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April 30, 2006

Follies Video "Every Breath You Take" a Cult Hit with Financial Media

April 28, 2006

The cast and producers of the Follies’ video “Every Breath You Take” were featured on CNBC’s Power Lunch today, as appreciation of the small masterpiece continued to spread over the Internet and through the media.

In his starring role in the student revue as Dean Glenn Hubbard, student Michael O’Rorke lip-synched a creatively worded spoof version of The Police pop hit to Chairman Ben Bernanke of the Federal Reserve Board. Outgoing GBA president Cabe Franklin provided the vocals.

The video got its nationwide release on April 25 when it was featured on CNNMoney.com’s EyeOpener newsletter. It has also appeared in the Washington Post and on CNN.

What was the price of gold then

Whether as the basis for the monetary unit of a country, or in its role in comparison to the currency price of silver, the price of gold has long been a subject of great interest to both the scholar and the general public. Below are five series for determining the value of gold historically:

  • British Official Price for the years 1257 to 1945
  • U.S. Official Price for the years 1786 to 2001
  • New York Market Price for the years 1791 to 1998
  • Gold/Silver Price Ratio for the years 1687 to 1998
  • London Market Price for the years 1718 to 2001
  • April 28, 2006

    Stay Long Commodities

    Will there be commodity class corrections ahead? Sure, and some may be quite violent. But at least for now, we'd continue to view these as buying opportunities as we believe the Fed and the central bankers are trapped. They are trapped in a set of circumstances they themselves spawned. Unwilling to allow prior period misallocations of capital (stock and housing bubble) to reconcile themselves, they have implicitly committed to facilitating ever larger amounts of liquidity support to the financial markets and theoretically real economy. But it seems to us that they have worked themselves into a corner now being that the harder they push on the liquidity accelerator, the harder they will have to yet push in the future to offset the real world inflationary costs of commodity prices their hedge, prop desk and momentum trading former friends are now supporting with the very liquidity the Fed creates in the first place. The veritable Catch-22? As the data above tell us, this liquidity is now squarely finding its way into the commodity complex and that process is accelerating. Can it continue on forever? Of course not. We continue to believe that US consumers will slow ahead, especially given our viewpoint that US household financial well being is negatively correlated to commodity prices, but anticipate that the Fed will ultimately panic and up the liquidity creation ante even further as they have in the past out of fear as consumer slow, again, playing right into the expectant hands of the financial sector who has been conditioned time and again to expect this very response from the FOMC. Who is the best friend of the current commodity bull, who is for now the longer term supporter of this trend, and who in public refuses to acknowledge what is plain for the entire planet to see in terms of forward inflationary pressures? The Fed and the US credit markets. Who else? Until this changes, stay long assets that benefit from inflationary trends, particularly those assets that have not already been significantly levered. Some day the Fed will change tactics. Some day they will realize the speculative financial community has played them for the fool. But we're not their yet. For now, the hedge, prop desk and momentum trading crowd are betraying their liquidity benefactors out of natural self interest as they pile into hard assets and hard asset related investments. We can only believe the Fed and their global central banking brethren are watching this in horror. Paralyzed and reverting to the only trick left in their bag - liquidity facilitation. But after all, the hedge, prop desk and momentum traders are only doing what the Fed has taught them to do for literally years now - put the Fed into a box of being forced to create and facilitate ever larger amounts of liquidity and credit. The financial sector servant of old has now assumed the role of master. You better believe it's different this time.

    To bring the dollar down a little, let Russia and Iran price oil in euros

    From Russia, you might say, with love. This weekend, Alexei Kudrin,
    Russia's finance minister, dropped a bombshell in Washington.

    Attending the annual meetings of the World Bank and International
    Monetary Fund, Kudrin caused his American hosts discomfort by openly
    questioning the dollar's pre-eminence as the world's "absolute"
    reserve currency.

    The greenback's recent volatility and the yawning US trade
    deficit, "are definitely causing concern with regard to its reserve
    currency status," he said. "The international community can hardly
    be satisfied with this instability."

    Kudrin's intervention coincided with another meeting, also in
    Washington, of finance ministers and central bankers from the Group
    of Seven - which doesn't include Russia.

    Top of the agenda: the effect of ever-rising oil prices on inflation
    and interest rates.

    G7 countries are worried the spiraling price of crude -- which
    closed at $72.79 a barrel on Friday and which has now trebled in
    three years -- could inflict real economic damage. The US Federal
    Reserve, in particular, has been forced to take drastic action --
    raising interest rates 15 times since June 2004 to keep inflation in

    Given that fragility, it is significant that Kudrin is now wondering
    aloud if the long-standing dollar hegemony can last. For him to do
    so is to highlight that America is vulnerable should that status be
    lost. That's because Russia, with its awesome oil and gas reserves,
    could kick-start a challenge to the dollar's supremacy.

    Most nations stockpile their foreign exchange holdings in dollars.
    The US currency accounts for more than two thirds of all central
    bank reserves worldwide.

    This reserve status means that the dollar is constantly in demand,
    whatever the underlying strength of the US economy.

    And now, with massive trade and budget deficits to finance, America
    is increasingly reliant on that status. The unprecedented weight of
    US liabilities means a threat to the dollar's dominance could result
    in a currency collapse, plunging the world's largest economy into

    That won't happen immediately. The dollar has sat astride the globe
    for some time now -- in fact, for most of the last century. But this
    statement from Russia -- a country of growing financial and
    strategic significance -- still caused the dollar to slide. It also
    fuelled speculation that central banks could increasingly diversify
    their holdings away from dollars.

    Kudrin's statement followed news that Sweden has cut its dollar
    holdings, from 37 per cent of central bank reserves to 20 per cent,
    with the euro's share rising to 50 per cent. Central banks in some
    Gulf states have also lately mooted a shift into the euro. Such
    sentiments helped push the dollar to a seven-month low against the
    single currency last week.

    But Russia's intervention will have raised eyebrows in Washington
    because the backbone of the dollar's reserve currency status -- the
    main guarantee that status continues -- is the fact that oil is
    traded in dollars. And that is something the likes of Kudrin can
    directly affect.

    For historic reasons, the dollar remains the
    world's "petrocurrency" -- the only currency for the settlement of
    oil contracts on world markets. That makes the EU and Russia
    dependent on it. But with central banks switching to euros, the
    logical next step would be for fuel-exporting countries to start
    quoting oil prices in euros too.

    The EU is Russia's main trading partner. More than two thirds of
    Russia's oil and gas is exported to the EU. That makes Russia a
    strong candidate to become the first major oil exporter to start
    trading in euros. Such a scenario, in recent years, has become
    theoretically possible. But now, with these latest comments, Kudrin
    has thrust that possibility into the open.

    The G7 meeting was dominated, of course, by concern over Iran's
    nuclear programme. The threat of military action against Iran,
    itself a major crude exporter, is one reason oil prices are now
    testing record highs.

    It is worth noting that Tehran has ongoing plans to set up an oil
    trading exchange to compete with New York's NYMEX and with London's
    International Petroleum Exchange. In the light of Kudrin's comments,
    it is significant that the Iranians want to run their oil bourse in
    euros, not dollars.

    Were the Iranians to establish a Middle-East based euro-only oil
    exchange, the dollar's unique petrocurrency status could unravel.
    That, in turn, would threaten its broader dominance -- which, given
    America's groaning twin deficit, could seriously hurt the US economy.

    Some cite this as the real reason the US wants to attack Iran: to
    protect the dollar's unique position. I wouldn't go that far, but
    the prospect of a non-dollar oil exchange in Tehran is certainly an
    aggravating factor.

    The opening of Iran's new oil exchange has recently been delayed.
    But having spoken with numerous officials in Tehran, and western
    consultants who've been working with the Iranians for several years,
    I think it will go ahead. The exchange entity has already been
    legally incorporated in Iran and a site purchased to house
    administrative and regulatory staff.

    The reality is that as long as most of Opec's oil -- read Saudi
    Arabia -- is priced in dollars, the US currency will retain its
    hegemony. But the opening of an oil bourse in Tehran, which now
    looks likely, will signal at least tacit Saudi consent for euro-
    based oil trading. The US knows this, which is why it is nervous
    about the dollar's status being questioned.

    From the G7's fringe, Kudrin has now touched this raw nerve. This
    weekend's meetings have been dominated by questions of global
    financial imbalance - in particular, America's huge deficits.

    Kudrin's missive comes as central bankers, and currency dealers,
    start to conclude the only way to resolve the massive US external
    deficit is a somewhat weaker US currency. As the IMF itself warned
    yesterday, a "substantial" dollar decline may be needed.

    One way to bring that about would be for the euro to enter the
    global oil trading system. This is unlikely to happen soon. It might
    not happen at all. But the idea is now not only realistic but firmly
    on the table in Washington. Perhaps not with love, but it was placed
    there by the Russians.

    No, It's Not Anti-Semitic

    By Richard Cohen
    Tuesday, April 25, 2006; A23


    During the Jim Crow era, many American communists fiercely fought racism. This is a fact. It is also a fact that segregationists and others often smeared civil rights activists by calling them communists. This technique is sometimes called guilt by association and sometimes "McCarthyism." If you think it's dead, you have not been following the controversy over a long essay about the so-called "Israel Lobby."

    On April 5, for instance, The Post ran an op-ed, "Yes, It's Anti-Semitic," by Eliot A. Cohen, a professor at the John Hopkins School of Advanced International Studies and a respected defense intellectual. Cohen does not much like a paper on the Israel lobby that was written by John Mearsheimer of the University of Chicago and Stephen Walt of Harvard University. He found it anti-Semitic. I did not.

    But I did find Cohen's piece to be offensive. It starts by noting that the paper, titled "The Israel Lobby and U.S. Foreign Policy," had been endorsed by David Duke, the former head of the Ku Klux Klan. It goes on to quote Duke, who, I am sure, has nodded his head in agreement over the years with an occasional piece of mine, as saying the paper is a "modern Declaration of American Independence." If you follow Cohen's reasoning, then you would have to conclude that David Duke and the Founding Fathers have something in common. I am not, as they say, willing to go there.

    Unfortunately, Cohen's piece is not unique. The New York Sun reported on its front page of March 24 an allegation from Alan Dershowitz that some of the quotes from the Israel lobby paper "appear on hate sites." Maybe they do, but Mearsheimer and Walt took those quotes (about press coverage of Israel) from a book written by Max Frankel, a former editor of the New York Times. To associate Mearsheimer and Walt with hate groups is rank guilt by association and does not in any way rebut the argument made in their paper on the Israel lobby.

    There is hardly a stronger, more odious, accusation than anti-Semitism. It comes freighted with more than a thousand years of tragic history, culminating in the Holocaust. The mere suggestion of it is enough for any sane person to hold his tongue. Yet this did not stop the respected German newspaper editor Josef Joffe from stating in the New Republic that the lobby paper "puts 'The Protocols of the Elders of Zion' to shame." He is referring to the most notorious anti-Semitic text of all time. My friend Joffe is in dire need of a cold compress.

    My own reading of the Mearsheimer-Walt paper found it unremarkable, a bit sloppy and one-sided (nothing here about the Arab oil lobby), but nothing that even a casual newspaper reader does not know. Its basic point -- that Israel's American supporters have immense influence over U.S. foreign policy -- is inarguable. After all, President Bush has just recently given Israel NATO-like status without so much as a murmur from Congress. "I made it clear, I'll make it clear again, that we will use military might to protect our ally Israel," Bush said. This was the second or third time he's made this pledge, crossing a line that previous administrations would not -- in effect, promulgating a treaty seemingly on the spot. No other country gets this sort of treatment.

    Israel's special place in U.S. foreign policy is deserved, in my view, and not entirely the product of lobbying. Israel has earned it, and isn't there something bracing about a special relationship that is not based on oil or markets or strategic location but on shared values? (A bit now like Britain.) But I can understand how foreign policy "realists" such as Mearsheimer and Walt might question its utility and not only think that a bit too much power is located in a specific lobby but that it is rarely even discussed. This may be wrong, but it is not (necessarily) anti-Semitic. In fact, after reading the Mearsheimer-Walt paper, the respected Israeli newspaper Haaretz not only failed to discern anti-Semitism but commended the paper to its readers. "The professors' article does not deserve condemnation," Haaretz stated in an editorial.

    An abridged version of the Mearsheimer-Walt paper was published by the London Review of Books and is available online at http://www.lrb.co.uk/ . Read it and decide for yourself whether it is anti-Semitic. Whatever the case, their argument is hardly rebutted by purple denunciations and smear tactics. Rather than being persuasive, Mearsheimer and Walt's more hysterical critics suggest by their extreme reactions that the duo is on to something. These tactics by Israel's friends sully Israel's good name more than Mearsheimer and Walt ever could.


    April 27, 2006

    Has Peak Gold Arrived? Lessons From The Peak Oil Debate


    Roland Watson (The New Era Investor) submits: As someone who has kept track of the “Peak Oil” movement for a few years now, it comes as no surprise that oil prices have risen nearly six fold since they hit rock bottom in the late 1990s. Does this mean Peak Oil has already arrived? Not necessarily, but we note that a final peak in global oil production needs to be preceded by a continual decrease in excess crude oil production capacity. When capacity reaches zero, then Peak Oil arrives. That capacity has been dropping now for several years.

    But what can that current debate about oil teach us about gold? Gold, like oil, has been continuously rising in price for five years. Admittedly, its performance has been poor compared to oil, but does this price mechanism also indicate the mining equivalent of reducing “excess spare capacity” and is it also a prelude to “Peak Gold”? My conclusions led me to believe that these two commodities are similar in terms of a Hubbert’s Peak analysis and in terms of the effects of a peak in global production.

    Firstly, Peak Oil based on Hubbert’s theory of oil production versus reserves states that production goes into decline at about the halfway point of remaining reserves. How does this play out for gold? Based on the United States Geological Survey’s 2006 summary for gold, about 152,000 tonnes of gold has been mined out of the ground since man first dug out those shiny yellow nuggets.

    Furthermore, the USGS estimates a remaining reserve base of 90,000 tonnes. So, from the point of view of peak being the halfway point of reserves, gold should have peaked at a remaining reserve base of 121,000 tonnes (152,000 plus 90,000 divided by 2). When was this the case? Backtracking 31,000 tonnes of global mining output gives us the year of 1993.

    However, a look at the graph below of global mining production shows that gold output merely dipped in 1993 as recession hit the Western nations and then resumed a climb to a new high in the year 2000 (which has not been exceeded since). Now, despite climbing gold demand, mine output has been in decline since then.


    Does this imply 2000 was the global peak in gold production? That would mean that out of a 4000-year time range of gold production, we have a seven-year error in estimating the peak, which doesn’t look so bad after all!

    But we have to understand that just like oil reserve figures, figuring out how much gold has ever been mined and how much remains under the ground in an inexact science. What we can be sure of is that the numbers we are using have never been more accurate as man’s knowledge of the earth has increased.

    Another evidence of a commodity production peak is falling supply in the face of rising prices and demand. In a free market, supply should increase to fulfill demand or demand has to fall. For some years now, the difference between new mine output and demand has been filled by scrap recycling and above ground stockpiles. However, this is where the peak argument gets contentious as the 1990s cutback in exploration is given as the explanation for the recent decline in production.

    A similar argument is given to partly explain the tightness in oil supplies today. Oil plummeted from $25 to $10 a barrel between 1996 and 1998. Exploration budgets were cut and we are apparently suffering the consequences today. Okay, perhaps, but that argument is beginning to wear a bit thin after seven years and prices still at all time highs. Likewise with the production of gold, how long does it take to re-open uneconomic mines and get new ones up and running? Seven years and counting and once again prices are still at multi-decade highs.

    But perhaps the most important warning sign of a commodity peak are major producing countries individually peaking before the overall global peak. In the case of oil, the USA, China, Britain, Norway and Mexico amongst a host of others are at or past their national peak of oil production. We only await the Middle East countries and Russia to join them and complete the picture.

    In the world of gold producing countries the picture is interesting if we examine a chart produced by the World Gold Council. If the reader clicks to that page and scrolls halfway down they will observe the multi-colored graphics for each major country and region.

    In summary, South Africa peaked in the 1970s at 1000 tonnes (yet is still the main producer). The USA peaked in 1998 at 366 tonnes while Australia peaked in 1997 at 314 tonnes. Canada peaked in 1991 at 177 tonnes and Brazil in 1982 at 200 tonnes and so on. These example regions when combined currently produce 40% of the world’s gold. If this 40% declines at 5% per annum then the other 60% has to increase production by 3% just to keep production flat. This is not a pretty picture - unless you hold gold.

    Just like oil, the relatively few “giants” of gold production are being replaced by a host of smaller “minnows”. Just like oil, gold explorers are finding less gold in lower grades of quality. In terms of oil, the gold Ghawars and Cantarells have long been discovered and exploited. It is now basically a mopping up operation at the edges of exploration.

    It seems to me that Peak Gold may well have arrived. When Peak Oil arrives as well, then Peak Gold will be confirmed because increasingly higher energy costs will make many mines uneconomic and gold above ground will become far more expensive than gold shut in underground. Unless, of course, gold vaults into the thousands of dollars to offset energy costs!

    This is what we call the “New Era” of investment. It is an era when hard assets will no longer be taken for granted and seen as cheap and easily accessible. They will become rarer and harder to extract and will remain so for decades to come.

    April 26, 2006

    A Long Time Coming

    By: Theodore Butler

    It has been almost eight months since I’ve been able to write about a dealer short-covering clean out in silver. It seemed like it took forever. No matter how long it has taken, the good news to the blasting to the downside we have just witnessed is that the dealers (including Mr. Big) have used the sell-off as an opportunity to buy back a large number of their shorts. Actually, it’s a little more involved than that; the dealers created the sell-off by collusively pulling their bids on the decline. (If you’re not clear on that, please read some of my previous articles.)

    Now the question becomes, is it done? Have we reached a low risk buy point? I think so, but with the tremendous volatility I can’t say it’s only dimes to the downside, the way I could at 4 or 5 or 6 dollar mark (although it may be). But I can say that there are many, many dollars to the upside, courtesy of a host of reasons not contemplated a few years ago, including the growing potential awareness of the real silver story and the prospective ETF.

    I also get the feeling, whether we have seen the bottom of this silver sell-off or not, that the dealers will be very reluctant to sell the next rally, when it comes, which I think is soon. This should free the price dramatically. I say this because I think the dealers have been taught a lesson they will not soon forget. Most of you know that the lessons you have learned in life the hard way, through adversity, are those that are most obeyed. The dealers, likewise, have suffered heavy losses as a result of the 8 month silver rally and are, in fact, covering at substantial loss for the very first time in decades. I think they are more concerned with closing out their shorts and eliminating continued exposure to the upside, than they are with the losses they have booked. I think they will be reluctant to put their heads back into the lion’s mouth by going short again.

    There are a number of good things related to the dealer silver short covering. In particular, the very recent decline in silver relative to gold, may have created a special opportunity for real gold investors who hold little or no real silver. As regular readers are aware, I have long suggested that gold only investors switch some of their gold holdings to silver (assuming no fresh funds were available for silver purchases). This is no way implied that I thought gold’s price was surely headed lower, but rather that silver would outperform gold, handily, in the future. I still feel that way and the recent gold catch-up to the silver price should give such gold only investors another good switch point.

    Although it may appear that I am suggesting doing a gold/silver ratio trade on a leveraged basis, that is not the case. I am still suggesting a cash only, fully paid for position in real silver, only with the suggestion that if one does not have cash, that the gold be the source for raising the cash. The rational for my suggestion lies in the fact that the strong rise in the price of gold over the past few years allows gold only investors the chance to buy silver at, effectively, single digit prices, compliments of the gold price rise. What matters most is what will prevail in the future and, clearly, I am of a mind that sees much higher silver prices relative to gold. After all, we are running out of silver, not gold.

    Now I would like to present an article by my friend Israel Friedman. Even though I have known him for almost 30 years, and we discuss silver every single day, I have always been able to learn something new from Izzy. I hope you have the same experience. I will offer some comments following his article.


    Crazy Izzy

    By Israel Friedman

    Before I concentrate and write about physical silver, I ‘d like to congratulate Ted Butler on the extremely good achievement he has accomplished with the articles he has written on silver. Even though he says he considers me his mentor and teacher, I must confess I think I have learned more from him. I can’t think of one important issue in silver that he hasn’t introduced and it bothers me that others steal from him.

    We can say that today many investors are very happy that they bought silver and in my private opinion those that buy today at current prices will be rewarded also. Many people have asked me where we are in the silver baseball game. I say to them that we are in the middle of the first inning and the first inning is going to end when silver prices will be at 23 to 25.

    Before you invest in silver you have to do research and decide by yourself is Crazy Izzy right, or the rational Ted Butler or the naked shorts.

    I can give you only my opinion and tell you that silver was never priced at its real value. The price is determined on the COMEX exchange and for them they trade numbers, and at any number or price they sell you a contract, and in the last 20 years they sold naked hundreds of millions of ounces and have made billion of dollars.

    You have to ask a legitimate question why the price on the COMEX doesn’t reflect true value? It is very simple – 90% of the mining companies are public and for them silver is just another product and they sell it only to survive and to make enough money to have good salaries, benefits, and to be reelected as directors.

    If these mining companies were in private hands with the knowledge of rarity and deficit of silver, today prices would be not less than $ 250. No real owner sells merchandise for less than fair value without a motivation.

    Crazy Izzy thinks that they minimum value of silver today is $600. Why $600? The answer is very simple – if the market can pay $600 for an ounce of gold when world stocks are close to 5 billion ounces, why the value of silver should be less with world stocks of half a billion ounces?

    I can give you more and more examples, but the most important thing is don’t invest in silver if you don’t think big like me. You can only make big, if you think big.

    If you decide to invest in silver or you have invested already, you have different ways to invest. In my opinion, it will not take long that we will start to have shortages in silver and slowly, slowly the price will rise to the real value. Remember today’s real value is $600; tomorrow can be only higher, never lower. Why? Every day we have less stockpile on earth and less reserves in the ground.

    You are going to ask a legitimate question – who is going to pay $600 for one ounce of silver? The answer is that the industrial user and new demand will come by the world jewelry stores who are going to start to sell silver as the main article because of big public demand.


    We have in the world hundreds of thousands of jewelry stores, who will need store inventory of at least 500 ounces per store to satisfy the coming public demand. In addition, we must have sufficient silver in the pipeline for wholesale distribution and inventory turnover by the jewelry stores and the manufacturers. All told we are talking about hundreds of millions of ounces annually in new demand.

    So you will come to the same conclusion like me that physical silver is the place to be. Some people will say it’s better on the COMEX where you have leverage. Maybe today, but in a shortage situation they can change the rules and you will have a paper contract that is worth zero instead of real silver.

    My father taught me that it is better to have one bird in hand than ten on the tree, and what is in your hand is the safest.

    We are coming to a new era when materials and commodities will do well and other assets will do less well. Lately, we are experiencing a rise in all commodity prices and in my opinion we are only in the beginning of rising prices. The only simple answer is that there is not enough materials in the world to satisfy demand for higher living standards by billions of Indians and Chinese.

    In the beginning, you will not feel too much the rising prices of commodities in finished goods. Why? The cost of a product is changing. In the past the cost of raw materials in a finished product was 20% and 80% was labor, profit, etc. In the future we are going to witness a change in the composition of costs in finished goods – 80% will be for raw materials and only 20% for the rest. Why? The labor in China costs only 5% of what labor costs in the US and Europe.

    Taking everything into consideration I can see silver as a commodity in short supply for years to come and prices higher and higher.

    I’m a crazy thinker and don’t copy me – only after you have made your homework.

    Congratulations, Mr. Butler on a fantastic job.



    Izzy Scores Again

    I thank Izzy for his kind words and especially for introducing a completely new concept, the potential coming jewelry demand for silver. While many are waiting for a replay of 1979-80, namely the dumping by households of unwanted silver objects in response to higher prices, Izzy (and I) see it different. Instead of dumping because of higher prices, we see the public actually wanting to acquire silver because of the higher prices. Please allow me to explain.

    First of all, this is not a new idea from Izzy, as I have heard him talk about it for almost 25 years. It’s just that I have never written about it before, although it always made sense to me.

    Let’s face it, the dumping scenario certainly hasn’t begun playing out yet, at all. Silver has more than tripled from its lows, and I have yet to see any evidence that even one teapot or fork has been melted because of the higher prices. You must remember that many commentators were predicting not that long ago that people would be running out of their houses clutching silver trays at 7, 8, or 9 dollars. Or that our ports would be backed up with boatloads of scrap silver from India. How much evidence do you see of that?

    If great numbers of people were selling silver household objects at current prices, I would tend to dismiss what Izzy predicts. (For the record, while he is the smartest man I have ever known, he is not perfect, and has been wrong on occasions. I say this primarily to keep his ego in check.) But I don’t see many selling silver objects, so what Izzy says is more credible.

    The key is human nature. Most of the time, people love to buy bargains in their daily lives, preferring to shop for what they need by price. But when it comes to investments and status items, price considerations often go out the window. At times, higher prices alone actually encourage more buying, witness stock and real estate bubbles, along with minor phenomenon like Beanie Babies or trading cards. This explains the mass mania that develops into bubbles, where people are sucked in only because of the continued expectation of higher prices.

    When silver prices truly explode, people will be drawn into investing in it because of the higher prices. But not just in an investment sense. What Izzy is saying is that there will be new status created about silver as a luxury item in jewelry and household objects. In my opinion, he’s right. Many people love to show off and impress others. There are many who wear a 5 or 10 thousand dollar watch because they want you to know that they can afford it. I’m not passing judgment, mind you, I’m just observing basic human nature.

    With higher silver prices, silver will take on a new respectability. It will no longer be the poor man’s gold. People will desire and wear silver jewelry with pride precisely because silver costs more. People will buy and use sterling silver flatware and display silver objects of art because it is made from an expensive material that is in the news.

    And it’s not just that people will buy silver jewelry and art objects because of higher prices, but that industry must gear up to manufacture and distribute and inventory in order to satisfy demand from the public for a new status symbol. This, as Izzy writes, could involve hundreds of millions of ounces of new silver demand at higher prices.

    As a silver analyst or an investor, the potential of new significant demand at higher prices is something to be considered and monitored. It’s something I know I will be studying. For that I thank Izzy, who’s as crazy as a fox.

    -- Posted 25 April, 2006

    Gold gains weak vis a vis Copper, Zinc and Lead.

    That gold has been so weak relative to cyclical metals tells us three important things. First, that gold's monetary premium has actually SHRUNK over the past year and is now as low as it was in Q4 2000. Second, that most people believe the commodity rally to have almost everything to do with real economic expansion (the China/India growth story in particular) and almost nothing to do with inflation. Third, that the best part of gold's bull market lies in the future because right now hardly anyone perceives a serious inflation problem.

    US federal spending

    Silver and Gold Prices in the German Wiemar Republic

    Hyperinflation: Wiemar, Germany January 1919 to November 1923
    [Expressed in German Marks needed to buy an oz. of ag. or au.]

    Jan. 1919 Silver 12 Gold 170
    May. 1919 Silver 17 Gold 267
    Sept. 1919 Silver 31 Gold 499
    Jan. 1920 Silver 84 Gold 1,340
    May 1920 Silver 60 Gold 966
    Sept. 1921 Silver 80 Gold 2,175
    Jan. 1922 Silver 249 Gold 3,976
    May. 1922 Silver 375 Gold 6,012
    Sept. 1922 Silver 1899 Gold 30,381
    Jan. 1923 Silver 23,277 Gold 372,447
    May. 1923 Silver 44,397 Gold 710,355
    June 5, 1923 Silver 80,953 Gold 1,295,256
    July 3, 1923 Silver 207,239 Gold 3,315,831
    Aug. 7, 1923 Silver 4,273,874 Gold 68,382,000
    Sept. 4, 1923 Silver 16,839,937 Gold 269,429,000
    Oct. 2, 1923 Silver 414,484,000 Gold 6,631,749,000
    Oct. 9, 1923 Silver 1,554,309,000 Gold 24,868,950,000
    Oct. 16, 1923 Silver 5,319,567,000 Gold 84,969,072,000
    Oct. 23, 1923 Silver 7,253,460,000 Gold 1,160,552,662,000
    Oct. 30, 1923 Silver 8,419,200,000 Gold 1,347,070,000,000
    Nov. 5, 1923 Silver 54,375,000,000 Gold 8,700,000,000,000
    Nov. 13, 1923 Silver 108,750,000,000 Gold 17,400,000,000,000
    Nov. 30, 1923 Silver 543,750,000,000 Gold 87,000,000,000,000

    April 25, 2006

    Tehran insider tells of US black ops

    By an Asia Times Online Special Correspondent

    TEHRAN - A former Iranian ambassador and Islamic Republic insider has provided intriguing details to Asia Times Online about US covert operations inside Iran aimed at destabilizing the country and toppling the regime - or preparing for an American attack.

    "The Iranian government knows and is aware of such infiltration. It means that the Iranian government has identified them [the covert operatives] but for some reason does not want to show [this]," said the former diplomat on condition of anonymity.

    Speaking in Tehran, the ex-Foreign Ministry official said the agents being used by the US "were originally Iranians and not Americans" possibly recruited in the United States or through US embassies in Dubai and Ankara. He also warned that such actions will engender "some reactions".

    "Both sides will certainly do something," he said in a reference to Iran's capability to stir trouble up in neighboring Iraq and Afghanistan for the occupying US troops there.

    Veteran US journalist Seymour Hersh wrote in a much-discussed recent article in The New Yorker magazine that the administration of President George W Bush has increased clandestine activities inside Iran and intensified planning for a possible major air attack as the crisis with Iran over its nuclear program escalates.

    Hersh wrote that "teams of American combat troops have been ordered into Iran, under cover, to collect targeting data and to establish contact with anti-government ethnic-minority groups". The template seems identical to the period that preceded US air strikes against the Taliban regime in Afghanistan during which a covert Central Intelligence Agency (CIA) campaign distributed millions of dollars to tribal allies.

    "The Iranian accusations are true," said Richard Sale, intelligence correspondent for United Press International, referring to charges that the US is using the Mujahideen-e Khalq (MEK) organization and other groups to carry out cross-border operations. "But it is being done on such a small scale - a series of pinpricks - it would seem to have no strategic value at all."

    There has been a marked spike in unrest in Kurdistan, Khuzestan and Balochistan, three of Iran's provinces with a high concentration of ethnic Kurdish, Arab and Balochi minorities respectively. With the exception of the immediate post-revolutionary period, when the Kurds rebelled against the central government and were suppressed violently, ethnic minorities have received better treatment, more autonomy and less ethnic discrimination than under the shah.

    "The president hasn't notified the Congress that American troops are operating inside Iran," said Sam Gardiner, a retired US Army colonel who specializes in war-game scenarios. "So it's a very serious question about the constitutional framework under which we are now conducting military operations in Iran."

    Camp Warhorse is the major US military base in the strategic Iraqi province of Diyala that borders Iran. Last month, Asia Times Online asked the US official in charge of all overt and covert operations emanating from there whether the military and the MEK colluded on an operational level. He denied any such knowledge.

    "They have a gated community up there," came the genial reply. "Not really guarded - it's more gated. They bake really good bread," he added, smiling.

    But that is contrary to what Hersh was told by his sources, According to him, US combat troops are already inside Iran and, in the event of air strikes, would be in position to mark critical targets with laser beams to ensure bombing accuracy and excite sectarian tensions between the population and the central government. As of early winter, Hersh's source claims that the units were also working with minority groups in Iran, including the Azeris in the north, the Balochis in the southeast, and the Kurds in the northwest.

    Last week, speaking on the sidelines of a Palestinian solidarity conference, Major-General Yehyia Rahim Safavi, the Iranian Revolutionary Guard Corps (IRGC) commander, sent a warning to the US and British intelligence services he accuses of using Iraq and Kuwait to infiltrate Iran. "I tell them that their agents can be our agents too, and they should not waste their money so casually."

    On April 9, Iran claimed to have shot down an unmanned surveillance plane in the southwestern province of Khuzestan, according to a report in the semi-official Jumhuri Eslami newspaper. US media have also reported that the US military has been secretly flying surveillance drones over Iran since 2004, using radar, video, still photography and air filters to monitor Iranian military formations and track Iran's air-defense system. The US denied having lost a drone.

    This new mission for the combat troops is a product of Defense Secretary Donald Rumsfeld's long-standing interest in expanding the role of the military in covert operations, which was made official policy in the Pentagon's Quadrennial Defense Review, published in February. Such activities, if conducted by CIA operatives, would need a Presidential Finding and would have to be reported to key members of Congress.

    The confirmation that the US is carrying out covert activities inside Iran makes more sense out of a series of suspicious events that have occurred along Iran's borders this year. In early January, a military airplane belonging to Iran's elite Revolutionary Guards went down close to the Iraqi border. The plane was carrying 11 of the Guard's top commanders, including General Ahmad Kazemi, the commander of the IRGC's ground forces, and Brigadier-General Nabiollah Shahmoradi, who was deputy commander for intelligence.

    Although a spokesman blamed bad weather and dilapidated engines for the crash, the private intelligence company Stratfor noted that there are several reasons to suspect foul play, not least of which was that any aircraft carrying so many of Iran's elite military luminaries would undergo "thorough tests for technical issues before flight". Later, Iran's defense minister accused Britain and the US of bringing the plane down through "electronic jamming".

    "Given all intelligence information that we have gathered, we can say that agents of the United States, Britain and Israel are seeking to destabilize Iran through a coordinated plan," Minister of Interior Mustafa Pour-Mohammadi said. This sentiment was echoed on websites such as AmericanIntelligence.us, where one reader commented, "We couldn't have made a better hit on the IRGC's leadership if planned ... sure it was just an accident?"

    Then, in late January, a previously unknown Sunni Muslim group called Jundallah (Soldier of Allah) captured nine Iranian soldiers in the remote badlands of Sistan-Balochistan province that borders Afghanistan and Pakistan. And in mid-February, another airplane crashed just inside Iraq after taking off from Azerbaijan and transiting Iranian airspace. The Iranian Mehr news agency reported that the "passengers on board were possibly of Israeli origin". It added that US troops have restricted access to the site to Iraqi Kurdish officials and that Western media were reporting the passengers aboard as having been German.

    The Iranian government has not sat idly by and just taken these breaches of sovereignty. Early this month, an unidentified source in the Interior Ministry was quoted by the hardline Kayhan newspaper as saying that the leader and 11 members of the Jundallah group had been killed by Iranian troops. Then last Friday, Iranian missile batteries shelled Iranian Kurdish rebel positions inside Iraqi territory. They were targeting a militant group called PJAK that seeks more autonomy for Iran's Kurdish population and has been operating out of Iraq since 1999.

    The former Iranian ambassador argues that in the event that US pressure on Iran continues, "the end of the tunnel" for President Mahmud Ahmadinejad's administration is "weaponization of the [nuclear] technology ... and a military strike".

    "The Americans are pushing Iran to become a nuclear state. Iran just wants to be a supplier of nuclear fuel. But [with their threats] they are pushing it further."

    April 24, 2006

    Statement by G-7 Finance Ministers and Central Bank Governors April 21, 2006


    We, Ministers and Governors, met today and resolutely reaffirmed that openness and globalization are beneficial in promoting economic prosperity and reducing poverty. These benefits are most effectively realized with sound economic management and supportive policies for those whose welfare is adversely affected. We committed to: strengthen economic policies in our countries; work together to remove distortions to the global adjustment process; resist protectionism and promote liberalization of trade and investment including an ambitious outcome from the Doha Development Round; and modernize the international financial institutions.

    The strong global economic expansion continues into its fourth year and the outlook remains favorable, supported by improved macroeconomic policies in many countries as well as benign financial market conditions. Inflation remains contained despite high oil prices and global trade growth is buoyant. Yet risks remain from oil market developments, global imbalances, and growing protectionism. We underscored that global economic adjustment is a shared responsibility.

    We are strengthening the dialogue between oil producers and consumers to further improve market transparency through the release of more complete and timely data on production, consumption and inventories, and for clear reporting of oil reserves. We urge investment in exploration, production, energy infrastructure, and refinery capacity. Investment is crucial and oil producing countries should provide open and secure investment environments to enable market participants to meet pressing needs. We remain committed to greater energy efficiency, conservation, and diversification, which will improve the balance between supply and demand.

    We reaffirm that exchange rates should reflect economic fundamentals. Excess volatility and disorderly movements in exchange rates are undesirable for economic growth. We continue to monitor exchange markets closely and cooperate as appropriate. Greater exchange rate flexibility is desirable in emerging economies with large current account surpluses, especially China, for necessary adjustments to occur.

    We welcomed the IMF Managing Director's Strategic Review to equip the IMF to help countries meet the macroeconomic and financial policy challenges of globalization. We supported the strengthening of IMF surveillance, including through increased emphasis on the consistency of exchange rate policies with domestic policies and a market-based international monetary system and on the spillover effects of domestic policies on other countries. We support a new remit for bilateral and multilateral surveillance by the IMF. An ad hoc quota increase would help better to reflect members' international economic weight. We agreed on the need for comprehensive reform of the IMF, and called on the Managing Director to come forward with concrete proposals for the Annual Meetings in Singapore.

    We reaffirmed the importance of implementing our commitments on development. In that context, we welcomed the decision by the IMF, World Bank, and African Development Bank to implement 100 percent debt cancellation for qualifying countries. We emphasized the importance of avoiding a fresh accumulation of unsustainable debt, of responsible lending by creditors, and of ensuring that recipient countries incur new debt in accordance with the debt sustainability framework. We stressed the need to bolster the fight against corruption so that development assistance effectively promotes growth, and call on the President of the World Bank and other MDB Heads to continue their focus on this issue, bringing forward a strategy in this critical area. Having endorsed the concept of a pilot Advance Market Commitments for vaccines, we call for the additional work necessary to make its launch possible in 2006.

    We reiterated our commitments to combat money laundering and terrorist financing and call on the IMF and the World Bank to collaborate closely with the Financial Action Task Force.

    Finally, we thank Roger Ferguson for his chairmanship of the Financial Stability Forum, and we have asked Mario Draghi to be his successor. ANNEX: GLOBAL IMBALANCES

    We, Ministers and Governors, reviewed a strategy for addressing global imbalances. We recognized that global imbalances are the product of a wide array of macroeconomic and microeconomic forces throughout the world economy that affect public and private sector saving and investment decisions. We reaffirmed our view that the adjustment of global imbalances:

    Is shared responsibility and requires participation by all regions in this global process;

    Will importantly entail the medium-term evolution of private saving and investment across countries as well as counterpart shifts in global capital flows; and

    Is best accomplished in a way that maximizes sustained growth, which requires strengthening policies and removing distortions to the adjustment process.

    In this light, we reaffirmed our commitment to take vigorous action to address imbalances. We agreed that progress has been, and is being, made. The policies listed below not only would be helpful in addressing imbalances, but are more generally important to foster economic growth.

    In the United States, further action is needed to boost national saving by continuing fiscal consolidation, addressing entitlement spending, and raising private saving.

    In Europe, further action is needed to implement structural reforms for labor market, product, and services market flexibility, and to encourage domestic demand led growth.

    In Japan, further action is needed to ensure the recovery with fiscal soundness and long-term growth through structural reforms.

    Others will play a critical role as part of the multilateral adjustment process.

    In emerging Asia, particularly China, greater flexibility in exchange rates is critical to allow necessary appreciations, as is strengthening domestic demand, lessening reliance on export-led growth strategies, and actions to strengthen financial sectors.

    In oil-producing countries, accelerated investment in capacity, increased economic diversification, enhanced exchange rate flexibility in some cases.

    Other current account surplus countries should encourage domestic consumption and investment, increase microeconomic flexibility and improve investment climates.

    We recognized the important contribution that the IMF can make to multilateral surveillance.


    by Bill Bonner

    Economics has been called the "dismal science." But even that is merely fraud and flattery. Economics is dismal, but it isn't science. At its best it is merely voyeurism - peeping in people's windows as they go about their business and trying to figure out what they are doing. At worst, it is pompous theorizing about how to get the schmucks to do better.

    We doubt that you are especially interested in economics, dear reader. We know we are not. But we can't resist a good comedy...or a good opportunity to point and giggle. We keep our eye on economists and politicians the way children watch clowns; we can't wait to see them get whacked in the head or trip over each other.

    But what is amusing is also instructive. Are not clowns people too? Are they not part of human life...human organization...and human economy? Every one of them is driven by the same motors that power everyone else. They want power...glory...money. But how do they get it? Can we not watch politicians and economists and learn something about ourselves?

    One of the many conceits of politicians and economists are that they are somehow out of ordinary. They are godlike, or so they pretend, having no other ambition but to make the world a better place. Neither drink, nor meat, nor false witness cross their lips. They sweat for no material gain...and know no lust - save for the betterment of all mankind. They pass laws...they enact codes and regulations...they jiggle this lever and turn another - as if they were the masters of the whole human race, rather than mere parts of it themselves. Since they float above it all, they are not subject to the normal temptations. The rest of us spend our whole lives like animals - craving profits, mates, status, pride, love, and money like a raccoon searching for a garbage pail without a lid. Unless we are kept in tight cages, who knows what we will do?

    That is why the tabloid press - especially in England - loves the stories of the government ministers having affairs with their secretaries or cheating on their income tax. Who doesn't like to see hypocrisy revealed in public? It is as if the King himself had been caught with his pants down; we gape...and see that he is human, just like the rest of us.

    But thank God there are leaders! Thinkers! Theorists with their "isms" and their rat wire...ready not merely to keep us from hurting one another, but also to give us a sense of moral purpose. It is not enough that we should each seek happiness in our own private way, we must Free the Sudetenland! Abolish Poverty! Make the World Safe for Democracy! We must realize our manifest destiny...and provide liebensraum [living space] for the German people! Full employment! A minimum wage! No humbug left behind!

    We bring this up only to laugh at it.

    In the early 20th century, John Maynard Keynes came up with a new idea about economics. The politicians loved it; Keynes explained how they could meddle in private affairs on a grand scale - and, of course, make things better. Keynes argued that a government could take the edge off a business recession by making more credit available when money got tight...and by spending itself to make up for the lack of spending on the part of consumers and businessmen. Keynes suggested, whimsically, hiding bottles of cash all around town, where boys might find them, spend the money, and revive the economy.

    The new idea caught on. Soon economists were advising all major governments about how to implement the new "ism." It did not seem to bother anyone that the new system was a fraud. Where would this new money come from? And what made anyone think that the economists' judgment of whether it made sense to spend or save was better than individuals? All the Keynesians had done was to substitute their own guesses for the private, personal, economic opinions of millions of ordinary citizens. They had resorted to what Franz Oppenheimer called "political means," instead of allowing normal "economic means" to take their own course.

    The economists wanted what everyone else wants - power, prestige, women (except for Keynes himself, who preferred men). And there are only two ways to get what you want in life, dear reader. There are honest means, and dishonest ones. There are economic means, and there are political means. There is persuasion...and there is force. There are civilized ways...and barbaric ones. The economist is a harmless crank as long as he is just peeping through the window. That is what we do here at The Daily Reckoning. But when he undertakes to get people to do what he wants - either by offering them money that is not his own...by defrauding them with artificially low interest rates...or by printing up money that is not backed by something of real value (such as gold)...he has crossed over the dark side. He has moved to political means to get what he wants. He has become a jackass.

    Keynesian improvements were applied in the '20s - when Fed governor Ben Strong decided to give the economy a little "coup de whiskey" - and later in the '30s when the stockmarket was recovering from the hangover. The results were predictably disastrous. And along came other economists with their own bad ideas. Rare was the man, like Robert Lucas or Murray Rothbard, who pointed out that you could not really improve economic results with political means. If a national assembly could make people rich simply by passing laws, we would all be billionaires, because assemblies have passed a multitude of laws and seem capable of enacting any piece of legislation brought before them. If laws could make people wealthy, some assembly somewhere would have found the magic edicts - simply by chance.

    But instead of making them richer, each law makes them a little poorer. Every time political means are used they interfere with the private, civilized economic arrangements that actually get people what they want. One man makes shoes. Another grows potatoes. The potato grower goes to the cobbler to buy a pair of shoes. He must exchange two sacks of potatoes for one pair of penny loafers. But then the meddlers show up and tell him he must charge three sacks...so that he can pay one in "taxes," to the meddlers themselves. And then he needs to put in an alarm system in his shop, and buy a hardhat, and pay his helper minimum wage, and fill out forms for all manner of laudable purposes. When the potato farmer finally shows up at the cobbler's he is informed that the shoes will cost seven sacks of potatoes! That is just what he has to charge in order to end up with the same two sacks he needed to charge in the beginning. "No thanks," says the potato man, "At that price, I can't afford a pair of shoes."

    What the potato grower needs, say the economists, is more money! The money supply has failed to keep pace, they add. That was why they urged the government to set up the Federal Reserve in the first place; they wanted a stooge currency that would be ready to go along with their plans. Gold is fine, they said, but it's anti-social. It resists new "isms" and drags its feet on financing new social programs. Why, it is positively recalcitrant! Clearly, when we face a war or a Great National Purpose we need money that is willing to stand up and sign on. Gold malingers. Gold hesitates. Gold is reluctant and reticent. Gold is fine as a private money. But what we need is a source of public funding...a flexible, expandable national currency...a political money that we can work with. We need a dollar that is not linked to gold.

    In the many years since the creation of the Federal Reserve system as America's central bank, gold has remained as steadfast and immobile as ever. An ounce of it today buys about the same amount of goods and services as an ounce in 1913. But the dollar has gone along with every bit of political gimcrackery that has come along - the war in Europe, the New Deal, WWII, the Cold War, the Vietnam War, the war on poverty, the war on illiteracy, the New Frontier, the Great Society, Social Security, Medicare, Medicaid, the War in Iraq, the war on terror...the list is long and sordid. As a result, guess how much a dollar is worth today in comparison to one in 1913? Five cents.

    Keynesianism is a fraud. Supply-siderism is a con. The dollar itself is a scam. All were developed by people with good intentions. But these good intentions not only paved the road to Hell, they greased it. There was no point putting on the brakes. Once underway, there was no stopping it.

    Right now, the United States slides towards some sort of Hell. A half-century of deceit has produced a nation that is ready to believe anything...and go along with anything...provided it promises to make them rich. They will be very disappointed when they discover that all the political means they counted on - the phony money, the laws, the regulations, and the wars - have made them poorer. That is when we will really need cages...

    "Nothing in nature is evil," said Marcus Aurelius. Keynes was human. Even Adolf Hitler was a man, a part of nature himself. And the "Evil Empire," was it not created by men too, men who - like economists and politicians - followed their own natural impulses? Adolf may have erred and strayed. But he did so with the best of intentions; he thought he was building a better world. And he had all the "reasons" you could ask for. He could argue all day; "proving" that his plan was the best way forward.

    Not that there weren't arguments on the other side. What were smart people to do? People argued about Keynesianism for many years. Each side had good points. One was convincing; the other was persuasive. It was like a couple arguing in divorce court - the husband forgot to take out the trash and knocked over a vase; the wife ran him over with the family car. "He had it coming," she says.

    What would an observer think? No amount of logic could help him. Both parties made good points. All the judge could do was to fall back on his own deep sense of right and wrong, of proportion...and good taste. "She shouldn't have run him down," he says solomaniacally.

    "Love the man, hate the sin," say the Baptist preachers. They have a useful point. There's no point in hating Adolf, Josef, Ossama...or John Maynard...or any of the other thousands of clowns who entertain, annoy and murder us. They are God's creatures too, just like the rest of us. What they did wrong was what they always do wrong...they all resorted to political means, to get what they wanted.

    We do not hate them; we just hope they get what they deserve.

    Bill Bonner

    The Daily Reckoning

    April 23, 2006

    Special Report: Australia soars on uranium bonanza

    The prospectors of the outback are coining it as nuclear comes back into fashion. By Paul Ham in Sydney
    AUSTRALIAN uranium miners come from tough stock. Bob Johnson’s great-great-great grandfather was a convict named Tom Askew, transported Down Under in 1819 for stealing 16 ducks to feed his starving family in Lincolnshire.
    “He was a church warden, desperately poor. He got himself a 15-year-old wife, they had six kids, and he ended up becoming a gold prospector,” said Johnson, who looked up his ancestor’s records while working for British Coal in the 1980s.

    Almost 200 years later, Askew’s descendant is also a prospector. But Johnson has joined a very different gold rush: he is looking not for gold but for yellow cake — mining speak for uranium ore. Australia has the world’s largest reserves: 40% of known deposits.

    And suddenly, the world desperately wants Australia’s yellowcake. China has just signed an agreement to buy thousands of tonnes, a deal said to be worth £40 billion. The metal will power the 28 new nuclear reactors it plans to build by 2020.

    The Australian deal was very sensitive. China has not signed the nuclear non-proliferation treaty, and the green lobby fears that enriched uranium may be used to make nuclear weapons. But the Australian government has waved aside those concerns. China, it said, has undertaken to use the uranium exclusively for nuclear power.

    China is in good company. India has announced a big investment in nuclear power, with plans to build 24 reactors. Europe, too, now sees it as a cleaner alternative to burning fossil fuels. Tony Blair’s scientific advisers have endorsed nuclear power. Sweden and France have used it for decades to electrify their countries, with no harmful results; and America has restarted its programme, with plans to build several reactors. Even some militant greens, horrified by the greenhouse gases produced by fossil fuels, have accepted the case for nuclear energy.

    The biggest beneficiaries will be Australian uranium miners, who have been extraordinarily quick to grasp this immense opportunity. Dozens of tiny uranium prospectors with little more than a drill bit between their teeth have floated on the Australian stock exchange in recent months.

    Their share prices have soared as “uranium-mania” has gripped local investors, amid analysts’ warnings of a bubble mentality. The believers point to the solid demand, chiefly Chinese, that underpins the industry — the price of uranium has risen from US$7 (£4) a pound two years ago to US$40 today. Some are steering clear, fearing a repeat of the dotcom fiasco: “The whole junior (explorer) situation has gone completely mad at the moment,” said Gavin Wendt, a resource analyst at Fat Prophets, an Australian share-tipping company.

    But the case for uranium is also underwritten by the imminent exhaustion of supplies of enriched uranium taken from obsolete, chiefly Russian, nuclear weapons, which have until recently met demand in Europe and America.

    The Australian federal government has stoked the euphoria, with explicit support from resources minister Ian Macfarlane, who said this month that local uranium miners could be shipping uranium to Asian countries within four years.

    Two of the world’s biggest mining companies, Australia’s BHP Billiton and Britain’s Rio Tinto, are best placed to exploit this opportunity. BHP Billiton owns the vast Olympic Dam mine in South Australia, which has the world’s largest untapped reserves. Rio Tinto, through its subsidiary Energy Resources Australia (ERA), is Australia’s largest exporter of uranium. It owns the Ranger and Jabiluka mines in the Northern Territory. Both companies’ cashflow has surged in recent years due to the global commodities boom.

    But investors are eyeing pure uranium stocks. They include smaller miners and explorers such as Marathon Resources, Summit Resources, Toro Energy, Paladin Resources and Alliance Resources, whose share prices have sizzled in recent weeks. Toro, which listed on March 23, has risen 504% to about $1.30. Paladin has soared 509% over the past year to about $5.40.

    Pure miners have tended to outdo explorers, because the real money is in extracting and selling the ore. But that hasn’t stopped dozens of minnows lining up to entice investors: Giralia is floating two in coming months: U308 and Gladiator Resources. Investors are queuing up; anything with uranium attached to it tends to be heavily oversubscribed.

    Uranium’s return to global favour has vindicated a few doughty Australian pioneers, mostly hard-bitten geologists, who for decades have stayed the course, dismissed the militant green hysteria about global irradiation, and are now set to become very rich indeed.

    Johnson is one of the hardiest of Australia’s uranium barons. The son of an iron-foundry worker, he is a tough, 58-year-old with degrees in geology and computer science. He invented the Maptek three-dimensional mine-planning software used by mining companies around the world. He is a founding director of Curnamona Energy, which has exploration rights over 4,300 square kilometres of the best uranium “paleo-valley sands” of South Australia.

    Curnamona has been a huge favourite with investors, partly because it uses new technology to detect uranium deposits. It was also well advanced. Floated in April 2005, money has since “just walked through the door”, said Johnson. “We saw this boom coming a couple of years ago. Everyone was negative. We realised there was a lot of uranium in the ground.”

    Curnamona, like Toro Energy, is an explorer — it has no assets, as Johnson readily admits. “We’re a speculative company, but we have a very methodical approach.”

    Like many uranium pioneers, he has little time for militant environmentalists. “The green movement has actually delayed the introduction of a safer alternative to coal. By stigmatising uranium, they have actually damaged the environment,” he said.

    Kate Hobbs is the only woman to head an Australian uranium mining company, Hindmarsh Resources, which floated this year to a thunderous reception. Yet she, too, cheerfully admits that her firm is purely an explorer, with no assets.

    Hindmarsh has a licence to explore 14,500 square kilometres in South Australia. The prospect has already attracted a buyer for the tiny company:

    Canada’s Mega Uranium will take control of Hindmarsh in the coming weeks.

    As a result, Hobbs, a 55-year-old mother of three, will be free to pursue her other mining interests. She has 1.5m share options in Hindmarsh, whose share price is at about $1.60 and rising. She speaks scornfully of the “great disservice” done to the environment by green groups that put the brakes on nuclear power.

    Greg Hall, a mining engineer, is a veteran of the uranium sector, with 27 years’ experience of extracting yellow cake and other minerals from the Australian outback.

    Hall, 47, has felt the sharp end of the environmental attack on uranium — he was mining manager of ERA’s Ranger and Jabiluka uranium mines in the Northern Territory at the height of the protests in the late 1990s and early 2000s. He now smiles at the idea of the green movement supporting nuclear power over fossil fuels.

    Between 1987 and 1992 he was responsible for the development and management of underground operations at Olympic Dam, situated in one of the earth’s most inhospitable regions. “When I first went there I lived in a caravan with my wife,” he said. “It was a bit of a shock for her — she worked in the fashion industry.”

    Last month Hall became managing director of the newly floated Toro Energy, an exploration spin-off from two mining companies, Oxiana Resources and Minotaur Exploration. Toro’s goal is to find uranium in an area covering 26,000 square kilometres in the centre of South Australia.

    Alan Eggers, founding director of Summit Resources, is equally upbeat about the prospects for uranium. A hard man of the mining sector, Eggers has suffered two setbacks in the wake of the collapse of commodities prices — the second time he was halfway through building a new home, with a wife and children.

    Summit is now largely seen as a “Queensland government play”, pinning its mining hopes in Mount Isa to the relaxation of the ban on uranium mining by the Australian Labor party. At present the Labor states of Western Australia and Queensland both ban uranium mining; but that is expected to change at the Labor party conference in April 2007. If so, Summit’s share price will hit the roof.

    Eggers holds a master’s degree with first-class honours in geology, and has staked his career on finding substantial uranium deposits in Mount Isa. Like Kalgoorlie, in Western Australia, Mount Isa is the gritty heartland of Australian mining, where generations of prospectors have made and lost their fortunes.

    In 1990 Eggers staked out an area near Mount Isa which he believed held substantial deposits of uranium; he invested A$5m in drilling. His persistence paid off: Summit announced in the mid-1990s the discovery of 35,000 tonnes of uranium, worth A$4 billion (£1.7 billion): “From my early days of pegging worthless ground we now have A$4 billion of metal,” he said.

    The Summit share price soared on the back of the discovery. Then it came crashing down when, in 1998, the new Queensland Labor government slapped a ban on uranium mining. That wiped A$70m off the company’s value, and infuriated shareholders. “I had a personal stake of $5m that went to nothing.”

    But in the past three years Summit’s price has clawed back, from 5c in 2003, to $1.65 this month, as investors cling to the hope that Summit will be given the green light.

    Eggers is worth millions of dollars on paper but, like most of Australia’s uranium barons, past experience has made him philosophical about whether he will realise it.


    New powers for IMF

    WASHINGTON -- The International Monetary Fund won new powers to

    police the world economy after its 184 member countries endorsed a

    new framework to monitor how the economic policies of one country

    affects others.

    The countries, represented by finance ministers or central bank

    governors, also agreed that some emerging economies needed more say

    in IMF decision-making, and a proposal for ad hoc increases in their

    voting shares could become a reality by the next IMF meetings in


    "We resolve to make the IMF more fit for purpose in a global economy

    and more able to address challenges that are quite different from

    those of 1945, when the IMF was created," Chancellor Gordon Brown,

    who also chairs the IMF's policy-setting committee, told a news


    "The IMF should be more able to address global questions with

    multilateral surveillance," Brown said.

    The International Monetary and Financial Committee, or IMFC, said

    IMF surveillance would focus on spillovers and links between

    countries' economic policies and reaffirm their monetary, fiscal and

    exchange rates frameworks.

    IMF Managing Director Rodrigo Rato will have the authority to bring

    nations together on an ad hoc basis to thrash out any economic

    misalignments based on IMF analyses.

    Officials said this would create a new forum that better reflected

    the rise of Asia in the global economy and could possibly replace

    bodies like the Group of Seven industrial countries, which some say

    can no longer call all the shots.

    One of the problems facing the G7 is that major economic players

    like China are not part of the club.

    Member countries welcomed enhanced IMF monitoring of exchange rates

    that will be extended to include major emerging markets, but several

    remarked they were hesitant about the IMF publishing analyses on

    theoretical fair value currency rates because it was market


    China, whose tightly managed currency is a concern to the G7, said

    this did not mean the IMF should interfere in how countries manage

    their exchange rates.

    "Fund surveillance should comply with the objective of promoting

    exchange and financial stability and respect the autonomy as to

    exchange rate systems that is granted to all (IMF) members," China's

    Governor Zhou Xiaochuan told the IMF committee.

    Addressing reporters, the IMF's Rato said the committee gave him a

    clear mandate to propose changes to the voting shares, or quotas, of

    some countries by September.

    "I have spoken several times about the need for increases in voting

    power for some countries, including a number of emerging market

    economies, to ensure they have a role in the fund's decision-making

    process that accords with their increased importance in the world

    economy," he said.

    A proposal he submitted to the IMFC would give ad hoc increases to a

    small number of countries like China, South Korea, Mexico and

    Turkey. Other nations that could also possibly qualify include

    Malaysia, Thailand and Singapore.

    But tensions remain between industrial and developing countries over

    how to reallocate voting power beyond initial increases in the

    quotas for some emerging nations.

    The Group of 24 finance ministers for developing countries from

    Asia, Africa and Latin America on Friday called for a more

    comprehensive package with timelines to greater representation,

    fearing changes could stall after any initial increases.

    They said it was "imperative" that a concrete proposal for changes

    be worked out by the next IMF meeting in Singapore in September,

    which should include a new formula to calculate quotas based on

    purchasing power parity of a country and not gross domestic product

    as is currently the case.

    U.S. Treasury Secretary John Snow said on Saturday he would support

    the ad hoc increase "if it is credibly linked as a down payment on

    near-term fundamental reform," like those to increase the fund's

    watchdog role on currency issues.

    Although it is generally recognised that China's quotas do not

    properly reflect its global economic weight, an increase in its

    voting share may be controversial in light of proposed U.S.

    legislation threatening a veto of such a move in the absence of

    Chinese currency reforms.

    German Finance Minister Peer Steinbrueck called for "equal

    treatment," saying some European countries -- like Germany -- were

    also underrepresented according to quota calculations.

    According to calculations of the current quota system countries like

    Britain, Ireland, Spain, the Netherlands, and Sweden are also



    "As the issuer of the world's reserve currency, the U.S. economy has for decades enjoyed the capacity to inflate dollar denominated securities at will. Our competitive advantage in issuing top-rated and liquid securities has served us especially well over the past decade. It was a key facet of “reliquefications” and “reflations” during periods of economic weakness and/or fledgling financial crisis. The much trumpeted “resiliency” of the U.S. economy and banking system owes almost everything to the capacity for the U.S. government and financial sector to endlessly create debt instruments readily accumulated by domestic and foreign holders. And I believe a strong case can be made today that long-term yields would be significantly higher if it weren't for the perception that the Bernanke Fed will aggressively cut rates at the first indication that the U.S. economic Bubble and/or Global Asset Market Bubble are beginning to falter. The blundering Fed apparently not only believes that the U.S. economy is more resilient than in the past, it presumes it now has significant leeway to cut rates and “reflate” when necessary.

    But the financial world is changing rapidly and radically. The dollar is methodically losing its status as a stable and reliable reserve currency. At the same time, currencies generally are losing favor to real assets as store of value. Understandably, market participants are questioning the will and capacity for central bankers and policymakers to stabilize the Unwieldy Global Credit system. It would at this point require a determined and concerted effort to instigate some serious financial and economic restraint, especially among American, Chinese and Japanese authorities. No one would dare hold their breath waiting for this outcome.

    With faith in the prospects for the dollar and global currencies in retreat, the U.S. is in the process of losing its invaluable competitive advantage issuing top-rated liquid securities. This has huge ramifications come the next period of financial dislocation. The Fed's intent to aggressively cut rates and incite yet another bout of lending and leveraged speculation (Credit Inflation) will likely be obstructed by the unwillingness of foreigners to accumulate more dollar IOUs. In the meantime, I believe the changing global landscape will necessitate that that the U.S. now pays an ongoing significant yield differential. Rampant liquidity and speculative excesses demand that global rates rise across the board, while the stability of the dollar depends upon the Fed's willingness to maintain significant rate differentials. Our foreign creditors will demand higher rates and much tighter monetary conditions, and the Fed's dream of wrapping things up before it gets painful faces the reality that our creditors are increasingly tired of getting hurt.

    This week, markets began to demonstrate many of the characteristics one would expect when approaching a key inflection point. There was heightened volatility, spectacular short-squeezes, and palpable euphoria. But there are also indications that the “smart money” is increasingly nervous and beginning to lighten up on some positions (including our currency). It is amazing how many have completely bought into The Notion of a Golden Age of Permanent Global Prosperity; that the omnipotent Fed has everything completely under control; and that surging energy and commodity prices are a sign of how wonderfully healthy the global economy is these day (ignoring that we are instead immersed in history's greatest Credit and Asset Bubbles). One should now be on guard for that exacting oscillation between “gee, things are just marvelously splendid” and the “oh my god, the end is near” – The Unpredictable Greed and Fear Seesaw – that will embroil global markets in an extraordinary period of uncertainty and volatility.

    April 20, 2006

    The Best little mining company in the world: Oxiana

    Listen and weep if you don't have exposure...


    by Dr. Kurt Richebächer

    In the early 2000s, Mr. Greenspan earned himself the honorable title of "serial bubble blower." Fearful of a painful burst of the equity bubble, he aided and abetted a bond bubble in order to boost the housing bubble. Measured by the mildest postwar recession, it appeared a smashing success. But taking measure of the following anemic recovery, and particularly the following dismal employment and income performance, into account, it was an utter policy failure.

    Any assessment has to further take into account that the government and Federal Reserve have supported this recovery with unprecedented fiscal and monetary lavishness. Tax cuts reduced government revenue by $870 billion, while the Federal Reserve slashed its fed funds rate to 1%, its lowest level since the Great Depression.

    The decisive failures of these policies have been in business fixed investment and in employment, both displaying a drastic shortfall in relation to reported GDP growth.

    Historical experience and economic theory leave no doubt that business fixed investment and employment play the crucial role in providing economic growth with the necessary traction to become self-sustaining. Even in its fifth year, the present U.S. economic recovery remains fully dependent on the housing bubble to drive the consumption bubble.

    The same, by the way, applies more or less to all Anglo-Saxon countries. Over the past few years, all of them have hung on the steroid of inflating house prices providing the collateral for outsized consumer borrowing-and-spending binges. Their further common features are large budget deficits (except Australia), very low savings and large trade deficits (except Canada).

    All of these economies have, in essence, become bubble economies. This means that monetary policy impacts the economy primarily through inflating asset prices, which in turn stimulate and facilitate credit-financed consumer spending.

    An important adverse feature of all asset and credit bubbles is that they inherently break an economy's pattern of growth. In all the English-speaking countries, the credit excesses have primarily inflated house prices. Using these as rising collateral, consumers have enjoyed unprecedented borrowing facilities to spend as never before in excess of their current income. What resulted were extremely unbalanced economies.

    Distorted demand over time invariably also distorts the economy's supply side. What has actually happened in all these countries is that domestic spending has increasingly outpaced domestic output. On the other hand, low domestic saving and capital investment keep a brake on output growth. The infallible result in all these countries, except Canada, is large, chronic trade deficits. Evidently, all this is structural, not cyclical.

    Essentially, the low savings, the low capital investment and the soaring trade deficits act as major drags on economic growth. Over the past few years, these drags have been offset by the rampant demand creation through the housing bubbles. But the trouble with this recipe is that it worsens the structural distortions and imbalances.

    Nevertheless, all asset and credit bubbles eventually run out of steam. Plainly, this is going on in all these bubble economies, the United States included. For us, the key question about whether there will be a hard or soft landing is the extent of the prior excesses. They are the worst in history.

    The consensus sees new momentum in the U.S. economy from strong retail sales. We focus on the inflation-adjusted monthly figures for overall consumer outlays and observe the opposite. There are sharp fluctuations in spending on durables, but with a distinct downward trend.

    As everybody knows, or ought to know, the strong monthly changes in consumer spending have their main cause in the sharp ups and downs of auto promotions. In the quarterly GDP reports, they are even annualized. But comparing the above figures, it strikes the eye that the recovery in the last three months was very much weaker than in the prior downturn.

    Any assessment of the U.S. economy's further course has to start with the recognition that the housing bubble is doomed, and in its wake the consumption bubble. Only the vigor of their slowdown is in question. Given this virtual certainty, the U.S. economy urgently needs an alternative source of growth.

    Unfortunately, there is but one possible alternative source, and that is sharply rising business fixed investment and exports. The consensus, apparently, takes a strong revival of business fixed investment for granted.

    Assessing the relevant figures, including profits, we take for granted that business investment and hiring are going to fail in the future even more than in the past. First of all, the record-sized fiscal and monetary stimulus of all times has been exhausted; second, business fixed investment in the United States, even though heavily bloated by hedonic pricing of computers, recently accounts for a record low of 11.5% of GDP, as against more than 70% for consumer spending; third, consumer demand is weakening; and fourth, nonresidential investment has slumped from double-digit growth rates in 2004 to just 2.6% in the fourth quarter of 2005, after 10% in the first half.

    Common arguments in favor of a comeback of capital investment are high business liquidity and high profits. Plainly, they have recovered from their lows, but growth has sharply slowed from 2004, when tax incentives gave a strong impetus.

    New orders for machinery are up over the year, but by far not enough to suggest a developing investment boom. Given for many years a preponderance of short-lived investments, it needs moreover large and ever-higher capital investments just to replace worn-out plant and equipment, as reflected in rising depreciations. There is every reason to assume that the rise in new orders of capital goods barely reflects rising depreciations.

    Most impressive is definitely the following chart reflecting the U.S. economy's profit performance. Since 2000, it is the greatest profit boom in the whole postwar period. Strikingly, it even compares most favorably with the profit performance during the "New Paradigm" boom years, from 1995-2000.

    Profits of the whole nonfinancial sector were $401 billion in 1995 and $413.4 billion in 2000. But from 2001 to late 2005, they have almost trebled, from $322 billion to $868.5 billion. Wall Street, of course, eagerly seizes them. For us, these numbers are so absurd as to require investigation.

    First of all, it was an extremely imbalanced profit boom reflecting an extremely imbalanced economic recovery. This recovery had literally nothing in common with the business cycle pattern of the past. Intrinsically, this shows in a radically divergent profit pattern.

    The profit boom of the last few years was narrowly centered in the category "other." The fact is that the housing bubble has been crucial not only in creating demand and GDP growth, but also in creating employment and profits.

    Most astonishing is, of course, the steep jump in profits from $534.2 billion in 2004 to $863.3 billion in 2005. Two phony causes are easily identified. One is a sharp decline in depreciations, from $804.3 billion to $668 billion. Depreciations are a business expense, of course. If a firm stops investment, it increases its profits. But this is hardly a desirable way toward higher profits. The second major cause of the sudden profit surge was a tax incentive that induced companies to repatriate a large amount of foreign profits into domestic profits.

    Leaving aside the grossly distorted profit figures for 2005, we focus on the period from 1997-2004, the former marking the U.S. economy's prior profit peak in the postwar period. Over these seven years, including the "New Paradigm" boom years, overall profits barely rose.

    The next thing to recognize is the tremendous differences in profit performance between sectors. For all sectors producing or moving goods, manufacturing and transportation, it has been seven years of profit disaster, and moreover of steady deterioration.

    In contrast, it has been seven years of profit bonanza for retail trade, wholesale trade and in particular for the branches captured under "Other." Here construction and real estate agents have been the main contributors.


    We would say that overall this is a dismal profit performance, definitely giving no reason for a booming stock market. Measured against nominal GDP, which has risen 41% between 1997-2004, it is a profit collapse.

    Very poor profits in the aggregate are the one big problem. An extremely lopsided pattern between sectors is the other. Manifestly, this lopsidedness in the profit pattern perfectly reflects the extraordinary lopsidedness of the U.S. economy's growth pattern during these years. The housing and consumption bubbles rule.

    It always amuses us when Mr. Greenspan and Mr. Bernanke criticize the government for its budget deficits. The irony is that the chronic deficit spending by the consumer, induced by their monetary looseness, is doing far greater structural damage to the economy.


    Dr. Kurt Richebächer

    for The Daily Reckoning

    Sell US Stocks

        What do I think of yesterday's stock-market bacchanalia?  I think it was and is an absolutely wonderful gift for people who have been dragging their feet in raising cash!  It's amazing, if not frightening, that any action of the nation's bumbling central bank can evoke such enthusiasm.
        On March 20th, I issued an unequivocal sell recommendation on stocks. If you wish, you may categorize the missive at hand as an unequivocal reaffirmation of the March 20th recommendation.
        After the close yesterday, I posted the following on the GRA website:
            "Can +195 points on the DJIA be a bearish development?  I think it can, and I will do my best overnight to explain why. I was hoping to use the time to catch up on some other research material, but something like today, occurring when it did and for the stated reasons, simply cannot pass without comment. The piece will be short, and I will try to have it out before the open tomorrow."  Here goes.
        Several months ago, I observed that two of the three US financial, markets -- debt and currency -- might very well have tougher sledding in a climate in which there was uncertainty about what the Fed was going to do on a forward basis, versus the one we've been in.  The climate we've been in has been one of relatively high certainty about the succession of rate hikes that commenced in June 2004.
        At the time, the above view was expressed in response to what was yet another attempt, albeit another premature attempt, by Wall Street bulls to promote into higher stock prices "the Fed is almost finished" mantra.  Yesterday, the bulls believe they finally got what they've been so arduously hoping for.  In the process, they may also wind up getting some fallout for which they had not been hoping nor will they especially enjoy.
       What they did want and get came in the minutes of the FOMC's March policy meeting, released yesterday afternoon.  Here's what put the Street into such an orgasmic mood:
            "In the Committee's discussion of monetary policy for the intermeeting period, all members favored raising the target federal funds rate 25 basis points to 4.75 percent at this meeting... Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy."
        The bullish camp placed inordinate emphasis on the above passage. Inordinate in that there was plenty of other material you easily could construe as being in conflict with it.  A major portion of the minutes appears in the excerpt at the conclusion of this missive, but I implore people to read the document in its entire context, which can be done at:
        Now that the Federal Reserve has wended its way through a succession of 15 rate increases over almost the last two years, I think there is a growing list of criticisms you can lodge against how this was handled and what it has accomplished.  Start with the fact the Federal Funds Rate never should have been taken to a trough of 1% to begin with.  How that came about and what took place afterwards can be laid squarely on the shoulders of Alan Greenspan and his practice of end-justifies-means leadership.  This variety of governance has now infected and corrupted, at least on an intellectual level, most of Washington.  In my view, it poses a huge threat to the well-being of the Republic!
        And has the 375 basis points in a higher Federal Funds Rate really accomplished much more than simply making everyone's cost of money a good deal more expensive?  Using money measures M2 and M3 as guides, we have more expensive money with no serious contraction in its availability:
                       Year-Over-Year Growth
             Money     ----------------------
            Measure    2/2006  2/2005  2/2004
               M2       4.7%    5.3%    4.5%
               M3       8.0%    5.0%    4.3%
        Of course, in the Greenspan/Bernanke New World Order of Fed governance, we are no longer allowed to have M3.  Do you think the above numbers might have anything to do with the real reason why?  (The "official" reasons provided by the Fed were moronic nonsense!)
        M3 is the broader, far better gauge of liquidity creation.  If you were the Fed and wanted to foster long-term trendline growth of around 3.5%, give or take, in real gross domestic product, there is no way you would be permitting M3 to grow at 8%.  Unless, of course, your motives were different than the ones publicly stated.  (A fibbing Fed? -- perish the thought!)
        And something else that bothers me -- a lot -- is that a variety of Federal Reserve communications strongly suggest that a majority of the FOMC's members are making monetary policy on the basis of actually believing the government's shoddy data, the inflation data in particular.
        Expanding and amplifying on this laundry list of criticisms is a task for another time.  What I want to emphasize here is that Federal Reserve monetary policy of years standing has created such a mess that an intended result in one area presents the major risk of unintended consequences in others.  And now that the central bank clearly is signaling its desire to throttle back on rate increases, the likely unintended consequences, at least in my opinion, will be seen in the behavior of the dollar's exchange-rate value and of open-market, longer-dated interest rates.  In my view, the behavior, on balance, will be of the negative variety.  (The possible policy shift that has been signaled is not likely to hurt the rise in prices of many commodities, though.) 
        As to the dollar and bond prices, the negative behavior already has begun!  Using the Dollar Index as a proxy, it is very close to making a multi-month low.  As to long-term interest rates, between February 9th and last Friday, the yield on the Treasury 4.50s of 2/15/2036 rose from 4.53% to 5.11%, representing a loss almost 8.9% of this issue's principal value.
        On the other hand, yesterday's release of FOMC minutes certainly gave the Fed what it wanted in stock prices.  And, yes, the Fed cares very, very much about the stock market.  Despite public protestations to the contrary, it certainly seizes on appropriate opportunities to "help" the market when possible. At a time stocks were in growing trouble, yesterday was one such opportunity, with advance billing in last week's Wall Street Journal article authored by Greg Ip.  (Leaking inside information is OK if you are a Fed official?)
        However, as it relates to the stock market and as the summary section of this missive opines, I think yesterday's rally, along with its probable follow-through into at least a portion of today if not a bit beyond, merely represents "an absolutely wonderful gift for people who have been dragging their feet in raising cash!"
          FOMC Minutes Excerpt
            "...Meeting participants saw both upside and downside risks to their outlook for expansion around the rate of growth of the economy's potential.  In the housing market, for instance, some downshift from the rapid price increases and strong activity of recent years seemed to be underway, but the magnitude of the adjustment and its effects on household spending were hard to predict.  Some participants cited stronger growth abroad and robust nonresidential investment spending as potentially contributing more to activity than expected.  It was also noted that an abrupt rise in long-term interest rates, reflecting, for example, a reversion of currently low term premiums to more typical levels, could weigh on both household and business spending.
            "Several participants noted that the labor market had continued to strengthen, with payrolls increasing at a solid pace.  The labor market was now showing some signs of tightness, consistent with a relatively low jobless rate.  There were anecdotal reports of shortages of skilled labor in a few sectors, such as health care, technology, and finance.  Still, participants expressed uncertainty about how much slack remained.  Pressures on unit labor costs appeared contained, despite rising health-care costs, amid continued robust productivity growth and still-moderate increases in several comprehensive measures of compensation growth.
            "In their discussion of prices, participants indicated that data over the intermeeting period, including measures of inflation expectations, suggested that underlying inflation was not in the process of moving higher.  Crude oil prices, though volatile, had not risen appreciably in recent months on balance, and a flattening in energy prices was beginning to damp headline inflation.  In addition, core consumer inflation was flat or even a bit lower by some measures. Some meeting participants expressed surprise at how little of the previous rise in energy prices appeared to have passed through into core inflation measures.  However, with energy prices remaining high, and prices of some other commodities continuing to rise, the risk of at least a temporary impact on core inflation remained a concern.
            "Participants noted that there were as yet few signs that any tightness in product and labor markets was adding to inflation pressures. To date, unit labor costs were not placing pressure on inflation, and high profit margins left firms a considerable buffer to absorb cost increases.  Moreover, actual and potential competition from abroad could be restraining cost and price pressures, though participants exchanged views on the extent to which conditions in foreign markets might be constraining prices domestically.  However, participants observed that there was a risk that continuing increases in resource utilization could add to inflationary pressures. Some participants held that core inflation and inflation expectations were already toward the upper end of the range that they viewed as consistent with price stability, making them particularly vigilant about upside risks to inflation, especially given how costly it might be to bring inflation expectations back down if they were to rise.
            "In the Committee's discussion of monetary policy for the intermeeting period, all members favored raising the target federal funds rate 25 basis points to 4.75 percent at this meeting.  The economy seemed to be on track to grow near a sustainable pace with core inflation remaining close to recent readings against a backdrop of financial conditions embodying an expectation of some tightening.  Since the available indicators showed that the economy could well be producing in the neighborhood of its sustainable potential and that aggregate demand remained strong, keeping rates unchanged would run an unacceptable risk of rising inflation.  Most members thought that the end of the tightening process was likely to be near, and some expressed concerns about the dangers of tightening too much, given the lags in the effects of policy.  However, members also recognized that in current circumstances, checking upside risks to inflation was important to sustaining good economic performance. The need for further policy firming would be determined by the implications of incoming information for future activity and inflation.
            "With regard to the Committee's announcement to be released after the meeting, members expressed some difference in views about the appropriate level of detail to include in the statement.  In the end, they concurred that the statement should note that economic growth had rebounded in the current quarter but that it appeared likely to moderate to a more sustainable pace in coming quarters.  Policymakers agreed that the announcement should also highlight the favorable outlook for inflation and summarize their reasons for that assessment, but that it should reiterate that possible increases in resource utilization, along with elevated levels of commodity and energy prices, had the potential to add to inflation pressures.  Changes in the sentence on the balance of risks to the Committee's objectives were discussed.  Several members were concerned that market participants might not fully appreciate the extent to which future policy action will depend on incoming economic data, especially when an end to the tightening process seems likely to be near. Some members expressed concern that retention of the phrase 'some further policy firming may be needed to keep the risks... roughly in balance' could be misconstrued as suggesting that the Committee thought that several further tightening steps were likely to be necessary. Nonetheless, all concurred that the current risk assessment could be retained at this meeting.
            "...At the conclusion of the discussion, the Committee voted to authorize and direct the Federal Reserve Bank of New York, until it was instructed otherwise, to execute transactions in the System Account in accordance with the following domestic policy directive:
            "'The Federal Open Market Committee seeks monetary and financial conditions that will foster price stability and promote sustainable growth in output. To further its long-run objectives, the Committee in the immediate future seeks conditions in reserve markets consistent with increasing the federal funds rate to an average of around 4.75 percent.'
    The vote encompassed approval of the paragraph below for inclusion in the statement to be released shortly after the meeting:
            "'The Committee judges that some further policy firming may be needed to keep the risks to the attainment of both sustainable economic growth and price stability roughly in balance.  In any event, the Committee will respond to changes in economic prospects as needed to foster these objectives.'
            "Votes for this action: Messrs. Bernanke and Geithner, Ms. Bies, Messrs. Guynn, Kohn, Kroszner, Lacker, and Olson, Ms. Pianalto, Mr. Warsh, and Ms.Yellen.
            "Vote against this action: None.
            "The meeting adjourned at 12:15 p.m."

    April 19, 2006

    Condi in Oz to "Contain China"

    Bringing Australia into this emerging anti-Chinese network has been a major priority of Condoleezza Rice, who spent several days there in mid-March. Although designed in part to bolster US-Australian ties (largely neglected by Washington over the past few years), the main purpose of her visit was to host a meeting of top officials from Australia, the US and Japan to develop a common strategy for curbing China's rising influence in Asia. No formal results were announced, but Steven Weisman of the New York Times reported on March 19 that Rice convened the meeting "to deepen a three-way regional alliance aimed in part at balancing the spreading presence of China".

    An even bigger prize, in Washington's view, would be the integration of India into this emerging alliance system, a possibility first suggested in Rice's Foreign Affairs article. Such a move was long frustrated by congressional objections to India's nuclear-weapons program and its refusal to sign on to the nuclear Non-Proliferation Treaty (NPT).

    Under US law, nations such as India that refuse to cooperate in non-proliferation measures can be excluded from various forms of aid and cooperation. To overcome this problem, Bush met with Indian officials in New Delhi last month and negotiated a nuclear accord that will open India's civilian reactors to International Atomic Energy Agency inspection, thus providing a thin gloss of non-proliferation cooperation to India's robust nuclear-weapons program. If the US Congress approves Bush's plan, the United States will be free to provide nuclear assistance to India and, in the process, significantly expand already growing military-to-military ties.

    In signing the nuclear pact with India, Bush did not allude to the administration's anti-Chinese agenda, saying only that it would lay the foundation for a "durable defense relationship". But few have been fooled by this vague characterization. According to Weisman of the Times, most US lawmakers view the nuclear accord as an expression of the administration's desire to convert India into "a counterweight to China".

    The Pacific build-up begins

    Accompanying all these diplomatic initiatives has been a vigorous, if largely unheralded, effort by the Department of Defense (DoD) to bolster US military capabilities in the Asia-Pacific region.

    The broad sweep of US strategy was first spelled out in the Pentagon's most recent policy assessment, the Quadrennial Defense Review (QDR), released on February 5. In discussing long-term threats to US security, the QDR begins with a reaffirmation of the overarching precept first articulated in the DPG of 1992: that the United States will not allow the rise of a competing superpower.

    This country "will attempt to dissuade any military competitor from developing disruptive or other capabilities that could enable regional hegemony or hostile action against the United States", the document states. It then identifies China as the most likely and dangerous competitor of this sort. "Of the major and emerging powers, China has the greatest potential to compete militarily with the United States and field disruptive military technologies that could over time offset traditional US military advantages" - then adding the kicker - "absent US counter-strategies."

    According to the Pentagon, the task of countering future Chinese military capabilities largely entails the development, and then procurement, of major weapons systems that would ensure US success in any full-scale military confrontation. "The United States will develop capabilities that would present any adversary with complex and multidimensional challenges and complicate its offensive planning efforts," the QDR explains. These include the steady enhancement of such "enduring US advantages" as "long-range strike, stealth, operational maneuver and sustainment of air, sea and ground forces at strategic distances, air dominance, and undersea warfare".

    Preparing for war with China, in other words, is to be the future cash cow for the giant US weapons-making corporations in the military-industrial complex. It will, for instance, be the primary justification for the acquisition of costly new weapons systems such as the F-22A Raptor fighter, the multi-service Joint Strike Fighter, the DDX destroyer, the Virginia-class nuclear attack submarine, and a new intercontinental penetrating bomber - weapons that would just have utility in an all-out encounter with another great-power adversary of a sort that only China might someday become.

    In addition to these weapons programs, the QDR also calls for a stiffening of present US combat forces in Asia and the Pacific, with a particular emphasis on the US Navy (the arm of the military least used in the ongoing occupation of and war in Iraq). "The fleet will have a greater presence in the Pacific Ocean," the document notes. To achieve this, "The navy plans to adjust its force posture and basing to provide at least six operationally available and sustainable [aircraft] carriers and 60% of its submarines in the Pacific to support engagement, presence and deterrence."

    Since each of these carriers is, in fact, but the core of a large array of support ships and protective aircraft, this move is sure to entail a truly vast buildup of US naval capabilities in the Western Pacific and will certainly necessitate a substantial expansion of the US basing complex in the region - a requirement that is already receiving close attention from Admiral Fallon and his staff at PACOM. To assess the operational demands of this buildup, moreover, this summer the US Navy will conduct its most extensive military maneuvers in the Western Pacific since the end of the Vietnam War, with four aircraft-carrier battle groups and many support ships expected to participate.

    Add all of this together, and the resulting strategy cannot be viewed as anything but a systematic campaign of containment. No high administration official may say this in so many words, but it is impossible to interpret the recent moves of Rice and Rumsfeld in any other manner. From Beijing's perspective, the reality must be unmistakable: a steady buildup of US military power along China's eastern, southern and western boundaries.

    How will China respond to this threat? For now, it appears to be relying on charm and the conspicuous blandishment of economic benefits to loosen Australian, South Korean, and even Indian ties with the United States. To a certain extent, this strategy is meeting with success, as these countries seek to profit from the extraordinary economic boom now under way in China - fueled to a considerable extent by oil, gas, iron, timber, and other materials supplied by China's neighbors in Asia.

    A version of this strategy is also being employed by President Hu Jintao during his current visit to the United States. As China's money is sprinkled liberally among such influential firms as Boeing and Microsoft, Hu is reminding the corporate wing of the Republican Party that there are vast economic benefits still to be had by pursuing a non-threatening stance toward China.

    China, however, has always responded to perceived threats of encirclement in a vigorous and muscular fashion as well, and so we should assume that Beijing will balance all that charm with a military buildup of its own. Such a drive will not bring China to the brink of military equality with the United States - that is not a condition it can realistically aspire to over the next few decades. But it will provide further justification for those in the United States who seek to accelerate the containment of China, and so will produce a self-fulfilling loop of distrust, competition and crisis.

    This will make the amicable long-term settlement of the Taiwan problem and of North Korea's nuclear program that much more difficult, and increase the risk of unintended escalation to full-scale war in Asia. There can be no victors from such a conflagration.

    Prominent U.S. Physicists Send Letter to President Bush



    Newswise — Thirteen of the nation’s most prominent physicists have written a letter to President Bush, calling U.S. plans to reportedly use nuclear weapons against Iran "gravely irresponsible" and warning that such action would have "disastrous consequences for the security of the United States and the world."

    The physicists include five Nobel laureates, a recipient of the National Medal of Science and three past presidents of the American Physical Society, the nation’s preeminent professional society for physicists.

    Their letter was prompted by recent articles in the Washington Post, New Yorker and other publications that one of the options being considered by Pentagon planners and the White House in a military confrontation with Iran includes the use of nuclear bunker busters against underground facilities. These reports were neither confirmed nor denied by White House and Pentagon officials.

    The letter was initiated by Jorge Hirsch, a professor of physics at the University of California, San Diego, who last fall put together a petition signed by more than 1,800 physicists that repudiated new U.S. nuclear weapons policies that include preemptive use of nuclear weapons against non-nuclear adversaries (http://physics.ucsd.edu/petition/). Hirsch has also published 15 articles in recent months (http://antiwar.com/hirsch/) documenting the dangers associated with a potential U.S. nuclear strike on Iran.

    "We are members of the profession that brought nuclear weapons into existence, and we feel strongly that it is our professional duty to contribute our efforts to prevent their misuse," says Hirsch. "Physicists know best about the devastating effects of the weapons they created, and these eminent physicists speak for thousands of our colleagues."

    "The fact that the existence of this plan has not been denied by the Administration should be a cause of great alarm, even if it is only one of several plans being considered," he adds. "The public should join these eminent scientists in demanding that the Administration publicly renounces such a misbegotten option against a non-nuclear country like Iran."

    The letter, which is available at http://physics.ucsd.edu/petition/physicistsletter.html, points out that "nuclear weapons are unique among weapons of mass destruction," and that nuclear weapons in today's arsenals have a total power of more than 200,000 times the explosive energy of the bomb that leveled Hiroshima, which caused the deaths of more than 100,000 people.

    It notes that there are no sharp lines between small and large nuclear weapons, nor between nuclear weapons targeting facilities and those targeting armies or cities, and that the use by the United States of nuclear weapons after 60 years of non-use will make the use of nuclear weapons by others more likely.

    "Once the U.S. uses a nuclear weapon again, it will heighten the probability that others will too," the physicists write. "In a world with many more nuclear nations and no longer a ‘taboo’ against the use of nuclear weapons, there will be a greatly enhanced risk that regional conflicts could expand into global nuclear war, with the potential to destroy our civilization."


    The letter echoes the main objection of last fall’s physicists’ petition, stressing that the Nuclear Non-Proliferation Treaty will be irreversibly damaged by the use or even the threat of use of nuclear weapons by a nuclear nation against a non-nuclear one, with disastrous consequences for the security of the United States and the world.

    "It is gravely irresponsible for the U.S. as the greatest superpower to consider courses of action that could eventually lead to the widespread destruction of life on the planet. We urge the administration to announce publicly that it is taking the nuclear option off the table in the case of all non-nuclear adversaries, present or future, and we urge the American people to make their voices heard on this matter."

    The 13 physicists who coauthored the letter are: Philip Anderson, professor of physics at Princeton University and Nobel Laureate in Physics; Michael Fisher, professor of physics at the Institute for Physical Science and Technology, University of Maryland and Wolf Laureate in Physics; David Gross, professor of theoretical physics and director of the Kavli Institute of Physics at the University of California, Santa Barbara and Nobel Laureate in Physics; Jorge Hirsch, professor of physics at the University of California, San Diego; Leo Kadanoff, professor of physics and mathematics at the University of Chicago and recipient of the National Medal of Science; Joel Lebowitz, professor of mathematics and physics, Rutgers, The State University of New Jersey and Boltzmann Medalist; Anthony Leggett, professor of physics, University of Illinois at Urbana-Champaign and Nobel Laureate, Physics; Eugen Merzbacher, professor of physics, University of North Carolina at Chapel Hill and former president, American Physical Society; Douglas Osheroff, professor of physics and applied physics, Stanford University and Nobel Laureate, Physics; Andrew Sessler, former director of Lawrence Berkeley Laboratory and former president, American Physical Society; George Trilling, professor of physics, University of California, Berkeley, and former president, American Physical Society; Frank Wilczek, professor of physics, MIT and Nobel Laureate, Physics; Edward Witten, professor of physics, Institute for Advanced Study and Fields Medalist.

    The physicists are sending copies of their letter to their elected representatives, requesting that the issue be urgently addressed in the U.S. Senate and House of Representatives.

    Media Pickin at Pickens -- US Blame game goes on

    1 Gasoline prices are rising, which means it's time for a new round of hysterical media stories about that dastardly oil industry, its obscene profits, and its nefarious ways.

    Now the media are at it again, but with a different target. They're turned their guns on Texas oilman T. Boone Pickens, whose energy hedge funds have delivered staggeringly successful results for their investors in recent years. (Full disclosure, and sorry to steal the thunder from left-wing conspiracy buffs: Pickens supports the Media Research Center. Not only that, but he's also a friend, though this friend didn't have the Abramoffian common decency to compensate me for writing this.)

    In February, the New York Times and CNN reported breathlessly that Pickens had made a $165 million tax-deductible gift to Oklahoma State University (OSU). So what's so scandalous about that? Well, there was more to the story, you see. After receiving the gift, OSU turned around and reinvested it all right back in Pickens' company. How perfectly quaint! If not illegal, certainly it was unethical. No, sleazy. The man took a monster tax write-off with this gift only to have the money put right back into his investment company. They don't call them the greedy rich for nothing. Some friends you've got, Bozell.

    Except for a couple of things. What neither "news" outlet saw fit to report was that by the time these stories emerged, just months after the re-investment, Boone Pickens' funds had already generated a cool $20-plus million additional profit for OSU. (That was February, remember.) I understand the number has now topped $40 million!.

    Yeah, but what did Pickens make on the deal between management and performance fees? Buried in the Times story in the 12th paragraph, when most people have stopped reading, and ignored altogether by CNN, was this little nugget of information: Pickens had waived all fees and commissions on that reinvestment. In other words, Pickens didn't earn a penny for the work he did increasing the value of his gift to his alma mater to over $200 million.

    And get this: The $165 million gifted by Pickens constitutes the largest gift ever received by Oklahoma State University. The fees and commissions waived by Pickens represent the second largest gift ever to that school.

    And for that he was attacked by the New York Times and CNN.

    Now comes "ABC World New Tonight" with another hit piece on Pickens introducing yet another variable. In their "eye-opening" (their words) pre-Tax Day report on April 11, anchor Elizabeth Vargas and "investigative reporter" Brian Ross charged Pickens' OSU gift was nothing more than an "audacious" abuse of a "loophole" in last year's Katrina Relief Act that allowed full deductions for charitable giving primarily to encourage assistance to hurricane victims. As a result, they charged, because of this "apparently legal" maneuver, "a taxpayer could deduct enough to effectively have a gross income of zero." Moreover, they claimed, Pickens was violating at least the spirit of the law. "None of Pickens' $165 million went to Katrina victims," Ross reported, "unless they were going to golfers in Oklahoma," While Ross dripped his sarcasm, visuals showed people lazily playing that sport at a country club.

    How many deliberate distortions, inaccuracies, and omissions of fact can we count here?

    Distortion: The gift to OSU was directed to a wide variety of the university's sports programs, including a new stadium -- not golf.

    Inaccuracy: There's nothing "apparently" legal about what Pickens did. It's completely legal, and completely ethical. But don't take my word for it. My colleague Amy Menefee found this poignant analysis of the tax code revision from Vargas' and Ross' co-worker, ABC financial contributor Mellody Hobson on Feb. 23: "Well, this is actually a terrific thing. After Katrina, the government really wanted to spur contributions to help the victims, so … they said that 100 percent of any contributions you made, regardless if it was Katrina-related or not, would be tax-deductible."

    Omission: Far from finding a loophole to deliver a gross income of zero, Pickens paid over $200 million in corporate taxes last year. That fact was known by ABC when it ran this hit piece.

    But what about Katrina victims? Isn't that the underlying point? A big gift to a university in Oklahoma is nice, but what about helping those desperately needy folks so decimated by those horrific hurricanes? Where are the conservatives when we need humanitarian relief?

    Here's another little bit of information known to ABC but kept from its viewers, purposely withheld in order to tell this story of corporate corruption.

    Guess who was the single largest individual donor in the United States of America, at $7 million, to help Katrina victims directly? Yup. Boone Pickens. And for good measure, his wife contributed hundreds of thousands of dollars more.

    The only scandal in these scandal stories is the stories themselves.

    Brent Bozell is President of Media Research Center, a Townhall.com partner organization, and author of Weapons of Mass Distortion. You may contact him here

    The creativity machine


    Vernor Vinge is an emeritus professor of computer science at San Diego State University. His novel Rainbows End (2006) considers the Internet of 2025.


    What will emerge from using the Internet as a research tool? The answer, Vernor Vinge argues, will be limited only by our imaginations.

    We humans have built a creativity machine. It's the sum of three things: a few hundred million computers, a communication system connecting those computers, and some millions of human beings using those computers and communications.

    This creativity machine is the Internet. It has already changed the way we do science, most importantly by enhancing collaboration between researchers. The present-day Internet provides convenient connections between computerized labs, simulations and research databases. It also represents an enormous financial investment that is driven by the demands of hundreds of millions of consumers. As such, the total Internet software and infrastructure investment dwarfs the budgets of scientific research programmes and even of many government defence programmes. And more than any megaproject of the past, the essence of the Internet is to provide coordinated processing of information. For researchers seeking resources, these are facts worth considering.

    For some disciplines, the Internet itself has become a research tool: grid computing has been used to exploit the power of millions of Internet-connected machines. Building on the popularity of SETI@home — an experiment that uses Internet-connected computers to search for extraterrestrial intelligence — and prime-number hunts, there are now physics, medical and proteomics projects enlisting the enthusiasm of people (and their computers) across the world. For linguists1 and sociologists, new questions can be investigated simply by observing what occurs on the publicly available Internet. Even experimental sociology is possible: in their study of social influence on music preference, Salganik et al.2 recruited more than 14,000 subjects through a popular website, ran online trials on these subjects, and then obtained results directly from their experiment website.

    The possibilities do not end there. Even online games are attracting academic interest. Some games have millions of players. MMORPGs (massively multiplayer online role-playing games), such as World of Warcraft and EverQuest, feature vivid three-dimensional action involving both cooperation and combat. Another genre of MMORPGs lack a significant combat or quest element and are more often called 'virtual worlds'. For example, the virtual world Second Life has the visual realism of many MMORPGs, but it exists as a venue for the participants rather than as a pre-designed adventure. Second Life provides a range of software tools, including a programming language, that gives participants the power to create artefacts according to their own designs. Thus the game depends on the skill and creativity of its participants to generate content. Such virtual worlds have already been used for educational projects, and are worthy of psychological and social research.

    People power

    The notion of enlisting users to create content is widespread on the contemporary Internet. Companies such as Google provide users with tools to integrate search and mapping services into their own websites. Interested users are numerous and have their own resources. In the 1990s, we had an early glimpse of the power of this new creativity machine: computers plus networks plus interested people delivered free and open-source software (FOSS) products of the highest quality, including the GNU/Linux operating system. FOSS products provide low-cost and flexible alternatives to proprietary software. For example, there is at least one open-source virtual-world platform, Croquet3, which allows users to customize and extend its architecture at all levels. FOSS tools can be mixed and matched with proprietary software to deal with an enormous range of projects from quick, ad hoc combinations of data harvested from multiple locations4 to large, long-duration experiments.


    © 2006, LINDEN RES.

    Participants in Second Life use software and creativity to build their environment.

    All this points to ways that science might exploit the Internet in the near future. Beyond that, we know that hardware will continue to improve. In 15 years, we are likely to have processing power that is 1,000 times greater than today, and an even larger increase in the number of network-connected devices (such as tiny sensors and effectors). Among other things, these improvements will add a layer of networking beneath what we have today, to create a world come alive with trillions of tiny devices that know what they are, where they are and how to communicate with their near neighbours, and thus, with anything in the world. Much of the planetary sensing that is part of the scientific enterprise will be implicit in this new digital Gaia. The Internet will have leaked out, to become coincident with Earth.

    How can we prepare for such a future? Perhaps that is the most important research project for our creativity machine. We need to exploit the growing sensor/effector layer to make the world itself a real-time database. In the social, human layers of the Internet, we need to devise and experiment with large-scale architectures for collaboration. We need linguists and artificial-intelligence researchers to extend the capabilities of search engines and social networks to produce services that can bridge barriers created by technical jargon and forge links between unrelated specialties, bringing research groups with complementary problems and solutions together — even when those groups have not noticed the possibility of collaboration. In the end, computers plus networks plus people add up to something significantly greater than the parts. The ensemble eventually grows beyond human creativity. To become what? We can't know until we get there.

    April 18, 2006

    More signs of rapid slowing in US housing

    Courtesy Gerard Minack
    Morgan Stanley
    Sydney Australia

    Housing's Margin Squeeze

    More evidence that US housing market has passed its peak. The National Association of Home Builders has reported that its monthly sentiment index fell to 50 in April, the lowest level (excluding the 11 September aftermath) since February 1996.

    Housing-related sentiment is now in the midst of a very sharp retrenchment. Home-buyer sentiment usually leads home-building sentiment, so there will presumably be further weakness in the NAHB index in the coming months. In turn, home-buyer sentiment is largely driven by affordability, although in this cycle sentiment has taken an unusual time to be depressed
    by falling affordability. The fact that affordability continues to deteriorate suggests that the
    improvement in home-buyer sentiment seen in April won't be sustained.

    Builders' sentiment is a reasonable lead indicator for new home starts. Exhibit 3 suggests that starts – which have pobably been boosted by unseasonably warm weather in the past few months – could be see a very sharp fall in coming months.

    The big issue, of course, is how much the turn in the housing market will affect consumer spending and saving. The bull and bear arguments on this issue are relatively well known and have been well rehearsed.

    A couple of points about this:

    First, discerning the effect of the housing market slowdown will be complicated in the near term by the payback for unsustainably strong consumer spending over the past few months. As our US Economist Dick Berner has recently outlined, the recent consumer rebound was driven in part
    by a fall in petrol prices and unusually warm winter weather. Dick expects a slowdown in coming months as the consumer faces another surge in petrol prices, higher interest rates and decelerating housing wealth. However, there will be offsets from the robust labour market, rising
    wages and non-wage income gains.

    Put another way: even if you are relatively optimistic about the outlook for the US consumer,
    there are good reasons to expect softer consumer spending in the near-term.

    The second point is to distinguish between the effect of the housing market slowdown on growth, and the effect on earnings. As I've discussed before, one of the remarkable features of the past few years has been the strength of consumer spending in the face of weak labour income. Whatever, the cause of this divergence, the simple fact is that this was a boon to corporate America: its largest single source of top-line growth (consumer spending) kept growing, even as its largest single cost (wages) were falling (as a share of GDP).

    The optimistic view looking forward is that consumer spending will be supported by rising wage payments. This suggests that the wedge in Exhibit 4 will start to close – that is, that corporate America will face a growing margin squeeze.

    As it is, I take a bearish view on the housing issue, but even if I'm wrong on that – and it looks like we'll find out relatively soon – I still think that the corporate America will face margin pressure heading into next year.

    Daily Forex Commentary

    By Jack Crooks


    She (Louise Yamada) believes the energy complex has entered a 20-year bull market cycle, which may have occasional corrections, but heads upwards nonetheless. "We think oil could go to $80 and I think over time we could see it go even higher," she says. - Louise Yamada, quoted in Barron's

    FX Trading
    Gold, oil, toil and $ trouble?

    Good TIC data and the dollar tanks on the news on Monday. From Reuters:

    Upbeat data showed more than enough capital flowed into the United States in February to offset its huge trade deficit, but that failed to stem the dollar's losses. "The sentiment is turning dollar negative - probably the biggest factor putting the dollar under pressure is the rise in oil prices and rise in gold prices," BNP Paribas senior currency strategist Ian Stannard said. "On oil - there's probably more of a risk aversion move taking place on the back of concerns with regards to supply which is a negative for the dollar," he added.
    Being of the skeptical nature as we are, we wanted to see for ourselves whether rising crude oil and gold prices were putting the dollar under pressure, so we went to the charts.

    And, sure enough, the dollar peaked when crude oil ebbed back in mid-November of last year. Gold didn't ebb much, but did put in a fresh high right around the same time mid-November after about two-months of consolidation. Is it coincidental or causal? Take a look:

    One question that comes to mind: where is the "inflation expectation cum interest rate hike cum yield differential" to support the dollar in this scenario? Maybe this all goes to the "growth thing".

    It's not a stretch to believe rising commodities prices and 15 Fed hikes might finally take a bite out of Mr US Consumer. From Jacqueline Doherty's The Trader column in Barron's this week:

    Unlike the past five years or so, liquidity is slowly draining out of the US via the Federal Reserve's 15 consecutive interest rate hikes. "Monetary policy acts with a big lag," says Ravi Malik, a senior portfolio manager at Froley Revy Investment Co. "You have to anticipate [its results] because by the time it shows up it's too late." Malik believes the results will include lower housing prices and eased consumer spending, which ultimately will slow the economy in the second half of the year from its current strength. Stocks may start to anticipate this sooner rather than later.

    Just as the US economy slows from its current red-hot pace, the Asian and European economies look set to pick up the slack and the emerging markets remain bulwarks of strength. Global markets seem to have sensed this shift. US financial assets - stocks, bonds and the dollar - are down 35% relative to the world's financial assets over the past three years, notes Bob Prince, co-chief investment officer at Bridgewater Associates.

    If this continues, it will become tougher for the US to attract the foreign investment on which it's so dependant. Then there's the potential unwinding of the yen carry trade, where investors borrow cheap money in Japan and invest it in higher-yielding markets like the US In February the Bank of Japan ended its policy of pumping excess funds into the economy and Japanese and last week the 10-year Japanese bond rose to 1.975%, the highest rate in just over five years.

    Wayne Nordberg, a senior director at Ingalls & Snyder, an investment-management firm, expects the dollar to decline 10%, which will be enough to make US assets unattractive versus those in the rest of the world. "Some time this year, in September or October, you'll see the S&P down 20%," he warns.
    Well now, isn't that just special! So back to where we started: Was the TIC data rear-view mirror stuff? Is it all downhill from here as far as US asset demand is concerned?

    We've seen the dollar doubters spew their view many times during its rally since late December 2004. Who knows, they may get it right soon or later. For now, the path of least resistance in the dollar is down. From a trading perspective, that's probably about the best we can do.

    Black Swan offers a subscription-based currency advisory service for forex and futures traders.

    Jack Crooks has actively traded in global equity, fixed income, commodity, and currency markets for more than 20 years. He is president of Black Swan Capital, a currency and commodities market advisory firm - BlackSwanTrading.com

    McHugh’s Monday Market Briefing, April 17th 2006

    We received a third Hindenburg Omen Monday, April 17th, 2006.  This extends the risk period, as the clock continues to tick on the 73.8 percent probability that equities are about to fall over 5 percent from current levels over the next four months, on the 52 percent probability that equities will drop more than 8 percent over the next four months, on the 39 percent probability that equities will drop 10 to 14.9 percent over the next four months, and on the 26.1 percent probability that the stock market will crash — either fast or slow motion — over the next four months.  Only one out of 11.5 times does this signal fail to generate at least a 2 percent decline from current levels.  Most declines are well underway within a month of this signal.  This is only the 24th confirmed Hindenburg Omen in the past 21 years, and so far has a cluster of three signals. We got one almost exactly two years ago, on April 13th, 2004, which led to a 5.4 percent drop before the PPT stopped it cold with massive infusions of liquidity.  We got one on September 21st, 2005, which the PPT also stopped with huge chunks of M-3, that one coming along with the three devastating Hurricanes of 2005.  There has not been one major stock market decline over the past 21 years that was not first preceded by a confirmed Hindenburg Omen. Here we go again.

    As of April 177h, 2006, here are the cluster of signals (3 so far) that meet all five of the conditions required for a potential stock market crash warning:

    April 17th, 2006: There were 3,440 issues traded on the NYSE Monday, with 113 New 52 Week Highs and a rising 190 New 52 Week Lows.  The common number of new highs and lows is 113, which is 3.28 percent of total issues traded. The McClellan Oscillator came in at negative –163.12, and the 10 week NYSE Moving Average is rising. New Highs were not more than double new lows.

    April 10th, 2006:  The figures were 3,463 total issues traded on the NYSE Wednesday, with 86 New 52 Week Highs and 104 New 52 Week Lows.  The common number of new highs and lows is 86, which is 2.48 percent of total issues traded, above the minimum threshold of 2.2 percent.  The McClellan Oscillator came in at negative -135.71, and the 10 week NYSE was rising.  New highs were not more than double new lows.

    April 7th, 2006:  The figures were 3,435 total issues traded on the NYSE Wednesday, with 167 New 52 Week Highs and 103 New 52 Week Lows.  The common number of new highs and lows is 103, which is 3.00 percent of total issues traded, above the minimum threshold of 2.2 percent.  The McClellan Oscillator came in at negative -120.43, and the 10 week NYSE was rising.  New highs were not more than double new lows.

    As for the McClellan Oscillator, Monday’s change from Thursday’s was small, as was Thursday's from Wednesday’s. While not a guarantee, small changes in this indicator usually lead to large price moves within a few days.  The past three day’s readings were –163.12, -164.24, and –168.38. There are a couple of ways to label the decline since April 7th’s small degree wave 2 top: Either we have traced out five waves down — the first leg of a small wave three in process, which means we are due for a 150 point rally in the DJIA — or we are just starting a sub-degree wave three down inside the small wave three, which means we could see a couple hundred point decline over the next few days. So the EW labeling is not directionally helpful short-term. This afternoon’s out-of-the-blue rally had strong volume behind it, which suggests a possible small rally could follow.  The PPT may be getting nervous as the Dow Industrials near 11,000. In fact, CBOE put options are on the rise, hitting 105 percent of their 10 day average Monday, and the PPT Intervention Risk indicator rose a bit to minus -5.23. Any short-covering rally here is not likely to lead to a significant multi-week advance, not until our PPT indicator rises toward positive18.00.
    The Dow Industrials lost 63.87 points Monday, closing at 11,073.78.  NYSE volume was light at 85 percent of its 10 day average. Downside volume was unimpressive at 56 percent, and declining issues were a mild 55 percent. S&P 500 downside points were only 49 percent. While these figures suggest Monday was a mild down day, NYSE New 52 week Lows hit their highest level all year, and were the most since November 16th, 2005.  Our studies of New Lows indicates that we are not approaching a multi-month bottom until they rise above 300.  The higher they go, they more long-lasting the bottom. The point is, we are not near a multi-month or even multi-week sustainable bottom here.

    S&P 500 Demand Power fell 1 point and the absence of buyers was responsible for the mild decline as Supply Pressure was Flat at 398.  Selling has been slow to develop, and until it does, any decline should be mild.  Our Secondary Trend Indicator fell 3 points to minus –7, and is still within the neutral zone of minus -30 to plus +30.

    The Blue Chip indices’ key trend-finder indicators remain on “sell” signals Monday.  The DJIA 14 day Stochastic Fast measure fell to 30.00, below the Slow reading of 32.00.  It’s “sell” from April 7th remains intact.  The S&P 500/DJIA Purchasing Power Indicator fell to a new low for the decline since April 11th, at 87.59, but the decline was small and on a rounded decimal basis, this indicator was flat Monday. The NYSE Advance/Decline Line Indicator fell to minus –383, and its “sell” from April 7th remains in force.
    The Russell 2000 small caps index fell 1.64 points to 749.47.  Volume was light at 91 percent of its 10 day average, with downside volume a mild 56 percent and declining issues at 62 percent. The Russell 2000 Purchasing Power Indicator remains on its “sell” from April 10th at 106.20, and would need to rise above 109.95 to trigger a new “buy.”  The RUT’s 10 day average Advance/Decline Line Indicator dropped to minus –288, and its “sell” signal from April 10th remains in play.

    The NASDAQ 100 appeared to have a bad day on its surface, and the point loss was sharp, however our measure of underlying Demand Power and Supply Pressure indicated that both buying and selling was lackluster. Demand Power fell 1 point to 397, while Supply Pressure rose 1 point to 402. NDX volume was 96 percent of its 10 day average, with downside volume a strong 85 percent, declining issues at 77 percent, and declining points at 78 percent. What showed up to trade was primarily to the downside, we just didn't see a huge underlying push to dump stocks.

    Both NASDAQ 100 key trend-finder indicators remain on “sell” signals Monday evening.  The NDX 14 day Stochastic Fast measure comes in at 33.00, below the Slow at 46.60, and its “sell” from April 10th remains in force.  The Stochastic measures the momentum of breadth. The NDX Purchasing Power Indicator comes in at 110.82, down 3 points, to a new low for the recent decline.  It’s “sell” from April 11th remains intact. The Purchasing Power Indicator measures the net effects of supply and demand, with our Demand Power and Supply Pressure indicators a breakdown of the separate components of the PPI.

    Gold had another huge up day.  Gold is telling us inflation is out of control, is telling us the government inflation statistics are lies, is telling us money supply is rising through the roof, despite the Fed hiding the M-3 figures. The HUI Amex Gold Bugs Index rose 13.79 points, or 4.0 percent Monday, to a new high at 362.54.  Volume was strong at 109 percent of its 10 day average, with all issues advancing.  Both key trend-finder indicators remain on “buy” signals Monday evening, the HUI 30 day Stochastic Fast measure rising to 100.00, above the Slow at 95.06.  Its “buy” from March 24th remains intact.  In fact, study the HUI Purchasing Power Indicator chart from issue no. 308 last Wednesday, and take notice of the incredible correlation of moves.  This indicator is a huge money maker for those trading the HUI, or a proxy such as Newmont Mining (NEM). It does a marvelous job siphoning out any “noise” and identifying the multi-week trend. Since it generated a “buy” on March 24th, the HUI is up 48 points, or 15.3 percent. This one indicator alone is worth ten times the cost of a subscription to our newsletter. The HUI Purchasing Power Indicator rose to a new high at 235.02, and its “buy” from April 14th remains intact.  It is more sensitive to smaller corrections within the primary trend.

    Gold the metal rose a whopping $16.80 Monday, to close solidly above $600 an ounce at $613.31.  We have been on record suggesting that Gold could be headed for $800 an ounce sooner than many folks anticipate. Silver also had a bust out day, rising almost vertically to $13.50, up $0.60 on the day. Oil (WTIC) rose $1.16 a barrel to $71.98 Monday. When inflation assets rise like this, equities are in grave danger. The Dollar fell one percent, down 0.89 to 88.66.  Bonds rose a hair to 107^13.

    Bottom Line:  We are sitting in treacherous equity market waters here. Cash is good. However, don’t be surprised by a short-covering rally attempt over the next few days as a small corrective move up is possible. But perma-bull buying here is serving the useful purpose of taking stocks off the hands of the wise at or near a major market top. Caution is warranted.
                Best regards,

                 Robert McHugh, Ph.D.


    Towards 2020 Science

    From my lockergnome dailies.. 

    In the summer of 2005, an expert group was brought together to define a new vision and roadmap of the evolution, challenges, and potential of computer science and computing in scientific research in the next fifteen years. The resulting document, Towards 2020 Science, sets out the challenges and opportunities arising from the increasing synthesis of computing and the sciences. It seeks to build on computer intensive fields and advances that span genomics and proteomics, Earth sciences, and climatology, nanomaterials, chemistry and physics.

    Even so, according to the Economist, the team’s case is a respectable one.

    This week’s issue of Nature has devoted several pages to news and commentary about the report.

    China, Russia welcome Iran into the fold

    By M K Bhadrakumar

    The Shanghai Cooperation Organization (SCO), which maintained it had no plans for expansion, is now changing course. Mongolia, Iran, India and Pakistan, which previously had observer status, will become full members. SCO's decision to welcome Iran into its fold constitutes a political statement. Conceivably, SCO would now proceed to adopt a common position on the Iran nuclear issue at its summit meeting June 15.

    Speaking in Beijing as recently as January 17, the organization's secretary general Zhang Deguang had been quoted by Xinhua news agency as saying: "Absorbing new member states needs a legal basis, yet the SCO has no rules concerning the issue. Therefore, there is no need for some Western countries to worry whether India, Iran or other countries would become new members."

    The SCO, an Intergovernmental organization whose working languages are Chinese and Russian, was founded in Shanghai on June 15, 2001 by China, Russia, Kazakhstan, Kyrgystan, Tajikistan and Uzbekistan. The SCO's change of heart appears set to involve the organization in Iran's nuclear battle and other ongoing regional issues with the United States.

    Visiting Iranian Deputy Foreign Minister Manouchehr Mohammadi told Itar-TASS in Moscow that the membership expansion "could make the world more fair". And he spoke of building an Iran-Russia "gas-and-oil arc" by coordinating their activities as energy producing countries. Mohammadi also touched on Iran's intention to raise the issue of his country's nuclear program and its expectations of securing SCO support.

    The timing of the SCO decision appears to be significant. By the end of April the director general of the International Atomic Energy Agency is expected to report to the United Nations Security Council in New York regarding Iran's compliance with the IAEA resolutions and the Security Council's presidential statement, which stresses the importance of Iran "reestablishing full, sustained suspension of uranium-enrichment activities".

    The SCO membership is therefore a lifeline for Iran in political and economic terms. The SCO is not a military bloc but is nonetheless a security organization committed to countering terrorism, religious extremism and separatism. SCO membership would debunk the US propaganda about Iran being part of an "axis of evil".

    The SCO secretary general's statement on expansion coincided with several Chinese and Russian commentaries last week voicing disquiet about the US attempts to impose UN sanctions against Iran. Comparison has been drawn with the Iraq War when the US seized on sanctions as a pretext for invading Iraq.

    A People's Daily commentary on April 13 read: "The real intention behind the US fueling the Iran issue is to prompt the UN to impose sanctions against Iran, and to pave the way for a regime change in that country. The US's global strategy and its Iran policy emanate out of its decision to use various means, including military means, to change the Iranian regime. This is the US's set target and is at the root of the Iran nuclear issue."

    The commentary suggested Washington seeks a regime change in Iran with a view to establishing American hegemony in the Middle East. Gennady Yefstafiyev, a former general in Russia's Foreign Intelligence Service, wrote: "The US's long term goals in Iran are obvious: to engineer the downfall of the current regime; to establish control over Iran's oil and gas; and to use its territory as the shortest route for the transportation of hydrocarbons under US control from the regions of Central Asia and the Caspian Sea bypassing Russia and China. This is not to mention Iran's intrinsic military and strategic significance."

    Russian Foreign Minister Sergey Lavrov said: "I would not be in a hurry to draw conclusions, because passions are too often being whipped up around Iran's nuclear program ... I would also advise not to whip up passions."

    Sergei Kiriyenko, head of Russia's nuclear power agency and a former prime minister, said Iran was simply not capable of enriching uranium on an industrial scale. "It has long since been known that Iran has a 'cascade' of only 164 centrifuges, and obtaining low-grade uranium from this 'cascade' was only a matter of time. This did not come as a surprise to us."

    Yevgeniy Velikhov, president of Kurchatov Institute, Russia's nuclear research center, told Tier-TASS, "Launching experimental equipment of this type is something any university can do."

    By virtue of SCO membership, Iran can partake of the various SCO projects, which in turn means access to technology, increased investment and trade, infrastructure development such as banking, communication, etc. It would also have implications for global energy security.

    The SCO was expected to set up a working group of experts ahead of the summit in June with a view to evolving a common "energy strategy" and jointly undertaking pipeline projects, oil exploration and related activities.

    A third aspect of the SCO decision to expand its membership involves regional integration processes. Sensing that the SCO was gaining traction, Washington had sought observer status at its summit meeting last June, but was turned down. This rebuff - along with SCO's timeline for a reduced American military presence in Central Asia, the specter of deepening Russia-China cooperation and the setbacks to US diplomacy in Central Asia as a whole - prompted a policy review in Washington.

    Following a Central Asian tour in October by US Secretary of State Condoleezza Rice, Washington's new regional policy began surfacing. The re-organization of the US State Department's South Asia Bureau (created in August 1992) to include the Central Asian states, projection of US diplomacy in terms of "Greater Central Asia" and the push for observer status with the South Asian Association for Regional Cooperation (SAARC) should be seen in perspective.

    US diplomacy is working toward getting Central Asian states to orientate toward South Asia - weaning them away from Russia and China. (Hamid Karzai's government in Kabul has also failed to respond to SCO's overtures but has instead sought full membership in SAARC.)

    But US diplomacy is not making appreciable progress in Central Asia. Washington pins hopes on Astana (Kazakhstan) being its pivotal partner in Central Asia. The US seeks an expansion of its physical control over Kazakhstan's oil reserves and formalization of Kazakh oil transportation via Baku-Ceyhan pipeline, apart from carving out a US role in Caspian Sea security.

    But Kazakhstan is playing hard to get. President Nurusultan Nazarbayev's visit to Moscow on April 3 reaffirmed his continued dependence on Russian oil pipelines.

    Meanwhile, Washington's relations with Tashkent (Uzbekistan) remain in a state of deep chill. The US attempt to "isolate" President Islam Karimov is not working. (Indian Prime Minister Manmohan Singh is visiting Tashkent on April 25.) Again, Tajikistan relies heavily on Russia's support. In Kyrgyzstan, despite covert US attempts to create dissensions within the regime, President Burmanbek Bakiyev's alliance with Prime Minister Felix Kulov (which enjoys Russia's backing) is holding.

    The Central Asians have also displayed a lack of interest in the idea of "Greater Central Asia". This became apparent during the conference sponsored by Washington recently in Kabul focusing on the theme.

    The SCO's enlargement move, in this regional context, would frustrate the entire US strategy. Ironically, the SCO would be expanding into South Asia and the Gulf region, while "bypassing" Afghanistan.

    This at a time when the North Atlantic Treaty Organization is stepping up its presence in Afghanistan. (General James L Jones, supreme allied commander Europe, said recently that NATO would assume control of Afghanistan by August.)

    So far NATO has ignored SCO. But NATO contingents in Afghanistan would shortly be "surrounded" by SCO member countries. NATO would face a dilemma.

    If it recognizes that SCO has a habitation and a name (in Central Asia, South Asia and the Gulf), then, what about NATO's claim as the sole viable global security arbiter in the 21st century? NATO would then be hard-pressed to explain the raison d'etre of its expansion into the territories of the former Soviet Union.

    M K Bhadrakumar served as a career diplomat in the Indian Foreign Service for more than 29 years, with postings including India's ambassador to Uzbekistan (1995-1998) and to Turkey (1998-2001).


    Commodities, China
    & Gold
    Interviewed by Peter Schiff, President and Chief Global Strategist

    There was a great division between me and many other analysts.
    I can remember some of the TV interviews I gave in the late 90s.
    The moderators were giggling and drooling over the latest
    doc.com success, just when I was saying buy commodities and
    buy China. By the end of the commodity boom, in 10 or 15
    years, everybody is going to be giggling and drooling on the
    financial TV shows, and saying “buy commodities.” Of course, if
    I am on the shows at that time, I’ll be saying it’s time to sell
    commodities. And they will would be giggling and drooling,
    saying, “Oh you old idiot, don’t you know commodities always go
    up. Don’t you know, this time things are different.” Of course,
    things will not be different. But in 2018 or so, everybody’s going
    to be shrieking about commodities. There will be shortages. And
    there well may be wars over commodities, between now and
    Exclusive Interview with Jim Rogers:
    Commodities, China & Gold
    Peter Schiff:
    In the late 1990's, most investors saw the brave new world of
    tech as the way to instant riches. You, instead, were focusing on
    commodities. Tech has collapsed, and commodities are booming.
    You were right, of course.
    Jim Rogers:
    In addition, one has to consider this: that the demise of the
    dollar is part of this problem. But overall, the commodity
    situation is not simple. It’s very complex, with many factors
    contributing to the world wide shortages. But, in the final
    analysis, there are shortages of commodities, and the shortages
    are getting worse.
    Peter Schiff:
    You always stressed the overwhelming importance of potentially
    explosive demand from China. You’ve also noted that the
    authorities there would periodically try to rein in runaway growth
    to keep things under control. It now increasingly looks like the
    overriding concern of the Chinese is in fact to keep the economy
    growing at all costs, in order to keep employment growing. What
    are your thoughts now on that score?
    Jim Rogers:
    Well, they’re still trying to keep the economy growing. But the
    main thing the Chinese ware doing is trying to avoid economic
    bubbles. For example, they have been trying to cut back on real
    estate speculation in China. They have been successful, at least
    to some extent, in real estate. Prices have weakened in many
    parts of China and some speculators have gotten into trouble.
    I’ve always said that the main part of the Chinese economy will
    continue to do well, even though speculators in Shanghai go
    broke. If you’re out there building infra-structure, or in the coal
    business or agriculture, or in many other areas of the Chinese
    economy, you will do well. Yes China is interested in increasing
    employment, and keeping the economy strong. But
    simultaneously, they are trying to keep things from overheating.
    The right sectors in China will continue to be very buoyant.
    Peter Schiff:
    Let’s talk specifically about commodities and energy. To what
    extant can technology and alternative fuels rescue us from the
    commodity and energy shortage? I’m thinking about
    nanotechnology, nuclear power, gas hydrogenation to provide
    clean-burning coal, solar energy, etc.
    Jim Rogers
    Yes, technology can help, of course. But all these new
    innovations take enormous amounts of time to be developed and
    enter the marketplace. Eventually this commodity bull market
    (which includes energy) will come to an end, Peter. If history is
    any guide, some time between 2014 and 2022, the bull market in
    commodities will come to an end. That’s based on history, that
    is not a prediction. The average commodity bull market has
    lasted about eighteen years. Something eventually causes it to
    come to an end.
    Let’s look at alternative energy sources, for example. If we all
    decided today we wanted to have wind power, we couldn’t. You
    can’t get windmills. You can’t change the world that quickly.
    And solar is not competitive right now. Eventually it might be.
    But if we all decided today, Peter, to have solar panels on our
    roofs, you can’t get them. You can’t change that quickly.
    Nuclear of course, is making a come-back. But it takes years to
    build a nuclear power plant. And remember in the mean time the
    old plants are all becoming obsolete. The power plants in
    America are thirty to forty years old. So by the time a new one
    comes on stream, those plants will be forty or fifty years old.
    There has been massive underinvestment in things like mining,
    oil exploration, and agricultural development. Agricultural land is
    left fallow. Plantations give way to real estate development.
    Renewing commodity infrastructure, finding new sources of
    commodities, new oil fields, developing new plantations takes
    lots of time…years in many cases. Only one new lead mine
    opened in the world in twenty-five years!
    Technological changes are coming, of course. But it just takes a
    long, long time. We don’t reverse these things quickly. Almost
    every oil country in the world has got declining reserves. All the
    major oil companies are quite open about the fact that they are
    not replacing their reserves, not by discoveries anyway or
    development. Maybe they’re buying other oil companies. But
    that’s not increasing the amount of oil in the world. There’s
    going to be something to cause this bull market to come to an
    end, someday, but the emphasis should be on someday, because
    someday is a long way, away.
    Peter Schiff:
    There is still a lot of money to be made by investing in these
    commodities. Which brings me to my next question: Would you
    comment about the differences between renewable commodities,
    like trees, agricultural products, solar power, on the one hand,
    and depleting categories on the other?
    Jim Rogers:
    If I were looking at commodities these days, I would look at
    things like agriculture. Because agriculture, for the most part,
    has moved up less than metals or anything. You know, cotton is
    still 50% below its all time high. Soy beans are something like
    60% from the all time high. There are fundamental changes
    taking place. The amount of acres devoted to wheat around the
    world has been declining for 30 years. The world has consumed
    more corn than it has produced for five years in a row. That’s
    never happened in recorded history. The worldwide inventories
    are low, on a historic basis. And that’s without a drought. We
    haven’t had a major drought anywhere in the world for some
    time. We used to have them all the time. Will we never have a
    drought again? I doubt it.
    And, by the way, increasing agricultural production is not as
    simple as just planting as few seeds. Take coffee, for instance. It
    takes five years for a coffee tree to mature. If you and decided
    to go into the coffee business today, it would take our plantation
    a long time to come on stream and mature. . You don’t snap your
    finger, and magically fruit tress cotton plants, soy bean bushes
    appear. And in the meantime, the price of everything those
    farmers use is skyrocketing: natural gas, diesel fuel, labor,
    insurance, etc. Everything they use to produce their products it is
    also going up in price. So it takes a high price for them to start
    bringing on marginal land to produce new and more products.
    Peter Schiff:
    Possessing valuable commodities is one thing, but that means
    little if they are located in geographically unsafe areas of the
    world. Have you tended to concentrate your investments in the
    U.S., Australia, Canada, New Zealand, for example? Are there
    any other geographic areas you like?
    Jim Rogers:
    Well, the countries that have raw materials are obviously going
    to be a better place than ones that don’t – all other things being
    equal. But remember those words, all other things being equal. COMMODITIES, CHINA & GOLD 6 - EXCLUSIVE INTERVIEW WITH JIM ROGERS
    The Congo has huge amounts of raw materials. But I am not
    investing in the Congo. I don’t think its going to be a good place
    for my money. I prefer areas with lower geopolitical risk. Canada
    has, perhaps, the soundest currency in the world right now, and
    a strong economy. If you want to invest in North America, the
    best place to invest is Canada, whether it’s directly in the
    economy, the stock market or the currency. That’s the sort of
    place you want to be focusing on in times like these.
    Peter Schiff:
    We have a lot of our clients invested Canada. It amazes me that
    the Canadian fundamentals are now so good. Don’t forget,
    Canada used to be leftist, and had so many problems. Now it is a
    far safer place to invest that the United States.
    Jim Rogers:
    One of the reasons for their problems was that commodities were
    cheap, and Canada is a commodity-based economy. So, of
    course they had huge problems. So did other countries whose
    economies were driven by commodities. Partly because of those
    problems, it forced some of the Canadian politicians to wake up.
    They have now had a balanced budget for, I think, eight years in
    a row. They have had a trade surplus for ten years in a row. And
    now of course, they have the bull market in commodities at their
    back. Because of the great long term commodity outlook, as well
    as some other reasons, Canada offers better investment
    opportunities the U.S.
    Peter Schiff:
    When it comes to investing in these commodity driven countries,
    you don’t necessarily have to be invested in just the pure
    commodity plays. Just about any investment in a commodityoriented
    country would benefit from the overall growth of that
    country’s economy. And it is probable that the country’s currency
    Jim Rogers:
    Well, there is no question that retailers in Canada or Australia or
    Brazil are going to be better than in other countries. Anybody in
    a country which has an economy that is expanding is better off.
    Peter Schiff;
    Of course, all the earnings would be more valuable, from an
    American perspective. The earnings are in a currency that is
    appreciating relative to our own.
    Jim Rogers:
    Exactly. By the way, some of the countries like Brazil, Peru,
    even Argentina, will be much better off than they were in the
    past. However, when the commodity bull market comes to an
    end in fifteen years or twenty years I wouldn’t bet that they
    don’t go back into the same old problems. But that’s a long way
    Peter Schiff:
    How do you deal with the cyclical concern that after 14 interest
    rate increases the U.S. economy may slow down later in 2006
    and into 2007. Would that have a significant downward effect on
    commodity prices in the intermediate-term?
    Jim Rogers:
    I expect the U.S. to have a decline in the economy this year and
    into next year. I don’t know how long the decline will last. We’ll
    probably have a recession. It is probably going to have an effect
    on some commodities, yes. But I would remind you, that there is
    always correction in every bull market.
    Peter Schiff:
    And I think from the American perspective, one of the big
    differences between this commodity cycle and the cycle in the
    seventies, is that then America was the world’s leading industrial
    economy: we manufactured everything. We had all the COMMODITIES, CHINA & GOLD 8 - EXCLUSIVE INTERVIEW WITH JIM ROGERS
    machines, we had a trade surplus, and we had a current account
    surplus. Now it’s the other way around. It’s Asia that is saving
    and manufacturing and producing. They’ve got the factories and
    the productivity and we’ve got no savings, a huge current
    account and a huge trade deficit and all we do is run around and
    service one another.
    Jim Rogers:
    We were an incredible nation in the seventies. We are now the
    largest debtor nation the world has ever seen. There’s another
    big difference. I don’t want you to think that there won’t be
    corrections, or there won’t be consolidation. But for the most
    part, it’s a secular bull market in commodities.
    Peter Schiff:
    Unfortunately, I think that Americans will feel the brunt of this
    commodity bull market on their standard of living much more so
    than they did in the 1970’s because of the underlying changes in
    the economy.
    Jim Rogers:
    And the currency situation makes things much worse in this bull
    market than it was in the seventies.
    Peter Schiff:
    Let me know if you agree with this observation that I have made.
    We are now seeing financial assets and commodities rising at the
    same time. I believe that it is not that everything is going up, but
    that currencies are going down. So even stocks and other
    financial assets appear to be rising, but what is really happening
    is that financial assets are losing value relative to commodities.
    Jim Rogers:
    Yes, there is no question that there is no soundness to paper
    currency anymore. There are some currencies that are sounder
    than others, but essentially there are virtually no sound paper
    Peter Schiff:
    Which brings me to my next question: your outlook on gold?
    You've always viewed gold differently from other commodities.
    Jim Rogers:
    The supply and demand dynamics for gold have been different
    from other commodities for two or three decades. I own some
    gold, but I’ve always tried to explain to people that they would
    make more money in other commodities than they would in gold,
    because of the supply and demand dynamics. Now that has been
    true for the last decade or so. For lead, in fact, you would have
    made a lot more money over the past thirty years, the past
    twenty years, the past ten years, than you would have in gold.
    But if you own gold, I still don’t expect to make as much in gold
    as I would in things like corn and soy beans. But I own it.
    Peter Schiff:
    For a while the Goldman Sachs Raw Materials ETF was the only
    commodity index fund available in that form. It has just been
    joined by a cousin, the Deutsche Bank Commodity index fund.
    More may join the party. Your thoughts?
    Jim Rogers:
    Now Merrill Lynch has a tracker fund based on my commodity
    index, The Rogers Commodity Index. The Goldman ETF has very
    serious flaws, as far as I am concerned. The Merrill Lynch Fund
    is a wonderful product, because it is the only financial instrument
    of which I am aware where you can get 100% long term capital
    gains after six months.
    Peter Schiff:
    Do you expect to see many more of these types of commodity
    Jim Rogers:
    Of course. Right now there are over 7,000 mutual funds in which
    the public can invest…there are fewer than 10 commodity funds.
    By he end of the commodity bull market there will many more
    commodity funds and products.
    Peter Schiff:
    Every good investment manager constantly asks him or herself:
    "what would cause me to change my mind?" What would cause
    you to change your mind on commodities?
    Jim Rogers
    If someone discovers a gigantic natural gas field in Spokane or
    Chicago, or the largest oil field in the world in the middle of the
    Atlantic, or a huge copper mine discovered in Tokyo, with easily
    accessible product, of course it will have an effect. If there is a
    dramatic increase in supply in a politically stable area, it will have
    an impact on prices. But even if dramatic new supplies are found,
    it takes years to bring them on stream.
    And likewise, if something dramatic happens to demand, it will
    have an effect on prices. But remember, even in bad economic
    times like the thirties and forties, commodities did a whole lot
    better than stocks and bonds – much, much better. And that
    was because the supply/demand equation was out of balance,
    like it is now. But, if we had some kind of devastation, of course,
    everything is going to suffer, at least for a while. But with that
    said, commodities from 1931 to 1953 were far, far, far and away
    a better place to be than stocks and bonds.
    Peter Schiff:
    And they certainly were a better place to be, in a recent bear
    market period, which was in the 1970’s.
    Jim Rogers:
    Peter Schiff:
    Basically then in either under a highly inflationary period or a
    recessionary period, you were better off holding commodities,
    raw material, rather than financial assets.
    Jim Rogers:
    The basic situation is when supply and demand are out of whack
    you are going to have a bull market. Whether it is inflation,
    recession, or whatever, if supply and demand are out of whack,
    prices will change. And they are seriously out of whack now and
    getting worse
    Peter Schiff:
    If you look at supply and demand, the one thing that we know is
    going to be in abundant supply is the U.S. dollar. And eventually
    the demand for the greenback is going to drop significantly.
    Because you cannot have huge demand for a currency that is so
    aggressively created. You need scarcity. So the fall in the dollar
    can be the biggest factor, from an American point of view,
    propelling the U.S. dollar price of commodities higher.
    Jim Rogers:
    That’s the icing on the cake. You can have a decline in the dollar
    and you wouldn’t necessarily have a bull market in commodities.
    Supply and demand are still the most important factors. We now
    we have supply and demand completely out of whack. These
    other things, like the dollar and war, are all icing on the cake.
    But the thing that has the biggest effect on commodity prices is
    this gigantic supply/demand imbalance. And it is definitely worse.
    Peter Schiff:
    And it comes from years and years of neglect and underinvestment
    in that area. And it is not going to change overnight.
    Well thank you very much Jim. It is always a pleasure talking
    with you, and I really appreciate the time you spent with us. I
    am sure our newsletter readers will appreciate your insights.

    April 17, 2006

    A Look at the Recent Horrors at the Longer End of the Treasury Curve

    by Douglas R. Gillespie

    On Monday, March 20th, I issued a strong, unequivocal sell recommendation on the stock market. As I explained at the time, the decision to do this was predicated on an amalgam of fundamental, technical and gut considerations. Very prominent among these was my growing bearishness on longer-dated, open-market interest rates. In turn, my bond-market views were heavily influenced by rapidly growing concerns of both a fundamental and technical nature.

    On balance, I am slightly ahead on my sell-stocks recommendation, and considering it was made going on a month ago, I feel pretty good about it. On a net basis, stocks have done little but back and fill, which means that thus far, the recommendation has worked out the way I would have hoped. To wit: people have had time to react to it in an orderly setting, without having been hurt in the process. In this regard, "hurt" means having prices move strongly against them to the upside.

    Incidentally, I would not have done this unless I thought equity prices had at least a 5% to 10% downside vulnerability from the levels prevailing at the time, with emphasis here placed on the "at least" part!

    But my pessimism on the stock market is not the subject at hand. Instead, it is what has happened to bond prices that I want to discuss.

    With the great interest-rate "conundrum" that Greenspan had been pondering for a long time, it occurred to me that many people might have forgotten the magnitude of negative price volatility of which longer-dated, fixed-rate debt obligations were capable under adverse circumstances. Therefore, on March 31st, I penned a short missive addressing the subject of bond-market total return.

    (As an aside, Greenspan and his highly, highly questionable monetary policy of recent years created the conundrum over which he so often mused. Uncle Al, Wall Street's pal, knew it, too! But as the saying goes, "timing is everything," and Greenspan got out just in time, before all hell broke loose at the longer end of the Treasury yield curve. To put icing on the cake, at least over the short run, Greenspan can blame Bernanke for what has happened. This is while Uncle Al sets out to establish his legacy, concurrently pimping huge speaking fees and a multi-million-dollar book deal!)

    When I wrote my late-March piece, the 10-year note the Treasury had auctioned as part of its February refunding operation already had sunk to a negative total return of 1.89% (comprised of an income accrual of +0.54%, netted against a loss in principal value of 2.43%.) In a world of highly leveraged hedge-fund carry trades and the like, this was pretty ugly, as well as potentially dangerous. Dangerous in the sense that large sell-offs over a short period of time ran a risk of margin calls, thereby exacerbating the sell-off.

    And while I cannot prove this is what has taken place, the additional large net decline over the last few days suggests it could have. For instance, the 10-year note (Treasury 4.50s of 2/15/2016) finished yesterday at a yield of 5.05%, a whopping 51 basis points higher than the 4.54% yield at which it was auctioned not very long ago. As for the 30-year bond auctioned in February (Treasury 4.50s of 2/15/2036), it ended yesterday at 5.11%, 58 basis points higher in yield than its February auction price. And because of the 30-year bond's much longer duration, its price has really been spanked in the open market.

    To put this in context through yesterday, the 10-year note's total return from the time it was paid for in mid-February through yesterday's close was minus 3.21% (income accrual of +72 basis points, netted against a loss in principal of 3.93%). As for the 30-year bond, its total return was a stunning minus 8.15% (income accrual of 72 basis points, netted against a loss of principal of 8.87%... Yes, you read correctly, that is minus 8.87%!).

    Is the bloodletting over? I rather doubt it, but that, too, is a discussion for a different time and place. In the meantime, the following link will take readers to my March 31st missive that helps supplement the points made here. That piece was entitled, "The Potential Horror of Fixed-Income Total Return" and can be read by following this link: www.gillespieresearch.com/cgi-bin/s/article/id=800

    April 16, 2006

    Bull And Bear Zoology

    by Nassim Nicholas Taleb

    The general press floods us with concepts like bullish and bearish which refer to the effect of higher (bullish) or lower (bearish) prices in the financial markets. But also we hear people saying “I am bullish on Johnny” or “I am bearish on that guy Nassim in the back who seems incomprehensible to me,” to denote the belief in the likelihood of someone’s rise in life.

    I have to say that bullish or bearish are often hollow words with no application in a world of randomness—particularly if such a world, like ours, presents asymmetric outcomes.

    When I was in the employment of the New York office of a large investment house, I was subjected on occasions to the harrying weekly “discussion meeting,” which gathered most professionals of the New York trading room.

    I do not conceal that I was not fond of such gatherings, and not only because they cut into my gym time. While the meetings included traders, that is, people who are judged on their numerical performance, it was mostly a forum for salespeople (people capable of charming customers), and the category of entertainers called Wall Street “economists” or “strategists,” who make pronouncements on the fate of the markets, but do not engage in any form of risk taking, thus having their success dependent on rhetoric rather than actually testable facts.

    During the discussion, people were supposed to present their opinions on the state of the world. To me, the meeting was pure intellectual pollution. Everyone had a story, a theory, and insights that they wanted others to share. I resent the person who, without having done much homework in libraries, thinks that he is onto something rather original and insightful on a given subject matter (and I respect people with scientific minds, like my friend Stan Jonas, who feel compelled to spend their nights reading wholesale on a subject matter, trying to figure out what was done on the subject by others before emitting an opinion—would the reader listen to the opinion of a doctor who does not read medical papers?).

    I have to confess that my optimal strategy (to soothe my boredom and allergy to confident platitudes) was to speak as much as I could, while totally avoiding listening to other people’s replies by trying to solve equations in my head. Speaking too much would help me clarify my mind, and, with a little bit of luck, I would not be “invited” back (that is, forced to attend) the following week.

    I was once asked in one of those meetings to express my views on the stock market. I stated, not without a modicum of pomp, that I believed that the market would go slightly up over the next week with a high probability. How high? “About 70%.”

    Clearly, that was a very strong opinion. But then someone interjected, “But, Nassim, you just boasted being short a very large quantity of S&P 500 futures, making a bet that the market would go down. What made you change your mind?”

    “I did not change my mind! I have a lot of faith in my bet! [Audience laughing.] As a matter of fact I now feel like selling even more!”

    The other employees in the room seemed utterly confused. “Are you bullish or are you bearish?” I was asked by the strategist.

    I replied that I could not understand the words bullish and bearish outside of their purely zoological consideration. My opinion was that the market was more likely to go up (“I would be bullish”), but that it was preferable to short it (“I would be bearish”), because, in the event of its going down, it could go down a lot. Suddenly, the few traders in the room understood my opinion and started voicing similar opinions. And I was not forced to come back to the following discussion.

    Let us assume that the reader shared my opinion, that the market over the next week had a 70% probability of going up and 30% probability of going down. However, let us say that it would go up by 1% on average, while it could go down by an average of 10%.

    What would the reader do? Is the reader bullish or bearish?

    Event Probability Outcome Expectation
    Market goes up 70% Up 1% 0.7
    Market goes down 30% Down  10% -3.00
        Total -2.3

    Accordingly, bullish or bearish are terms used by people who do not engage in practicing uncertainty, like the television commentators, or those who have no experience in handling risk. Alas, investors and businesses are not paid in probabilities; they are paid in dollars. Accordingly, it is not how likely an event is to happen that matters, it is how much is made when it happens that should be the consideration. How frequent the profit is irrelevant; it is the magnitude of the outcome that counts.

    It is a pure accounting fact that, aside from the commentators, very few people take home a check linked to how often they are right or wrong. What they get is a profit or loss. As to the commentators, their success is linked to how often they are right or wrong. This category includes the “chief strategists” of major investment banks the public can see on TV, who are nothing better than entertainers.

    They are famous, seem reasoned in their speech, plow you with numbers, but, functionally, they are there to entertain—for their predictions to have any validity they would need a statistical testing framework. Their frame is not the result of some elaborate test but rather the result of their presentation skills.

    Good trading,

    Nassim Nicholas Taleb

    From Fooled By Randomness, Copyright © 2004 by Nassim Nicholas Taleb. Reprinted by arrangement with Random House.


    Edited By Jeff Greenblatt
    April 13-16, 2006
    Since Passover and Easter happen to fall in the same period, happy holidays to all!
    This isn't reaching you on Thursday night, but then again, there's still plenty of time before the markets open on Monday, right?
    Since there are so many new readers, an explanation of my methodology is in order.  As well, this is a good time for a little advance promotion for the ebook. Those of you who have been here over the course of the past 3 years, this isn't the same dissertation you've read before.....There is a new shift in the methodology used here.
    About 5 years ago, I started having my forecasts posted in Club EWI, the Prechter chatroom.  A couple of them worked out very nicely and I was hooked. They also took notice but that's a story for another day.  When they started calling the top of the week back in 2003, I already decided to create a short term update of my own without the agenda of having to live up to a Grand Supercycle Bear Market crash.  I'm not trying to win the Nobel Peace Prize.
    I am at heart an Elliottician but those of you who are regular readers know I've been influenced along the way by people like Nison, Merriman, Gann, Wilder, Dorsey, Kaltbaum, Bill Williams, Leibovit and Mark Douglas. You have astrology, candlesticks, momentum, Delta, PnF,  volume, chaos theory, sentiment and psychology. Folks, you can never have enough tools in the shed in this business.
    Some of you are familiar with the work of Jim Sloman and Al Larson who are doing groundbreaking research in the area of how gravity and the tides affect financial markets. There is also Erman who has a formula of how the golden spiral affects price movements which differentiates his work from Elliott.  Over a half century ago Bradley figured out a complex formula for computing how the gravitational pull of the various planets affects price movements here on Earth.  Of course, the master of them all was Gann, who was able to translate most of the above in a practical way and apply it to financial markets better than anyone ever has.  Truth is most of these methods are extremely difficult for an individual to master.
    What is being done here is I've uncovered a methodology that doesn't take YEARS TO LEARN that is an improvement/enhancement of existing Elliott/Fibonacci cycles and studies.  Others have touched on the time dimension in their work but nobody works with it (especially the Lucas sequence) to the depth done here on a daily basis. When the ebook is done you will see an added dimension to technical analysis over and above price and volume which is simple to recognize once you know what to look for.  Problem is most don't know what to look for.   The beauty of this methodology lies in its simplicity. However simple it may be, don't confuse simplicity with easy.  The best part is how well it complements the technical work many of you are already doing.
    There is a small circle of you working with these time sequences who already know exactly what I'm talking about.
    If you are a support and resistance trader, these time sequences will tell you the highest probability window when price action will either reverse or break through.  This goes hand in hand with the candlesticks.
    If you are an Elliottician, these sequences confirm wave counts. Waves tend to complete on important time bars.  If you are wondering when a wave is going to end, knowing the bar count in the various degrees of trend takes much of the subjectivity out of Elliott.
    If you work with volume patterns, cup and handle patterns or anything you might read in the IBD, these time sequences navigate the highest probability window of when there will be a breakout.
    If you do point and figure, these time sequences will confirm your box reversals.  As a matter of fact time sequences are leading indicators and give you advance warning of your 3 point reversals.
    If you are into astrology, the daily counts work beautifully with Merriman's geocosmic signatures OR the Bradley Model.  As a matter of fact, we know how inconsistent Bradley can be and if your Bradley date does not cluster with a time date, there is a great chance the Bradley turn WON'T WORK. 
    If you work with MACD, stochastic or any other momentum indicator you know they can stay at extreme for some time.  However, when we get to an extreme condition usually we get the turn when the market hits the time window.
    I don't care if you work with stocks, Rydex, options, bonds, gold, futures, currencies, the European market or the Australian market.  This is a wonderful complement to WHATEVER YOU ARE DOING!  In other words, we are adding a whole new dimension to technical analysis. 
    However, you will have to decide if you are ready to incorporate something NEW into your game.  Some of you might be set in your ways and if you don't think your game needs to improve, fine!  But who can't do better?    Understand this, what we are doing here IS NOT A SYSTEM!  This is the natural order of HOW FINANCIAL MARKETS WORK. 
    You might be asking, if this is such a breakthrough, why don't we get every call in every market correct.  A good question.  The real answer is this work is a major first step in our understanding of how financial markets really work. The Wright Brothers achieved liftoff but they didn't make it to the moon.  The truth is someday, somebody is going to come out with a formula of how the various gravitational pulls of all the planets affect the tides which affects crowd psychology which affects the golden spiral which affects which Fibonacci/Lucas sequence turns the markets in the varying degrees of trend.  That will be the holy grail and somebody in the 21st century is going to figure that out. Until such time we have to be satisfied in working with the highest probability points in time of a Lucas/Fibonacci sequence turn. Until the Fibonacci Forecaster came along, nobody understood how Lucas does turn the markets.  The good news is what we do here is good enough to give anyone a HUGE EDGE without having to knock yourself out learning about planetary or ocean cycles.  Like whatever else you are doing in technical analysis, this is right there.
    What you will be seeing in the future in this column is a further departure from traditional Elliott because while the waves provide a picture of  the mood, structure and psychology of the action on any given chart something is missing. Wouldn't you agree?  With all the subjectivity in interpreting Elliott, wouldn't it be helpful to have something definitive you could sink your teeth into? We don't need to know exactly where we are in the wave count BUT WE DO KNOW WHEN NASDAQ HITS 262!!!   You know what I'm talking about.  It is these time principles that are leading the waves. Even with the time methodology, for the reasons mentioned above, there will be plenty of times where these markets are too complicated to read.  All I'm doing is helping us to have greater understanding of how these markets work in a practical and simple way. Again, don't confuse simple with easy.  However, if you could increase your understanding of how financial markets work even by 5% a month, what would that mean to your bottom line in the course of a whole year?
    It seems these holiday periods get longer all the time.  Trading slowed early Wednesday and for goodness sakes, the markets weren't closed until Friday!  As of Tuesday night, we knew the markets could have elected to bounce from either Tuesday's low which was a small degree 61% retracement or in the case of the NDX for instance, the larger one at 1678.  We know what happened.  However, Thursday was the full moon and also a potential near term cycle point.  We did not set a low there as we could have done.  My concern, as I see so many times on these charts as we enter potential turns is we end up turning early but it actually is just a SPIKE or a headfake.  To give you an idea what I'm talking about.  Thursday afternoon on the NQ we were in an intraday downtrend.  On the 5 min chart we were already down 57 bars.  At that point you can anticipate a potential low on bar 61-62.  However we hit 57...58....59 THEN WE BOUNCE up for 60...61 and a sharp spike down on 62 and then 63.  My point is when we turn early, often times it just turns how to be a SPIKE created by an inversion of the cycle.  Why this happens I HAVE NO IDEA. But it happens.  So if the full moon is the potential near term change, we turned 2 days early.
    From what I've seen so far, the biotech topped early just like it bottomed early back in 2002.  This condition was noted here weeks ago in the dissertation of market tops.  The biotech still shows no sign of a lasting bottom.  The high created by the NASDAQ as a result of the 262nd hour turn to this point is a more impressive calculation than whatever I've seen that created Tuesday's low. 
    Problem here is when I look at the SOX on an intraday basis since Tuesday's low I see absolutely nothing.  On an hourly basis or a 15min we have a virtual trendless market.  We have to go to the daily chart to pick up the trend. The bottom line is the drop we had on April 7th was the 26th bar off the last major pivot on March 2 which kicked off a small wave down.  I bring that up because if we were now in a new uptrend we likely don't drop on that bar the way we did.  The wave up in the SOX also had a squaring of time where the first leg up was 16 hours compared to the whole leg that reversed on the 16th day.   The whole move was 38.43 points which has a good Fibonacci relationship.   The bottom line to the SOX right now is the micro trend is sideways but the weight of the evidence suggests the larger trend is still down.   For now the bias is sideways to down.
    As far as the NQ or NDX is concerned, we were up 21 days and down only 3 days.  I don't think there is enough time in this leg down. The Dow hit a low in 16 days and the bounce hasn't been too impressive.
    BOTTOM LINE:  Thursday Nasdaq volume was 1.6b.  You can chalk it up to the holiday but still its a light volume bounce.  We still determine market psychology by greed and fear.  If buyers really wanted to buy they would have put up a better show.  Unless I get evidence to the contrary I'm viewing this as a B wave bounce, an inversion, whatever you want to call it.  Key resistance in the NASDAQ is 2347, NDX 1729, Dow 11221 and 1301 in the SP500. This leg up is not done and I don't think we've seen the low yet. So what I'm looking for is slightly more upside with a higher probability drop to larger support levels. 
    I think we could take a lesson from the folks down under who are on an extended holiday from trading.  Markets closed early on Thursday and correct me if I'm wrong, are closed until next Wednesday. I'm sure my friends down under will come back renewed and refreshed.  The move so far looks corrective but the big recovery day was nullified the next day.  The reversal hit in the time window we've discussed for the past 3 weeks.   Finally, trading ended earlier on Thursday so there is not anything new to add.  You will come back from the break dealing with a corrective pattern off the high which is likely not done.
    The story here is the XAU continues to lag the metal.  I'm not here to tell you why that might be from a fundamental basis.  What I do know is we've retraced 78% of the selloff and there are 2 technical schools of thought working.  First, from a pure wave basis, there is a chance we've had 5 waves up that completed to the recent high.  The other view, which I favor and explained last time is the time progression off the low.  To review, the first wave up was 29 (Lucas) hours and the next move was nearly 76 (Lucas) hours which gives us a 2.618 C or 3rd wave extension in terms of time.  The pattern off that recent high looks sideways and is setup to test the recent secondary high at 149.  That's as far as the waves reveal.
    Gold has put in another nice impulse wave off the March 10th low. If we look at this from a pure common wave relationship, the 1.61 extension point of wave one as measured from the bottom of wave 2 was back on March 30 around the 592 area.  Common sense dictates that if we didn't stop at a 1.61 extension, the chances are good we are going to get to the 2.61 extension point.  However, we've been hung up now this entire month of April at a point that traders look to take profits as previously mentioned. That would be the drop from March 2-10.  Folks, that's not an iron rule that is set in stone but there is a segment of participants that do look at things that way. We've been hung up going sideways in this general area for 2 weeks.   The first leg up off the 10th was 24 points and we hit that secondary low at 550.  A 2.618 extension is 62 points and would take us to 612 which is right in my zone for a longer term high (610-618).  To give you some kind of idea of the internals of this chart the first leg up here was 18 hours and we pulled back for 18 hours.  The next leg (which surpassed the 1.61 price extension) took a 3 day pause after going up 62 hours.  If you divide 18/62 you get .29 (Lucas).  Mind you, some of these arcane relationships are not to be traded upon but when you try to figure out what IS going on, the market supplies evidence in not so obvious ways.   At this stage of the game we've expired many time relationships that COULD have reversed this chart (like it did the XAU) but DIDN'T.  I'm looking at a sideways pattern here that will likely end up chopping its way to that 612 marker.
    Silver had conditions that could have created a bigger pullback back on day 147 of the trend last week where it put in that doji but the chart was still way too strong.  Now, Monday is day 156 of the present trend so we are very close to a potential turn window either here around day 155 or in a week when it gets to the 160-62 time frame.
    BOTTOM LINE:  You can go elsewhere to hear about the bull market as we've reached some sort of point of recognition.  Consider that after a point of recognition is reached we must be closer to the end of the wave than the beginning.  What I'm attempting to do is stay on top of points in time that could surprise people and create the reversal that seemingly comes from an invisible ceiling.  
    We may be close to a break in one direction, likely no longer than 3 trading days from here.  If we were to go down, we will be 18 days off the last pivot high by Wednesday and a downtrend will respect that pivot.  On the other hand, we are 6 days off the low and either Lucas 7 or Fibonacci 8 will cause a break north if we are respecting the lower pivot.  See how this works?  If the triangle scenario holds, we have already seen the low and should head higher.  What is interesting is I've heard quite a few analysts (including Arch Crawford) trash the dollar recently but it is hanging tough in the face of continued strength in the medal. One thing dollar bears have going in their favor is the recent low is 52 days off the January low and if we were going to break out I would have preferred to see the reversal come on an important Fibo or Lucas pivot but we didn't.  We bottomed on 18 days to the near term trend which gives me reason to believe we are not ready to break to the upside yet.  The bottom line is I'm slowly losing confidence that we have a completed triangle that is ready to break to the upside. If my analysis isn't crystal clear it is because the chart isn't crystal clear.  IS IT?
    Tuesday night we were discussing a small degree inversion and that's exactly what happened.  The discussion centered on what happens when we get close to an important set of bars.  In a continuing trend they can spike or dip into the window and keep the trend in place alive.  What happened here as opposed to a 3 day spike (bars 60-62), we spiked on day 60 but made a fresh low in day 61 which where we closed the week.  Now the momentum indicators are at least level to the point where there can be considered a slight positive divergence.  I think we are close to a bigger bounce.
    We are at the moment of truth.  A retest of the high that either creates a double top or a larger basing period that could launch a new wave of aggravation motorists everywhere.  Luckily we are in a position where we are right at a cluster of relationships THAT COULD TURN THE MARKET.  Wednesday we hit the 39th day of the trend (FBI 38.6) and Thursday we hit the 199th (Lucas) hour which set a lower high by 5 cents. There are other relationships that could reverse this market but unless we would see an overpowering black candle come in that would tell us we've definitively failed at resistance I wouldn't see it as anything more than a pullback.
    For those of who are new, this is the link you follow to get to the charts.  IF you like what you see, please vote for it at the bottom of my page once a day.
    The content in THE FIBONACCI FORECASTER is for educational and informational purposes only.  There is no offer or recommendation to buy or sell any security and no information contained here should be interpreted or construed as investment advice. Do you own due diligence as the information is the opinion of Jeff Greenblatt and subject to change without notice.   Please be advised to consult your investment advisor, attorney or tax professional before making any investment decisions.  Jeff Greenblatt will not accept any responsibility or be liable for any investment decisions based on the information discussed here.
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    Hedges Winge

    New York - Get your hankies ready: Hedge funds feel they're the
    newest victims.

    A long-simmering issue may soon come to a boil, potentially putting
    Wall Street's largest firms on the hook for billions more in
    liabilities years after the research scandal that extracted $1.4
    billion in legal fines from ten of the most influential investment

    This time, prime brokers face scrutiny for the fees they charge hedge
    fund clients, with securities lending being a particular focus.

    Attorneys at plaintiffs' firm Milberg, Weiss, Bershad & Schulmanare
    investigating securities lending fees and other practices by the
    biggest prime brokers and are considering bringing a class-action
    lawsuit on behalf of hedge funds.

    Steven Schulman, a partner at the firm, said Tuesday that it's still
    investigating the issues and declined to discuss details of any
    lawsuit. But he did say, "We're thinking about what we need to do."

    Prime brokerage is the business of catering to hedge funds,
    everything from loaning securities so funds can sell them short to
    providing office space for startup funds. The business has
    consolidated among the biggest three: Goldman Sachs Group (nyse: GS -
    news - people ), Morgan Stanley (nyse: MS - news - people ) and Bear
    Stearns Cos. (nyse: BSC - news - people ) in recent years, though
    several other banks have tried to get bigger in it, including Bank of
    America (nyse: BAC - news - people ), Credit Suisse (nyse: CSR -
    news - people ) and Merrill Lynch (nyse: MER - news - people ).

    Securities lending is among the most lucrative of prime brokerage
    services to the banks, reaping some $10 billion in annual fees, and
    the business just keeps growing as more hedge funds pop up. But it is
    also among the most opaque of businesses, with plenty of opportunity
    for abuse, lawyers unconnected with the Milberg firm say.

    Hedge funds have alleged privately for years that they are being
    overcharged for prime brokerage services or charged wrongly for
    services that haven't been performed. Most of the griping has to do
    with securities loaned but never delivered, the allegation being that
    the prime brokers are lending securities at high fees without
    actually having possession of the securities to lend in the first

    Playing by the rules, a trader can't sell short a security without
    having possession of it by the settlement date, or the trade would be
    what's called a naked short. A trade is often made while the
    settlement process continues, and most trades wind up with the
    security being delivered in ten days. Prime brokers lending
    securities to clients presumably assure their client that the
    borrowed securities will be delivered.

    The hedge fund pays a fee to borrow the shares, presumably with the
    knowledge that the delivery will occur. The allegation of fraud comes
    in when the prime broker takes the fee and never delivers the shares
    and doesn't intend to.

    The New York Stock Exchange and the Nasdaq keep lists of stocks that
    routinely fail to deliver, and some of the companies that have been
    on those lists since a new rule was enacted in January 2005 say they
    are the victims of naked short-selling. The most famous of these is
    Overstock.com (nasdaq: OSTK - news - people ), whose chairman,
    Patrick Byrne, has been on a mission to bring the issue to the
    attention of regulators and lawmakers.

    Bringing prime brokers into the loop would put the biggest firms at
    the center of yet another potentially explosive scandal. Lawyers not
    connected with the Milberg firm say a lawsuit could attract the
    attention of state attorneys general, who were instrumental in
    assessing the fines in the conflicts-of-interest scandal and in the
    mutual fund trading-abuse cases of recent years. Why? Hedge funds
    increasingly manage investments from pensions and endowments, meaning
    regular investors could be bearing the brunt of abusive fee schemes
    in the form of lower returns on their investments.

    A spokesman for New York State Attorney General Eliot Spitzer, who
    led the conflicts and mutual fund trading-abuse cases, had no
    immediate comment.

    "Some hedge funds feel they have been taken advantage of by their
    prime broker," says Josh Galper, principal at Vodia Group, a New York
    consulting firm. "Naked short-selling is an example of how pricing
    abuses can enter the market."

    April 15, 2006

    George Soros, "The Bubble of American Supremacy"

    Atlantic Monthy 2003

    It is generally agreed that September 11, 2001, changed the course of history.  But we must ask ourselves why that should be so. How could a single event, even one involving 3,000 civilian
    casualties, have such a far-reaching effect?  The answer lies not so much in the event itself as in the way the United States, under the leadership of President George W. Bush, responded to it.

    Admittedly, the terrorist attack was historic in its own right. Hijacking fully fueled airliners and using them as suicide bombs was an audacious idea, and its execution could not have been more
    spectacular. The destruction of the Twin Towers of the World Trade Center made a symbolic statement that reverberated around the world, and the fact that people could watch the event (live) on their television sets, endowed it with an emotional impact that no terrorist act had ever achieved
    The aim of terrorism is to terrorize, and the attack of September 11 fully accomplished this objective.

    Even so, September 11 could not have changed the course of history to the extent that it has if President Bush had not responded to it the way he did.  He declared war on terrorism, and under that guise implemented a radical foreign-policy agenda whose underlying principles predated
    the tragedy.  Those principles can be summed up as follows:
    International relations are relations of power, not law; power prevails and law legitimizes what prevails.  The United States is unquestionably the dominant power in the post-Cold War world; it is therefore in a position to impose its views, interests, and values. The world would benefit from adopting those values, because the American model has demonstrated its superiority.
    The Clinton and first Bush Administrations failed to use the full potential of American power.  This must be corrected; the United States must find a way to assert its supremacy in the world.

    This foreign policy is part of a comprehensive ideology customarily referred to as neoconservatism, though I prefer to describe it as a crude form of social Darwinism.  I call it crude because it ignores
    the role of cooperation in the survival of the fittest, and puts all the emphasis on competition.  In economic matters the competition is between firms; in international relations it is between states.
    In economic matters social Darwinism takes the form of market fundamentalism; in international relations it is now leading to the pursuit of American supremacy.

    Not all the members of the Bush Administration subscribe to this ideology, but neoconservatives form an influential group within it. They publicly called for the invasion of Iraq as early as 1998.
    Their ideas originated in the Cold War and were further elaborated in the post-Cold War era.  Before September 11 the ideologies were hindered in implementing their strategy by two considerations: George W. Bush did not have a clear mandate (he became President by virtue of a single vote in the Supreme Court), and America did not have a clearly defined enemy that would have justified a dramatic increase in military spending.

    September 11 removed both obstacles.  President Bush declared war on terrorism, and the nation lined up behind its President. Then the Bush Administration proceeded to exploit the terrorist attack
    for its own purposes.  It fostered the fear that has gripped the country in order to keep the nation united behind the President, and it used the war on terrorism to execute an agenda of American supremacy.
    That is how September 11 changed the course of history.

    Exploiting an event to further an agenda is not in itself reprehensible. It is the task of the President to provide leadership, and it is only natural for politicians to exploit or manipulate events so as to
    promote their policies.  The cause for concern lies in the policies that Bush is promoting, and in the way he is going about imposing them on the United States and the world.  He is leading us in a very dangerous direction.

    The supremacist ideology of the Bush Administration stands in opposition to the principles of an open society, which recognize that people have different views and that nobody is in possession of the ultimate truth. The supremacist ideology postulates that just because we are stronger than others, we know better and have right on our side.
    The very first sentence of the September 2002 National Security Strategy (the President's annual laying out to Congress of the country's security objectives) reads, "The great struggles of the twentieth century between liberty and totalitarianism ended with a decisive victory for the
    forces of freedom and a single sustainable model for national success: freedom, democracy, and free enterprise."

    The assumptions behind this statement are false on two counts. First, there is no single sustainable model for national success. Second, the American model, which has indeed been successful, is not
    available to others, because our success depends greatly on our dominant position at the center of the global capitalist system, and we are not willing to yield it.

    The Bush doctrine, first enunciated in a presidential speech at West Point in June of 2002, and incorporated into the National Security Strategy three months later, is built on two pillars: the United
    States will do everything in its power to maintain its unquestioned military supremacy; and the United States arrogates the right to preemptive action.  In effect, the doctrine establishes two classes of sovereignty: the sovereignty of the United States, which takes precedence over
    international treaties and obligations; and the sovereignty of all other states, which is subject to the will of the United States.
    This is reminiscent of George Orwell's Animal Farm: all animals are equal, but some animals are more equal than others.

    To be sure, the Bush doctrine is not stated so starkly; it is shrouded in doublespeak.  The doublespeak is needed because of the contradiction between the Bush Administration's concept of freedom and democracy and the actual principles and requirements of freedom and democracy.
    Talk of spreading democracy looms large in the National Security Strategy.  But when President Bush says, as he does frequently, that freedom will prevail, he means that America will prevail.
    In a free and open society, people are supposed to decide for themselves what they mean by freedom and democracy, and not simply follow America's lead.  The contradiction is especially apparent in the case of Iraq, and the occupation of Iraq has brought the issue home.
    We came as liberators, bringing freedom and democracy, but that is not how we are perceived by a large part of the population.

    It is ironic that the government of the most successful open society in the world should have fallen into the hands of people who ignore the first principles of (an) open society.
    At home Attorney General John Ashcroft has used the war on terrorism to curtail civil liberties.  Abroad the United States is trying to impose its views and interests through the use of military force.  The invasion of Iraq was the first practical application of the Bush doctrine, and
    it has turned out to be counterproductive. A chasm has opened between America and the rest of the world.

    The size of the chasm is impressive.  On September 12, 2001, a special meeting of the North Atlantic Council invoked Article 5 of the NATO Treaty for the first time in the alliance's history, calling on all member states to treat the terrorist attack on the United States as an attack upon their own soil.  The United Nations promptly endorsed punitive U.S. action against al-Qaeda in Afghanistan.
    A little more than a year later the United States could not secure a UN resolution to endorse the invasion of Iraq.  Gerhard Schroeder won re-election in Germany by refusing to cooperate with the United States.
    In South Korea an underdog candidate was elected to the presidency because he was considered the least friendly to the United States; many South Koreans regard the United States as a greater danger to their security than North Korea.  A large majority throughout the world opposed the war on Iraq.

    September 11 introduced a discontinuity into American foreign policy. Violations of American standards of behavior that would have been considered objectionable in ordinary times became accepted as appropriate to the circumstances.  The abnormal, the radical, and the extreme have been redefined as normal.  The advocates of continuity have been pursuing a rearguard action ever since.

    To explain the significance of the transition, I should like to draw on my experience in the financial markets.  Stock markets often give rise to a boom-bust process, or bubble.  Bubbles do not grow out of thinair.
    They have a basis in reality, but reality as distorted by a misconception.  Under normal conditions misconceptions are self-correcting, and the markets tend toward some kind of equilibrium.
    Occasionally, a misconception is reinforced by a trend prevailing in reality, and that is when a boom-bust process gets under way. Eventually the gap between reality and its false interpretation
    becomes unsustainable, and the bubble bursts.

    Exactly when the boom-bust process enters far-from-equilibrium territory can be established only in retrospect.  During the self-reinforcing phase participants are under the spell of the prevailing bias.
    Events seem to confirm their beliefs, strengthening their misconceptions.
    This widens the gap and sets the stage for a moment of truth and an eventual reversal.  When that reversal comes, it is liable to have devastating consequences.  This course of events seems to have an inexorable quality, but a boom-bust process can be aborted at any stage,
    and the adverse effects can be reduced or avoided altogether.
    Few bubbles reach the extremes of the information-technology boom that ended in 2000.  The sooner the process is aborted, the better.

    The quest for American supremacy qualifies as a bubble. The dominant position the United States occupies in the world is the element of reality that is being distorted.  The proposition that the
    United States will be better off if it uses its position to impose its values and interests everywhere is the misconception.  It is exactly by not abusing its power that America attained its current position.

    Where are we in this boom-bust process?  The deteriorating situation in Iraq is either the moment of truth or a test that, if it is successfully overcome, will only reinforce the trend.

    Whatever the justification for removing Saddam Hussein, there can be no doubt that we invaded Iraq on false pretenses. Wittingly or unwittingly, President Bush deceived the American public
    and Congress and rode roughshod over the opinions of our allies. The gap between the Administration's expectations and the actual state of affairs could not be wider.  It is difficult to think of a recent military operation that has gone so wrong.  Our soldiers have been forced to do police duty in combat gear, and they continue to be killed. We have put at risk not only our soldiers' lives but the combat effectiveness of our armed forces.  Their morale is impaired, and we
    are no longer in a position to properly project our power. Yet there are more places than ever before where we might have legitimate need to project that power.  North Korea is openly building
    nuclear weapons, and Iran is clandestinely doing so.  The Taliban is regrouping in Afghanistan.
    The costs of occupation and the prospect of permanent war are weighing heavily on our economy, and we are failing to address many festering problems, domestic and global.  If we ever needed proof that the dream of American supremacy is misconceived, the occupation of Iraq has
    provided it.  If we fail to heed the evidence, we will have to pay a heavier price in the future.

    Meanwhile, largely as a result of our preoccupation with supremacy, something has gone fundamentally wrong with the war on terrorism. Indeed, war is a false metaphor in this context.  Terrorists do pose a threat to our national and personal security, and we must protect
    ourselves.  Many of the measures we have taken are necessary and proper.
    It can even be argued that not enough has been done to prevent future attacks.  But the war being waged has little to do with ending terrorism or enhancing homeland security; on the contrary, it endangers our security by engendering a vicious circle of escalating violence.

    The terrorist attack on the United States could have been treated as a crime against humanity rather than an act of war.  Treating it as a crime would have been more appropriate.  Crimes require police work, not military action.  Protection against terrorism requires precautionary measures, awareness, and intelligence gathering, all of which ultimately depend on the support of the populations among which the terrorists operate.  Imagine for a moment that September 11
    had been treated as a crime.  We would not have invaded Iraq, and we would not have our military struggling to perform police work and getting shot at.

    Declaring war on terrorism better suited the purposes of the Bush Administration, because it invoked military might; but this is the wrong way to deal with the problem.  Military action requires an identifiable target, preferably a state.  As a result the war on terrorism has been directed primarily against states harboring terrorists.  Yet terrorists are by definition non-state actors, even if they are often sponsored by states.

    The war on terrorism as pursued by the Bush Administration cannot be won.  On the contrary, it may bring about a permanent state of war. Terrorists will never disappear.  They will continue to provide a pretext for the pursuit of American supremacy.  That pursuit, in turn, will continue to generate resistance.  Further, by turning the hunt for terrorists into a war, we are bound to create innocent victims. The more innocent victims there are, the greater the resentment and the better the chances that some victims will turn into perpetrators.

    The terrorist threat must be seen in proper perspective. Terrorism is not new.  It was an important factor in nineteenth- century Russia, and it had a great influence on the character of the czarist
    regime, enhancing the importance of secret police and justifying authoritarianism.  More recently, several European countries such as Italy, Germany, Great Britain, had to contend with terrorist gangs, and it took those countries a decade or more to root them out. But those countries did not live under the spell of terrorism during all that time.  Granted, using hijacked planes for suicide attacks is something new, and so is the prospect of terrorists with weapons of mass destruction.  To come to terms with these threats will take some adjustment; but the threats cannot be allowed to dominate our existence. Exaggerating them will only make them worse. The most powerful country on earth cannot afford to be consumed by fear.
    To make the war on terrorism the centerpiece of our national strategy is an abdication of our responsibility as the leading nation in the world.
    Moreover, by allowing terrorism to become our principal preoccupation, we are playing into the terrorists' hands.  They are setting our priorities.

    A recent Council on Foreign Relations publication sketches out three alternative national-security strategies. The first calls for the pursuit of American supremacy through the Bush doctrine of pre-emptive military action. It is advocated by neoconservatives. The second seeks the continuation of our earlier policy of deterrence and containment.  It is advocated by Colin Powell and other moderates,
    who may be associated with either political party. The third would have the United States lead a cooperative effort to improve the world by engaging in preventive actions of a constructive
    character.  It is not advocated by any group of significance, although President Bush pays lip service to it.  That is the policy I stand for.

    The evidence shows the first option to be extremely dangerous, and I believe that the second is no longer practical.  The Bush Administration has done too much damage to our standing in the world to permit a return to the status quo.  Moreover, the policies pursued before September 11
    were clearly inadequate for dealing with the problems of globalization.
    Those problems require collective action.  The United States is uniquely positioned to lead the effort.  We cannot just do anything we want, as the Iraqi situation demonstrates, but nothing much can be done in the way of international cooperation without the leadership, or at least the participation of the United States.

    Globalization has rendered the world increasingly interdependent,
    but international politics is still based on the sovereignty of
    What goes on within individual states can be of vital interest to the
    rest of the world, but the principle of sovereignty militates against
    interfering in their internal affairs.
    How to deal with failed states and oppressive, corrupt, and inept
    regimes?  How to get rid of the likes of Saddam?
    There are too many such regimes to wage war against every one.
    This is the great unresolved problem confronting us today.

    I propose replacing the Bush doctrine of pre-emptive military action
    with preventive action of a constructive and affirmative nature.
    Increased foreign aid or better and fairer trade rules, for example,
    would not violate the sovereignty of the recipients.  Military action
    should remain a last resort.  The United States is currently
    with issues of security, and rightly so.  But the framework within
    to think about security is collective security.
    Neither nuclear proliferation nor international terrorism can be
    successfully addressed without international cooperation.
    The world is looking to us for leadership.  We have provided it in the
    past; the main reason why anti-American feelings are so strong in the
    world today is that we are not providing it in the present.

    Macquarie: Are We Being Too Conservative?


    In light of the recent strong performance in the resource sector, Macquarie Research Equities (MRE) have conducted a review of their resource sector forecasts and have incorporated significant changes to a number of base metal, bulk commodity and currency estimates. Most notably, MRE have made significant upgrades to zinc and copper over the short and medium term. MRE's key picks remain BHP Billiton (BHP), Alumina Ltd (AWC), Oxiana (OXR), Jubilee Mines (JBM) and Kagara Zinc (KZL).

    Upgrading the base metals.
    Although MRE only recently completed a thorough review of their base metal price forecasts and considered themselves to be in the bullish camp, MRE have again been proven too conservative as the improving macroeconomic backdrop has shored up the demand outlook while ongoing supply disruptions continue to dampen the supply-side response. Consequently, MRE now expect metal markets to remain (in many cases) exceptionally tight and in deficit for an extended period. MRE therefore find it difficult to see the catalyst for a sustained correction in base metal markets in the short term.

    Seek terminal market exposure and plenty of it.
    The most significant change (given its importance to both the base metals complex and equities) is the ~50% increase to MRE's copper price forecasts for 2007 and 2008, which now exceeds US$2.00/lb until end 2008. In MRE's view, the consistent failure of producers to meet (lofty) expectations will necessitate broad upgrades across the market and drive strong earnings momentum for the sector.

    Zinc and copper the big movers
    Copper supply disruption maintaining the tightness- MRE continue to see a large number of supply disruptions due to strikes, mine production problems, equipment delays and lower ore grades. Those issues have had a substantial impact on MRE's production forecasts, have raised the forecast concentrates deficit, and have now swung their refined market balance forecast from surplus to deficit in 2006. With stocks already extremely low, this deficit is enough to make MRE question whether there is any justification to forecast a significant pull-back in prices this year, and MRE's conclusion is that there is not. As a result, MRE have revised up their forecast average copper price for 2006 from $2.20/lb ($4850/t) to $2.54/lb ($5590/t).

    The zinc rundown continues – In zinc, MRE have not changed their supply/demand balance significantly. MRE still see the refined zinc market in deficit by around 400,000t in 2006 – enough to run inventories down to record low levels. What has changed is the price reaction to these developments.

    Prices have reacted earlier than MRE had forecast, and have been above the levels suggested by the historical price/inventory relationship for the past six months. However, it would appear that the market is simply looking ahead to the tightness which is looming later in the year.

    MRE continue to expect virtually all of the LME zinc stocks to be run down by the end of the year, and the zinc market to be displaying all the signs of a shortage market – including prices moving to record highs. Copper is an interesting case study for those looking at possible price outcomes for zinc – in copper, prices have gone higher than we would ever have imagined – simply because there has just not been enough to go around. In zinc it is difficult to say just how high prices could go in a real shortage situation. MRE do not believe there will be significant price-related substitution out of zinc in the galvanised steel market.

    The earnings upgrade trend will continue.
    Earnings estimates for a number of MRE's favoured equity picks now comfortably exceed consensus forecasts. For example, MRE's BHP Billiton, Alumina Ltd and Zinifex forecasts are 16%, 29% and 44% ahead of the consensus in 2007 while forward earnings multiples remain at a significant discount to the market and the historical norm and are expected to ensure strong interest in the sector is retained.

    MRE's Favoured picks.
    Although MRE have upgraded their recommendation for Rio Tinto to outperform given the revised earnings outlook, MRE retain a preference for BHP Billiton given strong leverage to terminal metal markets and superior earnings growth in the medium term. Strong fundamentals for the aluminum market are expected to remain supportive of Alumina Ltd performance while Oxiana, Jubilee Mines and Kagara Zinc cannot be ignored given impressive leverage to base metal markets.

    In summary, MRE's key picks within the sector remain BHP Billiton (BHP), Alumina Ltd (AWC), Oxiana (OXR), Jubilee Mines (JBM) and Kagara Zinc (KZL).

    MRE continue to recommend an overweight position in the resources sector. In MRE's view, investors should remain acutely aware of, and not underestimate, the challenges facing the supply-side in this robust demand environment and therefore, the potential for ongoing positive (commodity) price surprise.

    Traders looking for maximum exposure to short-term movements in the above mentioned stocks should consider the following equity warrants for a high-risk, high-return strategy.


    April 14, 2006

    Faber's Latest: An Anatomy of Bear Markets

    Download file 1

     (Download PDF for charts)Market Comment: April 12, 2006 Dr. Marc Faber
    Today, I wish to address the subject of bull and bear markets. This cyclical
    movement in asset prices, investors will call, when prices are rising, “bull
    markets” and when prices are declining “bear markets”. On the surface this
    seems simple to understand. The Dow goes up, it’s a “bull market”, the Dow
    goes down it’s a “bear market”. But, in reality, bull and bear markets are far
    more complex. Let’s assume we have just five asset classes. Real estate,
    stocks, bonds, cash, and gold (or a hard currency for which money supply
    growth is kept at the rate of real GDP growth leading to stable prices). At
    present, it is clear that the Fed is printing money. So, all asset prices except
    bonds will rise in value. But, some asset prices will increase more than
    others. Since October 2002, the Dow Jones has rallied in US dollar terms,
    but against gold it has depreciated (see figure 1).

    So, we can say that, yes, the Dow has been in a bull market since October
    2002 in dollar terms, but it has been in a bear market in gold terms. This is
    an important point to understand. In case we should experience continuous
    monetary inflation, which could lift, over time, all asset prices such as
    stocks, real estate, and commodities, some asset classes will increase more
    in value than others. This means that some asset classes while rising in value
    could deflate against other asset classes, such as happened with the Dow
    against gold since year 2000. I have pointed out in earlier reports that since
    2002, all asset prices rose in value. But recently, some diverging
    performances emerged. Bonds started to decline and seem to be on the verge
    of a significant long term break down (see figure 2).

    I have also mentioned in earlier reports that, in times of monetary and credit
    inflation, such as we have now in the US, bonds are the worst possible long
    term investment.
    Another asset class, which has recently begun to depreciate against gold
    are home prices (see figure 3)

    As can be seen from figure 3, since last summer, home prices while only
    declining moderately in dollar terms, have declined significantly in terms of
    gold. So, whereas it took over 500 ounces of gold to buy a typical house in
    the US last summer, now, it only takes around 380 ounces of gold. In other
    words, home prices have declined over the last 9 months by 25% against the
    price of gold!
    What I really want every reader to understand is that bull and bear markets
    are extremely complex and an asset class, which seems to be in a bull market
    may not necessary be in a bull market when compared to a hard currency
    such as gold. In this respect the following is also important to consider.
    Conventional wisdom has it that a true market bottom, which offers a
    once-in-a-lifetime buying opportunities, only occurs after a devastating bear
    market. In this context, the following severe market declines usually spring
    to investors’ minds: the 1929–1932 bear market in US equities; the collapse
    in the US bond market between 1970 and 1981, when yields on 30-year US
    Treasuries rose from 6% in 1970 to 15.84% in September 1981 and sent
    bond prices tumbling; the 1973–1974 Hong Kong stock bear market, which
    brought the Hang Seng Index down by 90% to its December 1974 low at
    150; the great sugar bear market, which sent prices down from 70 cents per
    pound in 1973 to 2.5 cents in 1985; or the Japanese bear market post-1989,
    when the Nikkei dropped from 39,000 to less than 8,000 in April 2003.
    Moreover, major market lows are associated by investors with total despair
    and panic among market participants, depression in the asset class that was
    subjected to the bear market, bankruptcies in that sector, and overwhelming
    negative sentiment.
    But, as Russell Napier shows in his recently published book Anatomy of the
    Bear — Learning from Wall Street’s Four Great Bottoms the key element in
    undervaluation can also be a period of time “when the advance in stock
    prices has failed to keep pace with the economic and earnings growth”
    within the system (The book – an excellent read - is available from
    Amazon.com or from CLSA directly. Contact victoria.tang@clsa.com).
    Napier shows, for instance, that at the market low in 1921 the Dow Jones
    Industrial Average was no higher than it had been in 1899 — 22 years
    earlier — while nominal GDP had increased by 383% and real GDP by
    88%! Similarly, by August 1982, the Dow Jones Industrial Average was no
    higher than it had been in April 1964, and was down by 70% in real or
    inflation-adjusted terms. According to Napier, August 1982 represented the
    fourth-best buying opportunity for US equities in the last century, aside from
    1921, 1932, and 1949 (see figure 4). The important message one might
    Page 4 of 9
    take from Napier’s book is that it usually takes a long time — about 14
    years — for stocks to travel from overvaluation to undervaluation, and
    that the nominal low in stock prices isn’t always the best time to buy
    equities. What is more important is the real level of equity prices and
    various valuation parameters that indicate deep undervaluation. Thus, while
    the Dow Jones bottomed out on December 9, 1974 at 570, and stood at 769
    at its August 9, 1982 low, in real terms the Dow had lost another 15% since
    the 1974 low.
    I am mentioning this because it is possible that the October 2002 lows for
    the US stock indices will hold in nominal terms. However, as I have shown
    above, the Dow has been declining in gold terms since 2000 (see figure 1)
    and is, in my opinion, likely to continue to do so for many years.
    As a side, Russell Napier has filled a void with Anatomy of the Bear,
    since, to my knowledge, it is the first book to trace the swings from
    undervaluation to overvaluation and back to undervaluation, of US stock
    prices over the past 100 years. The book also provides much food for
    thought. If equity prices swing back and forth between overvaluation and
    undervaluation, other asset markets such as real estate, commodities, and
    bonds will do the same. Thus, I suppose that, in the same way that US bonds
    were grossly overvalued in the 1940s, Japanese bonds were grossly
    overvalued in June 2003, when the yield on JGBs had declined to less than
    0.50%. At the same time, the April 2003 low for the Nikkei Index at less
    than 8,000 may have been the best buying opportunity in Japan of this
    generation. In fact, the 2003 lows in Japanese equity prices and interest rates
    have similarities to the 1940s’ lows in US equities and interest rates. After
    the 1940s, US stocks rallied into 1973, but bond prices collapsed into 1981.
    Similarly, the stock market rally in Japan, which began in 2003, could last
    for many years and be accompanied by a significant bear market in Japanese
    bonds, which would drive local institutions and Japanese households out of
    their overweight bond and cash positions, which benefited during the 1990s’
    deflation, and into equities and real estate. Moreover, if, as Napier explains,
    1921, 1932, 1949, and 1982 provided outstanding buying opportunities for
    achieving subsequent high returns that tended to last for a minimum of eight
    years (1921–1929), but usually for much longer (1982–2000), then I suppose
    that — taking the late April 2003 low of Japanese equities as a generational
    low — the bull market in Japanese equities could easily last until at least
    2010 or even longer, and in the process significantly outperform US equities.
    Another lesson from Napier’s book could very well be that other Asian
    equity markets, relative to other assets, remain grossly undervalued despite
    their post-1998 recovery. After all, many Asian stock markets, whether in
    US dollar terms or in real terms, are still down by more than 50% from the
    highs reached between 1990 and 1994.
    Lastly, if, as Napier outlines, it takes about 14 years for equities to make
    the journey from overvaluation to undervaluation, the severity of the
    commodities bear market from 1980 to the turn of the millennium — about
    20 years — is evident. Put into the proper perspective, in real terms
    (inflation-adjusted) commodity prices were, in the 1998–2001 period, at the
    lowest level in the history of capitalism (see Figure 5). And, although I
    expect some industrial commodity prices will suffer from a significant phase
    of profit taking in 2006, given the fact that commodity bull markets tend to
    last anywhere from 20 to 30 years, we may just be at the beginning of an
    extended rise in the price of natural resources.
    There is another point I should like to add to Russell Napier’s excellent
    study, which I strongly recommend investors to read. In a world of rapid
    monetary and credit expansion, an undervaluation of the Dow Jones might
    occur, with a Dow Jones at 36,000, 40,000, or 100,000 or more — a stock
    price level that was predicted by several analysts in 1999. How so?
    At present, the Dow is at around 11,000 and the price of gold is at $590.
    Let us assume that, as a result of Mr. Bernanke’s more efficient paper money
    printing machine (incidentally, a machine that has been in operation since
    the formation of the Federal Reserve Board in 1913 and which accounts for
    the dollar’s 92% loss in purchasing power since then), the Dow Jones rises
    to 36,000 in the next few years. (It won’t take another 100 years for the US
    dollar to lose another 92% of its purchasing power; more likely is 10 to 20
    years.) If this were the case, the price of gold could rise from $550 to
    $3,600, which would bring down the Dow/gold ratio from currently about 19
    to 10; or, in an extreme case, gold could rise to $36,000, which would bring
    down the Dow/gold ratio to only 1 (as was the case in 1932 and in 1980)
    Thus, in nominal terms, the Dow would have trebled from the present
    level, but lost significantly in real terms — a possibility that I regard as very
    likely. In this respect, we shouldn’t forget that during the German
    hyperinflation period between 1919 and 1923, share prices rose sharply in
    paper mark terms but tumbled in dollar terms (then a strong currency),
    because the rate of the paper mark depreciation against the US dollar
    exceeded the local share appreciation. Thus, by October 1922, an index of
    shares in local paper mark terms had increased from 100 in 1918 to 171
    billion, while in dollar terms the same index had dropped from 100 to 2.72!
    Needless to say, the 1918–1923 German hyperinflation was devastating for
    paper mark cash and bond holders.
    Now, I am not necessarily predicting that we shall soon experience
    hyperinflation rates in the US, but when the Dow Jones and the US housing
    market will decline by 10%, it is very probable that Mr. Bernanke will put
    the money printing presses into high gear in order to fight asset deflation.
    So, US asset prices including homes, stocks and bonds could depreciate in
    real terms and against precious metals.
    Still, as I indicated last month, aside from bonds, all stock and
    commodity markets seem to be now overbought and vulnerable to a
    sharp correction. In fact, whereas I am extremely negative about bonds
    in the long term, I believe that for the next three months or so, bonds
    could actually outperform equities and also commodities. From figure 6,
    we can see that equities have formed a rising wedge against bonds since
    2005. More often than not, a rising wedge leads to a sharp downside
    reversals. This would not necessarily imply that bond prices will rally much,
    but the wedge might be broken on the downside by a sharp downturn in
    For this reason, my advice remains to be extremely defensive. Most asset
    markets including stocks and commodities are extremely overbought, and
    there is far too much speculation in all investment markets. Therefore,
    Page 9 of 9
    severe downside volatility, also in precious metals, should not be
    surprising in the period directly ahead.


    Commodities still cheap as chips...


    April 13, 2006

    Shadow Statistics

    Ben Bernanke, Fed chairman, recently delivered an upbeat view of the U.S. economy. It was cheerful, optimistic...and delusional.

    However, few know the extent of the deceit. What if you learned that inflation were closer to 7% than to the official 3%? What if unemployment were closer to 12%, rather than the official 5%? What if the economy were actually contracting, as opposed to growing?  You can read all about John's work in this interview

    It was the genius of writer George Orwell that he chose to build his dystopia on the foundations of language and information - how it is used to deceive, manipulate and control. His chilling novel 1984 stands out precisely because it is only a distortion of things that are happening now and that have always happened. Orwell's dystopia is a mirror in a funhouse, as you see enough of your own world in this disturbing reflection.

    Thankfully, there are still some people doing the important work of getting at the truth behind the official statistics - piercing the veil of Newspeak, sweeping away the cobwebs of sham. John Williams is an economist dedicated to doing just that. His Shadow Government Statistics reveals the extensive rot under the floorboards of the U.S. economy.

    Let's take the official inflation rate, tracked using the consumer price index, or CPI. The idea behind the CPI is to have a fixed basket of goods and track how the prices of these things change from year to year. It only gained prominence after World War II, as a way to adjust autoworkers' labor contracts, a practice that soon spread.

    Over time, its importance grew and more people looked to it as a gauge of general price inflation - and, hence, to get a feel for the health of the economy.

    The thing is, the way the CPI is calculated changed dramatically over the years. Politicians have figured out that these statistics are useful in winning elections. Ergo, nearly every administration has altered the calculation. And always, the changes made the CPI lower. Every effort to change the CPI, by design, aims to make the economy look "better" than it looked before the changes.

    The accumulation of these changes creates a huge difference over time. It's like making a series of small changes to a ship's course in the midst of a long voyage. Soon, you wind up way off course, miles and miles from where you think you are. The chart below is from William's Web page. It shows the extent of the difference, which is just massive. The rate of inflation using only the pre-Clinton era CPI is closer to 7%!

    The "Experimental C-CPI-U" is another innovation, introduced by the Bush administration to lower the CPI yet again, once again to paint a kinder portrait of the old hag known as the U.S. economy.

    But it's about more than just making the economy look better. For example, since increases in Social Security payments link to the CPI, a lower CPI also saves the government money. According to Williams, if you used the CPI when Jimmy Carter was president, you'd get Social Security checks 70% higher than today's levels. Yes, 70% higher.

    The government also duped all those people who thought it was such a great idea to buy TIPS (Treasury inflation-protected securities). Changes in the CPI determine the interest paid on these bonds. The higher the CPI, the more interest paid to bondholders. Some people loved the idea, figuring here was a bond that would keep pace with inflation. Given the government manipulates the CPI, you can be sure the interest rate paid will not keep pace with inflation - nor has it ever.

    The manipulation of the CPI explains the great disconnect between what the man in the street feels when he pays his bills and what the confident, well-dressed Fed chiefs and politicians try to tell him. The cost of living is rising a lot more than they want you to believe. At a 7% annual rate of inflation, the cost of living would double in about 10 years. Looked at differently, the purchasing power of your dollar will fall in half.

    What about unemployment? The government, since the time of the Kennedy administration, has been changing the definition of "unemployed." Again, many small changes over time lead to dramatic end results. According to Williams, if you back out the changes, you get an unemployment number closer to 12%!

    Let's look at the federal deficit - basically, the amount of money the government is losing every year. The official deficit for 2005 was $319 billion. However, this excludes unfunded Social Security and Medicare obligations. Throw them into the mix and calculate the deficit the way a business does in its financial statements - and you get an annual deficit around $3.5 trillion.

    That's more than 10 times the so-called "official" deficit. By Williams' calculations, you could raise the tax rate to 100% - dump everyone's salaries into the U.S. Treasury - and still have a deficit.

    Years of such deficits have created a mountain of obligations for the U.S. government. As Williams says, "The fiscal 2005 statement shows that total federal obligations at the end of September were $51 trillion; over four times the level of GDP." These debts are unsustainable. The bills must go unpaid. If the U.S. government were a private corporation, its bankruptcy would be beyond dispute.

    This is why Social Security and Medicare are not going to exist in the not-too-distant future. As Williams says, "There is no way the government can pay the Social Security or Medicare it has committed to."

    Williams believes GDP is contracting now. The government reported only a 1.1% increase in the fourth quarter. Even in an election year, and despite the government's best efforts to paint a pretty face, all it could muster was a measly 1.1%. More likely, the economy actually contracted 2% in the fourth quarter. This means we are in a recession NOW.

    This is not conspiracy-theory stuff. As Williams points out, it's all disclosed in the footnotes in the government's reports. All he is doing is backing out many of the changes to more realistically compare these numbers with the numbers of the past.

    The great H.L. Mencken, a scathing attack dog of idiocy in all its forms, wrote about "damning politicians up hill and down dale for many years as rogues and vagabonds, frauds and scoundrels." We need more Menckens. In the meantime, we'll have to make do with Williams and his cogent analysis of government skulduggery.

    Oddly enough, these insights do not change our approach here in the pages of Capital & Crisis. In fact, Williams' work reinforces several things we've already covered in past letters. To wit:

    Yields on real estate investment trusts (REITs) and utilities - to say nothing about the bond market - appear even more pathetic against an inflation rate of 7%. The yield for risks taken is simply not adequate. If the slumbering bond market awoke to the reality of a 7% inflation rate, there would be a sell-off the likes of which this country has never seen. Interest rates would bolt upward like a frightened cat.

    And the U.S. dollar is a doomed currency over the long haul. Bernanke, the self-professed student of the Great Depression, accepts the mainstream view that the Fed's great mistake then was not to flood the system with dollars. He won't make that "mistake" again. Expect the printing presses to run day and night at full capacity when the trouble starts.

    Trying to pin down the economy in precise numbers is futile anyway. It's too big, too complex. All macro statistics are severely flawed. This is why I seldom write about them. Investing using macro statistics is like trying to find the nearest post office with a globe. They are so vague as to be useless.

    The basic idea I want to leave you with is this: The economy is far weaker than generally portrayed. Most investors ignore the rat's nest of risks and invest indiscriminately in stocks - without proper due diligence. As investors, we need to stick to our fundamentals more carefully than ever.

     You can read all about John's work in this interview


    John Williams' Shadow Government Statistics for April


    Gold and Oil Price Surges Foreshadow Dollar, Inflation and Political Turmoil

    Inflationary Recession Continues Its Intensification

    Both Current-Need and Systematic Manipulations Distort Key Economic Data

    The price of gold has more than doubled in the last four years, in a steady run-up to what now is $600 per ounce. That market is sending out a warning signal of extreme danger facing the U.S. dollar and of rapidly increasing risk of severe global instability. Those observing these extraordinary times ignore such warnings at their peril.

    At the same time, the political geniuses running Washington continue to fret over the latest polling numbers, while ignoring the unfolding fiscal and structural economic crises that eventually will thrust the U.S. dollar into its final tailspin and the domestic economy and financial markets into crash landings.

    There are two broad types of political manipulation of economic data, systematic and current-event, and both are at work distorting economic reports. A new example of systematic manipulation -- using methodological change or redefinition -- is noted in this month's "Reporting Focus" on the PPI. Imported goods were excluded at one point from the pricing surveys. In an era of a generally weakening dollar, that removed some inflationary pressures from a series that was supposed to measure inflationary pressures.

    The current-event manipulation, however, is what will dominate key economic figures out through the mid-term election. It involves direct political intervention in the reporting process in order to enhance the reported results. Indeed, the relatively happy news from the employment/unemployment front in March appears to have been carefully crafted by Administration manipulators. Similar efforts are likely to generate a reported surge in first-quarter GDP growth, as well as ongoing "strong" jobs data.

    Nonetheless, continued negative inflation-adjusted growth in money supply (M2), monthly declines in key components of the purchasing managers surveys, sharp downturns in annual change for housing starts and help-wanted advertising, flat to negative annual change in consumer confidence and real earnings, and a record trade deficit all continue to show faltering economic activity.

    Then there is inflation. With oil pushing $70 per barrel and gold at $600 per ounce, how can anyone talk about low and stable inflationary conditions with a straight face? Some inflation considerations are discussed in the following section on gold and in this month's "Reporting Focus" on the PPI.

    Despite all the hype and all the propaganda, the doctored data are not fooling Main Street U.S.A., and they are not fooling the gold market......

    Behind 25-Year High for Gold:Changes From Ground to Market


    Technology and Strong Demand Alter Its Odd Economics;Inside a Secret Vault Trading In Jewelry for Cash

    By E.S. Browning
    The Wall Street Journal
    Wednesday, April 12, 2006

    After gold soared above $500 an ounce a few months ago, tub after plastic tub of gold jewelry from the Middle East and India began arriving at Darren Morcombe's refinery in southern Switzerland. In a part of the world where gold jewelry is as much an investment as an adornment, consumers and jewelers had decided the shiny bracelets, necklaces and belts -- many never worn -- were suddenly too valuable to keep.

    As prices skyrocket for one of the oldest forms of money, the rules of normal economics don't apply. Fears about inflation, terrorism and a possible dollar decline are driving gold's price up. But production is down, because mining companies cut back capital investment during a 1990s price slump.

    Some central banks, the biggest gold investors, sold when the price was low, and now a few are buying when the price is high. The jewelry industry buys the bulk of each year's output, but price today is driven more than ever by a much smaller slice of the market -- professional investors -- whose appetite lately has soared. After years of being squeezed, gold miners are making fortunes, while refiners and gold bankers are getting pinched.The price, in retreat for almost two decades after peaking at $847
    in 1980, has more than doubled in the past five years, closing yesterday in New York at $595.20 a troy ounce, near a 25-year high. Purchases by investors jumped more than 25% by weight in 2005 alone.

    Gold is the only major commodity that isn't produced primarily to be consumed in the economy -- like iron, copper, pork bellies or oranges -- but simply to be owned and admired. It is too heavy, soft and rare to have many practical uses outside of electronics and
    dentistry. Yet it is one of the earth's most prized objects, valued mostly because it is considered valuable.
    A look at gold's circuitous journey from the ground to refiner to bank vault to jewelry store -- and sometimes back again -- shows how the ancient world of gold is being shaken up by both markets and technology.

    ...The Gold Chain

    At the start of the gold chain stand people like Joel Lenz. He runs two Nevada gold mines for Newmont Mining Corp., the biggest U.S.- based gold producer. Mr. Lenz works, lives and serves on a local school board in the mile-high desert of Nevada, where the bulk of U.S. gold is unearthed.

     As recently as the 1970s, 70% of the world's gold was taken from South Africa's deep underground mines. South Africa remains the world's largest producer, but its output in tons now is one-third of
    what it was, and it represents 12% of the world's expanded production. Australia and the U.S. follow with 10% each, China 9%, Peru 8% and Russia and Indonesia 7% each, according to London-based researcher GFMS Ltd.

    The gold mined in most parts of the world, including at Mr. Lenz's Lone Tree Mine, differs significantly from the stuff that lured prospectors west 150 years ago. Visible sources of gold -- gleaming mountainside veins or nuggets and powder lying in riverbeds -- are becoming rarer. The Lone Tree Mine is an open pit two miles long and almost 1,000 feet deep, a monstrous gash that some day will be turned into a large lake. The gold Mr. Lenz removes from it consists of microscopic particles laced through earth and rock.

    "I've been here for 14 years," says Mark Evatz, who supervises Lone Tree Mine's digging and transport, "and I have never seen an ounce of gold that I have mined."to find the gold, modern-day prospectors like Newmont's Wayne Trudel pore over old drilling reports, set up computer models and theorize
    about which mineral formations are likely to contain fine gold particles. The process can take years, at a cost of $19 per ounce of discovery. The geologists drill out samples from various strata and examine them under microscopes. The results are plotted on three- dimensional computerized maps that outline twisting underground gold veins. As the price of gold rises, the areas on the maps considered
    worth mining expand.

    At Lone Tree, each ounce of gold is sprinkled through 75 tons of rock and soil. Miners use Global Positioning System consoles to make sure they are digging in the right spot -- since ore-rich rock looks little different from other rock. The gold is separated from rock and other metals through a variety of technologies that employ heat, pressure, cyanide and charcoal.

    In all, Lone Tree produces about 600 ounces of gold a day, in the form of a damp, cake-like sludge that is 50% to 75% gold and also includes silver and other metals.

    World gold production peaked at 2,621 metric tons in 2001 -- just as the price was falling below $260. As prices finally rose, output actually fell. Last year, less than 2,500 tons was produced. The reason: Opening or expanding mines can take a decade of exploring, investing and seeking environmental approvals, and shell-shocked companies cut such spending heavily during the long price decline. Some were slow to invest again when prices started climbing.

    Fearing further price declines, many mining companies in the 1990s made matters worse by contracting with large banks to sell future production in advance, at then-current prices. To pay the miners, the banks borrowed gold from central bank reserves, sold it and replaced it later with the mines' output. That flooded the market with gold, depressing the price. Newmont shunned such hedging and quickly boosted capital spending when prices rose, but the cutbacks forced people to leave the high desert in search of work.

    With Lone Tree running out of ore and its jobs now slated to disappear, Mr. Lenz spent months in 2003 helping persuade Newmont to reopen the nearby Phoenix Mine. It had produced gold and copper off and on since the 1860s, and its best ore was long gone. Newmont figures it can make money from the mine if gold sells for $340 or more an ounce, and it agreed in late 2003 to reopen it after gold crossed that price threshold.

    ... Environmental Concerns

    To keep the pit from flooding, Lone Tree pumps out 45,000 gallons of water a minute, lowering the water table in an already dry area. Environmentalists say that mercury emitted when gold is separated from other metals turns up in fish, wildlife and water supplies.
    Nevada regulations adopted this year require gold miners to use advanced technologies to control mercury emissions, formalizing a voluntary program. Critics say the rules don't solve the problem.Gold miners have been accused of more severe environmental damage in developing countries. In February Newmont agreed to pay Indonesia $30 million to terminate a civil lawsuit charging it with causing disease by polluting a bay with arsenic and mercury. Newmont
    officials face a separate criminal action over the same alleged pollution, which the company denies.

    When the miners at Lone Tree in Nevada are done producing gold sludge, gun-toting guards cart it off in armored trucks. The delivery schedule is kept secret even from senior mine executives.The sludge is delivered to a Newmont plant in another mining town,
    Carlin, about an hour away. Technicians run an electrical current through the sludge, separating out more base metals. The gold is formed into 100-pound "buttons" shaped like Hershey's kisses, now finally gold-colored but tinged with red, green or black (depending on how much copper, silver or nickel remains).

    About three times a week, when 2,000 ounces to 4,000 ounces have accumulated, workers melt the buttons into 55-pound to 60-pound bars. The bars, between 60% and 95% gold, are known as "doré," a French word meaning "gilded" or "golden."

    The gold now heads toward the world of jewelry and high finance, via a refinery, where the doré bars become almost pure gold. There's an independent refinery nearby, in Utah, but Newmont sends its Nevada doré by commercial airliner (no one will say from what airports) to Valcambi SA, the Swiss plant where Mr. Morcombe is chairman, because the mining company has a major stake in that refinery.Although high gold prices make mining quite profitable, other parts of the business have become jammed with competition and margins are tight. Some countries maintain refineries for nationalistic reasons, a bit like airlines, and the excess capacity is now keeping refining charges well under a dollar an ounce. Swiss banks, which helped make Switzerland a gold-refining center after World War II, have been pulling back, including Valcambi's former owner Credit Suisse.

    At Mr. Morcombe's refinery, in Balerna, just north of the Italian border, the high price of gold is affecting business. Recycled jewelry is still pouring in the door, while gold demand from jewelers is falling since the high prices make it tough for them to turn a profit.

    Doré bars from mining operations continue to arrive. They are melted and formed into thin rectangular plates that then can be slotted into a bath of chemicals in a nearby room. Another electric current is passed through, separating the gold from other metals. Depending on its initial composition, the doré can go through that and similar processes several times until it reaches a high level of purity -- from 99.5% to 99.99%. Before long, at a new higher-tech wing, the refinery plans to produce gold as pure as 99.9999% (a rare level known as six nines).

    Once refined, gold heads to manufacturers, investors or retailers.Jewelers use more than 70% of gold supplies every year. Italy long was the leading jewelry maker. Lately, lower-cost Turkey has taken a lot of business from Italy, and even-lower-cost India is taking some of Turkey's business. The world's biggest jewelry retail chain is Wal-Mart Stores Inc. But as a nation, India is the world's largest gold-jewelry buyer.In India and elsewhere in Asia, gold jewelry is used for dowries and major gifts. When people have extra savings, they buy jewelry, which can be sold either in times of need or when prices soar."We are selling old gold because the price is high," said Hemani Shah, a customer recently in a Mumbai shop. "During the monsoons when the market goes down, we'll buy."

    Gold also is used in electronics because it is a fabulous conductor. It is present in virtually all computers. Gold's use in dentistry has been falling for years, but last year alone Americans and Canadians had a total of 34 million teeth repaired or replaced with fillings, caps, bridges, crowns and other dental appliances containing gold, according to Dentsply International Inc., a dental supply company. World-wide, dentistry eats up nearly 70 metric tons of gold a year, says GFMS, the research group. All these business uses account for another 15% of yearly gold supplies.

    Most of the remaining gold -- 12% to 15% -- goes to private or government investors. Much of that ends up as large rectangular bars weighing 27 pounds or 28 pounds each, the mainstays of government and commercial bank vaults.

    When times are good, gold seems a waste of money compared with more modern investments, such as the stocks of fast-growing companies. In troubled times, such as during the recent bear market and following the 2001 terrorist attacks, broader groups of investors stash part of their nest eggs in safer places -- and gold is often seen as such a haven. Some bearish investors, called gold bugs, tend to stick with the metal through thick and thin.

    ... Wild Card

    One wild card in the gold market is the world's central banks, which, because of gold's traditional role as a store of value, long have been the largest gold hoarders. They still own about 19% of the world's gold, according to GFMS. European central banks, however,
    have been selling gold for years. Central bank sales mounted in the late 1990s, as gold prices fell to multiyear lows. Now, faced with criticism that they sold too cheaply, some central bankers are thought to be buying again, including those of Russia and some
    Middle Eastern oil countries -- reflecting the temptation even among experienced financiers to sell low and buy high.

    The U.S. went off the gold standard under President Nixon, but it still has by far the world's largest gold reserves at more than 8,000 metric tons, valued at about $153 billion. The U.S. hasn't sold significant amounts since the Carter administration, putting off any debate about the proper role of gold in backing a currency.A pair of exchange-traded gold funds created in 2004 and 2005 are helping to drive investor interest in the metal. These funds, which are set up like mutual funds and trade on stock exchanges, allow institutional investors and even individuals an easy way to bet on gold. As more money flows into the funds -- which total about $7.3 billion today -- more gold must be purchased to back them.
    The gold from those funds, like much of the world's investment gold, is stored mainly in London, where nine secretive bullion banks finance the trade. Financial institutions that own shares in the funds occasionally ask to see the gold backing their investments, but the two banks holding the funds' gold, HSBC Bank and Bank of Nova Scotia, have a policy of refusing such requests. Investors must take the word of auditors that it actually exists.

    J.P. Morgan Securities in London, an arm of U.S. banking group J.P. Morgan Chase, is another of the nine banks. It occasionally allows visitors. Gold comes and goes from its vault with surprising frequency, moving among miners, refiners, jewelers and investors.

    It often arrives at freezing temperatures after riding in a plane's hold. The gold is fork-lifted into a cavernous vault the size of a basketball court, deep below the ground. Stacked on mundane wooden pallets are billions of dollars in gleaming gold bars.

    Even amid all this accumulated wealth, competition has eroded profit margins.

    On a recent morning, the phone rang at the desk of Peter Smith, who helps run the gold business at J.P. Morgan. A bank in Dubai needed 600 bars, each 99.9% pure and weighing 10 tolas (an Indian measure). Sitting in front of a computer with three screens, Mr. Smith phoned
    a Swiss refiner and found his client some bars. The price he quoted included a refiner's markup of 50 cents an ounce, including shipping. The 2,250-ounce order totaled well over $1 million. The bank's cut was five cents an ounce -- or just $112.

    April 12, 2006


    Edited By Jeff Greenblatt
    April 11, 2006
    There are times when reputable analysts make calls that are worth remembering. Or reviewing.  As a review I'm going to pass this along and you could do with the information as you like.  I'm going to keep it in the back of my head for the rest of the year to see if it comes to pass......
    How many of you are familiar with Arch Crawford?  I believe he has nearly a 30 year track record of accurate calls on the market.  He is very well respected on Wall Street even though his methodology (financial astrology) is not in the main stream.  I know what some of you conservative types are thinking and that's fine.  You can skip this section (or read it for your entertainment).  Remember one thing, it was JP Morgan who stated that astrology is for billionaires, not millionaires.  Any billionaires in this readership?  I know a couple of you might be aspiring billionaires so take it for what its worth....
    Friday morning on local (Phoenix) Financial News Radio 1510 KFNN, Crawford called for a STOCK MARKET CRASH THIS YEAR.  His reasoning is every time since 1915 a certain planetary cycle combination has caused a major decline in the Dow.  This is a Mars-Uranus opposition that hits on August 13, 2006.  I looked it up.  I happen to have Merriman's complete library of timing cycles and I have data back to 1966. Merriman happens to agree this signature has the potential to correlate to very large reversals.  In 9 of 23 cases studied, a 50 week or greater cycle unfolded within 15 trading days (39%).  Folks, that has better odds than an expanded flat confirming. The cycle definitions are either Merriman's or from the Foundation of Cycles.   Here are some highlights of past Mars-Uranus oppositions:
    Feb 22, 1966  Primary and Double Top to 18 year cycle crest (off by 8 trading days)
    July 21, 1973 Major Top to a sharp decline led to 22 month cycle low (off by 4 days)
    June 28, 1975 Double Top to a 50 week cycle crest (off by 11 days)
    June 1 1981 Primary Top
    May 26, 1983 Trading Top to a 50 week cycle crest (off by 15 days)
    May 14, 1987 Trading Top (off by 3 days)
    Sept 21, 1994 Primary Top which was Double Top to 4 year cycle crest.  Started big decline to 4 year cycle low.
    Aug 29, 2000 Primary Top in SP500 And Dow (off 3 and 5 days) led to big decline
    Aug 24, 2002  Led to Final decline leg in bear market (off by 3 days)
    To be sure there have been a few inversions where this signature created primary bottoms most notably in recent memory was August 18, 2004 which as many of you who were on board at that time was the August low anticipated here weeks in advance.
    This signature is in effect from August 13-March 2007.  He claims the highest probability time would be on the seasonal change on September 21-22 (which we already know is a significant time for market reversals).  However, this time there is a SOLAR ECLIPSE right on the equinox on September 22. 
    What do I think? Crawford has credibility and a good track record of success.  He is not infallible and we could always have an inversion.  But, this IS a year where we have the potential for a 4 year cycle low. The longer this thing stays up in the stratosphere, on a cycle basis, the greater chance we have for a very serious decline at some point.  Apparently, the planets are suggesting IF it IS to happen, this is WHEN IT WOULD HAPPEN.
    We'll see..........
    As a review let's go back to Thursday night so we can better understand where we are right now.  Recall I was looking for a retest of the high in the NDX and a test of the 61% retracement level in the SOX.  We were so close on both accounts logic prevailed (at least in my mind) we'd at least get those tests.  We started out higher on Friday coming within 5 points in the SOX and 11 points in the NDX.  THEN WE WERE STONED by an invisible ceiling. 
    What happened?
    On the chart I follow most closely, the NQ, we hit a high wave candle on the 321st-5min bar of this particular leg.  A high wave bar implies (small body and tails on both sides) confusion and uncertainty.  The next bar was the 322nd (Lucas) bar which started the decline we experience to this moment.   Recall on Thursday I stated that we have to be on the alert for pullbacks when legs get into the 300s?  I know that's general because it covers 8 hours.
    More importantly, the NASDAQ hit the 262nd hour off the February 13th low.  Catching this exactly on the spot as a major turn was complicated by the fact there are separate bar counts for the NASDAQ and NDX which made a lower low on March 10 which was not confirmed by the NASDAQ.  By Friday afternoon I was able to figure out why we turned.  We were also 21 days up to the current leg.  When we get a turn on the hourly and daily time frame, we need to take it seriously because we only get those several times a year. Maybe once or twice a quarter.
    What happened in the SOX was instead of a 61% retracement of the whole move down, we topped on the 61% retracement of the big secondary high.  The NDX topped on the 88.6% retracement of the drop into March.  The 88.6% level happens to be the square root of the .786 common retracement.  After we pass a 61% retracement, there is a 95% chance of testing the high in all time frames.  However in that 5% of situations, we have to deal with that rare 88.6% marker which is always the last guard at the gate to a complete retest.
    Lower probabilities, to be sure.  However, since we came so close sentiment here seems to be one of surprising disappointment as those who bought last week are already under water in many cases.  Now it will be much tougher to get back up there in the NDX because as opposed to testing just one point in time (January high) we now have a resistance zone from 1750-61.  Those who have bought in this entire period from February will be looking to break-even or not get killed.   In other words, I think this high has a shot at being a multiweek high. 
    Coming to yesterday and today, the selloff leg that took out yesterday's low violated no less than 3 decent intraday time relationships from yesterday afternoon.  Something has changed, because the past 2-3 weeks have been characterized by lows being set on the kind of time cluster THAT WAS VIOLATED SO EASILY TODAY.   Everyone has their method of technical analysis and I have mine.  What I've noticed is markets always can elect to do or not do something at the fork in the road.  However, when time clusters are taken out SO EASILY, that means something.  Yesterday the NQ hit a low on a combination of 55-15min, 29-5min as well as 161-5 min bars that ALL BOTTOMED ON THE SAME BAR.   Not to mention an ABC price setup that saw a .61/1.61 relationship.   The SOX also bounced after declining for 13 hours.
    Obviously, many of the people who bought recently all fled for the exits at the same time.
    A word about the Dow.  I put up a new Dow hourly chart so many of you can get a look and sneak preview of the kind of charts that are in the ebook.  I know many don't totally get this time stuff and I'm not in a position to put too many of them at stockcharts but here is a good example.  Off the high from March 21 (change of season) we declined for 60 hours, reversed on 61 and topped on the 89th hour.  This is how we confirm wave counts because they turn on time clusters.  This 89th hour was not only the 89 (Fibonacci) hourly bar off the  high but it was also a 29 (Lucas) hour cycle.  Look at the chart, you'll see that hourly bar created a beautiful tail making the Nison people happy that we confirmed a failure at resistance.  For added certainty, we did it right on schedule. Now the Dow is down another 21 hours so is primed for some kind of bounce.  Also, it is in danger of breaking through a trend line that has contained three lows since the October rally leg started.
    BOTTOM LINE: Turning back to the NDX we are now at a small degree 61% marker with the hourly charts down at 30 RSI.  There is a much larger degree 61% marker at 1678.  I'd look for a bounce tomorrow but the NDX has a better chance of finding a trading low one level lower. Same thing for the NASDAQ which has a 61% marker at 2290. We just were up 21 days so I doubt the selling is done after 3 days. I'd look for a low around the April Fibonacci 13th where there is a full moon.  IF we were to get a better low on Thursday we would be down 5 days which is more reasonable than here.
    I've been looking for the elusive high for the past few weeks.  Sorry I couldn't be more precise because this is a three week time window.  Right now we just started week 162 off the 2003 low.  Australia is finally showing signs of cracking.  Today you are already down 40 after dropping 40 on Monday. Thursday to Monday saw a decent looking evening star pattern on a daily chart Yesterday was a recovery but today you given right back ON THE OPEN.
    For those of you who ever take one of Nison's advanced trainings which I recommend very highly he talks about a specific candle line that now appears on the daily chart.  I'm referring to THE LAST BULLISH ENGULFING BAR.  If you look at the last 4 four bars you'll see an evening star followed by a white candle.  The last 2 bars are black, then white.  When you see that combination on a low,  if implies a potential reversal.  When you see a bullish engulfing bar AT A HIGH,  many times it is the kiss of death to the trend. Same thing would be a bearish engulfing bar near a low.  If you throw in today's drop, we have the recipe for more selling.
    We've started a corrective wave in the XAU and what is most interesting here is the time count once again.  From March 10-16th we had a leg up that covered 29 (Lucas) hours followed by a pullback.  The pullback ended on the 64th hour off the bottom and the leg up spanned from hour 65-139 counting shared bars which is roughly 75 or one shy of Lucas 76.  The relationship of 29/76 is 2.62 which is why we are so interested in the Lucas sequence here.  We had an initial leg and then a 2.62 time extension which created a turn. What is interesting about the leg since the high is we SPIKED on hourly bar 17 and dropped on 18 which is a sure sign of change of direction. We have a gap up and 38% price retracement level at 138 which is where I think we are headed.   I tend to think this could be a 4th wave but we need to stay above 132 (first wave high) to confirm that.
    We are still in the area around 597 which I discussed last week which is an important marker for traders as it is a 1.61 extension level.   I'd look for a small pullback here but since we topped 600 I'd look for a more lasting high somewhere in a zone of 610-618.   We have a negative divergence on an hourly chart dating back to March 30.  The divergence is more pronounced on a 15 minute basis.  Silver has the same type of divergence but is now up 153 days so we are coming to that 155-162 day period.  Silver looks like we started a small degree abc correction that could find a low near 1220.  IF it drops here we could see a low at 155 days and perhaps another leg up to the 160-162 day cycle.
    The dollar finally hit a low in the time frame I was anticipating last Thursday. We've started a leg up and now a small correction for the past 10 hours.  IF it is to reverse, it should do so early in tomorrow's session on a time basis and at 88.72 on a price basis. The leg up off the low looks like an impulse wave.  If the larger count (a big triangle) is correct, we've already seen the low.
    I think we've hit another false bottom. We've hit the low on the 58th day of the leg which means we have a chance to hit a small degree high by day 62 which will happen on Thursday. Here's a chance for an inversion where instead of bottoming on the 62nd bar we invert and continue the downtrend.
    We are having our retest of the high right now which just about blows the triangle count out of the water.  The good news is we are 38 days up overall and 16 days up on the latest leg.   We are also at a point on the chart where after the decline into early March we are at a 1.61 extension of the leg from February.  The implication is we could get a pullback here with bearish divergences on the various intraday time frames dating back 2 weeks.
    For those of who are new, this is the link you follow to get to the charts.  IF you like what you see, please vote for it at the bottom of my page once a day.
    The content in THE FIBONACCI FORECASTER is for educational and informational purposes only.  There is no offer or recommendation to buy or sell any security and no information contained here should be interpreted or construed as investment advice. Do you own due diligence as the information is the opinion of Jeff Greenblatt and subject to change without notice.   Please be advised to consult your investment advisor, attorney or tax professional before making any investment decisions.  Jeff Greenblatt will not accept any responsibility or be liable for any investment decisions based on the information discussed here.
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    Murtha says war is lost

    Pa. congressman outlines failures
    Saturday, April 08, 2006
    Donna J. Miller
    Plain Dealer Reporter

    U.S. Rep. John Murtha's booming Marine colonel's voice filled the tight spaces between Greater Clevelanders packed into the City Club Friday to hear him protest President Bush's war on Iraq.

    He repeated the message he began trumpeting in November: that American military efforts in Iraq are failing and will continue to fail, while costing taxpayers $450 billion by the year's end.

    The 37-year decorated Marine and 32-year congressman from Pennsylvania said:

    Iraqis with 80 percent of them wanting the U.S. out need time to solve their own civil war. "It took 100 years to get stability in our country, with its own civil war."

    "We needed to win the hearts and minds of the Iraqi people." Instead, more than 40 percent of them say it is all right to kill Americans.

    "We needed to be able to pick up the trash, restore power and get the people working again." Instead, oil production remains below prewar levels; electricity is available for just 10 hours a day in the sweltering desert climate; 30 percent of the population is without drinkable water; 60 percent are unemployed.

    Troops are undermanned, underequipped and dying at rates higher than during World War II and the Vietnam War. "I visit the [veterans hospitals] every week. The troops don't know what their mission is any more." And 8,500 of them have returned with shattered bod ies or brains and the permanent "shadow on your soul" that fighting a war creates.

    Murtha took questions from several luncheon attendees who worried that Bush may be planning to invade Iran. The ranking and longtime member of the Defense Appropriations Subcommittee nearly shouted, "we will not" be entering Iran.

    He also said that the subcommittee would not approve funding the construction of permanent military bases in Iraq. The audience broke into applause.

    Murtha criticized Bush for using fear of terrorism to maintain public support for the war, when real dangers exist here.

    U.S. ports are not secure, but they could be in one month, if the money that has been spent on the civil war in Iraq was spent on ports, he said.

    Asked to predict the next threat to America that might require military force, Murtha said he's concerned about China and its increasing need for oil.

    "And if they think that we can't respond because we are overextended in Iraq. . ." He shook his head.

    The Issing Link

    TWO events in the past week highlight the huge divide in monetary policy thinking between Europe and America. On March 16th and 17th, a conference was held in Frankfurt to honour Otmar Issing, chief economist of the European Central Bank (ECB), who retires in May. Most participants agreed that central banks still need to watch the growth of the money supply. A week later, America's Federal Reserve stopped publishing M3, its broadest measure of money, claiming that it provided no useful information. Who is right?

    Mr Issing was the architect of the ECB's monetary-policy strategy. He built it using a design taken from Germany's Bundesbank, where he was previously the chief economist. He holds two controversial beliefs that challenge prevailing monetary orthodoxy. First, he thinks that central banks must always keep a close eye on money-supply growth. Second, central banks sometimes need to lean against asset-price bubbles.

    Consider the role of money first. Ask non-economists, "What is economics?" and they will often reply that it is "all about money". Yet the odd thing is that the standard academic models used by most economists ignore money altogether. Inflation instead depends simply on the amount of spare capacity in the economy.

    Nor does the money supply play any role in monetary policy in most countries, notably America. Alan Greenspan's last ten speeches as chairman of the Federal Reserve contained not a single use of the word "money".

    Yet Milton Friedman's dictum that "inflation is always and everywhere a monetary phenomenon" is still borne out by the facts. The chart plots the rate of inflation and broad money-supply growth in 40 economies over the past 30 years. In the long run, countries with faster monetary growth have experienced higher inflation. So why are central banks (except the ECB) paying so little attention to money?

    The problem is that over short periods the link between the money supply and inflation is fickle, because the demand for money moves unpredictably. The Bank of England's early days provide a good example. Uncertainty over exactly when ships laden with valuable commodities would arrive in London could cause unexpected shifts in the demand for money and credit. The uncertainty was caused by many factors, notably changes in the direction and the speed of the wind as ships came up the river Thames. The bank's Court Room therefore had a weather vane (still there today) to provide a surprisingly accurate prediction of shifts in the demand for money. Sadly, no such gauge exists today. Financial liberalisation and innovation have also distorted measures of money, making monetary targeting-all the rage in the early 1980s-unworkable.

    But it would be foolish to conclude that money does not matter. Throughout history, rapid money growth has almost always been followed by rising inflation or asset-price bubbles. This is why Mr Issing, virtually alone among central bankers, has continued to fly the monetarist flag.

    The ECB's monetary-policy strategy has two pillars: an economic pillar, which uses a wide range of indicators to gauge short-term inflation risks, and a monetary pillar as a check on medium- to long-run risks. The monetary pillar has attracted much criticism from outside the ECB; it is often dismissed as redundant, if not confusing. It was originally intended to guard against medium-term inflation risks. More recently, Mr Issing has justified the pillar as a defence against asset bubbles, which are always accompanied by monetary excess.

    Mr Issing's model is at last starting to win friends abroad. Julian Callow, an economist at Barclays Capital, sees strong parallels between the Bank of Japan's (BoJ) new monetary policy framework and that of the ECB. The BoJ has said that it will track the economy from two
    perspectives: price stability and growth one to two years into the future; and a broader assessment of medium- and longer-term risks, which is likely to include the growth of asset prices and credit. In his time at the podium at last week's conference, Kazumasa Iwata, deputy governor of the BoJ, seemed to confirm that the bank's new framework owed much to Mr Issing's legacy.

    Pick your monetary metaphor

    Unlike some central bankers, Mr Issing loves to be challenged, so he invited Don Kohn, a governor of the Fed, to tackle the ECB view that a central bank should sometimes "lean against the wind" to prevent an asset bubble inflating, by tightening policy by more than inflation alone would require. Mr Kohn argued the usual Fed line: because of huge uncertainties, it is too risky to respond to bubbles and therefore it is safer to "mop up" by easing policy after a bubble bursts. He tried to present the Fed's approach to asset prices as the neutral one, ie, less activist than the ECB's. But that is misleading. There is no such thing as "doing nothing". Under the Fed's approach, unfettered liquidity sustains a bubble.

    This link between money and asset prices is why the ECB'S twin-pillar framework may be one of the best ways for central banks to deal with asset prices. A growing body of academic evidence, most notably from economists at the Bank for International Settlements, suggests that monetary aggregates do contain useful information. Rapid growth in the money supply can often signal the build-up of unsustainable financial imbalances, as well as incipient inflation.

    Charles Goodhart, a former member of the Bank of England's Monetary Policy Committee, mused in his speech to the conference that it would be deeply ironic if Mr Issing's departure coincided with a demonstration of the underlying worth of the monetary pillar. In other words, this may be precisely the wrong time to dismiss monetary aggregates: in these days of asset-price booms and imbalances, their informational content may be becoming more, not less, valuable. Will Mr Bernanke please take note?

    April 11, 2006

    Copper breaks $6000 a ton

    London Metal Exchange benchmark three-month copper broke key level $6,000 a metric ton Tuesday, building on overnight momentum after Grupo Mexico SA declared force majeure, attracting more fund and speculative interest, an analyst said.

    LME copper peaked at $6,005/ton, the latest in a series of record highs. Copper has risen more than 11% since the beginning of April and 26% since the beginning of the year. Prices then dipped to $5,915/ton on profit taking, a move anticipated by most analysts.

    "The uptrend is likely to remain intact but after the hard and fast push up we could see some consolidation. The $6,000/ton level is likely to provide some resistance in the near-term," Barclays Capital analyst Ingrid Sternby said. News of Grupo Mexico declaring force majeure due to a three-week long strike at its La Caridad mine fueled copper's latest push up, channelling further fund and speculative money to the metals market, she added.

    La Caridad copper mine, in the northwestern state of Sonora, produces about 150,000 metric tons of copper concentrate a year and 250,000 tons of different refined copper products.

    Future pullbacks in copper will likely see buying on the dips while fund long position holders will seek to keep prices up, Calyon analyst Maqsood Ahmed said.

    The Easter period could also see some profit taking in order to square positions before the four-day weekend, he said.

    LME three-month zinc moved to a fresh record high of $2,985/ton, up 2.5% in line with copper's rise and on its own bullish fundamentals, brushing close to key target of $3,000/ton.

    Zinc's cash-to-three-month backwardation moves sharply out to $45 from $15.50. Backwardation is a condition where spot prices trade above dates further forward and usually indicate that a market is in short supply.

    LME nickel maintained Monday's strong gains to a two-year of $17,650/ton overnight and last traded at $17,450/ton.

    Copper's move comes amid buoyant commodities prices with oil at eight month highs and gold pushing through key psychological level of $600 a troy ounce overnight.

    Richard Russell snippet

    Dow Theory Letters
    April 11, 2006

    Extracted from the April 10, 2006 edition of Richard's Remarks

    My opinion on housing -- The Fed knows that housing MUST hold up -- a housing collapse would be a disaster, Housing has been the KEY to the US economy. To hold up housing, the Fed must keep the nation floating on liquidity. We don't know what the broad M-3 money supply is now, because the Government has taken away the figures. But I believe the precious metals are giving us the answer -- the answer is that liquidity is HUGE. The country is floating on money, and that's the way the Fed wants it.

    The cover-up to this Fed-created inflation is those mini-boosts in Fed funds. The little boosts give the false impression that the Fed is "fighting inflation." But inflation is a product of too much money chasing too few goods. Without M-3 we can't prove it, but gold is telling us that the Fed is creating huge amounts of liquidity. Above everything else, the Fed is intent on keeping housing UP.

    In my opinion, the housing bubble is still intact! If nothing else, I see it in the action of the home building stocks.

    Gold, silver, platinum. The precious metals are all in bull markets. Platinum today rose to a new record high above 1100 an ounce. The ratio of gold to silver dropped today to 47.9, meaning that one ounce of gold buys 47 ounces of silver. In January, gold would buy a large 62 ounces of silver. Thus silver is certainly outperforming gold, although both metals are rising. Rumors are that there is a short squeeze in silver. The once great silver supply is shrinking. A further bullish force for silver is that a silver Exchange Traded Fund will soon come out, meaning that investors will be able to buy a fund that is backed by actual silver.

    A question I'm often asked is, "What would happen to gold shares if the broad stock market sinks into a bear market?

    My answer is that a bear market in stocks would be basically deflationary. The Fed is mortally afraid of deflation, Therefore, in the face of deflationary action, the Fed would open the monetary spigots wide and bring rates down to 1% or even 0.5%. In other words, the Fed would move to the edge of destroying the dollar rather than deal with the forces of deflation. Under these conditions, I would expect gold to resist or outperform almost everything else, since the Fed's counter-deflationary action would place the viability of the dollar in doubt.

    The metals might not respond immediately to a bear market, but as investors realized what the Fed was doing, the metals should rise. As the metals rose, this should rub off on the metal stocks.

    Apr 10, 2006
    Richard Russell

    Chinese govt. economist includes gold in plan to slow rise in FX reserves

    BEIJING -- China should push yuan reforms, let firms hold more

    foreign currency, and raise gold reserves to help slow the rise in

    foreign exchange reserves, an influential government economist said.

    China should ideally hold about $700 billion in foreign exchange

    reserves to ensure debt repayment, finance imports and maintain

    stability, Xia Bin, head of the financial research institute at the

    cabinet's Development Research Centre, said in a research report

    seen by Reuters on Monday.

    The rapid rise in China's reserves, the world's largest at $853.6

    billion at the end of February, had made it hard for the central

    bank to control money supply and showed that China had failed to to

    keep badly needed capital at home, Xia said.

    A spokesman at the State Administration of Foreign Exchange which

    manages the reserves, declined to comment on the report.

    The reserves have soared in recent years as the People's Bank of

    China, trying to hold down the yuan, has bought most of the dollars

    generated by a growing trade surplus and the inflow of foreign

    direct investment and speculative capital.

    Investing those dollars, China has become a big buyer of U.S.

    government bonds and other dollar assets, helping to finance a heavy

    U.S. current account deficit and to keep U.S. interest rates low.

    "We cannot underestimate the possible loss to the reserves if, in

    the long run, the United States adopts a weak-dollar policy and we

    are still maintaining a high level of dollar reserves."

    China is keen to hedge risk by diversifying its reserve holdings

    away from the dollar, but economists say that fears of a collapse in

    the U.S. currency will prevent any dramatic shift.

    Xia suggested the government should consider a combination of

    measures to slow down the build-up of China's foreign exchange

    reserves, including giving the yuan more leeway to move.

    The government should also consider allowing firms to hoard more

    foreign currency and establish an investment fund to channel hard

    currency and personal investments overseas, Xia said.

    The central bank might need to raise its gold reserves, which had

    been too low in recent years, to reflect China's status as a major

    trading nation, he said.

    Part of the forex reserves could be used to recapitalise state banks

    following the injection of $60 billion into China Construction Bank

    Corp., Bank of China, and Industrial and Commercial Bank of China,

    Xia said.

    "How to effectively ease the upward pressure is vital for the yuan

    exchange rate reforms and also vital in resolving the problem of the

    runaway growth in foreign exchange reserves," Xia said.

    China must follow its own independent policy, regardless of foreign

    pressure, by letting market forces adjust the yuan's value towards

    its "equilibrium level", he said.

    The authorities should keep the yuan's crawling appreciation

    and "appropriately widen its floating band," Xia said.

    In July China revalued the yuan by 2.1 percent against the dollar

    and shifted to a managed float. The yuan has appreciated a further

    1.3 percent versus the dollar since then and the pace of rises has

    quickened in recent weeks, ahead of President Hu Jintao's visit to

    the United States.

    Commodities run turns to stampede

    The upward march in commodity prices picked up even further pace overnight as a combination of geopolitical tensions over Iran, supply concerns, fund diversification and sheer momentum drove prices higher across precious, base metal and oil markets.</ />

    New York gold futures closed above the psychologically important $US600 an ounce level for a third straight session - the highest level in a quarter century - although spot prices stopped just short of there. The precious metal has risen 16 per cent this year and more than 40 per cent in the past 12 months.

    Gold's breath-taking ascent gave further impetus to silver, which jumped 4 per cent to settle at a 23-year high at $US12.56. Silver is also being sought on expectations that the first silver exchange-traded fund will be launched soon, with the potential to boost metal demand sharply.

    In the energy markets, US crude oil futures prices gained 2 per cent on supply concerns related to tensions between Washington and Tehran over Iran's nuclear ambitions.

    "Geopolitics is playing a key role in pension/mutual funds' motivation to invest in oil. They perceive geopolitics not as trading opportunities but as risks," analysts at SG CIB said.

    The (Rude) Awakening

    While satire can be useful in pointing out the folly of America’s unprecedented borrowing and spending binge, the remedy will likely be so harsh that it precludes humor. Yet, the aspect of the effects of this credit phenomenon on the average American has long concerned me. So, with your permission, I will continue the story of the couple above, whom I’ll call Bob and Sally Smith, in my own admittedly dour way. If you are fortunate enough to be reading this article with no credit problems, you still have been, and will be, affected by this historic, reckless expansion of credit. Beyond the effects of inflation, and the probability of deflation, the consequences of our profligacy will not play out in a vacuum and will not be nearly as hygienic as an academic discussion of this problem. 
    In response to the bursting of the stock market bubble of the late ‘90s, in 2001, the Federal Reserve began slashing interest rates, from 6.5 to 1 percent by 2003, bringing rates to their lowest levels since the Great Depression. Not surprisingly, as the credit spigot was opened wide, housing prices went parabolic. The unsustainable stock prices of the late ‘90s gave way to the unsustainable real estate prices of today. In 2004 and 2005, thousands of articles warned of a real estate bust, but the bust has yet to occur. Over the last two years, like us, many have cautioned that the stock market is again nearing a significant decline, yet no such decline has unfolded.
    So, if things have been “good” for so long (three years is forever to most Americans), why do we so doggedly hold to the idea that there is a problem and that our current course is not self-sustaining? I think that we are nearing the end of this present course, and while no person can know that this is “the top” (until it is too late to do anything about it), keeping watch for “the top” has never been more crucial. So once again, this time – through the eyes of Mr. and Mrs. Smith, we will look at the line of dominoes, the first of which is teetering and appears to be starting to fall.
    The Smiths have heard stories from friends, family, and associates that are very close to their own experience. One day, Bob recognizes a common denominator and becomes concerned. He realizes that a lot of the people he knows have taken on increasing amounts of debt and ponders whether his small view of the world is a microcosm of what is happening on a much larger scale across the U.S. While they are certainly not “pessimists,” the Smiths decide to do some research on debt, which eventually leads them to a website called, prudentbear.com. There they happen upon the chart below. As they take in the size of household debt and the pace at which it’s growing, and realize that this is not a chart of a few families in their circle of friends, but a look at the 300 million people that comprise the United States, they become increasingly ill at ease.

    April 10, 2006


    PIRACICABA, Brazil — At the dawn of the automobile age, Henry Ford predicted that "ethyl alcohol is the fuel of the future." With petroleum about $65 a barrel, President Bush has now embraced that view, too. But Brazil is already there.

    Skip to next paragraph
    Lalo de Almeida for The New York Times

    Ethanol, or alcool, is popular at a São Paulo station and across Brazil because it costs less than gas.

    This country expects to become energy self-sufficient this year, meeting its growing demand for fuel by increasing production from petroleum and ethanol. Already the use of ethanol, derived in Brazil from sugar cane, is so widespread that some gas stations have two sets of pumps, marked A for alcohol and G for gas.

    In his State of the Union address in January, Mr. Bush backed financing for "cutting-edge methods of producing ethanol, not just from corn but wood chips and stalks or switch grass" with the goal of making ethanol competitive in six years.

    But Brazil's path has taken 30 years of effort, required several billion dollars in incentives and involved many missteps. While not always easy, it provides clues to the real challenges facing the United States' ambitions.

    Brazilian officials and scientists say that, in their country at least, the main barriers to the broader use of ethanol today come from outside. Brazil's ethanol yields nearly eight times as much energy as corn-based options, according to scientific data. Yet heavy import duties on the Brazilian product have limited its entry into the United States and Europe.

    Brazilian officials and scientists say sugar cane yields are likely to increase because of recent research.

    "Renewable fuel has been a fantastic solution for us," Brazil's minister of agriculture, Roberto Rodrigues, said in a recent interview in São Paulo, the capital of São Paulo State, which accounts for 60 percent of sugar production in Brazil. "And it offers a way out of the fossil fuel trap for others as well."

    Here, where Brazil has cultivated sugar cane since the 16th century, green fields of cane, stalks rippling gently in the tropical breeze, stretch to the horizon, producing a crop that is destined to be consumed not just as candy and soft drinks but also in the tanks of millions of cars.

    The use of ethanol in Brazil was greatly accelerated in the last three years with the introduction of "flex fuel" engines, designed to run on ethanol, gasoline or any mixture of the two. (The gasoline sold in Brazil contains about 25 percent alcohol, a practice that has accelerated Brazil's shift from imported oil.)

    But Brazilian officials and business executives say the ethanol industry would develop even faster if the United States did not levy a tax of 54 cents a gallon on all imports of Brazilian cane-based ethanol.

    With demand for ethanol soaring in Brazil, sugar producers recognize that it is unrealistic to think of exports to the United States now. But Brazilian leaders complain that Washington's restrictions have inhibited foreign investment, particularly by Americans.

    As a result, ethanol development has been led by Brazilian companies with limited capital. But with oil prices soaring, the four international giants that control much of the world's agribusiness — Archer Daniels Midland, Bunge and Born, Cargill and Louis Dreyfuss — have recently begun showing interest.

    Brazil says those and other outsiders are welcome. Aware that the United States and other industrialized countries are reluctant to trade their longstanding dependence on oil for a new dependence on renewable fuels, government and industry officials say they are willing to share technology with those interested in following Brazil's example.

    "We are not interested in becoming the Saudi Arabia of ethanol," said Eduardo Carvalho, director of the National Sugarcane Agro-Industry Union, a producer's group. "It's not our strategy because it doesn't produce results. As a large producer and user, I need to have other big buyers and sellers in the international market if ethanol is to become a commodity, which is our real goal."

    The ethanol boom in Brazil, which took off at the start of the decade after a long slump, is not the first. The government introduced its original "Pro-Alcohol" program in 1975, after the first global energy crisis, and by the mid-1980's, more than three

    April 06, 2006

    Farber on Commodities

    Worth a watch.

    Best Quotes of March 2006

    Ted Butler, Investment Rarities
    "If someone had asked me to devise a method, or scheme, that could propel silver prices sharply higher, I don’t think I could have dreamed up anything more potentially bullish than the Barclays ETF.

    At the heart of the silver story is the structural deficit and disappearing inventories. For more than 60 years, we have continuously consumed more silver than has been produced on a current basis, necessitating the draw down of inventories every year. As I have repeatedly stated, there is no more bullish or temporary a condition possible in any commodity than such a circumstance. In time, it guarantees a price rise sufficient to eliminate the deficit. The reason the silver deficit could exist for so many years was because so much silver had been accumulated through the ages that it took many decades to eat up those inventories. When inventories cease to be available, silver hits a brick wall. Prices must rise and the deficit end.

    What the proposed ETF promises to achieve is the acceleration of the time that available silver inventory will run out and we will smack into a brick wall…The largest single pool of investment capital in the world exists in institutional and individual retirement accounts. The total amount of capital in this category runs into the trillions and trillion of dollars. In the US, much of this giant pool of assets that covers institutional pension plans is governed by the Employee Retirement Income Security Act of 1974 (ERISA), which sets standards in how these funds should be safeguarded. Very simply stated, fiduciary responsibilities by plan administrators must be conducted by "prudent man" principles, including what type of assets could be invested in with plan funds. Again, staying simple, this meant only investing in sound securities, mainly stocks and bonds. Commodities or commodities futures contracts were strictly forbidden.

    Commodity ETFs change all that. Because they are structured as a common stock, they make it possible for investment by many types of accounts, where investment was not legal or possible before. This is what I would have never been able to imagine – someone actually came up with a way to connect or link the largest pool of investment capital in the world to the one market that could least handle (at least on an orderly pricing basis) an infusion of such funds, real silver. Just to put it into perspective, one-tenth of one percent of trillions is billions. I don’t see how billions of dollars could flow smoothly into the silver market. It’s like trying to stuff ten pounds of ice cream into a one-pound container – no matter how you do it; you’re going to make a mess. This is the other reason why I was sure the regulators would reject the silver ETF.

    By the time this silver story plays out, the $50 Hunt Brothers episode will merely be a footnote in silver history."

    Steve Saville, Speculative Investor
    "It is very unlikely, however, that the US$ will ever COLLAPSE in value relative to any other fiat currency. The reason is that ALL of these currencies are in the process of being inflated into oblivion; it's just that over the next few years the dollar is likely to move towards that ultimate destination at a modestly faster pace than some of the other major currencies."

    Jim Puplava, Financial Sense
    "Inflation can manifest itself in either of two ways. It can show up in the real economy in the price of goods and services as it is doing now or it can surface in the asset markets in the form of higher prices for assets be it bonds, stocks, commodities or real estate. Just look at the '80s and '90s for financial inflation and this new decade for hard asset inflation in the price of real estate and commodities.

    This brings me to the next reinflation effort which has now begun. Why else would M3, which has been growing at an annual rate of 8%, no longer be reported by the Fed? Monetary inflation is the reason. The U.S. is spending and borrowing too much money. Our current rate of spending is out of control and beyond balancing through tax increases, so monetary inflation through monetization is next. As the Fed goes on hold—perhaps after the Fed funds rate is taken to 5-5.25%—the dollar will begin its relentless decline."

    Puru Saxena, Money Matters
    "The absurd money-creation continues. Slowly yet surely, the "stealth" confiscation of savings is gaining momentum as money loses its value. Central banks claim that they are raising interest-rates to fight inflation. At the same time they are slipping in more rum into the punch bowl, thus creating just what they say they want to fight - inflation! Take a look at the latest year-on-year money supply growth-rates around the world:

    Australia + 9.1%
    Britain + 11.7%
    Canada + 7.7%
    Denmark + 14.7%
    US + 8.1%
    Euro area + 7.3%

    When I glance at these mind-boggling figures, at least I don't see any monetary tightening taking place! Make no mistake, this excessive liquidity is inflation that banks are creating and this inflation is destroying the purchasing power of your hard-earned money. As asset-prices continue to benefit from this monetary insanity, the wealth inequality is getting wider resulting in social unrest in several parts of the world. The ultimate truth about inflation is that it always benefits the rich who are able to ride the inflationary wave by investing in assets, whereas the poor become even more impoverished as things continue to become more expensive."

    Howard Ruff, Ruff Times
    "Silver will not be just twice as profitable as gold in the next few years, but many times more profitable--maybe ten times more profitable. Silver is in huge short supply; the inventories are gone! Unlike gold, government can’t dump the silver in the market to artificially suppress the price because they have none. Silver is still the poor-man’s gold, and the time is not far away when it will be difficult to find any silver at any price short of $100 an ounce."

    Stephen Roach, Morgan Stanley
    What happens to the world economy if the bond market conundrum is suddenly resolved and real long-term interest rates revert toward historical norms?  My guess is that this is not good news for what has been a liquidity-driven, increasingly asset-dependent global economy."

    Jim Willie, GoldenJackass
    "A return to normalcy is poppycock, never to happen! We have gone so far afield, so far from anything recognizable or rectifiable, that normalcy is not even remotely possible in the gold and crude oil markets. The USFed will tighten until they cause a crisis, then deny their role, then clean it up, probably followed by easing of interest rates. The next LTCM fiasco lies around the corner, under the surface, ready to be revealed, sure to wreck havoc. Gold and crude oil will be given a grand assist when it happens, not if. It is guaranteed since the USFed can no longer even define what “neutrality” means in its policy. Besides, what it says usually obscures its actual policy motive. My firm belief is that the Enron model was hatched from the USGovt incubator, where it continues."

    Doug Noland, Prudent Bear
    "As easy as it seems that it should have been, I don’t feel I effectively countered the absolute nonsense that our Current Account Deficit is driven by unrelenting global 'capital' inflows. And I have not even come close to shedding light on the reality that unchecked – and inevitably unwieldy and unstable - global finance has been a commanding force within what the New Paradigm crowd trumpets as virtuous free-market 'globalization.'

    Why then, you may question, do I suspect that Credit Bubble-like analysis will garner more attention going forward? Well, I believe the Fed and global central bankers may finally comprehend that they are facing a very serious problem – that Credit and speculative excesses begetting greater excess demand a true tightening of global financial conditions.  Importantly, hope that a cooling housing market will obligingly chill the Bubbling U.S. economy is fading rapidly. As the 'Flow of Funds' confirmed, the Credit system is currently firing on all cylinders and the Bubble economy has a full head of steam. The U.S. Current Account and Global Imbalances are poised to only worsen, fueled by Bubble dynamics that now command Credit systems and asset markets around the globe. Expectations for a slowing U.S. are shifting to fears of a runaway Global (Credit)."

    Reg Howe, GATA
    "Alan Greenspan confessed to the gold price suppression scheme. The European Central Bank confessed to the gold price suppression scheme.  Barrick Gold confessed to the gold price suppression scheme in U.S. District Court in New Orleans on February 28, 2003, The Reserve Bank of Australia confessed to the gold price suppression scheme in its annual report for 2003. And now the Bank for International Settlements, the central bank of the central banks, has confessed to the gold price suppression scheme by saying 'the provision of international credits and joint efforts to influence asset prices (especially gold and foreign exchange) in circumstances where this might be thought useful.'"

    Richard Daughty, the Mogambo Guru
    "The unusual action of silver and gold here lately is the result of lots and lots of guys, businesses and banks on the hook for billions and billions of dollars in short sales, year after year after year. The rise in the prices of gold and silver means financial death for them. So buy them with confidence, perhaps even with a little malice against those creeps, as they can't keep it up for much longer, and the prices of gold and silver will shoot to the moon when they finally give up."

    James Turk, GoldMoney
    "The federal government desperately needs strong economic activity in order to generate the highest possible tax revenue to decrease its reliance on debt.  But rising interest rates dampen economic activity. Rising interest rates also have an unfavorable impact on expenditures: A 6% average interest rate on $8.2 trillion of debt results in a higher interest expense burden than a 4.6% rate.

    Thus, higher interest rates restrain tax revenue while increasing the level of expenditures. Together these factors worsen the budget deficit, which then causes the federal government to borrow even more money.  The resulting higher level of debt leads to a greater interest expense burden, further worsening the deficit.  Consequently, the federal government is rapidly moving to the point where borrowing becomes necessary to meet its interest expense obligations. This condition is not sustainable. If the vicious circle is not addressed and corrected, it will turn into a death spiral in which the dollar is destroyed." 

    John Mauldin, Thoughts From the Front Line
    "Why are home supplies rising? The simple answer is that demand is falling. The University of Michigan has an index which measures the intention of people to buy a home in the near future. It is at its lowest level in 15 years. The National Association of Homebuilders Index which tracks a number of things but includes potential buying traffic in new home developments is also dropping dramatically in the last few months.

    Bear markets begin when growth in real consumer spending peaks and beings to slow. I think I made the case above that consumer spending is going to face a real uphill battle as cash-out financing slows down, higher energy costs don't go away, higher interest rates translate into higher mortgage and credit card payments on top of legislation requiring higher minimum payments on credit card balances."

    Texas Congressman Ron Paul
    "If there were a 'housing hurricane,' it would be just like a real hurricane. You spend whatever people demand you spend and worry about it later. FANNIE MAE and FREDDIE MAC have a line of credit from the Treasury, and they would use it if they had to. And I'm sure other mortgage companies would qualify. Congress would do whatever they feel they have to do…There is no historical example where paper money has lasted for a long period of time. It works for a while until the trust in that money is totally undermined, and then it ends up in an economic calamity, for the most part, in runaway inflation or other serious dislocations."

    Paul McCulley, PIMCO
    "The end of the housing boom will come soon, we think, and when it does, sales volume in the property market will reverse wickedly. Housing prices don't crash, but volume of transactions does, as sellers refuse to face reality on pricing and buyers wait them out." 

    Peter Schiff, Euro Pacific Capital
    "This week, as statistics revealed that China has surpassed Japan as the world’s largest holder of foreign reserves, the U.S. Congress continues to threaten China with 27% tariffs on their exports to the U.S. The move, which is akin to a cornered gunman turning the pistol on himself and threatening to pull the trigger, reveals the extent to which American politicians fail to comprehend the true nature of the current Sino-U.S relationship.

    In desperate need of capital, America is hardly in a position to insult those providing it, or dictate the terms by which they do so. However, the latest tough talk on China comes shortly after Congressional action which blocked key purchases of American assets by foreign interests. Such posturing sends a very dangerous message to our creditors. If as a nation we have decided to sell off our cows to pay for imported milk, we can not complain when our trading partners actually show up to collect the animals.

    As a result of the unprecedented foreign-financed consumption binge in the U.S., it is likely that nearly every major U.S. asset will ultimately pass into foreign control, including most companies in the S&P 500 and trophy properties in major U.S. cities. As America lacks the industrial capacity necessary to redeem its IOU’s with actual consumer goods, access to capital goods and domestic assets is all that gives its currency value. Restrictions on the ability to acquire such assets will diminish foreign interest in accepting dollars in exchange for exports, and will dissuade foreign governments from holding huge reserves of dollars that they cannot hope to spend."

    Paul Kasriel,  Northern Trust Company
    "Again, so what if mortgage defaults are on the rise? No biggie except that U.S. commercial banks have a record exposure to the mortgage market. About 62% of bank earning assets are mortgage-related. (I do not have access to the data to determine what part of this mortgage exposure pertains to commercial properties). What I'm driving at here is the potential for a bust in housing to cripple the banking system. History tells us that a crippled banking system renders central banks less potent in combating economic downturns and promoting robust recoveries. In other words, if a housing bust led to large credit losses to the banking system, Chairman Bernanke could cut the fed funds rate to 1% and be surprised that a low interest rate did not have the same magic for him as it had for his predecessor."

    James Grant, Grant’s Interest Rate Observer
    "There are more values in your hotel mini-bar than in the U.S. bond market,"

    Eric Andrews, Financial Sense University
    "In 2008, the first Boomers will begin retirement and sell their stocks, bonds, and other paper promises into the market to pay for rent, health care, and gasoline. Who will buy them? The younger generation makes far less per hour, and even if their wages were equal, there are not enough of them to offset a 30-year supply of selling pressure. Worse, as their selling drives the market down, no one could buy even if they wanted to, because who would buy a stock when the tide of the market will sink for 30 years? Our Generational Transfer problem can be mostly righted by canceling Medicare and increasing the Social Security retirement age to well over 70. Not so the stock and paper markets."

    I. M. Vronsky, Gold-Eagle
    "Gold & Silver Equities' fantastic performance in the last 5 years will slowly mesmerize and galvanize investor attention to the point Gold Fever contagion will spread through the world -- as frantic investors seek to place their hard earned savings in vehicles demonstrating intrinsic value and high liquidity…like gold and silver equities."

    The Silver story

    What is the real silver story and what would it take to proclaim that most observers and commentators knew that story? In my opinion, you would have to see articles and hear commentary from the popular media that dealt in the following topics. That silver had been in a continuous consumption/production deficit for 60 years. That the US government, formerly the largest holder of silver in history, had none left. That silver had become a vital industrial commodity with more applications and uses than any other commodity, save petroleum. That the price had not risen for 20 years in spite of the structural deficit, in defiance of the very law of supply and demand. That, according to the US Geological Survey, there were fewer years of production of silver left in the ground than any other metal or mineral. That, in terms of available world inventories, silver was more rare than gold.

    If I started to hear and read stories in the popular media that included these topics, then I would conclude that the real silver story was being learned. But there is one topic that would tell me the word was really getting out, if it were to appear. That topic, of course, is the out-sized short position; principally the COMEX short position. This is the subject that first told me, more than 20 years ago, that there was something definitely wrong in silver. For two decades, I have yet to come across anyone who could take the other side of the debate, namely, to show that there was anything legitimate about the COMEX silver short position.

    The COMEX silver short position, no matter how you slice it or dice it, stands out from any other commodity. Let me count the ways. The gross COMEX short position (open interest), for futures alone, is now over 700 million ounces. This is greater than total world annual mine production and greater than any world inventory amount than I have seen published. In no other commodity can this statement be made. The net commercial COMEX silver short position is also larger, by a disproportionate amount, than any other commodity when compared to real world production and inventories. Ditto the net concentrated short position, where a handful of large traders are short more silver than in any other commodity. In the 20+ year-history of the Commitment of Traders Report (COT), COMEX silver is the only commodity where the commercial have never been net long.

    You must remember, the only reason that the Commodity Futures Trading Commission (CFTC) even compiles and reports the concentration ratios of the largest traders in all commodities is as a safeguard against manipulation. But why do they even bother? My point is that why does the CFTC go the trouble to keep and publish such concentrated positions if they don’t intend to do anything about those positions, no matter how large and concentrated they may grow?

    Currently, there is a vocal debate about the prospective Barclays silver ETF and what effect the proposed maximum filing of 130 million ounces, or any amount up to that maximum filing amount, could have on the market. But why is there no debate about the 4 largest traders on the COMEX who are already net short more than 200 million ounces and what effect that has had on prices? Or about the 8 largest traders who are already short almost 300 million ounces?

    I know that I have been in a distinct minority in harping on this silver short position. I know many ignore it or dismiss it with shallow explanations, like "there’s a long for every short, so what’s the problem?" I know that regulators and exchange officials have always denied it was the problem that I have claimed it to be. That doesn’t bother me, and I look forward to being judged on this issue in the fullness of time.

    Along with the 60-year continuous structural deficit, the depleted inventories, the paucity of below ground remaining resources, and the stunning rarity of silver compared to gold, the uneconomic short position in COMEX silver is key to the real silver story. It is the resolution of this outrageous short position that will dictate the major moves in the price of silver.

    Make no mistake; this short position must be resolved. It is not possible for a short position that is larger than all the silver in the world, or could be produced, to last indefinitely. The only question is how quickly investors of the world learn the real silver story and rush to take advantage of it.

    Hedge Funds In Drag?

    Another quarter has come and gone, and with it has come the mandatory mark-to-market for mining company’s derivatives hedge books. I’d like to review and follow up on the likely hedge results of the two companies I had highlighted previously, in an article titled, "Lessons Learned?" http://www.investmentrarities.com/01-03-06.html

    Let me emphasize, once again, that I am not intending this to be investment advice on whether to buy or sell these stocks. I don’t have, nor have I ever had, any financial interest in these companies. I write about them for information purposes only, principally because there seems to be so little written on the topic.

    It would appear that the largest derivatives loss in history just got a lot bigger. Due to the $65 per ounce increase in the price of gold during the first quarter, Barrick Gold Mining should report a $1.2 billion additional open loss on its hedge book (now combined with the recently merged Placer Dome). Combined with the $220 million dollar loss already booked early in the quarter, the loss in the quarter should come to more than $1.4 billion. The open 18.5 million ounce gold short position that Barrick holds puts the total open loss on its hedge book at well over $5 billion. As the late Senator Everett Dirksen used to remark, "a billion here and a billion there, and pretty soon you’re talking about some real money."

    I know many contend that these horrendous hedge results are not really losses, but I would dispute that. In any event, they are, at the very least, negative to shareholder wealth. It’s kind of funny how when the hedges were going in Barrick’s favor years ago, the company was quite loud and forceful about how they were a big reason for Barrick’s success. They are not so loud and forceful these days.

    Of course, I can’t know what actions Barrick may have taken on their hedge book until they report their results in a month or so, but my back-of-the-envelope calculations should prove close to the mark. I’ll let you know.

    Coincidently, on the day of the quarter’s end, March 31, Apex Silver reported its results for the 4th quarter. They reported a loss of approximately $50 million on their hedge book, principally losses on their zinc hedge. They did not close any of their hedges in the fourth quarter, and appeared to slightly increase their shorts.

    Extrapolating for the first quarter, I would estimate that Apex lost roughly another $100 million dollars through March 31, bringing the total loss on their metal shorts to around $150 million. The loss was centered around the 30 cents per pound price rise in the price of zinc for the quarter. The bulk of Apex’s hedges were established as a requirement by their banks for them receiving a $225 million loan.

    Therefore, in essence, Apex is sitting on a $150 million hedge loss (still open) only months after getting a $225 million loan, which mandated the hedge. Those are some pretty expensive loan costs. I suppose it would have been cheaper for Apex to have arranged a loan from the Sopranos and skipped the hedge. Apex managers may have had their kneecaps broken if they didn’t pay up, but at least it would have been cheaper. Perhaps management should have let shareholders vote on it.

    April 05, 2006



    Greg Palast Reporting for BBC Newsnight TV

    Monday, April 3, 2006

    In an exclusive interview with GREG PALAST, Hugo Chávez declares a new oil order.

    Venezuela officially demands OPEC recognize his nation's reserves as largest.

    Tonight, BBC Newsnight will kick off its Latin America Week Special with Palast's exclusive report from Venezuela.

    You can watch the BBC Newsnight Report live at 5.30 pm EST at Newsnight's website: http://news.bbc.co.uk/1/hi/programmes/newsnight/default.stm

    (The report will remain viewable for 24 hours).

    Read below about BBC Newsnight revelations ...



    BBC Newsnight

    Monday April 3, 2006

    If you thought high oil prices were just a blip think again. In an exclusive interview with Greg Palast for BBC Newsnight the Venezuelan President Hugo Chavez has ruled out any return to the era of cheap oil.

    The colourful Venezuelan leader hosts the OPEC meeting on June 1 in Caracas and he will ask OPEC to set $50 a barrel - the average price last year - as the long term level. During the 1990s the price of oil had hovered around the $20 mark falling as low as $10 a barrel in early 1999.

    Chavez told Newsnight "we're trying to find an equilibrium. The price of oil could remain at the low level of $50. That's a fair price it's not a high price". Hugo Chavez will have added clout at this OPEC meeting.

    US Department of Energy analyses seen by Newsnight show that at $50 a barrel Venezuela - not Saudi Arabia - will have the biggest oil reserves in OPEC. Venezuela has vast deposits of extra heavy oil in the Orinoco. Traditionally these have not been counted because at $20 a barrel they were too expensive to exploit - but at $50 a barrel melting them into liquid petroleum becomes extremely profitable.

    The US DoE report shows that at today's prices Venezuela's oil reserves are bigger than those of the entire Middle East including Saudi Arabia, the Gulf states, Iran and Iraq. The US DoE also identifies Canada as another future oil superpower. Venezuela's deposits alone could extend the oil age for another 100 years.

    The US DoE estimates that Chavez controls 1.3 trillion barrels of oil - more than the entire declared oil reserves of the rest of the planet. Hugo Chavez told Newsnight's Greg Palast that "Venezuela has the largest oil reserves in the world. In the future Venezuela won't have any more oil - but that's in the 22nd century. Venezuela has oil for 200 years." Chavez will ask the OPEC meeting in June to formally accept that Venezuela's reserves are now bigger than Saudi Arabia's.

    Chavez's increased muscle will not go down well in Washington. In 2002 the Bush administration welcomed an attempted coup against Chavez. He told Newsnight that the Americans had organised it in an attempt to get hold of Venezuela's oil.

    Ironically by invading Iraq George Bush has boosted oil prices and effectively transferred billions of dollars from American consumers to Chavez. Up to $200 million a day - half of it from the US - is flooding into Caracas. Chavez is spending this on building infrastructure and increasing the minimum wage and improving health and education in the poor ranchos which surround the cities. As a result even his opponents accept that Chavez is extremely popular and will easily win the next Presidential election in December.

    Chavez is also spending billions in the rest of Latin America - exchanging contracts for oil tankers and infrastructure projects and buying up loans in Argentina and Brazil. He has made cheap oil deals with Ecuador and the Caribbean.

    He has also spent some of the dollars which have come in from the US supporting Fidel Castro in Cuba. In return Cuba has supplied the thousands of doctors and teachers who are transforming conditions in the barrios of Caracas. Washington accuses Chavez of buying influence in Latin America.

    The Newsnight team had to endure the long speeches and marathon six hour TV shows which Hugo Chavez delights in. Chavez posed for Newsnight posing with the sword of Simon Bolivar the 18th century liberator who drove out Spanish imperialists from South America. The symbolism was clear but behind the showman is a clever political brain.

    Chavez has not invaded any foreign countries. He does not have secret prisons at home or abroad. Chavez has repeatedly won democratic elections and the opposition operates freely although some members have been charged with accepting illegal foreign donations. Nonetheless George Bush's administration repeatedly targets Chavez on human rights and finances his opponents.

    Earlier this year US Defense Secretary Donald Rumsfeld compared Chavez to Hitler - because he was elected democratically - and last year the influential American evangelist Pat Robertson called for his assassination. Robertson later apologized and said that he did not "necessarily" have to be killed so long as he was kidnapped by American special forces.

    Chavez told Newsnight that he was still concerned that George Bush had not learnt the lessons of Iraq and would order an invasion to try to secure Venezuela's oil. "I pray this will not happen because US soldiers will bite the dust and so will we, Venezuelans". He warned that any such attempt would lead to a prolonged guerilla war and an end to oil production. "The US people should know there will be no oil for anyone".

    Chavez does not accept Tony Blair's criticism of him for lining up with Fidel Castro. He told Newsnight "if someone is sleeping together it is Bush and Blair. They share the same bed."


    Also see The Guardian story about the report: http://business.guardian.co.uk/story/0,,1745467,00.html

    Read, "The Assassination of Hugo Chavez," in Greg Palast's new book, "ARMED MADHOUSE: Dispatches from the Front Lines of the Class War" to be released by Penguin Dutton June 6 (US) and July 7 (UK).

    Pre-order it today or donate to Palast Investigative Fund for a personally signed copy at: http://www.gregpalast.com/armedmadhouse/preorder.html

    View Palast's investigative reports for Harper's Magazine and BBC Television's Newsnight at http://www.GregPalast.com

    Special thanks to Matt Pascarella, Leni von Eckardt, and Richard Rowley for their research and production assistance on this report.

    Housing bubble haiku

    The bids you receive,
    The sound of one hand clapping.
    Do they sound the same?

    Poof! In an instant–
    Disappearing without trace
    –All your equity.

    Hot market blazing
    Burn rate growing, credit maxed
    –Who put the fire out?

    Your intelligence,
    Your credit, your house: all are
    Well below average…

    Paper gains, but air
    Mortgage, a lead anchor.
    Which carries more weight?

    Costs are high, hope gone.
    The lender demands –foreclose!
    And away goes house…

    Like cherry blossom
    In last days of spring, your home
    Is well past its prime.

    Above the summit
    Beyond soaring clouds, comes
    …New tax assessment!

    As small kindnesses
    Shown strangers, your upgrades too
    Go un-rewarded.

    Dark clouds approaching,
    No more buyers found –Next comes
    Vengeful ‘Silent Spring'.

    Your Realtor job seems
    Beyond your abilities.
    –Is McDonalds hiring?

    Many clouds slip by,
    Unseen, unknown; much like your
    …Prospective buyers.

    How vast the ocean
    That separates asking price
    From true house value.

    Many are the paths
    That lead to prosperity.
    Sadly, none lead here…

    Daytrader before,
    Flipper now; coming soon:
    Parking attendant.

    Stainless steel, marble
    Glistens so, like Fool's gold,
    It has no takers.

    housing bubble blog

    April 04, 2006

    Commodities: Gold may rush higher as buyers switch from bonds

     Gold may top $600 an ounce this week for the first time in 25 years as investors buy bullion instead of U.S. bonds, according to a Bloomberg News survey.
    "It's going to $600," said Duncan Cruickshank, an analyst at Commodity Warrants Australia. "People are piling in. People will make money even if they buy at these levels."
    Nineteen of 30 traders, investors and analysts surveyed worldwide late last week advised buying gold, which rose $21.20 to $586.70 an ounce last week in New York. Seven advised selling and four were neutral.
    Gold has rallied 13 percent since the end of December, outperforming the 3.7 percent gain in the Standard & Poor's 500-stock index. Holders of the benchmark 10-year U.S. Treasury note lost 2.8 percent. Gold held for exchange-traded funds linked to the price of the metal grew about 28 percent in the first quarter, reaching 14 million ounces, the producer-financed World Gold Council, based in London said.
    Demand by investment funds has fueled the rally in gold this year.
    "The key buyers are funds," said Paul McLeod, vice president for precious metals at Commerzbank Securities in New York.
    Hedge-fund managers and other large speculators increased their holdings positions in New York gold futures in the week ended March 28, government figures show.
    "No one wants to be short in this environment," Adrian Day of Adrian Day's Asset Management said, referring to bets on falling prices. "People are looking for opportunities to buy, not to sell."
    Gold may rise as central banks sell dollars and buy gold. About 75 percent of China's reserves are held in dollars. The country may buy gold to protect itself from a falling dollar, analysts said.
    "Gold and the euro are most likely the top candidates to benefit from the Chinese, United Arab Emirates and other central banks selling the U.S. dollar," said Emanuel Balarie, a senior market strategist at Wisdom Financial.
    China has 1.3 percent of its reserves in gold, or 600 tons, the World Gold Council estimates.
     SEATTLE Gold may top $600 an ounce this week for the first time in 25 years as investors buy bullion instead of U.S. bonds, according to a Bloomberg News survey.
    "It's going to $600," said Duncan Cruickshank, an analyst at Commodity Warrants Australia. "People are piling in. People will make money even if they buy at these levels."
    Nineteen of 30 traders, investors and analysts surveyed worldwide late last week advised buying gold, which rose $21.20 to $586.70 an ounce last week in New York. Seven advised selling and four were neutral.
    Gold has rallied 13 percent since the end of December, outperforming the 3.7 percent gain in the Standard & Poor's 500-stock index. Holders of the benchmark 10-year U.S. Treasury note lost 2.8 percent. Gold held for exchange-traded funds linked to the price of the metal grew about 28 percent in the first quarter, reaching 14 million ounces, the producer-financed World Gold Council, based in London said.
    Demand by investment funds has fueled the rally in gold this year.
    "The key buyers are funds," said Paul McLeod, vice president for precious metals at Commerzbank Securities in New York.
    Hedge-fund managers and other large speculators increased their holdings positions in New York gold futures in the week ended March 28, government figures show.
    "No one wants to be short in this environment," Adrian Day of Adrian Day's Asset Management said, referring to bets on falling prices. "People are looking for opportunities to buy, not to sell."
    Gold may rise as central banks sell dollars and buy gold. About 75 percent of China's reserves are held in dollars. The country may buy gold to protect itself from a falling dollar, analysts said.
    "Gold and the euro are most likely the top candidates to benefit from the Chinese, United Arab Emirates and other central banks selling the U.S. dollar," said Emanuel Balarie, a senior market strategist at Wisdom Financial.
    China has 1.3 percent of its reserves in gold, or 600 tons, the World Gold Council estimates.

    Bill Bonner on Newspapers...

    People feel the need to be "informed." They read the paper as if it were a kind of daily hygiene - like brushing their teeth or dumping out the ashtray. Good citizens must keep up with things, they tell themselves. In school, we remember being encouraged to watch the news on television so we'd be able to discuss current events. Our teachers were doing their jobs, indoctrinating another crop of world improvers.

    Even the word "newspaper" is a conceit, if not a fraud. It pretends that the news industry is a clean pane of glass through which we look out at the spectacle of the world's events. But it is not a pane of glass at all; it is a microscope in which particular events are magnified and distorted. "News" that neither encourages journalistic prejudices nor inflates the journal's profits, is invisible.

    The British press focuses on "events" that are tawdry and puerile. The press lords must think the typical reader is a lout - if not before he begins reading the newspapers, soon after.

    The American press, alas, is more earnest. That is why hardly a day passes without a story about Israel on the front page of the International Herald Tribune, no matter how trivial or irrelevant. "Israelis fail to find strong center," was the International Herald Tribune's front-page news yesterday. We have no reason to think that events in Israel are always more important than those in Indonesia or Argentina. But, the paper seems to have a rule: Israel gets a cover story almost each and every day.

    We are not so naïve as to fail to understand why: the New York Times, owner of the International Herald Tribune, knows its market. They are in showbiz, too. In their theatre, Israel plays a central role. Maybe what happens to Israel is important to New Yorkers, as say, what happens to Ireland might be important to Bostonians. We don't know, but news, like sausage, is not news until it is run through the grinder and is mixed with the media's magical herbs, preservatives, and special seasonings. Like sausages, you can only take the papers seriously when you don't know what is in them.

    This story from the London Times was nowhere to be found in the International Herald Tribune: "Expose on Jewish role in US policy is disowned."

    "After a furious outcry from prominent American Jews," the report tells us, Harvard has withdrawn its support from a study done by one of its own professors showing how Jews affect U.S. foreign policy. The poor man who wrote the report, Professor Stephen Walt, must feel like he's picked up a hand grenade. He was carefully examining the U.S. political scene to see how it worked, when the thing went off in his face. According to the Times report, he's been kicked off the job as academic dean of the John F. Kennedy School of Government as a result:

    "No one disputes that the Jewish lobby is an influential force in U.S. politics and that the American Israel Public Affairs Committee (AIPAC) is one of the most powerful organizations in Washington. AIPAC is described in the report as 'a de factor agent of a foreign government [that] has a stranglehold on the U.S. Congress.'

    "Pressure from Israel and the [Jewish] lobby," the report continues, "was not only a factor behind the decision to attack Iraq in March 2003, but it was critical...the war was motivated in good part by a desire to make Israel more secure."

    At any given moment, people are committing murder, mayhem, and elections all over the globe, but it is the "news" from Israel that is the news that counts - in the New York Times and the International Herald Tribune at any rate. After a lifetime of reading about it, even non-Jews begin to care - which is fine by us. We only point it out to mock the "news" itself. It is not "news" that sells papers, but papers that sell news. Every headline is written by a hack with his own dog in the fight.

    Sometimes the papers sell news that is so far removed from the actual events that even they are eventually embarrassed.

    "Network of pedophiles: Searchers at Outreau look for the body of a little girl," was the headline in Le Monde. "The police began searching, Thursday, the 10th of January, in the gardens of the working class section of Outreau, near Boulogne-sur-Mer, for the body of a young victim of a Franco-Belgian pedophile network."

    At least Le Monde was fairly reserved about it. The rest of the press was howling in all caps about the gruesome details. Not only was the poor little girl tortured, raped, and murdered, it seemed like half the town was in on it.

    Sexual orgies...bizarre rituals...confessions...breakdowns...first there are a couple of adults charged and then, the papers and the local prosecutor got their blood up. Then, a taxi driver...a baker and his wife...a priest! Boy have we got a story now. Five, 10 - the list of pedophiles was beginning to look like the phonebook.

    And why not? The child shrinks were on the case, too. They couldn't believe the kids didn't know or wouldn't say what was really going on. They encouraged the kids to rat out their parents, their neighbors, their priests, and their guardians. They cajoled them. They pressured them. They wanted them to remember - to think hard. "Is it possible that someone put his hand on you? Wouldn't you like to tell us something? No? Try harder..."

    Finally, the kids played along.

    "You say a 'grand'[tall] man did something to you?" Believe it or not, the investigators went to the phone book, found a man whose name was "LeGrand" and had him arrested.

    The prosecutor was a fool. But behind him was such a strong, foul wind from the news media, he could barely keep his feet on the ground. Every day brought fresh gusts: "Pedophile Films Found in Belgium," "Pedophile Ring Arrested," "New Arrests of Leading Citizens." The headlines alone practically had the accused dangling from the gallows, even before any formal charges were filed.

    The media wallowed on with new, dazzling details: "18 children...now it is certain...have been the victims of sexual abuse, by their parents, by their neighbors, and by their friends...The children's testimony was sufficiently precise and detailed as to sweep away all doubt and eliminate any possibility of manipulation." Prominent figures were "recognized in the photos," averred the scribes confidently.

    Over and over again, the press referred to the "pedophile ring" as if it were a fact as established as gravity. The pedophiles raped and murdered. Hadn't practically every paper in the country said so? Pretty soon, people began to believe that not only it was true...it was ubiquitous. "Things like that, it happens all the time," said a lawyer to the TV cameras, gravely.

    In fact, it never happened...even once.

    That didn't stop the criminal justice system. Like Janet Reno, the prosecutor became a stooge for the press - and the mob. Someone - anyone

    - had to go to jail for such a crime. In this case, 18 people did. Many of them served years in jail; three of them attempted suicide...one succeeded.

    And then, the entire Affaire Outreau imploded: the main accusers recanted. They admitted that they had made the whole thing up. There was no pedophile ring. There was no little girl who had been murdered. There was no orgy of rape and murder. It was all a lie. The accused were innocent.

    The government opened the cells, apologized, and gave each of the wrongly accused inmates over $1 million in indemnity.

    But the hacks? From them, hardly a word of contrition or regret was heard. As far as their own role was concerned, they seemed to have been afflicted suddenly with a case of collective amnesia. Instead, out came new

    headlines: "Judicial Scandal," announced Le Monde. "Lives Ruined," pronounced another. And then, Le Monde deigned to bend its head: "A Media Tempest Turns into a Judicial Shipwreck," it noted.

    The gusts keep coming...

    Bill Bonner

    The Daily Reckoning

    April 03, 2006

    US's turn to face a currency crisis

    As the world turns, its the US's turn to face a currency crisis
    Capuchinomics Weekly eLetter
    April 2, 2006

    In 1994, Mexico came within a hairs breadth of a complete financial meltdown. The Mexican crisis was replicated in 1997 in Malaysia, Thailand, Indonesia, the Philippines and South Korea, referred to then as the "Asian tiger" economies because of their rapid growth. The Asian tiger economies, unlike Mexico, experienced meltdowns. Nearly all these economies saw their economies devastated, currencies devalued, asset price deflation and sudden impoverishment for a wide swathe of their populations. In 1998, Russia experienced the same fate as the Asian tigers with one additional feature, sovereign debt default. In 2002, Argentina, following a familiar script experienced a crisis that catapulted it from an emerging first world nation to third world nation overnight and featured the now familiar actors of a collapsed economy: devalued currency, asset price deflation, sudden impoverishment and sovereign debt default.

    It's an astonishing and tragic catalogue of failure. Only South Korea and to a lesser extent Mexico have recovered from the devastation of these crises. In physics, Newton's third law of motion states that "For every action, there is an equal and opposite reaction." The financial variation goes "for every loser there's a winner." This set of global crises had many losers i.e. the populations of these countries that suffered sudden impoverishment and decline in living standards. The biggest beneficiary of these crises was and still is the US.

    To understand how this came about, one must understand the political and economic backdrop to the crises we listed in the first paragraph. 1989 marked the biggest upheaval in post World War II human history as communism collapsed as an organizing principle for politics, economies and societies. The immediate aftermath of this collapse caused an immense void that the West and capitalist societies were wholly unprepared for. Few had anticipated the fall of communism and fewer had prepared to rebuild the shattered societies and economies of the ex-communist countries. The void was filled by the World Bank and the International Monetary Fund that advocated a neo-classicist capitalist model irrespective of the condition of the state of these economies. To ensure compliance to their recommendations financial aid and economic assistance was doled out based on the country's compliance and adherence to this model. The goal of the IMF was to remake these countries into capitalist economies and societies instantaneously.

    Such advice was in demand, and not just from ex-communist countries but also from reforming Asian countries and South American countries. The end of the cold war had caused mini-revolutions in all these areas and politicians were eager to abandon statist models and to adopt new capitalist ones. One of the key recommendations of the IMF and World Bank that played a critical role in every crisis was the recommendation that a country's currency should be set at some fixed value to the dollar. In almost every crisis, speculators attacked these fixed values, called pegs by shorting these currencies. The central banks of these countries were advised to defend the value of their currency by purchasing it in open markets even as it declined precipitously. Ultimately, these central banks did not have sufficient reserves to defend the fixed values (pegs) that had been set. In every case, currencies succumbed to these speculative attacks, catalyzing economic depredations for its populations.

    With this background, we can now look back at the last 15 years of global finance, and see an arc of cause and effect that provides a simplified narrative for what occurred during these years. In the first phase, liberalizing economies around the world fix the value of their currency to the dollar. Next, the inflated value of these currencies lead to fiscal crises as governments and businesses take on too much debt too soon. Consequently, speculators seeing an arbitrage opportunity, launch speculative attacks on these currencies. Currency crises erupt in the countries that followed the neoclassical model without adequately comprehending its risks. Next, currency devaluations and debt defaults catalyze disastrous economic consequences for these countries. These crises decimate local economies but provide one unintended benefit: they become highly competitive in their the cost of labor.

    That brings us to the present day. Now, American companies routinely manufacture overseas to tap into these low labor costs and have shipped their production of goods to these areas. The affected countries after suffering through the devastation of the crises have learned and put into practice two important lessons. First, don't take the IMF's handouts and its accompanying advice. Second, one can never have enough reserves. As a result world central banks have accumulated reserves far beyond than what is needed to maintain liquidity and solvency for their economies and currencies.

    The US emerged out of these various crises as the financial hegemon. The dollar became the de facto currency of the world. Around the world, dollars were preferred over local currencies. These developments coincided with the internet bubble and a budget surplus, a combination that caused capital flows to move even more rapidly to the US. Even after the internet bubble burst this fund flow continued unabated. It's human nature to take all manner of precautions to address the crisis that's just passed. As a result, central banks around the world are still accumulating treasury bonds even though the US's fiscal condition now matches that of Argentina or Mexico or the Asian tigers at the point of their financial crises.

    The US by dint of the fact that it issues the world's reserve currency believes that its position cannot be challenged. However, by any reckoning, the dollar today is an emperor with no clothes. The currency features low yields, deteriorating fiscal conditions and a deteriorating investment income position. And now political forces are combining, to overthrow the arrangements that made possible the extraordinary prosperity and wealth of the last two decades catalyzed by the fall of communism and the victory of capitalism.

    What lies in store next for the global financial system? In 1989, the dollar began its road back to preeminence. This preeminence has been lost after Nixon took it off the gold standard in 1971. Thirty years later (since the Dollar peaked in 2001), the dollar came full circle, traveling from global currency villain in 1971 to hero and savior status through the various crises listed in the first paragraph. By our reckoning, the dollar is headed for another stint as global villain. Ahead then is the a period of resolution of imbalances caused by the events described above. Will these imbalance be resolved by a series of small, incremental and painless adjustments? Or are we about to see a wholesale rearrangement of the dollar oriented global financial system? Sharp moves in financial markets are suggesting that some investors have made their decision and have begun to act.


    The Government of Australia (hereinafter referred to as "Australia") and the Government of the People's Republic of China (hereinafter referred to as "China"), both hereinafter referred to as "the Parties";

    Desiring to continue and expand their existing friendly relationship;

    Reaffirming their commitment to ensure that the international development and use of nuclear energy for peaceful purposes furthers the objective of the non-proliferation of nuclear weapons;

    Mindful that both Australia and China are Parties to the Treaty on the Non-Proliferation of Nuclear Weapons, done at London, Moscow and Washington on 1 July 1968 (hereinafter referred to as "the Treaty");

    Recognizing that Australia, a non-nuclear-weapon State, has, under the Treaty, undertaken not to manufacture or otherwise acquire nuclear weapons or other nuclear explosive devices, and that it concluded an agreement with the International Atomic Energy Agency (hereinafter referred to as "the Agency") on 10 July 1974 for the application of safeguards in connection with the Treaty;

    Recognizing that China is a nuclear-weapon State as defined by the Treaty, and that it concluded a safeguards agreement with the Agency on 20 September 1988 for the application of safeguards in China;

    Affirming their support for the objectives and provisions of the Treaty and their desire to promote universal adherence to the Treaty;

    Affirming their support for the Agency safeguards system and their desire to work together to ensure its continued effectiveness;

    Confirming the desire of the Parties to cooperate in the development and application of nuclear energy for peaceful purposes;

    Desiring to establish conditions consistent with their commitment to non-proliferation under which nuclear material can be transferred between Australia and China for peaceful non-explosive purposes;

    Have agreed as follows:


    Within this Agreement:

    (a) "military purpose" means, for the purposes of this Agreement only, direct military applications of nuclear energy or nuclear material such as nuclear weapons or military nuclear reactors, but does not include indirect uses such as power for a military base drawn from a civil power network, or production of radioisotopes to be used for diagnosis in a military hospital;

    (b) "peaceful purposes" means all uses other than use for a military purpose;

    (c) "nuclear material" means any "source material" or "special fissionable material" as those terms are defined in Article XX of the Statute of the Agency. Any determination by the Board of Governors of the Agency under Article XX of the Statute of the Agency which amends the list of material considered to be "source material" or "special fissionable material" shall only have effect under this Agreement when both Parties have informed each other in writing that they accept such amendment.


    This Agreement shall be implemented between the Parties through the designated authorities nominated by them. For Australia, the designated authority will be the Australian Safeguards and Non-Proliferation Office. For China, the designated authority will be the China Atomic Energy Authority. A Party may from time to time notify the other Party in writing of a change to the designated authority.


    This Agreement shall apply to:

    (a) nuclear material transferred between Australia and China for peaceful non-explosive purposes, whether directly or through a third country;

    (b) all forms of nuclear material prepared by chemical or physical processes or isotopic separation from nuclear material subject to the Agreement; if nuclear material subject to the Agreement is mixed with other nuclear material, the quantity of nuclear material so prepared which falls within the scope of this Agreement shall be an amount equivalent to the proportion which the nuclear material subject to this Agreement bears to the total quantity of nuclear material;

    (c) all generations of nuclear material produced by neutron irradiation of nuclear material subject to the Agreement; if nuclear material subject to the Agreement is irradiated together with other nuclear material, the proportion of nuclear material so produced which falls within the scope of this Agreement shall be equal to the proportion of the nuclear material irradiated that is subject to this Agreement;

    (d) nuclear material produced, processed or used in, or produced through the direct and major contribution of material, equipment, components or technology transferred between Australia and China, in accordance with the provisions of the Agreement between the Government of the People's Republic of China and the Government of Australia for Cooperation in the Peaceful Uses of Nuclear Energy (hereinafter referred to as "the Nuclear Cooperation Agreement").


    1. Nuclear material referred to in Article III shall remain subject to the provisions of this Agreement until:

    (a) it has been consumed or diluted in such a way thatit is no longer useable for any nuclear activity; or

    (b) it is practicably irrecoverable for processing into a form in which it is useable for any nuclear activity; or

    (c) it has been transferred beyond the territorial jurisdiction of Australia or beyond the territorial jurisdiction of China in accordance with paragraph 1 of Article IX of this Agreement; or

    (d) the Parties otherwise agree.

    2 . For the purpose of determining when nuclear material subject to this Agreement is no longer useable or is practicably irrecoverable for processing into a form in which it is useable for any nuclear activity, both Parties shall accept a determination made by the Agency. For the purpose of this Agreement such determination shall be made by the Agency in accordance with the provisions for the termination of safeguards of the relevant safeguards agreement between the Party concerned and the Agency.


    Nuclear material subject to this Agreement shall not be used for, or diverted to, the manufacture of nuclear weapons or other nuclear explosive devices, research on or development of nuclear weapons or other nuclear explosive devices, or be used for any military purpose.


    1. Where nuclear material subject to this Agreement is within the territory of Australia, compliance with Article V of this Agreement shall be ensured by a system of safeguards in accordance with the Safeguards Agreement concluded on 10 July 1974 between Australia and the Agency in connection with the Treaty.

    2. Where nuclear material subject to this Agreement is within the territory of China, compliance with Article V of this Agreement shall be ensured by a system of safeguards in accordance with the Safeguards Agreement concluded on 20 September 1988 between China and the Agency for the application of safeguards in China.


    If, notwithstanding the efforts of both Parties to support the Treaty and the Agency, the Agency, for whatever reason at any time, is not administering the safeguards referred to in Article VI of this Agreement in the territory of one or the other Party in which nuclear material subject to this Agreement is present, the Parties shall forthwith arrange for the application of safeguards satisfactory to both Parties which conform with Agency safeguards principles and procedures and which provide reassurance equivalent to that intended to be secured by the safeguards system they replace. The Parties shall consult and assist each other in the application of such a safeguards system.


    1. Each Party shall ensure that adequate physical protection measures are applied to nuclear material subject to this Agreement. The responsibility of a Party for ensuring the nuclear material is adequately protected extends to the international transport thereof, until that responsibility is properly transferred to another state, as appropriate.

    2. In addition to its obligations under the Convention on the Physical Protection of Nuclear Material, done at Vienna on 3 March 1980 and as amended from time to time, each Party shall apply, insofar as they are reasonable and practicable, the recommendations of Agency document INFCIRC/225/Rev.4 entitled, "The Physical Protection of Nuclear Material and Nuclear Facilities", as updated from time to time, or any subsequent document replacing INFCIRC/225/Rev.4. Any alteration to or replacement of document INFCIRC/225/Rev.4 shall have effect under this Agreement only when the Parties have informed each other in writing that they accept such alteration or replacement.



    1. Nuclear material subject to this Agreement shall not be transferred beyond the territorial jurisdiction of the recipient Party without the prior written consent of the supplier Party, except in accordance with Annex A.

    2. Nuclear material subject to this Agreement shall not be:

    (a) enriched to 20% or greater in the isotope uranium 235; or

    (b) reprocessed;

    without the prior written consent of the supplier Party.

    3. Nuclear material subject to this Agreement in China shall be subject to the safeguards referred to in paragraph 2 of Article VI and shall be processed or used:

    (a) only within the Delineated Chinese Nuclear Fuel Cycle Program defined in accordance with Annex B; or

    (b) in accordance with the procedures referred to in paragraph 1 of Annex B.

    4. The supplier Party shall not withhold consent for the purpose of securing commercial advantage.


    1. Each Party shall establish and maintain a system of accounting for and control of all nuclear material subject to this Agreement.

    2. The designated authorities of both Parties shall establish an Administrative Arrangement to ensure the effective fulfilment of the obligations of this Agreement. The Administrative Arrangement established pursuant to this paragraph may be changed with the mutual consent in writing of the designated authorities of both Parties.

    3. Nuclear material subject to this Agreement shall be transferred pursuant to this Agreement only to a natural or legal person identified by the recipient Party to the supplier Party as duly authorised to receive it.

    4. If nuclear material subject to this Agreement is present in the territory of a Party, that Party shall, upon the request of the other Party, provide the other Party in writing with the overall conclusions which the Agency has drawn from its verification activities, insofar as they relate to nuclear material subject to this Agreement.

    5. The Parties shall take adequate measures to ensure protection of any trade secrets acquired through the operation of this Agreement.


    1. The Parties shall consult regularly, or at any time at the request of either Party, in order to ensure the effective implementation of this Agreement, or to review matters relating to the peaceful uses of nuclear energy.

    2. The Parties may jointly invite the Agency to participate in such consultations.


    1. The supplier Party has the right to suspend or cancel further transfers of nuclear material and to require the recipient Party to take corrective steps if the recipient Party:

    (a) does not comply with any provisions of Article III to XI or Article XIII of this Agreement; or

    (b) does not comply with, or rejects, Agency safeguards arrangements.

    2. The supplier Party has the right to require the return of nuclear material subject to this Agreement if corrective steps are not taken by the recipient Party within a reasonable time.

    3. Nothing in this Article shall preclude recourse to dispute settlement under Article XIII.


    1. If any dispute between the Parties arises relating to the interpretation or application of this Agreement, the Parties shall in the first place settle the dispute by negotiation.

    2. If the Parties fail to reach a settlement of the said dispute within twelve months, the Parties may settle such dispute through diplomatic channels or through arbitration.

    3. Within a period of sixty days from the date of receipt by either Party from the other Party of a note through the diplomatic channel requesting arbitration of the dispute by a tribunal, each Party shall nominate an arbitrator. Within a period of sixty days from the nomination of the arbitrators, the two arbitrators shall appoint a president of the tribunal who shall be a national of a third state. If within sixty days after one of the Parties has nominated its arbitrator, the other Party has not nominated its own or, if within sixty days following the nomination of the second arbitrator, both arbitrators have not agreed on the appointment of the president, either Party may request the President of the International Court of Justice to appoint an arbitrator or arbitrators as the case requires.

    4. Except as otherwise determined by the Parties or prescribed by the tribunal established pursuant to paragraph 3 of this Article, each Party shall submit a memorandum within forty-five days after the tribunal is fully constituted. Replies shall be due sixty days later. The tribunal shall hold a hearing at the request of either Party, or at its discretion, within thirty days after replies are due.

    5. The tribunal shall attempt to give a written decision within thirty days after completion of the hearing, or, if no hearing is held, after the date both replies are submitted. The decision shall be taken by a majority vote.

    6. The Parties may submit requests for clarification of the decision within fifteen days after it is received and such clarification shall be issued within fifteen days of such request.

    7. The Parties undertake to comply with any arbitration decision given under this Article.

    8. The expenses of arbitration under this Article shall be shared equally between the Parties.

    9. If and for as long as either Party fails to comply with a decision under paragraph 5 of this Article, the other Party may limit, suspend or revoke any rights or privileges which it has granted by virtue of this Agreement to the Party in default.


    The terms of this Agreement may be amended at any time by agreement between the Parties. Such amendment shall enter into force on the date on which the Parties have notified each other in writing that their respective internal procedures necessary for its entry into force have been completed.


    1. This Agreement shall enter into force after each Party has notified the other in writing that all domestic requirements for entry into force for this Agreement and the Nuclear Cooperation Agreement have been completed. The date of entry into force of this Agreement shall be thirty days after the date of the last notification.

    2. The Agreement shall remain in force for an initial period of thirty years. The Agreement shall terminate:

    (a) if either Party notifies the other Party at least 180 days prior to the expiry of the initial thirty year period, or 180 days after notice of termination thereafter; or

    (b) upon the termination of the Nuclear Cooperation Agreement;

    whichever is the sooner.

    3. Unless otherwise agreed in writing between the Parties, termination, suspension or expiration of this Agreement or any cooperation under it for any reason shall not release the Parties from obligations under this Agreement in respect of nuclear material transferred while the Agreement was in force.

    4. The Annexes to this Agreement form an integral part of this Agreement.

    IN WITNESS WHEREOF , the undersigned, being duly authorised thereto by their respective Governments have signed this Agreement.

    Done, in duplicate in English and Chinese, both texts having equal validity, at Canberra on third day of April 2006




    Both Parties agree that the provisions of paragraph 1 of Article IX of this Agreement will apply in accordance with the following conditions:

    1. Transfers of nuclear material subject to this Agreement from China to third countries which have an Agreement in force with Australia concerning nuclear transfers, in relation to which Agreement Australia has not advised China that it has found it necessary to suspend, cancel or refrain from making nuclear transfers, can take place for conversion, enrichment below 20% in the isotope uranium 235, fuel fabrication and, where applicable, use in a reactor.

    2. China shall promptly notify Australia, in accordance with procedures set out in the Administrative Arrangement pursuant to paragraph 2 of Article X of this Agreement, of such transfers.

    3. Australia shall provide China with, and keep up to date, the list of countries to which transfers may be made in accordance with paragraph 1 above.




    1. Uranium ore concentrates transferred to China under this Agreement shall be substituted by an equivalent quantity of converted natural uranium in the form of uranium hexafluoride in accordance with procedures set out in the Administrative Arrangement established pursuant to Article X of this Agreement.

    2. Following conversion to uranium hexafluoride in accordance with paragraph 1 above, nuclear material subject to this Agreement in China shall be processed and used only in those facilities specified in the Delineated Chinese Nuclear Fuel Cycle Program.

    3. The facilities specified in the Delineated Chinese Nuclear Fuel Cycle Program shall be determined by mutual decision of the designated authorities. These facilities shall be included in the List of facilities designated by China in accordance with the provisions of the safeguards agreement referred to in paragraph 2 of Article VI of this Agreement.

    4. The facilities in the Delineated Chinese Nuclear Fuel Cycle Program shall be specified under the following headings:

    Facilities for enrichment;
    Facilities for conversion to UO2;
    Facilities for fuel fabrication;
    Development and demonstration projects;
    Facilities may be added to or deleted from the Delineated Chinese Nuclear Fuel Cycle Program by mutual decision of the designated authorities.




    Paragraph 2 of Article IX of this Agreement provides that nuclear material subject to the Agreement shall not be reprocessed without the prior written consent of the supplier Party.

    The Parties acknowledge that the separation, storage, transportation and use of plutonium require particular measures to reduce the risk of nuclear proliferation.

    Australia recognises the interest of China in reprocessing as part of its civil nuclear energy program in order to ensure efficient energy use and management of substances contained in spent fuel.

    Australia also recognises the interest of China in predictable and practical implementation of consent rights under the Agreement, taking into account the shared non-proliferation objectives of the Parties and the long-term needs of China's nuclear fuel cycle program.

    Australia shall provide consent on a long term basis to reprocessing under paragraph 2 of Article IX of this Agreement, on the following understandings:

    (a) long term consent shall be given for reprocessing for exclusively peaceful purposes under Agency safeguards referred to in paragraph 2 of Article VI, in accordance with the Delineated Chinese Nuclear Fuel Cycle Program referred to in Annex B of this Agreement, amended as necessary by mutual decision of the designated authorities; and

    (b) the separated plutonium shall be stored and used, under Agency safeguards referred to in paragraph 2 of Article VI, in accordance with the Delineated Chinese Nuclear Fuel Cycle Program.

    Australia shall provide consent as outlined above at such time that China's plans for reprocessing are sufficiently advanced to nominate the facilities, reactors and other facilities concerned for inclusion in the Delineated Chinese Nuclear Fuel Cycle Program.



    1. This Annex applies to ores or concentrates containing nuclear material, other than uranium ore concentrates, which are transferred from Australia to China directly or through a third country, and which transfer has been notified by the designated authority of Australia to the designated authority of China.

    2. China agrees not to extract nuclear material for nuclear use from such ores or concentrates. If there is any change in China's intentions in this regard, nuclear material shall not be extracted until the Parties have consulted and agreed safeguards measures to apply to such nuclear material.

    3. The Administrative Arrangement established pursuant to Article X of this Agreement shall include procedures for Australia to notify China of transfers of ores and ore concentrates pursuant to paragraph 1 of this Annex.



    The following records the interpretation given by the Parties regarding the scope of the definition of the term "military purpose" contained in paragraph (a) of Article I of this Agreement. The Parties agree that nuclear material subject to this Agreement shall not be used: for the production of tritium for military purposes; for military nuclear propulsion; or for direct military non-nuclear applications, such as munitions, including depleted uranium munitions.

    Labour Shortage in China Emerging -Bloomberg

    SHENZHEN, China — Persistent labor shortages at hundreds of Chinese factories have led experts to conclude that the economy is undergoing a profound change that will ripple through the global market for manufactured goods.

    The shortage of workers is pushing up wages and swelling the ranks of the country's middle class, and it could make Chinese-made products less of a bargain worldwide. International manufacturers are already talking about moving factories to lower-cost countries like Vietnam.

    At the Well Brain factory here in one of China's special economic zones, the changes are clear. Over the last year, Well Brain, a midsize producer of small electric appliances like hair rollers, coffee makers and hot plates, has raised salaries, improved benefits and even dispatched a team of recruiters to find workers in the countryside.

    That kind of behavior was unheard of as recently as three years ago, when millions of young people were still flooding into booming Shenzhen searching for any type of work.

    A few years ago, "people would just show up at the door," said Liang Jian, the human resources manager at Well Brain. "Now we put up an ad looking for five people, and maybe one person shows up."

    For all the complaints of factory owners, though, the situation has a silver lining for the members of the world's largest labor force. Economists say the shortages are spurring companies to improve labor conditions and to more aggressively recruit workers with incentives and benefits.

    The changes also suggest that China may already be moving up the economic ladder, as workers see opportunities beyond simply being unskilled assemblers of the world's goods. Rising wages may also prompt Chinese consumers to start buying more products from other countries, helping to balance the nation's huge trade surpluses.

    "The next great story in China is how they are going to move out of the lower-end stuff: the toys, textiles and sporting goods equipment," said Jonathan Anderson, an economist at UBS in Hong Kong. "They're going to do different things."

    When sporadic labor shortages first appeared in late 2004, government leaders dismissed them as short-lived anomalies. But they now say the problem is likely to be a more persistent one. Experts say the shortages are arising primarily because China's economy is sizzling hot, tax cuts have helped keep people working on farms, and factories are continuing to expand even as the number of young Chinese starts to level off.

    Prosperity is also moving inland, and workers who might earlier have migrated elsewhere are staying closer to home.

    Though estimates are hard to come by, data from officials suggest that major export industries are looking for at least one million additional workers, and the real number could be much higher.

    "We're seeing an end to the golden period of extremely low-cost labor in China," said Hong Liang, a Goldman Sachs economist who has studied labor costs here. "There are plenty of workers, but the supply of uneducated workers is shrinking."

    Because of these shortages, wage levels throughout China's manufacturing ranks are rising, threatening at some point to weaken China's competitiveness on world markets.

    Li & Fung, one of the world's biggest trading companies, said recently that labor shortages and rising manufacturing costs in China were already forcing it to step up its diversification efforts and look for supplies from factories in other parts of Asia.

    "I look at China a lot differently than I did three years ago," said Bruce Rockowitz, president of Li & Fung in Hong Kong, citing the rising costs of doing business in China. "China is no longer the lowest-cost producer. There's an evolution going on. People are now going to Vietnam, and India and Bangladesh."

    The higher wages come at a time when costs are already rising sharply across the country for energy and land. On top of a strengthening Chinese currency, this is likely to mean that the cost of consumer goods shipped to the United States and Europe will rise.

    To be sure, China is not about to lose its title as factory floor of the world. And some analysts dispute the significance of the shortages.

    "Reports of a shortage of unskilled and semi-skilled factory workers are overblown," said Andy Rothman, an analyst at CLSA, an investment bank. "Companies are, however, having trouble finding experienced people to fill midlevel and senior management jobs."

    The lack of workers is most acute in two of the country's most powerful export regions: the Pearl River Delta, which feeds into Hong Kong, and the Yangtze River Delta, which funnels into the country's financial capital, Shanghai. Wages are rising significantly in both areas.

    According to government figures, minimum wages — which averaged $58 to $74 a month (not including benefits) in 2004 — have climbed about 25 percent over the past three years in big cities like Shenzhen, Beijing and Shanghai, mostly by government mandate.

    Wages at larger factories operated on behalf of multinationals — which are typically $100 to $200 a month — are also on the rise.

    Here in Shenzhen, one of the first cities to benefit from the country's economic reforms, factory operators say finding low-wage workers is harder than ever. At the Nantou Labor Market, where hordes of people used to come to find jobs, there are now mostly lonely employment agents.

    "The people coming here are fewer and fewer," said a woman named Miss Li, who works at the Xingda Employment Agency. "All the labor agencies face the same problem. A lot of young people are now going to the Yangtze River area, where there are higher salaries."

    In Guangdong Province late last year, the government said factories were short more than 500,000 workers; and in Fujian Province, there was a shortage of 300,000.

    Even north of Shenzhen, Zhejiang Province, known for its brash entrepreneurs, is short about 200,000 to 300,000 workers this year, government officials say. The Wahaha Group, a Chinese beverage maker based in the city of Hangzhou, is one of the region's rising corporate stars. But one of the company's 500-worker factories is short by 50.

    "It seems to become more and more serious year by year," said Sun Youguo, the company's human resources manager. "Because of the shortage we're paying more attention to migrant workers. We're now building a dormitory to house couples."

    Government policy is playing a role in creating the coastal labor shortages. Trying to close the yawning income gap between the urban rich and the rural poor in China, the national government last year eliminated the agricultural tax, and it also stepped up efforts to develop local economies in poor, inland and western provinces, which have mostly been left behind.

    Now, even remote areas are starting to develop — sprouting malls, housing projects, restaurants and infrastructure projects. These are creating jobs in the middle of the country and offering alternatives to many young workers who once were forced to travel thousands of miles for jobs on the coast.

    According to Goldman Sachs and other experts, the beginnings of a demographic shift have already been reducing the number of young people between the ages of 15 and 24, who make up much of the migrant labor work force. Similarly, the number of women between the ages of 18 and 35 began falling this year, according to census data.

    The women are critical because China's factories like to hire many women from the countryside, who have been willing to migrate for three-to-five-year stints to earn money as factory workers before returning home with bundles of cash and fresh hopes of finding a marriage partner.

    China's one-child policy is also aggravating the shortages. With the first generation of young people born under the one-child policy now emerging from postsecondary education, many of them see varied opportunities not available to an earlier generation.

    "When the economic reform started, migrant workers were very hard-working, and usually stayed for a long time at factory jobs, but the new generation has changed," said Chen Guanghan, a professor at Zhongshan University in Hong Kong. "They are reluctant to take factory jobs that are harsh and pay very little."

    Many are going to college to avoid the factory floor. Last year, Chinese colleges and universities enrolled over 14 million students, up from about 4.3 million in 1999.

    Workers are sharing more information about factory conditions among friends and learning to bargain and leap from job to job. They are also increasingly ambitious.

    "There's still a lot of cheap labor, but Chinese workers are getting skilled very quickly," said Ms. Hong at Goldman Sachs. "They are moving up the value chain faster than people expected."

    Economists may continue to debate the severity of the shortages, but there is little doubt that the waves of migrants who once crowded into the booming coastal provinces are diminishing.

    As a result, manufacturers are already starting to look for other places to produce goods.

    "Many companies are already moving to Wuhan, Chongqing and Hunan," Ms. Hong said, ticking off the names of inland Chinese cities. "But Vietnam and Bangladesh are also benefiting. We're bullish on Vietnam."

    Deep Recession or Hyperinflation: Ben to decide soon

    The US current account (a negative) plus capital inflows tells us how much money is entering the US economy. In 2003, the US current account deficit was $US 531 Billion, it actually got $US 747 Billion, so net inflows were 216 Billion. In 2004, the US current account deficit was 666 billion; it got 915 billion so net inflows were 249 Billion. In 2005, the deficit was $US 801 Billion - $US 1.025 TRILLION was received, net inflows were 224 billion.But from its high of $US 117.2 Billion in August 2005, the commerce department reports are showing a steady decline in inflows. The flow was down to $US 74 Billion in December and $US 78 Billion in January. When foreign funds no longer cover the current account deficit, the Fed will either have to keep raising rates to attract savings from overseas and watch housing crash or hold off on rate rises and watch the dollar plummet. The Feds choice is now between the long postponed recession or a dollar crash.

    This is the reason why I expect gold to go to $US800.00 before the next serious correction.

    April 02, 2006

    Bruce Sterling on the State of the World

    Right. Okay! I have managed to turn my wi-fi off, so I will not actually blog during my own presentation. Yes, hello: I am Bruce Sterling. Thank you, thank you. Let’s cut to the immediate chase here, I am sure you are all anxious for the answer to this perennial South by Southwest question, is there a giant South by Southwest party, at my private home, with free beer, to which I will invite the entire audience?


    No, this is the largest South by Southwest audience I have ever addressed in many years of doing this. Does not scale, Ladies and Gentlemen. We have reached a limit. Last year, I had a class of design students and corporate backing, and I managed to have, like, a sponsored theme party, this year I’m in a very literary mood, I’m working on a novel, I don’t have any gophers to go be my grad student slaves, and a corporate sponsorship thing kind of violates the groovy spirit of the enterprise, so, no. You are too big, this year. You are too professional, this year. Even the tech panels are no longer intimate and personal, this year. I have been to standing room only Web 2.0 tech panels at this gig; this is a huge gig.

    I am in a dark, introspective literary mood, this year; I can’t be the design visionary and party animal all year, every year. I did just have a tech party in Belgrade, which is where I am staying now, during 2006, and about 20 Serbian web-geeks showed up for my party – they actually need a party, there. In 2006, you cats don’t actually need my party. This is the year of Web 2.0. This is the hottest innovative period on the web since the invention of the browser. There is blood in the water… Google’s buyin’. Oh, it does my heart good to see this crowd, you people, enjoying yourselves to this extent, even if it is in a rather muted fashion compared to the golden years of the “Al Gore Era.” Welcome to the Bubble Echo. Enjoy it while you got it. No, when there is a Web 2.0 Bust… you can come around to my house then. You’ll be welcome to gather ‘round the Shiner beer keg and moan on the Author’s shoulder.

    It’s gratifying to see what is happening now, even if I’m not having a party, because I’m too distracted. Commons-based peer production as an industrial method is getting it’s legs under it. This is something I complained about for years. I used to complain that GNU had the wrong name, because the recursive name for GNU is “GNU’s not UNIX.” And I described that as “rather childish.” Because you should not name yourself in opposition to something else, you should have your own name. It’s like, if “GNU’s not UNIX”, what is it?

    Well, it’s commons-based peer production. Flikr is not a copy of anything else. It is not a hippie knockoff of a commercial product. Wikipedia is not like anything else. A Wiki is like nothing known to mankind. Collaborative web filters are very spooky things. They are without historical precedent. Websites that throw their API’s open, and turn themselves into platforms, rather than sites - it is a little hard to explain the significance of that to everyday people who are not techies and programmers, but that is a major development. The Net community is no longer hanging on the coattails of Gates. That monopolistic chokehold that did so much to reduce innovation, and to introduce global criminality to hapless Windows users… “Windows Live”… Windows Live, after ten years of trying to build the MSN brand?

    You know, it amazes me to see this burst of healthy, popular creativity, considering how awful American industrial policy is, under the Bush Administration. If you’ve got a copy of this South by Southwest guidebook, you should look at this page, for the City of Austin… lists all these nice little non-governmental organizations. The Creative Director page, there. Now, it impresses me very much that Austin has like, a little “Creative Director’s” office where you can go out and get a little city sponsorship, that’s very Richard Florida, that’s very Web 2.0. But then, we’re looking at tiny little groups of people, who are trying to wire up the town, or unwire the town, on their own little lonesome selves. Now as an Austinite, that gives me a warm feeling: I would urge you, if you are an Austinite, to go help these little NGO’s, right away. But that is not a sign of creative vitality, that is a scary sign of complete incompetence on the Federal level! Why are towns having to do this? Only in the United States do dying phone companies lobby the Government as if they were Indian casinos.

    As you may or may not know, I am spending a lot of my time in Europe this year, after spending a year in California. I get to see America from the outside now – I get to see America as 94% of the planet sees America. And I look at wireless spreading in London, and the spread of broadband in Korea. I’ve got broadband in Serbia, where the phone companies are literally run by criminals in exile … and my broadband in Serbia costs twenty dollars a month. And it works. Our people in Washington are drinking their own bathwater. They have forgotten how to build anything. They are busy monetizing stuff for their reelection campaigns. It is decadent. It is sclerotic. It looks like the Soviet Union.

    These guys in power are so eager to monetize the Net, that they are turning the U. S. A. into a banana republic with rockets. Not just politically backward … technically backward. That’s the part that’s unforgivable. The Reality-Based community are fatally easy to push around, mostly because they’re so gentlemanly and ladylike.

    But when you actually ignore reality, for years on end, THE PAYBACK IS A BITCH, BROTHER!

    And I would know … because I’m a Science Fiction writer.

    Now, normally, I would never plug a book during a South by Southwest speech, because when authors do that, it is hopelessly déclassé, and lame. This year, I’m very literary, I’ve gotta plug some books a little. A Science Fiction book, yes, I write them. Here’s one that just came out this month: “Visionary in Residence.” No, they’re not selling it here, you’ll have to Amazon it. Came out last week. This is some pretty seriously audacious and freaky stuff, I think. This is my fourth story collection. There is some very weird material in here. This is not a Harry Potter book. That’s not the kind of thing you recommend your aunt in Topeka. But that really does have some seriously visionary stuff in it. It has got stuff in it that is way out of left field. It has got 21st Century stuff.

    The 21st Century definitely fertilizing my cyberpunk eccentricities. My writing, my living, have taken some very sharp turns in this century. I was always very interested in global political issues. I am an oil industry kid. I used to travel all over the world as a young man. Now I am living in Eastern Europe, because I am married to a Serbian feminist peacenik dissident. And we met because we have computers. She is an author and I am an author, authors are a volatile bunch. I always wanted to know exactly what went wrong in Yugoslavia. Now I know.

    I am into the 21st century electronic version of an Eastern European literary café society. I read people like Danilo Kis, Dubravka Ugresic. I read Slavenka Draculic. That’s her name. Slavenka Draculic. Mostly goes by Slavenka Schwartz. She’s a Croatian writer named Draculic. One of my wife’s best pals. You can learn a lot by earnestly studying global trends. Especially trends in an enemy state to your own. Serbia has one of the most dysfunctional societies on the planet. It’s a kind of world capitol of the New World Disorder. They’re burying Milosevic this week. It’s a total circus. I’ve got a ringside seat. People ask me, have you moved to Belgrade now, is this permanent? No, it’s not permanent. It’s just that some of my shoes are there, in a closet.

    I live out of my laptop, now. That’s how I live. And so do increasing numbers of my colleagues. I will be meeting Cory Doctorow, that Canadian-British-Los Angeles guy, Cory Doctorow? I’ll be meeting him on three different continents in five months, this year. It’s a world of diaspora and globalization, gypsies and jet-setters, refugees and tech pioneers, and the differences are that thin. Events just like this one, they send me spinning across this planet like a flung rock skipping on water. This year, I’m doing Serbia-Croatia-Sweden-Switzerland
    -Australia-San Diego-Denmark-Minneapolis.. That’s part of it. Nobody notices that I have left Austin. This is my legal residence, Austin. I get email from the Austin American Statesman, every day. I’ve got the Austin Chronicle online. People write me email, they get what they want, they leave, they never ask where I am. I no longer need to be a resident of any particular city. I don’t make any money in any foreign state. Nothing enters or leaves Belgrade except for ones and zeroes, that’s all. I never stay there long enough to become permanent. I don’t even do permanent. National borders, they’re like speed-bumps.

    And because I look over national borders, I can see that it’s depressing, here inside America. It’s like the last reels of Gone With the Wind, here. America is losing it’s cultural cachet. Nobody who isn’t American mistakes globalization for Americanization, any more. They see that as some kind of category error, now. It’s like an empire that lacks any sort of economic base, except for oil, real estate speculation, and blood. It’s a state at war, and it seems to be mostly at war with it’s own majority’s ideas of reality. Americans even look different physically, if you spend time in other countries, now. They’ve always been a very loud, expressive, boisterous lot, but now Americans are fat! By European and Asian standards, the American population is hugely and scarily fat. They literally look swollen up, as if they’d been poisoned, and were about to pop. The Dollar is low, compared to the Euro? The Euro ought to be in intensive care.

    I think maybe it comes down to this, do you really believe, I mean really, really believe that Adam and Eve rode to church on Sundays on the backs of dinosaurs? Is that what you believe, do you really believe that about the world, do you consider that to be objective reality? Creationism, that’s your geopolitical realpolitik? That’s what your diplomatic corps is supposed to tell the other diplomats? Your generals in your armies, they’re supposed to tell that to the generals of other armies? Your filmmakers, they’re supposed to make films about that? And people in other countries are supposed to watch those films, and be entertained? It’s an intellectual calamity. Really, the shame is hard to bear. However, American society is in less denial than the society where I live now, Serbian society. It’s very useful to me, to be living in the midst of the true extreme case.

    Because as I once told Zoran Gingic, the former Prime Minister of Serbia, before his enemies shot him dead in the streets in an ambush? I told him: you know, the Balkans have so much future that they have to export it to other people.

    And they do.

    It could be anybody, really. Slovenia? That’s like the part of Yugoslavia nobody ever heard of. It’s the piece that was farthest away from Milosevic. It’s a dull, conventional, harmless little place. It’s like Iowa. Because they’re way into “Serbian Truthiness” there. Not truth, just like, the “Serbian Truthiness.” And, you know, you’ve got to forgive them some of that. I mean, at least they didn’t blow themselves up.

    We’re seeing just frantic collisions of fundamentalist delusion, with objective reality. Things like the Arab Port Scandal – of course they own the ports, where do you think all the oil money is going? Dubai has got the biggest skyscraper in the world. They’re buying America’s ports with America’s money. Where are they supposed to put it? It’s going offshore, it’s going to circle around the world and come back. The Danish Newspaper Cartoons. You know, I know cartoonists. I know people like Warren Ellis and Neil Gaiman. They’re like, bright guys. Bright creative guys – you know, I feel sorry for them – Neil Gaiman once said, “We’re the sink that the gutter drains into, in comics.”

    And all of the sudden cartoonists are so politically important they’re getting embassies set on fire? Where is that at? Why don’t they get the credit for that, as well as – the mayhem they’ve reached?

    It’s like the Witching Hour – we’ve got a death cult, which is like, al Qaeda, like Om Shin Rikyo, or Jonestown, or the Heaven’s Gate cult, except they can, they can just get on Arab TV and just whisper aloud, and the world just sits right up in its chair, as if they were listening to voodoo priests – how many mosques have these guys bombed, now? These “defenders of the Islamic religion”? Nobody even keeps count.

    Where are Mladic and Karodzic? This is like the big issue where I live now. These are the two war criminals from Srebrenica, who kind of, accidentally killed 8000 people. Recently, they found a videotape of 8 people being killed – the country pretty much came apart at the seams – the 8000 sort of vanished off camera, but they’ve got the 8 on camera and that seemed to make all the difference. Where are these two guys? Everybody knows. They’re in monasteries. They’ve got religious asylum. That’s why they’re not in the Hague. They’re in a church. Karodzic is writing plays – they’re being put onstage! He’s like Vaclav Havel with a submachine gun.

    You know, now I finally get it, about the difference between actual war and global guerrilla war. Because what we’ve got now is not conventional shooting war, with military honor, military ranks, military activity. This is culture war. We’ve got The Troubles. We’ve got The Disorder. And now I really know how that works. No, when The Disorder is over, you don’t get to say: “I proudly served.” It doesn’t matter which side you were on. Because The Disorder is a war on the pride. It’s a war on people’s morale. You don’t get to confront the enemy as an equal. Everybody lives in shadow. It’s always covert, it’s always fake, it’s always trumped up. And no history can be written of it, because it’s all been compartmentalized. Suicide bombers, who are victims, oppressor, and evidence, all blown to pieces in the same neat beltpack. Official denials, star chambers, Abu Ghraibs and renditions, these aren’t accidents, this is the very stuff – of The Disorder. Espionage, black markets, privatization of the military. Secrecy, always and everywhere. No medals for your service, no ticker-tape parade. And no end to it! No formal end. When it finally burns out, even the victor is despised and distrusted.

    We’re on a kind of slider bar, between the Unthinkable, and the Unimaginable, now. Between the grim meathook future, and the bright green future. And there are ways out of this situation: there are actual ways to move the slider from one side to the other. Except we haven’t invented the words for them yet. We’ve got smoke building in the crowded theater, but the exit sign is just a mysterious tangle of glowing red letters. I’ll quote Warren Ellis now: he’s this comics writer, whose blog is turning him into a public intellectual. It’s kind of an interesting thing to watch. Warrenellis.com. He says there’s a middle distance between the complete collapse of infrastructure and some weird geek dream of electronically knowing where all your stuff is. Between apocalyptic politics and Nerd-vana, is the human dimension. How this stuff is taken on board, by smart people, at street level. You all know Bill Gibson’s saw from his cyberpunk novels, that the street finds it’s own uses for things? That still holds, but right now I think there’s an urgency and a sense of envelope-pushing, in exactly what uses are found for these things. That’s where the story lies, Warren Ellis says: in this spread of possible futures, and the people, on the ground, facing them. The story has to be about people trying to steer, or condemn other people, toward one future or another, using everything in their power, that’s a big story.

    Well, the Unthinkable, and the Unimaginable are hooked together in some ways. Unimaginable does not mean catastrophic. Neither does unthinkable. China and India right now? Kind of the healthiest success stories of the modern global epic? They’re unimaginable by the standards of Mao and Gandhi. If you took Mao or Gandhi, and put them in the streets of Shanghai or Bombay now, they would have no idea what to make of what has happened to their societies. And those are grim little societies too, in their own ways, I mean, there’s a lot of environmental decline in those two societies. China and India, if you go there, look around, they’re basically barren, strip-mined, polluted messes, in a lot of ways? I mean, basically everything that desperately poor people could do to survive has been done to the environment, in China and India. And yet, they’re booming. And I think the answer is, it’s the people. It’s the people who are doing it. They’ve got lots of people, in China and India.

    Ok, now I need to move to a word I have, oddly enough, never mentioned in public in Austin. This is something that’s been a big deal for me, over the past 2 years. It’s a word I made up, it’s a word called “spime.” I want to explain to you what this means because, you know, you’re a techie audience and you’ll kind of get this, this is of direct and immediate relevance to your demographic. Ok, in 2004 I did a speech at SIGGRAPH, ACM SIGGRAPH , the computer graphics thing, about a concept I called “spime.” And then I did a book, in 2005, while I was in residency at Art Center College of Design. Here it is, this really cute book, which is designed by Lorraine Wilde, it was the winner of the AIGA Medal for 2006, if you’re a graphic design maven. You can’t hang out at a design school without learning these things. Uh, it’s a weird and innovative book, with a really weird and innovative book design. It’s actually a visionary book, in a lot of ways, I would urge you to look at this, just for the graphic design in it, because it’s going to shock you and annoy you, and you need that done. Because you are a philistine, and you have no taste. So have a look at Lorraine’s really top notch packaging in this thing.

    But, you know, a book is a book, and a speech is a speech. But the term, “spime”, is not a word. I only realized, two weeks ago, that it’s a tag. It’s a theory object. So, you know, what does the word, spime mean? Well, you know, basically, any word in a language means what the popular consensus says that it means. Like, say, the word cyberspace? Which I can remember seeing for the first time on a manually typed manuscript? Ok, well, if you actually read William Gibson, and you see the term, “cyberspace”, you see that he’s describing a consensual hallucination, ok? Gibsonian cyberspace takes place inside people’s heads. It’s like, an electronically triggered, interior mental experience, it’s like a brain experience. We don’t have any of that. We may never have any of that. But the term cyberspace, the word “cyberspace”, already has a period flavor to it. You know, it’s associated with the boom of the eighties and nineties, it’s sort of the idea that you’ve got something to talk about besides the wiring. Right?

    All right, so I’ll give you the spime elevator pitch, although I do not think that this is the shape that the tag “spime” will eventually take, as it’s thrown out into the sort of chalm or the churn of internet commentary. Ok, well a spime is a sort of speculative, imaginary object, that is different from present day objects, stuff like this pen, here. It’s different, in basically 6 important ways, none of which existed, in the 20th century. First of all, it’s got an interactive chip on it, so it can be labeled with a unique identity. Electronic bar-coding, or RFID’s. It’s got a “tag.” It’s got a tag that you can mark, and sort, and rank, and shuffle. That’s a big advance. But it’s only one out of six differences. Number two is it’s got local, precise, positioning systems. It’s got a geo-locative system. So you can sort where things are, and where you are in relationship to them. It’s got Google Maps. Uh, and it’s got a powerful search engine. So you can find out things about it’s such and so, it’s an “auto-Googling object.” It’s got more sorting and shuffling of the data that’s associated with it. And it’s involved in cradle-to-cradle recycling. Because it’s more sustainable, because when you know where it is and what it is, it’s very easy to tear it apart, break it down, and just reuse the junk. It has transparent production. It has taggable, sortable garbage. And then there are two other brand-new factors in the mix. The first is 3-D virtual models of objects. It’s been virtually designed, it was not actually designed. It’s a product of CAD/CAM. It’s scanned. If you want to look at the schematics of it, they’re on the Net. Things are present as virtual objects, in the network, before they become physical objects. That’s how you shop for them. And then, last, it’s rapidly prototyped. It’s a fabject, it’s a blobject. If you saw the speech that Alex Steffen and I gave here last time, I was throwing little fabjects into the audience. If you happened to be there, you could see they were these frail little objects made of wax and plastic and starch; ok, they’re making them out of laser-centered metal now. You can cast your dreams out in these things and have it clang right on the ground.

    And Alex Steffen, who is not here, unfortunately, of WorldChanging – his book will come out soon. I have read his book. The book, put together by the WorldChanging cadre. I wrote a preface for it; I just heard it’s now going to get a forward by Al Gore. This WorldChanging book is heavy-duty. It’s like an index of ways out of the smoke-filled room. But – you see, my idea is, that if objects, 21st century objects, had these six qualities I just described, then people would interact with objects in a truly unprecedented way. Just really different, a way that’s so strange, so different from today’s expectations, that it’s unimaginable, it’s really hard to describe. And we would think about this prospect better, if this class of object had its own name. So, I called it a “spime”, because it’s trackable in space and time. And then I had sort of various “wise sage on the stage” things to say about it, like: “A spime is an object that ate and internalized the previous industrial order.” Because, if you think about it, what it’s really doing is just sort of attaching all the things to itself that have always been attached to objects, except now it’s open and more participatory: you get to see the plans, you get to see the production, you get to see the garbage. Right? And I also said that “Spimes are manufactured objects whose informational support is so extensive and rich that they are regarded as material instantiations of an immaterial system.” In other words, you look at what’s on the web, and every once in a while, it exists as a physical object. Spimes begin and end as data, because they’re virtual objects first and actual objects second.

    Now that’s a lot to swallow. I mean, why would we even want to do such a weird thing, I mean what problem are we solving, by doing this? Well, we want to do it, so we can build an Internet of Things. Not an Internet of data, an Internet of things, objects. So that we can engage with material objects much better, during their life-cycle, from that moment of their invention, to the moment of their decay. Now, that’s the technical reason, that’s the design reason. It’s the environmental reason. It’s a civilizational step forward. But the real reason we’ll do it, if we ever actually do it, is because of the way it will feel. The primary advantage of an internet of things, is that I no longer inventory my possessions inside my own head. They’re inventoried through an automagical inventory voodoo - which is done beneath my notice by a host of machines, so I no longer bother to remember where I put things. Or where I found them. Or how much they cost, or how to get more, and so forth. I just ask. And I am told, with instant, real-time accuracy. I have an internet of things, with a search engine of things. So I don’t hunt for my shoes in the morning, I just google them. And as long as machines are there to crunch the complexities, the interfaces make my relationship to objects feel much simpler, and more immediate. I am at ease in materiality in a way that people never were before.

    Well, that was my job, when I was Visionary in Residence at the Art Center College of Design. They wanted me to write something visionary about design. I wrote something visionary about design. That’s designer-speak. But I’m not a permanent design professor, I was just a design professor for a year. And I wrote a little non-fiction book, where I rattle on about the concept, and kind of turn it upside down and knock on it to see what falls out, and it’s a small book, but it’s a really big topic. A lot of people are at work on the Internet of Things, it’s too big for any one thinker to work it through. What it really needs is distributed intelligence, because this concept will only work out in real life when and if the population, the people, buy into it, and find it of some use and benefit.

    So, when I made up this word, and attached it to this grab-bag of concepts, I wanted that word to be googleable. So if you google the word spime now, which I’m sure about 30% of you are doing, you find a company called spime and there’s some mention of Frank Black of the Pixies, who used the term spime once, but most of the online commentary that you would find on the web about spimes necessarily centers around this set of ideas. Because it’s a new word, but it’s also a new tag. The Semantic Web is turning into the wetlands of language. Because a word placed in the semantic web is not just a word. It is a theory object. Which is a tagged idea. Which is not just a meme, or an intellectual conceit, or a literary neologism, it’s a whole cloud of associated commentary and data. Which can be passed around, from mouse to mouse, by people - and linked to, by people. A theory object is a word that’s a platform for development. And every time I go to an event like this, this word, this tag, “spime”: it grows as a theory object. And this is different in language. Just understanding that that is happening is making my own practice as a writer, a commentator, a blogger, a thinker, a public speaker – it’s changing it. It’s unprecedented. It’s really different. The 20th century literally could not think, write, speak, or comprehend, in this way. This term, theory object, is itself a kind of theory object. If you understand what a theory object is, you can create theory objects. Any real theory object has probably got links and trackback, pictures, maybe a powerpoint, a website, an f.a.q., maybe flash animation. It could have a database layer, user-centric graphic web-apps. It’s as if the coffee house chatter at the Surrealist café had been frozen into linkage and faq’s. It’s just a different method of social activism. And others, that do not buy into this, newspapers, for instance, ink-on-paper? A legacy medium. And more importantly, the people who read newspapers and television, and don’t engage in this other activity, and they believe that’s reality? Those are legacy people.

    So, I’m trying to write a novel, this year, because … that’s part of my job description. You know - and what is a novel, under these circumstances? What am I doing, I have to wonder? I’m dropping lit matches into the wet bog of language. And the matches go out, because most of them deserve to go out. Most weird riffing is just weird riffing. And the ideas that catch fire become unrecognizable to me. Because of the distributed intelligence, because of the added features, because of all the trackback. These are words that turn on their creators like Frankenstein. And that’s a pretty good word, Frankenstein, because in the original novel, Frankenstein was the guy who created the monster. He’s not the monster – the Frankenstein is Frankenstein’s monster, Frankenstein is the guy who actually made it up, but he’s somehow lost. He’s been packed down by public reaction. It’s the creator who’s Frankenstein, but we don’t see that, any more than we see that Mary Wollstonecraft Shelley was a 19 year old, liberated, feminist intellectual who had just run off with a radical atheist poet.

    It’s not enough to sort of virtually, verbally theorize about these issues. If we’re going to get anywhere we’re going to have to become the change we want to see. Become the change we want to see. And if I have learned something from hanging out with the Eastern European dissident crowd: “Make no decision out of fear.” That is their motto. Make no decision out of fear. No, the decline does not hold indefinitely. Because the people tire of the fraud. They tire of the evil. The people tire of the sheer, stupid pettiness of their unnecessary miseries. The people tire of being promised jam and fed ashes. You know, globalization needs to be understood culturally. Because the Great American Novel is over. What’s required at this point in literature is a Great Regional Novel about the planet Earth. A regional novel. And if the inspiration for that is found, it’s going to be found in human resilience, and in the depth of world history. It’s going to be found in the resilience of people.

    You know, I’m not one of the sentimentalists who says, “Oh, the people had bad leaders”, when a nation misbehaves. Because the people are not always blameless. Milosevic was a very bad leader. There was horror all over the Balkans because of this guy. Nine out of ten of the baldest and most polarizing atrocities, and there are plenty of people who do them, came out from him, and his own inner circle. He was the kind of guy who would kidnap and disappear the best man at his own wedding. And have this guy disappeared from the street, shot and secretly buried in a lime pit in the forest. And having done that, he would walk around for years, with Lady Macbeth on his arm, saying, “Oh, gosh, I wonder what could have happened to that guy, great friend of mine, my political mentor. Yeah, people said we had a little falling out, but you know, I miss him every day…”

    That was him, that was Milosevic. The guy was a serpent. But the people loved him. And a lot of them still love him. A whole lot of them. The best-organized political party in Serbia are the people who believe this guy was a hero and a martyr. And if he did some bad things, he was doing them for us. For us. For us and our “us-ness.” And they’ve got posters in the street for this guy, a mass murderer, a war criminal, he looks like an injured muppet. He didn’t come there as an invader from Mars. He was a product of that society. Because it was a society that preferred to live in a locked closet and feed on it’s own delusions. And the followers of this guy are still full of passionate intensity. Because they’re wild and they’re proud of their wildness. They are the kind of zealots who will cut off their own feet in order to bleed on the doorstep of more peaceable, more rational peoples. And they’re holy too. They didn’t used to be holy, but this is kind of the upward trend: they’re real holy, now. Because there are churches, Serbian Orthodox churches, going up all over Serbia. Kind of giant turnips of nationalist resentment.

    Evil has a face in the world today. It’s the person who resents you because you don’t buy into the insane, parochial crap of his ethnic group. “You are oppressing me beyond all reason, watch me die now.” Kaboom. That’s it. And it puts people into a panic stampede, that activity. It’s a thing with legs. That could stalk us for decades if we didn’t get a handle on it. But, you know, the cure for the panic stampede of the moment is historical perspective. That’s how you stop stampeding. Because time passes, you know? You come to yourself, you say, wait a minute, this voodoo curse you put on me, that I feared so drastically, it’s a patchwork of faith-based bullshit. This supernatural scheme you hot-wired together? It’s coming apart in public like a cheap, paper piñata. You imagined you were hammering the world into your own shape, but you weren’t really. You were hammering the electoral districts of Texas into shape.

    But, as the American poet said: “…the old anvil laughs at many broken hammers.” I kind of hate to quote poetry in public, especially at a tech gig, because it’s so soppy and author-ly, and déclassé. But you know, Serbia has a very small language, so they still actually have poets. Poets can be pretty famous guys, under some circumstances. They’re almost like right-wing pundit bloggers, in their famousness. When you can comprehend poetry, it means that your heart is not broken. You know, poetry is a big deal in societies like Russia. Because you have poets like say, Anna Akhmatova, who could be standing by the door of the prison house with the rest of the women, bemoaning their lost men, freezing and oppressed. And a woman will go up to Anna Akhmatova, and say, “Could you possibly bear witness to what has just happened to us?”

    And she would say, “Yes.”

    And it was true.

    So in societies like that, they read poetry in public, and people listen to the poetry, and they weep aloud. You know, they’re not Europe, that society, because frankly they don’t deserve to be Europe. But they’re not dead. They haven’t given up. Their hearts are not in the right place, but they’ve got a whole lot of heart. The music clubs are packed, in Belgrade. There are construction cranes, all over the place. The goods in the stores look much better than they did, even a year ago. The gang graffiti is getting scrubbed off the streets. The new restaurants are full of customers – the food is good. Even the pirates, who I thought were going to take over that society, with their forged goods, pirated video, pirated music, and sanctions breaking, are in retreat. They are, as a society, as a nation, a political, moral, legal, and international basket case. And they are about to break up even more than they’ve broken up over the last 12 years. Because now Montenegro wants to leave. And they’ve got every reason. North Belgrade wants to leave South Belgrade.

    There are people in the Balkans today who are so thoroughly Balkanized that they don’t know what to do with the warring halves of their own personalities.

    But they are a people of resilience, and when a comeback comes, they know how to go with that.

    All right, now, I’m going to sew this up, by quoting a poet, now. Then I’m going to go sign some books in the hallway, later. You know, drop by, if you need a word. Allright, historical perspective – 1937. That was a long time ago. The era of Depression. Fascism rising in Europe. World War II at the door. Dot-com busts. People couldn’t get venture capital, back then. Google wasn’t buyin’… All right, Carl Sandburg – somebody you’ve never heard of – poet, some guy from Chicago. I’m going to quote a little from one of his epics, here:

    The people yes
    The people will live on.
    The learning and blundering people will live on.
    They will be tricked and sold and again sold
    And go back to the nourishing earth for rootholds,
    The people so peculiar in renewal and comeback,
    You can't laugh off their capacity to take it.
    The mammoth rests between his cyclonic dramas.

    The people so often sleepy, weary, enigmatic,
    is a vast huddle with many units saying:
    "I earn my living.
    I make enough to get by
    and it takes all my time.
    If I had more time
    I could do more for myself
    and maybe for others.
    I could read and study
    and talk things over
    and find out about things.
    It takes time.
    I wish I had the time."

    The people is a tragic and comic two-face: hero and hoodlum:
    phantom and gorilla twisting to moan with a gargoyle mouth:
    "They buy me and sell me...it's a game...sometime I'll
    break loose..."

    This old anvil laughs at many broken hammers.
    There are men who can't be bought.
    The fireborn are at home in fire.
    The stars make no noise,
    You can't hinder the wind from blowing.
    Time is a great teacher.
    Who can live without hope?

    In the darkness with a great bundle of grief
    the people march.
    In the night, and overhead a shovel of stars for keeps, the people
    "Where to? what next?"

    April 01, 2006

    Interview with America's auditor in chief, David Walker

    The richest, most powerful nation on earth faces a fiscal "tsunami" which threatens to overwhelm Government and citizens alike. Who says so? America's auditor in chief, David Walker, whose job it is to oversee all Federal spending. He's pleading with US politicians and taxpayers to face up to the harsh economic realities that come with an ageing population and spiralling budget deficits.

    (Check out the site for the feedback, which is so typical)

     Stephen Sackur talks to David Walker.

    Signed, Sealed, Delivered?

    There are many positive recent developments in the silver market. The most noteworthy is the approval by the Securities and Exchange Commission (SEC) to the American Stock Exchange (AMEX) to list the silver ETF (Exchange Traded Fund). It appears that actual trading of the ETF is only a matter of time. Silver prices rose to new highs on the news.

    To say I was surprised by the approval would be an understatement. In fact, I’ll only truly believe it when I see this ETF actually trading. Certainly, the news is good for silver prices and those who expect higher prices. I question the propriety of two decidedly non-commodity institutions, the SEC and the AMEX, passing judgment on a commodity issue, namely, how much silver is available for purchase. How the Commodity Futures Trading Commission, an agency authorized by Congress to oversee commodity matters, managed to sidestep the most important decision in silver history without uttering a single public word is disturbing.

    My surprise at the approval stems from the fact of how bullish a silver ETF could be. If someone had asked me to devise a method, or scheme, that could propel silver prices sharply higher, I don’t think I could have dreamed up anything more potentially bullish than the Barclays ETF. (Not that the silver market needed a new major bullish development in order to climb in price).

    more here