Will Arab Muslim “Allies” Support the West in a Time of Crisis?

by David J. Jonsson

Iran captured 15 British military personnel last week, accusing them of illegally entering Iranian waters, and British Prime Minister Tony Blair has warned that the dispute would enter a “different phase” unless they are freed. Iran has denounced the U.N. resolution as illegal and has vowed not to suspend its nuclear work, denying Western accusations it is seeking to develop nuclear weapons. Putin, according to the Kremlin, said the recent U.N. Security Council vote on a new resolution expanding sanctions on Iran over its nuclear program had sent Iran a "serious political signal of the need for cooperation with the International Atomic Energy Agency and the international community." Putin also said the resolution "unambiguously rules out the use of force." British embassy spokesman said Wednesday that a freeze of relations with Iran will include bilateral formal meetings and all the state-sponsored commercial activities.

Two US, one French aircraft carrier in Gulf region- The United States and France have three aircraft carrier battle groups in the Gulf region, U.S. and French naval sources said on Monday. The USS Stennis carrier strike group arrived in late February with an additional 6,500 sailors to join the USS Dwight D Eisenhower carrier strike group. The West needs access to their ports and airbases in the Gulf to execute operations. This raises the questions:

• Can the West count on Gulf countries to support the West in a time of crisis?

• Should the West provide weapons to these states?

• Should the state owned companies be trusted to own critical industries in the West?

• Can the West count on their military being able to use the ports, shipping and airports owned by these countries.

In my article Dubai Ports – Strategic Implications I wrote; “The goal of Islamists, following in the footsteps of Muhammad is to create the Islamic kingdom of God on earth. The strategy to obtain this goal in our lifetime includes the control of the world's energy infrastructure, the transportation systems, currency, media, elections, immigration and education. The control of the port facilities is hence a critical element. Foreign ownership, in and of itself, although important, is not as significant as the strategy and goals of the owner. In the case of DP World ownership, my hypothesis is that their plan for utilization of these strategic infrastructure resources is to accomplish the ultimate goal of world domination of the sea borne transportation infrastructure. In similar moves, a newly-formed Dubai consortium unveiled plans to bid for the development and operation of airports in China, India and the Middle East, a market they estimate to be worth $400bln. The consortium comprises DAE Airports and six other top companies in the United Arab Emirates.

After buying sensitive access to world and American ports last year, Sheik Mo, the prime minister and vice president of the United Arab Emirates and the ruler of Dubai — also known as the man who will never be turned down by an American president — now is planning to get into the American defense-related aerospace industry and airports.

According to Bloomberg: Dubai Plans to Buy Two Aviation Firms From Carlyle “Dubai, the Gulf sheikhdom forced to sell its U.S. port assets last year on security fears, aims to buy two U.S. aircraft repair companies operating in the U.S. and is wooing American lawmakers to avoid a political backlash.”

State-owned Dubai Aerospace Enterprise plans to buy Landmark Aviation and Standard Aero Holdings Inc. from the Carlyle Group in “a couple of weeks,” Chief Executive Officer Bob Johnson said in a phone interview today. It has hired advisers to help it “carve out” parts of the deal that might concern U.S. politicians as Standard Aero has some defense contracts, he said.

Landmark calls itself one of North America's largest providers of services for the business aviation industry and has repair facilities at 19 U.S. locations. Winnipeg, Manitoba- based Standard Aero repairs military and business aircraft for 1,400 customers, the biggest of which are Lockheed Martin Corp. and Rolls Royce Group Plc.

The sheik and his family own everything that matters in Dubai, including all the land. His new targets are Landmark Aviation and Standard Aero Holdings Inc. which provide repair and overhaul services at 33 American airport terminals for small-jet aviation, including some military transports, according to news reports. Their activities include fueling, flight-scheduling services, maintenance operations, and repairs on jet aircraft.

Why is one opaque ruler from a little-known place like Dubai buying access to world seaports and airports with such determination?

Youssef Ibrahim writing in the New Your Sun Article: Where Are Clinton, Schumer? “He is closely managed by a group of equally opaque British and Palestinian Arab expatriate mercenaries who have created a well-crafted image him as a horseman and visionary. In effect virtually nothing reliable is known of the man. Dubai's population is almost entirely made up of expatriates — at least 300,000 are Iranian citizens. Only 10% are natives of the UAE… It is an open secret that Iran maintains one of its biggest spying and intelligence operations abroad in Dubai, as do, in all fairness, the CIA, the British, the Russians, and the French.

Almost a whole floor of the American Consulate in the World Trade Center building of Dubai is populated with intelligence agents fluent in Farsi. Iranian spies make their headquarters in an entire floor of the enormous Iranian hospital of Dubai. Many of the captains who sail back and forth on dhows to Iran from Dubai Creek maintain a wife in each port. Farsi is the second language of Dubai, after English.

We do know this about the UAE: It was one of three countries in the world to recognize the Taliban as the legitimate government of Afghanistan. It has been a key transfer point for illegal shipments of nuclear components to Iran, North Korea, and Libya. And, according to the FBI, money was transferred to the terrorists behind the attacks of September 11, 2001, through the UAE banking system, which is nothing but a huge money-laundering operation.

In the Whitehouse Fact Sheet: The United States–UAE Bilateral Relationship General Peter Pace, Chairman Of The Joint Chiefs Of Staff, 2/21/06 said: “[T]he military-to-military relationship with the United Arab Emirates is superb. ... They've got airfields that they allow us to use, and their airspace, their logistics support. They've got a world-class air-to-air training facility that they let us use and cooperate with them in the training of our pilots. In everything that we have asked and work with them on, they have proven to be very, very solid partners.”

• UAE Ports Host More U.S. Navy Ships Than Any Port Outside The United States. The UAE provides outstanding support for the U.S. Navy at the ports of Jebel Ali - which is managed by DP World - and Fujairah and for the U.S. Air Force at al Dhafra Air Base (tankers and surveillance and reconnaissance aircraft). The UAE also hosts the UAE Air Warfare Center, the leading fighter training center in the Middle East.

• The UAE Is Supporting Middle East Peace Efforts. The UAE is a moderate Arab state and a long-time supporter of all aspects of Middle East peace efforts. The U.S. and the UAE are also working together to create a stable economic, political and security environment in the Middle East.

The UAE Air Force and Air Defense Force (UAE AF&AD) has commanded the lion's share of new procurement funding over the past decade, including major programs to buy 80 new Lockheed Martin F-16E/F Block 60 Desert Falcon multi-role combat aircraft. Both new F-16 versions have the latest technology in avionics, weapons, sensors and systems integration that provide pilots with increased situational awareness. Block 50 aircraft were sold to Oman. Oman is the fifth Arab nation and the third member of the Gulf Cooperation Council to acquire the F-16. This follows UAE deals with France to acquire new Mirage 2000-9-combat jets and upgrade the UAE AF&AD's existing Mirage 2000 fleet to this new standard. These projects will give the UAE AF&AD long-range precision strike and beyond-visual-range air-to-air combat capabilities, making it one of the most advanced air forces in the Middle East.

In the article published in the Khaleej Times on March 28: UAE won’t be used for attack on Iran: Khalifa “The President, His Highness Shaikh Khalifa bin Zayed Al Nahyan, looks forward to pro-active participation in the Arab Summit in Riyadh and expressed the hope that the summit, would succeed in uniting Arabs, resolve existing differences and help tackle the many challenges facing Arab nations. He also said the country would not be used as a base for any US attack on Iran.”

Shaikh Khalifa reiterated that the UAE totally rejects the use of its land, air and territorial waters to attack any country. “We have reiterated to our Iranian brothers in a letter delivered recently by the foreign minister that we are not a party to the conflict between Iran and the United States and that we shall never allow the use of our soil for any military, security or intelligence activities against them,” he said.

The Gulf Cooperation Council, a loose alliance of six Gulf Arab states, has also called on its members not to offer support to any U.S. action against Iran.

The U.S. has denied any intention to attack Iran. But the public refusals of several countries to allow the United States to use their lands if any such action looms could affect U.S. military options, or require shifting of resources, if tensions did seriously escalate.

In the article from Air Force Times of March 28 U.A.E. ban may complicate U-2 mission “The president of the United Arab Emirates forbade the U.S. military from using bases in his country to attack or spy on Iran as mammoth Navy maneuvers in the Gulf entered their second day. Sheik Khalifa bin Zayed Al Nahyan, who leads this key U.S. ally, said Tuesday that the Emirates had assured Iran that it was not siding with Washington in its dispute over Tehran’s nuclear program.

The Emirates “refuses to use its territorial lands, air or waters for aggression against any other country, let alone a neighboring Muslim country with which we maintain historic and economic ties,” Sheik Khalifa said in a statement carried on Emirates news agency WAM.

“We have assured the brothers in Iran ... that we are not a party in its dispute with the United States, that we will not allow any force to use our territories for military, security and espionage activities against Iran,” Sheik Khalifa said.

The statement could prevent the Air Force from flying intelligence missions over Iran with its squadron of U-2 and Global Hawk spy planes based at al-Dhafra Air Base near the Emirates capital Abu Dhabi.

Earlier this month, Qatari Foreign Minister Sheik Hamad bin Jassem Al Thani issued a similar message, saying Qatar wouldn’t permit an attack on Iran to be launched from its soil.

Qatar is home to the enormous al-Udeid Air Base, from where Air Force Lt. Gen. Gary North commands all American air operations over the Middle East.

The U.S. maintains nearly 40,000 troops on bases in allied Arab countries that face Iran across the Persian Gulf, including about 25,000 in Kuwait, 6,500 in Qatar, 3,000 in Bahrain, 1,300 in the United Arab Emirates and a few hundred in Oman and Saudi Arabia, according to figures from the Dubai-based Gulf Research Center.

The Fifth Fleet base in Bahrain is the command center for the roughly 30 U.S. and 15 allied ships patrolling regional waters, including areas right on Iran's doorstep.

In February Iran said it had tested missiles that could sink “big warships” in the Gulf.

In the article by PressTV of March 27: Iran, UAE keen on expanding ties “Iran's ambassador to the UAE, Hamid-Reza Asefi, says he hopes the sound relations between the parliaments of the two countries will lead to further expand bilateral ties. Asefi made the comment in a meeting with the United Arab Emirates National Assembly Speaker, Abd al-Qarir. “Islamic Republic of Iran's policy is to expand its relations with the UAE and we are prepared to use all our potentials in this regard,” he added.

The UAE National Assembly Speaker, for his part, said the two countries should work to further expand bilateral ties, citing the role Iran's Majlis and the UAE Parliament can play in realizing that goal.”

Leon Trotsky was a Russian Communist theorist and agitator, and a leader in Russia's October Revolution in 1917. “The end may justify the means as long as there is something that justifies the end.”

Without diminishing the threat posed by the near term events in the Middle East, it is important nonetheless to recognize that they are a distraction, a deliberate provocation designed to keep our eyes focused on the wrong enemy. The true threat is and always has been the worldwide communist movement, spearheaded by Russia, and Communist China. While the Iraq and Iran crises continues, the strategy of the Grand Chess Masters—Russia the bear and China the dragon, along with their pawns the Leftists, Marxists and Islamists, continue to develop and put in place their strategy for the ultimate goal of world domination. See my article: The Grand Chess Masters—The Bear and the Dragon..

David J. Jonsson is the author of Clash of Ideologies —The Making of the Christian and Islamic Worlds, Xulon Press 2005. His new book: Islamic Economics and the Final Jihad: The Muslim Brotherhood to the Leftist/Marxist - Islamist Alliance (Salem Communications (May 30, 2006). He received his undergraduate and graduate degrees in physics. He worked for major corporations in the United States and Japan and with multilateral agencies that brought him to more that fifteen countries with significant or majority populations who are Muslim. These exposures provided insight into the basic tenants of Islam as a political, economic and religious system. He became proficient in Islamic law (Shariah) through contract negotiation and personal encounter. David can be reached at: djonsson2000@yahoo.co.uk

Engines of Inflation! - Puru Saxena

by Puru Saxena

INFLATION - Central banks are the engines of inflation. Whether it is the Federal Reserve in the US or the Bank of England in the UK, the sole purpose of these institutions is to inflate. At the same time, they understate the ongoing inflation problem and manage the public's fears. Therefore, in order to protect your wealth in this era of constant inflation, it is absolutely essential that you properly define and understand inflation. In other words, you need to distinguish between "cause" and "effect".

Today, most people have been conditioned to believe that inflation is an increase in prices as captured by the official "Consumer Price Index". However, the truth is that inflation is an increase in the quantity of money and credit. As the supply of money and credit are inflated (the cause), prices of goods, services and assets rise within an economy (the effect). Allow me to explain:

An over-supply of an item causes its value to diminish due to abundance. For example, a bumper crop of wheat will cause its market value to decline. On the other hand, a shortage of an item causes its value to appreciate due to scarcity. For example, a poor harvest of wheat will cause its market value to rise. Similarly, when you have a constantly increasing quantity of money and credit available within an economy, its value will continue to diminish. In other words, the purchasing power of each unit of money will dilute requiring more and more quantities of money to purchase the same amount of goods, services and assets within an economy. This "confiscation" of purchasing power is the biggest consequence of inflation.

Monetary inflation has another other dire consequence; it does not affect everybody in a uniform manner and causes a great wealth-divide. People who get access to this newly available money first, and most importantly BEFORE the remaining population, gain the most as their incomes rise prior to any increases in the prices of things they buy. In contrast, impoverished people in the remote areas of the economy who have not yet received the new money get robbed as they find that the prices have already risen before the new money has had a positive impact on their incomes. Furthermore, inflation also causes grave distortions within an economy. As this ever-expanding supply of money spreads through the economy, it causes gigantic "asset-bubbles" and the inevitable busts resulting in much hardship and wealth destruction for the majority of people. The most recent example being the sharp 10% intra-day decline in Chinese stocks.

So, if inflation is such a menace for society, why do the central banks continue with their inflationary program? And why do they claim that they are fighting inflation?

Banks are in the business of lending money in exchange for interest. The more credit they create, the greater their income through the collection of interest. Under "normal" circumstances and as long as the public is not worried about inflation, banks continue to inflate. However, for this immoral system to work and be accepted, the public must remain oblivious; hence the constant official propaganda of fighting inflation.

Occasionally, a situation arises whereby the public panics about the loss of the purchasing power of their savings. This causes people to start exchanging their paper money for tangible assets. Under these circumstances, banks momentarily stop their inflationary program and raise interest-rates to show they are indeed "fighting" inflation; a monster which they themselves created in the first place! This scenario occurred in the late 1970's, when Americans started dumping their US Dollars in exchange for gold and the Federal Reserve had to intervene by substantially raising interest-rates.

If you still have any doubts about the constant inflation agenda, you may want to note that despite the highly advertised recent monetary "tightening", US bank credit has continued to surge and currently stands at a record US$8.4 trillion. In fact, US bank credit rose 9.4% over the past year which is close to the record-high annual growth rate of 11.2% recorded in December 2005.

Furthermore, our planet is still awash in a sea of inflated "paper money". Non-gold international reserves held by non-US central banks are also at a record-high (US$4.92 trillion). Emerging nations hold a record-high US$3.52 trillion and the industrial nations hold US$1.4 trillion. It is interesting to note that China's reserves alone have soared to over US$1 trillion, whereas Japan's reserves are now around US$880 billion with no signs of a slowdown in sight (Figure 1). Finally, Asian central banks (excluding China and Japan) own another mind-boggling US$1.17 trillion of paper money.

Figure 1: Surging non-gold reserves

Source: Dr. Ed Yardeni, www.yardeni.com

This ever-expanding quantity of money and credit may eventually contract. However, in the meantime, central banks have plenty of methods they could use (if required) to flood the world with additional supplies of Dollars, Euros, Pounds or Yen. Therefore, with further inflation and loss of purchasing power almost a certainty, as investors, we must try and identify those assets which are likely to benefit from this monetary malaise.

In a world of inflated asset-prices, precious metals, energy and agricultural commodities are still inexpensive in real-terms and (especially) relative to financial assets. Furthermore, given the massive Chinese demand for natural resources and tight supplies, I believe that this sector will continue to be the biggest beneficiary of monetary inflation over the coming years.

The above is an excerpt from Money Matters, a monthly economic publication, which highlights extraordinary investment opportunities in all major markets. In addition to the monthly reports, subscribers also benefit from timely and concise "Email Updates", which are sent out when an important development in the capital markets warrants immediate attention. Subscribe Today!

Puru Saxena

Puru Saxena is the editor and publisher of Money Matters, an economic and financial publication NOW available at www.purusaxena.com.

An investment adviser based in Hong Kong, he is a regular guest on CNBC, BBC, Bloomberg, NDTV Profit and writes for several newspapers and financial journals.

Copyright © 2005-2007 Puru Saxena Limited. All rights reserved

The Shanghai Bubble and the "Euro/Yen" Tug-of-War - Gary Dorsch

by Gary Dorsch

"Free markets for Free men", was a slogan etched on the floor jackets of several traders at the Chicago Mercantile Exchange in the 1980's. But today, the slogan for traders is "Rigged markets for Central bankers," who try to move currency and stock markets with their control of the money spigots and timely "jawboning" to the media outlets, when markets become unruly. Today, trading in currencies, precious metals, and stock market indexes has turned into a game of central bank watching.

Right now, two of the most important pieces of the global market jig-saw puzzle are the Shanghai Stock Index bubble and the Tug-of-war over the "Euro /yen" carry trade. What happens in Shanghai can have a big influence over China's monetary policy, and is of great interest to commodity traders and Asian stock markets. The upcoming battle over the Euro /yen exchange rate can have a big influence over Japanese monetary policy and stock markets in Europe.

How will Beijing Deal with the Shanghai Bubble?

The 9% plunge in the Shanghai stock market on Feb 27th, was widely blamed for igniting the $1.5 trillion global stock market shake-out. Within hours of the Shanghai plunge, the Dow Jones Industrials fell as much as 550-points, forcing the US Treasury to issue a plea for calm. Yet the market which ignited the global panic in the first place, was the first to recover and then rumbled to new all-time highs.

The Shanghai Composite Index climbed to a new all-time high of 3,144-points four weeks later, overcoming heavy profit-taking, and is now beginning a new leg up. Technical analysis suggests an initial upside target of 3,250 with support at the January and February peaks around 3,000. The Shanghai index has already tripled since May 2005 and is up 17.5% so far this year, with many stocks trading at multiples above 40 times earnings, the most expensive in Asia.

Yet without a tighter Chinese monetary policy, the Shanghai A-share market could inflate into a Nasdaq-like bubble, and if it should burst from much higher levels, it could deal a big blow to China's economy, and have a chilling effect on Hong Kong-listed stocks. But it remains an open question of how far Beijing is actually willing to tighten its money spigots to keep this raging bull market under wraps.

It's a long war, and a determined central bank with enormous financial resources can eventually gain the upper hand over market speculators, if it is willing to pay the price. So far this year, Beijing has launched three salvos aimed at local stock market operators, in an effort to cap the Shanghai Composite Index of "A" and "B" shares below the psychological 3,000 level, but hasn't yet pricked the market bubble.

The opening salvo aimed at Shanghai traders was launched on Jan 31st, by Cheng Siwei, vice-chairman of the National People's Congress. "There is a bubble growing. Investors should be concerned about the risks. But in a bull market, people will invest relatively irrationally. Every investor thinks they can win. But many will end up losing. But that is their risk and their choice," Cheng warned.

"Jawboning" is usually the first weapon of choice for government interventionists, because it's cost free. Cheng's scare tactic worked for a week, knocking Shanghai red-chips into a 15% swoon by February 7th. However, two weeks later, the buoyant Shanghai stock index was climbing above 3,000 for a second time. The PBoC turned jawboning into action, by lifting bank reserve ratios 0.5% to 10% on Feb 19th.

The PBoC surprised the Shanghai money markets, and the 7-day repo rate briefly spiked upward by 1% to 2.65%, greasing the skids for the 9% plunge in Shanghai red-chips on Feb 27th. But the surge in the 7-day repo rate was a false alarm, and when the liquidity gauge drifted down to as low as 1.42% on March 13th, the Shanghai stock Index mounted its third attempt to breach the 3,000-mark

The third attempt to douse the Shanghai red-chips rally was unleashed on March 16th, when the PBoC hiked its deposit and lending rates by 0.27 percent. But China's money markets are still flush with cash. China's 5-year Treasury bond yield of 2.85% is barely above the 2.7% consumer inflation rate, offering a zero percent real rate of return. The 5-year Chinese bond yield is far below the peak of 4.55% set in 2004, the last time Beijing admitted to a flare-up of inflation.

The PBoC sells T-bills to soak up yuan and then re-invests the money into higher yielding foreign currency bonds, - otherwise known as a "carry trader". China held $353.6 billion in US Treasury securities in January, second only to Japan in value of Treasuries held, but holds most of its $1.07 trillion in FX reserves in US institutional bonds, corporate bonds, and mortgage-backed securities, the PBoC said on March 18th. Its holdings also include a range of currencies besides the US dollar, such as the Euro, the Japanese yen and the British pound.

The PBoC's T-bill sales are calibrated to siphon off roughly $25 billion of monthly currency inflows from foreign trade and investment, but are not indicative of a tighter money policy. Recently however, the PBoC was more aggressive in draining liquidity, selling a net 540 billion yuan ($70 billion) of T-bills, and guiding the 7-day repo rate from a low of 1.42% to as high as 1.95% on March 27th.

Shanghai Bubble Inflated by "cheap yuan" Policy

China's economy expanded 10.7% in 2006, led by a 27% surge in exports to a record $969 billion, and notching up double-digit growth for the fourth year in a row. One of the ingredients to China's stunning success is its manipulation of the yuan, which is undervalued on a trade weighted basis by 35 percent. China earned a $177 billion trade surplus last year and attracted $63 billion in foreign direct investment.

The Chinese central bank prints massive amounts of yuan to buy the foreign currency that is flooding into the country. For the past four years, China's M2 money supply has increased between an annualized 13.5% to as high as 21.5%, with an average rate of 17.5 percent. In other words, China's M2 money supply is 70% higher from four years ago, and its economy has grown by over 40 percent.

But the PBoC hasn't raised interest rates high enough to slow loan demand, which is essential to bring its M2 money supply under control. Lending surged by 413.8 billion yuan in February, compared with an increase of 149.1 billion yuan in February 2006. M2 money growth jumped to an annualized 17.8% in February from 15.9% in January. So Shanghai red-chip speculators are inclined to bid share prices higher, with so much easy money floating around in a red-hot economy.

Beijing's Mixed Blessing with a cheap US Dollar

China's leaders have opted into a gentleman's agreement with the Bush administration, buying large amounts of depreciating US bonds, in return for assurances of a Bush veto against protectionist legislation from angry Democrats in Congress. China reaped a record trade surplus of $232.5 billion with the United States last year. In the first two months of 2007, China posted a trade surplus of $39.7 billion, triple the total from a year ago.

Yet for China, its massive investment in US T-Notes, when measured against gold or yuan, has sunk to a six year low. And matters are only going to get worse, with Beijing forced to shoot itself in the foot, by devaluing its US dollar assets by about 5% this year against the Chinese yuan. But by Beijing's calculations, the benefits outweigh the costs, after figuring for net interest income and its massive trade surplus with the United States.

But it will become much harder for Beijing to support the US dollar, once the Federal Reserve begins to lower the federal funds rate and injects more US dollars into the banking system. Former Fed chief "Easy" Al Greenspan said on March 15th, there was a risk that rising defaults in sub-prime mortgage markets could spill over into other economic sectors, raising the odds of a recession.

Greenspan, who helped create and nurture the sub-prime loan debacle in the first place, said much of the strength in US consumer spending over the past five years could be traced to capital gains, both realized and unrealized, on surging housing prices. If US home prices turn south, due to rising loan defaults and foreclosures, it could sink the broader US economy towards zero percent growth.

It's quite a balancing act for Beijing, printing yuan on the one hand to cushion the dollar's downfall, while raising bank reserve ratios and interest rates on the other hand, to slow down bank lending. And the high-wire act is a bit more treacherous for the PBoC, after the US dollar's 5-year bond yield fell from a high of +230 basis points over 5-year Chinese bond yields on Feb 1st, to as low as +153 bp last week.

So far, the PBoC has printed enough yuan to limit the dollar's depreciation to just 1% since the beginning of the year. But the slow rate of yuan appreciation might not satisfy the US Congress, which is crafting protectionist legislation against Chinese imports this year. And by printing massive amounts of yuan to offset hot money and trade inflows into the Chinese currency, the PBoC risks generating higher inflation and a bigger stock market bubble in Shanghai. What a tangled web we weave!

The Tug of War over the Euro /Yen "Carry Trade"

"The fact that the Bank of Japan did not raised interest rates hardly surprises me," said EU finance chief Jean Claude Juncker on March 20th, after the BoJ left its overnight call rate target at 0.50 percent. "I think that some people in Europe and elsewhere had got their hopes up after the recent interest rate rise. But we stick to the message that we sent at the G-7 meeting in Essen," Juncker said.

"We think that Japanese growth is without doubt picking up. We think that the yen exchange rate must reflect the fundamental facts of the Japanese economy. Our Japanese friends know that. And we are watching them," Juncker warned.

Juncker's opposition to a weaker yen was backed up by European Central Bank chief Jean "Tricky" Trichet who spoke before the EU Parliament on March 21st. "I have signed the G-7 communique, a very important text, signed by the Americans, the Japanese, the Europeans, and we have all said we are going to continue to keep a very close eye on exchange markets and cooperate as necessary," he said.

After watching the Japanese yen sink by roughly 65% against the Euro over the past five years, European finance and trade officials are alarmed by Tokyo's "cheap yen" policy, and want the Bank of Japan to raise its interest rates to shore-up the value of the yen. Japan's near-zero interest rates and severely undervalued currency are at the root of the estimated 40-trillion ($440 billion) "yen carry" trade, and massive distortions in global bond and stock markets.

Tokyo's ruling elite did capitulate to heavy European pressure at Essen on Feb 10th, and agreed to a quarter-point BoJ rate hike to 0.50% on Feb 21st, the second increase in five years. But it's hard to get Tokyo to wean itself off low interest rates. "For now, the BOJ will maintain easy monetary conditions, while monitoring economic and price conditions," BoJ chief Fukui told parliament on March 26th.

"The BOJ and the government will work closely. They have to sustain the Japanese economy and get it out of deflation. The price movement is still weak and this is a challenge for the BOJ," said Japan's powerful FX chief Hiroshi Watanabe on March 16th. But European finance ministers know that Japan's low inflation figures are fraudulent, and are not buying Tokyo's deception any longer.

Japanese exports to the European Union have doubled over the past five years to 1.04 trillion yen in February, while European exports to Japan fell 8% during the same time period. But if the Euro's appreciation against the Chinese yuan and Japanese yen is left unchecked, European exporters could suffer in world markets from price handicaps with Japan and cut-throat competition with China.

The clash over the volatile "Euro /yen" carry trade between European and Japanese monetary officials is likely to escalate, with the ECB telegraphing a quarter-point rate hike to 4.00% in the months ahead to counter its exploding M3 money supply, while Japan's FX chief Watanabe is pressuring the BoJ to keep its powder dry. Speculation of a unilateral ECB rate hike, not matched by the BoJ, is behind the Euro's strong rebound from 151-yen on March 5th to as high as 157.5-yen on March 26th.

The Euro zone needs a strong Euro /US$ to shield against higher import prices for industrial commodities in the months ahead. "Central banks have to react appropriately to high oil prices pushing up inflation in oil-importing nations, and stop these increases feeding into consumer prices and wages. They must be ready to tighten the monetary reins as soon as significant risks of second-round effects appear," said Spanish central banker Jose Manuel Gonzalez-Paramo on March 16th.

"We see certain clouds on the horizon for the end of the year and for 2008 concerning inflationary developments," said Austrian central banker Klaus Liebscher on March 27th. "So altogether, I think we are not well advised to be too complacent. A very close monitoring of the situation is important, and we will decide what is necessary to keep inflationary expectations under control," Liebscher added. (That's an awful lot of "jawboning", for a baby-step quarter-point rate hike!)

But Japan's economy was sizzling at a 5.5% annualized rate in the fourth quarter, and the "jawboning" signals from Japanese finance officials can change at a moment's notice, to guide the Euro /yen into the secret trading range agreed upon in Essen, Germany on February 10th. BoJ chief Fukui hinted at a third rate hike to 0.75%, in his speech on March 26th, "We will adjust interest rates gradually based on economic and price conditions," he told a parliamentary committee.

"When the economy is recovering or expanding, albeit gradually, there could be side effects if market expectations lean too much towards the view that interest rates will be kept low for too long," Fukui added. Most interesting, is how small shifts in interest rate differentials of just 10 or 15 basis points between the Euro and yen, can lead to such violent swings in the cross rate between the two currencies.

And at least for now, the direction of the Euro/yen exchange rate has become a key driver of the EuroStoxx-600. Europe's top blue chips have been heavily pumped up with Japanese steroids, or cheap-yen margin loans, and have displayed an 88% degree of correlation with the Euro /yen so far this year. Merger and takeover deals worth $311 billion involving European targets have also been announced, just slightly below the record levels in Q'1 of 2006, and buoying equities.

On March 15th, Bundesbank chief Axel Weber warned against the practice of trading European stocks with money borrowed in yen, "The recent correction is a warning that carelessness and under-pricing of risks are not advisable even in a very favorable financial market environment. An unexpected deterioration in the macroeconomic environment could trigger a turnaround in sentiment with widespread repercussions. It is therefore essential that risks are taken into account and priced appropriately," he warned, but few traders are listening.

Bank of Japan is the biggest Player in "Yen Carry" Trade

European finance ministers are finding it difficult to combat the market's addiction to the "yen carry" trade, since the world's biggest addict is the Bank of Japan itself. Tokyo's ministry of finance controls $884 billion of foreign exchange reserves, which are mostly held in US dollars. The MoF borrows yen in Tokyo by selling short-term government paper, and then buys US dollars in the currency market.

The MOF's is paying an interest rate of 0.58% on its intervention financing bills, while earning a 5.05% return in three-month US Treasury bills. As a result, Japan earned about 3-trillion yen in interest income last year, far outstripping its interest expense of 460.6 billion yen. But if the BoJ is forced to raise short-term interest rates to placate Europe, the MoF's interest expense could rise to 1.16 trillion yen in fiscal 2007/08. The spread would get squeezed further, if the Fed lowers US$ rates.

Acknowledging that most of Japan's official reserves are in US dollars, Finance chief Koji Omi told a parliamentary committee on March 23rd, "We have no plan to substantially change the composition." But some Japanese lawmakers say the government's $884 billion intervention fund could be used to help pay down some of Japan's $6.7 trillion national debt, equaling 155% of GDP. Japan is projected to incur $177 billion in interest expense on the debt in the fiscal year ending March 31st.

The possible unwinding of the "yen carry" trade has made European stock markets skittish, but what other powder-keg that could ignite in the future, and trigger another big Euro-Stoxx Index shake-out? Which markets are most impacted by the Shanghai bubble? Which foreign stock market is the first to telegraph the next likely move for the global stock markets? The answers were revealed in the March 23rd edition of Global Money Trends. Next issue is scheduled for March 30th.

"This article is just the Tip of the Iceberg" of what's available in the Global Money Trends newsletter published on Friday morning (44 issues per year!).

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Mr Dorsch worked on the trading floor of the Chicago Mercantile Exchange for nine years as the chief Financial Futures Analyst for three clearing firms, Oppenheimer Rouse Futures Inc, GH Miller and Company, and a commodity fund at the LNS Financial Group.

As a transactional broker for Charles Schwab's Global Investment Services department, Mr Dorsch handled thousands of customer trades in 45 stock exchanges around the world, including Australia, Canada, Japan, Hong Kong, the Euro zone, London, Toronto, South Africa, Mexico, and New Zealand, and Canadian oil trusts, ADR's and Exchange Traded Funds.

He wrote a weekly newsletter from 2000 thru September 2005 called, "Foreign Currency Trends" for Charles Schwab's Global Investment department, featuring inter-market technical analysis, to understand the dynamic inter-relationships between the foreign exchange, global bond and stock markets, and key industrial commodities.

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Disclaimer: SirChartsAlot.com's analysis and insights are based upon data gathered by it from various sources believed to be reliable, complete and accurate. However, no guarantee is made by SirChartsAlot.com as to the reliability, completeness and accuracy of the data so analyzed. SirChartsAlot.com is in the business of gathering information, analyzing it and disseminating the analysis for informational and educational purposes only. SirChartsAlot.com attempts to analyze trends, not make recommendations. All statements and expressions are the opinion of SirChartsAlot.com and are not meant to be investment advice or solicitation or recommendation to establish market positions. Our opinions are subject to change without notice. SirChartsAlot.com strongly advises readers to conduct thorough research relevant to decisions and verify facts from various independent sources.

More Funding for the War in Iraq

by Ron Paul ( U.S Congressman )

Last week the House passed an emergency supplemental spending bill that was the worst of all worlds. The president’s request would have already set a spending record, but the Democratic leadership packed 21 billion additional dollars of mostly pork barrel spending in attempt to win Democrat votes. The total burden on the American taxpayer for this bill alone will be an astonishing 124 billion dollars. Democrats promised to oppose the war by adding more money to fight the war than even the president requested.

I am pleased to have joined with the majority of my Republican colleagues to oppose this bill.

Among the pork added to attract votes was more than 200 million dollars to the dairy industry, 74 million for peanut farmers, and 25 million dollars for spinach farmers. Also, the bill included more than two billion dollars in unconstitutional foreign aid, including half a billion dollars for Lebanon and Eastern Europe.

What might be most disturbing, however, is the treatment of veterans in the bill. Playing politics with the funding of critical veterans medical and other assistance by adding it onto a controversial bill to attract votes strikes me as highly inappropriate. Veterans’ funding should be included in a properly structured, comprehensive appropriations bill. Better still, veterans spending should be automatically funded and not subject to yearly politicking and nit-picking.

While I have been opposed to the war in Iraq from the beginning and do believe that there is a strong constitutional role for Congress when it comes to war, I could not support what appeared to be micro-management of the war in this bill. There is a distinction between the legitimate oversight role of Congress and attempts to meddle in the details of how the war is to be fought. The withdrawal and readiness benchmarks in this bill are in my view inappropriate. That is why the president has threatened to veto this bill.

In the last Congress I co-sponsored legislation urging the president to come up with a plan to conclude our military activity in Iraq, but that legislation contained no date-specific deadlines to complete withdrawal.

Once again Congress wants to have it both ways. Back in 2002, Congress passed the authorization for the president to attack Iraq if and when he saw fit. By ignoring the Constitution, which clearly requires a declaration of war, Congress could wash its hands of responsibility after the war began going badly by citing the ambiguity of its authorization. This time, House leaders want to appear to be opposing the war by including problematic benchmarks, but they include language to allow the president to waive these if he sees fit.

To top it off, House leadership may have actually made war with Iran more likely. The bill originally contained language making it clear that the president would need congressional authorization before attacking Iran – as the Constitution requires. But this language was dropped after special interests demanded its removal. This move can reasonably be interpreted as de facto congressional authority for an attack on Iran. Let’s hope that does not happen.

Ron Paul

Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the "one exception to the Gang of 535" on Capitol Hill.

Levered Technology, Unlevered Drillers - Dan Amoss

by Dan Amoss

My colleague Byron King wrote to you about the allure of private equity in his recent two-part series, "Energy and Private Equity." He describes how quite a few companies are weary of the mounting costs of listing their shares on public exchanges -- Wall Street's short-term focus being among the worst.

As Byron points out, the advantages of "going private" are numerous and growing. I want to expand on Byron's ideas by contrasting the capital structure of two well-known companies -- cell phone maker Motorola and offshore driller GlobalSantaFe -- and why private equity and merger activity is likely to continue bidding up drillers.

Most private equity deals seek to optimize the target company's capital structure, or the appropriate mix of debt and equity claims.

Debt holders have a priority claim on the company's assets, while equity holders have a residual claim. If things go wrong, debt holders are first in line at bankruptcy court, but their exposure to the good times is basically limited to a fixed stream of payments. Equity holders are left with nothing if the company a) goes bankrupt and b) there's nothing left after creditors liquidate what's left of the assets in an attempt to recoup as much of their principal as possible. But equity holders enjoy all the extra cash flow when business is booming.

When used appropriately, debt, or "leverage," can greatly enhance shareholder returns. Private equity, aka "leveraged buyout," funds generally look for businesses with solid competitive positions that consistently generate cash. Private equity deals are heating up into a craze because the supply of cheap credit appears to have no limit (until all of a sudden, everyone discovers that there is, in fact, a limit).

Private equity funds first pool together their capital. Then they leverage their buying power by layering debt on top of their capital. This allows them to buy much larger businesses -- and streams of future cash flow -- than they otherwise could buy outright with their limited funds. Returning to the concept of capital structure, the debt holders get paid a fixed 5-6% per year and the equity holders have a claim on the rest, whether it ends up being a total loss or a stream of cash that's even larger than they anticipated.

Motorola's Levering Shareholders' Exposure to Creative Destruction

Motorola's recent disappointments have been numerous. A glut of cell phones is building in the supply chain and the fallout is not going to be pretty. Wireless carriers are giving them away with minimal contract commitments. The title of this article on Bloomberg yesterday says it all: "Motorola's Zander 'Running Out of Scapegoats' as Profit Fades":

"Earnings and revenue this year will be 'substantially' below its forecasts because of plunging mobile phone prices, Schaumburg, Ill.-based Motorola said yesterday. Zander, who already is cutting 3,500 jobs, said the company will overhaul marketing and product design to make its prices competitive without sacrificing earnings.

"The world's second biggest maker of mobile phones also named a new president and detailed a plan to step up its share buyback program amid a proxy fight with shareholder Carl Icahn.

"Instead of sparking optimism, the news set off criticism of Zander's choice for the promotion and a product plan that investors said didn't show enough concern for bigger rival Nokia Oyj's recent advances in the market."

Bloomberg then describes Motorola's big management shake-up in the wake of this ugly news:

"Motorola's choice for its new president and chief operating officer, Greg Brown, who runs the networks and enterprise unit that sells networking devices to companies and government agencies, also drew fire.

"'There's not a single senior Motorola executive that had more predictions go wrong,' said Albert Lin, an analyst at American Technology Research in San Francisco, of Brown. He rates the shares 'neutral' and said he doesn't own them.

"Motorola also said Chief Financial Officer David Devonshire will retire. Director Thomas Meredith will be acting CFO.

"Motorola expects a loss of 7-9 cents a share, its first loss since 2004, on revenue of $9.2-9.3 billion this quarter. Motorola didn't provide new full-year figures.

"'I never would have thought that they would go into a money-losing situation,' Lin said."

Lin "never would have thought that they would go into a money-losing situation." This statement is puzzling because it's not that hard to imagine a situation where Motorola goes into the red. Short product cycles and high R&D spending requirements can combine to produce red ink very quickly when business sours.

In recent months, Motorola shareholders had gotten excited about the leveraged recapitalization efforts of Carl Icahn. Mr. Icahn has been branded with the title "corporate raider," yet his tactics have a record of creating value for shareholders when management and the board of directors slack off on this responsibility.

The recent cell phone boom left Motorola with plenty of excess cash that Icahn believes it doesn't need. Since Motorola's business doesn't entail managing a multibillion-dollar bond portfolio, Icahn is pressuring the company to disburse all excess cash to shareholders through share buybacks (allowing for enough of a cash cushion to fund operations through the rapidly approaching down cycle).

Here's a suggestion to Mr. Icahn: Why not consider targeting one of the many cheap offshore drillers? Most have already booked up their rigs for a few years under long-term contracts at very attractive dayrates. These contracts provide very visible cash flows, so perhaps a recapitalization is in order?

You have a business for which the underlying assets are increasing in value, not deflating. State-of-the-art drilling equipment has not yet succumbed to the global deflationary pressures we see in businesses like cell phone and chip manufacturing. Cell phone manufacturing capacity is overbuilt yet still receives more and more capital investment worldwide -- good for consumers, bad for producers. But offshore drillers emerged out of a 20-year recession just a few years ago.

Furthermore, while earnings visibility is very low at most technology companies, several offshore drillers know the next few years of earnings with a fair degree of confidence. To top it off, they'll have very valuable rig fleets at the end of the high-visibility period. Who knows what the cell phone industry will look like?

Technology businesses are not considered as "capital intensive" as drillers, but in my view, the ever-present challenge of technology obsolescence more than offsets this. Carl Icahn's efforts may pay off for shareholders in 2007, but they will magnify, or leverage, the shrinking shareholder base (shrinking due to share buybacks) to the downside of technology's creative destruction.

Examining the Effects of GlobalSantaFe's Cash Flow on Its Balance Sheet

When you buy a stock, you are essentially buying a claim on the company's assets and the cash that those assets generate when they are put to productive use. If you look at the assets on a balance sheet from the bottom up, you see that the least liquid assets are toward the bottom and the most liquid assets are closer to the top. Management's top job is to extract as much value out of these assets as possible, gradually converting them to cash over long periods of time:

Using this "back-of-the-envelope" model, I forecast what the trends in GSF's cash flow and balance sheet will look like in the future. These financials are certainly easier to project than Motorola's. This model has the following conservative assumptions: revenues peak in 2008 and slowly decline, net profit margins peak at 35% in 2007 and slowly decline, and annual capital requirements (working capital and capital expenditures) remain in the range of 17-22% of revenue:

The key estimate this model provides, highlighted in yellow, is "free cash flow," which is defined as net cash from operations minus capital expenditures.

A more accurate measure of free cash flow is net cash from operations minus maintenance capital expenditures. Free cash flow is a measure of the cash available to fund dividends, share buybacks, and growth projects after accounting for the spending necessary to maintain the existing business.

My model estimates a free cash flow peak of $1.6 billion in 2008, followed by a slow decline. But I'm confident that free cash flow will be higher than this because the estimate highlighted in yellow includes capital expenditures high enough to fund an expansion of GSF's rig fleet, which will in turn add to GSF's future cash flows. I'm assuming that all excess cash is returned to shareholders via stock buybacks. This produces the compelling returns I outline in the bottom row of the table. These share buybacks can be accelerated if more debt is issued (a "recapitalization").

Here's the key point I want to make about GSF and all the other contract drillers: Free cash flows will be so high that most of them must buy back hefty amounts of stock, raise dividends, or expand their rigs fleet quickly to avoid having too much cash pile up on their balance sheets. This is a nice problem for any company to have, but it puts them right in the cross hairs of private equity funds, aggressive peer acquirers, and activist investors like Carl Icahn.

Spreadsheets Must Pay Attention to the Outside World

Free cash flow models are only as good as the assumptions on which they are based. So investors must remember to test a model's assumptions when they see one. The "micro" analysis of projecting financial statements into the future cannot be separated from the "macro" analysis vital to these projections. The assumptions underlying my GlobalSantaFe model would have to be thrown out the window if, in fact, a huge glut of oil supply were about to come on the market and stay there for a few years.

But my research over the past few months indicates that the odds of this occurring are very low. Peak Oil has already occurred in many areas of the world including the U.S., the British and Norwegian sectors of the North Sea, and now Mexico.

What happens in every country after passing peak production? Demand for drilling skyrockets. The North Sea has been a very active offshore drilling market in recent years, and there's no sign of a slowdown.

GlobalSantaFe maintains an indicator of industry health called the SCORE (Summary of Current Offshore Rig Economics). It compares the profitability of offshore rig dayrates with the profitability of dayrates during the 1981 peak of the offshore drilling cycle. When the SCORE index is at 100, dayrates equal "the sum of daily cash operating costs plus approximately $700 per day per million dollars invested." (Source: GlobalSantaFe):

Approaching this in a simpler way -- the profit generated by a typical offshore rig when the SCORE is 100 means that its owner is recouping his capital outlay in just four years. In the 130s, you can imagine how quickly rig owners like GSF are "monetizing" their rig fleets.

As for oil demand, it's important to remember that higher prices are more likely to slow demand growth, rather than reverse it. Global oil demand hasn't contracted on a year-over-year basis since the early 1980s. John Segner, portfolio manager of the AIM Energy Fund, puts these numbers into context in a recent Barron's interview:

"China is still using only 6.5 million barrels of oil per day. We are using 20 million barrels per day here in the United States. China is 25% of the world population. The Chinese are getting off bicycles. They want air conditioning. They are getting housing. If China slows, it would just be a bump in the road. Oil-demand growth could slow down, but the chance of it going below 86 million barrels [per day], say, next year? I just don't see that happening. And I don't see a lot of capacity growth. Supply-demand is still going to be tight.

"Energy [investments are] going to do very well. The multiples have been contracting for the better part of 12 months. And we are toward the end of that correction more than we are at the beginning of it."

Drilling Rigs Will Inflate Faster Than Houses

Amid the rumors of a $100 billion private equity bid for Home Depot, I find it surprising that there has been little private equity interest in exploration and production (E&P) or oil field service companies.

Perhaps financial engineering could unlock some value for Home Depot shareholders, but there is only so much you can do with a large retailing business model. Plus, the company is still exposed to the housing bubble's hangover. It's impossible to quantify just how much "spec" building and home equity refinancing money found its way into Home Depot cash registers over the past three years.

HD's price-to-earnings ratio when business is firing on all cylinders is a lot lower than when it's not -- especially when you think about the effect of spreading lower sales across a high fixed cost structure (big box stores) and the financial burden of holding slower-turning inventory.

Home Depot may be a good buyout someday, but I think potential buyers can get a better price at some point over the next two years.

Think about the "leveraged" income strategy employed by most landlords. Assume that a landlord purchases an apartment building with a 10% down payment and a 90% mortgage. If rents provide enough income to offset mortgage interest and maintenance, the landlord is left in a position where his equity goes up and down by a factor of 10-to-1 with each fluctuation in the value of the apartment building.

Leveraged exposure to a long-term real estate bull market is how most real estate moguls have made their billions. If an opportunity comes along to borrow money at a low fixed interest rate and buy a cheap asset that is both inflating in value and throwing off income, it's hard to lose.

Why not consider contract drilling businesses?

I'd bet that a fleet of drilling rigs will inflate in value at a faster pace than physical buildings over the next 10 years. I'd also bet that quite a few savvy investors recognize this and we'll see more mergers, acquisitions, and private equity transactions as the energy bull market continues to roll on.

Good investing,
Dan Amoss, CFA

for Whiskey and Gunpowder

Dan Amoss CFA is managing editor of Strategic Investment, the highly respected US newsletter. Previously Dan worked at Investment Counselors of Maryland - investment advisors tor one of America's top small-cap value mutual funds over the past 15 years.

Ron Paul 2008

Congressman Ron Paul (R-Texas) is the leading advocate for freedom in our nation’s capital. As a member of the U.S. House of Representatives, Dr. Paul tirelessly works for limited constitutional government, low taxes, free markets, and a return to sound monetary policies. He is known among his congressional colleagues and his constituents for his consistent voting record. Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the "one exception to the Gang of 535" on Capitol Hill.

Ron Paul was born and raised in Pittsburgh, Pennsylvania. He graduated from Gettysburg College and the Duke University School of Medicine, before proudly serving as a flight surgeon in the U.S. Air Force during the 1960s. He and his wife Carol moved to Texas in 1968, where he began his medical practice in Brazoria County. As a specialist in obstetrics/gynecology, Dr. Paul has delivered more than 4,000 babies. He and Carol, who reside in Lake Jackson, Texas, are the proud parents of five children and have 17 grandchildren.

While serving in Congress during the late 1970s and early 1980s, Dr. Paul's limited-government ideals were not popular in Washington. In 1976, he was one of only four Republican congressmen to endorse Ronald Reagan for president.

During that time, Congressman Paul served on the House Banking committee, where he was a strong advocate for sound monetary policy and an outspoken critic of the Federal Reserve's inflationary measures. He was an unwavering advocate of pro-life and pro-family values. Dr. Paul consistently voted to lower or abolish federal taxes, spending and regulation, and used his House seat to actively promote the return of government to its proper constitutional levels. In 1984, he voluntarily relinquished his House seat and returned to his medical practice.

Dr. Paul returned to Congress in 1997 to represent the 14th congressional district of Texas. He presently serves on the House Committee on Financial Services and the House Committee on Foreign Affairs. He continues to advocate a dramatic reduction in the size of the federal government and a return to constitutional principles.

Congressman Paul’s consistent voting record prompted one of his congressional colleagues to say, “Ron Paul personifies the Founding Fathers' ideal of the citizen-statesman. He makes it clear that his principles will never be compromised, and they never are." Another colleague observed, "There are few people in public life who, through thick and thin, rain or shine, stick to their principles. Ron Paul is one of those few."

Brief Overview of Congressman Paul’s Record
He has never voted to raise taxes.
He has never voted for an unbalanced budget.
He has never voted for a federal restriction on gun ownership.
He has never voted to raise congressional pay.
He has never taken a government-paid junket.
He has never voted to increase the power of the executive branch.

He voted against the Patriot Act.
He voted against regulating the Internet.
He voted against the Iraq war.

He does not participate in the lucrative congressional pension program.
He returns a portion of his annual congressional office budget to the U.S. treasury every year.

Congressman Paul introduces numerous pieces of substantive legislation each year, probably more than any single member of Congress.

http://www.ronpaul2008.com/

Meat and Crusaders - Jim Amrhein

by Jim Amrhein

Before I get started today, I want to take a few moments to address some reader feedback to my last essay, "A Clear and Pheasant Danger."

First, I give a heartfelt thanks to those who wrote in with kudos and "attaboys." It's always nice to hear from those who've been persuaded, or whose points of view, so long unechoed in the mainstream, have been affirmed. Special thanks to the fellow who invited me to join him for a pheasant hunt on his Michigan farmland.

I also want to thank the entire Whiskey & Gunpowder readership for NOT writing in to bust my chops about the cheesy pun I used for the title of my last piece. I simply could not resist the wordplay, even though it no doubt made some of you groan. A thousand thanks for your restraint (not one person wrote in about it) -- and a thousand apologies for my self-indulgence.

And finally, just to prove to you that we don't shrink from criticism here, I offer the following responses to my detractors...

To those readers who wrote in to claim, in so many words, that I'm an enemy of the Earth, I say this: As a lifelong outdoorsman and conservationist, pristine, untrammeled nature is as precious to me as it could ever be to you, likely more so. And I'd wager you a year's salary that I spend more time out in it -- and more dollars on its preservation, defense, and maintenance -- than you ever will.

To those readers who complained that I tend to steer my essays on the environment toward issues involving shooting and the blood sports, I say this: I write about freedoms. And when it comes to the environment, those freedoms most in the cross hairs of the quasi-religious fashion show the environmental movement has become in this country are those involving hunting, shooting, fishing, and the responsible treading upon the lands our tax dollars pay for with the gear involved in pursuing these freedoms.

To those who wrote in to take offense at characterizations like "tree-hugger" and "enviro-Nazi," I say this: These labels are meant to call into glaring relief zealous factions of the new religion of environmentalism that would sacrifice all American freedoms -- not to mention prosperity -- on the altar of flawed assumptions about the natural world, and about how best to save and preserve it. Most Americans who would call themselves environmentalists fall nowhere near these classifications in my eyes. Apologies if I didn't make this clear in my prior essay. The last thing I wish to do is alienate the open-minded and receptive with my characterization of the narrow-minded and destructive.

And last but not least, to the guy who wrote to excoriate me as clueless and factually inaccurate because HE didn't distinguish between my comments on carbon monoxide and carbon dioxide, I say this: Get a clue yourself -- and learn to read!

Now, onto other matters, like offending another group of misguided, misanthropic misusers of the environmental agenda: animal rights activists.

An Inconvenient "Toot"

As you know, I'm normally either poking fun at the animal rights crowd or exposing their agenda as disingenuous, fraudulent, and logically flawed.

But today, I'm their best freakin' friend. Seriously, I am so glad these fools exist right now -- because they've poked a far larger and more-visible-to-the-mainstream hole in the human-caused global warming argument than I could with a thousand essays in this forum...

As you may have noticed, a new element has entered the global warming debate lately. Well, it's not really new at all, but it is newly anointed as credible by the mainstream media -- owing largely to the slick, refined PR machine that PETA and friends have spent all their donation and membership monies building (they certainly haven't used it to buy any land for wildlife to flourish on). The element I'm talking about:

Greenhouse gases from livestock, uhh... emissions.

Yep, cow farts and other livestock-related processes. As it turns out, PETA's rabid hatred of all things carnivorous has driven them to mass-publicize a fact that pulls the rug out from under a major pillar of Al Gore and company's politically motivated hatred of all things carboniferous: that the cumulative effects of raising animals for food creates more greenhouse gases than all the world's cars and trucks combined.

Only around 9% of the world's atmospheric CO2 comes from livestock sources. However, as measured by CO2 equivalent, around 18% of the Earth's greenhouse gases (CO2, methane, and nitrous oxide are the biggies) result from animal emissions, the livestock-rearing process, and the carbon-negative impact of clearing grazing acreage of forest and other plants, according to a United Nations Food and Agriculture Organization report released last November.

Here's how this is possible, in case you're wondering...

While it's true that the carbon dioxide that cars, trucks, fossil fuel power plants, and the like spew out represents around 75% of the greenhouse gases released by all mankind-related sources, other gases -- like the methane and nitrous oxide that livestock rearing generates in copious quantities -- have a "greenhouse" effect many times more powerful than CO2. In fact, methane's actions in the atmosphere account for 23 times more GWP (global warming potential) than CO2, and nitrous oxide nearly 300 times as much!

What this means is that if Earth's current warming trend is indeed caused by mankind (despite what Gore and friends say, there isn't a scientific consensus), and if the U.N. report is accurate, then cows, pigs, and chickens are more to blame for it than cars...

This is what PETA has latched onto and successfully penetrated the mainstream media with. On the strength of this U.N. report and the high profile of Al Gore's movie, PETA is calling for eco-minded Americans -- and, specifically, Gore himself -- to go vegetarian in the name of Mother Earth. And indeed, it has a point.

According to researchers from the University of Chicago, if someone really believed that reducing their personal "carbon footprint" (more accurately called a "greenhouse footprint") would make a difference in the global temperature, eschewing meat would make far more of an impact than buying a Prius. Around 50% greater, the U of C scientists estimate.

Unwittingly Exposed: The Green Crowd's 1% Solution

I'm a hunter and carnivore -- so why do I love the PETA crowd for exposing this, you're asking?

Because it underscores exactly how insignificant vehicular CO2 emissions are, from a global warming standpoint -- again, that's IF you buy into their correlation. Think about it: Everyone's making such a squawk about tailpipe CO2, yet if the U.N. folks are right about livestock making more of an impact than cars, that means vehicle exhausts are the source of less than 18% of the world's greenhouse gases (some credible estimates peg this number far lower). For simpler math moving forward, let's say that 16% of global GHG comes from vehicular exhausts. That's probably generous, but what the hell...

This means that the mass adaptation of more efficient hybrid cars -- which offer at most a 25% real-world fuel mileage benefit over comparably sized gas-powered cars (Prius real-world MPG hovers at around the high 40s, not much higher than what a Honda Civic or VW TDI will get you) -- would result in a net GHG benefit of around 4% AT MOST. But remember, that's if everyone in the world were to adopt these lean, green machines.

Of course, this wouldn't be possible, since trucks, buses, tractors, military conveyances, and other low-mileage vehicles would still be gas- or diesel-powered. Also, not all nations give a rat's ass about GHG, or are in a position to adapt to hybrid vehicles on a massive scale.

So let's come at this another way -- one that isolates the U.S. impact alone:

Estimates peg the current number of cars and trucks at around 600 million worldwide. Around one-third of these are here in the States. Assuming that the average vehicle in the U.S. is likely to be far newer, in much better condition, and of a more efficient design to begin with than most other places on Earth, I'm guessing that NO MORE than a fourth of Earth's tailpipe CO2 comes from America's cars and trucks (it's probably far less). So given a 16% estimate of global GHG from tailpipe emissions, this means around 4% of the total annual atmospheric GHG burden comes from AMERICAN tailpipes. Now, stay with me here...

Let's say that every American citizen were all of a sudden forced by law to trade in their current personal automobiles for hybrid "roller-skate" models. Since these cars represent only around a 25% efficiency benefit over normal cars -- and since millions of delivery trucks, big rigs, buses, tractors, and military and emergency vehicles would still be guzzling gas and spewing lots of GHG -- the overall impact of such a switch on Planet Earth's annual GHG output would likely be no more than 1%.

Pretty pathetic, huh?

Now I ask you, as environmentally conscious Americans: Is a 1% reduction in world GHG really worth giving up the luxury, utility, convenience -- and yes, even the extra safety -- of larger and more capable vehicles?

I say no. Why should Americans give up any variety of our beloved cars and trucks -- not to mention our economic advantage -- while Kyoto-exempt "developing" Asian and African nations can belch as much GHG into the atmosphere as they want? It isn't fair by any method of measure...

And now, poetically, PETA's agenda is exposing this lack of international energy parity.

Carnivores vs. Carbon Whores

Of course, none of this addresses the "problem" of livestock/agricultural GHG sources. In other words: What should we do about the cow farts -- now that we know they're a prime source of atmospheric GHG?

Well, if PETA and friends had their way, we'd all be forced into vegetarianism for the sake of the environment. Mind you, the animal rights crowd doesn't care WHY we're vegetarian -- only that we don't harm their precious beasts. They're single-issue folks, and they're leveraging the "carbon footprint" concept to further their agenda. That's why they feel no compunction whatsoever about throwing their own comrades on the political left under the bus with their public calls to Al Gore to become vegetarian or admit being a hypocrite...

What they don't realize is that when forced to make the choice, Americans will stand up as carnivores instead of lining up with PETA's carbon whores. There's no way in this world that we'll give up our bull roasts and pig feasts, burgers and steaks, baby back ribs and carnitas, ball park dogs and sausage links, fried chicken and Thanksgiving turkeys -- even if we do suspect that it's all contributing to global warming.

And what's kind of funny-ironic is that if people really stop to consider the ramifications of what PETA has successfully brought to the mainstream consciousness, they may realize things that aren't in the best interests of either the animal rights OR militant environmental movements. Things like...

What if all the fuss about animal "emissions" makes people realize that global warming from greenhouse gases is a perfectly natural process -- one that has waxed and waned many times over many eons in response to many factors (like animal life and its byproducts)?

What if Americans and others around the world decide that while they can't give up their meat -- but they can do without all those GHG-farting deer, moose, elk, bison, horses, cape buffalo, yaks, gnus, caribou, water buffalo, kudus, impala, wart hogs, kangaroos, lions, tigers, and bears? (The PETA crowd would love this, huh?)

What if people start thinking about how their OWN flatulence is killing the planet? Would we start regulating our diets to reduce our own "tailpipe" emissions (I'm telling you right now, a vegetarian beans-and-cabbage diet wouldn't be optimal)? Would we start restricting human births for fear of the environmental impact of their ass-gas?

See how absurd this could all get -- how absurd it already is?

Now, imagine how absurd and restrictive all this environmental hysteria could become if the government figures out ways to leverage all these fears for more control over your dollars and freedoms? Make no mistake -- that's the goal here, as it always is with politicians.

And anyone with half a brain who's able to detach from fear and prejudice long enough to think about it can figure this out. This leaves out most militant environmentalists (see als tree-huggers and eco-Nazis), all animal rights activists, and anyone who accepts as the scientific gospel anything in Al Gore's one-sided, campaign-in-a-film can HOLLYWOOD MOVIE An Inconvenient Truth.

Bottom line: I don't want to lose any more of my freedoms, choices, or money because a bunch of weasel politicians have found a way to parlay a "crisis du jour" that's far from solidly rooted in science into even more cash and power -- and a bigger, more far-reaching government. And it's all because we're putting our faith not in facts, or even reasoned debate, but into half-truths that we're being scared and shamed into accepting by people who are hopelessly agenda driven...

Can't we just stop and think about this a little -- preferably over a burger -- before our naivete and capitalist guilt cause us to plunge like so many lemmings headlong over a cliff of needless regulation?

Stomping hysteria in my carbon footprint,

Jim Amrhein
Contributing editor, Whiskey & Gunpowder

Jim Amrhein is a cocksure, venomous disbeliever in the ability of governments to do much of anything right-especially compared to the vast, yet grotesquely shackled power of the American entrepreneur. Degreed in Political Science, Jim is a widely published columnist on political issues, both under his own byline and as a ghostwriter for one of America’s most outspoken critics of the corrupt farce our elected officials have made of the pure, evolving, and self-correcting system they’ve been entrusted to maintain.

Tactical Silver Trends 6 - Adam Hamilton

by Adam Hamilton

Much has been said and written about all the chaos that buffeted the financial markets several weeks ago in response to the selloff in the parabolic Chinese stock markets. The mini-panic's impact on the US stock markets and commodities in general has been analyzed from countless perspectives.

Silver, perhaps speculators' most beloved commodity, did not escape this carnage unscathed. With the relatively tiny size of the global silver market combined with considerable interest among speculators leading to its extreme volatility, it should not be surprising that silver sold off too. Speculators were quite scared for a few days there and they liquidated everything indiscriminately.

While it makes sense to be concerned about the selloffs in some markets, in others it is totally unjustified. In general stocks for example, very compelling arguments exist suggesting that a major cyclical bear may be starting to flex its muscles. If such an event indeed comes to pass, many are wondering what it may portend for silver and silver stocks.

Based on my studies of market history, I seriously doubt silver has anything to fear from a general-stock bear. During the brutal cyclical bear of 1973 and 1974 when the Dow 30 fell 45% for example, silver rose 115% over this entire two-year period and soared 241% at best within it! Like gold, silver is an alternative investment that shines the brightest when paper assets are struggling.

But although every contrarian understands this deep down, that precious metals usually thrive when the general stock markets suffer, it is easy to be overcome by the fear of the moment. With silver plunging 14% within five trading days as this month dawned, even some among the hardcore silver faithful experienced doubts about silver's ability to weather a general-stock downleg despite the metal's incredibly bullish fundamentals.

Endless tomes have been penned discussing these fundamentals, describing how and why global silver supplies are unable to keep pace with accelerating global demand and why this trend is likely to persist for a decade or more into the future. But as it is not the fundamentals that have spooked silver traders, but the technicals, it is into the latter I want to delve today.

While you wouldn't know it from reading the wailing and gnashing of teeth on Internet forums regarding silver's struggles of late, this restless metal looks absolutely awesome today technically. Not only did the mini-panic-induced selloff several weeks ago not damage silver technically, but its tactical trends have rarely looked better.

The fantastic tactical silver trends unfolding today are readily apparent in this chart. It encompasses the last 15 months of silver action. As always, considering the silver selloff of several weeks ago within its longer-term context immediately removes any ability for it to generate fear. Silver is near a technical point today that has nicely rewarded silver investors and speculators who went long when it was approached previous times.

To gain proper strategic perspective before considering recent tactical action, it is best to start with the big picture. Since the dawn of 2006 the silver market has been in three distinct states. The first, running until May 2006, was the culmination of silver's biggest upleg of its entire bull market by far. From August 2005 to May 2006 it blasted 124% higher. But roughly 5/8ths of this entire upleg's gains happened from March to May, during its final parabolic ascent.

Parabolas have nasty reputations in the financial markets, and rightly so. When a parabola happens at the end of a secular bull market, like in the NASDAQ in 2000, it can take decades before the old parabolic high is decisively broken. But thankfully silver's parabola did not occur at the end of a bull market, but at the beginning. With silver's fundamentals still so strong, its parabola aftermath would be relatively limited.

On a sidenote, we have already seen a number of parabolas in young commodities bulls that did not witness collapses afterwards. Why? Because their global fundamentals were still dazzlingly bullish even after the parabolas topped. If you are a Zeal subscriber, log in to our private charts on our website and check out the base-metals charts. Aluminum, copper, lead, nickel, zinc, and uranium have all gone parabolic in recent years yet none have crashed. Corrected, yes in most cases, but certainly not crashed.

Silver's incredible parabola witnessed a year ago also corrected, and hard. In roughly one month ending last June, silver shed 35% in a hard correction. Even more interesting than the magnitude was where the slide ended. When the dust settled, as you can see above, silver was back down to where its parabola had started in late February. Its entire parabolic ascent was completely erased technically.

If you were long silver back then as a speculator, this couldn't have made you very happy. Yet this hard correction was very necessary. Way too much euphoria had been baked into the precious metals by early May and a correction was inevitable and expected. At Zeal we pulled in our horns and waited for the coming correction to run its course. While very unpopular at the time, we were right.

Silver's sharp correction that totally erased its whole parabola also largely eliminated the excessively euphoric sentiment generated by the parabolic ascent. In most markets I wouldn't expect to see a new bull high yield to a deep interim low in just one month, but silver is probably the most volatile major commodity market on the planet. While it took gold until October to shake out its own euphoria and bottom, silver radically compressed this process and cleansed its own euphoria rapidly.

The reason speculators so love silver is because it can move so fast, in either direction. Extreme volatility can yield fantastic gains in very short periods of time if traders are betting in the right direction. But whenever speculative capital is deployed in silver for short-term trades, traders must be ready to lose money fast if they are wrong.

Silver traders live by the sword and die by the sword, especially if leveraged via futures. After every major silver correction in this bull, I've received sad e-mails from traders who were seriously burned when silver turned on a dime and plummeted. So if you are a leveraged speculator instead of a margin-free long-term investor, please be careful in silver and realize your capital can multiply or disappear incredibly rapidly.

But silver's apparent manic/depressive behavior mirroring that of the consensus of its speculators does have benefits. After silver bottomed in June its fledgling correction was already finished. It did not need to go any lower because the euphoric traders had already been driven away or slaughtered. Its current upleg began the very day after it bottomed in June. Silver has not looked back since.

Note above that since that June low, silver has carved a beautiful uptrend with rock-solid support and resistance lines. Before we delve into the tactical mechanics of this upleg, please consider the sum of its efforts. Just one month ago, on February 26th, silver had meandered 51% higher since June to within a mere 2% of its dazzling bull high achieved in May! And this time its approach was not parabolic, but a long, steady upleg built on a solid foundation of patient fundamental-based buying.

The fact that silver has spent nine months climbing back up to bull highs that it initially carved in just two should do more than anything else to underscore silver's dazzlingly bullish fundamentals. If the silver parabola of last year had been purely sentiment-driven like the NASDAQ in early 2000 with no fundamental underpinning, then silver would still be falling. But with silver back above $14 last month without any euphoria or parabola, global supply and demand truly justifies today's silver prices.

So strategically, what on earth is there to fear in silver? Even on its worst day early this month when silver traders were duped into believing that Chinese stock-market speculators are the primary drivers of the global silver market, silver was still up 27% to the day year-over-year! Over this same period of time the S&P 500 rose just 7% and change. Thus silver investors, long-term buy-and-holders, certainly had nothing to fear in early March. At Zeal we started recommending physical silver as an investment back in late 2001, at $4.20 per ounce.

But speculators caught in silver's fast 14% decline were certainly scared. I received a surprising number of e-mails on silver over the last couple weeks, which is why I wrote on it today. Interestingly though, even for gunslinging traders the tactical silver trends look excellent on balance. Considered in context there is nothing to fear.

In the beautiful new silver uptrend that has been relentlessly powering higher since June, silver has rallied and retreated three separate times now. The rallies lasted two to three months each and carried silver from its lower support to its upper resistance. The mid-upleg pullbacks, as is silver's style, were much faster and usually only took a matter of weeks to drag the metal back down to its lower support. The result of all of this was a series of higher highs and higher lows, a textbook-perfect upleg.

The mid-upleg rallies ran 34%, 32%, and 21% respectively. The latter didn't quite make it up to resistance as shown above so I suspect it met an untimely demise as it was swept aside in the Chinese-stock-market-plunge-induced mini-panic. When particularly emotionally-compelling news hits the wires, it is not at all uncommon for it to briefly short-circuit prevailing sentiment and lead to temporary unforeseen swings.

After each of these mid-upleg rallies there was a sharp correction, in typical silver fashion. Over the short-term silver prices are so dominated by speculators that prices fall fast when these speculators flee. The three sharp pullbacks in silver since this upleg began ran 18%, 14%, and 14% respectively. And as you can see on this chart, there was nothing out of the ordinary about our latest sharp pullback. It had a similar magnitude and similar duration to its two predecessors making it look quite ordinary and unimpressive.

Now when any price swings unexpectedly and is apparently driven by unforeseen news, the first thing speculators should do is evaluate its technical impact within proper strategic context. In silver's case several weeks ago all that happened is the metal fell back down near support, just as it had done prior times in this upleg, and then stabilized. Moves within a well-established uptrend channel, no matter how sudden or sharp, are seldom worthy of concern.

And perhaps most exciting of all is where silver ended up when it emerged from this minor scrum. Silver fell right to its uptrend support line and remained above its 200-day moving average. The former, of course, is where past silver pullbacks within this upleg have ended and powerful new rallies have begun. If you want the highest-probability-for-success time to add new long silver positions within an upleg, it is when the metal is plumbing support like today.

And within a far broader strategic bull context, the best times to buy within an ongoing secular bull are when a price retreats back near its 200-day moving average. This is especially the case for long-term investors who plan on deploying capital in silver for years. Time your buying to occur when silver is near its 200dma as it is today and your entry points on balance will be far superior to haphazard buying timing.

With silver looking fantastic and very bullish over both the short-term and long-term time horizons, now looks like as high-of-probability-for-success time as any to add new long silver positions. If you are a conservative long-term investor, you can call up your favorite coin dealer and buy new physical silver positions. Our favorite type of physical silver at Zeal has always been old US 90%-silver coins, bags of "junk" silver.

Speculators can consider going long silver futures and silver futures options, as well as silver stocks and silver-stock options. Personally I prefer the stock side of this game to the futures side for a variety of reasons. There are many more stocks to choose from, much more imperfect information, and a far greater proportion of naïve traders in silver stocks than in silver futures. These combine to create more pricing anomalies that we can exploit in elite silver stocks than exist in the singular silver futures markets.

And of course silver stocks have fantastic profits leverage to the silver price. Profits growth and hence ultimate stock-price performance in the best-performing silver stocks will utterly dwarf that of silver. They should even be much larger than the gains won in futures using maximum leverage. Of course there are countless company-specific risks in stocks that don't plague futures, but bearing these is just the price of shooting for truly legendary gains.

The biggest challenge with silver stocks is picking the right horses to bet on. Not only do you have to have a good grasp of where silver is within its tactical silver trends so you can time your buys well, but you have to wade through oceans of information to find the highest-potential plays in which to deploy. This task is Herculean and intimidating, as there are literally hundreds of publicly-traded silver stocks worldwide. Burning off the dross takes an enormous amount of time and knowledge.

Thankfully at Zeal we are blessed to study the markets full time to support our own personal trading, so we are constantly evaluating stocks to find the very best fundamental prospects. We used to keep all our fundamental research internal and merely use it as the basis to recommend new trades to our subscribers, but demand for pure fundamental research was high so we decided to start selling it a year ago. We launched a new business line, Zeal Reports, to formally offer our deep fundamental research.

Just this week my business partner Scott Wright finished months and hundreds of hours of research into the world's silver stocks. He profiled our 20 favorites out of the hundreds in the world in a brand-new Zeal Favorite 20 Silver Stocks Research Report now for sale. It is fascinating reading. These 20 silver stocks are the elite population from which we are going to choose new silver trades in our newsletters and buy into personally. Ranging from large to small, investment-grade to hyper-speculative, they all have excellent fundamental prospects and tremendous potential to thrive with silver.

So if you are interested in understanding our favorite silver stocks to bet on for the continuation of this upleg, which is likely to accelerate considerably once enthusiasm finally builds, please buy our new report today. It will save you hundreds of tedious hours of wading through mind-numbing SEC reports, financial statements, project documentation, websites, and marketing propaganda. We did the hard work so you don't have to.

We also plan to recommend specific silver stocks out of this report in our acclaimed monthly newsletter in the future as long as silver's technicals remain favorable for buying. Please subscribe today if you don't want to miss the next stage of this silver upleg, which should be the larger one if long-lost silver euphoria finally returns.

The bottom line is the tactical silver trends look fantastic today, despite the turbulence of several weeks ago. Silver is not driven by the fortunes in the Chinese stock markets, but by its worldwide supply and demand fundamentals which remain incredibly bullish. Any setbacks within such a fundamental backdrop will only be temporary, great opportunities to add new long positions.

Since silver is such a relatively tiny market, its ultimate gains in this secular bull will probably far exceed gold's just as happened in the 1970s. By adding long positions whenever silver is near well-established support zones as well as its 200dma, such as today, both investors and speculators stand to reap truly legendary gains by the time this bull ultimately matures.

Adam Hamilton, CPA
Zeal LLC.com

Do you enjoy these essays? Please help support Zeal Research by subscribing to Zeal Intelligence today! &www.zealllc.com/subscribe.htm

If you have questions I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/financial.htm for more information.

Thoughts, comments, flames, letter-bombs? Fire away at & zelotes@zealllc.com Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I WILL read all messages though, and really appreciate your feedback!

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing delivered from an explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to subscribe.

Copyright © 2000-2007 Zeal Research

Energy and Private Equity, Part II - Byron King

by Byron King

What prompts me to write about PE is its current relation to investments in the energy arena. According to one authoritative estimate by Cambridge Energy Research Associates (CERA -- which has been so opposed to Peak Oil theory, but which also does quite good work in other areas), the U.S. electric power sector will require about $800 billion of new investment by 2020. By way of comparison, the current net book value of the U.S. power sector is about $700 billion. So right away, the discerning mind can figure out that it will require significant outside investment to keep the lights on in the U.S. over the next 15 years. Much of that new investment will probably come from PE.

Private Equity and Energy Investment

One large deal that is in the news is the proposed, $45 billion-plus takeover of the Texas utility TXU by a group composed of PE players KKR and Texas Pacific Group. The PE players want to take TXU private, and run the power houses and distribution channels themselves. The interesting angle of the takeover is an “environmental” play, as well as a financial offer for the stock. That is, the PE group is promising to cancel up to eight proposed pulverized-coal power plants that TXU has previously announced its intent to build. By changing TXU’s management and strategic direction, the proposed PE takeover will focus on using a mixture of conservation methods and new, more “green” generating capacity, to lower the impact of TXU power-generating activities on the environment in general and the atmosphere in particular. Will it work? I suppose that anything can work, if the management and funding are present. And anything can fail to work, where the will, ways, and means are lacking.

Energy Trends

The point to keep in mind is that PE is recognizing some ominous energy trends in the U.S., and beginning to do what smart money often does best, which is to take advantage of the situation. That is, some really big money is now stepping up to the plate. Here is a summary of what is going on.

For the past two decades, there has been strong demand growth in the U.S. for electricity and natural gas, both of which are considered relatively clean and convenient energy sources at the point of use. But due to chronic underinvestment in the U.S. energy infrastructure over the same past two decades and more, reserve margins for electricity and natural gas have been tightening. There is very little in the way of “spare” capacity at the lower-cost, “base-load” level, and in many instances, the spare capacity that does exist lacks the transmission facilities to move it from where it is to where it is needed. (This is true even with renewable energy supplies, such as wind power. Almost all wind farms are located in rural areas, far from the urban load. So there is a need for new transmission infrastructure to move the electricity from the point of generation to the area of use.) The bottom line is that on both the hottest and coldest days of the year, the U.S. power system is stretched to its limit as was, for example, demonstrated so dramatically by the cascading power outage that affected the Northeast U.S. and Ontario in August 2003.

Thus, there are looming requirements in every region of the U.S. for new-build decisions in the fields of basic energy supply and power production, plus generation, transmission, and distribution, as well as overall requirements to upgrade systems for safety and reliability. But capital costs for construction are soaring due to worldwide inflation in the prices of many basic elements such as cement and steel, machinery and pipe, copper wire and welding rods, and, of course, the basic engineering and project management talent that brings it all together.

This situation dovetails with a large number of immensely complicated issues of environmental regulation, rate-base calculations (necessary for determining appropriate ROI), and design and technology assessments. And through it all, the past few years have also been ones of severe commodity and price volatility, both due to improper market manipulation (such as what Enron did with electricity in California early in the decade), and geological factors such as Peak Oil and Peak Gas in North America. Add to this the growing scientific and political concerns about the emission of greenhouse gases, which is leading to calls to burn less carbon. Things are just plain complex. No, make that really complex.

The View of Private Equity

I do not propose to speak on behalf of all private equity, nor to praise PE more than it deserves. But in general, the situation that we are describing lends itself to some of the self-described advantages, if not virtues, of PE.

The convoluted situation in supply, new-build decisions, construction, and overall regulation is causing many existing players in the energy business to re-evaluate their stakes and revise their business strategies. Recently enacted regulatory and accounting rules are forcing many publicly held companies to bear costly burdens that they would just as soon avoid (Sarbanes-Oxley reporting requirements come to mind.) On the best of days, many firms face a shortage of capital, yet they are held accountable by the public and the regulatory agencies for any failings or lack of results. So there are incentives simply to, as the saying goes, “monetize assets,” and certainly to get rid of unnecessary or underperforming assets.

The “For Sale” signs for energy infrastructure are beginning to come out, publicly and, on numerous occasions, not so publicly. And PE is standing there, with checkbooks in hand -- after the obligatory due diligence, of course.

PE can afford to, and in many respects must, focus on cash return, as opposed to mere book income, and lacks the prurient fixation on quarterly results that drive many bad decisions by publicly held companies in other instances. Most of the funds that go into PE are locked up for terms ranging from five years to as long as a decade or more. So PE managers can be patient and deliberate in making their investment plans over time frames that approach a decade. PE can also accelerate development decisions, because it is spending its investors’ money, and not what is referred to as the “ratepayers’” money, and, when appropriate, PE can make efficient use of hedging.

Again, I am not making a blanket endorsement of any one investment method or another. But I believe it is worth discussing that PE advertises a focus on long-term value creation that is often absent in the quarterly driven world of publicly traded companies. My view is that whether a company is PE or publicly traded, much of any firm’s success depends upon the kind of people who are making the decisions. Your success or failure always depends on how the assets are managed and how the people perform.

One Great and Historic Success

One great historical example of a person who took a nest egg and, through a then-prevalent form of PE, turned it into the foundations of a fortune was Andrew Carnegie and his investment in the Columbia Oil Co. in the early 1860s. I wrote about this in another article in Whiskey & Gunpowder, entitled “Columbia, the Gem of the Oil Patch.” Carnegie took his earnings from his job with the Pennsylvania Railroad and, in an early form of PE, bought into an oil company near Titusville, Pa. The Civil War era gains and dividends from the Columbia Oil Co. provided Carnegie with the money he used to change careers and get himself into the steel business. The rest is history. You can look it up.

Until we meet again,
Byron W. King

for Whiskey and Gunpowder

Bio: Byron W. King is a practicing attorney in Pittsburgh, Pennsylvania, with real clients and real law books on his shelves. After graduating from Harvard University more years ago than he cares to discuss, Byron worked as a geologist in the exploration and production division of a major international oil company. He has followed developments in the oil and gas industry for almost three decades. However, in the process of seeking more excitement than a man can safely obtain from flaring over-pressurized gas whipping out of a 21,000-foot well, Byron also served for many years in both the active and reserve components of the United States Navy.

While in the sea service, Byron logged more flight time in tactical jet aircraft than George W. Bush, as well as 127 more carrier landings than the recently-re-elected commander in chief. Among other assignments, Byron has served as a field historian with the Navy.

Byron looks at current events, economics, and politics through the lens of history. He brings to the table a unique perspective that incorporates many millions of years of the Earth’s geologic history, and blends its significance into the more recent, man-made kind of tale.

Energy and Private Equity, Part I - Byron King

by Byron King

I RECENTLY HAD occasion to deal with some people who are involved in the "private equity" (PE) side of the energy business. I am bound by a confidentiality agreement not to say too much about the details of their project. But I was surprised at how much money these people controlled, the quality of the management team, and the scope of their ambitions in the energy arena. I know that many of our readers are financially sophisticated and probably know quite a bit about the topic I am discussing. But I also thought that some Whiskey & Gunpowder readers might be interested in learning more about PE and other investment instruments. So that is the subject for today.

What Is Private Equity?

What is PE? In a broad and general sense, PE is a term that commonly refers to any type of "equity" investment in an asset, but in which the underlying equity does not trade freely on a public stock market like the New York Stock Exchange or Nasdaq. Also, in a general sense, PE refers to the manner in which the funds have been raised, namely on the private markets. Many people use the term "private equity" interchangeably with the term "private equity funds," which are committed pools of managed capital, raised from private sources.

Currently, some PE funds invest across a broad spectrum of industries. KKR, Texas Pacific Group, Blackstone, and Carlyle are well-known names in this area, and there are many others. Some PE funds focus on investments in particular industries, such as energy, technology, or health care. In many instances, PE firms invest in companies listed on public exchanges, by buying up the stocks and taking them private. But PE might also purchase a company from private holders, such as an individual or family (often as part of a succession plan), or from a closely held group of owners who want to cash out.

Spectrum of Investment Methods: Not a Hedge Fund

PE funds are part of a spectrum of investment methods. For comparison, let's look at how PE differs from hedge funds. Hedge funds are vehicles that work with an investment of pooled funds, almost always open only to "accredited investors." (See the end of the article for a short discussion of accredited investors.)

PE tends to take a relatively long-term view of investing, such as a four-eight-year horizon (and sometimes even longer), for reasons that we will review toward the end. In contrast, a hedge fund usually is focused on short-term trading opportunities, with traders using instruments such as arbitrage, swaps, derivatives, and other forms of financial leverage. In many instances, and again unlike the case with PE, the hedge fund traders might have little fundamental knowledge of the companies or industries in which they are conducting their trading, but to them it does not matter. The hedge fund traders are following the trading action, the price movement, and the overall market volatility in an effort to capture short-term gains.

Hedge funds usually charge a performance fee against both the principal within the fund, and any gains over time. Despite much criticism of their short-term view of just trading in and trading out of stocks and other ownership instruments, hedge funds have grown very much in size and influence on both the public securities and private investment markets. (Last summer, I discussed hedge fund investments in the mining business, in an article entitled "Money, Mines, and Nickel," published Aug. 1, 2006.)

Private Equity, Ventures, and Places Where Angels Tread

PE also differs from venture capital (VC). PE focuses on more mature companies or business efforts. VC, in contrast, invests in the early stage of startup enterprises. Thus, there is relatively more risk associated with the VC investment. Typical VC is provided by professional or institutionally backed outside investors, infusing cash in exchange for shares (and often one or more seats on the board) of the company that is being assisted. VC finds its place in the market because the enterprise under consideration is usually too risky for standard capital markets or sizeable bank loans. But while VC is usually high risk, it can offer the potential for above-average returns.

VC funding is a step up from what is called the "angel investor." An angel is an individual or pool of funds that provides capital for a business startup, except it does so at an earlier stage than does the VC. That is, someone starts a business in the proverbial garage, or otherwise on a shoestring and a prayer. Not a few businesses have been started using the line of credit on a founder's personal credit card. Angels and their capital are said to fill the gap in startup financing, between what are known as the "three Fs" (friends, family, and fools) of seed money, and the more discriminating VC.

As most people who have ever tried can attest, it is usually difficult to raise more than a few hundred thousand dollars from friends and family. (You might get lucky with the fools, but even that will eventually come to an end.) At some point, the fact is that red ink is thicker than blood, and your friends and family, and even the fools, will shut you off. The standard in the industry is that most VC funds do not consider investments under about $1-2 million. Thus, angel investment is the common second round of financing, in the range of about a quarter million to couple of million dollars, for startup companies with great hope, if not high growth prospects. Typical for startups, angel investments carry high risk and need to offer very high returns on investment (ROI).

The fact is that a large proportion of angel investments are completely lost when early-stage companies fail. Thus, professional angel investors look for investments that have the potential to return at least 10 or more times their original investment within about five years. Angels tend to be an expensive source of funds, but cheaper sources of capital such as bank loans are usually not available for most early-stage ventures. And after the initial five-year development period, the angel is looking for an exit strategy such as an infusion of cash from VC, or an initial public offering of stock (IPO) or other acquisition. That "other acquisition" may also be a sale to PE.

Private Equity Takes Over

So whether it is a former startup that grows and eventually sells out to PE or a mainstream, old-line firm that gets bought out from a major stock exchange, PE moves in to take over. Private equity funds typically control management of the companies in which they invest. Often, PE brings in new management teams that focus on making the company more valuable. At least that is the idea.

Critics, of course, have a less charitable view, which can be boiled down to the accusation that PE takeovers are little more than "strip and flip" operations. That is, the new guys take over and promptly lay off lots of personnel (usually, goes the claim, they lay off the ones who know how to run the business). Then the new guys sell the good stuff, load the company up with debt, and bail out by selling the corporate carcass to gullible investors who are too dumb to know any better. There have been quite a few examples of this kind of relatively destructive PE management activity in the past few years (one fast-food chain that shall remain unnamed offers a Whopper of an example), but then again, one can cite publicly traded companies that have financially engineered themselves into the dirt as well (Sunbeam and the mercurial "Chain Saw" Al Dunlap come to mind). As is the case with many things in this world, however, the truth depends upon the situation. Nothing is all good or all bad.

In the second part of this two-part article, I will discuss further the role of private equity in the development of energy resources in the U.S.

Until we meet again,
Byron W. King

for Whiskey and Gunpowder

P.S.: There are substantial risks involved in placing funds with relatively unregulated, complex, and leveraged investments such as private equity. Hence, these types of investment instruments (along with the likes of venture capital or hedge funds) are normally open only to professional, institutional, or otherwise accredited investors. The restrictions are often implemented through limits on participating investors or minimum investment amounts.

The criteria established by the U.S. Securities and Exchange Commission (SEC) are as follows:

Any director, executive officer, or general partner of the issuer of the securities being offered or sold, or any director, executive officer, or general partner of a general partner of that issuer

Any natural person [i.e., not a corporation] whose individual net worth, or joint net worth with that person's spouse, excluding principle residence, at the time of his purchase exceeds $2,500,000

Any natural person who had individual income in excess of $200,000 in each of the two most recent years or joint income with that person's spouse in excess of $300,000 in each of those years and has a reasonable expectation of reaching the same income level in the current year

Any trust with total assets in excess of $5,000,000, not formed for the specific purpose of acquiring the securities offered, whose purchase of the securities is directed by a person who has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of the prospective investment

Any organization that was not formed for the purpose of acquiring the securities being sold, with total assets in excess of $5,000,000

Any entity in which all of the equity owners are accredited investors.

Bio: Byron W. King is a practicing attorney in Pittsburgh, Pennsylvania, with real clients and real law books on his shelves. After graduating from Harvard University more years ago than he cares to discuss, Byron worked as a geologist in the exploration and production division of a major international oil company. He has followed developments in the oil and gas industry for almost three decades. However, in the process of seeking more excitement than a man can safely obtain from flaring over-pressurized gas whipping out of a 21,000-foot well, Byron also served for many years in both the active and reserve components of the United States Navy.

While in the sea service, Byron logged more flight time in tactical jet aircraft than George W. Bush, as well as 127 more carrier landings than the recently-re-elected commander in chief. Among other assignments, Byron has served as a field historian with the Navy.

Byron looks at current events, economics, and politics through the lens of history. He brings to the table a unique perspective that incorporates many millions of years of the Earth’s geologic history, and blends its significance into the more recent, man-made kind of tale.

The Gold Standard in Theory and Myth

Ludwig von Mises Institute

Don't Blame the Market for Housing Bubble - Ron Paul

by Dr. Ron Paul ( U.S Congressman )

The U.S. housing market, long considered vulnerable by many economists, is now on the verge of suffering a serious collapse in many regions. Commodities guru and hedge fund manager Jim Rogers warns that real estate in expensive bubble areas will drop 40 or 50%. Mainstream media outlets like the New York Times are reporting breathlessly about the possibility of widespread defaults on subprime mortgages.

When the bubble finally bursts completely, millions of Americans will be looking for someone to blame. Look for Congress to hold hearings into subprime lending practices and “predatory” mortgages. We’ll hear a lot of grandstanding about how unscrupulous lenders took advantage of poor people, and how rampant speculation caused real estate markets around the country to overheat. It will be reminiscent of the Enron hearings, and the message will be explicitly or implicitly the same: free-market capitalism, left unchecked, leads to greed, fraud, and unethical if not illegal business practices.

But capitalism is not to blame for the housing bubble, the Federal Reserve is. Specifically, Fed intervention in the economy-- through the manipulation of interest rates and the creation of money-- caused the artificial boom in mortgage lending.

The Fed has roughly tripled the amount of dollars and credit in circulation just since 1990. Housing prices have risen dramatically not because of simple supply and demand, but because the Fed literally created demand by making the cost of borrowing money artificially cheap. When credit is cheap, individuals tend to borrow too much and spend recklessly.

This is not to say that all banks, lenders, and Wall Street firms are blameless. Many of them are politically connected, and benefited directly from the Fed’s easy money policies. And some lenders did make fraudulent or unethical loans. But every cent they loaned was first created by the Fed.

The actions of lenders are directly attributable to the policies of the Fed: when credit is cheap, why not loan money more recklessly to individuals who normally would not qualify? Even with higher default rates, lenders could make huge profits simply through volume. Subprime lending is a symptom of the housing bubble, not the cause of it.

Fed credit also distorts mortgage lending through Fannie Mae and Freddie Mac, two government schemes created by Congress supposedly to help poor people. Fannie and Freddie enjoy an implicit guarantee of a bailout by the federal government if their loans default, and thus are insulated from market forces. This insulation spurred investors to make funds available to Fannie and Freddie that otherwise would have been invested in other securities or more productive endeavors, thereby fueling the housing boom.

The Federal Reserve provides the mother’s milk for the booms and busts wrongly associated with a mythical “business cycle.” Imagine a Brinks truck driving down a busy street with the doors wide open, and money flying out everywhere, and you’ll have a pretty good analogy for Fed policies over the last two decades. Unless and until we get the Federal Reserve out of the business of creating money at will and setting interest rates, we will remain vulnerable to market bubbles and painful corrections. If housing prices plummet and millions of Americans find themselves owing more than their homes are worth, the blame lies squarely with Alan Greenspan and Ben Bernanke.

Ron Paul

Congressman Ron Paul of Texas enjoys a national reputation as the premier advocate for liberty in politics today. Dr. Paul is the leading spokesman in Washington for limited constitutional government, low taxes, free markets, and a return to sound monetary policies based on commodity-backed currency. He is known among both his colleagues in Congress and his constituents for his consistent voting record in the House of Representatives: Dr. Paul never votes for legislation unless the proposed measure is expressly authorized by the Constitution. In the words of former Treasury Secretary William Simon, Dr. Paul is the "one exception to the Gang of 535" on Capitol Hill.

A Clear and Pheasant Danger - Jim Amrhein

By Jim Amrhein

Though I know a lot more about it than the average tree-spiking enviro-Nazi, I’m by no means an expert on alternative energy sources. My colleagues Byron King and Eric Fry, as examples, are far more versed than I am on where we’re headed energy-wise -- and which among the newest technologies are realistic, viable, and sustainable replacements for oil.

However, one doesn’t have to be an expert to see a lot of very obvious flaws in the “ethanol intoxication” that so many Americans (including our president) seem to be so blindly buzzing on these days. Ethanol’s critics claim that current methods of producing the alcohol for use as a motor fuel represent little, if any, actual energy benefit on the balance…

Even the most optimistic numbers paint a picture of marginal benefits: about 1.25 units of bioethanol energy yielded per unit of fossil fuels consumed to produce it.

The most zealous (or ignorant, depending on how you look at it) ethanol advocates are convinced that even this meager benefit is worth revamping America’s vehicle industry and vehicular fuel infrastructure. Tomorrow’s technologies will be more efficient in the transformation of fossil energy to bioethanol energy, they insist. And the fringe benefits, they like to trumpet, include a reduced dependence on foreign oil and a cleaner environment…

This last bit may be technically true -- since ethanol does indeed burn cleaner than gasoline. However, most folks who don’t know any better equate ethanol’s “cleaner” emissions with “less global warming” emissions. This is a myth that the pro-ethanol (anti-oil) crowd does nothing to dispel among the throngs of their Prius-driving, Gore-worshipping supporters.

The reality, however, is that ethanol still produces copious amounts of carbon dioxide when burned, much like gasoline. And since it yields LESS mileage and horsepower than gasoline in typical internal combustion engines (which means more of it must be used to go the same distance under the same power), it’s arguable that ethanol consumption is worse for the environment than gasoline -- from a “greenhouse gas” standpoint. Ethanol is really only cleaner in the sense that it produces far less carbon monoxide than gasoline consumption…

Don’t get me wrong: Less carbon monoxide is a good thing for the environment, in that it makes the air less toxic to breathe, especially in smog-choked urban areas. But to say, as so many do these days, that burning ethanol in place of gasoline would help to curb global warming -- assuming the truth of the far-from-proven notion that it’s caused by man-made CO2 emissions -- is just plain wrong. The grand (or tragic) irony that no one in the pro-ethanol camp wants their army of tree-hugger cheerleaders to know is this:

Even if ethanol did represent concrete and significant economic or atmospheric benefits from reducing U.S. oil consumption, an aggressive domestic movement toward the large-scale adaptation of bioethanol vehicular fuels almost certainly represents a net environmental -- and quite likely fiscal -- NEGATIVE.

And it’s already starting…

Feathers Fly as Croplands Creep

The current tide in ethanol theory is toward the mass adaptation of “bioethanol” alcohol that’s made from crops like corn (even though as source material goes, corn is relatively poor for ethanol production). What most people don’t realize is that even if domestic demand for vehicle fuel were to remain static in the future though a series of magical quantum leaps in vehicle fuel efficiency, it would take far more acreage worth of arable farmland than is currently allocated to corn growth in the U.S. to generate enough corn to make bioethanol even debatably worthwhile…

This means that in order to make the switch to ethanol, MORE land across the “fruited plain” would have to be cleared, cultivated, fertilized, sprayed with pesticides, and converted into cropland. The net result is a lot of extra pollution of waterways, greater soil erosion, increased silting and warming of stream and river fisheries, very likely a certain amount of deforestation (quite a quandary for tree-huggers) – and, last but not least, large-scale destruction of America’s wildlife habitat.

In other words, an environmental nightmare.

These downsides are already being felt, even though the mass adaptation of bioethanol is still in its infancy. Case in point: South Dakota’s pheasant population.

Numbers of ring-necked pheasants, that perennial favorite of American game birds (ironically imported from Asia in the late 1800s), have boomed in South Dakota over the last 20 years -- due in no small part to the establishment of the USDA’s Conservation Reserve Program. For those who don’t know, the CRP is a comparatively modest subsidy program that grants financial and technical assistance to farmers and landowners who are willing to restore easily eroded and polluted agricultural acreage to a natural state of forests, wetlands, grasslands, and riparian “buffer zones.”

These lands are invaluable habitat for all manner of wildlife -- but especially upland game bird species like quail, pheasants, turkeys, and other species. According to USDA data, pheasant populations alone have jumped 22% for every 4% increase in CRP lands within known pheasant habitat zones…

Now, you may not think that, on the balance, increasing the pheasant population in Midwestern and Plains states is anywhere near as economically important as planting more corn for ethanol. But in South Dakota -- the nation’s pheasant hunting capital -- the numbers make a pretty powerful case. Every year:

Pheasant hunting pours $135-153 million into the Mount Rushmore state’s economy
Nonresident hunters -- the vast majority of which come to South Dakota to hunt pheasants -- spend $143 million on retail-priced gear and supplies
Upland bird hunting in South Dakota (again, the bulk of which is for pheasants) supports over $51 million in wages paid, over $6 million in fuel and sales taxes, and over $4 million in federal income taxes.

Bottom line: Pheasant hunting and related tourism is just one example of a major economic boon to not just South Dakota, but many other U.S. states. And a huge percentage of this money -- not to mention a huge percentage of the wildlife -- is facilitated by privately owned lands that are part of the CRP land restoration program…

But now, because of booming demand for a fuel product that’s driven by misguided notions about its environmental benefits, a lot of this land may soon be in jeopardy. According to an Associated Press article from Feb. 7, President Bush’s latest budget proposal would back burner CRP, freezing new enrollments in the program through 2008.

The USDA expects this move to result in an 8% decline in CRP acreage nationwide over just the next 21 months as farmers eager to capitalize on the ethanol-charged price of corn revert this acreage back to croplands. The agency predicts corn will top $3.60/bushel this year, an 80% increase over 2005’s $2/bushel price.

And since Congress’ 2005 energy bill stipulates that the U.S. nearly double its production of ethanol by 2012, this price will only keep going up. So will the number of acres that are pulled out of CRP’s protection and converted back into waterway-polluting, erosive, wildlife-barren, pesticide-laced cornfields.

Amber Waves of Greed

It’s easy for politicians to get behind ethanol. For them, it’s a solution to several problems. Ratcheting up rhetoric about reducing American dependence on foreign oil opens the door for BOTH increased domestic petroleum production and the pursuit of new energy sources. One of these (bioethanol) also boosts the government’s bottom line in at least three ways: less money spent on CRP; less money spent in farm subsidies spurred by historic overabundances of corn; and greater revenue from now-booming farms’ income taxes, refinery taxes, and, yes, even fuel taxes (ethanol can’t be pipelined -- it must be trucked to wherever it’s being blended or used)…

And because of the widespread misapprehension that ethanol adaptation is a net positive for the environment, politicians also get to appear “green” -- while pocketing lots more of the only kind of green that really matters to them.

So no wonder Bush and friends are all about ethanol. Big Oil isn’t necessarily hurt by the movement (it may even be helped domestically), Big Agro gets a major boost from it, and the tree-huggers are appeased even as they LOSE a major battle in their fight to protect the environment. And as usual, the feds laugh all the way to the bank!

This brings me to my final point. One of the great ironies about today’s typically uninformed environmental zealotry comes when conflicting conservation goals meet in the political arena. In America today, we’re poised ringside at the opening bell of such a brawl, where one very real species of bona-fide conservation is pitted against another of a largely theoretical stripe…

In the red-white-and-blue corner, we have a champion fighting for most Americans’ desire for cleaner waterways; the restoration of wetlands, forests, grasslands, and buffer zones; wildlife conservation and expansion; and the large-scale preservation of myriad recreational opportunities (especially hunting and fishing, but not limited to them) -- along with their enormous and wide-reaching economic benefits.

And in the supposedly “green” corner, we have a champion who claims to be fighting to break the back of foreign oil for everyone’s benefit -- but only truly representing the economic interests of a few in the process: Big Agro, Big Oil (especially if it results in more domestic drilling), and Big Guv.

I hope that at the final bell, our grand countryside is still dotted with woodlots, wetlands, rolling grassy plains, hedgerows, briar patches, thickets, and dense river drainages where wildlife abounds -- and where clear, cool, unpolluted-by-fertilizer streams and rivers are still teeming with fish…

But I fear it’ll be one great lifeless sea of corn, where no man treads with dog or gun and where no beast larger than a groundhog flourishes -- interrupted only by highways teeming with streamlined, generic micro-cars running on $3-a-gallon ethanol fuels.

Does that sound like “America the Beautiful” to you?

Wringing necks for ring-necks,

Jim Amrhein
Contributing editor,

Whiskey & Gunpowder

Jim Amrhein is a cocksure, venomous disbeliever in the ability of governments to do much of anything right-especially compared to the vast, yet grotesquely shackled power of the American entrepreneur. Degreed in Political Science, Jim is a widely published columnist on political issues, both under his own byline and as a ghostwriter for one of America’s most outspoken critics of the corrupt farce our elected officials have made of the pure, evolving, and self-correcting system they’ve been entrusted to maintain.

Peter Schiff Interview

Euro Pacific Capital

Eve of a Bear? - Adam Hamilton

It is hard to believe that only several weeks ago the US stock markets were carving exciting new highs and complacency reigned supreme. The S&P 500 and NASDAQ were trading at their highest levels since 2000 and 2001 respectively while the Dow 30 soared well into new all-time record territory.

It seemed like the best of times, but the markets were getting overextended to the greed side and it was only a matter of time until the tide turned. Ever-vigilant, contrarians have been steadfastly warning about the dangers inherent in the roaring stock markets for some time. On the Friday just days before the markets topped I wrote the following in an essay.

"And the general US stock markets almost certainly remain mired in a secular bear despite the cyclical bull we've seen over the last four years. Such secular bears tend to last seventeen years or so in history, but ours only started in 2000 so it is almost certainly not over yet. And it is totally normal and expected for powerful cyclical bulls to erupt in the midst of these long secular bears to keep hope alive and seduce the bulls into complacency ahead of the next brutal downleg."

One of the great ironies of the financial markets is the tragic fact that no one wants to listen to contrary opinions when they are the most valuable and could prevent the most harm. Back in October I wrote an essay after the Dow 30 hit its first record highs. The conclusion? "Our current cyclical bull is long in the tooth and likely to roll over soon into a cyclical bear." Yet because of the rising stock markets few were interested in the mushrooming risks so I shifted my research focus back to commodities.

But today, with the Dow 30 down 5.8% at worst so far, finally investors are once again willing to hear a contrary opinion. Thankfully it is certainly not too late. While the selloff we've seen to this point may have felt steep, that was only because the markets have been bereft of downside volatility for so darned long now. If what we've seen so far was just the eve of a bear, then 9/10ths of the potential selling likely still remains ahead.

On what basis can such a grim hypothesis be constructed? Markets tend to move in great cycles throughout history, long bulls followed by long bears. These cycles are best measured by general stock-market valuations, or P/E ratios. The Long Valuation Waves each run about a third of a century in duration, with the first half being a great bull witnessing rising valuations and the second half being a great bear suffering through falling valuations.

One doesn't have to be a math professor to figure out that one-half of a third-of-a-century cycle is about 17 years. Our last Long Valuation Wave peaked in early 2000 and we have been in a secular bear since. But this is only 7 of the 17 years of secular bear that we should expect. Of course conditions haven't felt bearish since the stock markets have been in a strong cyclical bull since 2003, but this perception is deceiving.

As of their recent February highs that so captivated the bulls, the S&P 500 was still down 4% since 2000, the NASDAQ still down a whopping 50%, and the Dow 30 up a modest 9%. These are catastrophically bad returns for 7 long years even before the pernicious effects of inflation. The Great Bear that awoke back in 2000 is very much alive and well despite the powerful stock rally since 2003.

The primary reason that Great Bears last for 17 years is they do a masterful job of stringing the bulls along. They are not an endless grind lower, but instead a series of periodic multi-year downlegs (cyclical bears) punctuated by spectacular multi-year cyclical bulls. This pattern gradually turns the screws to the bulls, continually providing them with just enough hope so they stay fully invested until the very end. Long bear markets are the most masterful orchestration of naked psychological warfare that I have ever seen.

The best way to attempt to grasp this deadly mind game is to consider today's secular bear compared to the last Great Bear in stocks in the 1970s. The charts in this essay do just that. Lest you fear that I am one of the newly-minted weathervane bears jumping on this bandwagon, I first built this chart and wrote about it five years ago in March 2002. The Curse of the Long Trading Range is not a new concept by any means.

This chart shows today's Dow 30 since 2000 rendered in blue superimposed over the Dow 30 from the 1970s Great Bear rendered in red. Since it is general stock-market valuations that drive these secular bears, P/E ratios and dividend yields are noted at key technical points. Because it is easy to manipulate perceptions of scale and slope on charts by playing with non-zeroed axes, the small inset chart in the lower right shows the identical data with true zeroed axes for accurate visual scaling.

Unfortunately this comparison is rock solid and is not a cunning sleight of hand. The world's most elite blue-chip stock index has cut a path over the past 7 years that is virtually indistinguishable from the sorry one it trod back from 1966 to early 1973. And as you graybeards would probably rather forget to avoid dredging up the emotional trauma, 1973 and 1974 witnessed one of the worst cyclical bears in US financial-market history.

Man, the US military could sure learn a thing or two about psychological warfare from studying Great Bear markets! The red Dow 30 line from the 1970s shows an incredibly wild ride. The markets would grind relentlessly lower and spawn enormous losses. But just before total despair and capitulation selling set in, the bear would back off and gigantic bear-market rallies would erupt. These rallies sometimes turned into cyclical bulls lasting for years.

Then by the time the top of any particular cyclical bull arrived, when the Dow once again neared its 1966 highs near 1000, investors would totally forget all their bear-market-bottom agony and fears. Even worse, their memories were so short and their greed so unbridled that they would think a new secular bull was being born. Yet right when things looked the best and the markets neared or exceeded their old highs, the sadistic bear would spring his trap once more and unleash a brutal downleg that again spawned huge losses.

This cycle continued over and over again throughout the last Great Bear. By the time it ended in 1982, investors were so demoralized and hated stocks so much that major financial magazines ran covers declaring stocks dead as an investment. It was 17 years of exquisite psychological warfare designed to slowly boil the bulls without them knowing and ultimately slicing every last pound of capital out of their flesh.

I find that most investors tend to believe that bear markets are declining prices for long periods of time. This definition is technically true, but myopic. Secular bears are really long periods of time when the markets trade sideways on balance, huge cyclical bulls followed by devastating cyclical bears. It is this sideways trading that slaughters even the bravest buy-and-hold investors in the end. Imagine if the Dow 30 is still trading near 12000 a decade from now.

As mere mortals, we humans are really not allotted much time at all to build our fortunes. If the average investor finally starts getting serious at 30, and plans to retire at 65, he only has 35 years to multiply wealth. But if he is unfortunate or foolish enough to get trapped in a secular bear, he could lose nearly half of his entire investing lifespan and emerge with no nominal gains and big inflation-adjusted losses. The opportunity costs of letting capital languish without growing for 17 years are catastrophic.

Of course hindsight is 20/20, and no one would have waited 17 years for the Dow 30 to decisively break 1000 once and for all if they had known how long it would take. Unfortunately we appear to be in a very similar situation today. The Dow 30 has had 7 years since 2000 to make new highs and enter a new bull, but the sum total of its performance as of its recent February highs was a trivial 9% gain. A savings account would have done better with a tiny fraction of the risk!

Even worse, today the stock markets are at the same phase in this Great Bear where they rolled over into the brutal 1973 and 1974 downleg in the last Great Bear. Over the past two years or so especially the comparison between the 1970s Dow and today's Dow is uncanny. And heaping even more burning coals on the head of today's Dow, the valuation trends over the past 7 years are very similar to those of the 1970s too.

Both Great Bears started at high P/E ratios and low dividend yields. Then these key valuation metrics gradually declined throughout the bears. Indeed this is the purpose of bears fundamentally, to maul stock prices long enough for earnings to catch up with them. At the end of Great Bulls stock prices shoot stratospheric and disconnect with their underlying earnings. Then the long bears hold down stock prices long enough for earnings to finally catch up and make the stocks fundamental bargains again in the end.

One of the most persuasive and pervasive arguments on Wall Street these days is that we cannot be on the eve of a bear because today's valuations are so reasonable compared to where they were in 2000. This is certainly true. In early 2000 the Dow 30 was trading at 44.7x earnings and yielding only 1.0% in dividends, radically overvalued and bubbly. But at its latest interim top a few weeks ago it was only trading at 16.7x and 2.4%, not too far over historical fair value.

Yet back at the dawn of 1973, on the top edge of the cliff, the US stock markets were also trading at moderate valuations, 18.7x and 2.7%. These valuations are so close to each other despite the vast gulf of history between them that it is uncanny! This gives me goosebumps. Not only are today's stock markets at the same stage where the last Great Bear launched a brutal downleg, but they are at the same valuation level. Yikes.

The problem with Great Bears is that they do not just drive stocks from overvalued to fair-valued, but they ultimately drive stocks all the way down to deeply undervalued levels. So while 17x earnings today may seem far superior to 45x at the bubble top, and indeed it is, 17x is still a far cry from the 7x levels where Great Bears tend to end in history. Given today's levels of earnings what black depths would the Dow 30 need to plumb to hit 7x? 5150.

5150?!? Inconceivable? Preposterous? Absurd? Perhaps. But before you dismiss this thesis outright, I would humbly encourage you to humor me a little bit longer. Once again we seem to be dealing with a market phenomenon here that hasn't been seen for three decades. So it behooves us to examine the last Great Bear of the 1970s to see what degree of declines are possible 7 years into secular bears.

This next chart zooms in on the first chart. It shows our current Dow from 2002 superimposed over the Dow 30 from 1968 to 1974. This period of time encompasses an incredible cyclical bull in both markets and the wickedly ugly cyclical bear in 1973 and 1974. Once again note the disturbing symmetry between our markets over the past couple years with those of decades past.

Our current cyclical bull, if the highs of several weeks ago indeed prove to have marked its end, rallied 75% since October 2002. It was a tremendous run by any standards, and very profitable for those who rode it. The analogous cyclical bull in the last Great Bear ran 57% higher from July 1970 to January 1973. So while our current cyclical bull was bigger and longer, its technical behavior matched its ancestor's remarkably well.

But by early 1973, complacency had again grown great enough to tempt the Great Bear out of his slumber for another feast on the flesh of fattened investors. Over the next couple years gradual-yet-sustained selling on balance drove the Dow 45% lower, from over 1050 to under 600. The same 45% decline applied to the recent February highs would yield a Dow 30 trading near 7000 by the end of 2008!

Now 7000 is not 5150, but I think any investor would agree that either eventuality would be devastating. It would not surprise me one bit to see the next cyclical bear lop 50% off of the headline stock indexes. And provocatively, since the Dow is now following the last Great Bear's pattern so well, there are a couple ways to argue for the potential of a 50% loss.

For example, if you look at the first chart again, you will notice a striking symmetry between cyclical bulls and their immediately following cyclical bears. The steeper and longer the preceding cyclical bull, generally the steeper and longer the subsequent cyclical bear. Perhaps these symmetrical tendencies will hold in this secular bear as well.

Our current cyclical bull achieved a massive 75% run compared to 57% in the last Great Bear, or 1.3x. If we get a roughly symmetrical cyclical bear, it could hence conceivably grow to 1.3x the 45% loss in 1973 and 1974. That works out to a 59% decline! Yikes. Coincidentally that would carry us down to 5250, right near half fair-value levels at 7.0x earnings. While I suspect a 60% decline is far less probable than a 45% decline, it is still possible.

And talking strictly in valuation terms, the late 1974 cyclical-bear bottom happened near 8.3x earnings. Our Dow 30 today would have to fall near 6100, or down 52%, to hit a similar valuation at today's earnings levels. Realize I am not bandying about these numbers as exact predictions, merely trying to illustrate that a 50% decline in the Dow 30 is certainly within the realm of probability based on historical precedent.

So as these charts show, we probably are on the eve of a bear. Believe me, I don't like it any more than you do. It is far, far easier to make money in a bull market when a rising tide lifts all boats. Successfully trading in bear markets is vastly more arduous. It requires a huge amount of fundamental and technical research to pick the right stocks at the right times along with a hefty dollop of luck. I'd prefer bull to bear any day.

Yet, the markets don't care one bit what you or I want. They'll do whatever the heck they want to. If we want to survive and even thrive, we have no choice but to go with the flow. Fighting the markets is hopeless. And if you are going to ride the bear, there are two very dangerous misconceptions prevalent today that could do you great harm. Neither are supported by history, they are fabricated fears.

The first is that a cyclical bear is sharp and fast, like a crash. This couldn't be farther from the truth. The 1973 and 1974 cyclical bear took two full years to unfold, not a matter of weeks like a crash. After the initial selloff which was similar to what we've seen in the last several weeks, there were only two additional months with steep declines (marked above). So don't look for a crash, look for a long, demoralizing period of gradual selling on balance.

The second is that a stock bear will drag down everything with it. This myth has no basis in history and is solely the result of careless analysts extrapolating the behavior of the last few weeks out into infinity. During the 1973 and 1974 cyclical bear for example, gold literally tripled over the exact period of time that the stock bear ran. And elite gold miners' stocks followed gold up on balance over this period of time, not the general stocks down.

Both of these increasingly popular misconceptions are very important and I would like to address each in its own essay. But if some rookie with little knowledge of history who has never actively traded through any bear has tried to convince you that gold stocks are doomed with general stocks, I'd encourage you to read an essay on this very topic I wrote last month. Not all stocks fall in bear markets, and a gold mine is probably the best thing any investor can hope to own when general stocks are burning around him.

Realize that a Great Bear exists to drive down valuations to undervalued levels. Thus the most richly-valued stocks are the most susceptible to sharp declines. But stocks that are already undervalued, like many elite commodities producers, ought to thrive. They, along with precious-metals stocks, become real-asset-based safe havens in bears, beacons of refuge for flight capital to bid higher.

Just as we successfully traded the last cyclical bear from 2000 to 2002 to outstanding realized gains, we are going to do it again here if we are indeed on the eve of a bear. If you'd like to invest and speculate in the types of stocks that have usually thrived in past bears, please subscribe today to our acclaimed Zeal Intelligence monthly newsletter. It explains what stocks we are trading and why, truly cutting-edge research.

The bottom line is the odds are rising that we are indeed in the eve of a new cyclical bear. If this particular specimen follows precedent, the Dow 30 could fall 50% or so over the coming two or three years. Prudent and careful investors and speculators will thrive, but those caught unaware will be utterly slaughtered. Bears are brutal and unforgiving times to enter the markets armed with anything less than the best knowledge and research.

Cyclical bears within secular bears are not fast and sharp crashes, but long slow demoralizing grinding affairs that unfold over years. As paper assets are relentlessly shredded in these ugly events, real assets like commodities tend to shine. Like a minefield, a bear can be successfully navigated and yield big profits if you are careful and meticulous.

Adam Hamilton, CPA
Zeal LLC.com

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When Too Many Investors Think Alike, Nobody is Thinking! - Marc Faber

by Marc Faber.

“As a general rule, it is foolish to do just what other people are doing,
because there are almost sure to be too many people doing the same thing.”

William Stanley Jevons
(1835–1882)

INTRODUCTION

A friend of mine, Marcel Tjia, whose father was the founder of Indonesia’s PT Astra Group and who had the misfortune to work for me when I ran Drexel Burnham Lambert’s Hong Kong office in the 1980s, sent me the following tale:

It was autumn, and the Red Indians on the remote reservation asked their new
chief if the winter was going to be cold or mild. Since he was a Red Indian
chief in a modern society, he couldn’t tell what the weather was going to be.
Nevertheless, to be on the safe side, he told his tribe that the winter was
indeed going to be cold and that the members of the village should collect wood
to be prepared.

But, being a practical leader, after several days he got an idea. He went to the phone booth, called the National Weather Service and asked, “Is the coming winter going to be cold?”

“It looks like this winter is going to be quite cold indeed,” the meteorologist at the weather service responded.

So the chief went back to his people and told them to collect even more wood.

A week later, he called the National Weather Service again.

“Is it going to be a very cold winter?”

“Yes,” the man at the National Weather Service again replied, “It’s definitely going to be a very cold winter.”

The chief again went back to his people and ordered them to collect every scrap of wood they could find.

Two weeks later, he called the National Weather Service again.

“Are you absolutely sure that the winter is going to be very cold?”

“Absolutely,” the man replied.

“It’s going to be one of the coldest winters ever.”

“How can you be so sure?” the chief asked.

The weatherman replied, “The Red Indians are collecting wood like crazy.”

Now, this tale may seem to be irrelevant to today’s investment environment. However, when I continually hear and read about “excess liquidity”, “sustainable record corporate profits”, “new highs”, “Goldilocks economy”, and that “central bankers today are smarter than in the past”, I wonder whether the 19th-century economist John Ramsay McCulloch wasn’t on to something when he wrote: “In speculation, as in most other things, one individual derives confidence from another. Such a one purchases or sells, not because he has had any really accurate information as to the state of demand and supply, but because someone else has done so before him” (J. R. McCulloch, Principles of Political Economy, 2nd ed., London, 1830).

What McCulloch omitted to add is that speculators not only buy assets because someone else has done so in the past, but because they expect that in the future someone else will enter the market and purchase the asset from them at an even higher price, since “excessive liquidity” will surely push asset prices higher.

This is certainly the view of Stanley Gibbons (Guernsey) Ltd, one of the world’s largest stamp dealers, who recently sent me an email offering guaranteed return contracts on a basket of rarities stamps. According to Adrian Roose, a director of Stanley Gibbons, “The actual returns which will be achieved are expected to exceed the minimum returns based on the quality and rarity of items included within investment contracts and backed up by a 50 year history of long term price appreciation in the rare stamp market averaging 9.5% per annum.” (The returns, in British pounds, on the guaranteed contracts offered by Stanley Gibbons vary according to the duration of the contact as follows: 4% per annum for four years, 5% per annum for five years, and 6% per annum for ten years.)

According to Stanley Gibbons, the 35-year history (decimal) of the Great Britain Rarities Index shows that stamps within the index haven’t dropped in value in any five-year period. “This highlights the long term stability of the rare stamp market, underpinned by many millions of stamp collectors worldwide.” The GB Rarities 30 (Rare Stamp Index) has increased as follows: 1970–1975: 83.2%, 1975–1980: 593%, 1980–1985: 10.3%, 1985–1990: 8.6%, 1990–1995: 5.3%, 1995–2000: 29.4%, and 2000–2005: 70.4%, which works out to an average annual increase of 10.6%. (All Stanley Gibbons’ portfolios are offered with free insurance and storage — with a proof of ownership certificate, free annual valuation, and no further management fees.)

My readers shouldn’t assume that I have mentioned stamp guaranteed return contracts as an investment because I will receive a commission from Stanley Gibbons for any clients I introduce to them, or because I recommend stamps as an investment. I haven’t invested in stamps and don’t intend to do so. However, I do admit that I inherited boxes filled with stamps from my grandparents, who owned a hotel and, therefore, received mail from all over the world. The stamps were diligently cut from the envelopes and put aside, and for a while when I was a child I put them in albums. Unlike my superb electric train, which I stupidly sold in the mid- 1960s in order to buy a flashy secondhand Italian Motobi motorcycle, whose life expired shortly thereafter, I held on to the stamps, which are stored in my 91-year-old mother’s attic.

The reason I have mentioned stamps as an investment is because they show clearly the depreciating value and erosion in the purchasing power of paper money over the last 50 years or so. Moreover, not since I started out in the glorious business of investments in 1970 have I seen so much conviction among investors that all asset prices will continue to increase in value based on “excessive liquidity” and “money printing”.

Let me explain: to date, I have experienced four investment manias of epic proportions. By “epic proportions” I mean investment bubbles that, when they burst, caused serious economic pains to either an important sector of the economy, a whole country or an entire region. Those four investment manias were the parabolic increase, between 1970 and 1980, in the prices of precious metals, oil, mining and energy-related equities, as well as the Kuwaiti stock market, whose market capitalisation in 1980 exceeded that of Germany.

The second “big” investment mania surrounded Japanese equities and real estate, and Taiwanese equities, in the late 1980s. It culminated in Japanese stocks commanding a larger market value than the combined values of the US, British, and German stock markets. At the same time, the trading volume in Taiwan frequently exceeded the daily turnover on the New York Stock Exchange! Then, in the 1990s, we had several rolling investment manias in the emerging markets, which ended with the devastating Asian crisis of 1997, and the Russian crisis and LTCM in 1998. In the fourth and last great investment mania, the object of speculation was the TMT sector on a worldwide scale and we all know very well how that ended.

These four “epic” investment manias — I have omitted mini manias such as the US casino stock boom in 1978 ahead of the opening of the Atlantic City casinos; the 1978–1980 Philippine oil frenzy, which collapsed when no meaningful oil deposits were discovered; the 1983 personal computer mania (remember Commodore, Wang, Televideo, and Atari?); the 1986–1987 US stock market and leveraged buyout (LBO) boom; the 1993–1994 Mexican investment euphoria; and the 1996–1997 Hong Kong property market surge — all had one common feature: they were concentrated in just one or very few sectors of the economic or investment universe and were accompanied by a poor performance in some other asset classes.

CHRONOLOGY OF MAJOR INVESTMENT MANIAS IN RECENT TIMES

The 1970–1980 Precious Metals Boom

Best-performing assets: Silver, gold, oil, and platinum. Energy-related shares and mining companies, the Kuwaiti stock market, and Japanese equities (the Nikkei rose from 1,900 in 1970 to 8,000 in 1981, while the Yen strengthened from US$1 = ¥369 in 1969 to US$1 = ¥177 in 1978.

Worst-performing assets: Bonds and the US dollar against hard European currencies and bonds. Bonds performed much worse than anyone could have imagined in the early 1960s, when bond yields never exceeded 6%, but subsequently rose to more than 15%. What may be relevant to the current environment is that, with the exception of a brief period in 1970, bond yields in the US were consistently lower than nominal GDP.

Characteristics of the period: Very high volatility in stock prices and sector rotation within the commodities bull market. (This is the reason I describe the 1970s as a precious metals boom rather than as a commodities boom.) Sugar, wheat, corn, and soybeans peaked out in 1973 and coffee and cocoa in 1977. Precious metals and oil topped out in 1980, but the CRB had already made its inflation-adjusted high in 1974.

A homebuilding, REIT, and shipping investment frenzy from 1971 to 1973 collapsed in 1974. Moreover, the leaders of the late sixties (conglomerates, electronics, and growth stocks in a variety of industries) and the nifty fifties (stocks such as Polaroid, Xerox, Avon Products, Burroughs, Digital Equipment, Mohawk Data, etc), which performed superbly from the1970 low up to 1973, didn’t do well for the rest of the decade as the leadership had shifted to energy and mining stocks.

Consumer price inflation accelerated largely due to easy monetary policies, which kept interest rates below the rate of inflation and below nominal GDP growth.

Consensus at the end of the 1970s: Oil and precious metal prices will continue to rise, consumer price inflation will accelerate, the dollar will become worthless, and bonds are certificates of confiscation. Kuwaiti stocks will never decline because there is so much liquidity about!

The 1980–1990 Japanese Asset Boom

I realise that one could use as a starting point for the Japanese asset boom the early 1950s, and certainly 1970 since Japanese equities quadrupled between 1970 and 1981. But because I am focusing here on epic investment booms I personally experienced, and also because there were no symptoms of a mania in Japanese equities in the 1970s, I use the early 1980s as a starting point.

Best-performing assets: Taiwanese, Japanese, and Korean stocks; Japanese and Taiwanese real estate.

Worst-performing assets: Middle Eastern and Latin American stock markets (following the 1981 Petrodollar crisis), commodities, Texas banks, oil servicing and mining companies.

Characteristics of the period: Stocks and bonds around the world soared and vastly exceeded the expectations investors had in the late 1970s and early 1980s regarding their future performance. Also, whereas the Dow Jones and the Nikkei had already performed well between 1982 and 1985, most Asian stock markets — such as those of Korea, Taiwan, the Philippines, and Thailand — took off only after 1984–1985. (The increase in Japanese asset prices created a positive domino effect around the region.) The inflation scare of the late 1970s only dissipated very slowly. Bond prices tumbled in 1983–1984 and in 1986–1987. US bond yields were consistently higher than nominal GDP.

Equities underwent a serious correction in 1983–1984 and in 1987. And whereas by the end of the decade US and European equities had failed to exceed their 1987 highs — or did so only marginally — Japanese, Taiwanese, and Korean stocks continued to soar. From its 1987 high at 26,600, the Nikkei rose to 39,000 at the end of 1989. The Taiwanese stock market rose from around 500 in 1985 to 4,700 in 1987, dropped by 50% to 2,300 in the 1987 crash, and then soared — with another almost 50% correction occurring in 1988 — to 12, 500 in early 1990.

In the US, LBO became a buzzword and the decade ended with the demise of Drexel Burnham Lambert (February 1990) and the S&L crisis. In Japan, Zaitech and Tokkin funds became buzzwords.

Consumer price increases decelerated (disinflation) and the US dollar remained very strong between 1980 and 1985. The US dollar doubled against the Deutsche Mark during that period. Thereafter, it resumed its downtrend and declined by more than 50% between 1985 and 1987. As was the case in the 1970s, volatility in bonds, equities, commodities, and currencies was extremely high.

Consensus at the end of the 1980s: Forget about investing in US equities, as Asia will continue to outperform. Japanese banks, insurance companies, and brokers will own all the world’s financial institutions by the end of the 1990s. Japanese and Taiwanese stocks will never decline because there is “so much liquidity around” and because “the government will support prices”. Japanese real estate prices cannot decline because there is a shortage of land. However, in the unlikely case that Japanese asset prices were to decline and lead to a recession in Japan, the few pundits who were then bearish about Japan expected the global economy and financial markets to suffer badly.

The 1990–1998 Emerging Markets Mania

Best-performing assets: Latin American markets between 1989 and 1994, selected Asian stock markets until 1994, Hong Kong real estate and property stocks until 1997, and Russia until 1998. Japanese bonds (until 2003).

Worst-performing assets: Japanese and Taiwanese equities and properties, commodities, and mining and metal stocks.

Characteristics of the period: Investors by and large failed to recognise that US equities would significantly outperform emerging markets and Japanese equities in the 1990s (see also below). The Latin American equity boom between 1989 and 1994 came to an end with the Tequila crisis. (The Brazil Fund rose from $6 in 1990 to $34 in 1994.) Thereafter, the Latin American and Mexican stock markets failed to make new highs in the 1990s.

And whereas, in Asia, Japanese stocks plunged from 39,000 in late 1989 to 14,000 in 1992 and thereafter traded in the 1990s between approximately 13,000 and 22,000, and Taiwan experienced a historic crash from 12,500 in early 1990 to 2,500 at the end of the year, other Asian markets (Malaysia, Singapore, and Thailand) reached new highs in 1994 and Hong Kong in 1997. (Hong Kong even made a new high in 2000 despite the 1997–1998 Asian crisis.)

Between 1994 and 1997, Asian stocks traded in a wide trading range amidst very positive sentiment among especially international investors. The Asian crisis came out of the blue and long after economic fundamentals had begun to deteriorate. (Most Asian countries had already gone from current account surpluses to deficits in 1990–1991, and vast overbuilding was already evident in 1994.) In US dollar terms, most markets declined during the crisis by between 70% and 90%.

The Russian Trading System Index calculated in US dollars (RTSI$ index) increased from 69 in 1995 to 571 in 1997 and fell during the 1998 Russian crisis to 38. (Currently, the RTSI$ is at 1900.) The 1990s were an extremely volatile and difficult period for emerging economies and their financial markets (equities, bonds, and currencies).

Consensus before the Asian crisis in 1997: A Latin American crisis such as occurred in 1994 (the Tequila crisis) is out of the question in Asia, because whereas Latin American equity markets had been boosted in the early 1990s by volatile foreign portfolio flows, Asia’s current account deficits were offset by strong and more consistent foreign direct investment flows! The already strong performance of US technology stocks in the early 1990s went largely unnoticed, whereas each time the Japanese market rallied investors believed that a new bull market had begun. Buzzword before the Asian crisis: “Foreign investors are buying!”

The 1990–2000 High-tech Boom

Best-performing assets: High-tech, media, and telecommunication stocks on a worldwide scale.

Worst-performing assets: Emerging markets and Japanese stocks (see also above), oil (until late 1998), gold, industrial commodities, metal and mining stocks, and “old economy” companies in general.

Characteristics of the period: Although it is common to put the high-tech mania in the 1995–2000 time frame, I use 1990 as a starting point. Above, I explained that we had a personal computer boom in 1982– 1983. Thereafter, US high-tech companies, with very few exceptions (Microsoft was one), performed miserably until 1990. In 1990, stocks such as Texas Instruments, Micron Technology, and Intel were selling for less than half their 1983–1984 highs. But between 1990 and 1995, Microsoft and Intel rose 10-fold, Micron Technology 60-fold, Texas Instruments 6-fold, and newly listed Cisco and Dell 50-fold and 15-fold, respectively.

The strong performance of high-tech stocks and the US stock market in the early 1990s went largely unnoticed by the investment community. After 1995, the high-tech mania took off in earnest, whereby newly listed companies such as Yahoo! (listed in 1996) and Amazon.com (listed in 1997) performed significantly better than more established high-tech companies such as Motorola, Texas Instruments, and Micron. Between 1996 and 2000, Yahoo! rose 200-fold, and Amazon.com rose 70-fold between 1997 and 2000, whereas between 1995 and 2000 Cisco soared 15-fold, Microsoft and Texas Instruments rose 8-fold, and Micron rose by just 112%. The bull market in high-tech companies was interrupted by minor corrections in 1995–1996 and in 1997, and by a severe correction in the fall of 1998. In 2000, mergers and acquisitions in the US hit an all-time record as a percentage of GDP, which hasn’t yet been broken.

The 1990s also saw in the US the proliferation of investment clubs, and the most popular books were about how novice investors such as the Beardstown Ladies could make a fortune in the stock market. Main Street Beats Wall Street described “how the top investment clubs are outperforming the top investment pros”.

In the meantime, mining and metal shares were hardly higher than in 1990 (Newmont Mining was down 67% from its 1990 high), although the US stock market had risen almost five times between 1990 and its 2000 peak.

The 1990s were also characterized by four major bailout and credit easing operations by the US Fed and the US Treasury: massive easing in 1990–1991 to bail out the S&L industry, in 1994–1995 in order to save Mexico, after the LTCM and Russian debacle in 1998 to bail out the financial system, and ahead of Y2K because of unfounded concerns that the new millennium would disrupt computer systems.

Consensus in early 2000: “New economy” stocks will continue to flourish, “old economy” stocks and commodities are out forever, the 21st century will be the century of the US, and “gold only goes down”. Fascinated with high-tech stocks, investors neglected to notice the extreme undervaluation of emerging stock markets and commodities.

COMMON FEATURES OF PREVIOUS EPIC INVESTMENT MANIAS AND DIFFERENCES TO THE CURRENT INVESTMENT ENVIRONMENT

I realise that documenting the chronology of previous investment booms is boring. It is nevertheless necessary to recognise the differences between previous investment booms and today’s unique investment environment.

As mentioned in my introduction, the feature most common to the previous investment booms was that a bull market in one asset class was accompanied by a bear market in another important asset class. Precious metals soared in the 1970s, but bonds collapsed. Equities and bonds rose in the 1980s, but commodities tumbled. In the 1990s, we had rolling bubbles in the emerging markets, but Japanese and Taiwanese equities were in bear markets while commodities continued to perform poorly.

Finally, the last phase of the global high-tech mania (1995–2000) was accompanied by a collapse of the Asian stock markets and Russia, as well as a continuation of the Japanese and commodities bear markets. By the late 1990s, most emerging markets (certainly in Asia) were far lower than they had been between 1990 and 1994. In the 1990s, emerging markets grossly underperformed the US stock market.

Currently, looking at the five most important asset classes — real estate, equities, bonds, commodities, and art (including collectibles) — I am not aware of any asset class that has declined in value since 2002! Admittedly, some assets have performed better than others, but in general every sort of asset has risen in price, and this is true everywhere in the world.

In the early phases of all previous investment booms, investors failed to recognise that the “rules of the game” had changed and continued to play the asset class that had been the leader in the previous investment mania. In the 1980s, every increase in gold and silver prices was perceived to be the beginning of a new bull market in precious metals (after silver prices collapsed in January 1980, prices doubled three times between 1980 and 1990 — all within a downtrend), while investors maintained a very sceptical view of bonds. In the early 1990s, investors failed to recognise the emergence of a high-tech sector uptrend, although, as explained above, high-tech stocks were already performing extremely well between 1990 and 1995. Global investors continued to believe in the merits of Asian stocks right to the end and actually stepped up their buying in early 1997!

Similarly, in the current asset inflation, investors have continued to focus on the high-tech bull market and have largely missed out on the huge increase in price of commodities, and of Indian, Latin American, and Russian equities.

At the end of each investment mania, investors believed in some sort of “excess liquidity” that would drive the object of the speculation forever higher. At the end of the 1970s, the “excess liquidity” related to the OPEC surpluses; at the end of the Japanese stock and real estate bull markets, “excess liquidity” centred around the enormous Japanese current account surpluses; during the 1990s emerging markets mania, “excess liquidity” was perceived to come from foreign buying and the Yen carry trade; and at the end of the high-tech boom the investment community believed that “excess liquidity” would come from record mergers and acquisitions, a reallocation of funds from bonds to equities, and easy monetary policies by the Fed (a belief that was fostered by the Mexican and LTCM bailouts and money printing ahead of Y2K).

But as Albert Edwards so eloquently explained in a recent scathing report entitled “Lies, rhubarb, poppycock, bilge, utter nonsense, caravans and liquidity” (see Dresdner Kleinwort Global Strategy Report, January 16, 2007), “liquidity is the hocus pocus of the investment world. It means totally different things to different people but is often cited as being a major driver for buoyant markets”.

Most presciently, Edwards explains that with respect to investment manias, “when markets are rallying but seem expensive, when new issues fly out of the door and when fundamental analysis often appears to fail to explain events, the safe haven for the market commentator is often to rely on the explanation that there is lots of liquidity” (see also below). I urge our readers never to forget these words!

What is peculiar to the current investment environment is that liquidity is supposed to come from not just one or two sources, but from everywhere! From OPEC surpluses, from the US Fed and other central banks, from the Asian current account surpluses (excess savings), from the Yen and Swiss Franc carry trade, from the large size of money market funds and bank deposits, from rising asset prices, leverage, and a tidal wave of private equity funds, and from artificially low interest rates. It’s no wonder that, given such beliefs, asset markets are all flying to the moon!

In all the previous investment booms we discussed, the bull market was interrupted by severe corrections. Gold corrected by more than 40% between December 1974 and August 1976, equity markets corrected violently in 1987 (Taiwan and Hong Kong dropped by 50%), and bonds corrected sharply in 1983–1984, in 1986–1987, and in 1994. In the high-tech mania, technology stocks corrected sharply in 1995–1996 and in 1998. Between its 1997 high and its 1998 low, the Russian stock market gave back almost all its previous gains.

In the current asset bull markets, we have, with very few exceptions (copper, zinc, oil, and sugar), not had a concerted and strenuous correction phase à la 1987 and 1998 (and certainly not in US equities).

As the advance in previous investment manias matured, its leadership tended to narrow considerably. At the end of the 1970s’ commodities bull market, only oil, copper, precious metals, and energy and mining shares were still rising. In Japan, most of the listed equities peaked out in 1987–1988, but financial stocks, including insurance companies, banks, and brokers, drove the index up until the end of 1989. In the rolling emerging market bubbles of the 1990s, most markets peaked out between 1990 and 1994 but some markets such as Hong Kong still managed to make a final high in 1997. In the TMT boom, the advance became extremely concentrated after 1999, with many tech issues only making marginal new highs in March 2000 or failing to better their 1999 peak prices.

In the current asset boom, we haven’t yet seen any significant narrowing of the asset markets’ advance (although Middle Eastern markets tumbled last year). Aside from a few commodities and US home prices and housing-related stocks, most asset prices are still rising, although admittedly with varying intensity.

A feature common to all great asset booms is that they were born from either an extremely low valuation in real terms, an extended base-building period, or from a lengthy and pronounced underperformance compared to other asset markets. In 1970, the gold price was no higher than in 1933, and down in real terms by 70% from its 1897 high. The Japanese asset boom, which had in fact begun back in the 1960s, led to the entire Japanese stock market having a stock market capitalization in 1970 lower than that of IBM. In other words, in 1970, Japanese equities were very inexpensive compared to the US stock market.

In 1982, US stocks had declined by more than 70% in real terms from their 1966 highs. And although, at the time, US equities were, adjusted for inflation, no higher than they had been in 1899, to be fair their total real return (including dividends) was far higher. Still, by 1982, including reinvested dividends, US equities were no higher than in 1961. Also extremely depressed were US bond prices, with bond yields at their highest level in the 200-year history of the US capital market. Taiwanese and Korean equities in 1984 were at about the same level they had been in the early 1970s and, adjusted for inflation, dirt cheap.

In the late 1980s, Latin American stock markets were, in US dollar terms, no higher than they had been in the late 1970s and far lower than in the early 1970s and early 1980s. In 1990, US high-tech stocks were selling for about the same prices they had reached at their 1973 peak and for around ten times earnings. Compared to the valuation of the Japanese stock market in 1990, US high-tech stocks were then extremely depressed.

The 2002 asset price increase in all asset classes also included some asset classes that started to rally from extremely low inflation-adjusted prices or low valuations compared to some other asset prices. Particularly low inflation-adjusted prices were evident for commodities (which bottomed out between 1999 and 2001). And whereas the Nikkei had massively underperformed US and European equities in the 1990s, and was therefore relatively inexpensive compared to these markets, emerging markets had both underperformed US assets since 1990 and were, adjusted for inflation, very depressed. However, not depressed (adjusted for inflation) or compared to other asset prices, were US equities. Moreover, following their 20-year bull market, US bonds — and especially Japanese bonds — were by no means depressed!

Every epic investment boom lifted prices far higher than anyone could have imagined (although I concede that in the mid-1990s, Richard Strong told me that if Japanese stocks could sell for 70 times earnings in 1989, US equities could also sell in future for 50 times earnings). In 1970, no one dreamt that precious metals would increase by more than 20-fold. In the early 1980s, it would have been considered heresy to forecast that the Dow Jones would double and bond yields would decline to less than 4%! And investors certainly didn’t expect the Japanese stock market, which had already quadrupled in the 1970s, to rise by almost another six-fold between its low in 1982 and its high of 1989. In the late 1980s, few people expected the Latin American markets would ever recover; and in the early 1990s, no one (including myself) expected US high-tech stocks to become the best performing asset class in the 1990s.

Since the current asset price increases got under way in 2002 — and contrary to the expectations of some of the perma-bulls on US equities — commodities, and emerging stock markets and economies, in which, fortunately, platform companies are largely absent, have performed substantially better than US asset prices. Since 2000, the Dow Jones has lost more than 50% of its value against gold and much more against industrial commodity prices. Moreover, since 2002, the Argentine and Russian stock markets, whose economies are perceived as “knowledge absent” when compared to the great “knowledge-based” American economy, are up ten-fold or more! Now, I will concede that the current “asset inflation” (a pompous and potentially dangerous notion, to quote my friends at GaveKal Research) may be far from over and that the end game in the current asset price increases is far from predictable, but, based on the experience of the previous four investment booms, it is likely that the significant diverging trends in the relative performance of asset classes (underperformance of US assets) will persist for far longer than is now expected.

Another common feature of the last stage of every asset boom was high trading volume, widespread public participation, high leverage, and money inflows into all kinds of money pools (Zaitech and Tokin funds, investment clubs, mutual funds, LBO funds, venture capital, private equity, emerging market, art and collectibles, and equity, commodity and index funds). In this respect, the current asset boom is no different than previous investment manias, except that it includes all asset classes and is taking place practically everywhere in the world.

In the four great investment booms we have described, and also in previous investment manias, once the boom came to an end, most, if not all, of the price gains that occurred during the mania were given back. In 1992, silver prices were lower than they had been in 1974. In 2003, the Nikkei was lower than at its high in 1981. In 2002, in dollar terms, most Latin American markets were no higher than in 1990 and most Asian markets had declined to their mid- or late 1980s level. By 1998, the Russian stock market had given back its entire advance since 1994; and in 2002, most high-tech and telecommunication stocks were no higher than they had been in 1996 or 1997. And in those manias where prices didn’t retreat in nominal terms to the level — or, as frequently happened, to below the level — from where the investment boom had begun (as was the case in 1932), prices retreated in inflation adjusted terms to those levels. Adjusted for inflation, in 2001 the CRB Index was far lower than it had been in 1971, while precious metals, oil, and grains were all either no higher, or lower, than they had been in the early 1970s.

Following all great investment booms, the leadership changed. The 1970s’ precious metal boom was followed by the boom in financial assets in the 1980s. The Japanese stock and real estate mania of the late 1980s and the emerging market boom of the early 1990s were followed by the parabolic rise of high-tech stocks in the late 1990s. Therefore, while it is possible that in a prolonged environment of “excess liquidity” all asset markets could continue to increase in nominal value, it is most unlikely that the leaders of the previous boom — the US stock market and, specifically, the TMT sector — will be the leaders of the current asset inflation. And whereas it may be premature to make a final judgment about this point, as the current asset inflation could last for much longer, so far the gross underperformance of US equities and especially of the Nasdaq (still down by 50% from its 2000 high) compared to the emerging markets and commodities seems to confirm that the leadership has indeed changed.

Best regards,
Marc Faber

For Whiskey and Gunpowder

Dr Marc Faber was born in Zurich, Switzerland. He went to school in Geneva and Zurich and finished high school with the Matura. He studied Economics at the University of Zurich and, at the age of 24, obtained a PhD in Economics magna cum laude.

Dr Faber publishes a widely read monthly investment newsletter "The Gloom Boom & Doom Report" report which highlights unusual investment opportunities, and is the author of several books including “ TOMORROW'S GOLD – Asia's Age of Discovery” which was first published in 2002 and highlights future investment opportunities around the world. “ TOMORROW'S GOLD ” was for several weeks on Amazon's best seller list and is being translated into Japanese, Chinese, Korean, Thai and German. Dr. Faber is also a regular contributor to several leading financial publications around the world.

Unwinding the Yen, Unravels Global Stock Markets - Gary Dorsch

by Gary Dorsch

Millions of words have been written about the heavy handed tactics of Japan's Ministry of Finance (MoF) in manipulating the value of the Japanese yen, the Japanese bond market, and squeezing short sellers in the Nikkei-225 futures market. Manipulation of markets through the use of jawboning, re-jigging of inflation statistics, and outright intervention is a time honored tradition at the MoF.

Japan's Ministry of Finance is a political, economic, and intellectual force without parallel, and with a greater concentration of power than any branch of government amongst the major industrialized democracies. In Japan, there is no institution with more power, and it has a borrowing ceiling for foreign exchange intervention of up to 140 trillion yen ($1.2 trillion) for the upcoming fiscal year.

So if US Treasury chief Henry Paulson was looking for a quick fix to rescue the Dow Jones Industrials from crashing below the psychological 12,000-level, his visit to Tokyo's Financial Warlords on March 6th, was perfectly timed.

The US dollar was plummeting towards 115.25-yen, when Paulson arrived at MoF headquarters in Tokyo. "Yen carry" traders borrowed an estimated 40 to 70 trillion yen ($350-600 billion) and channeled much of the funds into commodities and stocks around the globe. But the "yen carry" trades were going sour, when the yen suddenly zoomed 5% higher.

US stocks lost $837 billion of value in the five-day period ended March 2nd, amid a worldwide rout that began in Hong Kong. The sudden unwinding of the "yen carry" trade had whacked $1.5 trillion of value from global stock markets, threatening the global economy.

The infamous "yen carry" trade stopped generating rewards, soon after the Group of Seven central bankers warned on February 10th, that speculators could get burned by one-way bets against the yen. Then, under heavy pressure from angry European finance ministers who are fed up with Tokyo's six-year "cheap yen" policy, the Bank of Japan hiked its overnight loan rate to 0.50%, its highest level in 10-years, to stop the slide in the Japanese yen against the Euro and US dollar.

While the BoJ's rate hike put a floor under the yen, it wasn't enough to push the low yielding currency higher. What lifted the yen sharply higher, and ignited the global stock market shake-out, were meltdowns in share prices of US sub-prime mortgage lenders, and fears the weakening US housing sector could topple the US economy. Former Fed chief "Easy" Al Greenspan put the odds of a US recession at 1:3.

Carry traders were losing an estimated $10 to $12 billion on over-extended short yen positions, and it was looking very bleak for the global stock markets until the US dollar suddenly found support at 115-yen and the Euro bottomed at 150-yen. Did the Bank of Japan intervene in the currency markets on March 6th, at the request of US Treasury chief Paulson, to stop the surge in the yen? Did the BoJ and the US Treasury intervene to support the Japanese and US stock markets last week?

The Nuts and Bolts of the "Yen Carry" Trade

Before examining the latest Japanese MoF and US Treasury intervention tactics, it's important to understand how the "yen carry" trade works. It's simple to understand, and it's not just hedge funds and international bankers who engage in the trade. Many brokerage firms offer margin loans at near 1% in Japanese yen, which are re-invested by their clients to buy stocks around the world.

The "yen carry" trade is primarily a simple game of interest rate arbitrage. Step 1: Borrow yen at 0.5% and convert the yen into $9,000 US dollars. Step 2: With $9,000 from Japan and $1,000 of your own money, invest $10,000 in US Treasury notes at 5.00%. Step 3: Collect $500 in interest from the US Treasury, and pay $45 to the Japanese lender. Step 4: Pocket the $455 difference as a profit, for a rate of return of 45.5% on your original $1,000. Step 5: Sell the US Treasury note, and convert the US dollars back into Japanese yen to pay off your loan.

Step 5 is the tricky part, because if the yen were to suddenly surge by 5% against the US dollar, the principal amount of the yen loan would also climb 5% from $9,000 to $9,450, which would wipe out the $455 profit from the interest rate spread. It would be nice to buy yen futures as a hedge against a climbing currency. The problem is that yen futures trade at a hefty premium to the cash market price.

Locking into a yen futures contract at say a 4.5% premium to the cash price would wipe out the profit from the interest rate differential between the two currencies. So carry traders must take on currency risk to play the game, which can go very wrong, if the yen suddenly shoots higher. And that's what happened earlier this month, when the Japanese yen suddenly surged by 5% against the Euro and US dollar, until US Treasury chief Paulson huddled with Tokyo financial warlords on March 6th.

On February 10th, G-7 central bankers had warned traders against the practice of borrowing vast amounts in low-yield currencies such as the yen and Swiss franc to reinvest for a profit elsewhere. "We want the markets to be aware of the risks of one-way bets, in particular on the foreign exchange market. One-way bets in the present circumstances would not be appropriate. We want the markets to be aware of the risks they contain," said European Central Bank chief Jean "Tricky" Trichet.

Japanese Finance Minister Koji Omi was singing from the same song book. "This means that G-7 countries think that markets, particularly foreign exchange markets, should recognize the risk of moving in one direction too heavily. I think we have come to the appropriate conclusion," he said. And when the chief of the powerful Japanese ministry of finance speaks, currency traders listen but don't always obey.

European Central Bankers demand a Stronger Yen

Aided by the Euro's strength against the yen, Japanese exports to the European Union nearly doubled to 1.06-trillion yen in December. But on the flip side, European exports to Japan have waffled between stagnation and deterioration. While Japan is a small market for European exporters, Euro zone finance ministers understand that its exporters will suffer badly in world markets because of cheap competition from Japan in addition to cut-throat competition from China.

"I will read again what we just said in Essen, we reaffirm that exchange rates should reflect economic fundamentals," said ECB chief Trichet at the Amsterdam Chamber of Commerce and Industry on Feb 15th. "We believe that the Japanese economy is on a sustainable economic path and that exchange rates should reflect these economic fundamentals," Trichet added.

Earlier on Jan 31st, Bank of France chief Christian Noyer said there was room for the Bank of Japan to raise its interest rates carefully. "I'm concerned about developments in the yen. The yen exchange rate is not in line with an improvement in the Japanese economy and its strength. Japan is one of the engines to drive global growth. A weak yen will cause distortion in the world economy in the medium term. However, I think the market will correct it in an autonomous manner," he concluded.

So last month, European finance ministers demanded and received an interest rate hike from the Bank of Japan to 0.50%, to stop the slide of the yen. For his part, US Treasury chief Paulson was opposed to Europe's idea of pressuring Japan for a rate hike, and instead was content with Tokyo's cheap yen policy. "I may be looking at it a bit more carefully only because of the publicity coming out of Europe. But from my standpoint, the yen's value is set in a competitive marketplace," he said on Feb 1st.

On Feb 14th, Federal Reserve Chairman Ben Bernanke aligned himself squarely with Paulson before the Senate Banking Committee. "We don't see any manipulation or intervention in the value of the yen. The Treasury and Federal Reserve have expressed a view that exchange rates ought to be determined in free and open markets. As best we can tell, the yen's value is being determined in a free, open, competitive market. There is no evidence of any intervention going on."

Yet Bernanke's testimony coincided with an announcement by DaimlerChrysler that it was slashing 13,000 jobs at its North American car plants, bringing the loss of US auto manufacturing jobs to 80,000 over the past 12-months. "The last time the Japanese purchased dollars was in March 2004," Bernanke quipped. The disintegration of the US manufacturing base is the price that the US Treasury is willing to pay in return for cheap credit from China, Japan, and South Korea.

G-7 Pressure for Unwinding of Yen carry Trade

But European finance ministers were not buying the US Plunge Protection Team's propaganda and demanded that Japan begin to lift its abnormally low interest rates into alignment with the rest of the world. Four weeks later, the yen carry trade began to unravel, triggering widespread selling of commodities and stocks around the globe by over-extended speculators, banks, and hedge funds.

When asked about the sudden panic sales of global stock markets at the G-10 meeting in Basel, Switzerland on March 12th, ECB chief Trichet described the markets slide as a correction and not triggered by economic fundamentals. "We do not observe that it will or should trigger a correction in the real economy. In an environment where risk appetite was historically high, and signs of under-pricing of risks in a large number of markets, this episode has been a useful reminder that there are risks in all markets, two-way risks in all markets," he said.

Brief history of Tokyo Intervention in the Yen

There are many tricks of the trade that the US Treasury's Plunge Protection Team can learn from Tokyo's Financial Warlords, who have decades of experience in hand to hand combat with nasty currency speculators and bearish stock market operators. Tokyo's MoF has acquired $875 billion of foreign currencies through its intervention operations, and has skillfully manhandled the $6.7 trillion Japanese government bond market into a range of just 1.2% to 1.9% for most of the past six years.

(The next edition of the Global Money Trends newsletter will present a special section with a chronological history of Japanese MoF intervention in the yen, Japanese bond market and the Nikkei-225 stock index over the past five-years).

MoF jawboning is very effective in moving the yen into Tokyo's desired range, because it has built up a reputation for uncompromising ruthlessness in the markets. The last time foreign currency traders engaged in all-out war with the MoF was after Canadian, European, and US finance officials called for a stronger yen at the Group of Seven meeting in Dubai Sept 23, 2003. Within minutes, the BoJ's previous nine-month and $78 billion defense of 115-yen collapsed.

Currency traders were given the "green light" to knock the US dollar lower, and it quickly fell through the BoJ's next line of defense at 110-yen. But Tokyo was determined to cushion the dollar's downfall, and stepped up its intervention over the next six months, by selling 26 trillion yen and purchasing US$250 billion in the foreign exchange market between 104 and 110-yen.

But the massive BoJ intervention campaign on behalf of the dollar came to a halt on March 16th, 2004 after former Fed chief Greenspan critiqued the manipulative practice. "We are getting closer to the point where continued intervention at this scale will no longer meet the monetary policy needs of Japan," he said on March 9th, 2004. US Treasury chief Snow added, "No currency can be regarded as strong if it relies on life support, is being propped up, by interventions."

Since March 2004, the BoJ has stayed out of the FX market, the longest period that Tokyo has gone without getting its hands dirty since 1991. But that hasn't stopped the practice of jawboning and verbal threats to guide the yen, when unruly currency traders get out of line with Tokyo's target zones.

Since March 2004, Japan's foreign currency reserves have grown by around $50 billion to a record $875 billion, mostly due to the appreciation of the Euro against the yen. About 65% of Japan's FX reserves are in US dollars and 35% in Euros, so MoF warlords can enforce a floor under the yen at any point of its choosing, and keep a lid on the "yen carry" trade through massive intervention.

Angry US Democrats are demanding that Tokyo start boosting the yen in the FX market. "We believe that a weak yen is a reflection of Japanese government policy," said Rep's Charles Rangel, Barney Franks, John Dingell and Sander Levin on Feb 11th. "We urge the Japanese government to reverse their weak yen policy through concrete action. Japan should be selling the massive reserves it has accumulated, thereby changing the imbalances with the dollar and the Euro."

In October 2006, Japanese FX chief Hiroshi Watanabe put a lid on the US dollar rally near 120-yen and then triggered a slide to as low as 114.5-yen over the next six weeks, after telling reporters in New York, "I see no reason for a further deterioration in the yen given the strength in the Japanese economy." Watanabe said he had "no fear of the Japanese economy tipping into recession any time in the next two years," adding that Japan's economy had become resilient to high oil prices.

But "yen carry" traders regrouped for another rally in the Euro and US dollar, and also pushed the yen to its lowest level in 21-years against a basket of currencies representing Japan's largest trading partners. Japan's ultra-low interest rates have created enormous bubbles in global stock markets, and have increased the risk of disorderly unwinding of global trade imbalances.

For a second time, Japanese MoF warlords put a lid on the dollar's rally, this time to 122-yen last month, when the radical inflationist Prime minister, Shinzo Abe finally bowed to the European demand for a stronger yen. The Bank of Japan's rate hike to 0.50% capped the dollar's rally at 121.50-yen, and then trouble in the US housing sector, sent herds of "yen carry" traders scrambling for the exits at the same time.

The dollar was dealt the final hammer blow on March 5th, after Japanese trade minister Akira Amari said, "I've been thinking that 120-yen /dollar was too cheap in light of Japanese economic power," he told a Fuji TV program. By the time US Treasury chief Paulson arrived in Tokyo for meeting with MoF chief Omi, the dollar was plunging to 115.25-yen, after guru Greenspan told a big ticket audience in Hong Kong that the US economy faced a 1:3 chance of a recession in 2007.

While MoF chief Omi huddled with US Treasury chief Paulson, Japanese deputy Finance Minister Hideto Fujii did damage control on March 5th, saying he was "keeping a close eye on moves in the stock and foreign exchange markets."

Japanese MoF and US Treasury try to Rescue Global Stock markets

With all eyes focused on the world's two most powerful figures in global finance huddled in Tokyo, to stitch a rescue package for the dollar and global stock markets, Japan's Chief Cabinet Secretary Yasuhisa Shiozaki said, "As share prices have fallen worldwide, our stance is that we are closely watching, while keeping close contact with authorities from other countries," he said.

But Japan's near-zero interest rates and severely undervalued currency are at the root cause of financial market bubbles and distortions, says Eisuke Sakakibara, "Mr Yen" the former Japanese vice-minister for international finance in 1997-99. Mr Yen estimates the "yen carry" trade to be worth Y40 trillion ($430 billion), "it may be Y60 trillion or Y70 trillion, but I don't think it matters now, it's so large," he said.

Sakakibara said it's "worrying that nobody had any real idea of the scale of the yen carry trade, and traders, hedge funds and asset fund managers operating within it are accustomed to operating only in relatively calm market conditions. All the BoJ can do is to normalize Japanese interest rates at the earliest reasonable opportunity because the excess liquidity situation emanating from the Japanese monetary system needs to be changed as soon as possible," he warned

It seems like deja'vu all over again. After witnessing a 575-point plunge in the Nikkei-225 index, a 3.3% loss to 16,642 on March 5th, the powerful MoF warlord, Hiroshi Watanabe was asked for his opinion on the market. "We should be closely monitoring stock markets, but we don't have any serious concern. In Japan the size of the correction is very big, but I don't think it will last for very long."

Sure enough, Watanabe's comments put a floor under the Nikkei-225 on March 5th, similar to his rescue of the Nikkei-225's rout in January 2006 from the Livedoor fiasco. Japanese traders have complete faith in Watanabe's ability to put out fires and turn bearish markets around. Within a few days, the US dollar rebounded from a low of 115.25 on March 5th to as high as 118.50-yen, which triggered a 700-point rebound in the Nikkei-225 index.

US Treasury borrows MoF Script on Intervention

With MoF warlords putting a floor under the Nikkei-225 at 16,600, the US Plunge Protection Team (PPT) went into action on March 5 and 6th. Just 12-hours earlier, the share price of Goldman Sachs had plummeted by $5.75 to $190 per share, off 14.7% from its record highs set on Feb 22nd. Shares of New Century Financial NEW.N, the second-largest US home lender in the sub-prime market had plunged 70% the previous day, after some lenders refused to let it tap credit lines. Goldman Sachs is one of New Century's lenders, along with Morgan Stanley and Citigroup.

Suddenly, the masters of the universe, with their slick and sophisticated Ponzi schemes requiring ever-larger infusions of cheap money were caught off guard. Bear Stearns, Goldman Sachs, Lehman Bros, Merrill Lynch and Morgan Stanley, which earned a record $24.5 billion in 2006, are exposed to sub-prime junk bonds, equaling 10% to 15% of their firm's capital. Prices for credit-default swaps linked to their bonds traded at levels that equated to debt ratings of Baa2.

Speaking from Tokyo on March 5th, with the Dow Jones Industrials (DJI) teetering on the brink of the psychological 12,000 level and Goldman Sachs stock in need of some oxygen, PPT chief commander, Henry Paulson issued a buy signal, "Some of the credit issues are there, but they're largely contained. The global economy is more than sound. It's as strong in the last couple of years as I've seen in a lifetime. All the economies are growing, inflation is low, and liquidity is high," Paulson declared. His comments triggered a powerful 160-point DJI rally by day's end.

On Feb 27th, White House spokesman Tony Fratto said President Bush got a briefing over the phone from Paulson concerning the 416-point plunge in the DJI. "The president's economic advisers are keeping an eye on the markets. We believe that the economic fundamentals in the US economy are sound," said Fratto, borrowing the script from Tokyo's Ministry of Finance.

Treasury spokeswoman Brooklyn McLaughlin said the President's Working Group of Financial Markets (Plunge Protection Team) was monitoring the markets. "The president's working group regularly monitors markets and will continue to do so," McLaughlin said. The high-level group is made up of the Federal Reserve chairman, Treasury secretary, chairman of the Securities and Exchange Commission and chairman of the Commodity Futures Trading Commission.

It's very interesting to note that the Dow Jones Industrial futures market gapped 80-points higher after Paulson's "don't worry, be happy" comments in Tokyo, during the first 15-minutes of Asian trading on March 6th, putting a nasty squeeze on short sellers.

On the previous day, March 5th, a large buyer entered the market to catch a falling knife, and lifted the DJI futures 140-points off their intra-day low within the second hour of Asian trading, when market conditions are usually thin.

By week's end, Goldman Sachs shares had recovered to $201 /sh.

Is there Intervention in the Stock Index futures markets?

Did Japan's finance ministry and the US Treasury intervene in the stock index futures markets, to prevent panic free-falls, and engineer short squeeze rallies? Only their floor brokers know for sure. But intervention also includes jawboning, painting rosy scenarios, downplaying bad economic news and sub-prime mortgage defaults, and pushing money into the hands of securities dealers through coupon passes.

The US Plunge Protection Team (PPT) gave frazzled US investors a chance to catch their breath as the Dow Jones Industrials rebounded 226 points last week, after a 736-point plunge from its Feb 20th record high. But it has been almost four years since the Dow Industrials or the Standard & Poor's 500 fell 10% from a high, which is an exceptionally long period without such a pullback. Not even Tokyo's financial warlords have been able to put together such as winning streak!

The upcoming March 16th edition of Global Money Trends will examine the next likely move in the "yen carry" trade, with its implications for the global stock markets, commodities and gold. Was the 416-point plunge in the Dow Jones Industrials and sharp declines in other global stock markets the beginning of a bear market, or just a nasty correction in the a longer term bull market?

What are the signals to look for, to determine when the US Treasury is intervening in the stock market? Which foreign market is a top leading indicator of the next likely move for the global stock markets? What are Chinese and European central bankers saying about the correction in the global stock markets, and what is their next likely move on interest rates? The answers can be found in the upcoming March 16th edition of Global Money Trends. Subscribe today!

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Mr Dorsch worked on the trading floor of the Chicago Mercantile Exchange for nine years as the chief Financial Futures Analyst for three clearing firms, Oppenheimer Rouse Futures Inc, GH Miller and Company, and a commodity fund at the LNS Financial Group.

As a transactional broker for Charles Schwab's Global Investment Services department, Mr Dorsch handled thousands of customer trades in 45 stock exchanges around the world, including Australia, Canada, Japan, Hong Kong, the Euro zone, London, Toronto, South Africa, Mexico, and New Zealand, and Canadian oil trusts, ADR's and Exchange Traded Funds.

He wrote a weekly newsletter from 2000 thru September 2005 called, "Foreign Currency Trends" for Charles Schwab's Global Investment department, featuring inter-market technical analysis, to understand the dynamic inter-relationships between the foreign exchange, global bond and stock markets, and key industrial commodities.

Disclaimer: SirChartsAlot.com's analysis and insights are based upon data gathered by it from various sources believed to be reliable, complete and accurate. However, no guarantee is made by SirChartsAlot.com as to the reliability, completeness and accuracy of the data so analyzed. SirChartsAlot.com is in the business of gathering information, analyzing it and disseminating the analysis for informational and educational purposes only. SirChartsAlot.com attempts to analyze trends, not make recommendations. All statements and expressions are the opinion of SirChartsAlot.com and are not meant to be investment advice or solicitation or recommendation to establish market positions. Our opinions are subject to change without notice. SirChartsAlot.com strongly advises readers to conduct thorough research relevant to decisions and verify facts from various independent sources.

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'Atlas Shrugged' – 50 Years Later - Mark Skousen

WHEN AYN RAND finished writing Atlas Shrugged 50 years ago this month, she set off an intellectual shock wave that is still felt today. It's credited for helping to halt the communist tide and ushering in the currents of capitalism. Many readers say it transformed their lives. A 1991 poll rated it the second-most influential book (after the Bible) for Americans.

At one level, Atlas Shrugged is a steamy soap opera fused into a page- turning political thriller. At nearly 1,200 pages, it has to be. But the epic account of capitalist heroes versus collectivist villains is merely the vehicle for Ms. Rand's philosophical ideal: "man as a heroic being, with his own happiness as the moral purpose of his life, with productive achievement as his noblest activity, and reason as his only absolute."

In addition to founding her own philosophical system, objectivism, Rand is honored as the modern fountainhead of laissez-faire capitalism, and as an impassioned, uncompromising, and unapologetic proponent of reason, liberty, individualism, and rational self-interest.

There is much to commend, and much to condemn, in Atlas Shrugged. Its object – to restore man to his rightful place in a free society – is wholesome. But its ethical basis – an inversion of the Christian values that predicate authentic capitalism – poisons its teachings.

Mixed Lessons from Rand's Heroes

Rand articulates like no other writer the evils of totalitarianism, interventionism, corporate welfarism, and the socialist mindset. Atlas Shrugged describes in wretched detail how collective "we" thinking and middle-of-the-road interventionism leads a nation down a road to serfdom. No one has written more persuasively about property rights, honest money (a gold-backed dollar), and the right of an individual to safeguard his wealth and property from the agents of coercion ("taxation is theft"). And long before Gordon Gekko, icon of the movie Wall Street, she made greed seem good.

I applaud her effort to counter the negative image of big business as robber barons. Her entrepreneurs are high-minded, principled achievers who relish the competitive edge and have the creative genius to invent exciting new products, manage businesses efficiently, and produce great symphonies without cutting corners. Such actions are often highly risky and financially dangerous and are often met with derision at first. Rand rightly points out that these enterprising leaders are a major cause of economic progress. History is full of examples of "men who took first steps down new roads armed with nothing but their own vision." In the novel, protagonist Hank Reardon defends his philosophy before a court: "I refuse to apologize for my ability – I refuse to apologize for my success – I refuse to apologize for my money."

But there's a dark side to Rand's teachings. Her defense of greed and selfishness, her diatribes against religion and charitable sacrificing for others who are less fortunate, and her criticism of the Judeo-Christian virtues under the guise of rational Objectivism have tarnished her advocacy of unfettered capitalism. Still, Rand's extreme canard is a brilliant invention that serves as an essential counterpoint in the battle of ideas.

The Atlas characters are exceptionally memorable. They are the unabashed "immovable movers" of the world who think of nothing but their own business and making money. "... I want to be prepared to claim the greatest virtue of them all – that I was a man who made money," says copper titan Francisco d'Anconia. But these men are regarded as ruthless, greedy, single-minded individualists. They are men (except for Dagny Taggart, who could be confused for a man) who always talk shop and give scant attention to their family. In fact, no children appear in Rand's magnum opus.

Her chief protagonist, John Galt, is an uncompromising superman. He is the proverbial Atlas who holds the world on his shoulders. He has invented a fantastic motor, yet is so frustrated with state authority that he withdraws his talents – hence the title, Atlas Shrugged – and spends the next dozen years working as a manual laborer for Taggart International.

Mr. Galt somehow succeeds in getting the world's top capitalists to go on strike and, in many cases, strike back at an increasingly oppressive collectivist government. Rand's plot violates a key tenet of business existence, which is to constantly work within the system to find ways to make money. Real-world entrepreneurs are compromisers and dealmakers, not true believers. They wouldn't give a hoot for Galt.

Rand, of course, knows this. And that's OK, because Atlas Shrugged is about philosophy, not business. In her world, there are two kinds of people: those who serve and satisfy themselves only and those who believe that they should strive to serve and satisfy others. She calls the latter "altruists."

Rand is truly revolutionary because she makes the first serious attempt to protest against altruism. She rejects the heart over the mind and faith beyond reason. Indeed, she denies the existence of any god or higher being, or any other authority over one's own mind. For her, the highest form of happiness is fulfilling one's own dreams, not someone else's – or the public's.

Galt crystallizes the Randian motto: "I swear by my life and my love of it that I will never live for the sake of another man nor ask another man to live for mine." No sacrifice, no altruism, no feelings, just pure egotistical selfishness, which Rand declares to be supreme logic and reason.

This philosophy transcends politics and economics into romance. The novel's sex scenes are narcissistic, mechanical, and violent. Are the lessons of her book any way to run a marriage, a family, a business, a charity, or a community?

To be sure, Rand makes a key point about altruism. A philosophy of sacrificing for others can lead to a political system that mandates sacrificing for others. That, Rand shows with frightening clarity, leads to a dysfunctional society of deadbeats and bleeding-heart do-gooders (Rand calls them "looters") who are corrupted by benefits and unearned income, and constantly tax the productive citizens to pay for their pet philanthropic missions. According to Rand, they are "anti-life."

But is the only alternative to embrace the opposite, Rand's philosophy of extreme self-centeredness? Must we accept her materialist metaphysics in which, as Whittaker Chambers wrote in 1957, "Randian Man, like Marxian Man, is made the center of a godless world"?

No, there is another choice. If society is to survive and prosper, citizens must find a balance between the two extremes of self-interest and public interest.

Adam Smith, the founder of modern economics, may have found that Aristotelian mean in his "system of natural liberty." Mr. Smith and Rand agree on the universal benefits of a free, capitalistic society. But Smith rejects Rand's vision of selfish independence. He asserts two driving forces behind man's actions.

In The Theory of Moral Sentiments, he identifies the first as "sympathy" or "benevolence" toward others in society. In his later work, The Wealth of Nations, he focuses on the second – self-interest – which he defines as the right to pursue one's own business. Both, he argues, are essential to achieve "universal opulence."

Smith's self-interest never reaches the Randian selfishness that ignores the interest of others. In Smith's mind, an individual's goals cannot be fully achieved in business unless he appeals to the needs of others. This insight was beautifully stated two centuries later by free-market champion Ludwig von Mises. In his book, The Anti-Capitalist Mentality, he writes: "Wealth can be acquired only by serving the consumers."

Golden Rule Anchors True Capitalism

Smith's theme echoes his Christian heritage, particularly the Golden rule, "Therefore all things whatsoever ye would that men should do to you, do ye even so to them" (Matt. 7:12). Perhaps a true capitalist spirit can best be summed up in the commandment, "Love thy neighbour as thyself" (Lev. 19:18; Matt. 22:39). Smith and Mr. von Mises would undoubtedly agree with this creed, but the heroes of Atlas Shrugged – and their creator – would agree with only half.

Today's most successful libertarian CEOs, such as John Mackey of Whole Foods Markets and Charles Koch of Koch Industries, have adopted the authentic spirit of capitalism that is more in keeping with Smith than Rand.

Theirs is a "stakeholder" philosophy that works within the system to fulfill the needs of customers, employees, shareholders, the community, and themselves. Their balanced business model of self- interest and public interest shows how the marketplace can grow globally in harmony with the interests of workers, capitalists, and the community – and can even displace bad government.

The golden rule is the correct solution in business and life. But would we have recognized this Aristotelian mean without sampling Rand's anthem, or for that matter, the other extreme of Marxism-Leninism? As Benjamin Franklin said, "By the collision of different sentiments, sparks of truth are struck out, and political light is obtained."

John Galt – it's time to come home and go to work.

Regards – AEIOU
Mark Skousen
for Whiskey and Gunpowder

This essay first appeared in the Christian Science Monitor.

Mark Skousen Bio: Known as the "maverick" of economics for his contrarian and optimistic views, his sometimes-outrageous statements and predictions, Mark Skousen is a college professor, prolific author and world-renowned speaker. He's made his unique sense of market and investment trends known and respected in the financial world. With a Ph.D. in economics and a focus on the principles of free-market capitalism and "Austrian" economics, Mark Skousen has often gone contrary to the crowd in his investment choices and economic predictions -- and has often been proved right.

Gold-Stock Fears - Adam Hamilton

by Adam Hamilton

Echoing the mini-panic in commodities in early January, the past couple of weeks have once again been trying for gold and gold-stock investors. In just five trading days ending this past Monday, gold fell 7.2% while the HUI gold-stock index plunged 13.0%. The raw fear spawned by this pullback has been pretty extraordinary.

This cascading fear driven by the falling prices created a negative sentiment storm that buffeted gold, and especially gold stocks, like a hurricane shredding a seaside town. By the time the dust settled a few days ago, investors were deathly afraid that everything from central banks, to bear markets, to overextended Chinese stock-market speculators, to Martians were threatening to blast gold and gold stocks far lower.

But fear in the markets, while compelling at the time, is a totally irrational and useless emotion. Investors and speculators, if they ever want to become great, have to systematically train themselves to totally ignore fear. While there are rare situations in life that warrant true fear, such as plummeting to earth in a crashing airplane, nothing in the financial markets should ever scare us. We are merely talking capital here, not life and limb! And the markets are supposed to rise and fall.

As always, the best way to fight irrational fear is to confront it with rational perspective. One trading day considered in isolation, like last Friday's $21 plunge in gold, can be scary. But one trading day, no matter how ugly, considered in the light of the months of action that led to it is almost never frightening. Traders need to concentrate on the trends, not the day-to-day noise, if they want to remain prudently rational.

So although the interesting 3.5% single-day decline in the S&P 500 a couple weeks ago led the easily excitable to believe that full-on global economic Armageddon was nigh, the charts remained coldly rational. Like many other commodities, the gold technicals looked fantastic throughout the entire mini-panic. Provocatively the Continuous Commodity Index hit an all-time nominal high two weeks ago soon after the stock markets peaked and only fell 3.2% overall compared to the S&P 500's 5.9% total decline.

Gold's 7.2% five-day decline was much worse than commodities in general fared, which is incredibly ironic considering gold's elite safe-haven status. The traders who sold gold because stocks were retreating must have no history books, because gold tends to thrive in times of downside general-stock volatility. Adverse market turbulence increases overall gold investment demand on balance, so selling gold on stock weakness alone is foolish.

Yet this is exactly what happened in the midst of the irrational excitement of the moment. But even after this illogical sentiment storm, gold's new uptrend still looks flawless. All gold did in response to the mini-panic in general stocks is pull back from the upper resistance of its textbook-perfect uptrend to its lower support. Curiously this minor move spawned a mini-panic in gold stocks, which has very bullish implications as I will discuss below.

This is a simple one-year gold chart. During this time gold had two distinct tactical trends. From early May to early October, gold was retreating on balance in a necessary and healthy correction after it hit a dazzling new bull-to-date high last spring. But since early October, gold has been climbing in a textbook-perfect uptrend. As you can see clearly here, gold's uptrend channel has been rock solid and inviolable so far.

As in any uptrend, the highest tendency for a price to pull back occurs when it nears its upper resistance line. It is really interesting that prior to its recent pullback gold had surged up to its resistance after a powerful seven-week rally that launched in early January. So even if the sharp plunge in the parabolic Chinese stock market had not yet happened, gold was at a technical point where a pullback was due. Any catalyst could have kicked it off, and often no visible news catalyst is necessary to spawn a pullback from resistance.

And after gold fell $49 or 7.2% in just five trading days and terrified the weak-willed, it was still above both its lower support line and crucial 200-day moving average when the dust settled. How on earth can a normal pullback within a strong uptrend channel scare traders? Sure, it happened in five days this time around instead of five weeks like the similar December pullback, but the overall magnitude was not threatening at all.

Being in the newsletter business, when our subscribers get scared they write in to share their fears with me. I really appreciate this as it helps me better understand what concepts are feeding a particular sentiment storm. In gold's case, at least judging from my e-mail inbox, the ever-present gold boogeyman of the central banks once again loomed its ugly head. Last week many investors feared that central banks would dump gold to support their currencies and try to avert a cascading global financial panic.

Discussing central banks in the gold world is like talking about abortion or global warming. No matter what you say, 50% of the people are going to want to rip out your still-beating heart and drink your blood from your newly-cleaved skull. Personally as a gold investor I used to fear central banks quite a bit from 1999 to 2002 or so. But the more I observe their actions and the greater my own fortune grows in this secular gold bull despite central-bank machinations, the less I respect their fabled power.

Compared to you or me alone of course, a central bank is awesomely powerful. But compared to all of us investors together, a central bank is totally impotent. Think of an elite commando, a Navy SEAL, versus a single bee. No matter how many times the bee stings the commando, the commando is going to eventually crush it like a grape. Victory was never in doubt. But imagine this same elite commando versus a swarm of killer bees. It doesn't matter how tough this soldier is, it doesn't matter how many bees he kills, the swarm is eventually going to overwhelm and annihilate him in the end. Defeat is inevitable.

Worldwide the ever-growing ranks of gold investors are like a massive horde of killer bees stinging the central-bank commandos. Individually we are nothing, but collectively we rule the gold world. Every year the total amount of gold held by hostile central banks dwindles as they sell and expend their very finite supply of ammunition. And every year the total amount of gold held by investors swells. As long as central banks continue to sell and investors continue to buy, the balance of power in the gold world will continue tilting towards investors.

So for you folks who feared potential central-bank action to somehow lessen the recent general-stock mini-panic, please consider this. Gold bottomed six years ago in April 2001 at just above $255. During this entire six-year period, western central banks sold gold and badmouthed it every chance they got. They dumped huge amounts of physical gold onto the markets. The central banks can never do more against gold in the coming years than they did over the past six years because their "market share" of global gold holdings continues to decline.

What was the net result of their long campaign? From April 2001 to May 2006, despite their best efforts, gold soared 181% to $720! Investors worldwide including myself and our Zeal subscribers are getting rich, building big fortunes, by actively betting against central banks in the gold market. Now if gold had only gone from $255ish to $260ish over six years, then I can understand fearing central banks. But to fear inept government bureaucracies that "allowed" gold to nearly triple under their watch? I have infinitely more fear of my dentist.

So this gold bull's stellar performance to date proves that fearing central banks is not rational. They are big and tough and mean like commandos, but swarms of investors always overwhelm them in the end all throughout history. Odds are the recent sharp pullback in gold had nothing at all to do with central-bank selling and was merely the result of temporary stock-market fears.

And it is interesting that even at the bottom of this latest gold pullback the metal was still looking fantastic within its newest upleg. From early October to early March, bottom to bottom, gold was still up 13.3% over six months. Now if the S&P 500 was up 13%+ over six months, investors would be ecstatic. But not in the incredibly surreal and paranoid world of gold. Gold-stock traders ignored gold's awesome technicals and sold their stocks in a blind panic. The sky was apparently falling.

This next chart shows the behavior of gold stocks over the same period of time as represented by the HUI unhedged gold-stock index. For reference, the closing gold data is rendered in red underneath the HUI technicals. Even though gold, not the stock markets, is the primary driver of the HUI, the latter's performance has been terrible. Many of our fellow gold-stock investors have been acting like preschoolers on Halloween, trembling in fright at the smallest odd sound or temporary selling streak.

Not that you'd notice lately, but believe it or not the HUI is in a young upleg too! Although it has struggled a bit on the higher-high front since early October, it is carving higher lows. The really interesting thing to me about this upleg is how pathetic it has been so far. Gold-stock investors and speculators are so steeped in fear, so ridiculously paranoid about everything under the sun, that even after a $124 and 22.1% gold rally since early October they still don't believe this gold upleg is real so they are not buying gold stocks.

This surreal disconnect is most evident when examining the HUI's leverage to the gold price. Leverage is a simple concept. If gold rises 10% over any given period of time and the HUI rises 20%, for example, then the latter has 2.0x leverage to gold. While I have done extensive studies on this leverage in the past, here is a quick benchmark for comparison. Overall in their respective bulls to date, the HUI has outpaced the gains in gold by 5.4x. Sometimes its leverage is higher, sometimes lower, but 5.4x is the final six-year result so far.

In both of these charts today I drew in some gray arrows that mark the four major moves we have seen in our current gold and HUI uplegs. While these moves don't match to the very trading day between gold and the HUI, as usual both assets have followed very similar big-picture patterns. They rallied and retreated. Then they rallied and retreated again. Of course this is very typical behavior within an upleg, two steps forward followed by one step back.

But what is not typical this time around is the HUI's abnormally low leverage to gold. In the initial surge off the early October interim bottoms, to point 1 in these charts, gold rose 15.2% by late November but the HUI only managed a 27.4% gain. This represents leverage of only 1.8x. Early on in an upleg is when it is hardest to believe in and it has the fewest converts, so I can understand this low initial leverage. We've seen it in the past too when new uplegs are first born.

But incredibly the HUI's leverage has been getting progressively worse since late November, which is not supposed to happen. From early October to early January, point 2 in these charts, the HUI only managed 1.2x leverage to gold bottom-to-bottom. This is really bad. Since gold stocks are vastly riskier than physical gold will ever be, they need to outperform gold by a large margin or there is no reason to own them. At a mere 1.2x, they barely broke above parity with their primary driver.

As of point 3, the latest interim highs of late February right before the recent slide, the HUI's upleg-to-date leverage to gold since early October had improved modestly to 1.3x. Still pathetic. And this is readily apparent on this chart too. Although gold's latest high of late February was 6.0% higher than its late November high, the HUI was flat high-to-high with a mere 0.4% gain. Gold rallied $39 but gold-stock investors could only drive a break-even.

This is certainly ugly, but here's the real kick in the teeth. From early October to point 4, this week's latest lows, the HUI's leverage to gold sunk below 0.9x! From early October to early March, despite gold being up $75 per ounce bottom-to-bottom, the HUI's gains were only 0.85x those of gold. Is this the end of the world? Has something fundamental truly broken? I really doubt it.

All bull markets climb an endless wall of worries. Every step of the way in the 996% run higher in the HUI since late 2000 has been plagued by fears and doubts. It was never psychologically easy to be long gold stocks in this whole bull market. Sometimes, such as today, the fears and doubts overthrow the minds of investors and rule in their hearts, and they are paralyzed and just cannot buy regardless of logic or opportunity.

The really ironic thing is that today's fears and doubts, central banks and bear markets, are the very same fears and doubts of years past. Yet legions of today's gold and gold-stock investors, either because they are new or suffer from amnesia, have forgotten. I discussed central banks above. If they were powerless to prevent gold from nearly tripling over the past six years, why does anyone still think they can somehow pull off a miracle and stop gold from tripling again over the next six years?

And a potential general-stock bear market being perceived as a negative for gold and gold stocks? Are you kidding me?!? Back in the day, between 2000 and 2002, one of the primary reasons fearless contrarians originally invested in gold and gold stocks was because we expected a secular bear in general stocks. Gold and gold stocks are safe havens during stock-market declines throughout history. The worse the general stock markets do, the more mainstream investors flee to the safety and big gains in gold and gold stocks.

So when I saw the US stock markets sell off in response to the Chinese stock-market selloff, I was really excited. Bring on the bear! During almost any bearish episode in history that you research, gold and gold stocks have thrived while general stocks go down in flames. Alternative investments shine the brightest when mainstream investments are in their deepest and longest declines. Yet apparently our peers disagree, as they carelessly flung their valuable gold stocks away last week like used toilet paper while general stocks fell.

But while I am disappointed at the sheer levels of fear paralyzing the gold investment community, this is very encouraging from a sentiment standpoint. Fear is highest early on in major bull markets and uplegs. Later when bulls and uplegs near tops, no one fears anything and greed reigns supreme. So to see such suffocating fear today strongly suggests that the parallel gold and HUI bull markets remain quite young. And this applies to shorter time scales too, so this particular upleg also looks quite young.

During most major uplegs in gold stocks, the HUI's leverage to gold starts out low initially and then soars near the end. As paralyzed by fear as this HUI upleg has been so far, I suspect its leverage ramp in the coming months is going to be very impressive. Gold stocks have the potential for huge gains in the months ahead as investors shake off their blind fear and start buying rationally again in response to a powerful new upleg in gold.

At Zeal we continue to focus on the big picture and add new trades in elite high-potential gold stocks during all of these irrational selloffs. While bull markets fight back every step of the way and try hard to buck investors off, the rewards for those who hold on through adversity are enormous. Please subscribe to our acclaimed monthly newsletter today if you want to fight your fears and ride this tremendous gold-stock bull much higher.

The bottom line is gold's technicals look fantastic. The HUI's are much weaker, but the HUI always follows gold in the end so the catch-up rally in this beleaguered index has an excellent chance of being huge and fast. Although fear is a normal human emotion, it has no place in the financial markets. The fearful always lose money in the end.

And today's gold-stock fears are nothing new, they are just recycled from the previous six years. And the gold-stock investors who sold out in response to these very same fears in the past missed enormous gains. The only ones who get rich in bull markets are those who train themselves to laugh at the wall of worries and focus on the cold, hard underlying fundamentals. Of course they remain very bullish for gold and gold stocks.

Adam Hamilton, CPA
Zeal LLC.com

Do you enjoy these essays? Please help support Zeal Research by subscribing to Zeal Intelligence today! &www.zealllc.com/subscribe.htm

If you have questions I would be more than happy to address them through my private consulting business. Please visit www.zealllc.com/financial.htm for more information.

Thoughts, comments, flames, letter-bombs? Fire away at & zelotes@zealllc.com Due to my staggering and perpetually increasing e-mail load, I regret that I am not able to respond to comments personally. I WILL read all messages though, and really appreciate your feedback!

Mr. Hamilton, a private investor and contrarian analyst, publishes Zeal Intelligence, an in-depth monthly strategic and tactical analysis of markets, geopolitics, economics, finance, and investing delivered from an explicitly pro-free market and laissez faire perspective. Please visit www.ZealLLC.com for more information, www.zealllc.com/samples.htm for a free sample, and www.zealllc.com/subscribe.htm to subscribe.

Copyright © 2000-2007 Zeal Research

An All-Weather Portfolio Using Multiple Asset Classes

By Chris Ciovacco
March 8, 2007

Note: Click on images to enlarge
Checking Your Diversification
"Watch the costs and the profits will take care of themselves."

Andrew Carnegie (1835-1919)

This article is part of a continuing series on asset allocation, which explores the potential benefits of investing a wide variety of asset classes beyond simply stocks and bonds. The multiple asset class approach to investing attempts to minimize the probability of incurring significant and prolonged portfolio losses.

In the world of investing, Mr. Carnegie might have said, "watch the losses and the profits will take care of themselves". As mentioned in a timely article dated December 29, 2006, False Diversification May Prove Costly In 2007, long bull markets often cause us to forget about the benefits of true asset class diversification. To illustrate the concept of false diversification, we studied a hypothetical portfolio made up of 12 different mutual funds and ETFs, which declined by 42.49% during the last bear market in U.S. stocks (2000-2002). Considering the S&P 500 declined by 46.34% in the same period, our hypothetical growth investor did not have a truly diversified portfolio due to positive investment and asset class correlations.


Building A Truly Diversified Portfolio
Understanding Asset Class Correlations


If one of your primary objectives is to produce positive investment returns while having a low probability of incurring losses in a reasonable time frame, you must first understand how different asset classes behave in different economic and financial market environments. Asset class performance during the 2000-2002 bear market is covered in Upgrading Your Asset Allocation For 2007.

Figure 1 shows the performance of the dividend-reinvested S&P 500 index from 1995-2006. When attempting to reduce portfolio volatility, it is helpful to identify asset classes or hedging strategies which performed well during the periods of weakness in U.S. stocks (shown by the blue circles below).

Figure 1











Asset Class Correlations In A Bear Market

Daily price data for specific investments representing the wide variety of asset classes listed in Figure 2A was collected from January 1, 1995 to December 31, 2006. Based on investment performance in both bull markets for U.S. stocks (1995-2000 & 2002-2006) and bear markets for U.S. stocks (2000-2002), the asset classes were separated according to their appeal in economic expansions (bull markets), economic contractions (bear markets), and special situations.















Asset Class Correlations In A Bear Market


An asset allocation between the asset classes listed in Figure 2A was developed which was able to produce positive annual returns every year from 1995-2000. In oversimplified terms, the asset allocation was built as shown in Figure 3.






Figure 3

Asset Class Correlations In A Bear Market


The resulting allocation produced the historical results shown in Figure 4. It should be noted that while this allocation was able to significantly reduce volatility is was not able to eliminate it. You can see by close examination of the blue line in Figure 4 that the allocation does exhibit periods of investment losses as you would expect in any investment program. However, the historical results are much more appealing than those of the S&P 500 index. While we will not publish the specific allocation which produced the historical results in Figure 4, Figure 3 does give you a visual representation of weightings between each asset class or investment.

Figure 4

Asset Class Correlations In A Bear Market


Investors can use ETFs, such as SPY, IYR, RWR, ICF, RWX, AWF, VDE, XLE, DGT, EEM, VBR, GSG, IEF, TLT, DVY, GLD, and SLV to gain access to a variety of asset classes.


Historical Performance vs. The Real World

Obviously, the next bear market and subsequent bull market in U.S. stocks will be different from the most recent cycles. The strategy we are building was developed with a respect for Mark Twain's way of looking at history: he stated,

"The past does not repeat itself, but it rhymes."

The future will not be exactly the same as the past, but there will be meaningful similarities. This strategy is based primarily on how asset classes, not individual stocks, performed under different economic and market conditions. This should make the results more relevant than if we studied how Microsoft's stock performed under the same conditions since individual stocks can be influenced by company specific outcomes (earnings disappointments, fraud, credit ratings, analyst recommendations, etc).

A common criticism of any study of historical asset class correlations is to point out that none of us know which asset classes will be the winners in the future. While that criticism does hold water, many of the asset class correlations presented here should remain relevant in future economic cycles. For example, the odds are extremely high that bonds will be more desirable in an environment where the Federal Reserve is lowering interest rates (the Federal Funds Rate). Conversely, in the future, the odds are good that bonds will be less attractive under conditions where the Federal Reserve is raising interest rates. The odds are also reasonable that commodities will be more attractive in periods of economic expansion and they will be less attractive in periods of economic contraction.

Is multiple asset class investing the cure for all your investment worries? We all know that no such cure exists. However, research shows that there may be a better way to build a portfolio of investments that offers real diversification and an opportunity for improved returns. In an effort to better prepare for 2007 and beyond, I recently conducted some extensive research on the potential benefits of investing in a wide array of asset classes, including some with low or negative correlations to U.S. stocks. Since the study, Protecting Your Wealth From Inflation And Investment Losses, is rather lengthy, I will continue to summarize what the historical numbers tell us in future articles. While there are several ways to successfully approach the investment markets, I feel we can all gain some advantage from reviewing how different asset classes performed in both bull and bear markets. As time permits, I will continue to expand on these topics in the coming weeks.

Chris Ciovacco
Ciovacco Capital Management

Atlanta Independent Money Management Atlanta
Chris Ciovacco is the Chief Investment Officer for Ciovacco Capital Management, LLC. More on the web at www.ciovaccocapital.com

All material presented herein is believed to be reliable but we cannot attest to its accuracy. Investment recommendations may change and readers are urged to check with their investment counselors and tax advisors before making any investment decisions. Opinions expressed in these reports may change without prior notice. This memorandum is based on information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned. The investments discussed or recommended in this report may be unsuitable for investors depending on their specific investment objectives and financial position. Past performance is not necessarily a guide to future performance. The price or value of the investments to which this report relates, either directly or indirectly, may fall or rise against the interest of investors. All prices and yields contained in this report are subject to change without notice. This information is based on hypothetical assumptions and is intended for illustrative purposes only. THERE ARE NO WARRANTIES, EXPRESSED OR IMPLIED, AS TO ACCURACY, COMPLETENESS, OR RESULTS OBTAINED FROM ANY INFORMATION CONTAINED IN THIS ARTICLE. PAST PERFORMANCE DOES NOT GUARANTEE FUTURE RESULTS.

Why housing figures to be a drag on the U.S economy for a long time to come - Thomas Au

by Thomas Au

Are subprime mortgage lenders like New Century Financial and Novastar taking it on the chin? And is this just a local problem affecting a few imprudent, overleveraged operators? Or are investors right to sell out of stronger lenders such as Washington Mutual, as I did recently? Perhaps the collapse of the housing bubble will even lead to a credit crunch that will last for a year or two like that of 1966. But maybe it would be a small price to pay for the boom of the past few years, if we could have a result similar to the earlier event (which involved no recession and was relatively painless). Or is housing finance an issue that could affect the U.S. economy for a much longer period of time?

In fact, it matters a great deal. For instance, the rise in housing values has provided a boost to American consumption, hence the U.S. economy, up until early 2006 when we started to see a softening of housing prices, which was reflected in the decline of housing sales and also borne out in the decline of the housing stocks. The latter hasn’t hurt the consumer yet, but will soon, an important consideration when one considers that some 1%-2% of annual GDP growth has been due to home equity-driven spending, enough to make the difference between growth and recession. And, in finance, besides the little guys, HSBC (formerly Hong Kong Shanghai Bank) is a global player that could become the modern Credit Anstalt.* Meanwhile, others such as Jamie Dimon’s JP Morgan Chase, which has relatively few such loans on its books, and claims to be a more astute player in this market, is a prime broker to a large number of hedge funds, at least some of whose portfolios are stuffed with mortgage-backed securities.

As pointed out by Professor Robert Shiller of Yale (who, as Doug Kass and I have noticed has become a housing bull since his 2001 warning about Irrational Exuberence), the rise in housing prices during the 100 years between 1896 and 1996 basically tracked inflation. So adjusting for inflation, his index was 100 in 1896 and about 100 in 1996, with only a brief dip into the 60s during the 1930s and a rebound since. But between 1996 and 2006, house prices doubled in real terms from around 100 to almost 200 in 10 years. It’s interesting to note that this parabolic rise closely tracks the rise in home equity extraction, via securitization, home equity loans, and related products such as interest only-and negative amortization mortgages. Perhaps the best analysis and graphics regarding this phenomenon was put out by Paul Kasriel of Northern Trust in 2005, showing essentially zero equity extraction prior to 1996, with essentially all of it having come since then.

Why did this happen recently, and not at some other time in American history? Previously, a house had just been a place to live in, as well as a store of value. The advantage to homeowning, over renting, was that home equity, built up over a professional lifetime, was at least portable, whereas rent payments were not. That is, the sixtyish owner of a house paid up over thirty years could sell it and presumably buy an equivalent home in a retirement community in warmer weather, or else purchase a smaller home somewhere, and live off the difference in values, whereas a renter would have nothing to show for decades of paying rent. But even real estate investors such as owners of apartments formerly bought them as they would bonds or TIPs (Treasury Inflation Protected Securities), primarily for rents, and maybe some inflation protection, rather than (real) capital gains. Until recently, therefore, rental properties would almost always “cash flow” (be priced to allow rents to more than cover the cost of mortgage payments and maintenance expenses).

But the securitization of housing made it possible to treat it as an investment, because homeowners could readily borrow against it in times of need. Since it “always” went up (at least since the 1930s, which everyone has forgotten and almost no one thinks will happen again), this was not an imprudent thing to do, went the argument. The cycle reinforced itself, as genuinely greater liquidity reduced the “cap rates” (relative to rents) on homes, pushing up house prices at a faster rate than inflation. Then the sudden availability of housing-related credit made it possible for homeowners to ratchet up consumption by monetizing the newly-created equity. Once housing acquired these desirable investment features, it seemingly could be priced as a risk-free investment, a point (wrongly) made regarding stocks by the authors of “Dow 36,000” in the year 2000.

A similar thing happened to stocks in the 1920s. Prior to that time, they had been bought primarily for income, like low-grade bonds, as companies typically paid out 60%-70% of their earnings in dividends (as utilities still do), reinvesting less than half. While present, capital gains mostly matched inflation, as was the case with housing until 1996. The transition from owning stocks for income to buying stocks for real capital gains was a challenging experience that created a bunch of excesses, including 10% margin requirements, that brought about the 1929-1932 stock market crash that also took down housing values by nearly 50% (versus a decline of nearly 90% for Dow stocks). Although the resulting creation of the SEC eliminated those particular excesses, a similar thing may have happened in housing today, with 0% down, “low doc” loans, for some 40% of new buyers and 25% of all buyers, even (until recently) subprime borrowers. This could quite possibly produce a similar result in both the housing and the stock markets.

So where does all this leave the consumer? Well, today, the average family income is something like $40,000 a year (using round numbers) and the average house price is more like $240,000, versus a trend-line value of $120,000. The old rule of thumb was that a family could afford a house worth 3 times its income, meaning that a family with income of $40,000 a year could afford a hypothetical average house costing a trendline $120,000. This would consist of a down payment of perhaps $20,000 and a mortgage for 2.5 times income, or $100,000.

But when the average house actually costs about $240,000, or 6 times the average family income (which is a more suitable ratio for a Japanese person who can borrow at a 2% rate), that’s when an average American’s problems begin. With no money down, supporting a house of that cost on a $40,000 income will leave precious little money for other needs. And if the “New Economy” metrics no longer hold up and the value of the average American house mean reverts to its trendline $120,000 (adjusted for inflation), the average U.S. homeowner will have taken a huge capital loss that will be a spending- and lifestyle- crimping event for some decades to come. Under such circumstances, “rent and invest the difference” (to paraphrase term life insurance advocate A.L. Williams), would have been the smarter thing for consumers to do. And lenders should have felt the same way, which would have enabled them to avoid the mess they’re now in.

No positions.

Thomas P. Au
R. W. Wentworth
New York City, NY
Email

Thomas P. Au, CFA is an author and Market Analyst. Mr. Au has over twenty years of experience in securities analysis and portfolio management for both equity and fixed income securities. He has worked for Value Line, Cigna Investment Management, and other organizations. Prior to joining R.W. Wentworth, he was an analyst of the "monoline" municipal bond insurance companies. He is the author of "A Modern Approach to Graham and Dodd Investing" (Wiley, 2004).

Mr. Au graduated cum laude, with a B.A. in Economics and History from Yale University, and an M.B.A. in Finance from New York University. He is a Chartered Financial Analyst (CFA).

A Function of Price and Technology - Byron King

by Byron King

On March 5, 2007, The New York Times published an article entitled “Oil Innovations Pump New Life Into Old Wells,” by Times correspondent Jad Mouawad. The title of the article referred to recent increases in oil extraction from older oil fields, noting:

“Within the last decade, technology advances have made it possible to unlock more oil from old fields, and, at the same time, higher oil prices have made it economical for companies to go after reserves that are harder to reach. With plenty of oil still left in familiar locations, forecasts that the world’s reserves are drying out have given way to predictions that more oil can be found than ever before.”

As is the case with much of what gets published in The New York Times, some of the information in the article is true. But then again, to the well-trained and highly polished Peak Oil mind, the article has a lot of disinformation in it about what is the long-term state of the oil patch. In a not-so-subtle manner, the Times article appears to diminish the credibility of the Peak Oil argument. Specifically, the Times article focuses on allaying any Manhattanite fears of future scarcity of conventional oil by suggesting that “new technology” will locate and extract immense volumes of oil with which mankind will, to all intents and purposes, power its way into a brighter future. It is as if we can now all kick back, pop a beer, wipe the sweat from our collective brow, and say, “Whew, we dodged that Peak Oil bullet.”

Oh yeah? Not so fast, pilgrims. Let’s take another look at this “new technology” subject matter. And allow me to amplify some of the substance of what the Times is attempting to relate.

Porosity, Permeability, Rocks, and Reserves

The “world’s reserves are drying out,” states the article. I would not put it quite that way. Oil reserve estimates are a complex mixture of science and art, but the aggregate number depends in large measure on price. Reserve estimates do not really “dry out.” Estimates or volumes or quantities may rise or fall, but there is nothing dry about them, except for the Securities and Exchange Commission rules that govern how publicly traded oil companies have to do the underlying engineering-based accounting. And is it true that, as the article states, “more oil can be found than ever before”? No, not exactly. The oil in older oil fields has, of course, by definition, already been found. The oil may or may not have been extracted and recovered, but it has been found. Getting it out is the problem, and for that we have to drill holes into the rocks. Always have, and always will.

Oil, and associated natural gas and water, accumulates in what are known as “reservoir” rocks over periods of geologic time, meaning very long time periods often as not measured in millions of years. Reservoir rocks are almost always sedimentary rocks that have a fortuitous combination of what is called “porosity” and “permeability.” (In rare locales, such as offshore Vietnam, metamorphic, and even igneous, rocks serve as reservoir rocks. The oil originated elsewhere, and has migrated into porous, permeable metamorphic or igneous rocks. We will address the migration process shortly.) The porosity of a rock is a measurement of the volume of the (usually) microscopic “pore” spaces between the mineral grains that make up the bulk of the rock. And the permeability of a rock is a measurement of the ability of a fluid to flow through these small pore spaces. (Just to be clear, oil is not located in big, empty voids deep within the earth. There are no natural “pools” of oil, like gigantic underground swimming pools, waiting for someone to drill and pump the oil out.)

But a reservoir rock also needs some sort of “cap,” or trapping mechanism, to hold the oil inside its pore spaces. Over geologic time, even very minor leaks (along, say, fractures or faults) can allow essentially all of the fluids, and certainly the valuable ones like petroleum, to drain out of a rock formation. Rock formations such as salt beds or tight, very impermeable shales often serve as cap rocks, keeping the petroleum fluids sealed within the reservoir rock. And all of this assumes that somewhere nearby is a “source” rock, from which the oil and natural gas originated. Usually, the source rocks are located in close proximity to the reservoir, but not always. In some of the conventional oil fields of Western Canada, for example, the source rocks are as much as 100 miles from the reservoir rocks, indicating quite a long migration to their ultimate resting place.

So the oil that lubricates and powers the world originated during various geological periods of the past and came to be formed in source rocks. Eventually, and subject to a multitude of geologic forces and phenomena acting over relatively long periods of time, the oil migrated from the source rocks into permeable reservoir rocks. As the oil flowed through these reservoir rocks, it came to occupy the pore spaces within the grains that make up the underground oil reservoir. Some sort of cap, or other lithologic seal, kept the oil in the reservoir rocks, awaiting discovery in the years since Col. Drake ushered in the modern Age of Petroleum, starting in 1859 at Titusville, Pa. This oil in the ground is usually called the “original oil in place” (OOIP).

Gushers and Blowouts

While we are on the subject of oil in the reservoir (or OOIP), I should mention that in order for the oil to be able to migrate into a drill hole, there is a requirement for “reservoir energy.” That is, some form of energy has to be present within the reservoir rock to cause the OOIP to move from the pore spaces where it has resided for these many years into a hole in the ground. Reservoir energy can be present due to the fact that most oil contains dissolved natural gas, usually under pressure, and in some locales under great pressure. (I write from personal experience on this one.) So the oil, with the “higher pressure” gas dissolved within, tends to flow, via that above-noted permeability, through the pores of a rock formation and into the “lower pressure” hole that the drillers have put down into the ground. The aboveground analogy would be the carbon dioxide (CO2) gas dissolved in a bottle of soda pop. When you remove the cap from the bottle, the dissolved gas starts to fizz towards the low-pressure open end of the bottle.

In the olden days, when people who drilled for oil did not quite understand the process, they would drill down into a rock formation and the reservoir energy would overwhelm the hole in the ground. This ofttime led to a rapid explosion of pressurized oil from the ground, famously known as a “gusher.” The old movies and photos show people acting happy, and even dancing with joy when a well “gushed.” But unbeknownst to the early oil pioneers, this was a disastrous waste of the reservoir energy of the oil field, because it caused the dissolved gas rapidly to exit from the reservoir rock and leave much of the otherwise recoverable oil behind. Thus, much of modern petroleum engineering has to do with monitoring and maintaining reservoir pressures as high as possible for as long as possible during drilling and producing operations, so as to recover as much of the OOIP as is possible. And yes, things like gushers can still happen in today’s highly engineered world, but we call them “blowouts.” They are not happy occasions.

Neglected Resources: 2 out of 3 Barrels

The New York Times article further discussed the process of oil recovery, stating:

“Typically, oil companies can only produce one barrel for every three they find. Two usually are left behind, either because they are too hard to pump out or because it would be too expensive to do so. Going after these neglected resources, energy experts say, represents a tremendous opportunity.

“‘Ironically, most of the oil we will discover is from oil we’ve already found,’ said Lawrence Goldstein, an energy analyst at the Energy Policy Research Foundation, an industry-funded group. ‘What has been missing is the technology and the threshold price that will lead to a revolution in lifting that oil.’”

This description makes it seem like oil companies have always had more control over what happens than is actually the case. “Too hard to pump out,” states The New York Times article. Well, sort of. What the article is attempting to describe is the process whereby, over time, about one-third of the conventional oil in a given reservoir migrates from its geological location to the drill hole. The reason that it migrates is because of that above-noted reservoir energy. Think of the high pressure oil (or at least, the “higher” pressure oil) moving towards the low-pressure drill hole. This migrating oil is that one barrel out of three, on average. (Some oil fields yield higher percentages of the original oil in place. Other oil fields yield far lower percentages.) By the time that the one barrel makes its way to the borehole, the reservoir energy has diminished to the point that it is not sufficient to mobilize the other two barrels. So that oil remains behind, in the reservoir rock formation.

For most of the history of the oil industry, oilmen have been at the mercy of the reservoir energy in the rock formations deep beneath their feet. If you were fortunate enough to locate low viscosity oil with a high measure of reservoir energy, then you could extract a high percentage of the OOIP. Col. Drake’s first well at Titusville, for example, produced a “Pennsylvania” grade of crude oil that was exceedingly slippery (i.e., low viscosity, such that it feels smooth like hand lotion) from a thin, porous sandstone with excellent permeability, and the reservoir energy that benefited Col. Drake was what is called “water drive.” That is, ground water was essentially pushing the oil from the rock formation into Drake’s 69-foot-deep hole in the ground. Under these circumstances, recovery of OOIP from the sandstones beneath the Titusville region was relatively high over the years.

Enhancing the Reservoir Energy

At the other end of the oil patch spectrum, however, the Kern River oil field, discovered in 1899 near Bakersfield, Calif., yields a highly viscous sort of oil, loosely described as “heavy oil.” There was never all that much reservoir energy to begin with, so the original rates of recovery of OOIP were in the range of perhaps 10%. In other words, nine out of 10 barrels of OOIP were left in the rock formation.

But in recent years, as The New York Times notes in its article, Chevron has been using steam-flood technology and computerized 3-D reservoir modeling to boost the output of the Kern River field’s heavy oil reserves. For something over two decades, Chevron engineers have injected high-pressured steam into the oil reservoirs, to enhance the reservoir energy and to mobilize the oil. This has allowed Chevron to pump out more oil. Production from the Kern River field had slumped to about 10,000 barrels a day in the 1960s, but with the steam flood, it now has a daily output of about 85,000 barrels. And even after a century of production, Chevron engineers say there are many more years of productive life left in the field, and much more oil to be pumped from Kern River, although all the steam in the world will not prevent the inevitable phase of irreversible decline in production over time.

According to The New York Times article:

“At the Kern River field…millions of gallons of steam are injected into the field to melt [sic] the oil, which has the unusually dense consistency of very thick molasses. The steamed liquid is then drained through underground reservoirs and pumped out by about 8,500 production wells scattered around the field, which covers 20 square miles.

“Initially, engineers expected to recover only 10% of the field’s oil. Now, thanks to decades of trial and error, Chevron believes it will be able to recover up to 80% of the oil from the field, more than twice the industry’s average recovery rate, which is typically around 35%. Each well produces about 10 barrels a day at a cost of $16 each. That compares with production costs of only $1 or $2 a barrel in the Persian Gulf, home to the world’s lowest-cost producers.”

While there is nothing objectionable about what The New York Times article states, the article misses an important point with those “millions of gallons of steam.” There are immense amounts of energy involved in generating the steam that goes into the ground, and this is one of the reasons why Kern River oil is up to 16 times more costly to produce than Persian Gulf oil.

And not to quibble, but pumping steam is not exactly new or revolutionary technology. Oil well drillers near Titusville were documented as pumping steam down well bores as early as 1862, at first in an effort to remove the paraffin wax that built up inside the well casings. Then, over time, people noticed that a “steam bath” tended to give a kick to subsequent production. These old drillers may not have understood the engineering aspects in any detail, but they knew what worked out in the field.

Then as now, making steam required boiling water, which required more capital investment, equipment, energy, and labor, so it drove up costs. Plus, making and pumping steam added to the danger of working in the oil patch, and it was dangerous enough to work just around oil wells with no hot steam pipes crisscrossing the landscape. So the steam-pumping process added even more potential for leaks, sparks, and explosions. Thus, for many years steam pumping was used only in exceptional circumstances. As long as oil was cheap and relatively available from other oil fields in other locales, there was no particular incentive to add more layers of complexity to a process that was difficult enough on good days.

But above a certain price for a barrel of oil, the extra cost of steam, or other methods of enhanced oil recovery, can pay for itself. The New York Times article noted that the Kern River is…

“Littered with a forest of wells, with gleaming pipes running along dusty roads. Seismic technology and satellites are now used to monitor operations, while sensors inside the wells record slight changes in temperature or pressure. Each year, [Chevron] drills some 850 new wells there…

“There are very few workers in the field. Engineers in air-conditioned control rooms can get an accurate picture of the field’s underground reservoir and pinpoint with accuracy the areas they want to explore. None of that technology was available just a decade ago.”

What a Difference a Decade Makes

No, a decade ago, oil was selling for as little as $10 per barrel. And the Kern River field was a high cost outpost of marginal wells that produced viscous oil that was (and still is) hard to handle and refine. But things have changed, and now the place is booming.

Worldwide, reserves of conventional oil, also known as the “easy” oil, are declining and not being replaced. Oil companies, from the likes of large majors like Chevron to the national oil companies (NOCs) of many nations, are looking further afield for oil supplies, and are also looking at older areas to attempt to recover what they left behind the first time around. In some areas, old oil fields that were long ago abandoned and plugged with concrete are being drilled again.

“There are finite resources in the ground, but you never get to that point,” states Jeff Hatlen, an Chevron engineer, in a discussion with the reporter from The New York Times. “Peak Oil is a moving target,” Mr. Hatlen said. “Oil is always a function of price and technology.”

Price, Technology, Time, and Depletion

Yes, oil is a function of price and technology. But oil is also a function of time and depletion. So over the long term, and as existing reserves deplete, we have to ask the question, “What price and what technology?” That is, how much are people willing to pay, and for what kinds of equipment, to recover oil from the ground? Of course, every good business student learns early to ask, “What is the return on investment?” But the next question, that far fewer people even understand how to ask, is “What is the energy return on energy investment (EROEI)?” How much can anyone pay, and what measure of resources is it worth to get to that last marginal barrel? And the ultimate question is, “Can price and technology move the marketplace for energy faster than oil reserves are declining in the face of depletion?”

We are, of course, all going to find out, should we live so long.

Until we meet again…
Byron W. King

For Whiskey and Gunpowder

Byron W. King is a practicing attorney in Pittsburgh, Pennsylvania, with real clients and real law books on his shelves. After graduating from Harvard University more years ago than he cares to discuss, Byron worked as a geologist in the exploration and production division of a major international oil company. He has followed developments in the oil and gas industry for almost three decades. However, in the process of seeking more excitement than a man can safely obtain from flaring over-pressurized gas whipping out of a 21,000-foot well, Byron also served for many years in both the active and reserve components of the United States Navy.

While in the sea service, Byron logged more flight time in tactical jet aircraft than George W. Bush, as well as 127 more carrier landings than the recently-re-elected commander in chief. Among other assignments, Byron has served as a field historian with the Navy.

Byron looks at current events, economics, and politics through the lens of history. He brings to the table a unique perspective that incorporates many millions of years of the Earth’s geologic history, and blends its significance into the more recent, man-made kind of tale.

The Coming Entitlement Meltdown - Ron Paul

by Dr. Ron Paul

David Walker, Comptroller General at the Government Accountability Office, appeared on the show “60 Minutes” last evening to discuss the federal budget outlook. If you saw the show, you know that he painted a very sobering picture regarding the federal government’s ability to meet its future obligations.

If you didn’t see the show, Mr. Walker’s theme was simple: government entitlement spending is like a runaway freight train headed straight at American taxpayers. He singled out the Medicare prescription drug bill, passed by Congress at the end of 2003, as “probably the most fiscally irresponsible piece of legislation since the 1960s.”

When it comes to Social Security and Medicare, the federal government simply won’t be able to keep its promises in the future. That is the reality every American should get used to, despite the grand promises of Washington reformers. Our entitlement system can’t be reformed- it’s too late. And the Medicare prescription drug bill is the final nail in the coffin.

The financial impact of the drug bill cannot be overstated. Government projections that the program would cost $400 billion over the next decade were a joke, as everyone in Congress knew even as they voted for the bill. The real cost will be at least $1 trillion in the first decade alone, and much more in following decades as the American population grows older.

The Medicare “trust fund” is already badly in the red, and the only solution will be a dramatic increase in payroll taxes for younger workers. The National Taxpayers Union reports that Medicare will consume nearly 40% of the nation’s GDP after several decades because of the new drug benefit. That’s not 40% of federal revenues, or 40% of federal spending, but rather 40 % of the nation’s entire private sector output!

The politicians who get reelected by passing such incredibly shortsighted legislation will never have to answer to future generations saddled with huge federal deficits. Those generations are the real victims, as they cannot object to the debts being incurred today in their names.

The official national debt figure, now approaching $9 trillion, reflects only what the federal government owes in current debts on money already borrowed. It does not reflect what the federal government has promised to pay millions of Americans in entitlement benefits down the road. Those future obligations put our real debt figure at roughly fifty trillion dollars- a staggering sum that is about as large as the total household net worth of the entire United States. Your share of this fifty trillion amounts to about $175,000.

Don’t believe for a second that we can grow our way out of the problem through a prosperous economy that yields higher future tax revenues. If present trends continue, by 2040 the entire federal budget will be consumed by Social Security and Medicare alone. The only options for balancing the budget would be cutting total federal spending by about 60%, or doubling federal taxes. To close the long-term entitlement gap, the U.S. economy would have to grow by double digits every year for the next 75 years.

The answer to these critical financial realities is simple, but not easy: We must rethink the very role of government in our society. Anything less, any tinkering or “reform,” won’t cut it. A good start would be for Congress to repeal the Medicare prescription drug bill.

Ron Paul
Project Freedom

Our words come back to bite us -Leeb

by Stephen Leeb

In this week's "wordy" update ...

***** Our words come back to bite us.

***** What's the Mandarin word for "ah choo"?

***** TCI's word of the week is "complacency."

***** Words of wisdom gleaned from soap operas.

-------------------------------------

If you read our previous update carefully, you might recall our saying, "Sure, we could have another down week..." Not that we're trying to claim any prescience. Like most commentators, we did not expect the 4.4% sell-off which occurred in the past few days.

At the same time, as we mentioned in Tuesday's Special Update, we were not too surprised. Several updates ago, we pointed out that the highs which recently occurred in all the major averages, including the Dow Transports, constituted a Dow Theory BUY signal. We also noted that such signals are often followed by a short-term correction.

The last time this occurred was in March 2006. After all the major averages made new highs, they endured a five to six week slide. It wasn't until July that stocks finally began to rise again -- which was the beginning of a seven-month rally. The one that seems to have ended last week.

We would also not be surprised if a similar pattern unfolded again -- say if the Dow were to fall 200-400 points over the next six weeks. That's not a prediction -- just an attempt to narrow our range of expectations. The important thing to remember is that even after a correction of that degree, the long-term bull market would remain intact. We are therefore not ready to start panic-selling. Not by a long-shot.

So why did this sell-off occur? The answers may surprise you ...

WHEN CHINA SNEEZES ... IT'S A NEW WORLD ORDER

You may have read by now that the catalyst for last week's correction was the sudden 9% plunge in China's stock exchange. That's a sizable drop. But it didn't occur for the reasons many Westerners would like to think.

Let's remember, first of all, that Chinese stocks were due for a pullback, having been on a crazy tear for some time. Multiples were very high. Then the Chinese government spooked investors by making a small attempt to curb the growing market for a type of loan which is illegal in the first place. And they did it to reduce the risk of an even bigger stock market decline later on.

There are those who would prefer to believe the sell-off was a sign of a slowing Chinese economy -- but it wasn't. It is the U.S. economy which appears to be growing slower than expected. China and India are zipping along same as ever.

Once upon a time, the saying went, "When the U.S. sneezes, the world catches a cold." But in today's global economy, if any major economy sneezes, the world reacts in step.

And there's another even bigger reason why U.S. stocks dipped ...

THE ERROR OF COMPLACENCY.

Today's investors (you excluded, naturally) had again become too complacent. It's a flaw in human nature. People want to relax in good times. And when everything looks like it's under control and stocks have chugged along nicely for seven months, investors let their guard down. Bulls realize they're ready for a nap just as bears are getting warmed up.

This is why markets often correct after a Dow Theory buy signal, after everything hits new highs. It's that moment when investors breathe a sigh of relief, put their feet up, and take their coffee break. They become complacent, and therefore easy victims to surprises.

The Chinese sell-off certainly caught everyone by surprise. And Tuesday's follow-up in the U.S. market was as one-sided as we've ever seen. Only two stocks in the S&P 500 rose. Of the 30 stocks that make up the Dow, none rose. Clearly the bulls were hanging out in the lunchroom a bit too long.

What happens now? Our best guess would be another week of weakness, followed by a flattening out. We do want to emphasize that our indicators remain solidly bullish. Indeed, despite last week's action we saw the relative strength of small cap stocks hit an all-time high, which is a very positive sign. If the market truly were about to tank, we wouldn't expect the small caps to be holding up better than the economic leaders.

So -- as we said in the last update -- regard pullbacks more as buying opportunities than reasons to exit. That includes the one we're in. Just bear in mind that the bottom may not yet have been reached.

Meanwhile, if you want to worry about something ...

OIL: THE REAL PERIL

Turning to oil, we see where the real threat lies today. The more we and other financial and industry experts study the data, the more it seems something is not right. It is extremely suspicious that the Saudis have been cutting back oil production while prices were rising; this has taken place in fits and starts dating back to the fall of 2004. In fact, it suggests the Saudis have very little excess capacity. Perhaps the 2.5 million barrels a day they claim to hold in reserve does not exist.

If you have ever watched a daytime soap opera, you know one thing: all secrets eventually come to light. So if the Saudis are keeping secret a shortage of production capacity, we are certain that growing demand for oil will force that secret into the open.

Assuming the Saudis are forced to confess the truth in time, the result will likely be a big jump in oil prices. And that would certainly affect the world economy much more seriously than China's attempt to prick a stock market bubble before it fully inflates.

Clearly, we still have time. While no big "official" agency or government is ready to expose this possible situation in the Saudi oilfields, we would not be surprised if it eventually came to light (and consequently sent reverberations through the energy markets). And we aren't ready to declare a new uptrend in oil until the price surpasses $65 a barrel. (We actually think there could be a brief pullback to the mid-50s first.) But in the long run, higher oil prices are inevitable, and are the biggest threat we see today.

Turning to stocks ... Berkshire Hathaway's recent earnings report was notable for two important items. First, the numbers were terrific. The company is growing its earnings like crazy, yet remains undervalued. We continue to recommend it to all investors. Second, we note that Warren Buffet has taken big positions in the British food giant Tesco and a Korean steel company called Tosco. If Buffett is bullish on food and steel, the world must be in pretty good shape economically.

We also note that Buffet has not sold any of his PetroChina stake, which is a vote of confidence in the Chinese economy.

Bottom line: the next few weeks may be bumpy. But any of the stocks in our Growth Portfolio that fell last week remain "buys." When you see signs the worst is over, add to your positions.

Until next week,

Stephen Leeb
Editor,
The Complete Investor

Disclaimer

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IRAQ, IRAN, GLOBAL WARMING AND THE APOCALYPSE

by David J. Jonsson

Islam has many apocalyptic prophecies; this aspect of Islam contributes to the driving force of Islam. Iran joined by Syria wants to end the democratic experiment in Iraq. Iranian money, weapons and expertise are used by terrorists to kill Americans in Iraq. Iran’s support of Hamas disrupts Palestinian peace efforts. Hezbollah, a group also backed by Iran and Syria, seeks to destabilize Lebanese democracy and restart a border war with Israel. Iran which denies that a European Holocaust ever took place is now planning to create a second Holocaust in Europe and in the U.S. with the development of nuclear weapons and the missiles to deliver the weapons.

Only the sustained American policy of ostracizing Iran and Syria, galvanizing the international community to enforce financial and trading sanctions, supporting Iranian and Syrian reformers, and keeping all options for war on the table including a high-profile presence in the area offers any hope containing a potential holocaust.

In order to understand the issues faced by the Administration it is necessary to review history and look at the many factors that are currently leading to the almost intractable solution to the crisis developing in the Middle East. The solution requires thinking outside the current events in Iraq. It requires abandoning the ‘silo’ approach of addressing foreign policy, energy, environment—Global Warming, homeland security, and defense as separate issues. The solution also requires the integration of commercial/business and government sectors in the solution. Without addressing the geopolitical ramifications to the U.S., EU, Russia and China beyond the immediate crisis in Iraq and Iran; a solution cannot be found.

Exclusively increasing military strength, diplomacy or withdrawing from Iraq will not defer or result in a lasting peace. Whatever way the Iran and Iraq crisis is resolved, it will lead to a major shift in the geopolitical landscape. The goal is to have a soft landing. This will require sacrifice, compromise but not appeasement, and most importantly prioritizing the most important elements of our culture – faith, freedom, liberty, and democracy, as we know it in America. Decision time is fast approaching. Unfortunately both Iran and the U.S. may be underestimating the power of the other side and overestimating their own. Iran thinks it has a lot of deterrents, in Iraq and elsewhere, and in the armed forces - and it sees the US bogged down in Iraq, Washington divided and public opinion in the Muslim world opposed to war.

We will discuss how these elements are directly interrelated and suggest potential solutions for consideration.
· The Power of Apocalyptic Teaching
· Likud leader Benjamin Netanyahu Comments on the Simularity to Events Preceding World War ll
· Kofi Annan Learns of the Intent of Iran
· Persia is an Ancient Country with a Great Tradition
· Germany’s Four-Year Plan a Precursor for World War ll
· Implications of the Immanent Return of the Twelfth Imam
· The Prophetic Messages of Christianity and Islam
· Shiite and Sunni Apocalyptic Teaching
· The Nuclear Crisis with Iran Continues
· The Need for Addressing the Global Risk

The Power of Apocalyptic Teaching

There is power in apocalypse. Fundamentally, the belief in the imminent end of the world changes people and gives them the strength of an absolute conviction that God is on the side of the believer, a very definite goal, and the impetus to excel above and beyond their ordinary abilities. All three of these components are present in a truly apocalyptic group and serve to mold it together into a possibly, though not necessarily, destructive organism, to which the outside world is an enemy to be conquered and dominated. While all of the above is well known and obvious after studying any of the apocalyptic groups, the question before us is: Is Islam an apocalyptic faith, and if it is, then what were and still are the ramifications for the outside world? How does the Global Warming Apocalypse relate? The ideologies are political religions that substitute the state for divine reality. Pantheist-environmentalism is apocalyptic and is a form of Gnosticism. This religion worships mother earth and its members proudly slander Jesus the Messiah and Christian sexual morals.

Global Warming Apocalypse

Ironically, the Hedonistic Left led by ex-President Al Gore supports another doctrine of apocalypses that is the Global Warming Apocalypse. Al Gore has been busy returning global warming to center stage with terrifying warnings of disaster with his best-selling book, An Inconvenient Truth, and the popular companion documentary. This same left has become key participants in the Leftist/Marxist – Islamist Alliance. This is a little hard to take from the global warming alarmists, given that they normally support live-for-today hedonism. It is further difficult in that the implementation of Shariah law would be the end for their hedonism and potentially their lives. Can a decadent elite which ushered in decades of self-indulgent, drugs-and-promiscuity-laden lifestyles credibly warn of “death and destruction,” civilizational collapse and the need for abstemiousness? Ellen Goodman of the Boston Globe has now famously compared global warming skeptics to Holocaust deniers, bringing to bear a stern moral certainty about protecting the earth she can't find in her heart for the protection of unborn children. Like Marxism, this Global Warming Apocalypse pronouncement is supposed to sustain civilization not through individual virtue but through regulation and centralized planning. Their elite whose goodness is measured not by their own moral behavior but by the brilliance of their statist schemes will apparently save the earth. And through the Leftist/Marxist – Islamist Alliance they promote appeasement with the vary forces seeking their own destruction.

The Hedonistic Left revolutionaries have a vision of the new and perfect world, the beginning of a new age when all would be different. The hedonistic left promotes ideologies which encompass political secular religions—the belief in the spirit of Gaia—the Mother Earth and that substitutes the state for divine reality.

Maurice Strong previously a senior advisor to United Nations' Secretary General Kofi Annan is also a key participant with his involvement in the U.N. Education Scientific and Cultural Organization (UNESCO). Strong's most significant role at the U.N. to-date has been his position as Secretary General of the 1992 U.N. Conference on the Environment and Development, the Rio Earth Summit. At the core of the UN-NGO alliance is Maurice Strong, a multimillionaire Canadian-born businessman who has devoted much of the last 30 years to orchestrating the alliance's "global governance" campaign. Through his work in UNESCO, Strong promotes Gaia, the Earth God, among the world's youth. Strong is also a part of The Temple of Understanding in New York a global interfaith organization with NGO consultative status with the United Nations Economic and Social Council and has had representation at all of the major international conferences. He uses The Temple to encourage Americans concerned about the environment to replace Christianity with the worship of "mother earth." See also my article: Axis of Appeasement — The Inconvenient Truth

What Part Will Religion Play in Emerging Global Warming Struggles?
It is important to review the history of Global Warming Apocalypse development.

The Global Forum of Spiritual and Parliamentary Leaders on Human Survival began in October 1985. While the United Nations was celebrating its 40th anniversary, ten "spiritual leaders," two each from the world's five major religions, and eight elected officials from parliaments on five continents, met together at psychology's New Age center in Tarrytown, New York to explore ideas for ecological salvation and world peace. Out of this meeting grew a working partnership between the world's religious and political leaders—something which had been unthinkable since ancient Rome.

The politicians belonged to the Global Committee of Parliamentarians on Population and Development. The religious leaders had been invited by the Temple of Understanding, long headquartered at the then "Very Reverend" James Parks Morton's infamous Cathedral of St. John the Divine in New York City. As early as 1975 the Temple (Morton was president), known as "the spiritual UN," had sponsored a week-long "Spiritual Summit Conference" which culminated in "addresses at the United Nations by representatives of five major faiths," with Mother Teresa as the keynote speaker.

Bishop Moore transformed the Cathedral of St. John the Divine into a Gnostic stronghold for such organizations as: The Lucis Trust, founded in 1922 by Alice Bailey, a disciple of Theosophist Madame Helena Blavatsky. Originally named the Lucifer Trust, it became a mother institution of the modern New Age movement. Moore, who entered the 1970s "peace movement" by visiting with the Vietcong-controlled, underground peace movement in Vietnam, had by 1983 joined with the pro-terrorist Institute for Policy Studies and the U.S.A.-Canada Institute of the U.S.S.R. Academy of Sciences, to mobilize the American peace movement to stop the Strategic Defense Initiative. Thirty top Soviet intelligence officers, who were joined by Bishop Moore, gave marching orders to the American peace leadership to this effect in Minneapolis, Minnesota in 1983.

In April 1988 the UN Global Forum on Human Survival held in Oxford, England was Co-sponsored by the Temple of Understanding and the UN Committee on Parliamentarians and Population, chaired by James Parks Morton. , Gaia scientist James Lovelock [Gaia: A New Look at Life on Earth by James Lovelock], was the featured speaker. It brought together about 200 spiritual and legislative leaders from 52 countries. "For five days parliamentarians and cabinet members met with cardinals, swamis, bishops, rabbis, imams, monks....Among them: the Dalai Lama, Mother Teresa, the Archbishop of Canterbury...Cardinal Koenig of Vienna...Carl Sagan, Vice-Chairman of the Soviet Academy of Sciences Evguenij Velikhov, Cosmonaut Valentina Tereshkova." The conference was covered by media teams from 35 countries. The same year the World Meteorological Organization (WMO) and the United Nations Environment Programme (UNEP) established the Intergovernmental Panel on Climate Change (IPCC)

The Global Forum on Human Survival held in Moscow January 15-19, 1990 was, hosted by Mikhail Gorbachev and Javier Perez de Cuellar, chaired by James Parks Morton. Other co-hosts included what the program called a "unique alliance": "the Supreme Soviet, the country's first freely elected parliament; all faith communities of the USSR, coordinated by the Russian Orthodox Church; the USSR Academy of Sciences; and the International Foundation for the Survival and Development of Humanity." Moscow saw more than 1,000 participants from 83 countries call for a "new planetary perspective" involving a "new spiritual and ethical basis for human activities on earth." In his address to the Forum, Mikhail Gorbachev called it "a major step in the ecological consciousness of humanity." He drew cheers from delegates when he pledged "to ban nuclear tests completely, for all times, and at any moment, if the U.S. does the same...[and] to open our territory for inspection...." See also my article: Nuclear Proliferation—Options In A Perfect Storm.

Laying the foundation for the coming world religion, ecological concerns are being expressed increasingly in pantheistic/New Age terms as though the universe were a living and even conscious entity (the Gaia hypothesis) with whom we must make peace and live in harmony. Calling spirituality "common to all humanity," New Age physicist Fritjof Capra defined it at the Moscow Global Forum as "the experience of being connected to the cosmos as a whole...a sense of belonging that gives meaning to life." Capra recently founded The Elmwood Institute, dedicated to "the convergence of politics, ecology and spirituality."

In his keynote speech at Moscow, then U.S. Senator Al Gore declared: "I do not see how the environmental problem can be solved without reference to spiritual values found in every faith." He is not referring to biblical Christianity, but to an ecumenical world "spirituality" based upon what he called a "new faith in the future of life on earth...[providing] higher values in the conduct of human affairs." The final "Moscow Declaration" called for "a global council of spiritual leaders" and the "creation of an inter-faith prayer...." It declared, "We must find a new spiritual and ethical basis for human activities on Earth: Humankind must enter into a new communion with nature...."

Strong is also associated with the United Religions Initiative (URI), a movement to “…promote an enduring, daily, interfaith cooperation, to end religiously motivated violence and to create cultures of peace, justice and healing for the earth and all living beings.” The founding Trustee and President is The Rt. Rev. William E. Swing-Episcopal Bishop of California. Naturally, interfaith cooperation implies a one world religion. A one world secular, godless religion for a one world government is the objective.

Maurice Strong stated “The real goal of the Earth Charter is that it will in fact become like the Ten Commandments, like the Universal Declaration of Human Rights.” For supporters of the URI an ecumenical union of all religions is seen to be essential, for there can be no political peace without religious peace as well.

U.S. taxpayers are being forced to subsidize a new form of state religion which holds that natural resources have to be protected for the sake of Gaia, a so-called Earth spirit. This religious movement, which has cult-like qualities, is being promoted by leading figures and organizations such as Vice President Albert Gore, broadcaster Ted Turner, and the United Nations.

The Judeo-Christian culture and religion must be destroyed and replaced by the new one-world religion as a precursor for fall of the West and usher in the Islamic kingdom of God on Earth. The new world order will be a global community where our spiritual lives and our economic, legal, and governmental systems will be dictated to us all in the name of the greater good. All of these forces, in the form of NGO's, business, non-profit organizations, media, academia, and New Age cults will be working closely with the United Nations to usher in the New Age. Right under our noses the way is being paved for the prophesied one world religion and huge armies of volunteers are being amassed to usher it in.

The transformation brought about by the Global Warming doctrines had a number of consequences:
1. The power of the ruling elite rested in Environmentalism ideology as the main source of legitimacy.
2. It increased the role of Environmentalism ideology (Worship of Gaia) in the country’s internal and international politics.
3. Environmentalist revolutionaries had a vision of a new and perfect world, a New Word Order the beginning of an age when all would be different.

The elite are careful about letting Westerners know what their real goal is.

The Modern Apocalyptic Muslim

A grasp of history is crucial to the understanding of the modern apocalyptic Muslim, because of the living nature of this past for him. Therefore, our discussion must start at the dawn of Muslim history. Many theories have been proposed to explain the phenomenal Muslim conquest of the entire ancient world, from Tours in France to the borders of China in Central Asia, during the period of a century. Some scholars dismiss the idea that religious belief was a primary or even a secondary contributing factor in these conquests. Yet this prejudice is very damaging to our present-day understanding, if only because contemporary Muslims themselves believe that their absolute faith in Allah and the unifying nature of Islam are the most important reasons for their successes. Here, one must read between the lines and understand that absolute faith and unity was not enough to embark on the jihad. There had to be a third component to this equation: the imperative to conquer the world before the expected Hour of Judgment. This is the component that will interest us here.

It is not as important for us to know what impelled this conquest historically, as to understand how the modern Muslim feels about his history. This conquest, called the jihad, is closely connected in the sources to apocalyptic beliefs. In this regard, a tradition should be quoted: Behold! God sent me [the Prophet Muhammad] with a sword, just before the Hour [of Judgment], and placed my daily sustenance beneath the shadow of my spear, and humiliation and contempt upon those who oppose me. Muslims, according to this understanding, did not try to conquer the world for the sake of domination, but because God commanded them to do it before the imminent end of the world.

In Islam we have the first example of what an apocalyptic group can achieve when given a limited time frame to accomplish an impossible task: world conquest. They almost made it. Since the most revolutionary idea present in fundamentalist Islam is that modern Muslims are reenacting the situation of the Prophet Muhammad during the seventh century and that all of the rest of the world, including the so-called Muslim countries, are infidel. Therefore, it should come as no surprise that the feeling that an apocalyptic-jihad is necessary to correct things is very strong.

Likud leader Benjamin Netanyahu Comments on the Similarity to Events Preceding World War ll

Likud leader Benjamin Netanyahu on November 13, 2006 drew a direct analogy between Iran and Nazi Germany.
“It’s 1938 and Iran is Germany. And Iran is racing to arm itself with atomic bombs,” Netanyahu told delegates to the annual United Jewish Communities General Assembly, repeating the line several times, like a chorus, during his address. “Believe him and stop him,” the opposition leader said of Iranian President Mahmoud Ahmadinejad. “This is what we must do. Everything else pales before this.”

“Bernard Lewis, the influential Princeton scholar of Islam, claimed earlier Mr. Ahmadinejad and a powerful coterie around him actually wanted to provoke nuclear conflict as a means of hastening the arrival of the Mahdi, the Muslim messiah. “It would seem that he and his immediate circle really believe that the apocalyptic age is now,” he told an audience at Tel Aviv University.” … “Tel Aviv University’s Institute for National Security Studies set the tone at the turn of the year with publication of its annual strategic balance, in which it warned: “Time is working in Iran’s favor and, barring military action, Iran’s possession of nuclear weapons is only a matter of time.” Reference: Financial Times, January 12, 2007, Israel braced for action.

While Iran is developing WMD and forming alliances throughout the world including Cuba just 90 miles off the coast of America, Russia and China are providing arms for the alliance and equally important Russia is finalizing the energy noose around Europe. The Islamists along with their Leftist/Marxist alliance partners meanwhile are quietly assuming key positions in the governments, the media and even financial institutions. See also: Islamic Economics and the Final Jihad: The Muslim Brotherhood to the Leftist/Marxist - Islamist Alliance by David J. Jonsson

In the article of August 7: The Origins of the Next Great War are Visible I commented:

“With every passing year following the events of 9/11 the rise of Leftist/Marxist-Islamist Alliance has increased global instability. By the beginning of 2006, nearly all the combustible ingredients–far bigger in scale than those leading to World Wars 1 and 11 and the Gulf Wars of 1991 or 2003–were in place.”

Kofi Annan Learns of the Intent of Iran

In early September of 2006, as Kofi Annan passed through the Middle East on a farewell journey as United Nations secretary general, he made a stop in Tehran. There, in a meeting with Mahmoud Ahmadinejad, Iran’s president, he heard something startling.

As later recounted to the New York Times by an Annan aide, Ahmadinejad told Annan that though Britain and the United States had won the last world war; Iran would win the next. “It wasn’t the tone and the content that stunned us,” the aide told the Times. “It was the fact that he talked like he meant it and believed it.” After all, Annan and his colleagues hadn’t realized there would be a next world war.

The War has Already Begun

In the eyes of the Ahmadinejad and his supporters, however, that war has already begun. In their way of thinking, radical Islamists have already brought the collapse of one superpower (the Soviet Union, which they believe fell because of the Afghan war) and are on route to victory in Europe. America is next.

The good news about the Iranian Ahmadinejad’s wild rhetoric is that he is not a particularly important figure in Iran’s peculiar system in which the revolutionary institutions matter more than the state. Real power is wielded by the hard-line clerics, especially Supreme Leader Ayatalloh Ali Khamenei, whose title accurately reflects his unchecked authority.

The post of Supreme Leader is literally the Leader of the Revolution. Leadership Authority, or Valî-ye Faqîh or Guardian Jurisprudent was created in the constitution of the Islamic Republic of Iran as the highest-ranking political and religious authority of the nation. The Assembly of Experts appoints the Supreme Leader and is also in charge of overseeing the Supreme Leader and has the power to dismiss and replace him at any time. Members are elected for an eight year term. Only clerics can join the assembly and candidates for election are vetted by the Guardian Council.

Hashemi Rafsanjani is the Expediency Council Chairman. Expediency Discernment Council of the System is an unelected establishment in the Constitution of Islamic Republic of Iran created on 6 February 1988. Its purpose is to resolve differences or conflicts between the Majlis and the Council of Guardians [The most influential body in Iran.], and also to serve as a consultative council to the Supreme Leader. The Guardian Council of the Constitution is an unelected high chamber within the constitution of the Islamic Republic of Iran. It has legislative, judicial, and electoral powers. This reflects the difference between the Islamic Republic of Iran and democratic states, such as the United States, which have separation of the branches of government. Guardian council represents the official will of the Supreme Leader.

The transformation brought about by the Iranian Revolution of 1979 had a number of consequences:

4. The power of the ruling elite rested in Islamic ideology as the main source of legitimacy.
5. It increased the role of Islamic ideology in the country’s internal and international politics.
6. Islamic revolutionaries had a vision of a new and perfect world, the beginning of an age when all would be different.

The bad news is that Khamenei and the other hard-line clerics entirely agree with Ahmadinezhad’s dangerous views. They are just more careful about letting Westerners know what they really think.

To audiences in the Middle East, Khamenei is more open. He has long met with Holocaust deniers and warmly endorsed their disgusting lies. In Persian, he regularly calls the state of Israel a “cancer” that must be cut out and urges Muslims never to accept the existence of the Jewish state. He has been the force behind Iran’s longstanding arms supplies to Lebanon’s Hezbollah terrorist group, and he has constantly urged that group to keep up the fight against Israel no matter what concessions Israel might make. He has pushed Iran to provide more support for Hamas in the West Bank and Gaza because of the group’s refusal to accept the state of Israel. Iran has pledged to give Hamas $250 million this year, about half of which has been delivered, making Iran by far the largest funder of the Hamas-led Palestinian Authority.

According to a report in the Iran News & Cultural Journal of January 6, Iran’s Supreme Mullah Leader Will Be Dead Soon. “Iran’s Supreme Mullah Leader, Ali Khamenei is seriously ill and will have to be replaced in the coming months, as he is no longer capable of holding office, according to Assembly of Experts member mullah Nasseri. The powerful mullah body appoints and oversees the country’s supreme leader. “Ayatollah Seyyed Ali Khamenei is gravely ill - he can no longer see very well, has difficulty hearing, and is no longer able to properly perform his duties,” Nasseri told a women‘s group.”

“The country’s supreme leader since 1989, Khamenei succeeded the founder of the Islamic Republic of Iran, infamous mullah Khomeini, as president in 1981 and served two terms. His death or removal from office by the Assembly of Experts will trigger a power struggle within the mullahs’ regime, according to observers.”

“The names of three possible successors to Khamenei are currently on the lips of Iranians: Khamenei’s son, Mojtaba; Iran’s former reformist president, Akbar Hashemi Rafsanjani-Expediency Council Chairman; and Gholam Ali Mesbah Yazdi, the ultra-conservative ayatollah who is considered the spiritual father of Iran’s current hard-line president, Mahmoud Ahmadinejad.”

As commented by Haaretz, January 5, 2007, Bringing Ahmadinejad to justice: “The win of Hashemi Rafsanjani in the recent elections was characterized as the “moderate” victor in the recent Iranian elections. However, the Argentinean judiciary recently determined that it was this same Rafsanjani who planned, organized and ordered the mass terrorist bombing of the Argentinean Jewish community center (AMIA) in 1994, resulting in the death of 85 people and 300 wounded. In a fortuitous yet chilling reminder, the Argentinean prosecutors’ decision calling for arrest warrants to be issued against the Iranian leadership was released on the same day that President Ahmadinejad called yet again for the disappearance of Israel, and on the anniversary of his first public and direct call for the destruction of Israel (on October 25, 2005) when, as he put it, “Israel must be wiped off the map, as the imam says.”

“The imam, in this instance, is former Ayatollah Ali Khameini, the supreme leader of Iran, who had declared in 2000 that “there is only one solution to the Middle East problem, namely the annihilation and destruction of the Jewish state,” while otherwise using epidemiological metaphors in calling for Israel, “the cancerous tumor of a state,” to be ‘removed from the region.’”

Iran’s revolutionary leaders deeply believe they can carry out their ambitious agenda. To us, that sounds bizarre because we see Iran as a middle-sized country that causes an amazing amount of trouble. Things look very different to Iran’s hardliners. They see themselves as the leaders of the world’s 1.2 billion Muslims who are destined to dominate the world.

Persia is an Ancient Country with a Great Tradition

To their conviction that Allah is on their side, Iran’s hardliners add a strong dose of nationalism. Iran’s history is 2,500 years old; by contrast, Islam has been around for a mere 1,300 years. For most of that time, Iran (the ancient Persia) has been a much larger country than it is today. After all, the Bible tells us that it was the Persian Emperor who ended the Jews’ Babylonian captivity, freeing them to return to build the Temple in Jerusalem and giving them the money with which to do so. Coming to a more recent time, only 200 years ago, Iran was more than twice its present size. No wonder Iran expects to be the regional superpower, especially when its population is three times that of Saudi Arabia and all the other Gulf Arab monarchies combined.

While its self-conceit may be impressive, Iran’s only real chance to be able to dominate its neighborhood, much less to accomplish its often-stated goal of eliminating Israel, is through its nuclear program. That is why U.S. policy toward Iran has appropriately focused on the nuclear issue. President Bush and his top officials have made many strong statements about the dangers from Iran, calling a nuclear-armed Iran unacceptable. But the sad reality is that over the last year, Iran has made slow but steady progress with its nuclear program, creating facts that will be hard to reverse. Perhaps diplomacy can rescue the situation, but only stronger pressure can produce results.

Russia and China, who have so far blocked Security Council action on Iran, are hard to read. The pessimistic view is that they do not care much about a nuclear Iran: yes, a militant Islamist Iran could threaten them (both have large Muslim populations), but a nuclear Tehran’s greater threat to the West would be welcomed by some in Moscow and Beijing.

The Role of Propaganda—Saying What the Listener Want to Hear

We must realize that within the Middle Eastern culture, saying what your listener wants to hear is more important than telling the truth. For a Middle Easterner, words are more important than ideas, and ideas are more important than facts. It is this trait that has caused many Americans to wonder how such outlandish statements can be made that are patently false. For example, when Saddam Hussein said that the battle of the first Gulf War (Desert Storm) would be the “mother of all battles” and claimed victory before anything started, it was the words and ideas that were embraced by his followers. The facts were not important. Predominantly Muslim nations with state-controlled media—virtually all of them—exhibit this mentality most powerfully.

Germany’s Four-Year Plan a Precursor for World War ll

Just as the West may now not recognize the planning and sincerity of Iran’s preparations for war, it is important to review the history of Germany during the period before World War ll.

In reading the excellent book The War of the World: Twentieth-Century Conflict and the Descent of the West by Niall Fergurson, I noticed the striking similarity to the events occurring prior to World War II and the events occurring in Iran and Europe. I refer specifically to pages 441-6.

“Later, after it was all over, the historian Friedrich Meinecke tried to explain ‘the German catastrophe’ by arguing that technical specialization had caused some educated Germans (not him, needless to say) to lose sight of the humanistic values of Goethe and Schiller; thus they were unable to resist Hitler’s ‘mass Machiavellianism’. Thomas Mann was unusual in being able to recognize even at the time that, in ‘Brother Hitler’, the entire German Bildungsbilrgertum possessed a monstrous younger sibling who embodied some of their deepest-rooted aspirations. An academic education, far from inoculat­ing people against Nazism, made them more likely to embrace it. So much for the greatness of the German universities. Their fall from grace was personified by the readiness of Martin Heidegger, the greatest German philosopher of his generation, to jump on the Nazi bandwagon, a swastika pin in his lapel.”

“Were German intellectuals worse in these respects than their counterparts elsewhere? Possibly. Yet other intellectuals were never exposed to Hitler’s supernatural magnetism - and that, surely, was the crucial factor. For, on closer inspection, what Hitler offered Ger­mans was something much more than Roosevelt was offering Ameri­cans. Roosevelt spoke of frankness, action and leadership in a national emergency. But he emphasized in his inaugural address that the nature of that emergency was purely material; spiritually and morally there was nothing wrong with American society. Hitler, by contrast, saw Germany’s economic problems as mere symptoms of a more profound national malaise. Roosevelt made eight references in his speech to the ‘people’; Hitler used the word Volk no fewer than eighteen times. His role was not just to restart the economy but to be the nation’s savior, the redeemer who would end years of national division by forging a Volksgemeinschaft-a folk-community.” [The folk-community has striking similarity to the Islamic concept of Ummah.] Tellingly, His first speech as Chancellor ended as follows:

I cherish the firm conviction that the hour will come at last in which the millions who despise us today will stand by us and with us hail the new, hard-won and painfully acquired German Reich we have created together, the new German kingdom of greatness and power and glory and justice. Amen.

The Rise of Messianic Populism

The response that this messianic proposition elicited was quasi-­religious in its fervor. As an SA sergeant explained: ‘Our opponents ... committed a fundamental error when equating us as a party with the Economic Party, the Democrats or the Marxist parties. All these parties were only interest groups; they lacked soul, spiritual ties. Adolf Hitler emerged as bearer of a new political religion. [Just as we see today the rise of Political Islam.] See Islamic Economics and Shariah Law: A Plan for World Domination by David J. Jonsson.] ‘The Nazis developed a self-conscious liturgy, with November 9 (the date of the 1918 Revolution and the failed 1923 Beer Hall putsch) as a Day of Mourning, complete with fires, wreaths, altars, blood-stained relics and even a Nazi book of martyrs. Initiates into the elite Schutzstaffel (SS) had to incant a catechism with lines like:

‘We believe in God, we believe in Germany which He created ... and in the Führer
... whom He has sent us.’

Mohammad Amin al-Husayni, (alternatively spelt al-Husseini), the Mufti of Jerusalem, was a Palestinian Arab nationalist and a Muslim religious leader. Known for his anti-Zionism and anti-Semitism, al-Husayni fought against the establishment of a Jewish state in the territory of the British Mandate of Palestine. Husayni collaborated with Nazi Germany, becoming a resident in Berlin during World War II, where upon being granted a rank of SS Gruppenführer by Heinrich Himmler, he helped recruit Muslims for the Waffen-SS.

It was not just that Hitler more or less overtly supplanted Christ in the iconography and liturgy of ‘the brown cult’. As the SS magazine Das Schwarze Korps argued, the very ethical foundation of Christianity had to go too: ‘The abstruse doctrine of Original Sin ... indeed the whole notion of sin as set forth by the Church ... is something intolerable to Nordic man, since it is incompatible with the ‘heroic’ ideology of our blood.” [This parallels in many respects the teaching of the Qur’an.]

Social Transformation

‘The Nazis’ opponents also recognized the pseudo-religious charac­ter of the movement. As the Catholic exile Eric Voegelin put it, Nazism was ‘an ideology akin to Christian heresies of redemption in the here and now ... fused with post-Enlightenment doctrines of social transformation’.

As Clifford F. Porter in his article “Eric Voegelin on Nazi Political Extremism” Journal of the History of Ideas - Volume 63, Number 1, January 2002, pp. 151-171 commented: Voegelin’s analysis of Nazism is worth revisiting by historians because it delineated the Nazi rationale for the Holocaust in the early 1930s, even if the Nazis themselves had yet to move towards mass murder early in the regime. Voegelin was not prescient enough to predict the extent of the Holocaust, but he understood that the ideological rationale of Nazi violence was unlimited. Furthermore, his description of political extremism as Gnosticism in 1952 is valid for explaining why an individual might support the Nazis and then voluntarily commit extraordinarily vicious acts to try to realize the dream-world [social transformation] of the Third Reich. … By 1938 he had theorized that ideologies were political secular religions that substituted the state for divine reality.

The journalist Konrad Heiden called Hitler ‘a pure fragment of the modern mass soul’ whose speeches always ended ‘in overjoyed redemption’.

“Hitler had provided them with a suitable formula: ‘we know two Gods: one in heaven and another on earth; the second is Germany.’ But ‘we’ are Germany, Hitler had said on another occasion, and ‘we’ meant ‘I.’ And so there were people who prayed to Hitler, perhaps without realizing that this was prayer”. [Der Fuehrer by Konrad Heiden, pp 631]

An anonymous Social Democrat called the Nazi regime a ‘counter-church’. Two individuals as different as Eva Klemperer, wife of the Jewish-born philologist Victor, and the East Prussian conservative Friedrich Reck-Malleczewen could agree in likening Hitler to the sixteenth-century Anabaptist Jan of Leyden. (Niall Fergurson)

As in our case, a misbegotten failure conceived, so to speak, in the gutter, became the great prophet, and the opposition simply disintegrated, while the rest of the world looked on in astonishment and incomprehension. As with us ... hysterical females, schoolmasters, renegade priests, the dregs and outsiders from everywhere formed the main supports of the regime ... A thin sauce of ideology covered lewdness, greed, sadism, and fathomless lust for power ... and whoever would not completely accept the new teaching was turned over to the executioner.

Still, all this leaves one question unanswered: What had gone wrong with the existing religions in Germany? For if National Socialism was a political religion, the fragmentation of the old political parties can­not satisfactorily be presented as the essential precondition for its success. Evidence of declining religious belief among German Chris­tians is in fact not hard to find: a substantial proportion of Germans exercised the option to be registered as konfessionslos (without a religion) in the 1920s. There were marked declines in church attendance, particularly in North German cities. Significantly, unlike the Catholic Church, the Lutheran Church had suffered very heavy financial losses in the hyper­inflation. Morale among the Protestant clergy was low; many were attracted to the Nazi notion of a new ‘Positive Christianity’. All this may offer a clue as to why the farmer were more likely than the latter to vote Nazi in the crucial elections of 1930-33 - as we have seen, the single most striking sociological characteristic of NSDAP support, though here too there was considerable regional variation and it would be quite wrong to infer from this anything stronger than inertia in Catholic voting patterns. After all, Austrians were scarcely less enthusiastic about National Socialism and they were virtually all Cath­olic. And nearly all the fascist dictators were themselves raised as Catholics: Franco, Hitler, Mussolini, to say nothing of wartime pup­pets like Ante Pavelic in Croatia and Jozef Tiso in Slovakia, who was himself a priest. (Niall Fergurson)

In the article on Wesley Center Online by Leon O. Hynson, THE CHURCH AND SOCIAL TRANSFORMATION: An Ethics of the Spirit “We may call the Church to a Christian discipleship in all spheres of life. If the Church, with its vision of righteousness and wholeness, is excluded from social involvement, then whom will the Church suggest for the task? The sectors of power and influence, professions and business, labor and politics, have no adequate ethical ground from which to re-create, sanctify, and energize. These sectors of power all have particularized ethical norms for self-regulation, but lack an ethic equal to the depth of human demand and need.”

George Forell - Distinguished Professor Emeritus in the School of Religion at the University of Iowa, in answering the question: “Why did the church not speak up against Nazism?” said, “Now, this church should have probably said more. But when all is said and done, the only people that said anything were the churches. Certainly the legal profession said nothing. Certainly the medical profession said nothing. Certainly the schools and the university professors said nothing.” There was no university Kampf, or a medical association Kampf. The only Kampf in Germany was the Kirchenkampf. This illustrates my claim that the community of the Spirit is able to speak because it possesses the moral force. The ethic of the Spirit offers both the structure and substance of a “categorical imperative” to humankind. The ethics of the Spirit offers the dynamic for its actualization. This ethics of the Spirit is the ethics of the Church. Even now in our apocalyptic time, the Spirit is moving over the face of the world; and through the community of the Spirit, God is commanding: “Let there be light”; and behold, light breaks forth, and God says. “It is good.”

George Forell writing in the article Admonition in 2002 “The center of the Christian Faith is the Lord Jesus Christ who was crucified for our sins and raised for our salvation. Without Christ there is no Christianity. This might seem obvious to most of us but we live in a time in which there are some, claiming to be Christians, who believe that the overwhelming centrality of Christ for Christians is an embarrassment in a pluralistic world. They say, “We should consider all founders of religion and important religious leaders of equal significance.” Our answer must be our Lord Jesus Christ for he is not just the founder of a religion or a great religious leader. He is the second person of God, the Holy Trinity. To downgrade Jesus to a religious leader or prophet is for Christian’s blasphemy. Christ is our only savior. We are saved by faith alone through Christ alone.”

Implications of the Immanent Return of the Twelfth Imam

An official Iranian State media website, The World toward Illumination predicts the coming of both the Imam Mahdi, the Shiite messiah, and Jesus by the spring equinox. ‘Imam Mahdi (may God hasten his reappearance) will appear all of a sudden on the world scene with a voice from the skies announcing his reappearance at the holy Ka’ba in Mecca,’ the message says.

The website said the Mahdi will form an army to defeat Islam’s enemies in a series of apocalyptic battles, overcoming his archenemy in Jerusalem, WorldNetDaily.com reported on December 31 in the article, Iran website heralding ‘Mahdi’ by springtime.

In a greeting to the world’s Christians for the coming New Year, Iranian President Mahmoud Ahmadinejad said he expects both Jesus and the Mahdi to return and ‘wipe away oppression,’ WND reported last month.

‘I wish all the Christians a very happy new year and I wish to ask them a question as well,’ said Ahmadinejad, according to an Iranian Student News Agency report cited by YnetNews.com.

Ahmadinejad’s mystical obsession with the coming of the Mahdi raises concerns that a nuclear-armed Iran could trigger the very conflagration he envisions for the end of the world.

In a videotaped meeting with Ayatollah Javadi-Amoli in Tehran, Ahmadinejad discussed a paranormal experience he had while addressing the United Nations in New York last September. He says he found himself bathed in light from heaven throughout the speech.

‘People are anxious to know when and how will He will rise; what they must do to receive this worldwide salvation,’ says Ali Lari, a cleric at the Bright Future Institute in Iran’s religious center of Qom. ‘The timing is not clear, but the conditions are more specific,’ he adds. There is a saying: ‘When the students are ready, the teacher will come.’

“The Bright Future Institute was established in early 2004 by a number of scholars and masters of Islamic seminaries in the holy city of Qom with a view to develop the culture of Intizar or Awaiting Imam Mahdi a.s and to increase the knowledge about him both in Iran and abroad by supporting research and cultural works of other scholars. this institute is a non-profit making, independent research centre which promotes efforts to reject wrong ideas about imam Mahdi by holding discussion sessions and also by preparing scientific answers to respond to superstitions surrounding him.The Bright Future Institute is to hold an international Seminar every year about the fifteenth of Sha’ban, the auspicious birthday of Imam Mahdi (May God hasten His reappearance) to bring together researchers in messianic science.”

“The institute is the eighth of its kind in Iran to study and even speed the Mahdi’s return. But it is the largest and most influential, with 160 staff, a growing reach in local schools, children’s and teen magazines, and unlimited ambition to spread the word.”

“Mahdaviat is a code for the revolution, and is the spirit of the revolution,” says cleric Masoud Poursayed-Aghaie, head of the institute. “It’s the code of our identity, [and] I think this belief has been increasing.”

Critics in Iran and outside dismiss end-of-timers as unscientific, traditional followers of myths. To counter those critics, the institute’s news agency, online at www.bfnews.ir, began churning out reports three months ago.

“There is a gap between us and the popular media,” says editor-in-chief Sayed Ali Pourtabatabaie. “We started the idea of a messiah news agency of the Mahdi [because] we thought we needed a news agency to publish His news.”

According to an article in the Christian Science Monitor of January 4, 2006, True believers dial messiah hotline in Iran “Have a quick question about when the Mahdi is coming to save mankind, according to Shiite Muslim adherents? Need to know the signs?”

The 12th Imam is Expected to Return to Impose Justice and Spread Peace

“Just call the new messiah “hotline.” Or log on to Bright Future News Agency to get the latest religious readout - all part of the effort by freshly rejuvenated true believers in Iran to spread their message of the imminent return of the Mahdi, the 12th Imam who is expected to return to impose justice and spread peace.”

The Prophetic Messages of Christianity and Islam

In Matthew 24:3-8 (Holy Bible, NIV), we find Jesus sitting on the Mount of Olives, where the disciples came to him privately.

“Tell us,” they said, “when will this happen, and what will be the sign of your coming and of the end of the age?” Jesus answered, “Watch out that no one deceives you. For many will come in my name, claiming, ‘I am the Christ,’ and they will deceive many. You will hear of wars and rumors of wars, but see to it that you are not alarmed. Such things must happen, but the end is still to come. Nation will rise against nation, and kingdom against kingdom. There will be famines and earthquakes in various places. All these are the beginning of birth pains.”

By contrast, Muhammad said:

I have been ordered to fight against people until they say that there is no god but Allah. “That Muhammad is the messenger of Allah,” they pray, and pay religious taxes. If they do that, their lives and property are safe. Sahih Muslim, #0033, and Sahih Bukhari, volume 1, #387

You shall fight back against those (i.e., Christians and Jews) who do not believe in GOD, nor in the Last Day, nor do they prohibit what GOD and His messenger have prohibited, nor do they abide by the religion of truth—among those who received the scripture—until they pay the due tax, willingly or unwillingly (until they pay tribute out of hand, and they be humbled). The Jews said, “Ezra is the son of GOD,” while the Christians said, “Jesus is the son of GOD!” These are blasphemies uttered by their mouths. They thus match the blasphemies of those who have disbelieved in the past. GOD condemns them. They have surely deviated. Qur’an 9:29-30

Shiite and Sunni Apocalyptic Teaching

It is important to recognize that both the Shiites and Sunni sects have teaching related to the End Times. While the teaching of Shiite Iranian President Mahmoud Ahmadinejad considers that the return of the Mahdi, the 12th Imam as ushering in the End Times, the Sunni scholar, Sheikh Al-Qaradhawi, in a fatwa posted on the website www.islamonline.net, (December 2, 2002) in response to a reader’s question, wrote of the “signs of the victory of Islam,” citing a well-known Hadith: “… The Prophet Muhammad was asked: ‘What city will be conquered first, Constantinople or Romiyya?’ He answered: ‘The city of Hirqil [i.e. the Byzantine emperor Heraclius] will be conquered first’ - that is, Constantinople… Romiyya is the city called today ‘Rome,’ the capital of Italy. The city of Hirqil [that is, Constantinople] was conquered by the young 23-year-old Ottoman Muhammad bin Morad, known in history as Muhammad the Conqueror, in 1453. The other city, Romiyya, remains, and we hope and believe [that it too will be conquered].” (See: Al-Qaradhawi: “Islam will Return to Europe as a Conqueror” MEMRI Special Dispatch No. 447, December 6, 2002.)

“This means that Islam will return to Europe as a conqueror and victor, after being expelled from it twice - once from the South, from Andalusia, and a second time from the East, when it knocked several times on the door of Athens.”

Sheikh Al-Qaradhawi qualified his statement: “I maintain that the conquest this time will not be by the sword but by preaching and ideology…”
http://www.islamonline.net/fatwa/arabic/FatwaDisplay.asp?hFatwaID=2042

Al-Qaradhawi made similar statements on other occasions, on his weekly religious program on Al-Jazeera. He declared: “This means that the friends of the Prophet heard that two cities would be conquered by Islam, Romiyya and Constantinople, and the Prophet said that ‘Hirqil [i.e. Constantinople] would be conquered first.’ Romiyya is Rome, the capital of Italy, and Constantinople was the capital of the state of Byzantine Rome, which today is Istanbul. He said that Hirqil which is Constantinople would be conquered first and this is what happened…”

Scott Peterson-Staff writer of The Christian Science Monitor in the article True believers dial messiah hotline in Iran writes: “Shiite writings describe events surrounding the return in apocalyptic terms, similar to those used in Revelations, which some Christian evangelicals believe predicts a final world war during which Jesus returns to win and reign for 1,000 years.

In one script, forces of evil would come from Syria and Iraq and clash with forces of good from Iran. The battle would commence at Kufa - the Iraqi town near the holy city of Najaf (and home to the anti-US Iraqi cleric, Moqtada al-Sadr).

“The evil commander named Sofiani and the anti-Mahdi known as Dajjal (comparable to the Christian antichrist), would both be killed. The forces of good would be led by a “man from Khorasan” - a province in northeast Iran.” (Scott Peterson)

The Mahdi would return at Mecca, and fight. His victory would bring a government of God for a period of “seven,” according to one reading. Seven months, years, or millennia are not clear.

Another text details a conversation, in which the Muslim prophet Mohammad describes the Mahdi as “God’s ultimate thing,” and that God “will conquer the Easts and the Wests of the earth through Him, and He will be absent from his followers [as he is now, known as the “hidden” 12th imam] to such an extent, no one can confirm his existence except the believer whose heart has been tested for faith by the Almighty.”

Even while absent, the prophet is to have said, the Mahdi would benefit his followers, “just as people still benefit from the sun on a cloudy day.”

“The Imam of the Age will have victory, and the entire world will support him, except some regimes and governments that are racist, like Zionists,” says Poursayed-Aghaie. The result will be global dominance of Shiite Muslims.

The Nuclear Crisis with Iran Continues

Remember he has a plan just like the Nazi’s “Four Year Plan“, he is a scholar of history, and he also is follower of the Qur’an. The Persians are also Aryans. The Aryan race is a notion mentioned in the Old Persian inscriptions and other Persian sources from c. 500 BC onwards. The word Iran is a cognate of Aryan, and is derived from the word Aryanam (see Airyanem Vaejah), meaning “Land of the Aryans”, a term adopted in antiquity by the Iranic-peoples meaning free, noble, spiritual. Seventy percent of those living in modern Iran are native speakers of Iranian/Aryan dialects.

The Tehran Times reports that on February 25, Iran successfully launched its first rocket into space for research purposes, but state television has yet to broadcast pictures of the launch. According to the article by Joel Leyden of the Israel New Agency on February 28, Iran Plans To Nuke Europe, US - Sanctions Urged “An Israel security official told the Israel News Agency that the recent launch of a missile from Iran into space illustrated a direct threat to both Europe's and US national security.”

In my article last month Using the Oil Weapon and Sanctions to Avert War With Iran, I commented about the necessity of sanctions and the use of the oil weapon.

It is up to Europe to prevent the two worst developments in Iran - war and nuclear armament - by acting jointly and with determination. Vital European and transatlantic interests are at stake. It is thus Europe's responsibility - and especially Germany's, as the current EU president - to act now.

A source within the Israel commented similarly according to Joel Leyden “If we don't see severe economic sanctions coming from Europe in the next few weeks, we will witness a catastrophe,” said a source at the Israel Ministry for Foreign Affairs. The source would not give his name because he would lose his position, but the matter of urgency had him staring at this writer praying to get the message out.

“Iran has no plans to land a man on the moon,” Col. Adam an Israeli security source told the INA. “The same technology is used to build intercontinental ballistic missiles. This Iran space launch is not a threat to Israel. The Iranians need not reach a space orbit to attack Israel, but such a high orbit would be needed to deliver a nuclear payload into Europe or the US.” - Israeli security source.

“Iran is no different than Nazi Germany”, the MFA source said. “They too built up an army, resources and created the V-2.” The V-2 was the first man-made object launched into space, during test flights that reached an altitude of 189 km (117 miles) in 1944. “While Germany was putting the finishing touches to the V-2 which was eventually used against Britain, the world stood by wanting to talk. Now we have Iran repeating history, declaring to “wipe Israel off the map” while planting bombs in Iraq and Afghanistan, one which nearly killed US Vice President Cheney during his visit there a few days ago.”

“Iran which denies that a European Holocaust ever took place, is now planning to create a second Holocaust in Europe and in the US,” said the Israel MFA source. “Europe will be first to feel this nuclear suicide bomb, as London, Moscow, Madrid, Rome and Paris are now in range of Iranian missiles. We no longer have the luxury of time to implement sanctions. This is not a movie. This is not the “24” TV series about nuclear terrorism. This is real. Sanctions worked against North Korea, they can and will work against Iran.”

The Need for Addressing the Global Risk

Diplomacy and military strength may deter the expansion of the threat of a global confrontation but the West must address its lack of energy security and dependence on ‘energy interdependence’ instead of ‘energy independence’. The foreign policy of the United States and Europe must address the energy, the environment, foreign trade, financial, immigration, homeland security and defense tracks in a unified manner. Similarly, addressing the crisis in the Middle East, including the Israel-Palestine solution also involves solving relations with Russia, China and Eurasia. This will require commitment and pain now to our way of life. It will require sacrifice. The alternative will be even worse.

Until the U.S. and its allies understand who the enemy is and their goals, and put forward a plan for survival, the world will be heading toward a major war of untold destruction. As mentioned above, we are revisiting 1938 and commercial interests and not security are driving our actions, as then.

Europe followed by America stand at the precipice, will they succumb to a hedonist Leftist future scenario and then becoming Islamicized either through the actions of Leftist/Marxist – Alliance or nuclear Holocaust or will they reestablish their Judeo-Christian heritage. The loss of Europe and America may occur by virtue of a collapsed population, faith and identity. The center of the Christian Faith is the Lord Jesus Christ who was crucified for our sins and raised for our salvation. Without Christ there is no Christianity. Which will it be? It is not possible to determine the outcome, but, YOU the people living in Europe and America can influence the outcome. Decision time is fast approaching.

Bio: David J. Jonsson is the author of Clash of Ideologies —The Making of the Christian and Islamic Worlds, Xulon Press 2005. His new book: Islamic Economics and the Final Jihad: The Muslim Brotherhood to the Leftist/Marxist - Islamist Alliance (Salem Communications (May 30, 2006). He received his undergraduate and graduate degrees in physics. He worked for major corporations in the United States and Japan and with multilateral agencies that brought him to more that fifteen countries with significant or majority populations who are Muslim. These exposures provided insight into the basic tenants of Islam as a political, economic and religious system. He became proficient in Islamic law (Shariah) through contract negotiation and personal encounter. David can be reached at: djonsson2000@yahoo.co.uk

Revisit Fundamentals When the Market Panics

by Dan Amoss

This week, the stock market flashed warnings that investors should fasten their seat belts and revisit fundamentals. The fundamentals underlying the broad market are weakening, so if you are invested in the stock market, you want to be in the right sectors.

As my colleague Chris Mayer wrote in this space on Wednesday, "Diligence and discipline and selectivity are keys. As I've said before, we don't invest in the market. We invest in specific opportunities in the market. Not the produce section, but specific avocados, onions, and melons."

I view my Strategic Investment recommendations in a similar light. While my top-down approach differs a bit from Chris's bottom-up approach, we share the goal of finding winning stocks for our readers. Macroeconomic analysis can increase the odds of finding them. If the produce section is consistently good, we want to look for opportunities there -- and avoid the overripe beef in the meat department.

The Picture of Panic

The CBOE volatility index (VIX) indicates how volatile speculators expect the stock market to be in the future. More specifically, the CBOE defines the VIX as "a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices." When it's low, stock options are cheap, and when it spikes upward, stock options become expensive. During Wednesday's meltdown, the VIX recorded one of the largest percentage spikes in its 14-year history:

To what can we attribute such a move? Who's to blame?

Not very much has changed over the past week. Simply put, risk now matters. The market often chooses to ignore fundamentals until they suddenly matter. After nearly everyone's joined the bullish camp, the slightest defection back toward the bearish camp can produce the type of market action that we saw Wednesday. Markets go into a free fall when buyers sit on their hands, waiting for the plunge to stop.

For too long, the market has been caught up in such pointless distractions as anticipating the Fed's next interest rate move or using the three-week Northeast U.S. weather forecast to trade natural gas futures. While such distractions make nice stories for the financial media, they shouldn't form the foundation of investment decisions.

My advice to Whiskey & Gunpowder readers is to take a good look at the fundamentals supporting the value of every stock you own. Then separate the wheat from the chaff. You want to buy and hold solid companies with favorable macroeconomic winds at their backs. And you want to avoid overpaying for these shares.

What would I define as "overpaying"? Here's where we delve into the art/science of security analysis. A stock may appear cheap if it has just delivered a few years' worth of impressive earnings results. But it may, in fact, be expensive if a one-off economic event like the housing bubble temporarily boosted earnings. If earnings per share decline 50%, a 15 P/E stock immediately becomes a 30 P/E stock. Traders will punish this stock, likely pushing it back down to its typical 15 P/E range -- or below.

S&P 500 Price-to-Peak-Earnings

How can we judge if the market is cheap or expensive when earnings fluctuate so wildly? One of the best ways to do this is to calculate the market's price-to-peak-earnings ratio. The market as a whole is pretty well defined by the S&P 500, an index of the largest 500 stocks on U.S. exchanges (measured by market value). It's now trading at about 18 times peak earnings, so it's quite expensive by historical measures. And peak earnings happen to be the earnings from the last 12 months, when conditions have hardly been better for Corporate America.

Steve Saville, editor of The Speculative Investor, incorporates Austrian Economics-based analysis and advanced charting into his newsletter ideas. He was kind enough to allow me to reproduce the following chart for Whiskey & Gunpowder readers:

Source: www.speculative-investor.com

Steve dissected 80 years of market history into secular (long-term) bull and bear markets. Only instead of using indexes, he defines bull markets as periods of expanding P/E ratios and bear markets as periods of contracting P/E ratios. Market prices and earnings can move up together, down together, or independently of each other. But major peaks and valleys in the price-to-peak-earnings ratio provide reliable signals of change in the market's long-term tide.

The public's fear of consumer-level inflation spiraled out of control in the 1970s. This period was pretty unique in financial market history. It demonstrated that investors are not willing to pay a high multiple of earnings in a high CPI (consumer price index) environment. Look at the 1966-1982 bear market in the chart. While earnings grew rather dramatically over this 16-year period, the S&P went practically nowhere. The price-to-peak-earnings ratio compressed all the way down to about 8 by 1982. Who cares about earnings growth if it just keeps pace with CPI inflation?

I agree with Steve that we are in a secular bear market similar to the 1966-1982 market, where the index went nowhere, but the price-to-peak-earnings ratio contracted to single digits. While history never repeats exactly, it often rhymes.

If I had to go out on a limb and choose the most likely outcome over the next decade, I'd expect the S&P 500 will fluctuate in a trading range between 1,000-1,500, while earnings grow enough to push the price-to-peak-earnings ratio back below 10.

Look also at the 1995-2000 period on the price-to-peak-earnings chart. The initial dividend yield was low starting in 1995, and dividends didn't grow much over the next five years, but returns were huge. Investors were willing to pay double the P/E ratio to get into stocks because they feared missing out on the biggest boom in history. These market returns were driven by speculation, not fundamentals, and the consequences were costly during 2000-2002.

A Closer Look Reveals Strength in Energy Earnings

So which market sectors will remain attractive investments through a period of higher market volatility? You want to own companies that produce what consumers need and can afford without exotic financing arrangements. The energy sector provides a great starting point for your search.

Veteran economist Ed Yardeni produces great chart books. Here is one that provides us with a good perspective on how much energy sector earnings have contributed to overall S&P 500 earnings. Since the 2003 bottom, energy stocks in the S&P 500 have grown from 5% to 10% of the index's market value. But this huge price move was supported by fundamentals. Energy's share of total S&P 500 earnings grew from 6% to 13% over this time frame. This trend has plenty of room to run over the next decade because the bull market in energy stocks has not pushed them to overvalued levels:

Source: www.yardeni.com

Many are worried that the commodity pricing environment cannot possibly get any better. But at 3% of the average family budget, gasoline is not prohibitively expensive. Neither are the other energy commodities. Gasoline prices could climb to 10% of the family budget without significantly altering demand.

If this were to happen, consumers would just cut 7% worth of discretionary or leisure spending to offset this price hike. Given the good probability of this occurring over the next 10 years, you want to own stocks whose earnings benefit from higher energy prices and avoid stocks whose earnings will be undercut by them.

Source: www.yardeni.com

Government Refuses to Let the Free Market Allocate Scarce Resources

Odds are good that the government will eventually throw a wrench into orderly free market gasoline pricing. Many in Congress think that consumers should not have to prepare for a long period of expensive gasoline. The U.S. Congress appears ready to fight on their behalf if this occurs. The Oil & Gas Journal reports:

"U.S. House Rep. Bart Stupak (D-Mich.) introduced legislation aimed at preventing price gouging for gasoline, natural gas, and other forms of energy. The bill, which has 78 cosponsors, would give the Federal Trade Commission explicit authority to investigate and prosecute anyone found artificially inflating energy prices, he said...

"Under the bill, FTC would be empowered to exercise its new authority at each stage of energy production and distribution. It would be allowed to impose fines up to $150 million against corporations and fines up to $2 million and jail sentences up to 10 years for individuals found guilty of price-gouging...

"Stupak said that during the 109th Congress, 123 House members cosponsored a similar bill he wrote, and several more signed a discharge petition to bring it to the floor. 'There was strong support for my bill, but the Republican leadership blocked it from being considered. This Congress, I look forward to working with my colleagues on both sides of the aisle and to help protect the American consumer from energy price gouging,' he said."

This sounds frighteningly similar to Venezuelan dictator Hugo Chavez's actions in Venezuela. He is threatening fines and imprisonment for shopkeepers who hike prices above a government-mandated inflation limit. But these sorts of price controls only prompt suppliers to start smuggling and black market operations. One way or another, the free market will ensure that goods like gasoline supplies will flow to consumers willing to pay the highest prices.

The government tried price controls in the 1970s and only created frustrating gas lines. Thinking that they help the little guy, price controls actually bring about the very shortages that lead to hoarding and inflationary spirals.

But government influence over the economy doesn't stop in Congress. The Federal Reserve is the other half of the dynamic interventionist duo, with plenty of inflationary tools at its disposal.

Liquidity From the Free Market May Dry Up...

"Liquidity" has become the new buzzword explaining why financial markets have remained tranquil and expensive. But the past few days of action in the stock and credit default swap markets hint that this wave of liquidity may be drying up.

A good parallel to the wave of liquidity was the IPO environment for tech stocks in 1999-2000. Companies with little chance of developing profitable business models were easily financed. Investors lined up around the block, desperate to buy ownership stakes.

Near the peak of the Nasdaq, speculative demand for IPOs indicated that we were in a new era of easy financing for IPOs. Liquidity seemed abundant. But within months, it had vanished and every tech IPO over the next few years became difficult to finance. Subprime mortgage lenders are the IPO buyers of the housing bubble, and they have left the market completely or dramatically tightened lending standards.

...But the Fed Will Be the Inflator of Last Resort

Markets can seize up and go into free fall when a flood of free market financing dries up. New Century and NovaStar will certainly not be hungry for subprime paper. They'll be lucky to survive their recent implosions.

So the Federal Reserve will attempt to rise to the rescue. Many believe that it will be powerless against the forces of deflation, but it's not smart to bet against central bankers' ability to destroy the value of paper money. The Fed will act in concert with most central banks around the world to keep the inflation game going.

A large, increasing global debt load creates constant demand for the money and credit necessary to service it, and if the free market refuses to supply the money and credit, central banks will. The free market's supply of credit dried up during the Great Depression and the Fed's inflationary ability was hampered by early 20th-century banking and monetary policy restrictions. It was powerless to stop a cycle of defaults.

The Fed's 21st-century inflationary tool kit is far more potent and flexible. Deflation cannot happen when governments can create infinite quantities of money and credit at zero cost -- and are insensitive about returns on investment, malinvestments, bubbles, and ever-growing trade deficits.

But bailouts do not happen without consequences. The faster central bankers inflate their currencies, the faster gold will return to its place as real money in the eyes of the public. You'll want to have a full allocation of gold-related investments as insurance.

Prepare for the Next Wave of Inflation

So the Fed and the federal government will attempt to magically protect us from both stock market crashes and gasoline shortages. After years of relative tranquility, stock market investors are due for some turbulence. If you are exposed to financial markets, it's not too late to reassess the fundamentals supporting the value of your investments.

In the inflationary environment I expect, you'll want to avoid holding long-term bonds and increase exposure to select precious metals, energy, and "old economy" infrastructure stocks and minimize exposure to consumer discretionary stocks. Companies vital to the production of developed and emerging market economy needs -- energy, food, and water -- will enjoy strengthened competitive positions.

Replacement values of the physical assets on their balance sheets will grow year after year, supporting their stocks' values. An entrepreneur (assuming environmental permitting were even possible) could probably not construct an oil refinery for anything less than twice the cost of buying the portfolio of refineries offered by shares of Valero in the stock market.

Conversely, what sorts of barriers to entry characterize an apparel retailing business? All you need is access to credit, low-cost clothing supplies, and a lease at the local shopping center. Companies that can deliver consistent, sustainable (i.e., not one-off, housing bubble-driven) earnings should assume market leadership positions in the near future.

I plan on profiling such companies for my readers and for attendees of the March 14-17 Investment U conference in Phoenix.

Good investing,
Dan Amoss, CFA

for Whiskey and Gunpowder

Dan Amoss, CFA is managing editor for Strategic Investment and a contributing editor for Whiskey & Gunpowder. Dan joined Agora Financial from Investment Counselors of Maryland, investment advisor for one of the top small-cap value mutual funds over the past 15 years. As a buy-side analyst, Dan refined his value investing approach by meeting with corporate executives, sell-side analysts, and writing proprietary research for the fund’s management team.

Dan brings to Strategic Investment the unique experience of an institutional background and a drive to seek out the most attractive investments within favored "big picture" trends. He develops investment ideas for SI readers with a global network of geopolitical and macroeconomic analysts. Dan holds the Chartered Financial Analyst® designation, a professional designation widely recognized within the investment community.

Marc Faber Interview

Will Hong Kong Shanghai Bank be the New Credit Antstalt - Thomas Au

by Thomas P. Au

Arguably the biggest story from last week was that Hong Kong Shanghai Bank (HSBC) one of the world’s largest banks, has taken a $10.6 billion hit on U.S. consumer loans, specifically in the subprime arena. (Forget for a moment, what happened to smaller concerns like New Century Financial or NovaStar.) These problems are not only bad in and of themselves, but in their potential effects on the global economic system. That’s because the bank has ties to China through its original namesake, and to Britain and the United States, through the acquisition of Britain’s Midland bank and America’s Household International.

Like Austria’s Credit Anstalt bank in relation to Germany in 1931, HSBC is located barely outside of China, but with important indirect ties to that country. (The bank’s traditional area of strength has not been in China per se, but rather in lending to companies based in Hong Kong or elsewhere offshore China that do business in China.) And HSBC’s links to the United States go far beyond what Credit Anstalt boasted. Besides being one of the largest banks around, HSBC thus represents a connection between the world’s two most important economies like perhaps no other bank in the world. Thus, a problem in one country could be transmitted through HSBC via a weakening of the bank, to a curtailment of its role vis-à-vis the other country.

The danger arises because the world’s two big economic bubbles are U.S. consumer spending and Chinese capital spending. HSBC’s recent problems were tied to the former. So far, I haven’t heard of issues for the bank in connection with the latter. Even so, the fact that HSBC is having major problems at one end of the spectrum has to be unsettling. And unfortunately I don’t know enough about the bank’s exposures at the other end to even guesstimate the extent of potential problems before they are actually reported.

At the risk of a slight digression, one knows that the U. S. consumer lending market is on its last legs when lenders like Bank of America considers illegal immigrants a hot market for its loan products, because everything better has already been mined. (I owned, then sold, the stock in the past year when the full extent of the bank’s exposures became apparent to me. If I were to take a position today, it would be short.) This seems like a case of trying to suck the last bit of juice from an already oversqueezed lemon, an extreme application of the well known law of diminishing returns. HSBC, through Household International, was on the horns of the same dilemma.

And some think that Chinese capital spending may be in similar straits. Columnist Jim Jubak is a case in point. In his article “Time is Running Out on China’s Economic Boom,” he rightly points out that “the current spate of growth has been built on non-renewable human, environmental, and capital resources,” which is to say that it is soon likely to regress to the global mean as Japan’s economic miracle did in the 1980s. And such a regression, while normal for the United States, would represent a hard landing for China. That’s because the distribution of wealth in that nominally socialist, and increasingly nationalistic, country is now so unequal (somewhat worse than the United States, somewhat better than Brazil), that large segments of the population would suffer even if the aggregates remained in positive territory.

The collapse of the Credit Anstalt Bank, with its ripple effect on Germany, probably was more responsible than events stateside, for the length and severity of the Global Depression of the 1930s. (And it ended Weimar, Germany’s experiment with democracy, bringing about the rise of Adolf Hitler and national socialism.) That’s because of its impact on the already-shaky economies of a whole continent, Europe. Because of China’s economic clout (represented by the fact that it is now the largest international holder of U.S. dollars), the end of the Chinese economic miracle would have grave consequences for the United States, as well as for the rest of Asia. Hence I take little comfort in the presumed ability of the Fed to ward off the crisis. And because its importance is even greater in Asia than in the U.S., HSBC could have a major role in bringing the Chinese miracle to an end.

Some may find it hard to reconcile these remarks with my “constructive” investment posture for 2007. The reason I am not a full fledged bear right now is because historically, most of the nation’s financial crises on one contributor’s February 15th list, have originated in the corporate or international, rather than U.S. consumer, sector. (My investments are tilted in favor of industrial, capital goods, and international stocks, and away from U.S. consumer goods and financials.) The non-consumer/non-financial areas are quite healthy for now. Stateside, I believe the resident bear when he characterizes the (consumer) subprime mortgage and securitization markets as a “fungus” but like the resident bull (albeit with less assurance), I don’t (yet!) believe that it will have national or global ramifications. Even so, this posture is probably skating on thin ice, because I regard this theme as “warm.” And if I hear that HSBC has major problems with industrial exposures, perhaps to China’s troubled state-owned enterprises (SOEs), my days as a “bull” will be numbered.

R. W. Wentworth
New York City, NY
Email

Thomas P. Au, CFA is an author and Market Analyst. Mr. Au has over twenty years of experience in securities analysis and portfolio management for both equity and fixed income securities. He has worked for Value Line, Cigna Investment Management, and other organizations. Prior to joining R.W. Wentworth, he was an analyst of the "monoline" municipal bond insurance companies. He is the author of "A Modern Approach to Graham and Dodd Investing" (Wiley, 2004).

Mr. Au graduated cum laude, with a B.A. in Economics and History from Yale University, and an M.B.A. in Finance from New York University. He is a Chartered Financial Analyst (CFA).

Whats behind the Global Stock Market Shake-out? - Gary Dorsch

In a keynote speech on February 2nd, in the northern Italian city of Turin, Bank of Italy chief Mario Draghi, warned global stock market operators not to assume that present favorable conditions would last. "It is not realistic to expect that the current orderly market conditions will last forever, we do not know where the next crisis will come from, we must do everything to be prepared," he said.

"Market pricing does not currently incorporate the full range of potential risks. Financial market participants need to take into account in their risk analyses, the full implications of a possible reversal of the current benign conditions, including the possibility of less liquid markets," he warned.

But Draghi is the "Boy who Cried Wolf", and few hedge fund or stock traders heeded his warnings. Central banks, including Draghi's ECB, are flooding the global money markets with liquidity, encouraging rampant speculation in financial markets. On Jan 29th, the ECB's Klaus Liebscher admitted, "Liquidity levels continue to be enormously accommodative, driven by high borrowing due to low interest rates," he said. The Euro M3 money supply is exploding at a 9.8% annual clip, it's fastest in 17-years!

Two of the biggest culprits behind the rampant speculation in global markets are the Bank of Japan (BoJ) and the Swiss National Bank (SNB), whose lending rates are so low, that an estimated $330 billion of "carry trades" in yen and Swiss francs are swirling around the global markets. On Feb 28th, the BoJ's Atsushi Mizuno, pointed to the side effects of keeping low interest rates near zero percent. "It could cause distortions in global asset prices by speeding up capital outflows from Japan."

And on January 24th, SNB Chairman Jean-Pierre Roth told the annual meeting of the World Economic Forum. "My current thinking on the Swiss franc, which is going against the fundamental elements in the Swiss economy, is that it's part of the exuberance in the financial markets," before vowing to crank up Swiss loan rates. The SNB started cranking up rates from near-zero in mid- 2004 to its current 2%.

Interestingly enough, the latest plunge in global stock markets came on the heels of a hike in the Bank of Japan's overnight loan rate to 0.50%, its highest in a decade, and renewed warnings by Swiss central bankers of a tighter monetary policy in the weeks ahead, and threats of a short squeeze on speculators betting against the Swiss franc. Earlier, on February 10th, G-7 central bankers warned currency speculators that they could get burned betting in one direction against the yen.

Global Jitters Linked to Downturn in US Housing market

Since former Goldman Sachs CEO Henry Paulson took the helm at the US Treasury last July, the Dow Jones Industrials (DJI) had marched 2,100-points higher, almost without interruption, and without more than a single 2% correction along the way. That was a winning streak unparalleled since 1964. It seemed as if the US Treasury and the Federal Reserve had gained complete mastery over the markets.

"The combination of lower energy prices, job creation and a strong stock market has limited the impact of stagnating house prices on consumer spending," said Chicago Fed chief Michael Moskow on February 18th, hinting at the Fed's clandestine strategy. But the higher the DJI flies, the greater the amount of liquidity that is necessary to keep the stock market afloat, and prevent a boom from turning into a bust.

Then on Feb 15th, with the DJI climbing to within a stone's throw of the 13,000 level, Federal Reserve chief Ben Bernanke identified the depressed US housing market as the biggest risk to the Fed's goal of a soft landing of 2-½ to 3% growth this year and next. "The ultimate extent of the housing-market correction is difficult to forecast and may prove greater than we anticipate," he said.

The "soft landing" scenario for the US economy was jolted on February 16th with news that housing starts plunged 14.3% in January to a 1.41 million annual rate, the lowest level since 1997. The Fed's 2-year rate hike campaign has toppled the US home building industry into a severe recession, and now a meltdown in the sub-prime US home loan market threatens the stock market.

In other signs of severe distress in the all important US housing sector, sales of new US homes plunged 16.6% in January to an annualized rate of 937,000 units, the sharpest monthly decline in 13-years. The Mortgage Bankers Association purchase index fell 4.8% to 381.4 last week, below its year-ago level of 408.7, and is considered a timely gauge of US home sales.

Suddenly, the first major crisis facing the Bernanke Fed arrived without much advance warning - a rash of defaults on sub-prime home loans that if unchecked, can drive the US economy into recession in 2007. Shares of many US sub-prime lenders, such as New Century Financial (NEW.N), and NovaStar Financial (NFI.N), have been brutally hammered in recent weeks, as defaults mount among homeowners with poor credit histories, and where there is smoke, there is fire.

Skyrocketing property values during the US housing boom made it easy for homeowners to borrow heavily against their homes with second mortgages and home-equity loans. But if home prices continue to slide amid a glut of unsold homes and foreclosures, many over-extended homeowners will lose their ATM machines.

HSBC Holding, HBC.N Europe's largest bank and a major sub-prime lender in the US, shocked Wall Street by announcing that home-loan delinquencies have gotten so bad that it set aside $10.6 billion to cover potential losses. Delinquencies in the $1.3 trillion impaired-credit mortgage market exceeded 13% among borrowers with sub-prime adjustable-rate loans in the fourth quarter. The top catalyst of delinquencies was second-lien "piggyback" loans taken by borrowers for a down payment.

Defaults could spiral higher as lenders are slated to reset as much as $1.5 trillion in ARM's this year. A credit squeeze could develop with major players such as HSBC and New Century taking big hits, the entire sub-prime industry is likely to tighten underwriting standards and throttle back on the highest-risk loans.

So with the Dow Jones Industrials badly shaken to as low as 12,086 on Feb 27th, the Plunge Protection Team went into action to rescue the other important ATM machine. "There's not much indication that sub-prime mortgage issues have spread into other mortgage markets," Bernanke said on Feb 28th, triggering a 150-point rally in the DJI futures market, and allowing buy-side Wall Street investment bankers to shrug off the bearish news of a 16.6% plunge in existing home sales.

The epicenter of Asian contagion is located in China, and how Beijing decides to deal with the Shanghai bubble, can have a great impact on the outlook for the Chinese economy, global commodity markets, and exporters in the region from Australia, Hong Kong, Japan, and Korea. Will Beijing try to prick the bubble and set-off a steep correction, or carefully calibrate a series of tightening measures to take some steam out of the market and simply flatten it out?

"There is a bubble growing. Investors should be concerned about the risks," said Cheng Siwei, vice-chairman of China's National People's Congress in a January 31st interview with the Financial Times. "But in a bull market, people will invest relatively irrationally. Every investor thinks they can win. But many will end up losing. But that is their risk and their choice," Cheng warned. Sometimes, markets can boomerang on central banks and torpedo the most carefully designed strategies.

On Feb 9th, the People's Bank of China (PBoC) tried to keep the market off balance, by warning that it would use a number of tools to keep flush liquidity conditions in check. "The central bank would use a combination of open market operations and higher required reserves for banks in an effort to stave off a credit-fuelled investment boom, and will make the yuan more flexible," it said.

The PBoC put its verbal threats into action on February 16th, when it lifted bank reserve ratios by half-percent to 10%, coming only six weeks after the last hike, and at faster pace of tightening than expected. The hike in bank reserve ratios should drain about 160 billion yuan ($20.7 billion) from the Chinese money markets. What disturbs Chinese government officials are signs of a speculative bubble in the stock market. Investors opened 50,000 retail brokerage accounts a day in December and mutual funds raised 389 billion yuan last year, quadruple the 2005 amount.

China's stock markets are dominated by retail investors, who hold 60% of the total trading shares. By comparison, in Hong Kong, which lists a number of mainland Chinese companies, institutional investors account for 70% of daily transactions.

The Chinese stock market has now become the most expensive in Asia, trading at 40 times 2005 earnings, compared to 16 in Hong Kong. The high P/E ratio is supported by expectations of 25% earnings growth for 2006 and 2007, from the possible new tax policy and new accounting standards starting from 2007. However, if 2006 corporate results fail to meet strong expectations, Chinese investors could easily dump inflated stocks, and send the overall market into a tailspin.

Swiss National Bank takes aim at Swiss franc "carry traders" in SMI

Swiss Market Index futures plunged about 175 points from their intra-day high on Feb 21st, following hawkish comments by Swiss National Bank (SNB) chief Jean Pierre Roth. "Inflation will accelerate in 2009. The current interest rate level is not high enough to ensure price stability in the medium term. If the weakness of the franc feeds inflation, an interest rate increase would be necessary" he warned.

Roth also repeated SNB warnings against the risks attached to short-selling the Swiss franc. "The exchange rates on the markets develop out of line with economic fundamentals. Experience shows that such situations are fragile. If the correction comes, it is often harsh and can overshoot," he said.

Earlier, on Feb 4th, SNB member Thomas Jordan warned investors of the high risks in carry trades, because of a possible sudden and violent appreciation of the Swiss franc. "The weaker the franc gets, the higher the risks investors take when they engage in new carry trades. A sudden appreciation of the franc would lead to heavy losses for those who are short in the franc or sold it in futures," he said.

"I am not sure whether all the market participants in this business are always aware of the risk. If import goods got significantly costlier due to the weaker franc and signs of higher inflation existed, we would have to react. We would also move to a tighter monetary policy if the weaker franc led to an overheating in the export industry and a strong wage increase," Jordan warned.

The SNB lifted its target for the three-month Swiss franc Libor rate to 2.00%, on Dec 15th. The next policy meeting is due on March 15th, when the SNB is almost certain to lift its Libor target to 2.25%, to match the ECB's repo rate hike to 3.75% a week earlier. Two more rate hikes by the SNB to 2.50% might slow M3 to as little as 1-2% growth, which could trigger an unwinding of short positions in the Swiss franc, but put a lid on the high-flying Swiss Market Index.

India Signals Tighter Money Policy to control Inflation

"We will continue to take more steps to dampen inflation," said Indian Finance Minister Palaniappan Chidambaram on Feb 27th. If true, the Reserve Bank of India still has a long road ahead to contain the M3 money supply, which grew at an annualized 21.3% last month, and bank loans expanded at 30% clip, much higher than the central bank's target of 20 percent.

India's central bank has been raising official interest rates gradually for the past 2-½ years, and lifting bank reserve ratios, to curb rapid credit expansion and accelerating inflation, but remains far behind the inflation curve. "It is important to lower inflation perceptions and the Indian central bank will take all measures to rein in price pressures," said Deputy Governor Rakesh Mohan on Feb 28th.

India's wholesale inflation rate climbed to 6.73% in January, and prices paid by farmers are at an eight-year high of 8.94 percent. New Delhi expects unprecedented growth of 9.2% in the year to March 31st, the fastest pace after China among the world's major economies. The economy has averaged 8.6% growth since 2003.

The Bank of India, which owns nearly a quarter of banking sector assets in India,, raised its benchmark prime lending rate by 75 basis points to 12.25% last week, the second time it has raised its benchmark lending rate in two months. It also lifted the rate a half-point to 11.50% in late December. Leading private lender ICICI Bank's benchmark rate for corporate loans is now 14.75%, and expects Indian loan demand to slow to a 20% annualized rate in the future, and in turn, slowing M3 growth.

The RBI's tightening campaign, up until now, has failed to slow the M3 money supply or bank lending. But since mid-December, India's 3-month Libor rate has climbed 300 basis points to 10.25%, the tightest