Wednesday, April 23, 2008

Obama's Texas strategy.

I assume that Obama will be the democratic nominee. Maybe I'll make yet another post about that. Anyway, this post is even more valid if Hillary somehow ends up as the nominee.

I think Obama should make a huge push to win Texas in the general election in November. A huge push, where a lot of time is spent and, in particular, where a lot of money is spent. Here's why.

I don't think Obama can win Texas (bear with me). In the best election in recent years for the democrats, 1996, Dole beat Clinton by just under 5 points in an election Clinton won by 8.5 points. In other words, Texas was 13.5 points more Republican (or redder) than the whole country (including Texas). So it would seem that trying to win Texas is a lost cause for a democrat just now. And it may well be. I still think Obama should spend huge resources trying.

First, as more Hispanics register and vote, and as immigration becomes a huge issue, that may well add a few points to the democrats (although McCain is widely seen, rightly, as not anti-immigrantion/anti Mexican immigration, as so many Republicans are).

Second, campaigning in Texas is excellent practice for campaigning in states democrats can win, namely neighboring Louisiana and Arkansas (which Clinton won twice) and in my opinion could be won by Obama in 2008, New Mexico (won by Clinton twice and Gore by a hair, but lost by Kerry) and to a lesser extent Missouri and Colorado. Colorado is trending democratic, big time, and is expected to be in play this year, although its similarity with Texas is, to say the least, tenuous. Missouri is always a swing state, but again, it isn't really similar to Texas. Still, campaigning more in the region and less in the Midwest and Florida can't hurt in Missouri and Colorado.

Finally, the main reason by far for my Texas Strategy is money. Obama will have more of it than he knows what to do with. I expect that assuming he wants to, Obama will raise north of $1 billion dollars! In contrast, in 2004 Bush raised $360 and Kerry raised more than $317.

I expect Obama to be an order of magnitude better, both because of the enthusiasm he generates, and because of the enthusiasm of democrats following 8 years of Bush, who democrats loathe. The huge sums he has raised in the primary season seem clear evidence to me that, at a minimum, he will blow Bush's 2004 fundraising numbers out of the water.

McCain and the Republicans, in contrast, are struggling financially. This is a stunning turn of events. I asked myself how Obama could best to use a boatload of money, I looked for an expensive big state to spend it in and Texas jumped off the page. It is the second biggest electoral prize (34 electoral votes, compared to Florida's 27) behind huge California (55). In addition, the GOP can't win without it. Not a chance in hell. If Obama spends time and big big money in Texas there is every chance that the polls will show him within striking distance of McCain there. This will inspire raw panic on the GOP side, which is a good thing, and will divert precious money the GOP would much rather spend in the traditional swing states (Florida, Ohio, Missouri, the Midwest).

As an added bonus, the democrats might even begin rebuilding their name in Texas, which if you ask me is a hot idea. Simply writing off gigantic swaths of the country is lousy politics and is bad for the nation as a whole. Much better for the democrats, as Howard Dean has emphasized, to compete in all 50 states (or at least as many as humanely possible).

If the election is a landslide none of this matters a bit. And a landslide is what I expect, in favor of the democrats. Still, you always plan for failure, and if the election is close my strategy (particularly if money is the main resource poured in rather than time) could swing Arkansas, Louisiana and New Mexico (which borders Arizona, McCain's home state). Had Gore won either Arkansas or Louisiana he would have won, regardless of Florida. It may seem like a lot of money and effort for small states, assuming Texas is unwinnable. But again, Obama will have more money than he can possibly effectively spend, and as between a ton more ads in Florida or Ohio in freaking September, or a whole new battlefield, which may help in a few neighboring states, I vote to flood Texas with money.

The other new expensive battleground, which Obama is 100% certain to go after, vigorously, is Virgina. Bill Clinton came within 2 points in 1996, and Virgina is much less unfavorable for the democrats now than it was then. Ask Senator Webb. Advertising in Northern Virginia, near DC, is very expensive. Obama cleaned Hillary's clock in Va., and should run very well against McCain. But this is low hanging fruit-- an obvious choice to spend money and time. Texas is much more subtle. Potentially more powerful. And more useful as a party building strategy/mandate strategy.

Fight for Texas Obama!
Fed's next steps.

The fed next meets to discuss monetary policy on April 29/30, next week. I hearby call on the fed to stand pat, and leave rates unchanged.

As you all know as loyal readers, I have advocated a policy of dropping interest rates, fast, and keeping them low, as well as fiscal stimulus, to prevent a possible implosion of the financial system, and to prevent the recession we are in from becoming needlessly deep. Fortunately, Fed Chairman Bernanke has been thinking along exactly the same lines! I love Bernanke!

The Federal Funds rate, the most important rate set by the fed, is now at 2.25%. With inflation higher than that, at between 3-4 % depending on which measure you look at, interest rates are, in the jargon, highly stimulative. Real short term interest rates are negative, a fairly rare condition, which only occurs when the fed is worried about DEFLATION (2001-2004) or when the fed is concerned about a recession becoming severe (1990-91, 2001-2002, and now). In simple terms, the fed has the pedal just about to the medal, and is willing to let the dollar twist in the wind in order to try and stimulate the economy.

As my friend Andrew and many others predicted, the previous rate cuts have caused the dollar to continue to tank, gold and oil prices to explode, and other commodity and food prices to rise sharply. I consider these reasonable prices to pay to try and ensure that the economy doesn't slide into a deep and long recession.

I now call on the fed to stand pat. I am delighted with interest rates exactly where they are! I'm not worried about inflation, at all. The US economy will weaken, north of a million more jobs will be lost, and consumers will continue a shopping strike. (Read this interesting article to learn why. )

The weakening of the US economy and the consumers' shopping strike will put sharp downward pressure on prices, even oil prices (for complex reasons). So it is not because of a fear of inflation (the usual argument against interest rate cuts) that I advocate the fed standing pat. Instead, I want the fed to have further ammunition in case the financial markets weaken further, or there is some crisis. If rates are lowered much more the fed will have run out of bullets, a really bad idea in a world full of armed people trying to sneak up on you.

In addition, I think standing pat will signal to the oil and currency markets that the fed isn't on a wild, drunken, damn the dollar spree (unlike the Bush administration, which has been on one since January of 2001). By standing pat, the fed will say in essence, "don't worry, competent adults are in charge of economic policy now. Fear not, and invest in the US).

This is what I would like to see. As for a prediction, a 25 basis point, or .25% point cut would not surprise me in the slightest.

Wednesday, April 16, 2008

Oil prices. Where do they go from here.

First, oil prices have gone NUTS. As any of you who own a car are painfully aware, oil prices have gone through the roof. As I write this on 4/16/08, oil is at $113 a barrel. This is staggering! It is also a classic BUBBLE. This bubble, like the recently burst housing bubble, the tech stocks bubble, the baseball card bubble of the 1980s (yes, there was one, a BIG one for that tiny market) and all other bubbles down through history occur when, for various reasons, prices get completely out of whack with a "normal" supply and demand curve. For example, the demand for tech stocks with few revenues, no profits (laugh) and no clear way to BECOME profitable grossly exceeded the supply for several years. Accordingly the prices shot through the roof. Now of course the main reason why demand consistently exceeded supply was the greater fool theory. That is, you could always unload the thing on some other sucker. Until the game of financial musical chairs ended, that is.

Look up the tulip bubble, at for an absolutely fascinating story of how prices can get out of line. What a mind boggling bubble that was!

Anyway, oil prices are now in a bubble, a BIG one. Well, partially a bubble. Demand has soared in recent years, and that's no bubble. China, you may have heard, is fast growing. REALLY REALLY fast. India too. The US has grown. In fact, the world economy grew more in the last few years than at any time since the 1950s. It was quite the boom while it lasted. So part of the oil price run up is "real," by which I mean demand really has sustainably increased. But part of it is a fear in the oil markets regarding Iraq, possible war with Iran, instability in Venezuela, and so on. And a bigger part of it, imho, is that there is a LOT of money sloshing around the world financial system that needs a home. Interest rates have been low and are now dropping some in the US, so bonds aren't too attractive. Why not buy commodities (or more accurately bet on oil prices increasing)? People have. In HUGE amounts. Some of this is well outside of my knowledge, but the people I read have long felt that a fair bit of the run up in oil prices the last few years is simply speculative froth that will wear off.

Another part of the oil run up is the precipitous fall of the US dollar. For historical reasons, nearly all oil contracts are priced in DOLLARS. Well, you're Saudi Arabia. The dollars you get don't buy nearly as many Euros/Yen as they used to. Figure it out.

Why will oil prices very likely decline from here:

A) Demand growth will slow considerably. The US is in recession, which slows demand growth. The Euro economy is slowing, and the UK is probably headed for a housing led recession. This will slow growth. China is trying to slow its economy. This will slow growth.

B) The dollar will not keep falling for the next few years. I think. (Heaven help us all if it does).

C) The Bubble will burst. Demand on the spot market will drop as betting on oil prices is no longer a one-way winning bet.

On the political instability front, I don't know what will happen. It wouldn't surprise me a bit if the situation in the world oil producers became more stable. A perfect storm is possible, where oil prices quickly crater (to a still high number, say $70 a barrel).

Which brings me to my last point. Andrew and I have made one of our periodic wagers. Now my record in these wagers is NOT good. I am approximately 1-7. That is, I've won 1 (I think) and lost around 7. With that in mind:

I have wagered that sometime between now and the end of the decade, 12/31/09, Oil will drop below $80 a barrel. Andrew has wagered that it will not. A fancy dinner, plus the more important bragging rights, are at stake. It has a relatively long way to drop and a somewhat short time to do it, but I'm convinced this is a bubble, and bubbles DO burst. The only question is when. Wish me luck. Against the Goliath that is Andrew, I'll need it.