Title:  ’A Commandeering of the People

Sub-title: One of America’s leading libertarian legal scholars handicaps whether the Supreme Court will find ObamaCare’s insurance mandate constitutional.

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My comment with minor edits– MM

Among all other issues in this highly complex legislation, the mandate is the most severe error with consequences surely no human can yet forecast with any accuracy. That any party, President, or Congress would take that leap with so little thought (obviously) about the consequences does not provide me with much confidence in the future of America. In addition to mandating that individuals buy something (anything — if it is not found to be unconstitutional then the Constitution needs amending and the court needs to revisit historical context), the problem was compounded by multiple factors by not requiring competition in the private sector, and breaking down the state by state duopoly, or in a few cases oligopoly.

This was a profound error that took the U.S. down a path that was never intended by my study of the published work by the Founding Fathers, the Constitution, and in fact historical and modern social evolution. In addition, as has been pointed to here several times– to my knowledge– even those countries with a sharply different culture and economy do not mandate that citizens acquire products and services. Many tax and provide subsidized services– a much different model and topic.

Personally I am absolutely in favor of healthcare reform, and I am pleased with several components of the insanely long document — health insurance doesn’t act like a rational business in the U.S. because it isn’t — if any competition existed they would not decline applicants outright who are a much better risk than the majority they accept, and that is common practice throughout the industry. And obviously any system that all but requires patients with the least deadly symptoms to abuse the most expensive trauma centers for basic care is in the process of imploding, and taking the rest of society with it — this too is insane, and Congress was correct in changing. Other portions of the legislation, however, appear to have been written by lobbyists.

Like so many other legislative attempts in recent years, the key issues that this country was founded upon — individual rights, liberty, freedom, and right to pursue happiness — have been corrupted by special interest group control over the political process, and yes ideologues.

Citizens across the ideological spectrum had best come together very quickly on one issue– if the political process is corrupt — and the super majority understands that it is apparently, then government cannot function — democracy cannot function, and the economy cannot function. That means, among many other things, that regardless of what one believes in — helping others, increased justice, rational protection, opportunity — anything other than corruption itself, simply isn’t possible. That is to say that the economic trajectory of the U.S. is not sustainable due to a political system that has a fatal disease (systemic corruption).

Passing legislation isn’t a sign of success, as we’ve seen for years now. Passing legislation that addresses the fundamental problems facing the country — meaning doing so free from the dominance of powerful lobbies, is the only metric of success for any legislative body. By that measure Congress and the White House have failed (increasingly) for decades. The Supreme Court has failed by not understanding fully that the law of economics eventually trumps the rule of law– particularly in a nationalist body within a hyper competitive global economy. I am not sure anyone fully understands all of the dynamics involved here, but It appears to include a cultural malaise of elitism, structural problems in academia and our educational system, and combined with a toxic mix of broader social and psychological issues of the type that have eventually taken down all empires.

Too bad we lack leaders across our society who have the strength of previous generations — people who worked in fields, personally constructed communities, built businesses from scratch, understand the power of good will and commerce in a voluntary Republic, and last but not least — understand that nations must never/ever cross the line of realizing system-wide moral hazard like we have done over the past few years. The one thing one does not do in a system even similar to ours in the U.S. that is utterly dependent on those not in the ivory tower– is to reward destructive behavior en masse at the expense of those who followed the rules.

What we have today are primarily various forms of monopolies — in government, industry, education and healthcare (did I forget the Bar), that abuse power to protect the past instead of embracing competition, innovation, and creative destruction of the status quo.

It’s not too late for America, but the law of economics is bearing down — alarms are going off, and smoke is getting very thick indeed. It won’t be long before someone yells fire and buyers of treasuries run for the exit.

If a trader sold the Dow index on Monday morning’s rally and invested the proceeds in oil futures, as I contemplated but did not do, the net difference would have been 10% to the upside for the week. Compound such a move in any market a few times per year while avoiding the associated risks, and the results would catapult the fund into the top tier worldwide. The natural inclination then is of course to jump on spikes, but that behavior is often as painful as it sounds.

In the case of oil we are seeing strange bedfellows sharing interests that I consider to be a key causal factor for the oil bubble. We have a lame duck administration in the U.S. that apparently favored a weak dollar and higher oil prices, despite rhetoric suggesting otherwise-Texas drilling boomlets are exceptions to the rule in the rural U.S. economy. The administration may also share the belief, probably correctly, that one way to overcome the long-standing political resistance to increased domestic oil production is to apply price shock therapy.

On the other side of the aisle we have Al Gore, university endowments, and pension funds who also share an interest in higher gas prices for achieving both a short-term investment gain and green objectives. Hedge funds, environmentalists, corn growers, emerging alt energy, OPEC, media, and leading investment banks….. everyone but the consumer and the transportation sector it seems are in nearly perfect alignment in wanting to see oil prices move higher.

Most baby boomers have realized since the 1970s that we have a fundamental supply and demand challenge in oil, as well as an environmental crisis. In 1976 I myself wrote a term paper on the topic while working nights at the local gas station that was sufficiently trendy for 2nd in class. The recent explosive growth of emerging markets towards U.S. consumption levels is truly a recipe for eventual crisis worthy of avoidance. The question is one of timing.

What we are currently experiencing in commodity futures is short-term bubble management 101. A text book on the topic would coach students to seek fundamental demand that is hyped by credible evangelists who are popular with mass media, preferably in markets that players can influence, if-not dominate. Cynical perhaps, but historically effective.

One issue many commentators miss is that most markets have at least two supply and demand drivers working dynamically. The consumer is well understood, albeit through lagging indicators, but the investment side is just beginning to see some light. Of particular interest to me are the ramifications from the recent spike in institutional capital that is significantly changing the global economy, not all of which is for the better, particularly for those who are trampled. In the case of food commodities, the trampled are primarily the world’s starving that many of the same institutions claim to be concerned with.

As most have heard by now, the Homeland Security and Governmental Affairs Committee confirmed that commodity investment has experienced a similar spike as venture capital did during the dotcom bubble a decade ago. From 2003 to 2008, investment in the index funds tied to commodities has skyrocketed from $13 billion to $260 billion. The effect has been similar to adding another China to the demand side of commodities. The precise portion of commodity price increase caused by spiking investment is unknown, but I believe is quite significant in the short-term and increasingly divorced from real fundamentals-classic characteristics of a market bubble.

Signs are emerging however that we may have finally reached the tipping point for demand in commodity prices in general and gas prices in particular. While it may be true that in Q1 year-over-year (Y-O-Y) growth in world oil consumption outstripped growth in non-OPEC production by over 1 million barrels per day (bbl/d), and OPEC will probably not increase production at least until their next scheduled meeting on September 9th, it‘s also true that the customer is king, and beginning to speak in unusually strong language.

Despite commentary that over-emphasizes in the short-term what is truly a long-term challenge, global oil demand has not spiked by 1% per day over the past several weeks, nor is supply evaporating anytime soon. According to the EIA, world oil consumption is projected to grow by 1.2 million bbl/d in 2008. Almost all of the growth in 2008 is expected to come from the non-OECD countries, led by China, Middle East oil producing countries, Russia, Brazil, and India, but these numbers are based on previous GDP growth projections, which are trending downward. Remember that data collection represents lagging indicators, and projections more often than not miss the mark considerably, particularly in volatile times.

In 2007, U.S. domestic crude oil output averaged 5.1 million bbl/d, unchanged from 2006, and was projected to grow by 10,000 bbl/d in 2008, but again over the past two months the slow-to-react projections have been revised sharply lower.

As of last month U.S. oil consumption was projected to decline by 190,000 bbl/d in 2008, but this was prior to the recent 30% spike. The U.S. DOT reported this week that total vehicle miles driven in March fell by 4.3% from 2007 levels, the largest Y-O-Y decline since the government began keeping records in 1942. Another piece of good news is that greenhouse gas emissions of course also fell, estimated to be 9 million metric tons for Q1 2008.

This data was collected before the recent sharp increase in oil futures, which has yet to be reflected at the pump, so sharp reductions should follow. Let’s not forget a similar reduction in other petroleum products is underway as managers scramble for increased cost efficiency, or as in the case of a growing number of airlines, simply halt operations. I don’t have the precise numbers, but the recent reduction of flights in airlines represents a very large reduction of jet fuel consumption in a matter of weeks.

The worlds’ largest market has immense potential for conservation that is underappreciated, particularly given the current stress on the average U.S. consumer combined with the increasing fear of global warming. If the trend line continues at even a plausible level of half the previous month’s gain in oil prices, and demand reacts similarly to the previous quarter’s price increases, we could easily see a 500,000 bbl/d consumption decline in the U.S. within weeks, representing about half of the gap in global supply and demand. An immediate 10% reduction in U.S. oil consumption with a pump average of $4 per gallon is not an unreasonable expectation, and 20% is certainly possible, which would alone close the gap. (Correction- the 10% figure was based on domestic output, not consumption, which is about half what it should have been. In fact a 10% reduction in gas demand by U.S. consumers, which appears to be well underway, would almost close the entire global gap projected between supply and demand).

Now consider the global reaction to higher oil prices just in the past few days. On Thursday several Asian countries announced a reduction of oil subsidies for its citizens, and on Saturday Indonesia raised oil prices by 30%. Coincidentally (or not), the U.S. dropped the travel warning on Indonesia within 24 hours, which has been in place since ‘05. If China and India follow with modest price increases, global oil inventories will rise very quickly. The price elasticity in oil is getting a bit thin. If based on fundamentals, oil futures would be falling.

Using very rough numbers, about half of the U.S. current account deficit is from oil imports, and the U.S. imports more than half of its oil consumption. So therefore the majority of every dollar saved at the pump remains in the U.S. at least temporarily where it’s frankly needed more than in oil exporting countries, which currently enjoy a large capital surplus. Oil conservation directly increases the savings rate, reduces the national debt, and should reduce real interest rates a bit while strengthening the dollar. In the mid-term, the impact includes increased employment by freeing up significant capital for much wiser deployment.

Of course reduced oil consumption also has negative implications for specific sectors, including tourism and rural economic development, which are old passions of mine, but overall oil conservation is among the best prescriptions for the U.S. today. – M.A.M.

©2008 Mark A. Montgomery All rights reserved.