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February 28, 2006

Newcrest lacks Midas Touch

James Kirby
February 26, 2006
Australia's most disappointing company, gold miner Newcrest, has staggered over the line with another poor result - and this time investors will not have to take any more excuses from chief executive Tony Palmer.

By the close of trade on Friday, Newcrest shares, at $20.89, had fallen more than than 10 per cent in two days and Newcrest was looking for a new boss after the unlucky Palmer announced he was hanging up his gold-plated boots to do nothing for a while.

Newcrest is Australia's biggest gold mining stock and the gold price is trading close to a 30-year high. Newcrest should be a winner but endless production problems mean this Perth-based company is a perennial loser in the gold mining game.

Even after the price plunge Newcrest shares remain highly valued - but it's got little to do with the company and everything to do with its gold assets and because it's a takeover target.

It makes you wonder whether Newcrest investors might not have been better off if Palmer and his team had decided to do nothing about two years ago. They could have played golf every day instead of going to work and Newcrest's gold reserves alone would have pushed the stock price higher.

Which goes to show that just because the underlying price of a commodity is going through the roof, it does not mean every company in the sector is going to be successful. Newcrest is probably the most spectacular example but there are dozens more gold stocks - including Lihir - that face similar challenges.

Gold is a unique commodity because it carries a reputation as a safe haven in times of trouble. This reputation has been questioned in recent years but Michael Knox, the chief economist at ABM Amro Morgan, has determined that in the 55 years from 1950 gold really did serve as a haven. With an annualised inflation adjusted return of 2.7 per cent, gold was better than bonds.

Many commodity experts expect gold will continue to trend upwards. After hitting $US572 an ounce it's slipped to about $US550 this month. Forecasts are widely variable, generally ranging up to $US750. I've seen one forecast for $US2000 - that's for what's known as a price spike but it's a genuine forecast and it's been made in Europe by Cheuvrex, the broking arm of respected French bank Credit Agricole.

There are 20 different reasons why the gold price is rising - China, inflation fears and so on. But the pivotal point is that many of the world's central banks sold gold in the last boom and the gold price slumped. Will it happen again? The bears say it will, it happens every time. The bulls say "this time is different" because the central banks do not have as much gold in the vaults as they had. Needless to say the central banks aren't telling.

Either way, there is compelling evidence gold is a sound long-term investment and gold is most likely to rise further. But don't buy those gold explorers, buy gold instead - there are index funds and pure gold funds listed on the ASX. You can even buy gold itself from the government-owned Perth Mint: at least then you won't be paying for management that might serve you better on the golf course.

James Kirby is the editor of Eureka Report at eurekareport.com.au

Carry trade winding up..

The cash machine that sustained a world boom is about to close, and it's going to get ugly, says Ambrose Evans-Pritchard

One by one, the eurozone, the Swedes, the Swiss and now even the Japanese, are turning off the tap of ultra-cheap credit that has flushed the global system for the past year, keeping the ageing asset boom alive.

The "carry trade" - as it is known - is a near limitless cash machine for banks and hedge funds. They can borrow at near zero interest rates in Japan, or 1pc in Switzerland, to re-lend anywhere in the world that offers higher yields, whether Argentine notes or US mortgage securities.

Arguably, it has prolonged asset bubbles everywhere, blunting the efforts of the US and other central banks to restrain over-heating in their own countries.

The Bank of International Settlements last year estimated the turnover in exchange and interest rates derivatives markets at $2,400bn a day.

"The carry trade has pervaded every single instrument imaginable, credit spreads, bond spreads: everything is poisoned," said David Bloom, currency analyst at HSBC.

"It's going to come to an end later this year and it's going to be ugly, even if we haven't reached the shake-out just yet," he said.

[...] "There are several hundred billion dollars of positions in the carry trade that will be unwound as soon as they become unprofitable," said Stephen Lewis, an economist at Monument Securities. "When the Bank of Japan starts tightening we may see some spectacular effects. The world has never been through this before, so there is a high risk of mistakes."

Toshihiko Fukui, the Japanese central bank governor, gave a fresh warning yesterday that this day is near, saying the country was pulling out of seven years of deflation. The economy grew at a 5.5pc rate in the fourth quarter of 2005.

[...] It is an open question whether the yen, euro, Swiss franc and Swedish krona carry trades have occurred on such a scale that they have led to over-investment in Latin America and beyond, and compressed US yields, fuelling the American housing boom in 2005 despite Fed tightening.

There are other big forces at work: huge purchases of US Treasuries by Asian central banks, and petrodollar surpluses coming back to the US credit markets. Stephen Roach, chief economist at Morgan Stanley, warns that the carry trade is itself, in all its forms, a major cause of dangerous speculative excess. "The lure of the carry trade is so compelling, it creates artificial demand for 'carryable' assets that has the potential to turn normal asset price appreciation into bubble-like proportions," he said.

"History tells us that carry trades end when central bank tightening cycles begin," he said. Ominously, almost every bank other than the Bank of England is now tightening in unison.

February 27, 2006

Yenick gets it

Cycles says: end of this counter-trend rally late Spring, about when the Greenspan Indian Summer gives way to a Bernanke Winter, driven by (a) higher short-term rates and a deeper inversion of the yield curve, (b) coupled with a clear slow-down in US consumer spending due to the cratering of real estate refinance, and (c) possible oil price spike coming from turmoil with Iran trying to switch the oil trade from the Dollar to the Euro, all leading to (d) expectations of a recession in 2007. And when that occurs in 2007, the government will begin priming the pumps looking towards the 2008 election. Coupling that with continued Chinese pumping leading into the 2008 Beijing Olympics should give us a nice mini-Bull run in 2007-2009. Not as good as that 82W5 would have been (or will be), but we'll take it anyway.

February 26, 2006

Here is the Hersh Report

Evidently the US Department of Energy is interested enough in the Peak-Oil debate to commission a report on the subject. Released in February this year by Science Applications International Corporation (SAIC), and titled "Peaking of World Oil Production: Impacts, Mitigation and Risk Management," the report examines the likely consequences of the impending global peak. It was authored principally by Robert L. Hirsch. It disappeared from view. Read it here.

Download file

February 25, 2006

The Paradigm Shift Is Here, Or, Everybody Must Be Stoned

Wallace, Idaho, 23 February 2006 – If we can get through the end of next month without serious economic havoc (say, the whole planet blowing up, or a full-tilt outbreak of the bird flu pandemic in Arkansas) it might be safe to dig a few of those rat-holed Maple Leafs, Morgan dollars and Krugerrands out of that backyard coffee can and trade them out for Fednotes at your local pawnbroker or coin-dealer.But in the middle of a paradigm shift, things move very rapidly, so don’t go reaching for the shovel just yet. Barely had we begun digesting this United Arab Emirates port deal and the terrible bombing of that mosque and near-certain civil war in Iraq when Capitol Hill Blue’s Doug Thompson yesterday unearthed a Secret Service account that Dick Cheney was drunk as a skunk when he shot his lawyer-buddy on that South Texas quail hunt weekend before last. Being liquored-up when you’re handling a gun is never a good idea, but when you’re hunting in that condition it’s a felony in Texas. Doug’s stories usually show up a week or two later in Time or Newsweek, officially vetted by the MSM. Our faithful correspondent Fred Reed grabbed a jug of cheap red wine (Padre Kino) and slunk off to a corner in Mexico to try to make some sense of it all. The wine didn’t help. He wonders if psilocybin might level the playing-field of White House insanity, put things in perspective.
Forget digesting or recovering from a day of cheap red; we were beginning to stagger like a first-round boxer after a right hook from Ali when word arrived from Chris Laird that the Yen-carry trade was about to unwind. Being unsophisticated silver slugs from Wallace, Idaho, we didn’t know there was such a thing as a Yen-carry trade, but it’s been working like this. The Bank of Japan has been charging zero interest on loans for the past 10 years to try to revive the economy. So guys were going to Japan, borrowing Yen for no interest, converting those Yen to dollars, and lending them to us by buying U.S. Treasury notes paying 3 percent interest, or wholesale home mortgages paying a little more. Nice mark-up, if you can get it. Except that the party is about to end, because three quarters of economic growth in Japan will cause its central bank to start raising the borrowing rate.
Writes Laird: “The BOJ literally acts like a central bank of the world through the Yen carry trade, supplying liquidity that finds its way into markets everywhere. The phenomena is a decade old now for the latest manifestation. The last time this level of penetration of the Yen carry trade was reached was just prior to the LTCM collapse. Back then, when the Yen unexpectedly strengthened 20% it caused a massive move out of Borrowed Yen on the Cheap, and caused massive market sell offs world wide, and was a direct cause of the LTCM collapse, where the US FED had to act immediately to bail out banks and illiquid brokerages and financial entities with blank checks to forestall that crisis.”
We started to run from all this chaos like Fed governors abandoning a sinking ship – the second one to do so recently, with 8 years still left in his term, Roger Ferguson, bailed this week – when Libertarian Paul Gallagher and a European think tank, LEAP E2020, simultaneously and without having chatted with each other first, warned of economic calamity within the next bloody month or two.
March, the Europeans noted, is going to be one nasty month. LEAP E2020 “now estimates to over 80 percent the probability that the week of March 20-26, 2006 will be the beginning of the most significant political crisis the world has known since the Fall of the Iron Curtain in 1989, together with an economic and financial crisis of a scope comparable with that of 1929.” Why? Because the Iran Oil Bourse will open on the 20th, and the U.S. Fed three days later will quit reporting the M-3 figures, which most accurately reflect the actual amount of dollars floating around there at any given moment. Toss in an “intervention” by the Bush-Blair axis or by Israelis in the Iran nuke mess and the think tank’s estimate of calamity goes to 100 percent.
Hot damn! Meantime, the dollar-denominated value of that coffee can out in the back yard slides along sides, “correcting” from recent “highs.” As David Morgan noted back on 12th December, these “highs,” in terms of 1980 Fednotes, are still half-priced. And if all the foregoing is too weird to sort out even with the help of Dago Red or psychedelic mushrooms, maybe it’s time to dig another hole, and fill up another can with metal and silver stock. There could be as little as four weeks left.

Paul Questions Bernanke on M3, Inflation

February 15, 2006    
Washington, DC:  Congressman Ron Paul of Texas today questioned new Federal Reserve Chairman Ben Bernanke before the House Financial Services committee.  Paul continued his longtime criticism of Fed policies, focusing on whether the relentless increase in the money supply that took place during Alan Greenspan’s tenure will continue.


Mr. Bernanke has pledged to bring increased transparency to Federal Reserve policymaking, but the recent Fed decision to discontinue compiling and releasing the M3 monetary aggregate figure casts doubt on this promise.  M3 is widely used by economists, policy makers, and investors as the most accurate and reliable true measure of the money supply.   


Paul, known as a congressional expert on monetary policy, reminded Mr. Bernanke that inflation is always a monetary phenomenon, resulting from an increase in the money supply as ordered by the Fed itself.  M3 has risen more than twice as fast as M2 and GDP in recent years, illustrating that real inflation is much higher than the government admits through its CPI statistics.  The troubling possibility is that the Fed discontinued M3 for the simple reason that it wants to conceal the extent to which the money supply- and hence price inflation- really grows.


Paul is preparing legislation that will compel the Fed to continue publishing M3, and plans to introduce the bill in the Financial Services committee later this month.

Norwegian Bourse Director wants oil bourse - priced in euros

by Laila Bakken and Petter Halvorsen
Bourse Director Sven Arild Andersen is fed up with Norwegian oil having to be traded in London and wants to have a commodities and energy bourse in Norway. The Bourse Director believes that Norway already has the prerequisites for building up a Norwegian or Scandinavian energy bourse.

"This would in such case compete with the bourse in London. Why not have the ambition to outcompete the British petroleum bourse," says Sven Arild Andersen. "Here, you could trade crude oil, natural gas contracts and establish derivatives for these products."

"In addition, we must set up a larger financial industry around this, as important in other large markets and employ many people. And which are important for the competencies that are needed beyond the extraction itself of oil and gas," says Andersen.

Andersen in of the opinion that Norwegian oil must be traded in Euros, which can be advantageous for international customers. "We have performed market studies and both Russia, which is a large oil exporter, as well as the countries of the Middle East have large parts of their economies in Euros. They would be able to view such a bourse as a contribution to balancing their economies in a better manner than at present, where their products are traded solely in dollars," says Andersen.

The Bourse Director holds out the Scandinavian power bourse, Nordpool, as an example of how a successful bourse is constructed. And he believes that this ought to be included in a Norwegian or Scandinavian energy bourse.

"We currently we have the leading power bourse in Europe. It is large, well-respected and efficient. Nordpool would be natural to consider as being important in the establishment of an oil and energy bourse," says Andersen.

The plans have been discussed for years, but have never gone past the stage of being just talk.

"We must get large Norwegian players onboard such as Statoil and Hydro, and even though the interest has been there, nobody has taken it further with great enthusiasm.

"There is now talk of a fish bourse in Norway and there certainly is no doubt as to whether we thus aren't in a position to build an energy bourse that would be much, much larger and for which we possess significant requisite competence to get up and running."

Translation from Norwegian (C) 2006 by Hugh Whinfrey, all rights waived in perpetuity.


February 24, 2006

Gold: Swiftly Precious in 2006


 By Roger Wiegand              
February 23, 2006

Gold’s freight train of positives is running over the sellers. Technically, gold wants to sell but supporting reasons simply will not allow it. In this time of purported correction and profit-taking there are few sellers or buyers. Both seem to be standing around with their hands in their pockets like little kids, looking nervous unable to choose. Cycles and seasons say look out below but energy, politics and radical Islam conspire to prop gold’s prices, instilling uncertainty and fear subduing the profit takers. Nobody wants to miss the next rally as progressively weaker thoughts of weaker gold markets persist. On the other hand traders think the correction has some time to run and worry about buying into a selling market. What should gold traders and investors be doing?

After excellent fundamentals, high priorities for gold rallies are energy, politicians, and terror freaks. This President’s Day, George Bush is out stumping for energy policy and conservation. Since Nigerian oil pirates have effectively shut down nearly 500,000 daily barrels of high quality crude oil with their mischief, you might not wonder why Bush is doing this now. In our view, Bush has some other extremely serious Middle Eastern problems coming to flash points and they are presently unsolvable. Domestically things are quite mediocre at best. On television today, supposedly making a happy speech to a non-threatening corporate crowd, Bush seemed strident and visibly nervous. For a good ‘ol boy this is out of character for him. We sense something is very wrong. We think he is terrified of an outrageous oil price spike about to drive a stake through the heart of his “economic recovery” and currently very fragile second term presidency. A major oil spike and gold rally will not help his political friends in this fall’s coming election either. And for politicians, getting votes and getting elected is all that matters.

Energy and gold prices often follow each other and in 2006 this rule has proven to be consistent. In other years, oil rallied and peaked into mid-April while gold had a modest rally the last week of March. Seasonal gold charts show us gold sells down to range bound prices from late February through most of August. However, in these times of maladjusted markets, timing is suspect at best.

We think this year is different as more of the Middle East rapidly goes sour. The wrong people won the Palestinian election, Syria is killing internal and Lebanese enemies, Turkey’s Muslims are misbehaving, Egypt took an unpopular USA position, the Iraq war grinds on out of control, fighting continues in Afghanistan, and worst of all Iran is moving into the nuclear club while Israel warms up its retaliatory missiles. Making it worse, Putin antagonized Europe temporarily cutting off their natural gas and is pretending to be an Iranian mediator but secretly chuckling and doing nothing while Bush squirms. Putin has quickly reverted to his old KGB ways and is effectively nationalizing (stealing) the entire Russian energy industry and is not allowing any new bidding on precious metals leases by western mining companies. What happens to existing mining operations has not yet been addressed. Country geopolitical risks are popping up all over the globe and gold investors should be very careful and aware of these potential threats to gold miners.

A formidable cabal of USA enemies are politically ganging up while signing new and significant energy contracts not only advantageous to themselves but deliberately disadvantageous to the United States. Further reinforcing this negative effect will be the re-pricing of oil sales in Euros, other non-USA currencies or direct barter trading of armaments, technical support and industrial goods for oil. Iran’s new leader has threatened to rally the entire Muslim world against western nations including the USA and Israel if his nuclear installations are attacked. What most are not watching is the daily violence in Pakistan where its leader has survived two assassination attempts. Western governments are holding their breath on this one. If the Pakistan leader is killed, this government and all of its ready-to-go missiles and nuclear arsenal would be in the hands of radicals. They would be passing around nuke-tipped missiles like candy to every Middle Eastern nut case who wanted one and had the money. This is way beyond Iran who is in the very early stages of building something nasty that can fly against Israel. We do not need a large oil curtailment to drive gold prices, only the impression of such a situation.

Forthcoming gold seasonal selling in typical range bound patterns might be obviated by energy, political problems or both. Gold mine production has been down the last four years and exploration budgets have shot up the last three. Focusing on the best production and reserve locations in Canada and the USA, Nevada and Alaska have 19 major known deposits. Fifteen of those projects have over three million ounces and five projects have over five million ounces. Fundamentally, all annual production continues to slip, while physical and gold trading fund demands are rising. Jewelry fabrication for 2006 is forecast at 3312 tons and production is expected -5.6% lower providing 3,997 tons of supply. Some time ago we forecast 2006 gold demand at 4250 tons, approximately 250 tons short of estimated needs.

All of the Asian nations seemingly without exception are promoting the purchase of gold. Indian jewelry buyers slowed down their gold purchases during the last quarter of 2005 due to higher prices. Now that gold has topped and settled back toward $550, those gold buyers are ready to load the boat when a price near $500 gold is reached. This is the best they shall get in this long rally and they know it. Understand India consumes 25% of global gold production and they need the product to keep feeding their jewelry machine. Additionally, gold fabricators are expanding in Dubai to produce jewelry for sale in the Indian markets. The jewelry gold buying in Mumbai is seemingly insatiable.

Next, we have the new Dubai gold exchange announcing they traded 1,000 gold contracts today. Three new members have signed-up to trade and we should never under estimate the buying power of this group. We suspect if a foolish central bank put 500-600 tons of gold bullion on the auction block, somebody in Dubai would step up and write a check with no problem. We think at this juncture these rich oil sellers would rather have the gold bullion than be holding U.S Dollars diminishing in value.

Engineering News reported 2-22-06, that The World Gold Council’s GFMS report update said gold demand hit a record of $53.6 billion in 2005 with a 26% rise in investment tonnage demand. Jewelry demand was overall, 14% higher in spite of those higher prices we just discussed. What impresses us very much is the institutional demand which means the big boys and the big money are coming into the gold game. Further, it was impressive that this forth quarter demand both absorbed a 10% year on year increase in supply and a 12% price increase. Higher prices are not going to slow gold demand but rather increase it.

Recently, in the USA, the gold and commodity funds took the lion’s share of contract positions while physical sales were down. Thirteen commodity contracts are now collectively up to $100 billion from $25 billion in 2001. Of the seven existing ETF gold funds approved, five are currently trading. Central banks are slowing on their international bank gold sales agreement and seem to have gotten off the notion of being so anti-gold. While we do not trust their numbers, central banks claim they hold 43% of the above ground gold (stored bar bullion) with the USA having 26% and the IMF 10%. The balance is being held by others. Anti-gold forces are still very busy in collusion with central banks to suppress gold’s price in efforts to continue propping sick stock markets and fiat currencies. They are not only losing in these efforts but their dramatically huge short positions are getting worse by the day. One of the largest gold hedgers in the world is in jeopardy of bankruptcy if gold hits $850 according to one analyst. We cannot forecast a BK but we do forecast gold at $850 for fall, 2006.

Hedging was on the wane but lately the big companies continue to de-hedge while some smaller ones are installing new hedges per lender mandates. Japan was a large physical buyer until recently when a weaker Yen curtailed some purchases. They sell gold in 7,000 Japanese 7-11 convenience stores. We showed dollar-gold comparative charts recently which graphically demonstrate gold and the dollar have decoupled. What has not decoupled but increased in velocity in our view is the oil fear premium coupled with gold. In recent days energy supplies of crude and refined products have increased in storage. This new supply with a quieter Middle East (for a few days) cut oil from $69 to $61. This week expectations are for higher crude oil. Gold may very well run right along with it, ignoring its cyclic correction. Gold bullion and crude oil cash values almost instantly revalue their underlying futures commodity product and their related stocks. This is why traders and investors should focus on weekly and monthly charts for directional guidance not trading entries. The shorter term charts including tick, 30 and 60 minute and daily charts do the shorter term work at entry time, not evaluation time.

We suggest gold buyers are nearing a point when the junior gold stocks will have seasonally bottomed and it’s almost time to buy once again. If you own them now and want to exit, wait until fall. Senior gold stock buyers should wait for a better price. Senior gold stock option buyers are nearing a lower price where they can enter positions for fall 2006, winter 2007, and identical seasons for 2008. For this week, we suggest waiting on the buying to determine if gold prices slide from $550 to 540, 526 and possibly 507.

In summary, gold can only go higher in price, ever faster. Technically, gold has moved into its second and largely more volatile growth sector with our forecast of $850 by late fall seemingly assured. Other major gold driving forces are at work with a soon to arrive severe stock market decline, followed by the fall 2006 selling in bonds and our dollar. Imposition of these technical weaknesses with geopolitical trouble onto advancing gold markets can only produce higher gold prices a whole lot faster. We expect some market fear when stocks cave-in this spring. Will these losers go to gold? We think they will. In addition, the institutions with their “long only” buy positions have great power to lift gold prices. They are struggling for client returns and understand gold will provide them.

The first leg of gold’s rally was 2001 through the last fall. Now, gold has broken upper resistance moving almost vertical in price. This usually signals a top and subsequent selling, some of which we have seen. As we move toward March and a forecast gold price of $507 support, we wonder if other events will either extend the current softness sideways followed by strongly advancing prices or, will the $507 number appear right on schedule in Mid-March or the end of July.

Seasonal gold charts show a double bottom in late July and late August. Last year, however, gold bottomed on June 1. This is fully 60 days early compared with 15 and 30 year seasonal chart dates. Should gold move another 60 days backwards from last year’s June 1, the newest gold rally would be underway April 1, 2006. Traders and investors with far out long option positions for fall 2006, and into 2007-2008 are not only safe but are buying into a lower price today. Junior gold and silver stock holders who have not exited for any reason this year should hold until fall for exits if at all possible.

We are looking for a minimum 35% gold price advance from this spring-summer’s basing bottom to a Thanksgiving top in 2006.

Watching little market nuances and movements among gold funds, gold stocks and far out futures can provide clues to forthcoming support and resistance for gold. An inflation adjusted gold price today would not be $550 but $1850-1950. Adjusting prices 35% beyond the $1950, it is easy to see a $2650-$2950 price range top we forecast two years ago. While forecasting three years forward is generally not a good idea, we are expecting a high for gold of $2960 with a later adjusted, correction-settled price of $1250 per ounce. Inflation is insidious and has eroded a great deal of gold’s true value relative to the $850 1979-1981 rally top. Understanding these numbers and the basis for their reference, it is no surprise gold has a very long and positive trail ahead.

The average of commodity bull markets is 16-17 years. Since the current one began in say 2000, we have possibly ten more years of bullish gold and other commodities moving through an inflationary and volatile period of time. With each year we advance, gold prices can only go higher faster. –Trader Rog

Nonie Darwish on the Cartoons...

We were brought up to hate - and we do
By Nonie Darwish
(Filed: 12/02/2006)

The controversy regarding the Danish cartoons of the Prophet Mohammed completely misses the point. Of course, the cartoons are offensive to Muslims, but newspaper cartoons do not warrant the burning of buildings and the killing of innocent people. The cartoons did not cause the disease of hate that we are seeing in the Muslim world on our television screens at night - they are only a symptom of a far greater disease.

I was born and raised as a Muslim in Cairo, Egypt and in the Gaza Strip. In the 1950s, my father was sent by Egypt's President, Gamal Abdel Nasser, to head the Egyptian military intelligence in Gaza and the Sinai where he founded the Palestinian Fedayeen, or "armed resistance". They made cross-border attacks into Israel, killing 400 Israelis and wounding more than 900 others.

My father was killed as a result of the Fedayeen operations when I was eight years old. He was hailed by Nasser as a national hero and was considered a shaheed, or martyr. In his speech announcing the nationalisation of the Suez Canal, Nasser vowed that all of Egypt would take revenge for my father's death. My siblings and I were asked by Nasser: "Which one of you will avenge your father's death by killing Jews?" We looked at each other speechless, unable to answer.

In school in Gaza, I learned hate, vengeance and retaliation. Peace was never an option, as it was considered a sign of defeat and weakness. At school we sang songs with verses calling Jews "dogs" (in Arab culture, dogs are considered unclean).

Criticism and questioning were forbidden. When I did either of these, I was told: "Muslims cannot love the enemies of God, and those who do will get no mercy in hell." As a young woman, I visited a Christian friend in Cairo during Friday prayers, and we both heard the verbal attacks on Christians and Jews from the loudspeakers outside the mosque. They said: "May God destroy the infidels and the Jews, the enemies of God. We are not to befriend them or make treaties with them." We heard worshippers respond "Amen".

My friend looked scared; I was ashamed. That was when I first realised that something was very wrong in the way my religion was taught and practised. Sadly, the way I was raised was not unique. Hundreds of millions of other Muslims also have been raised with the same hatred of the West and Israel as a way to distract from the failings of their leaders. Things have not changed since I was a little girl in the 1950s.

Palestinian television extols terrorists, and textbooks still deny the existence of Israel. More than 300 Palestinians schools are named after shaheeds, including my father. Roads in both Egypt and Gaza still bear his name - as they do of other "martyrs". What sort of message does that send about the role of terrorists? That they are heroes. Leaders who signed peace treaties, such as President Anwar Sadat, have been assassinated. Today, the Islamo-fascist president of Iran uses nuclear dreams, Holocaust denials and threats to "wipe Israel off the map" as a way to maintain control of his divided country.

Indeed, with Denmark set to assume the rotating presidency of the UN Security Council, the flames of the cartoon controversy have been fanned by Iran and Syria. This is critical since the International Atomic Energy Agency is expected to refer Iran to the Security Council and demand sanctions. At the same time, Syria is under scrutiny for its actions in Lebanon. Both Iran and Syria cynically want to embarrass the Danes to achieve their dangerous goals.

But the rallies and riots come from a public ripe with rage. From my childhood in Gaza until today, blaming Israel and the West has been an industry in the Muslim world. Whenever peace seemed attainable, Palestinian leaders found groups who would do everything to sabotage it. They allowed their people to be used as the front line of Arab jihad. Dictators in countries surrounding the Palestinians were only too happy to exploit the Palestinians as a diversion from problems in their own backyards. The only voice outside of government control in these areas has been the mosques, and these places of worship have been filled with talk of jihad.

Is it any surprise that after decades of indoctrination in a culture of hate, that people actually do hate? Arab society has created a system of relying on fear of a common enemy. It's a system that has brought them much-needed unity, cohesion and compliance in a region ravaged by tribal feuds, instability, violence, and selfish corruption. So Arab leaders blame Jews and Christians rather than provide good schools, roads, hospitals, housing, jobs, or hope to their people.

For 30 years I lived inside this war zone of oppressive dictatorships and police states. Citizens competed to appease and glorify their dictators, but they looked the other way when Muslims tortured and terrorised other Muslims. I witnessed honour killings of girls, oppression of women, female genital mutilation, polygamy and its devastating effect on family relations. All of this is destroying the Muslim faith from within.

It's time for Arabs and Muslims to stand up for their families. We must stop allowing our leaders to use the West and Israel as an excuse to distract from their own failed leadership and their citizens' lack of freedoms. It's time to stop allowing Arab leaders to complain about cartoons while turning a blind eye to people who defame Islam by holding Korans in one hand while murdering innocent people with the other.

Muslims need jobs - not jihad. Apologies about cartoons will not solve the problems. What is needed is hope and not hate. Unless we recognise that the culture of hate is the true root of the riots surrounding this cartoon controversy, this violent overreaction will only be the start of a clash of civilis-ations that the world cannot bear.

February 23, 2006

Global Systemic Rupture

EUROPE 2020 ALARM / March 20-26, 2006:
Iran/USA - Release of global world crisis
The Laboratoire européen d’Anticipation Politique Europe 2020 (LEAP/E2020) now estimates to over 80% the probability that the week of March 20-26, 2006 will be the beginning of the most significant political crisis the world has known since the Fall of the Iron Curtain in 1989, together with an economic and financial crisis of a scope comparable with that of 1929. This last week of March 2006 will be the turning-point of a number of critical developments, resulting in an acceleration of all the factors leading to a major crisis, disregard any American or Israeli military intervention against Iran. In case such an intervention is conducted, the probability of a major crisis to start rises up to 100%, according to LEAP/E2020.

An Alarm based on 2 verifiable events
The announcement of this crisis results from the analysis of decisions taken by the two key-actors of the main on-going international crisis, i.e. the United States and Iran:

--> on the one hand there is the Iranian decision of opening the first oil bourse priced in Euros on March 20th, 2006 in Teheran, available to all oil producers of the region ;

--> on the other hand, there is the decision of the American Federal Reserve to stop publishing M3 figures (the most reliable indicator on the amount of dollars circulating in the world) from March 23, 2006 onward [1].

These two decisions constitute altogether the indicators, the causes and the consequences of the historical transition in progress between the order created after World War II and the new international equilibrium in gestation since the collapse of the USSR. Their magnitude as much as their simultaneity will catalyse all the tensions, weaknesses and imbalances accumulated since more than a decade throughout the international system.

A world crisis declined in 7 sector-based crises
LEAP/E2020's researchers and analysts thus identified 7 convergent crises that the American and Iranian decisions coming into effect during the last week of March 2006, will catalyse and turn into a total crisis, affecting the whole planet in the political, economic and financial fields, as well as in the military field most probably too:

1. Crisis of confidence in the Dollar
2. Crisis of US financial imbalances
3. Oil crisis
4. Crisis of the American leadership
5. Crisis of the Arabo-Muslim world
6. Global governance crisis
7. European governance crisis

The entire process of anticipation of this crisis will be described in detail in the coming issues of LEAP/E2020’s confidential letter – the GlobalEurope Anticipation Bulletin, and in particular in the 2nd issue to be released on February 16, 2006. These coming issues will present the detailed analysis of each of the 7 crises, together with a large set of recommendations intended for various categories of players (governments and companies, namely), as well as with a number of operational and strategic advices for the European Union.

Decoding of the event “Creation of the Iranian Oil Bourse priced in Euros”
However, and in order not to limit this information to decision makers solely, LEAP/E2020 has decided to circulate widely this official statement together with the following series of arguments resulting from work conducted.
Iran's opening of an Oil Bourse priced in Euros at the end of March 2006 will be the end of the monopoly of the Dollar on the global oil market. The immediate result is likely to upset the international currency market as producing countries will be able to charge their production in Euros also. In parallel, European countries in particular will be able to buy oil directly in their own currency without going though the Dollar. Concretely speaking, in both cases this means that a lesser number of economic actors will need a lesser number of Dollars [2]. This double development will thus head to the same direction, i.e. a very significant reduction of the importance of the Dollar as the international reserve currency, and therefore a significant and sustainable weakening of the American currency, in particular compared to the Euro. The most conservative evaluations give €1 to $1,30 US Dollar by the end of 2006. But if the crisis reaches the scope anticipated by LEAP/E2020, estimates of €1 for $1,70 in 2007 are no longer unrealistic.

Decoding of the event “End of publication of the M3 macro-economic indicator”
The end of the publication by the American Federal Reserve of the M3 monetary aggregate (and that of other components) [3] , a decision vehemently criticized by the community of economists and financial analysts, will have as a consequence to lose transparency on the evolution of the amount of Dollars in circulation worldwide. For some months already, M3 has significantly increased (indicating that « money printing » has already speeded up in Washington), knowing that the new President of the US Federal Reserve, Matt Bernanke, is a self-acknowledged fan of « money printing » [4]. Considering that a strong fall of the Dollar would probably result in a massive sale of the US Treasury Bonds held in Asia, in Europe and in the oil-producing countries, LEAP/E2020 estimates that the American decision to stop publishing M3 aims at hiding as long as possible two US decisions, partly imposed by the political and economic choices made these last years [5]:

. the ‘monetarisation’ of the US debt
. the launch of a monetary policy to support US economic activity.
… two policies to be implemented until at least the October 2006 « mid-term » elections, in order to prevent the Republican Party from being sent in reeling.
This M3-related decision also illustrates the incapacity of the US and international monetary and financial authorities put in a situation where they will in the end prefer to remove the indicator rather than try to act on the reality.

Decoding of the aggravating factor “The military intervention against Iran”
Iran holds some significant geo-strategic assets in the current crisis, such as its ability to intervene easily and with a major impact on the oil provisioning of Asia and Europe (by blocking the Strait of Ormuz), on the conflicts in progress in Iraq and Afghanistan, not to mention the possible recourse to international terrorism. But besides these aspects, the growing distrust towards Washington creates a particularly problematic situation. Far from calming both Asian and European fears concerning the accession of Iran to the statute of nuclear power, a military intervention against Iran would result in an quasi-immediate dissociation of the European public opinions [6] which, in a context where Washington has lost its credibility in handling properly this type of case since the invasion of Iraq, will prevent the European governments from making any thing else than follow their public opinions. In parallel, the rising cost of oil which would follow such an intervention will lead Asian countries, China first and foremost, to oppose this option, thus forcing the United States (or Israel) to intervene on their own, without UN guarantee, therefore adding a severe military and diplomatic crisis to the economic and financial crisis.

Relevant factors of the American economic crisis
LEAP/E2020 anticipate that these two non-official decisions will involve the United States and the world in a monetary, financial, and soon economic crisis without precedent on a planetary scale. The ‘monetarisation’ of the US debt is indeed a very technical term describing a catastrophically simple reality: the United States undertake not to refund their debt, or more exactly to refund it in "monkey currency". LEAP/E2020 also anticipate that the process will accelerate at the end of March, in coincidence with the launching of the Iranian Oil Bourse, which can only precipitate the sales of US Treasury Bonds by their non-American holders.


In this perspective, it is useful to contemplate the following information 7: the share of the debt of the US government owned by US banks fell down to 1,7% in 2004, as opposed to 18% in 1982. In parallel, the share of this same debt owned by foreign operators went from 17% in 1982 up to 49% in 2004.
--> Question: How comes that US banks got rid of almost all their share of the US national debt over the last years?

 Moreover, in order to try to avoid the explosion of the "real-estate bubble" on which rests the US household consumption, and at a time when the US saving rate has become negative for the first time since 1932 and 1933 (in the middle of the "Great Depression"), the Bush administration, in partnership with the new owner of the US Federal Reserve and a follower of this monetary approach, will flood the US market of liquidities.

Some anticipated effects of this systemic rupture
According to LEAP/E2020, the non-accidental conjunction of the Iranian and American decisions, is a decisive stage in the release of a systemic crisis marking the end of the international order set up after World War II, and will be characterised between the end of March and the end of the year 2006 by a plunge in the dollar (possibly down to 1 Euro = 1,70 US Dollars in 2007) putting an immense upward pressure on the Euro, a significant rise of the oil price (over 100$ per barrel), an aggravation of the American and British military situations in the Middle East, a US budgetary, financial and economic crisis comparable in scope with the 1929 crisis, very serious economic and financial consequences for Asia in particular (namely China) but also for the United Kingdom [8], a sudden stop in the economic process of globalisation, a collapse of the transatlantic axis leading to a general increase of all the domestic and external political dangers all over the world.

For individual dollar-holders, as for trans-national corporations or political and administrative decision makers, the consequences of this last week of March 2006 will be crucial. These consequences require some difficult decisions to be made as soon as possible (crisis anticipation is always a complex process since it relies on a bet) because once the crisis begins, the stampede starts and all those who chose to wait lose.
For private individuals, the choice is clear: the US Dollar no longer is a “refuge” currency. The rising-cost of gold over the last year shows that many people have already anticipated this trend of the US currency.

 Anticipating… or being swept away by the winds of history
For companies and governments - European ones in particular - LEAP/E2020 has developed in its confidential letter – the GlobalEurope Anticipation Bulletin -, and in particular in the next issue, a series of strategic and operational recommendations which, if integrated in today's decision-making processes, can contribute to soften significantly the "monetary, financial and economic tsunami" which will break on the planet at the end of next month. To use a simple image – by the way, one used in the political anticipation scenario « USA 2010 » [9] -, the impact of the events of the last week of March 2006 on the “Western World” we have known since 1945 will be comparable to the impact of the Fall of the Iron Curtain in 1989 on the “Soviet Block”.

If this Alarm is so precise, it is that LEAP/E2020’s analyses concluded that all possible scenarios now lead to one single result: we collectively approach a "historical node" which is henceforth inevitable whatever the action of international or national actors. At this stage, only a direct and immediate action on the part of the US administration aimed at preventing a military confrontation with Iran on the one hand, and at giving up the idea to monetarise the US foreign debt on the other hand, could change the course of events. For LEAP/E2020 it is obvious that not only such actions will not be initiated by the current leaders in Washington, but that on the contrary they have already chosen "to force the destiny" by shirking their economic and financial problems at the expense of the rest of the world. European governments in particular should draw very quickly all the conclusions from this fact.
For information, LEAP/E2020's original method of political anticipation has allowed several of its experts to anticipate (and publish) in particular : in 1988, the pproaching end of the Iron Curtain; in 1997, the progressive collapse in capacity of action and democratic legitimacy of the European institutional system; in 2002, the US being stuck in Iraq’s quagmire and above all the sustainable collapse of US international credibility; in 2003, the failure of the referenda on the European Constitution. Its methodology of anticipation of "systemic ruptures" now being well established, it is our duty as researchers and citizens to share it with the citizens and the European decision makers; especially because for individual or collective, private or public players, it is still time to undertake measures in order to reduce significantly the impact of this crisis on their positions whether these are economic, political or financial.

LEAP/E2020's complete analysis, as well as its strategic and operational recommendations intended for the private and public actors, will be detailed in the next issues of the GlobalEurope Anticipation Bulletin, and more particularly in the econd one (issued February 16th, 2006).

1. These decisions were made a few months ago already:
. the information on the creation by the Iranian government of an oil bourse priced in Euros (http://www.mehrnews.com/en/NewsDetail.aspx?NewsID=260851 ) first appeared in Summer 2004 in the specialised press.
. the Federal Reserve announced on November 10, 2005 that it would cease publisging the information concerning M3 from March 23, 2006 onward :

2. By examining Table 13B of the December 2005 Securities Statistics of the Bank for International Settlements entitled International Bonds and Notes (in billions of US dollars), by currency ), one can notice that at the end of 2004 (China not-included), 37.0% of the international financial assets were labelled in USD vs 46,8% in Euros ; while in 2000, the proportion was contrary with 49,6% labelled in USD for 30,1% only in Euros. It indicates that the March 2006 decisions will most probably accelerate the trend of exit-strategy from the dollar.

3. Monetary aggregates (M1, M2, M3, M4) are statistical economic indicators. M0 is the value of all currency - here the dollar - that exists in actual bank notes and coins. M1 is M0 + checking accounts of this currency. M2 is M1 + money market accounts and Certificates of Deposits (CD) under $100,000. M3 is M2 + all larger holdings in the dollar (Eurodollar reserves, larger instruments and most non-European nations' reserve holdings) of $100,000 and more. The key point here is that when the Fed stops reporting M3, the entire world will lose transparency on the value of reserve holdings in dollars by other nations and major financial institutions.

4. See his eloquent speech on these aspects before the National Economists Club, Washington DC, November 21, 2002
(http://www.federalreserve.gov/boarddocs/speeches/2002/20021121/default.htm )

5. It should be noticed that the upward trend of the Dollar in 2005 was mostly the result of an interest rate differential which was favourable for the US Dollar, and of the “tax break on foreign earnings” Law (only valid for 1 year) which brought back to the US over $200 billion in the course of 2005.
(source : CNNmoney.com
http://money.cnn.com/2005/10/05/news/economy/jobs_overseas_profits )

6. As regards Europe, LEAP/E2020 wishes to underline that European governments are no longer in line with their opinions concerning the major topics, and in particular concerning the European collective interest. The January 2006 GlobalEurometre clearly highlighted the situation with a Tide-Legitimacy Indicator of 8% (showing that 92% of the panel consider that EU leaders no longer represent their collective interests) and a Tide-Action Indicator of 24% (showing that less than a quarter of the panel thinks EU leaders are capable of translating their own decisions into concrete actions). According to LEAP/E2020, public declarations of support to Washington coming from Paris, Berlin or London, should not hide the fact that the Europeans will quickly dissociate from the US in case of military attack (the GlobalEurometre is a monthly European opinion indicator publishing in the GlobalEurope Anticipation Bulletin 3 figures out of which 2 are public).

7.(source : Bond Market Association, Holders of Treasury Securities: Estimated Ownership of U.S. Public Debt Securities ;
http://www.dailykos.com/story/2006/1/28/122315/558 )

8. The United Kingdom indeed owns close to 3,000 billion $ of credits, that is almost three times what countries such as France or Japan hold. (source Bank of International Settlements, Table 9A, Consolidated Claims of Reporting Banks on Individual Countries )


Lunch Near LAX

Well, Harry was right! I wonder what he would be saying now....
By Ron Ellison, Global View
Blasingham and Ellison Financial Group
Article Posted On May-24-02 14:45

I got a call the other day from my old friend Harry. Harry is a trader. There's probably not a market in the world Harry hasn't traded. And he's been quite successful. I don't think he's had more than one or two down years in all the time that I've known him.

Harry has a peripatetic soul. Lots of money managers brag about visiting companies. Harry visits countries. Years ago before most retail investors had ever heard of emerging markets, Harry informed me that opportunities were hardly confined by the continental U.S. borders. Harry is also a data computer junkie. He never goes to the bathroom without his laptop.

Just before the Asian meltdown, he called one morning and said he was in Bangkok. He said he could look out his hotel window and see building cranes in every direction. He called it the positive crane sign. He said the bhat at 25 to the dollar was overvalued by 50 percent. Then, before I could get a word in, he rattled off a gob of statistics, informed me he was short the entire region and hung up.

Another time some years ago he phoned from Bogota and launched into a 10-minute peroration about success. "Success is about consistency, not triples and homeruns," he informed me. That's the way Harry is. To say he's eccentric is to say that Tom Daschle likes to spend other peoples' money. Like all good traders Harry has strong opinions and he's contrarian to the core. I once heard him tell an audience of investors that 75 percent would probably disagree with what he was going to say. But that would make them examine their own biases about why they disagreed and probably learn something in the process. For all of his eccentricities, however, over the years Harry's views have been correct too often to be ignored.

We agreed to meet for lunch. The restaurant was one of those little Italian joints, the kind with the red and white checkered tablecloths and the narrow milk white vases for phony long stem roses sitting in the center. It was located in a strip shopping center near LAX. In all the years I've known Harry he's always on his way to somewhere.

It was dark inside and it took a minute before I spotted him sitting at a booth in the back with his laptop open. We exchanged greetings as I slid into the seat across from him. The waitress appeared suddenly. We ordered a bottle of super Tuscan red, pate' crostini and some penne on the side. Harry's always believed that good food compliments the wine, not the other away around.

A lot had happened since we last chatted and I was curious to hear what was on his mind. From past discussions, however, I knew that Harry subscribed to the Hollywood school of conversation: He liked to cut straight to the economic chase.

"If the dollar were an Olympic athlete," he offered. "It would've been busted for anabolic steroid abuse long ago."

With that opening I realized this was probably going to end up a discussion about inflation and the current account deficit. The waitress came, the wine got poured and after a token toast, Harry warmed to his topic.

"Treasury Secretary O'Neill has been there less than two years and he's already caught the Greenspan disease—speaking in tongues. This decade is going to look a lot more like the ‘70s and early ‘80s," he said. "And nothing like the 90s. That's what's gonna bust the back of most retail investors and the deflationary hawks you see on the tube everyday."

"What do you mean?" I interjected.

"The similarities with the Nixon days are getting eerie. To win some union and farms votes, Bush's slapping price controls on and ramping up the pork. From Cubans to education to lumber to unions, is there anybody this guy hasn't placated? They ought to change the name of the White House. Call it Placation Palace. Programs increased under Nixon and he devaluated the currency," he said.

"If they send any more pork up to South Dakota, those folks will be able to give up farming and retire. I was watching bubble vision the other day, CNBC, and they were interviewing Al Gore's economic flack, Alan Blinder. He revealed he had just created a new statistical indicator that shows the capital spending trend is improving.

"It's gone in two quarters from something like negative five to negative three. To which the commentator suggested that should be good for the market and folks' confidence. When you're worried about getting you head blown off by some jihad freak, your 401 (k) is in the toilet, and accounting guarantees you about as many correct answers as astrology, who the hell cares about cap ex?"

"The Berlin Wall," he continued, "crumbled more than a decade ago. That created a window of opportunity that ended on 911. Fraud, terrorist threats, shrinking tax receipts, a war on something as vague as terrorism, bad times increase regulations and government interference, does that sound like a high protein meal for financial assets? You've got a real estate bubble, a huge trade deficit and a dollar that look likes it's coming down with a bad case of pernicious anemia."

"What about inflation?" I asked

"Most of the television types will tell you they can't find any with an electron microscope. These are for the most part the same flacks that spread the new-age gospel during the dot-com madness. I was sitting on a plane the other day next to a guy who told me he just came back from burying his mother. After the appropriate condolences, he told me he just paid $589 bucks for the exact same headstone he bought 20 years ago for $59 when he buried his father. You do the math."

Harry finished his wine, checked his watch and closed his laptop.

"So where are you putting money now?"

"Outside the U.S.," he shot back. "Just returned from Japan. We started accumulating gold and silver a year ago. Energy is one. Sometime in the next three to five years, the U.S. will experience major fuel shortages compliments of the political hacks running this charade. And commodities."

"But commodities have been in a 25-year downturn?" I probed.

"You just made my point," he said, motioning to the waitress for the bill.

February 22, 2006

Omen at Chicxulub

by Kevin McKern
February 21, 2006
65 million years ago the Chicxulub meteor crashed into the sea near the Yucatan Peninsula, ending the reign of the Dinosaurs and the lives of most of the species then living on earth. The fossils types change so radically that the impact marks the end of that period of earth history called the Cretaceous and the start of the Tertiary, the so called K/T boundary.

The impact left a hole in the earth 100 miles in diameter and a mile deep but so capped by limestone and buried in sediments in the meantime as to be invisible in modern times. It was only after finding a global iridium spike at the K/T boundary, the "smoking gun" of an extraterrestrial impact, that geologists finally traced the outline of the buried Chicxulub crater in PERMEX (the Mexican Oil Company) seismographic data. Ironically, the crater was only found because a section of its sand and limestone cap had trapped 35 billion barrels of oil and become Cantarell, one of the world's greatest oil fields.

Discovered in 1976, it was quickly producing a million barrels a day from less than fifty wells, but as the years passed and the gas pressure dropped, PEMEX kept production up by injecting 1.2 billion cubic feet of nitrogen into the field daily. This is what keeps current Cantarell production at 2 million barrels a day and Mexico's total exports at 1.82 million barrels.(1)

Last year, the decline started, 2005 production was 5% lower than in 2004.

Last week the top secret PEMEX Cantarell Depletion study was leaked and apparently it reports that there is only 825 feet between the gas cap over the oil and the water that is pushing into Cantarell from the bottom and closing at between 250 and 360 feet per year. Cantarell's production will drop from 2 million b/d to 875 thousand barrels a day by the end of 2007 and halve again by mid 2009.

The loss of 1.5 million barrels a day of production capacity within three years will be very difficult to overcome because exports will be seriously reduced or perhaps even eliminated forever.

High depletion rates are not unknown. Production at Oman's Yibil field peaked in 1997 at 225-250 thousand barrels a day and then declined to 88-95 thousand barrels a day in three years. Part of that decline was attributed to the introduction of horizontal and multi-lateral drilling into the field that increased the percentage of water being brought to the surface with the oil to a greater extent then anticipated.

Increasingly the concern is expressed that advanced technology may not increase the quantity of oil you can recover from a field so much as get a slightly smaller amount out much faster. In the meantime, oil production from Cantarell bears close watching. An unusually fast decline will be yet another indicator that peak oil is near at hand.

The Oil Depletion Analysis Centre in London reports that 68 oil-recovery mega projects with announced start-up dates through 2010 will add 12.5 million b/d of crude supply by the turn of the decade, but, according to Chris Skrebowski, a board member.(2) "This new production would almost certainly not be sufficient to offset diminishing supplies from existing sources and still meet growing global demand."

If demand increased by 2% year, available supplies would fall short of the total projected to be needed in 2010 by more than 2 million b/d" roughly equivalent to losing all of Kuwait's current daily production," ODAC said.

Other analysts see this estimate as optimistic.

IHS Energy, consultants in Epsom, UK, reports that 85% of all the oil ever discovered is now in production and that only half of the total produced last year was replaced by new field discoveries.(3)

Oil consumption has now exceeded new discoveries every year since the early 1980s and oil discoveries have been declining steadily for the past 40 years. With most producers operating flat out to meet runaway demand increases this year, the world's immediately available spare production capacity has disappeared.

1) http://www.fcnp.com/550/peakoil.htm
2) Oil & Gas Journal, Tulsa: Nov 22, 2004. Vol. 102, Iss. 44; pg. 28
3) Petroleum Economist, London: Mar 2005. pg. 1

February 21, 2006

Oceans may soon be as corrosive as when the dinosaurs died


Ken Caldeira of the Carnegie Institution’s Department of Global Ecology will present research today at the AGU/ASLO Ocean Sciences meeting in Honolulu that not only is carbon dioxide emissions making the world’s oceans more acidic, but that, if unabated this acidity could cause a mass extinction of marine life similar to one that occurred 65 million years ago when the dinosaurs disappeared.

Caldeira’s models predict that the oceans will become far more acidic because, with fifty times more atmospheric carbon dioxide than normal, the natural buffering mechanism will be overwhelmed. In less than 100 years, the pH of the oceans could drop by as much as half a unit from 8.2 to about 7.7. The drop in ocean pH would be especially damaging to corals. (abstract)

The last time the oceans saw a change of this magnitude was 65 million years ago and it is presumed that the acidification was due to carbon dioxide emitted by limestone vaporised by the impact of the asteroid. The pattern of extinction was consistent with acidification because it was species with calcium carbonate shells that died off while animals with shells made from silicate minerals survived.

February 20, 2006

21st Century Commodities Boom

By Scott Wright       
The turn of the century has brought upon a change of guard for the financial markets. The general stock markets peaked and a new secular commodities bull was born. Even though many have had to endure the pain of a bursting stock-market bubble, the global economy has been thriving since the turn of the millennium and I suspect those in the future will look back on the 21st century and tag it as the Consumption Age.

Globally this consumption is not necessarily that of excess or overindulgence. Rather it may be considered more or less a movement of economic progressivism. Lending part to this trend is the fact that our global population is growing at a blistering pace and will continue to do so for years to come. Many people overlooked the incredible milestone that was attained in 1999. Our enduring planet lofted above the six billion mark in total population.

To put this growing and changing world into perspective, it was only about 200 years ago that the global population passed the one billion mark. According to the U.S. Census Bureau it only took another 118 years for the global population to double, reaching two billion in 1922. It then took 37 years to reach three billion, 15 years to reach four billion, 13 years to reach five billion and only 12 years to reach six billion.

Today we are already past the half-way mark to the next billion. Now with 6.5 billion potential consumers living in an era in which considerable industrial and technological advances are demanding more resources than ever, it’s no wonder global demand for commodities has soared. In this high-tech world we live in, commodities are zealously sought after in order to maintain, support and develop this growing population. Because of this, commodities of all types are soaring in value as their availability and economics are continually being challenged. Simply put, supply has not been able to keep up with demand.

This massively increasing population has contributed to an increase in consumption in virtually all goods and services, and in turn has contributed to the robust economies we are seeing today that are seemingly necessary in order to maintain status quo. Almost not surprising, GDP in the U.S. has increased ten-fold since 1972, China has seen a ten-fold since 1978 and the U.K. has seen its ten-fold since 1976. The macroeconomics we see here tell an incredible story in which commodities have and will play a large part now and in the future.

It is important for everyone to understand why we are in the midst of a commodities craze from a socioeconomic perspective, if for no other reason than to understand how it may affect their everyday lives. It is especially important to understand this if you are an investor. Investors and speculators who have taken part in the commodities bull thus far have scored incredible gains if they have played the upside of this secular trend.

It’s not too late though to continue to profit from this commodities bull. We are still likely in the first half of a long-term bull market. To this day commodities of all sorts are still in the midst of major economic imbalances. Global demand for both soft and hard commodities is on the rise and supply is struggling to keep up. It is the prudent investor or speculator who is able to recognize this pattern before it corrects itself and is able to leverage his capital to take advantage of the upside.

Our task now is to determine which commodities to focus on from an investment perspective. Now depending on whom you ask and where you look, the definitions for soft and hard commodities tend to range across the board. For our purposes we will consider any commodity that can be grown or raised a soft commodity, and any commodity that you have to mine or drill for a hard commodity.

Soft commodities tend to have a renewing characteristic. Crops can be re-grown, and typically in the same spot as the previous crop. And meat commodities are the result of animal breeding that has remarkably accurate forecasting. Softs are integral in this bull market, but are not the major player.

Commodities such as coffee, cotton, cocoa, orange juice and hogs are examples of soft commodities and are all non-finite in nature. As long as a global ice age doesn’t miraculously strike the earth, crops will always be grown. And I surely doubt that cows, pigs and chickens will ever become extinct.

Now there are external factors that can influence the pricing of these soft commodities and they are certainly not exempt from supply and demand pressures. Weather, disease, geopolitical unrest and labor are examples of some of these factors. But when an economic imbalance presents itself, the fact that these commodities are renewable typically avoids a pushing of the panic button.

Even so, soft commodities continue to play a large role in the overall futures markets and are not exempt from the volatility most people associate with commodities. Farmers need to lock in prices and speculators play the game to try and capture profits.

In come hard commodities. Hards consist mainly of energy and metals and require extensive capital expenditures in order to retrieve these commodities from the earth. These commodities are finite in nature and have limited resources. Hards have been on a tear the last four years, have captured mainstream media attention and are the major player in this secular commodities bull market.

Precious metals, crude oil and natural gas are not the only commodities that have taken part in this bull. These commodities do command the lion’s share of attention but let’s not overlook those others that play an integral part in the global economy. Below are many of the popular hard commodities and their bull-to-date highs since the beginning of 2001.

- Aluminum +94%
- Gold +124%
- Silver +142%
- Platinum +159%
- Zinc +220%
- Lead +252%
- Copper +280%
- Crude Oil +300%
- Nickel +302%
- Butane +330%
- Propane +346%
- Heating Oil +360%
- Gasoline +578% (+333% not including Katrina/Rita 3-day spike)
- Natural Gas +807% (+429% not including Katrina/Rita spike)

As you can see, these hards have had quite a run thus far and we’ll touch on them in more detail later. But in addition to these above, there are many other soft and hard commodities that trade in the futures markets. On top of analyzing each individually, it is equally important to get an overall perspective on the look and feel of this bull market in order to grasp the long-term trend of this commodities bull.

A good way to package all these commodities together and obtain this high-level look is to turn to the flagship CRB Commodities Index. The CRB Index has long been the benchmark that many investors use in order to track the overall progress of commodities.

Our first chart below provides an excellent representation of the development and progression of this commodities bull market. The 2001 low we see in this chart is the second bottom to a massive double-bottom in which the first in 1999 was within a point of what we see here. This bottom represents the lowest point the CRB has been since 1975.


As you can imagine, barring the occasional bear-market rally, commodities have been out of favor for quite some time. Today’s commodities bull is finally reflecting the importance of commodities and the realization that in this growing global economy the resources that support it are not to be taken for granted.

The CRB Index beautifully reflects this bullish trend. As you can see on this chart, the last four years display a textbook bullish footprint. The CRB Index has stayed within a relatively tight trend channel and has continued to produce higher lows and higher highs. In fact, just recently it surpassed its all-time high! In 1980 the CRB Index closed at its previous all-time high, but today’s commodities bull shattered it in recent weeks and has not looked back. Since its bottom in 2001, the CRB Index has risen 91%!

Now that we have our baseline for the look and feel of this commodities bull, let’s revert back to our soft versus hard commodity discussion. Currently the CRB Index is comprised of 19 commodity components. Today’s mix weights 59% as what we are calling hard commodities with soft commodities capturing the remaining 41%.

Interestingly, 9 of 19 components in the CRB Index are hard commodities, of which each is included in the list of 14 above. As mentioned previously, each of these gains are spectacular. While many hard commodities today are still hovering around their bull-to-date highs, most of the soft commodities that have actually produced gains are quite a bit off of theirs.

The 10 components that rank as soft commodities in the CRB Index have not had as impressive of a run thus far as hards. Corn and hogs are trading at the same prices today as they were in 2001. Wheat, soy beans and orange juice are up less than 50% from their 2001 lows. Cattle and cocoa are up a meager 62% and 87% respectively from their 2001 lows. And only coffee, cotton and sugar can boast gains in excess of 100% since the inception of this bull market.

Sugar is the truly interesting story among the softs. It has performed very well in this bull market, but for reasons that would exhibit the characteristics of a hard commodity. It recently hit a 25-year high not because more people are putting sugar in their coffee, but rather due to the huge increase in ethanol demand.

Sugar happens to be a common compound in ethanol production with well over 50% of the global ethanol supply coming from it. Ethanol consumption has significantly increased over the years and its demand is expected to continue to rise sharply in the years to come. As more and more countries are implementing ethanol as an alternate energy source we are now faced with a supply-deficit in sugar.

In fact, ethanol has been in such demand that both the New York Board of Trade (NYBOT) and the Chicago Board of Trade (CBOT) recently introduced futures contracts for sugar-derived ethanol. Because of this it is quite possible we may see gains in sugar that exceed the 282% we’ve seen since 2000.

Even with sugar as the stand-out soft commodity, it is evident that hard commodities are the strongest of the group and have been pulling their weight, hoisting the overall index. As with all indexes, the CRB Index went through a revision last July in order to reflect the weightings we see above. Hard commodities now become more of a focus and the results going forward should reflect more on their performance.

But now we look at the CRB Index, or commodities in general, and ask ourselves, why should we buy at all-time highs? But wait, are we truly experiencing all-time highs? Nominally yes, but in real terms, absolutely not! My partner Adam Hamilton penned an essay last year when the CRB Index broke 300 for the first time since 1981 and went into great detail on this topic. One of the charts he developed took a look at the inflation-adjusted CRB Index, and it revealed dramatic results.

I’d like to update this chart and show you why commodities, reflected through the CRB Index, are still relatively cheap in today’s dollars. When analyzing long-term price trends, it is always prudent to compare apples to apples and consider the true value of a dollar. Due to the relentless rolling of presses by the inflation-crazed Federal Reserve, a dollar today has nowhere near the purchasing power it did in 1981. And we need to highly consider this when we discuss the true value of a commodity.


If you only consider the nominal price of the CRB Index, then today’s highs are phenomenal as indicated by the blue nominal CRB line above. But when you factor inflation into the mix, as indicated by the red real CRB line, today’s prices are not as exciting as originally thought and it shows we still have a long way to go before true highs are met.

All we did was simply factor in the conservative CPI data in order to compare the purchasing power of today’s dollar to that of it in the past. The above chart reveals the fascinating reality of the true progress of this commodities bull market. In real terms, the CRB would have to nearly triple from today’s levels in order to approach its all-time high. This is a massive 200% increase over the nominal highs we’ve seen in the past month.

In real terms, today’s commodities prices are actually trading at the same levels they were in the early 1990s. In order to approach its real high in 1980, the CRB Index would have to rally up to over 777. And because of inflation, the 1980 nominal high is in fact not the true high as seen by the pinnacle achieved in 1974. Imagine the CRB Index trading at 1000! Well, this is what it would have to trade at in today’s dollars in order to equal its true all-time high. Commodities are still cheap!

Now that we’ve established the fact that commodities have enormous potential even at the nominal highs we are seeing today, how does an investor jump on board and leverage his capital in order to profit from this? Believe it or not there actually is a reason why I broke down the commodity types between soft and hard. In my humble opinion softs are nowhere near as exciting as hards, but regardless of this opinion, softs are just plain more difficult to invest in.

As an example, let’s say I saw further potential in sugar and wanted to jump on its bandwagon. Only one problem presents itself, I’m the average Joe investor, I invest in stocks, and not only do I not have a futures trading account, but I am not even interested in futures trading, way over my head!

Well, if you look real hard you will find various hedge funds out there that have recognized sugar’s potential and have thrown capital in its direction. But ultimately for the common investor there is really not an easy way to get a piece of the pie. Soft commodities are almost exclusively traded in the futures markets. You would be hard pressed to find a publicly traded company that produces a soft commodity and is exposed to its price fluctuations.

Hard commodities, on the other hand, offer wonderful opportunities for investors to join the party. Because of the massive capital expenditures and operating costs necessary to produce hard commodities, and because funding is always a challenge, most producers and servicers of these sorts are publicly traded in the stock markets.

With this, we need to again keep in mind the underlying reason why the CRB Index was revised to favor hard commodities. Its custodian’s goal is to reflect the commodities that are most important and influential in today’s economy. Energy and metals are such commodities today and are currently faced with serious economic and fundamental challenges.

Demand for these resources has reached unprecedented territory in order to service today’s global economy. And the supply that is being mined and drilled is not only slow to meet this demand, but for many of these commodities the reserves for future supply are quickly dwindling with new discoveries becoming increasingly difficult to find.

The reason you see these immense gains in hard commodities is because of the now and future economic imbalances that present themselves. For many years capital has poured into the general stock markets with focus on tech stocks, and though commodities need significant funding in order to sustain future supply, the funds had just not made it their way. For many years exploration budgets were slashed and new discoveries were few and far between. This brazen ignorance of commodities for so long has finally commanded the world’s attention.

It’s going to take many years for commodities producers to ramp up output in order to meet this increasing demand and even more to renew and build reserves for future sustainability. Because of this prices will most likely continue to rise as much-needed capital is directed towards these commodities producers. At Zeal we have gone into great detail analyzing the core economic fundamentals and imbalances that many hards are faced with, and I encourage you to research and discover the problem the world is grappling with today.

Now as mentioned earlier, the wonderful thing about these hard commodities producers is that most are publicly traded companies. Investors and speculators indeed have the opportunity to leverage their capital at the epicenter of this global commodities shortage.

Some commodities producers are more leveraged than others to their underlying product, but ultimately the stocks of these producers can be looked at as non-expiring call options in their various sectors that should continue to soar as this secular bull market in commodities climbs.

The stocks for many of these companies have produced gains far better than those of their underlying commodities thus far. And as the prices of their products rise as we expect them to, if they are leveraged correctly so will their profits rise. The continued appreciation of their stock price will reflect such.

So as an investor or speculator looking to invest in these stocks, which ones do you choose? There are literally hundreds upon hundreds of stocks that fall into this category. At Zeal we have had great success investing in metals and energy stocks since the very beginning of this commodities bull market. In addition to cutting-edge commodities market analysis, our monthly Zeal Intelligence newsletter updates a Watch List of over 50 of our favorite commodities related stocks and as the technicals guide we recommend some of these as trades to our subscribers.

In our recent metals campaign we closed some of our options trades with several-hundred percent gains and our current stock trades recommended during this latest upleg are up an average of 85%. We are also currently in the midst of deploying in a new energy stock campaign and are already blessed with excellent gains thus far.

As the short-term cycles within a long-term trend flow and ebb with upward momentum, we will continue to invest and speculate in metals and energy-related stocks. At Zeal we do extensive research and try to uncover high-probability-for-success stock trades in various commodity sectors. Join us today and subscribe to one of our newsletters so you may ride this commodities bull with us.

The bottom line is commodities are still in the early part of a secular bull market. The global economy is starved for commodities and producers are struggling to keep up with demand. It will take many years for today’s economic imbalances to correct themselves and prices should only continue to rise.

The best way for investors and speculators to leverage their capital in order to take advantage of this commodities bull market is to invest in the stocks of the companies that produce these commodities.

February 19, 2006

After the House Party Ends...

February 18, 2006 THE defining structure of John Howard's Australia is the McMansion. The house with four or more bedrooms has been the trigger for record household debt, which is now one of the most tangible threats to the nation's longest economic expansion.

Our obsession with bricks and mortar has been stronger than the caricatures of politics and popular culture had thought, based on the latest unpublished official tables crunched by Inquirer.

The McMansion accounts for 60 per cent of the 1.2 million houses and apartments erected since 1995, the tables confirm. It is now the second-most common type of domestic house in the nation, behind the three-bedroom house. There are, in fact, 200,000 more McMansions than the total number of houses and apartments with one or two bedrooms.

The rise of the McMansion has reduced the three-bedroom house to less than 50 per cent of the total dwelling cake (see tables).

The Prime Minister and his Labor opponents of the past 10 years have assumed that the McMansion was the story of young families moving to the outer suburbs, and shedding their former working class loyalties.


As it happens, the politicians were only half right.

Families with one or two children were responsible for 48 per cent of the 716,554 McMansions erected between 1994-95 and 2003-04, the new Australian Bureau of Statistics tables show.

But childless households, namely those comprising a single person or couple, are responsible for another 42 per cent of the boom.

Kath & Kim were closer to the truth than their ABC stablemate SeaChange. Many empty-nester baby boomers have been trading up in the capital cities, not down-shifting to the coastline.

The template for the baby boomer McMansion is when Kath and Kel are alone with their gym equipment and gadgets.

Kath & Kim scripted their matrimonial home as a pit-stop between circuits of retail therapy.

The problem for the real economy is the trips to Fountain Gate are becoming shorter, and less exuberant, because the owners of McMansions are now trying to pay off their mortgages.

Reserve Bank governor Ian Macfarlane quantified the new mood in debtland in his opening address to yesterday's meeting of the federal parliamentary economics committee.

"The risks to the economy posed by the over-heating in housing and credit markets in the period up to late 2003 have eased," Macfarlane said.

"Households now seem to have entered a period of greater financial caution, and this may act as a restraining influence on the growth of household spending for a while tocome."

This is a mixed blessing for the real economy, because while consumer demand has cooled, and house prices have been flat, the amount of new money borrowed is still increasing by 12 per cent a year.

This week, the Reserve Bank revised its tables for household debt, and in doing so made Paul Keating's 17 per cent mortgage rate at the end of the 1980s seem relatively benign with the benefit of hindsight.

As Labor treasurer, Keating pushed the repayment burden on households to 8.4 per cent in the September quarter 1989. This figure measures the share of household disposable income devoted to interest repayments for all loans - the mortgage and consumer credit.

John Howard broke that benchmark in the June quarter 2003. By the September quarter last year, the repayment burden had reached a new high of 10.9 per cent, even though nominal interest rates are less than the half the level they were under Keating.

The previous Reserve Bank research had put Keating's worst at 8.9 per cent and Howard's at 9.8 per cent, a difference of less than $500 a year for a household with $50,000 in disposable income. This week's report recast the gap to $1250 a year against Howard.

The debt debate has taken on a new edge with these revisions.

Macfarlane warned yesterday that household debt would rise further before it stabilised. "For more than a decade, household indebtedness has grown at a rate well in excess of the growth in household incomes," he said.

"Simple rules of thumb would suggest that this cannot be sustained indefinitely.

"Yet there are a number of reasons why these ratios may rise further.

"In a low-inflation environment, nominal interest rates are also low, and households are able to service much higher levels of debt than they could in the past. A significant proportion of households still carry little or no debt, and in the years ahead might choose to borrow more."

Macfarlane said community attitudes were also changing. People were "more willing to borrow against assets later in life".

This is apparent in the Australian Bureau of Statistics tables supplied to Inquirer.

The home ownership rate in Australia has remained stable at about 70 per cent. What has shifted in the Howard era is the share of the population with a mortgage hanging over their heads.

In 1994-95, those who owned their homes outright were 41.8 per cent of all households, while those with a home loan were just 29.6 per cent.

In 2003-04, there were more people with mortgages than with freehold title - 34.9 per cent of the former versus 35.1 per cent of the latter.

Every household type, and every state and territory except the ACT have witnessed a fall in the share of who own their homes outright.

The reasons are complex, but all lead to the same conclusion - a population that is carrying more debt than ever before. Many young families, and baby boomers have been trading up, or borrowing against their title to fund renovations.

Also, the cost of entering the housing market is substantially higher than it was. All capital cities have seen prices jump many times faster than wages since the mid-'90s, nothwithstanding the corrections of the past two years, most notably in Sydney.

"It is quite possible that the rise in household debt ratios could go a good distance further," Macfarlane said. "The risk, of course, is that the process goes too far and that a painful correction ensues."

Those words "painful correction" should send a tremor through the Howard Government. The reason why Keating's interest rate regime led to the "recession we had to have" at the start of the '90s was that businesses had borrowed too much during the boom.

Household budgets, by contrast, were in good shape going into the recession. It was only when businesses started sacking people to reduce their overheads that the community suffered.

The roles are reversed today. Businesses are carrying significantly less debt than households, so they are less likely to begin a wave of retrenchments when the economy slows.

One way to see the switch is to compare the household repayment burden on domestic borrowings with the interest bill on the foreign debt, as measured against export income. The foreign debt repayment burden hit 20 per cent in the September quarter 1990, which was more than double the rate that households faced at the time.

This week's figures had business 1.6 percentage points better off than households, with the foreign debt repayment burden at 9.3per cent.

The McMansion helped to shape the last two election victories for the Coalition. In 2001, Howard managed to revive the housing market just in time, after the indigestion of the GST the previous year. In 2004, he ran a successful interest rate scare against Labor's Mark Latham.

Yesterday, Macfarlane played an interest rate card of his own. "It is more likely that the next move in interest rates would be up rather than down," he said.

Expect voters to be confused if that day comes. The public understands that higher interest rates are meant to stop the economy overheating.

But the economy as they see it is already well off the boil, because they have lost their taste for Fountain Gate.

"The political significance of a much earlier than expected slowdown in trend growth from the 3.75 per cent average of the last 14 years to a rate around 1 percentage point less has not yet dawned on Canberra - but sooner or later it certainly will," John Edwards, a former economic adviser to Keating said yesterday.

A weaker economy, rising interest rates and household debt setting new records virtually every quarter is a cocktail Australia has never tried before.

But this is the legacy of the McMansion. Sooner or later, the party must end. There are only so many things to buy to fill those extra rooms before it occurs to people that they should get their household budgets in order.

February 18, 2006

Nigeria Suspends 380, 000 Bpd Oil Exports After Attack

Filed at 7:51 a.m. ET

LAGOS (Reuters) - Royal Dutch Shell (RDSa.L) suspended exports from the 380,000 barrel-a-day Forcados terminal on Saturday after militants bombed the tanker loading platform, a senior oil industry source said.

The company is still trying to ascertain the damage to the platform, which is located three miles offshore, but has already begun shutting oilfields in the area which feed the terminal, the source added.

``Of course no ships can go near there now. This is going to be a major deferment,'' the senior industry source said.

``If we can't export, we can't produce,'' he added.

Nigeria is the world's eighth largest oil exporter and normally pumps about 2.4 million barrels per day.

The militant Movement for the Emancipation of the Niger Delta, which is fighting for more local control over the Niger Delta's oil wealth, claimed responsibility for Saturday's attacks, which also included the kidnapping of nine foreign workers and the bombing of two pipelines.

President Olusegun Obasanjo has called a meeting of oil industry and security chiefs to discuss the crisis later on Saturday, the source said.

Conservatives Endorse the Fuhrer Principle

 Our leader über alles
by Paul Craig Roberts

Last week's annual Conservative Political Action Conference signaled the transformation of American conservatism into brownshirtism. A former Justice Department official named Viet Dinh got a standing ovation when he told the CPAC audience that the rule of law mustn't get in the way of President Bush protecting Americans from Osama bin Laden.

Former Republican congressman Bob Barr, who led the House impeachment of President Bill Clinton, reminded the CPAC audience that our first loyalty is to the U.S. Constitution, not to a leader. The question, Barr said, is not one of disloyalty to Bush, but whether America "will remain a nation subject to, and governed by, the rule of law or the whim of men."

The CPAC audience answered that they preferred to be governed by Bush. According to Dana Milbank, a member of the CPAC audience named Richard Sorcinelli loudly booed Barr, declaring: "I can't believe I'm in a conservative hall listening to him say Bush is off course trying to defend the United States." A woman in the audience told Barr that the Constitution placed Bush above the law and above non-elected federal judges.

These statements gallop beyond the merely partisan. They express the sentiments of brownshirtism. Our leader über alles.

Only a few years ago this same group saw Barr as a conservative hero for obtaining Clinton's impeachment in the House. Obviously, CPAC's praise for Barr did not derive from Barr's stand on conservative principle that a president must be held accountable if he violates the law. In Clinton's case, Barr's principles did not conflict with the blind emotions of the politically partisan conservatives demanding Clinton's impeachment.

In opposing Bush's illegal behavior, Barr is simply being consistent. But this time, Barr's principles are at odds with the emotions of the politically partisan CPAC audience. Rushing to the defense of Bush, the CPAC audience endorsed Viet Dinh's Fuhrer Principle over the rule of law.

Why do the media and the public allow partisan political hacks, like Viet Dinh, to define Bush's illegal actions as a national security issue? The purpose of the Foreign Intelligence Surveillance Act is to protect national security. FISA creates a secret court to which the president can apply for a warrant even after he has initiated spying. Complying with the law in no way handicaps spying for national security purposes. The only spying handicapped by the warrant requirement is spying for illegitimate purposes, such as spying on political opponents.

There are only two reasons for Bush to refuse to obey the law. One is that he is guilty of illegitimate spying for which no warrant would be issued by the FISA court. The other is that he is using "national security" to create unconstitutional powers for the executive.

Civil libertarian Harvey Silverglate writing in the Boston Phoenix says that Bush's grab for "sweeping, unchecked power in direct violation of a statute would open a Pandora's box of imperial possibilities." In short, it makes the president a dictator.

For years, the Republican Federalist Society has been agitating for concentrating more power in the executive. The members will say that they do not favor a dictator, just a check on the "imperial Congress" and "imperial judiciary." But they have not spelled out how the president can be higher than law and still be accountable, or, if he is only to be higher than some laws, but not other laws, and only in some circumstances, but not all circumstances, who draws the line through the law and defines the circumstances.

On Feb. 13, the American Bar Association passed a resolution belatedly asking President Bush to stop violating the law. "We cannot allow the U.S. Constitution and our rights to become a victim of terrorism," said bar association president Michael Grecco.

The siren call of "national security" is all the cover Bush needs to have the FISA law repealed, thus legally gaining the power to spy however he chooses, the protection of political opponents be damned. However, Bush and his Federalist Society Justice Department are not interested in having the law repealed. Their purpose has nothing to do with national security. The point on which the regime is insisting is that there are circumstances (undefined) in which the president does not have to obey laws. What those circumstances and laws are is for the regime to decide.

The Bush regime is asserting the Fuhrer Principle, and Americans are buying it, even as Bush declares that America is at war in order to bring democracy to the Middle East.

The Conundrum of Risk

"Let us start with what we know. First, these markets look nothing like anything I've ever encountered before. Their stunning complexity, the staggering number of tradable instruments and their interconnectedness, the light-speed at which information moves, the degree to which the movement of one instrument triggers nonlinear reactions along chains of related derivatives, and the requisite level of mathematics necessary to price them speak to the reality that we are now sailing in uncharted waters.

"Next, we know things have been getting less, not more, turbulent, and that the tendency towards market serenity (complacency?) has been increasing. This is counterintuitive. It's not as though the 21st century has been lacking in liquidity shocking events. Since the bursting of the tech bubble, we've had a disputed Presidential election, 9/11, the collapse of Enron and Worldcom, the invasion of Afghanistan, the war in Iraq, US$70 oil, the largest debt downgrade in history and the failure of Refco, to name just a few. There seems to be an inverse correlation between market complexity and market stability, for now anyway.

"Counterintuitive though it may be, it's not like we don't see this pattern everywhere we look. Take aviation, as one example of many. There were three fatal flights per million in 1979 as compared to 0.5 in 2004. Flying today is statistically 6 times safer than it was 25 years ago, even though technology now does most of the actual 'flying' with autopilots, GPS navigation and the like. In medicine, engineering, even warfare, risk is being reduced at the junction of technology and human endeavor....

...the present level of financial technology has allowed the western world to take leverage to new levels - ratios never before contemplated in our financial history. It is without a doubt smarter leverage, and it is, in no small part, responsible for the wealth we enjoy today as a society....

"...But something isn't different, too, and it's what keeps me up at night. It's the other side of the hyper-efficient frontier: the investors. Over the years, when trying to make sense of the impossibly complex global economy, I think a lot about the elegant advice of Albert Einstein, who said everything should be made as simple as possible, but not more so. Two simple things I understand are risk and return, both of which seem to have been coming down.

"Lets' start with return. There are several truths about return that have held up well over the centuries, making for a good statistical sample. Eventually, returns diminish relative to assets invested. The point where the diminishing returns occur vary across investments, but were it not true some very smart investor would have wound up with all the money in the world by now. We also know there has been an explosion in asset growth in efficiency capital, the term I use to describe the societal function hedge funds and prop desks perform, and that returns in that space have come down. I'm still trying to find someone who thinks that's a coincidence.

"The next thing we know about return is that asset classes have a risk premium. They will pay you a return relative to the amount of risk the 'market' deems you to be taking by owning a particular asset. The risk of a T-Bill is less than the risk of a small cap stock, and so is the return over time. Now let's talk about what we don't know. Or, to be fair, what I don't know. If these hypotheses about the hyper-efficient frontier are true; if the restructuring of the world's capital and derivative markets and the explosion of efficiency capital have structurally lowered risk in financial markets, then wouldn't risk premiums also be lower? Let me say that again. If markets really are less risky, why would they continue to pay us the same return? Wouldn't that be the proverbial free lunch that isn't supposed to exist?

"The implications here are large and it's too early to prove them. There will not be enough data actually to prove anything for years. The premise is that the growth of efficiency capital has not just lowered the returns in hedge funds, but by lowering the risk across capital and derivative markets, it has lowered the future returns in those markets as well. Great for the business economy, but a new, and unappealing paradigm for investors.

"There was a saying in the seventies among commodity traders: 'Watch out for the risk, and the returns will take care of themselves.' Today, returns do not seem to be taking care of themselves, and going forward, it may be that investors have to actively seek riskier assets or structures to earn a respectable risk premium. So let's talk about risk.

"We can start by acknowledging that the nature of risk in the markets has changed. It could be higher or lower, but it's different. The cumulative impact of technology, telecommunication and financial product innovation has, at the least, altered the way information is shared, orders are transmitted, and both risk and return factors are dispersed. The proliferation of derivatives has created leverage never imagined a generation ago, and trillion dollar exposures now exist in instruments that make the '90s seem like a different century. Ok, they were a different century. But empirical data supports the conclusion that market risk is changing, at least in the short term.

"This leaves us with two options, and their respective implications:
  • Markets are structurally less risky, leaving us to answer the question about future risk premiums, or
  • Markets are still as risky as they ever were, but the nature of the risk has somewhere been altered...
"... and this brings us back to the question I raised in my last column about 'risk compensation,' the proven tendency in humans to react to safer conditions by taking more risk. You make me wear seat belts, I drive the car faster.

"Having given it some thought, I believe we are adjusting our risk levels in the financial markets back up to where they were before we employed all this efficiency capital. In fact, we may have no choice. Sitting on the short arm of chromosome 11 is a gene with the Stars Wars-like name of D4DR. Its function is to regulate the flow of dopamine in the brain. Dopamine is a neurotransmitter which, among other things, regulates the flow of blood in the brain. To greatly oversimplify, the level of dopamine in the brain affects behavior. Too little and individuals tend toward lethargy, too much and they become easily bored and tend to seek adventure. Put simply, we may one day discover that, for all our efforts at building safer roads and more efficient markets, our collective appetite for risk is set at the genetic level. Genetically or not, the generalized response to the more-or-less recently created hyper-efficient frontier seems to be that we keep adding leverage.

"The warning signs are there. The Bank of England's 'Financial Stability Review' in December of 2005 said the following: 'The U.K. financial system remains healthy. However, the persistence of the 'search for yield' across financial markets continues to fuel an increase in highly leveraged and potentially illiquid financial products. It has placed pressure on financial intermediaries to ease lending terms, challenged operational controls within the financial sector, and may have heightened the vulnerability of the U.K. financial system to adverse developments.'

"The BoE goes on to talk about crowded trades, the potential for financial contagion, the possibility of smaller banks with rising loan losses cutting back on lending with dangerous consequences in a macro downturn, and concentrated lending to emerging markets, culminating in potential risk to the payment system, otherwise known as a liquidity shock. I've seen this movie before. So after all this, I'm left thinking about the old wedding rhyme: 'something old, something new, something borrowed, something blue.'

"I've had 30-plus years of learning experiences in markets, all of which tell me that technology and telecommunications will not do away with human greed and ignorance. I think we will drive the car faster and faster until something bad happens. And I think it will come, like a comet, from that part of the night sky where we least expect it. This is something old.

"But I have learned to trust my eyes and ears and overrule my heart, when I have to. Everywhere I look, technology is making things faster, more efficient, safer. I cannot find the law of physics or economics that says it cannot happen in financial markets as well. I think, because risk will be lower, return will be as well. And savvy investors may have to seek additional risk, and manage it well, in order to earn an excess return. This is something new.

"I think shocks will come, but they will be shallower, shorter. They will be harder to predict, because we are not really managing risk anymore. We are managing uncertainty - too many new variables, plus leverage on a scale we have never encountered (something borrowed). And, when the inevitable occurs, the buying opportunities that result will be won by the technologically enabled swift.

"At least, that's what I think tonight. My goal every morning is to wake up humble, with an open mind. It's harder than it looks, and I fail far more often than I succeed. These ideas represent secular change on a fundamental level. They go against all our learned experiences. They could be wrong, and we won't know for a long time what the correct answer was. And, for all of that, there is still money to be made. The tactics may have changed, but then tactics usually do, every ten years or so. The shape of alpha may change and reappear in new forms and arenas, but it won't go away. And it can be captured by those who can adapt. Those who don't? Well, the song they sing will be something blue."

Lost in Translation: 45,000 Derivatives

Let's pull out one important paragraph. "I think shocks will come, but they will be shallower, shorter. They will be harder to predict, because we are not really managing risk anymore. We are managing uncertainty - too many new variables, plus leverage on a scale we have never encountered (something borrowed). And, when the inevitable occurs, the buying opportunities that result will be won by the technologically enabled swift."

Why are we no longer managing risk? Primarily because of derivatives and other forms of insurance. It was the advent of insurance at a pub in London which later became Lloyd's lo London that enabled the quicker proliferation of trade and commerce. Insurance of all types spreads the risk of any one negative event from one person to many persons.

And thus credit default swaps, one form of derivatives, have enabled more and more firms to mange their risk and feel comfortable increasing their leverage, adding to the pool of capital looking to go to work. But in an effort to mange risk we create a new form of uncertainty.

Bill King brought this to my attention this morning: The WSJ in GM Debt Poses Challenge To Derivatives Market: "The car maker has about $30 billion in debt. Traders estimate more than $200 billion in credit derivatives are linked to GM. But because such derivatives don't trade on an exchange, nobody knows for certain how much credit-default swap protection has actually been written on GM. And nobody can say with confidence that they even know who is on the other side of the trades that they have entered into. Such uncertainty is one reason that, since last year, regulators have asked participants in the fast-growing market to get their operational act together. That encompasses everything from dealing with a backlog of unconfirmed trades to figuring out who their counterparties are when one side transfers contracts to another party. The Fed has asked market participants to report by today on their progress in dealing with these and other issues...Four years ago, the derivatives market was a fraction of the size of the underlying corporate-bond market. Today, it is estimated at $12.5 trillion, more than twice the underlying market's size, and it continues to expand rapidly."

As King wryly notes, "So GM CDS have created a 6.67 fold increase in the $30B risk that they are supposed to mitigate. What possibly could go wrong?"

What if I told you there are 45,000 derivative trades the confirmations for which are at a minimum of over 30 days late? Doesn't sound good. But that's not the whole story. Regulators, led by the New York Fed, have been pressing the industry hard to get solve what could be a real problem in the derivatives markets. Even though Greenspan did not want those markets regulated, he did note that inadequate infrastructure was "a significant problem."

To make a long story short, a report was released last July from an industry committee detailing the problems and making 47 suggestions as to new policies and procedures. Last September, the Fed, along with other regulators, called the main players (named "The 14 Families") to a meeting and more or less said, "clean up this mess or we will step in." At the time there were 97,000 trades that were unconfirmed for 30 days or longer. Also, traders would buy a "credit swap" and then sell it the next day, but not tell the original party, who now did not know who his counter-party was.

This week, the number of late unconfirmed trades was cut to 45,000, 2 1/2 months ahead of the target. Re-assignments are reported in one day, much to the moaning of hedge funds and traders who do not want to reveal their strategies. Most of the trades are now matched electronically. But as the WSJ notes:

"The problems aren't solved. There is a backlog of thousand of unconfirmed trades. About 40% of new trades still aren't matched electronically. There's no centralized utility to process credit derivative trades. But the industry and its regulators are on the way to replacing the pipes before they burst - without cumbersome rule making or humiliating any one firm to make a point, or waiting for a crisis to force action."

Let's be very clear. While derivatives sound like potential weapons of capital destruction to the average investor, they are a very necessary part of our capital markets. The world would come to a screeching halt without them.

They in fact allow for market participants to "buy insurance" from a one time event by placing the risk with parties who have an appetite for such risk.

Are derivatives risky? Of course. That is the point. As Taylor noted, it is the potential risk (and the risk premium it yields) that drives the potential reward. If there were no risk in them then there would be no profit, and on one would buy them.

It is the massive buying and selling of all sorts of derivatives that has distributed the risks of the various markets to a much larger universe, who presumably have calculated the costs of that risk and built in a profit. Of course, there will be problems. Hurricane Katrina was a problem for insurance companies. But because they sold risk (hurricane) insurance over a wide variety or regions and types of insurance, they were able to withstand the storm, even though their profit margins were surely hit.

(This brings up an interesting side point. There are many hedge funds that are simply banks or insurance companies in drag. Instead of listing on a stock exchange, they run a private fund. Instead of a stock which can go up or down, you get a fund which can go up or down. Instead of a board which sets salaries, the management charges 20% of the profits as their fee for management (along with a typical) monthly management fee of 1-2%.

This trend is not just in banks and insurance companies. I am seeing more and more hedge funds which are really just some type of business which lets management charge a percentage of the profit rather than the typical salary and stock options. I like that model. Management and investors are on the same side of the table. Of course, just like any business, that fund can fail.)

Just the same, hedge funds buy lots of derivatives, any one of which could go bad at any time. In fact, most hedge funds and investments banks will assume that some will in fact go bad. They just try to diversify across enough types of derivatives from many companies and "charge" enough in the form of buying risk at a decent price to offset those losses.

The massive amount of derivatives and their rapid growth is on the surface a troubling trend. But Harry Browne taught me a lesson that I will never forget. In analyzing a whole economy, you have to trust the individual players in the market to tend to their own businesses. Self-interested parties will work to make sure they are ok.

Each of those funds and investment banks knows their own books. They have very risk managers whose job it is to make sure the risks and rewards are balanced. To assume that the world is going to end because of derivatives assumes that the world of finance in populated mostly by fools. My brief sojourn says this is not the case. There are some very bright people.

Of course, very bright people brought us Long Term Capital. But those people and the banks which loaned them money lost a lot of their capital. And deservedly so. They took risks because of greed they should not have done. The world rocked along fine even as those firms and individuals lost billions.

Now, the New York Fed had to tell them to play nice. It was a very scary moment. But the system worked. Those who took the risks lost their money.

And in some crisis in the future, some uncertainty event, there will be a number of funds and individuals which will lose their money. That is the way of the world. In the next uncertainty event, the headlines will be screaming, but the world will move right along. That will be small consolation to those who are hit by the train, but it should bring a sense of optimism to the rest of us.

The whole result is that risk is distributed to more and more players. And that is a good thing, except. Except for Black Swans. Just because you have not seen a Black Swan does not mean one does note exist.

Black Swans (as Nicholas Taleb in Fooled by Randomness called system shocks) still exist: "Reality is far more vicious than Russian roulette. First, it delivers the fatal bullet rather infrequently, like a revolver that would have hundreds, even thousands of chambers instead of six. After a few dozen tries, one forgets about the existence of a bullet, under a numbing false sense of security. . . . Second, unlike a well-defined precise game like Russian roulette, where the risks are visible to anyone capable of multiplying and dividing by six, one does not observe the barrel of reality".

I hope Taylor is right. The shocks will come, but they will be shallower and shorter, because the risks are more distributed. The trick for clever managers and investors is to make sure they are distributed to someone else.

Home Again, Home Again

I am going to quit a little early tonight. My twins are home from college for the weekend. It will be nice to see them. It looks like we night actually get some winter weather in Texas and I want to beat the ice, not to mention get to bed and deal with some jet lag.

London was fun. I enjoyed being on CNBC. Being a guest host was a hoot. On Wednesday, I had a really interesting dinner party. Bill Bonner and Simon Hunt, both of whom I quote often, some very smart local money mangers, another from South Africa and Tom Kass (who works with EFG), one of the brightest biotech analysts I have ever met. We had dinner with my London partner, Niels Jensen, who is also Danish.

We did discuss the irrational and out-of-proportion response to the publication of cartoons in some third rate Danish paper. The irony of the vilifying of a nation which almost makes a fetish of being non-offensive should be lost on no one. To show our solidarity, we decided to let Niels pick up the check.

In future letters, I am going to be writing about some of the amazing things that are happening in the biotech world. Tom really opened some eyes.

One of the books I read this last week was called Getting Things Done. It has inspired me to once again see if I can increase my own personal productivity. We will see. Have a great week.

Your deciding to get organized analyst,

John Mauldin

Copyright 2006 John Mauldin. All Rights Reserved

If you would like to reproduce any of John Mauldin's E-Letters you must include the source of your quote and an email address (John@FrontLineThoughts.com)

February 16, 2006

Looking back at the peak

We passed the Peak Oil peak in December, 2005.
Hubbert postulated that the rate of new oil discoveries depends on the fraction of the oil that has not yet been discovered. In the same way, the rate of oil production depends on the fraction of oil that has not yet been extracted.
This is self evident after reflection. Consider that no matter what we measure: the frequencies of words in texts, the size of human settlements, the file size distribution of Internet traffic or the size of sand particles, meteorites or craters, the distribution pattern is the same -- commonly expressed as the "80-20 rule".
Formally this power law is called a Pareto distribution but it is also known as the law of the vital few or the principle of factor sparsity. We shouldn’t be surprised, therefore, that oil field sizes follow the same rule.
The February 2006 edition of the ASPO newsletter contains a history of Exxon Mobil’s discoveries and calculates total world reserves at 2.013 trillion barrels. If those estimates are accurate, and there was no reason to think they are not, world peak would happen when 1.0065 trillion barrels have been produced.
As pointed out by Professor Kenneth S. Deffeyes, the cumulative world production at the end of 2004 was 0.9812 trillion barrels and in 2005 it reached 1.00748 trillion. Therefore we passed the halfway mark round about the middle of December. Surprise, surprise, compared to 2004, world oil production was up 0.8 percent in 2005 but this was nowhere near enough to compensate for the rise in demand of roughly 3 percent.  
The Swedish Prime Minister, Göran Persson, has founded a non-political committee with the intent of making Sweden fossil fuel-independent by 2020 and acknowledged that peak oil was a fact. Its time we all not only acknowledged our addiction, but outlined our national 12 step program, AA style.
Oh Lord, give me the courage to change the things I can, the serenity to accept the things I can’t, and the wisdom to know the one from the other."
Deal with it or it will deal with you.

February 15, 2006

Everything you're told officially about the US economy is a lie

On Friday, Feb. 3, the Bureau of Labor Statistics released the
nonfarm payroll jobs report for January. New York Times reporter
Vikas Bajaj wrote an upbeat news story, obviously based on a Labor
Department press release rather than any study of the BLS report. If
the rosy view of Ethan Harris, chief economist for Lehman Brothers,
is typical, Wall Street has no more idea than Bajaj of what the jobs
report really says.

The export and import-competitive sectors of the U.S. economy have
been tanking for a long time. To keep the story manageable, let's
just go back to January 2001. The latest BLS payroll jobs report
says that January 2006 is now the 61st month that the U.S. economy
has been unable to create any jobs except ones in domestic non-
tradable services, most of which are low-paid.

Of the 194,000 private-sector jobs created in January, 46,000 were
in construction (and most likely went to Mexican immigrants, both
legal and illegal) and 136,000 were in domestic services: Financial
activities (essentially credit agencies) account for 21,000.
Administrative and waste services account for 17,600. Health care
and social assistance account for 37,500. Waiters, waitresses and
bartenders account for 31,000. Wholesalers account for 15,100.

There were 7,000 new jobs in manufacturing in January, but the total
number of manufacturing jobs in January 2006 is 48,000 less than in
January 2005. Over the past five years, millions of manufacturing
jobs have been lost. At the rate of 7,000 new manufacturing jobs per
month, the lost manufacturing jobs over the past five years would
not be regained for 34 years.

Does anyone remember when reporters were curious? In his rosy jobs
report, Vikas Bajaj does let it out of the bag that "economists
estimate that the nation needs to add roughly 150,000 jobs a month
just to keep up with population growth." That translates into
1,800,000 new jobs per year to stay even with population. Over the
past 61 months 9,150,000 new jobs were necessary in order to prevent
population growth from pushing up the unemployment rate.

How many new jobs have been created over the past five years and one
month? According to the Bureau of Labor Statistics' latest
revisions, a total of 1,054,000 net new private sector jobs were
created over the past 61 months (January 2001 through January 2006).
Add the total net government jobs created over the period for a
total net job creation of 2,093,000 jobs over the past 61 months.

That figure is 7,057,000 jobs short of keeping up with population

What, then, does it mean for Bajaj to tell the Times' readers that
the unemployment rate has fallen to 4.7 percent, a rate that
economists consider to be essentially full employment?

How can the economy possibly be at full employment if the economy is
7 million jobs short of keeping up with population growth!

The unemployment rate does not measure the millions of Americans who
have lost their jobs to offshore outsourcing and to foreign workers
brought into the United States on work visas. These millions of
Americans have exhausted their unemployment benefits and severance
benefits, and have been unable to find jobs to return to the
workforce. Economists refer to these millions of unemployed people
as discouraged workers who have dropped out of the workforce. As
they have given up searching for jobs, they are not considered to be
in the workforce and, therefore, do not count as unemployed.

If you are an American engineer whose job has been outsourced to
India, China or Eastern Europe, where the cost of living and
salaries are far below U.S. standards, or you are an engineer who
has been forced to train as your replacement an Indian engineer
imported on a H-1B or L-1 work visa, where do you go to find a new
engineering job? All the companies are doing the same thing.

It is amazing to hear politicians and corporate executives blabber
on about a shortage of engineers and scientists when there are now
several hundred thousand unemployed American engineers. The
corporate executives, whose own bonuses grow fat from replacing
their American employees with foreigners who work for less, spread
disinformation about "shortages" so that Congress will give them
more H-1B visas. This is one of the greatest frauds ever perpetuated
on the American people.

If the unemployment rate is now at essentially full employment, why
only a few days ago did 25,000 Americans apply for 325 jobs at a new
Chicago Wal-Mart?

Americans are not being told the truth about anything, not about
Iraq, not about Iran, not about terrorism and not about the
disastrous state of their economy. The information is available, but
the people have no way of finding out about the economy if they are
not trained economists with some knowledge of the data (except by
watching Lou Dobbs on TV). Few economists themselves will tell them,
because if they do they will lose their corporate and government
grants. It is not in the corporations' interest or the Bush
administration's interest for Americans to know what is happening to

Washington-based economist Charles McMillion of MBG Information
Services tells it the same way (and he has been doing so longer than
I have). Here is his summation of the January payroll jobs
report: "The familiar pattern continued with almost all job growth
occurring in industries that face little or no outsourcing or import
competition: construction, health care and social services,
restaurants and bars, credit agencies and wholesalers."

Gentle reader, the politicians, the media, and the corporations are
all lying to you.

Murrow remembered...

If we confuse dissent with disloyalty — if we deny the right of the individual to be wrong, unpopular, eccentric or unorthodox — if we deny the essence of racial equality then hundreds of millions in Asia and Africa who are shopping about for a new allegiance will conclude that we are concerned to defend a myth and our present privileged status. Every act that denies or limits the freedom of the individual in this country costs us the ... confidence of men and women who aspire to that freedom and independence of which we speak and for which our ancestors fought."
– Ford Fiftieth Anniversary Show, CBS and NBC, June 1953, "Conclusion." Murrow: His Life and Times, A.M. Sperber, Freundlich Books, 1986

February 14, 2006

Year of Base Metals

With spot metal prices having risen above their annual
forecast for 2006 Macquarie has reviewed its estimates,
resulting in strong upgrades to its metal price
forecasts both this year and next year.
The broker notes its higher forecasts reflect the
likelihood the inflow of funds into the metals sector
from commodity fund and index buying will continue and
will support a higher profile for metal prices in the
Supporting its view, the broker also notes the demand
side of the equation remains very tight as constraints
continue to limit any substantial supply response.
Acknowledging the current environment is difficult for
attempting to forecast metal prices, the broker offers
as an example the fact its copper price estimates have
risen by 100% in the past year or so.

 The broker has upgraded its nickel price forecast in
2006 by 17.8% to US678c/lb, while in 2007 it has lifted
its forecast a further 13% to US650c/lb.
Even larger upgrades have flowed through for copper and
zinc, the broker lifting its copper price forecast this
year by 37.5% to US220c/lb and its zinc estimate by
46.9% to US118c/lb, with similar increases flowing
through in 2007.
Lead has also been upgraded significantly, the broker`s
2006 estimate increasing 46.7% to US55c/lb, while the
increase for aluminium is less substantial, rising 14.3%
to US120c/lb.
In share terms the broker suggests there should be a
change of focus by investors, as while last year was the
year of the bulks given higher iron ore and coal prices,
this year should be the year of the base metal
The broker suggests investors remain modestly overweight
resources and while quality plays such as BHP Billiton
(BHP) and Rio Tinto (RIO) should still be in portfolios
the focus should be on companies with high asset quality
and leverage to its preferred base metals of aluminium
and zinc.
The broker`s preferred stocks therefore are Alumina
(AWC) as a quality, leveraged aluminium play and Oxiana
(OXR) and Kagara Zinc (KZL) for their copper and zinc
Copyright Australasian Investment Review.

The triumph of the "Gold Bugs" and a question

Believe It or Not

For the longest time, those who contended that the gold market was rigged [the Gold Bugs] were looked upon with disdain  almost exclusively  by the mainstream media and mainstream financial outlets alike. The Gold Bugs' claims were widely dismissed as a chimera - concoctions by aggrieved speculators with active imaginations or too much time on their hands.

This widely held mainstream view was challenged recently when the brokerage arm of one of Europe’s most venerable institutions  Cheuvreux, the brokerage arm of French banking giant Credit Agricole - published a 56 page research report that not only outlines, but then throws its substantial support behind the central thesis of the gold bug’s conspiracy against gold” theory  that prices have long been rigged by Western Central Banks.

It was convenient and easy for the collective mainstream to ignore the gold conspiracy arguments  so long as gold bugs were isolated, alienated or otherwise relegated to the fringes of economic thought. This conscious denial on the part of the mainstream is becoming a much trickier notion now that one of their respected members  Credit Agricole  is singing from the same hymn book.

This is clearly a conflict, as yet to be resolved.

Cutting Through The Fog

To accept the Gold Bug’s assertions about the rigging of gold’s price, brings with it at least tacit acknowledgement [because it’s woven into the design of the fabric of the same argument] that inflation numbers as reported by officialdom  are misreported through understatement. After all, it was the suppression of the gold price that was intended to make the fudged” inflation numbers believable, no?

Acceptance of this assertion creates another disturbing dilemma  one that interestingly envelopes Alan Greenspan’s infamous interest rate conundrum  that of what prudent or proper asset allocation is or should be. If inflation has been systematically under reported, then it follows that interest rates are erroneously low. Nobel Laureates have asserted that asset allocation models are built from a foundation of assumptions or truths,

For each asset class the user forecasts an expected return, a standard deviation, and a correlation to each of the other assets. Given these inputs, the software uses mean-variance optimization to build an efficient frontier. The frontier represents the efficient set of portfolios that can be created using the selected asset classes. Each portfolio on the frontier has the maximum expected return for a given amount of risk.

Inherent in this modeling  correlating assets - is the assumption that real interest rates are positive as evidenced by the efficient frontier always being plotted in the upper right quadrant. Under reporting of inflation has rendered this base assumption false [false data implies that the efficient frontier” is a misnomer]. Empirical evidence in the real world supports this contention  in that large capital pools [pensionable assets of large companies like GM, Ford, IBM and the airlines] invested along traditional lines  steeped in fixed income securities - are proving to be woefully inadequate to fund current obligations.

This has created confusion that is begging for clarity.

Clear Vision From A Disciplined Mind

While deceptions, like those outlined above, abound - I’ve got to hand it to Mr. Llewellyn [Lew] H. Rockwell Jr. In a paper published just last week, What Economics Is Not, Rockwell the reigning chief Austrian economic academic in North America - states,

And just as economic structures are best managed by property owners and traders, the entire society contains within itself the capacity for self-management. Any attempt to thwart its workings through the coercion of the state can only create distortions and reduce the wealth of all.

Rockwell’s words, which mirror or embody the wisdom of Mises, go on to articulate,

Anyone familiar with current economics texts and journals knows that this is not the view that they promote. They are still stuck in an era where bureaucrats imagined themselves as smarter than the rest of us, where central bankers believed that they could end the business cycle and inflate just enough to cause growth but not ignite inflation, where antitrust experts knew just how big businesses should be.

Before anyone dismisses these words as unimportant meanderings by academics for academia, you’d be well served to consider,

The most common misunderstanding about economics is that it is only about money and commerce. The next step is easy: I care about more than money, and so should everyone, so let’s leave economics to stock jobbers and money managers and otherwise dispense with its teachings. This is a fateful error, because, as Mises says, economics concerns everyone and everything. It is the very pith of civilization.

So there you have it folks, in three short, very succinct stanzas in true Austrian form Rockwell - consciously or not - has dissected, analyzed and laid bare the essence of the Greenspan Era as chairman of the Federal Reserve.

This is a mess which needs to be sorted out.

Time Is Of The Essence

The clock is ticking folks. Next month, the Federal Reserve is due to discontinue reporting M3 money supply [and related] statistics. They would have us believe that it’s their intenti

February 13, 2006

Bird Flu definition changed.


The World Health Organization said it would change its definition of what constituted a bird flu infection.

WHO says there have been 55 confirmed cases of bird flu; recently, researchers examined two young children - a brother and sister - who lived with their parents in Vietnam. They were admitted suffering from gastro-enteritis and acute encephalitis. Neither displayed respiratory problems, which are considered typical in cases of avian flu. But analysis revealed the four-year-old boy had traces of the virus indicating that the virus can attack all parts of the body, not just the lungs.

It is suspected his nine-year-old sister, who died two weeks earlier in February last year, was also suffering from the virus. Dr Jeremy Farrar, director of the Wellcome Trust's Vietnam unit, said: "This latest work underlines the possibility that avian influenza can present itself in different ways. The main focus has been on patients with respiratory illnesses but clearly that's not the only thing we should be looking for. "Therefore the number of cases of H5N1 may have been underestimated."

Meanwhile, analysis of the spanish flu that killed millions in 1918 suggests the flu virus descended directly from a bird virus and moved into human hosts after slowly accumulating the necessary mutations.

He said: "It means the range of illnesses we have been looking for when considering a diagnosis of avian flu will now be expanded.

"We will have to change the way we conduct our investigations, the management of hospital patients and even the way we deal with their bodily secretions."

With reports of Avian Flu in Nigeria, Italy, Greece and Slovenia Italian health authorities imposed strict controls on the movement of poultry at the weekend after the lethal H5N1 bird flu virus was detected in five dead wild swans in southern Italy.

You can download a Google Earth Map of Bird Flu outbreaks to date below.

Download file

Classic Greenspan Animated Gif


February 11, 2006

The Commodity Supercycle: Will it continue

 See the charts at my site

Are we in the ninth inning of the “Commodity Super Cycle” that has lifted the Reuters Jefferies Commodity (CRB) price index 91% higher from four years ago to its highest level in 26 years? The Reuters Jefferies CRB index of 19 commodities reached a high of 349.56 on Jan 30th and is comprised of futures in live cattle, cotton, soybeans, sugar, frozen concentrated orange juice, wheat, cocoa, corn, gold, aluminum, nickel, unleaded gasoline, crude oil, natural gas, heating oil, coffee, silver, copper and lean hogs.

Barclays Capital said on January 5th that commodity investments might parlay another $40 billion this year up to $110 billion as pension funds and other money managers diversify from stocks and bonds. Big-money investment funds have boosted their stake in commodity indexed markets to around $70 billion in 2005, up from $45 billion by the end of 2004 and only around $15 billion at the end of 2003.

Pension funds, as well as small, retail investors are looking to commodities as a crucial part of diversification of any investment portfolio. Although schizophrenic commodity day traders could decide to turn massive paper profits into hard cash at a moment’s notice, causing a 5% shakeout, the longer-term odds still favor a continuation of the “Commodity Super Cycle, into extra innings.

Central bankers point the finger of blame for soaring commodity prices on China’s juggernaut economy, which has expanded at breakneck speed of 10% for each of the past three years, competing with rampant demand for basic resources from big importers like India, Japan, Germany, South Korea, and the United States. India’s booming economy expanded 8% and Korea’s by 5% last year. China bought about 22% of the global output of base metals in 2005, compared with 5% in the 1980’s, and has doubled its crude oil imports from five years ago.

Central bankers stare at the explosive CRB rally from the sidelines with a sense of indifference or stone faced silence, though sharply higher commodity prices are telegraphing higher producer price inflation. Furthermore, China is under daily pressure from the Bush administration to revalue its yuan higher against the dollar, which in turn, would give Beijing even greater purchasing power abroad, and provide more support for a whole range of commodities from crude oil, iron ore, zinc, copper, platinum, uranium, soybeans, and ethanol.

But perhaps, the simplest answer to explain the long term bullish outlook for global commodities boils down to one simple equation. According to the latest population count by the United Nations, the world had 6.5 billion inhabitants in 2005, 380 million more than in 2000, or a gain of 76 million persons annually. By 2050, the world is expected to house 9.1 billion persons, assuming declining fertility rates. In other words, a world of finite raw materials, along with an increasing population base, translates into higher prices.

Until recently, the “Commodity Super Cycle” has been led by base metals such as copper, aluminum, and zinc, precious metals such as gold, silver, and platinum, and higher energy prices led by crude oil and natural gas. Recently however, commodity traders have doubled sugar prices to 24-year highs, and are moving into coffee and soybeans. Other raw materials such as iron ore rose 72% in 2005. Although China is a big exporter of steel, fears of a global supply glut could disappear rapidly, if global steel makers begin a pattern of consolidation, following in the footsteps of the gold mining industry over the past few years.

But how did the Reuter’s CRB index reach record levels in the first place? Well consider the Chinese and Indian economies, which also account for one third of the world’s population, and the super easy money policies pursued by the big-3 central banks, the Bank of Japan, the European Central Bank, and the Federal Reserve. Both ingredients, when mixed together, make an explosive cocktail that has lifted commodity indexes into the stratosphere.

And a trend in motion, will stay in motion, until some major outside force, knocks it off its course. So not withstanding inevitable profit-taking sessions, what major outside force is out there that could derail the CRB’s upward trajectory?

Chinese demand for imports has soared by 330% from roughly $15.5 billion per month in early 2002 to a record $64.4 billion in December 2005. China is the world’s fifth largest importer, and bought $632 billion worth of goods in 2005. The world’s number-one miner BHP Billiton BHP.AX ran its mines and smelters at full speed in the fourth quarter to capture strong commodities prices, setting the stage for full-year profits to exceed $9 billion. Rio Tinto, RIO.AX, the world’s second largest miner pushed its operations harder to double its 2005 profit to around $5 billion.

China's economy overtook France and the Great Britain to become the world's fourth largest last year, and will grow an estimated 9.4% this year. The European Union and Japan expect growth of 1.9% this year. Chinese Premier Wen said on December 1st that China needs to “maintain rapid and stable economic growth to raise the living standards” of the nation's 1.3 billion people, whose per capita income of $950 per year, ranks 129th in the world. Beijing is cutting taxes and raising salaries to encourage more spending on cars and household appliances.

Exports are a key driver behind the Chinese economic miracle, with China's currency exchange controls and trade surplus with the US topping $204 billion in 2005, a 25% increase on the previous year and nearly 30% of the total US deficit. The lynchpin of Chinese exports is the low yuan /dollar exchange rate pegged at 8.11 per dollar, undervalued by 30% to 40% on a trade weighted basis.

The People’s Bank of China increased its M2 money supply by 18.3% last year, issuing more yuan to soak up foreign currency earned through foreign trade and direct investment into Chinese factories from abroad. Explosive money supply growth, in turn, boosted domestic retail sales by 13% last year, and industrial production was 16.6% higher in November from a year earlier. China’s central bank raised its M2 money supply target to 17% in the third quarter from 15% earlier, to offset stronger demand for the yuan, and maintain the peg at 8.11 per US dollar.

China’s crude oil imports rose 4.4% in the first 11 months of 2005, and are expected to total 130 million tons of crude (2.5 million bpd) in 2005. Crude oil production from China's biggest oil field, Daqing, fell about 3% to 44.95 million tons (900,000 bpd) last year. China, the world's second-largest oil consumer, expects to secure foreign energy supplies with foreign deals for its economy, after it turned into a major oil importer and still suffers from severe power shortages.

China's oil giant Sinopec signed a $70 billion oil and natural gas agreement with Iran, to buy 250 million tons of liquefied natural gas over 30 years from Tehran and develop the giant Yadavaran field. Iran is also committed to export 150,000 barrels per day of crude oil to China for 25 years at market prices after commissioning of the field. Iran is China's biggest oil supplier, accounting for 14% of Chinese oil imports. In return, Tehran’s Ayatollah is demanding a Chinese veto at the UN, to shield his secret nuclear weapons program from international sanctions.

India’s Prime Minister Manmohan Singh, wants his country to achieve 10% economic growth in the next two to three years, to create more jobs and help lift a third of the country's 1.1 billion people out of poverty. Asia's fourth-biggest economy expanded 8% in the second and third quarters of 2005. Singh's government wants industrial production, which makes up a quarter of India's economy, to grow 10% annually to boost the incomes of Indians, one in three of whom live on less than $1 a day.

India’s industrial production grew at an annualized 8.3% rate between April and November 2005, faster than major economies like US, UK, the Euro zone, Japan, Brazil, Indonesia and Russia. Only China and Argentina recorded faster industrial production rates of 16.6%, and 9.6% respectively. On the global sphere, US industrial production grew only 2.8%, and the UK, the Euro zone, and Indonesia, saw declines of 2.4%, 0.8%, and 3.4% respectively in their overall industrial production.

Indian economists have observed an 86% correlation between industrial production and exports. But the Indian export sector does not dominate growth in the Indian economy, such as in China and South Korea. The Indian economy is more about domestic consumer demand, which contributes nearly 70% to GDP, while exports contribute only 15% to India’s GDP. India ranked 24th among global importers purchasing $113 billion of goods in 2005, or about a sixth Chinese demand.

Japan is also a major factor behind the rise in global commodity prices, with industrial production rising for a fifth month in December to a record, sustaining the nation's longest expansion in eight years. Japanese industrialists plan to spend 17.3% more on factories and production facilities in 2006 than last year. Overseas sales are also bolstering production and imports of raw materials from abroad. Japan imported $451 billion of goods in 2005, the seventh highest among global importers.

Japan's exports rose 14.7% in November from a year earlier to 5.9 trillion yen ($50.2 billion), the second highest ever, on the heels of the yen’s 19% devaluation against the dollar, and 17% drop against the Chinese yuan. Shipments to China rose 12.8% and those to the US climbed 8.9 percent. Exports were up for the 23rd consecutive month while imports rose for the 20th month in a row.

To meet strong demand from abroad, and an economic revival at home, Japanese imports of raw materials have soared 66% to 5.42 trillion yen per month from three years ago, and in turn, providing underlying support for global commodity prices. Japan paid 20% or more for nonferrous metals, crude oil and coal in 2005, which companies are expected to pass on to customers.

Japan’s wholesale price index was 1.9% higher in November from a year earlier, and has been in positive territory for two years, but the Japanese government claims that consumer prices are just emerging from a seven year bout of deflation. But the Japanese wholesale price index tracks major trends in the Reuters Commodity price index, which has risen 91% over the past four years, for an annualized gain of 23%, much higher than the Japanese wholesale price index of 1.9% inflation.

That would imply that Japanese manufacturers are getting squeezed by sharply higher raw material costs, and unable to pass costs along to intermediaries. Yet, large Japanese manufacturers claim their profits are expected to be 5.2% higher in 2005, and the Nikkei-225 stock index rose 40% last year to a 5-year high. If correct, then profit margins might have been inflated by a stronger dollar against the Japanese yen. That explains why the Japanese ministry of finance is jawboning or intervening in the currency markets, whenever the dollar has a rough day.

Global commodity prices bottomed out in late 2001, soon after the Bank of Japan lowered its overnight loan rate to zero percent, and adopted quantitative easing. The central bank prints about 1.2 trillion yen ($10 billion) per month to purchase Japanese government bonds, inflating the amount of yen circulating around global money markets. More Japanese yen yielding zero percent, chasing fewer natural resources in turn, leads to sharply higher global commodity prices.

The Japanese ruling elite are devaluing their way to prosperity, by flooding the Tokyo money markets with 32 trillion to 35 trillion yen above the liquidity requirements of local banks. The enormous supply of excess yen pushed Japan’s 3-month deposit rate below zero percent for most of 2004. With borrowing costs at zero percent or less, Japanese and foreign hedge fund traders have found the cheapest source of capital to leverage speculative positions in global commodities.

And the Japanese ministry of Finance is not expected to grant permission to the Bank of Japan to begin mopping up some of the excess yen until the second half of 2006, at the very earliest. On January 9th, Japanese Finance Minister Sadakazu Tanigaki said, "There is a need for the BOJ to make a careful assessment of data. It should not rush things.” The BOJ is certainly not rushing things. It has kept the overnight loan rate pegged at zero percent for five long years.

Kozo Yamamoto, the ruling LDP party chairman on monetary policy matters expressed outrage at the prospects of a BOJ policy change, saying quantitative easing must stay in place to eradicate deflation for good and to keep bond yields low to help the government trim debt servicing costs. "But if the BOJ were to ignore our view and force through the same mistake it made when it ended the zero rate policy in August 2000, ending up with a miserable outcome, we would then revise the BOJ law of independence,” he warned.

The European Central Bank cannot ignore the Euro zone's loose monetary conditions and increased risks to price stability, said ECB chief economist Otmar Issing on December 19th. "Money growth has been high for quite some time and credit growth has continuously increased, supporting our assessment of the risks to price stability. Liquidity in the Euro area is more than ample. A central bank with the mandate to maintain price stability cannot ignore these signals," Issing added.

Yet for two and a half years, the ECB ignored a 50% surge in commodity prices, since lowering its repo rate to 2.00% in May 2003. The Euro M3 money supply growth rate was 7.6% higher in November from a year earlier, above the central bank’s original mandate of 4.5% growth. Thus, the ECB’s quarter-point rate hike to 2.25% in December was too little, too late, to get in the way of the “Commodity Super Cycle,” with the Reuters CRB rising another 10% in its aftermath.

Italian central banker Bini Smaghi spoke with a twisted tongue on the matter on January 25th. "If a central bank stops excess liquidity too late it has to raise rates much more strongly and that causes turbulence on the markets.” Then, casting doubt about the ECB’s resolve to combat commodity inflation, Smaghi said there are a range of risks to durable economic recovery in the Euro zone. “There are no clear signals about how strong growth really is. That's why we've got to be careful in this early stage of the recovery," Bini Smaghi said.

For the past three years, the ECB pursued a policy of “asset targeting”, inflating its Euro M3 money supply to lift European stock markets into higher ground, and through the “wealth effect” lift the spirits of the frightened European consumer. The ECB is running into a barrage of resistance from top European finance officials to higher Euro interest rates, fearful of any action that could undermine the European stock markets. The ECB has much greater political independence than the BOJ.

Sending a clearer signal on January 23rd, ECB economist Issing argued, "Trichet made it very clear. The December rate hike was not the first in a series of steps. But we will always act on time. The risk to price stability has increased in the context of higher oil prices," Issing said, adding that Euro zone consumer inflation, which fell to 2.2% in December, was likely to rise again.

The ECB’s Klaus Liebscher also expressed concern that the sustained high cost of oil would feed into wages and prices for other goods and services. "Without a doubt, there is still a large danger," he said, citing the German producer price index, which rose by 5.2% in December, its fastest pace for 23 years. Traders should always trust the hard dollars and cents flowing through the commodity markets for real time indications of future inflation, and not government statistics.

One has to question how the Japanese wholesale price index is only 1.9% higher from a year ago, or roughly 3.3% less than the German PPI, when the yen was 6% weaker than the Euro against the dollar last year. But in an age where ruling parties distort data to serve their own interests, it is hardly surprising that Japan’s financial warlords present price indices and inflation data in a manner best suited to their immediate needs. There is simply is no limit to how far the Japanese government will go to keep its borrowing costs down and to protect the interest of its exporters.

Because most commodities are traded in US dollars, the Federal Reserve has a special role to play in the fight against commodity inflation. The Fed must protect the value of the US dollar in the foreign exchange market, with higher interest rates if necessary, to keep the Commodity Super Cycle in check. Yet the Greenspan Fed waited for the Reuters Commodity price index to rise by 45% above its 2001 low, before taking its first baby step to lift the fed funds rate by a quarter-point to 1.25%.

The Fed has moved in predictable quarter-point moves for the past eighteen months, and has signaled that 4.50% could be the peak in the tightening campaign. The Fed is targeting US home prices, which have flattened out in recent months, and should preclude further rate hikes in 2006. Still, the Fed’s go-slow approach to combating inflation has left it far behind the “Commodity Super Cycle.”

The Greenspan Fed produced a sizeable counter trend rally for the US dollar in 2005, pushing the greenback from 102-yen to as high as 121.50-yen, and knocking the Euro from as high as $1.3450 to a low of $1.1650. However, the Fed efforts to control commodity inflation were completely undermined by the super easy money policies of the Bank of Japan and the European Central Bank.

How would the new Fed chief Ben Bernanke react, if commodity prices were to continue to soar further into the stratosphere? Without the life support of higher interest rate expectations, the deficit ridden US dollar could come under renewed speculative attack in 2006. Especially, after China signaled a desire to diversify an expected build-up of $200 billion of foreign currency reserves away from the US dollar this year. A weaker dollar could give commodity prices extra support.

Fortunately for commodity bulls, Bernanke doesn’t believe there is a link between a higher CRB index and higher producer price inflation. On February 5th, 2004, Bernanke said, “rising commodity prices a variable of growth rather than inflation.” Then on May 24, 2005 Bernanke played down worries about higher energy and commodity prices. “Much of the recent price gains in energy and commodities reflect the rapid growth of the Chinese economy. Chinese authorities are now trying to slow that growth, and should help check the growth of commodity prices,” he said.

Bernanke has also rejected opinions that the recent rise in oil prices is largely a symptom of super easy central bank monetary policies. “The consensus that emerges from this literature is that the relationship between commodity price movements and monetary policy is tenuous and unreliable at best. Moreover, recent experience doesn't support the notion that monetary policy had a substantial effect on the oil price rise,” he said.

Then on October 25, 2005, the day after his nomination to lead the Federal Reserve, Bernanke was asked again about soaring commodity prices and their impact on the inflation outlook. "The evidence seems to be that it is primarily in energy and some raw materials and has not fed into broader inflation measures or expectations. My anticipation is that's the way it's going to stay.”

Most likely, Bernanke would continue to ignore a surge in commodity prices, but keep a close eye on US home prices. Any sign of a significant downturn in US home prices, could quickly prompt the new Fed chief to lower the fed funds rate. Already, home re-sales in the United States fell 5.7% in December to the lowest level since March 2004, after five years of gains that shattered construction and sales records and sent prices up more than 55% nationwide. The national median sales price in December was $211,000, and down from a record high of $222,000.

The Greenspan Fed was an “Asset Targeter” and inflated US home prices over the past few years to offset huge losses in the Nasdaq and S&P 500 stock indexes. The Fed borrowed this strategy from the Bank of England, which pioneered home price targeting in 2001. By moving in baby step quarter-point rate hikes, the Fed was careful to avoid a meaningful downturn in the housing markets, until signs of froth in home prices were sprouting in over 100 major US cities in late 2005.

Any sign of potential weakness in the DJ home construction index towards the horizontal support at the 800-level, could be met by aggressive half-point rating cutting by the Bernanke Fed to head off an implosion of consumer wealth and confidence. A significant decline below the 800 level could signal a head and shoulders top pattern to technicians, projecting a decline to the 550-level. Fortunately, head and shoulder pattern rarely work anymore, and usually just set bear traps. Sharp rate cuts by the Fed might bring Wall Street investment bankers to the rescue of the housing sector.

So what could derail the “Commodity Super Cycle” in 2006? Schizophrenic speculators could be tempted to lock in profits at a moment’s notice. But big time players like China, Japan, and India could provide a safety net for falling commodity markets, gratefully locking in lower prices for raw materials. Beijing is on course to reach $1 trillion of foreign currency reserves by years ahead. Base metal and precious metal dealers could be loathe to offer big discounts to cash rich Beijing.

China is still holding a massive short position in copper futures, estimated at below 200,000 tons because of positions amassed by trader Liu Qibing. Yet there are only 140,000 tons of copper in publicly reported stockpiles worldwide, equal to about three days of global usage, and stored in warehouses monitored by the London Metals Exchange and commodity exchanges in New York and Shanghai.

The Bank of Japan is aiming for negative interest rates by forcing the “core” inflation rate to rise above its zero percent overnight loan rate, before moving to tighten its monetary policy. Negative interest rates would actually produce an easier money policy in Japan in the short term, and possibly create a major bubble in the Nikkei-225 stock index. The ECB’s baby step rate hike campaign would probably fizzle out near 2.75%, hardly enough to scare anyone. And the Fed’s Bernanke is on guard against falling home prices.

Crude oil is hovering near record highs, fearful that Iran’s Ayatollah might unleash the “Oil Weapon” in 2006, squeezing crude oil to $80 per barrel, if Europe and the US muster the nerve to impose economic sanctions on the Islamic regime. A battle in the Strait of Hormuz could disrupt oil supplies and the supply of commodities worldwide. But high-flying Asian and European stock markets are betting the Ayatollah will flinch at the eleventh hour to avoid a military showdown with the US and NATO, and wipe out a $10 per barrel “War Premium” for crude oil.

Weighing all the bearish and bullish arguments however, it’s appears likely that the “Commodity Super Cycle” is bound to go deeper into extra innings and reach new frontiers in un-chartered territory.

February 09, 2006

Masters of Science Fiction

In 1976, Bruce Sterling sold his first science fiction story, "Man-Made Self". Sterling advocated a streetwise revamp of SF, what would later be called "Cyberpunk". Few science fiction writers speak with such passion and clarity about today's world. Here is his speech to the Library Information Technology Association in San Francisco on June 1992, a speech that anticipates many of the issues internet users face today.

"What's important --*increasingly important* -- is the process by which you figure out what to look at. This is the beginning of the real and true economics of information."....That's why the spin-doctor is the creature who increasingly rules the information universe.  Spin doctors rule our attention. I can make a candidate disappear. Watch me pull a President out of a hat. Look!.. Nothing up my sleeve. Presto!". "Spin-doctors are like evil anti-librarians; they're the Dark Side of the Force"... which I guess makes "The Librarian's Spin" kinda ironic, dunit.

His essay on bacteria, which asks readers to imagine that they are thirty feet long, makes you appreciate why giving antibiotics in low doses to livestock is madness.

Other essays, which he describes as "literary freeware," are all highly recommended.

My favourite diamond hard SF writer is Greg Egan, who hails from Perth in Western Australia has a great site with some far out java applets and some cool short stories.

Evangelicals Urge Action on Global Warming

By Alan Elsner, Reuters

WASHINGTON (Feb. 9) - A group of 85 evangelical Christian leaders on Wednesday backed legislation opposed by the White House to cut carbon dioxide emissions, kicking off a campaign to mobilize religious conservatives to combat global warming.

The group which included mega-church pastors, Christian college presidents, religious broadcasters and writers, also unveiled a full-page advertisement to run in Thursday's New York Times and a television ad it hopes to screen nationally. "With God's help, we can stop global warming for our kids, our world and our Lord," the television spot declared.

The campaign by evangelicals coincided with a call on Wednesday by a leading U.S. think tank for the United States to take immediate steps to fight global warming, including working with other nations to reduce greenhouse gas emissions.

The Pew Center for Global Climate Change said in a report that America has waited too long to seriously tackle the climate change problem and spelled out 15 steps the United States could take to reduce emissions it spews as the world's biggest energy consumer and producer of greenhouse gases."This transition will not be easy, but it is crucial to begin now," the Pew Center said. "Further delay will only make the challenge before us more daunting and more costly."

The campaign by the evangelical leaders represented a possible split in President George W. Bush's political base, in which Christian evangelical voters are heavily represented.However, the names of most of the president's most influential Christian political backers were notably absent from the list of signatories joining the campaign. Possibly the best-known signer was Rick Warren, author of the best-selling book, "The Purpose Driven Life."


Specifically, and mirroring a proposal by the Pew Foundation, the leaders called on Congress to pass laws to create a trading system that would spur companies to reduce emissions of carbon dioxide, which scientists say is a major cause of global warming.

One such bill, The Climate Stewardship Act, first introduced in 2003 by Arizona Republican Sen. John McCain and Connecticut Democrat Sen. Joseph Lieberman, would require that U.S. emissions return to their 2000 levels by 2010.The United States, with around 5 percent of the world's population, accounts for a quarter of its greenhouse gases and U.S. emissions rose by 2 percentage points in 2004 alone, according to government figures.

The McCain-Lieberman bill has failed to win passage twice in the Senate, although a majority there did adopt a non-binding resolution to cap emissions. The issue has not come up for a vote in the House of Representatives. The Bush administration opposes imposing mandatory limits and backs voluntary efforts by companies. It has also refused to join the Kyoto Protocol, an international accord signed by the European Union, Japan and most other industrialized nations that sets hard targets for cutting emissions.

The Christian leaders said they were impelled by their faith to launch the campaign out of a growing realization that the threat of global warming was real and that the world's poor would suffer the most. Paul de Vries, president of New York Divinity School, said: "However we treat the world, that's how we are treating Jesus because He is the cosmic glue." The leaders said a poll they commissioned of 1,000 evangelical Protestants showed that two thirds were convinced global warming was taking place. Additionally, 63 percent said the United States must start to address the issue immediately and half said it must act even if there was a high economic cost.

The Pew Foundation also recommended boosting renewable fuel output and providing financial incentives to farmers to spur absorption of greenhouse gas emissions on farm lands. U.S. government weather forecasters reported on Tuesday that the nation's January temperatures were the warmest on record, beating the average for the month by 8.5 degrees Fahrenheit. Two weeks ago NASA scientists confirmed that 2005 was the hottest year ever recorded worldwide.

Found an interesting post on the "cartoons" issue

Its here and worth a read.

February 08, 2006

Gibson's paradox


This is the observation by the economist, J.M. Keynes, that during the period of the Gold Standard, there was a direct correlation between the long-term interest rate (Keynes used the yield on British "Consols") and the general price level. The paradox stemmed from the way it differed from the consensus view that the long-term interest was correlated with the rate of change in prices, i.e. inflation. Under Gibson's Paradox, with a gold standard, a falling price level corresponded with falling real interest rates.
With the gold price fixed, the purchasing power of gold is obviously increasing.

The thinking behind Gibson's Paradox can be transferred into today's world of floating gold prices and fiat money. A rising gold price equates to a falling price level (in terms of gold purchasing power) and lower real interest rates. This makes sense as falling real yields make holding financial assets less attractive, while rising real interest rates increase the opportunity cost of holding gold (which has zero or a minimal yield). In simple terms and outside of a Gold Standard, Gibson's Paradox suggests that the gold price rises as the attraction and confidence in financial/paper assets declines. This was neatly outlined by former Fed Governor, Wayne Angell, in the minutes of an
FOMC meeting in July 1993.

"The price of gold is pretty well determined by us… But the major impact on the price of gold is the opportunity cost of holding the US dollar… We can hold the price of gold very easily; all we have to do is to cause the opportunity cost in terms of interest rates and US Treasury bills to make it unprofitable to own gold".

-Gibson's Paradox is a free market phenomenon. Studies have shown that it was disrupted by government intervention in the gold market after World War 1 and the London Gold Pool in the run-up to the collapse of Bretton Woods. In both of these instances, when government intervention was relaxed, the gold price rose strongly and found its correct market level. Given renewed intervention by governments in the gold market from around 1995, it seems reasonable to expect the same to occur this time.

Our conclusion on what drives the gold market is that the gold price "comes out of hiding" as real yields on financial assets decline and especially as the risk of a financial crisis in terms inflation or deflation rises. As the risk rises, the role of gold as "true" money and a store of value reasserts itself. In essence, gold acts as a barometer of the financial attraction and confidence level of paper money.


"Goldbugs" might be right

Many market commentators are currently bullish on gold, but few as bullish as Cheuvreux, part of Credit Agricole.

The UK-based company recently lifted its 2006 gold price estimate to US$900/oz from US$750/oz in this report. Cheuvreux thinks the gold price could spike to US$2,000/oz, but the reason sounds like a conspiracy theory: that the gold price has been kept low by secret central bank selling designed to preserve confidence in financial markets during periods of uncertainty and keep bond prices up and thereby improve the perception of U.S. monetary policy.


Alan Greenspan referred to the power to manipulate the price of gold. He told the House Banking Committee in July, 1998 that "central banks stand ready to lease gold in increasing quantities should the price rise."

While the notion that western governments would conspire to suppress the gold price has not gained widespread support, Cheuvreux suggests organizations such as GATA (Gold Anti Trust Association) mad "gold bugs" and conspiracy theorists, according to the financial mainstream, have been right all along.

Gold is a store of value, and Cheuvreux says the metal's value soars when yields on financial assets decline and the risk of crisis increase.

Billions of U.S. dollars do seem to be sparking commodity price inflation and Cheuvreux says that gold will eventually skyrocket due to its safe haven status. Sprott Asset Management agrees. "Start hoarding" might turn out to be very good advice.

Peak Oil and the State of the Union

In his State of the Union speech, President Bush said, "America is addicted to oil," and set a goal of replacing 75 percent of the nation's Mideast oil imports by 2025 with ethanol and other energy sources.

Who is he kidding?

Saudi's Ghawar field is close to being in irreversible decline. The Saudis are only managing to maintain current oil production volumes by virtue of a massive seawater injection program that pumps more than seven million barrels of salt water per day into its oil fields. This pumping helps to maintain production pressures in the oil reservoirs, but is also the source of formation damage due to the presence of oxygen and bacteria in the seawater. By 2025, Saudi will still export oil, but far less oil than now and each tanker will be of such value as to require its own armed escort.

United States Peak Oil: Iran and Iraq

Iran is not quite at its production peak, but within 20 years, even the most optimistic estimates forecast that Iran will cease to be a net oil exporter. (This may also have something to do with Iran's desire to develop a nuclear program.) And Iraq? By 2025, Iraq may be an oil exporter, not to mention an eastern province of Iran. But considering the looming and inevitable decline in daily world oil production, who will be able to afford whatever gets exported? (Hint, do you speak Chinese?)

The point is, on the other side of Peak Oil, the United States will be fortunate to receive any oil at all from the Mideast, let alone the Bush goal of only 25% of current (or forecasted) imports. The planners, who are connecting the dots of the past, and mechanistically extrapolating out into the future with no allowance for Peak Oil, are living in a fantasyland. They are planning, if anything, for the failure of the American economy and the attendant decline of American civilization.

Still, our Mr. President raised the subject. To recall an old phrase: "What does the President know, and when did he know it?" If G.W. Bush is onboard with Peak Oil, he failed to bring up the subject with specificity in his State of the Union speech and give the concept the publicity and credibility that such a speech would merit. Then again, maybe the president saw the movie A Few Good Men. Maybe he is imitating Jack Nicholson's character, a colonel in the Marines, who said, "You want the truth? You can't handle the truth." Maybe, to Mr. Bush's way of thinking, he is just doing the best that he can.

There are people who plan for the long term. There are Japanese companies with 100-year business plans. Can anyone predict what the world will be like in 100 years? No. But these companies, reputedly, intend to be around when the next century rolls over. One way or the other. It might be the founder's great grandchildren, but they will be around. As the saying goes, "It's not the plan, it is the planning." (This is a famous quote from General Eisenhower that is painted on the wall of every staff college of the U.S. military.)

United States Peak Oil: Strategy

Strategic planning, operational planning, tactical planning...they all have their place in this world. It is not that things will follow exactly the plan. It is that you have at least planned something and thought things through. You have identified your challenge. You have considered your "desired end state," and determined which pathways might get you there. There are many roads from which to choose, so ya gotta choose. What are you going to do? You need to marry-up your resources to your action plan. What do you need in order to accomplish your mission? You need to identify what you need, and how you are going to get it. And you have to consider the alternatives along the way.
Few things in this world are more scripted than a U.S. President's State of the Union address. By comparison, the Oscars are a little-old-lady Bingo game down at the fire hall. The entire resources of the U.S. federal government are at the disposal of Herr POTUS. If el Presidente says "X," then the next day there are small armies of federal employees power-pointing "X." If el Pres. says "Y" in the SOTU address, then...you get the picture.

The U.S. Navy, for example, has a 50-year plan. Why? It is because we are building ships with a useful life of 50 years. What will the world look like in 50 years? Beats me; beats anybody. But I bet that you will see U.S. Navy nuclear-powered aircraft carriers floating on the waters of the world. The Navy is inventing its own future, Congress permitting and appropriating. They are designing berthing compartments and kitchen sinks, not to mention nuclear reactors and gear reduction systems and catapult systems, for sailors who will not be born for another 25 years. And when the time comes, these young lads & lassies will be sleeping and washing up, and sailing and shooting airplanes, off of something that some guy designed at a drafting table in Newport News, like, maybe, yesterday.

United States Peak Oil: Reduction of Dependence

Yes, we have been hearing this "We will have to reduce our dependence on foreign oil" B.S. for 30 years. And for 30 years, it was easier to let the daily oil markets dictate that the nation did not have to get serious. What were we going to do, put a $4.00-per-gallon tax on gasoline and kill the driving-based economy? Sorry, guys. Democracy gave you Hamas in Palestine, and Ahmadinejad in Iran, right? Well it also has given cheap gas in the United States for the past century. It was fun while it lasted. Now, Mother Nature is at the door, telling you that it's payback time. Uh-oh.

So, we had our $8.00-per-barrel oil in the 1980s, and our $10.00-per-barrel oil as recently as 1999. We sprawled all over the land, from sea to shining sea, paving over the amber waves of grain, running condos up the sides of purple mountains, and laying out housing tracts where the deer and the antelope used to play. We choke the land with Interstates from the Redwood Forests to the Gulf Stream Waters. This land was made for you and me, huh?

And we plugged a hell of a lot of stripper wells along the way, too. So long to those marginal barrels, at three or five units per day, times 100,000 wells.

Now we see and hear G.W. Bush, who is pals with Matt Simmons and Richard Rainwater (ahem...), saying we are going to reduce out oil imports from the Mideast by 75% in the next 20 years.... Considering the reality of Peak Oil, G.W. Bush's statement is a freaking no-brainer. Finally ("Hallelujah!!"), the Bush Administration gets it right, even if it may well be for all of the wrong reasons.
Wisdom may come late, but it seldom never arrives....
This applies to motive as well. Why alternative energy? Why now? Hmmm. The gears are turning, slowly maybe. But they are turning. I can hear the medulla oblongata, grinding away in the Oval Office. "I cannot really say 'Peak Oil.' The only people who know what it is are a bunch of too-smart people at the margins. Besides, whatever I say, it won't be enough for them. And I have to talk to the center. And we all know how stupid they are out there in the center.

“The proles in Florida cannot even push a stick through a piece of paper on election day. Do I want to lay the Peak Oil gig on them? It will be panic-city. What will happen to the stock markets if the masses wake up and realize that their 401(k) funds are invested in....an economy whose long-term business model is just plain busted.

“Besides, we have 60 Minutes peddling all that crap about how the Alberta tar sands are our salvation. People are confused, and I cannot hold school for the entire freaking country during a one-hour SOTU speech. So, I will say as much as I can get away with, and not get myself assassinated by the...well, I'm not supposed to even think about those people."

Something is going on. Something big.

February 07, 2006

Vonnegut's Blues for America


Persuasive guessing has been at the core of leadership far so long, for all of human experience so far, that it is wholly unsurprising that most of the leaders of this planet, in spite of all the information that is suddenly ours, want the guessing to go on. It is now their turn to guess and guess and be listened to. Some of the loudest, most proudly ignorant guessing in the world is going on in Washington today. Our leaders are sick of all the solid information that has been dumped on humanity by research and scholarship and investigative reporting. They think that the whole country is sick of it, and they could be right. It isn’t the gold standard that they want to put us back on. They want something even more basic. They want to put us back on the snake-oil standard.

Loaded pistols are good for everyone except inmates in prisons or lunatic asylums.

That’s correct.

Millions spent on public health are inflationary.

That’s correct.

Billions spent on weapons will bring inflation down.

That’s correct.

Dictatorships to the right are much closer to American ideals than dictatorships to the left.

That’s correct.

The more hydrogen bomb warheads we have, all set to go off at a moment’s notice, the safer humanity is and the better off the world will be that our grandchildren will inherit.

That’s correct.

Industrial wastes, and especially those that are radioactive, hardly ever hurt anybody, so everybody should shut up about them.

That’s correct.

Industries should be allowed to do whatever they want to do: bribe, wreck the environment just a little, fix prices, screw dumb customers, put a stop to competition, and raid the Treasury when they go broke.

That’s correct.

That’s free enterprise.

And that’s correct.

The poor have done something very wrong or they wouldn’t be poor, so their children should pay the consequences.

That’s correct.

The United States of America cannot be expected to look after its own people.

That’s correct.

The free market will do that.

That’s correct.

The free market is an automatic system of justice.

That’s correct.

I’m kidding.

And if you actually are an educated, thinking person, you will not be welcome in Washington, DC. I know a couple of bright seventh graders who would not be welcome in Washington, DC. Do you remember those doctors a few months back who got together and announced that it was a simple, clear medical fact that we could not survive even a moderate attack by hydrogen bombs? They were not welcome in Washington, DC.

Even if we fired the first salvo of hydrogen weapons and the enemy never fired back, the poisons released would probably kill the whole planet by and by.

What is the response in Washington? They guess otherwise. What good is an education? The boisterous guessers are still in charge – the haters of information. And the guessers are almost all highly educated people. Think of that. They have had to throw away their educations, even Harvard or Yale educations.

If they didn’t do that, there is no way their uninhibited guessing could go on and on and on. Please, don’t you do that. But if you make use of the vast fund of knowledge now available to educated persons, you are going to be lonesome as hell. The guessers outnumber you – and now I have to guess – about 10 to one.

I’m going to tell you some news.

No, I am not running for President, although I do know that a sentence, if it is to be complete, must have both a subject and a verb.

Nor will I confess that I sleep with children. I will say this, though: My wife is by far the oldest person I ever slept with.

Here’s the news: I am going to sue the Brown & Williamson Tobacco Company, manufacturers of Pall Mall cigarettes, for a billion bucks! Starting when I was only 12 years old, I have never chain-smoked anything but unfiltered Pall Malls. And for many years now, right on the package, Brown and Williamson have promised to kill me.

But I am now 82. Thanks a lot, you dirty rats. The last thing I ever wanted was to be alive when the three most powerful people on the whole planet would be named Bush, Dick and Colon.

Our government’s got a war on drugs. That’s certainly a lot better than no drugs at all. That’s what was said about prohibition. Do you realise that from 1919 to 1933 it was absolutely against the law to manufacture, transport, or sell alcoholic beverages, and the Indiana newspaper humourist Ken Hubbard said: “Prohibition is better than no liquor at all.”

But get this: The two most widely abused and addictive and destructive of all substances are both perfectly legal.

One, of course, is ethyl alcohol. And President George W Bush, no less, and by his own admission, was smashed, or tiddley-poo, or four sheets to the wind a good deal of the time from when he was 16 until he was 40. When he was 41, he says, Jesus appeared to him and made him knock off the sauce, stop gargling nose paint.

Other drunks have seen pink elephants.

About my own history of foreign substance abuse, I’ve been a coward about heroin and cocaine, LSD and so on, afraid they might put me over the edge. I did smoke a joint of marijuana one time with Jerry Garcia and the Grateful Dead, just to be sociable. It didn’t seem to do anything to me one way or the other, so I never did it again. And by the grace of God, or whatever, I am not an alcoholic, largely a matter of genes. I take a couple of drinks now and then and will do it again tonight. But two is my limit. No problem.

I am, of course, notoriously hooked on cigarettes. I keep hoping the things will kill me. A fire at one end and a fool at the other.

But I’ll tell you one thing: I once had a high that not even crack cocaine could match. That was when I got my first driver’s licence – look out, world, here comes Kurt Vonnegut!

And my car back then, a Studebaker as I recall, was powered, as are almost all means of transportation and other machinery today, and electric power plants and furnaces, by the most abused, addictive, and destructive drugs of all: fossil fuels.

When you got here, even when I got here, the industrialised world was already hopelessly hooked on fossil fuels, and very soon now there won’t be any left. Cold turkey.

Can I tell you the truth? I mean this isn’t the TV news is it? Here’s what I think the truth is: We are all addicts of fossil fuels in a state of denial. And like so many addicts about to face cold turkey, our leaders are now committing violent crimes to get what little is left of what we’re hooked on.

I turned 82 on November 11, 2004. What’s it like to be this old? I can’t parallel park worth a damn any more, so please don’t watch while I try to do it. And gravity has become a lot less friendly and manageable than it used to be.

When you get to my age, if you get to my age, and if you have reproduced, you will find yourself asking your own children, who are themselves middle-aged: “What is life all about?’” I have seven kids, three of them orphaned nephews.

I put my big question about life to my son the pediatrician. Dr Vonnegut said this to his doddering old dad: “Father, we are here to help each other get through this thing, whatever it is.”

Extracted from A Man Without A Country: A Memoir Of Life In George W Bush’s America, (Bloomsbury). 

Have Commodities Become the New Tech Stocks?


Published: February 5, 2006

RETURNING to basics has been a major theme in the markets. If investors in the late 1990's took a bold leap into the future with technology stocks — off a high ledge, as it turned out — they are now embracing age-old economic mainstays like copper, lumber, oil and gold.

Prices for metals such as aluminum, above, are recovering from a slide in the 1990's, which had led companies like Alcoa and Reynolds to merge to improve their finances.

A widely followed benchmark of commodity prices, the Commodity Research Bureau index, reached a record high recently after nearly doubling since late 2001. Shares of companies that supply these materials — gas pipeline operators, miners of industrial and precious metals, forest products concerns — have followed a similar trajectory, but some analysts contend that prices have risen too far, too fast.

"There are probably some areas that offer better prospects" for investors "because commodity price expectations are very high," said Stuart Schweitzer, global markets strategist at J. P. Morgan Asset Management. "I would be surprised if the commodity-type stocks are a top-performing group in 2006."

Commodities, especially industrial ones like copper and lumber, are a bet on economic growth. Mr. Schweitzer expects continued strength in Asian and other emerging markets — a trend that has underpinned commodity prices — but he expects growth elsewhere, especially in the United States, to be more subdued than it was in the last couple of years. "I suspect the U.S. economy will slow down somewhat this year," mired by softness in housing, he said. "If that's right, commodity demand will ease back along with it."

Some fund managers with portfolios that specialize in commodity producers are also beginning to show concern about rapid price gains. While they maintain optimistic long-range outlooks, they express reservations about the near future.

"We're going through a long-term recovery from stupid oversold levels," said Fred Sturm, who manages the Ivy Global Natural Resources fund. "Prices of many of these commodities were unsustainably low." In the late 1990's and early 2000's, he pointed out, gold and oil traded at nearly 20-year lows after having fallen by more than two-thirds.

The depressed prices helped to force commodity producers to merge — Alcoa and Reynolds in aluminum, for example, and Exxon and Mobil in energy — and to take other steps to improve their finances. That drove the first move in what he expects to be a three-stage rally in commodity markets.The last stage, he predicted, will be "a true scarcity phase when Mother Nature slaps us in the face and grabs our attention and tells us we're running out of commodities like oil when people keep wanting more."

But that's well in the future, Mr. Sturm said. Right now, "we're in a big fat middle phase where commodity prices are expected to remain above their average ranges but will not continue to trend higher," he said. "We expect them to modify from recent levels in energy and in some of the metals, including copper."

He described his view of commodity stocks during this stable period as "persistent but moderated bullishness" and said valuations "are still very attractive, even if earnings don't continue to grow at the same supercharged pace" as in recent months.A bit more than half of Mr. Sturm's fund is invested in energy suppliers, including ChevronTexaco, Thai Oil and Massey Energy, an American coal mining company. For the last six months, he said, he has been allocating more of the fund's $2.5 billion in assets to producers of precious metals as a play on growth in developing markets.

"Gold remains a form of money, and in much of the emerging world where they don't trust what comes out of the A.T.M. machine, people may buy an extra gold bangle and store it as money," Mr. Sturm said. He said, too, that energy producers in the Middle East and elsewhere were prone to buying gold with surplus cash, of which they have plenty these days.His bet on precious metals is also a hedge against unforeseen negative events. "Gold is the best form of insurance when you're not sure what you're insuring against," he explained. Among the miners of precious metals in his portfolios are Buenaventura in Peru and Impala Platinum in South Africa.

John Hill, an analyst at Citigroup, says he also thinks that the rally in gold has further to go. He has told clients that prices have continued to climb against an economic backdrop often associated with weakness for the metal, including rising interest rates, controlled inflation and a stronger dollar. 

"We continue to be positive on gold," he wrote, citing "healthy underlying supply-demand fundamentals in the form of Indian fabrication, Chinese retail investment and recycled Middle Eastern petrodollar flows."

Citigroup's analysts have buy ratings on Newmont Mining and Barrick Gold and they are neutral on another large North American producer, Placer Dome. They also recommend buying Alcoa, United States Steel and the specialty steel maker Nucor. Other prominent components of Mr. Sturm's portfolio are Aracruz Celulose and Suzano, the Brazilian pulp and paper companies; Nalco, an American water treatment company; and Companhia Vale do Rio Doce, or CVRD, a Brazilian miner of base metals.

Mr. Sturm highlighted one segment — chemical making — that benefits when prices of other commodities fall. Energy is a major cost in chemical production, and with energy prices due to moderate, in his opinion, the chemical makers could thrive.

He is especially optimistic about suppliers of industrial gases. "Companies may enjoy stronger profitability and an ability to pay down debt" for the next two years as prices increase for the gases they manufacture, he said. Shares of companies like Praxair, Air Liquide and Air Products and Chemicals "are more attractive than they may appear." The outlook for Praxair appears so bright that one investor who seldom buys commodity producers, Rick Drake, co-manager of the ABN Amro Growth fund, keeps it in his portfolio.

Mr. Drake shuns commodity stocks. "They tend to be cyclical companies," he said, "and our focus is on consistent, sustainable growth through all parts of the cycle."

"They do well when prices skyrocket," he added, "then eventually someone comes along and builds up supply, the price comes down and companies get hurt."

Praxair's performance is not nearly as volatile, he said. It is a basic materials company producing hydrogen, and Mr. Drake expects its use to expand. "The hydrogen business has been real strong because of oil," he said, "not because oil prices are higher, but because environmental laws are such that when you get low-grade crude oil, you need more hydrogen to refine it."

Hydrogen also produces efficiencies in steel making, Mr. Drake noted, and is used in clean rooms for, among other things, semiconductor production. "It is more of a play on industrial production" than commodity price inflation, he said, describing Praxair as "a very steady, consistent growth company."

STEADY growth is desirable, but investors are often willing to take a chance on companies with more volatile earnings streams if they believe they can catch the upswing. Gil Knight, a senior portfolio manager at Gartmore, contends that the rally in commodity prices is robust enough to warrant significant exposure to the sector, although he also worries that prices may have moved ahead too fast.

Mr. Knight has long held shares of oil drilling and exploration companies, such as Halliburton, Ensco International, Southwestern Energy and Range Resources, but he warned against following his lead.

"I wouldn't buy any of these stocks up here," he said. "They're in nosebleed territory." Still, he said, "in terms of percentage gains versus other industries, I don't think they're going to do as badly as people think."

He finds greater opportunity in other industries. He said he added to his position in Freeport-McMoRan Copper and Gold in January, when the stock dipped slightly amid allegations that the company had inappropriate ties to the Indonesian military. Its shares have risen about 50 percent in the last six months.His other favorites include Joy Global, a manufacturer of mining equipment that he called "a fantastic little company," and two suppliers of cement and other basics, Florida Rock and Vulcan Materials.

He agreed that commodity prices would be supported by strength in emerging economies. "If you pay attention to growth," Mr. Knight said, "you have to stick with energy stocks and probably some commodity stocks this year."

February 04, 2006

Sympathy for the devils..

The puzzle regarding the source of the mysterious cancer killing Australia's Tasmanian devils has been solved, it is a cell line without sex chromosomes and the cancer cells are transferred between devils when they fight. A big shame, devils fight for fun, fight for food and males must fight and defeat their prospective mates, who will then allow themselves to be dragged off for mating. They sound absolutely terrifying. The world's largest carnivorous marsupial is the size of a small dog and can weigh up to 12 kg. On the island state of Tasmania they are the dominant predator, but over the past three years the facial cancers have cut some population groups by 85%.

The population of the Tasmanian devil, Sarcophilus harrisii, peaked at 200,000 in 1996; the cancer may kill two thirds of the carnivorous inhabitants by 2006.The disease spread throughout the eastern and central parts of Tasmania over the last two years; the tumours  grow so large they block the animals' eyesight, hearing or mouth and unable to feed, they starve to death.

Australians are isolating healthy animals, but only a vaccine can save the vast majority of the devils.

February 01, 2006

Ted Butler on the Silver EFT

What about silver? Well, if an ETF bought the same percentage of annual mine production in silver as it did in gold, then the number would be 75 million ounces out of a current silver mine production of 600 million ounces. While I don’t think that there are 75 million real ounces available south of $20 per ounce, that’s only one method of calculation. Another method would be by comparing the dollar amounts in the gold ETFs and extrapolating what silver ETF investment dollar demand might be. Here, one quickly comes to hundreds of millions of ounces of new silver demand. There is as much likelihood that many hundreds of millions of ounces of silver could be bought by the silver ETF south of $100 an ounce, as me starting a Silver Users Association fan club.

I ask you to consider something else. More than 13 million ounces, or more than 400 tons, or almost $7 billion worth of gold have been bought by the gold ETFs in a little over a years’ period of time, resulting in a 25% increase in the price of gold. This ETF buying, of course, is in addition to all the regular demand, from jewelry to regular coin and investment buying, by individuals, funds and central banks. How could gold not have gone up in price with the sudden introduction of the massive buying by the ETFs?