any question? Isn’t the answer obvious? Demand growth in China had been driving the price up, but now Russian supply growth has stalled out and Russian demand growth has switched into high gear, together with Middle Eastern demand growth. It is a prescription for higher prices and the prescription is working. At the beginning of the year I did not realize that Russian supply growth would stall out and I did not realize the extent to which Russian demand would grow. And I don’t have a big research staff. I’m sure that if I did I would have nailed it, not, because predictions are difficult. But with a big research budget, and an array of minions, one would have thought that at least CERA would have come a little closer. And one would hope that the New York Times, with the array of resources at its disposal, would be able to offer a more cogent analysis.

There is a basic philosophical problem with all of these funds. Apportioning according to market cap mimics and therefore accepts the actual distribution of money in the market. This distribution, just like the price of every stock, is that which those with the most money invested have made it. Those with the most money invested, unsurprisingly, have typically hired the best minds, with the most time and the best training to make the investment decisions that have resulted in the relative market caps of the various stocks. Using a statistical guide for the distribution of money into stocks suggests that this process has been inefficient.

The designer ETFs take a subset of the information that has been analyzed by the investors who have set the distribution of market caps, in an ever changing dynamic process. They then take this subset of available information and apply a rigid formula to it. And they appear to believe that this distribution, based on a subset of information and devoid of an ongoing application of human judgment can beat a process based on the full set of information and constantly informed and updated by skilled human judgment.

I don’t buy it.

Now I do swear to you, the reader, that when I began to write this journal entry I had not checked the performance of SDY or PRF. I picked them at random from a short list of designer ETFs. I have just checked performance and over the past two years they have both been beaten by the S&P 500 index. PRF was beaten by about 5%, whereas SDY was absolutely clobbered by roughly 20%. I did not take out the management fees of SDY or PRF, but also did not add in the dividends one would receive if holding the S&P 500. Clearly this is a quick analysis based on only two randomly selected designer ETFs. Nevertheless it tends to bear out my point. You can’t outsmart the market by basing your distribution of money between stocks on a rigid computer analysis of part of the data. It just does not make sense.

Now we all know that in March of 2000 the largest of the large cap stocks were overvalued. Since that time an S&P 500 index in which each stock was equally weighted has far outperformed the actual S&P 500 index in which each stock is weighted according to its market cap. But the designers of the designer index funds are not the only ones who have noticed this phenomenon. There is every possibility that the current market caps in the S&P 500 have been strongly influenced by this past overvaluation. Perhaps the market has actually overreacted. It is possible that the present valuations actually undervalue the largest large cap stocks. But let us theorize that there actually is some attribute of investor psychology which causes the largest large cap stocks to be consistently overvalued. If this were to be the case, surely a better way of addressing this issue would be to apply a secondary weighting to the market cap weighting, which would cause the largest large cap stocks to be weighted slightly lower than they would be in a straight market cap rating. I’m not recommending it, except for as a more sensible alternative to ranking by dividend payments or any other subset of the available financial information.

Market cap is a function of democracy, except for resulting from a process in which each dollar, rather than each eligible person, gets a vote. So Winston Churchill’s famous aphorism about democracy, that it is absolutely the worst system of government, “except for all the rest,” holds true in this context.

Plan Would Lift Saudi Oil Output

You see the Saudis are going to raise their oil output by 500,000 barrels a day, next month. Yes, according to Jad Mouawad of the New York Times Saudi officials have briefed “analysts” and “oil traders” of their plans. Ahhh, but Ibrahim al-Muhanna, of the Saudi petroleum ministry declined to comment on the reports. Hmmmm, now that is a trifle curious. Why would the Saudi petroleum ministry refuse to confirm the good news? After all, this is what the world has been crying, dare we say, “begging” for. So if the Saudis were really going to do this, would there be a need for secrecy?? It is a little hard to imagine, given that they would win accolades all around. And who doesn’t like accolades? So why would Mr. al Muhanna refuse to confirm the good news? Maybe because it is not true? After all, you can spread all sorts of false reports, but if you have never gone on record with the supposed information, it will be pretty hard for people to blame you after the fact. Especially if Mr. Mouawad never tells us who his sources are.

Mr. Mouawad also lets us know that as part of a “huge expansion program” expected to bring its production capacity to 12.5 million barrels a day by 2009, Saudi Aramco “is planning to start soon an oil field, called Khursaniyah, with a daily production rate of 500,000 barrels per day.” This “could” be made public at an energy meeting scheduled by King Abdullah.

If Mr. Mouawad had taken five minutes to do a simple Google search he would have found the following articles, indicating that Khursaniyah has already been started, more than a month ago, but has just not reached 500,000 barrels per day, yet.

RIGZONE - Saudi Aramco Starts Up Khursaniyah
Apr 22, 2008 ... RIGZONE News - leading source for the latest news and information for the oil and gas industry.
Saudi Aramco Starts Up Khursaniya - 27k - Cached - Similar pages - Note this

Upstreamonline - Aramco 'opens Khursaniyah taps'
Saudi Arabia has kicked off production at its 500000-barrels-per-day Khursaniyah oilfeld, Abdullah Jumah, head of state oil company Saudi Aramco said. ...
Aramco 'opens Khursaniyah taps' - 42k - Cached - Similar pages - Note this

Aramco to miss Khursaniyah deadline
Mar 7, 2008 ... Boost in production to 500000 barrels a day unlikely to be achieved until later in the year....
Aramco To Miss Khuraniyah Deadline - 25k -

Also,….can we please get real for a second. No one ever just flips a switch and starts a field producing 500,000 barrels a day. That is not how it works. Do you imagine that they have all the wells drilled, a huge array of pumps all in place, King Abdullah flips a switch, and they all start pumping at once, filling the pipelines? That would be crazy. Production from an oil field gradually builds over time, as it is increasingly developed. There is never a simple step function from 0 to 500,000 barrels per day.

Mr. Mouawad does note that “Some investors doubt that Saudi Arabia has the capacity to increase its production beyond current levels.” That is the only point in the article that he recognizes, without naming the name “Matthew Simmons” that at least one very smart and very insightful petroleum analyst, who has spent a lot of time and effort studying this issue, does indeed, refuse to believe that “Saudi Arabia has the capacity to increase its production …. .” And why???? For one thing they are working awfully hard to produce at their current levels. For another, the “water cut” at their premier field, named “Ghawar” is up to 30%. This is a real problem. As the Khursaniyah field comes on stream, it is likely to be partially replacing a decline in production at Ghawar.

What has really happened here??? This is my theory. There is indeed a lot of pressure on the Saudi’s to do something to alleviate the high petroleum prices. There is a rising public sentiment, looking to find someone to blame, and OPEC is ever convenient. But if truth be known, I don’t think they can increase their production. I think they would love to produce more oil and sell it at $135 a barrel. But they can’t. Because of the intense ruckus, however, they have decided to pretend to do something, just to see if that mollifies the crazy westerners. So they float a rumor, and host an oil summit. They say they would really like to see the price come down a bit. This part might be true, because they tried to keep prices high in the early 1980’s and it really backfired. So now they might truly be somewhat worried that this latest price increase will lay the seeds of a future price decline. Then again, they are raking it in now, so I don’t think they are too terribly upset. Whether they are, or not, I really doubt that there is a thing they can do about it. Just sit back, enjoy, and host a summit, just to let people know that they are concerned. Float a rumor that they are increasing production, but not go on record so that in two months when people ask, “where was that increased production?” they can say, “we never said we were increasing production.”

What is wrong with this picture?? There is this brilliant guy, turns out to be a fabulous fund manager, but it takes him 11 years after graduating from the best business school to get to show his stuff as a fund manager. The point is that you can't tell who is going to be good at it till you give people a chance to actually do it. There were lots of other grads from Harvard Business School, how were we supposed to know that this one was the one who was going to be great as a fund manager?? And the skills that it takes to get that first crack at it in the "real world" are not the ones that it takes to do well after you get that first chance. Sure, there is some overlap. But it is far from a perfect match. Ken Heebner was not all that good at patiently accepting leadership that seemed questionable to him. He, perhaps, did not make the best impression on an interview. Those are the skills needed to get the first chance. His penetrating insight and admirable intellect got him the chance eventually, but it took awhile. Perhaps if Marketocracy had been around back then, it would have taken him a lot less time.

How very true this is. When I told folks back in 2001 that the price of petroleum was going to rise, they ridiculed the idea, then many violently opposed the notion, now people take it as self-evident that this was bound to happen.

But that is just an example, and not my central point here. Why do people do this?? I think it is to avoid mental dissonance. When something new is first proposed to be true, (e.g. Einsteinian physics, the Big Bang Theory, Evolution) it is likely to conflict with present beliefs. That causes conflict inside the minds of those who hear the new message. They don't like it. People have a strong distaste for mental conflict. That bears repeating, people have a strong distaste for mental conflict. I think that is what the Thirty Years War was all about.

What does this have to do with Marketocracy??? Marketocracy causes mental conflict. To those who believe that all actively managed funds are a bunch of hooey, it is just one more managed fund with a lot of big claims, that are all going to turn out to be nothing. For those who have their money socked away at Fidelity, it is just not going to make sense that people who are not with a big-name, well-established, long-history, big-money, blue-blood, ivy-league mutual fund organization could possibly do better than those who are. For those who work at Fidelity, it might well be infuriating that anybody who is not at a big-name, well-established, long-history, big-money organization and who does not have blue-blood and did not graduate from an ivy-league school could possibly think that he or she could pick stocks better than those who do and did.

But the Marketocracy performance is starting to all add up.

So get ready to start saying that it was self-evident all along, all you big-name, well-established, long-history, big-money types. Yeahhhhhhh, I mean you. Hey, what are you doing reading this anyway, if you are so confident it is all a bunch of hooey.

Timothy Siegel

Timothy Siegel

The Hobbit, J.R.R. Tolkien

The above riddle is one of a wonderful set of riddles that Bilbo Baggins and Gollum trade back and forth in the fifth chapter of The Hobbit.

But now our entire society faces another sort of riddle.

What interest rate is low enough to foster an incipient recovery?
Yet high enough to bolster the dollar and prevent inflation?

Answer: There is none.

Not every puzzle has a solution.

Ben Bernanke's talk has managed to push up the dollar, a little, for now. But export growth and import substitution are some of the main strengths of our otherwise beleaguered economy right now. If the dollar goes up by much, these strengths will go away, too. Also, the U.S. has negative real interest rates right now. So are the U.S. bills, notes and bonds really a good investment? It's hard to see it. Also, if the Fed is going to raise interest rates, what is that going to do to housing? How is the housing market ever going to recover, if interest rates start to go up?

I'm not going to try to predict currency rates in the short term. This month and next month, anything can happen. But there is a long term trend for the dollar, and it's not up. Nothing the Fed can do or say can stop that, because it is based on the fundamental fact that the U.S. has a huge trade deficit that must be corrected. It might take 40 years to do it, but eventually this country will have balanced trade. And only a weaker dollar is going to get us there.