One way the stimulus bill could defy critics would be if it leads to scientific breakthroughs that can give our country a competitive edge. The bill appropriates a small percentage to research and development of new technologies.

Here's a list of where exactly that money is heading and how much:

$220,000,000 - National Institute of Standards and Technology research, including research into technology with high-growth potential and program giving technology to small and mid-size manufacturers
$230,000,000 - Extra money for National Oceanic and Atmospheric Administration facilities and research
$400,000,000 - NASA climate research
$150,000,000 - NASA aeronautics research
$2,500,000,000 - National Science Foundation research
$300,000,000 - Research and development of renewable energy generation for military
$2,500,000,000 - Research and development of renewable and efficient energy technology
$1,000,000,000 - Fossil energy research and development
$800,000,000 - Research into low-emission coal plants
$20,000,000 - Grants for training and research on safe storage of carbon emission
$1,600,000,000 - Physics research including high-energy physics, nuclear physics and fusion energy sciences
$400,000,000 - High-risk research into energy sources and energy efficiency
$9,500,000,000 - National Institutes of Health biomedical research
$1,100,000,000 Funding for research comparing effectiveness of treatments funded by Medicare, Medicaid and SCHIP

Total: $20,720,000,000 (Approximately 2.6% of the total spending)
(bolded things that interest me, source Wall Street Journal)

"[...] That's what the stimulus bill was about-not knowing what time it is, not knowing the old pork-barrel, group-greasing ways are over, done, embarrassing. When you create a bill like that, it doesn't mean you're a pro, it doesn't mean you're a tough, no-nonsense pol. It means you're a slob.

That's how the Democratic establishment in the House looks, not like people who are responding to a crisis, or even like people who are ignoring a crisis, but people who are using a crisis. Our hopeful, compelling new president shouldn't have gone with this bill. He made news this week by going to the House to meet with Republicans. He could have made history by listening to them."

Peggy Noonan has a great piece in the WSJ. Read it.

Just like in nature, the market has its own Laws of Motion. On the most fundamental level they are supply and demand and risk and reward. If the market represents the "invisible hand," then these concepts are it's tendons and muscle.

The most basic, and probably most well understood of the two, is supply and demand.



The price of a product (Px) is determined at the point where supply (S) and demand (Dx) meet. Q represents quantity sold. The point where it all meets is equilibrium.

Yeah, I know. I just lost some of the non-nerds. Let me translate.

Something that has little supply and very high demand sells for a high price in the market (a new gaming console on eBay, for example). Something with very high supply and low demand sells for a low price in the market (SUVs during an oil boom). An example of a product where this is easily seen would be laser pointers -- in the mid 90s, they were hundreds of dollars in Sharper Image magazines. Now, you can buy them at a gas station for $4.95. Supply has been greatly increased through mass production.

This concept also applies to labor. Skilled positions make more than unskilled positions. For example, doctors make more than tile setters. If there were somehow only one person in the world who knew how to set tile, they'd likely be highly paid.

The next concept that's important to understand is the relationship between Risk and Reward.

For the purposes of most discussions, you can assume this relationship is linear. Truthfully, it's not perfectly linear. There is a slight bend on the left before approaching the 'expected' linear path. The goal of investing, for instance, is to find the point where reward is maximized without taking on any additional risk. In the stock market, this is most often defined as the 80% stocks, 20% bond portfolio. You can theoretically achieve a higher return by being 100% into stocks, but it comes with a disproportionate amount of risk. If I can find a graphic, I'll add one.

At its most basic level though, the higher the risk the larger the reward. A penny stock is not likely to go anywhere, but if it does, you can quickly double your investment. Loaning money to an "at risk borrower" allows the bank to charge a higher interest rate than they would otherwise, increasing the potential reward to make up for the added risk associated with potential loan default.

This concept also applies to labor. A fisherman going after Alaskan king crab makes more per hour than the fisherman going after salmon. A doctor spends years undergoing expensive and elaborate training with no guarantee of making the grade while a tile setter picks it up after a little bit of on-the-job experience. A founder of a company likely quits his day job and takes no pay in order to focus on building the company, while the contractor has the safety of other work and a steady pay check.

I guess you could say an example of disproportionate risk might be professional wrestling vs. soap opera acting. I'd suspect your chances of making Hulk Hogan money are pretty similar in both fields, but Hulk Hogan had to get his ass beat every day for the majority of his life ;)

The point of all this is...

In labor markets, risk dictates reward relative to the supply and demand of that position.

Let's put it all together in an easy to understand example.

A musician makes little because the supply outweighs the demand. The risk is that they'll spend a good portion of their lives as a 'starving artist' because of it. If they make it mainstream though, the reward is very large (both financially and personally, I'm sure). If there were only one musician in the world, there would still be a demand for music. And that one musician would be around to reap the rewards of that demand.

We'll discuss the political implications of these things later, but for now, that should help build at least a basic foundation for understanding our economy's underpinnings.

* for the sake of accuracy and completeness, there are occasional outliers and a direct comparison to the laws of motion may upset my physics-minded friends. For example, someone who plays the lotto only once and wins -- the risk was $1, the reward was much more. Or, in the case of supply and demand, a bubble is created when supply out weighs demand but prices still remain high. The thing is, in both examples folks usually end up going broke, sooo ;)

Gotta love this guy.

Man oh man. What a couple of weeks for the market.

In my lifetime at least, I'm not sure we've seen this kind of pessimism. I've always read about the fear that can strike a market down but this is truly something. There are so many behavioral aspects to all this, and now international aspects to all this, that it's totally unpredictable. As Thomas put it to me in an IM earlier, it's not about finding the legitimate bottom -- it's about "finding the bottom of our fears." Sounds way more profound when I retype it, but yeah.. that's basically the situation.

I've had a few friends ask me about what I think the "other side of the coin" could be to the bailouts. Basically, I kept mentioning that its hard to know if it's a good idea or a bad idea when you have an incomplete picture of all possible scenarios. Government intervening is seen as bad not only because of the tax implications, but also because of inflation and the proverbial "moral hazard" (making people feel its okay to do something wrong, cause Unky Sam will save us if we screw it up.)

Well.. The "other side of the coin" for me is little to do with economics I guess. The fictitious wealth that's on the books has to come off. That's the way markets work. So, that part, no matter the bail out, is going to happen. I guess the other side of the coin has more to do with the social and geopolitical realities of the situation than anything. A bailout could mean a prolonged recession instead of a short, deep recession/depression. Who knows.

Look back to the 1920s though and the events leading up to the Great Depression. As an overly simplified summary, we were the nations largest creditor after WWI. We experienced "roaring" economic growth domestically and saw household debt levels more than triple in under a ten year period. When all the sudden sales couldn't meet growth demands (not enough people to buy the Ford's new car, for example) things started to get shaky. We started to call some of that debt, people started defaulting. Add in a crash here and there and we found ourselves in a depression (not our first, and likely not our last, when defined as a 10%+ decrease in GDP).

It wasn't just a depression here. It was a global depression, and as I understand it, at least partial reasoning behind things like the Marshall Plan post WWII. Our economies were then, and are even more so now, very much connected.

Much of the power that bad guys like Mussolini and Hitler found themselves with, came about because of the depressed economic realities their countries were faced with. Fascism promised a return to prominence and meaning. Look around at world affairs right now and assume the worst for our economy. Consider a global depression and the effects that it could have for people like Putin, Chavez, Ahmadinejad and others.

Consider that much of our political clout on the world stage, rightfully or not, has been lost over recent foreign policy.

Now, is a $850bn in tax payer money more expensive or cheaper than the potential World War that may come out of it, if history is, in fact, repeating? (big if, and yes, the Senate raised it to $850bn from $700bn but our media was too busy trying to make the stock market crash seem like 1927, which it was no where near, to talk about it, but I digress)

You have to make a couple really big if's to arrive at that. The great depression wasn't simply a bad time economically, it was a horrible time. Something our generation has zero concept of even remotely comprehending. It was a time when 1 out of 4 able bodied people were not able to find anything productive to do. That's likely a long, long ways off. But.. Again, without knowing if the doom and gloom is true or not, it's hard to know what is a good idea or a bad one.

Anyhow... I'm, I guess you could say, a cynical optimist. I don't think we're staring down the barrel of that (nor do most economists), but at this point I'm scared it'll become a self fulfilling prophecy. Hopefully countries will be smart enough not to start isolating themselves and putting up large trade tariffs and the like. We're way to interconnected, I'd think.

I've been thinking a lot lately on various investments that would be able to handle the pending recession. There are the obvious answers (gold, basic materials, etc.), but I'm trying to round things out a bit.

It seems to me that when money is tight, people certainly cut back their spending, but the need for entertainment and pleasantry still exists. Cheap entertainment and thrills seem like a decent bet. Movies used to fall into this category I'd think, but that's just not the case anymore. I wonder if Netflix/blockbuster and other rental outlets would fit? Video games actually work out to be cheaper than most forms of entertainment, but they have such a high barrier to entry. Gamestop might be an answer to that, being that they sell a great deal of pre-owned (cheaper) games.

My sister pointed out makeup companies. That might sound a little funny, but truthfully if a $10 thing of lip gloss makes someone feel better, then it might match up perfectly. Never under estimate the feel good powers of vanity. That would suggest who, Proctor & Gamble?

Costco, BJ's, Walmart, Target, Dollar Tree, Big Lots -- big box stores and discount chains are a likely candidate. I started wondering about home depot. Normally, I'd say probably not, but given that much of this is caused by housing, maybe. People aren't going to be able to sell like they used to and will probably be planning on staying around a little longer. There might be a decent amount of home improvement going on, it's just whether or not that amount of home improvement is greater than the home improvement that was taking place during the housing boom. Probably not, but might be worth keeping an eye on.

Vacations are likely to be cut back on as well, but that doesn't mean families still won't try to go places and it doesn't mean that business will stop sending folks to different cities. Cheap destinations, discount travel outlets, discount airlines and discount hotel chains might be worth looking into (I think I'll pass on Spirit, though ;). When Kat and I were visiting family up in Ohio, we went to an indoor water park. I remember it as being a bit more pricey than I would have suspected, but I wouldn't be surprised if there were cheaper alternatives. It wasn't a water park like oh-my-god-a-water-park!, but more of an indoor pool with a bunch of neat slides attached to a hotel/destination type of place.

I've already been researching and following along with the alternative fuels world. I think given our economic situation, national politics and the general pulse of things, alternative energy will become even bigger in all this. A big part of our economic situation is oil. China isn't going to slow down their growth anytime soon, so oil demands aren't going to go down anytime soon. High oil creates higher inflation. The best way for us to reduce this added inflation may very well be alternative energy sources (combined with some clever Fed moves, of course). If the next president of the United States is a Democrat or one of the few Republicans pushing for massive energy reform, this sector will blow up.

Am I missing anything? Is my head in the right place or am I off base? I wasn't quite "investing age" during the last real recession we had, so I'm kinda basing this all off of logic. ;)