Bakhtiari’s Event of the Century - Byron King

by Byron King

I HAVE RECEIVED more correspondence from Ali Samsam Bakhtiari of Tehran, Iran. I want to bring Dr. Bakhtiari’s important work to the attention of the readers of Whiskey & Gunpowder.

Ali Samsam Bakhtiari

I wrote about Dr. Bakhtiari last August, when Whiskey & Gunpowder published a set of articles that I wrote about his views on Peak Oil. In “Nothing Like Business as Usual,” I explained that Bakhtiari is a retired "senior energy expert," formerly employed by the National Iranian Oil Co. (NIOC) of Tehran, Iran. During his long career with NIOC, between 1971 and his mandatory retirement due to age in 2005, Bakhtiari held a number of important positions of immense trust and responsibility.

At the time he retired, Dr. Bakhtiari was attached to the director's office in the Corporate Planning Directorate of NIOC, specializing in issues related to the global oil, gas, and petrochemical industries. Bakhtiari is now an independent consultant with no official affiliation with NIOC. He spends his time writing and speaking to a worldwide audience on the subject of oil depletion in general, and Peak Oil in particular. Dr. Bakhtiari is far too humble to say it, but of course you may presume that his views on Peak Oil are published in Iran. This helps to understand certain strategic assumptions in the realm of energy that inform the Iranian governing bodies.

“An Era in Which We Know Nothing Much”

Last year, in an address to the senate of Australia, Bakhtiari stated that "I can see a range of $100-150 [per barrel of oil] not very far into the future." He amplified this statement as follows:

"We are entering an era in which we know nothing much, where we have a
brand-new set of rules...One of these new rules, in my opinion, is that there
will be in the very near future nothing like business as usual. In my opinion,
nothing is usual from now on for any of the countries involved. And the lower
you are in the pile, the worse it is going to get."

Four Phases of Decline

Dr. Bakhtiari views the future of worldwide oil extraction in terms of four phases of transition, or, as he puts it, T1, T2, T3, and T4. I described these four phases in greater detail in an article entitled “Peak Oil and Bakhtiari's 4 Phases of Transition.”

In an e-mail to me that explained and amplified his views, Bakhtiari stated:

“The four transition periods (T1, T2, T3, and T4) will roughly span the
2006-2020 era. Each transition [will] cover, on average, three-four years…[T]he
only transition we can see rather clearly (or rather, we hope to be able to
comprehend) is T1. It is clear that T1 will witness the tilting of the 'oil
demand’ and 'oil supply’ scales -- with the former dominant at the onset and the
latter commanding toward the close (say, by 2009 or 2010).”

That is, Bakhtiari's view of T1 is that worldwide oil supplies will remain almost constant during this initial phase. New discoveries and production that is now coming on line will just about compensate for the production that is lost due to depletion. But T2, T3, and T4 will be, as Bakhtiari puts it, "more turbulent phases."

The Peak Has Been Reached

According to Dr. Bakhtiari, the world has now reached and passed the point of Peak Oil. Bakhtiari has recently published an essay entitled “The Century of Roots.” Bakhtiari has reviewed the available evidence on world oil production and believes that world output peaked absolutely in 2006. Here is what he is saying:

“After some 147 years of almost uninterrupted supply growth to a record
output of some 81-82 million barrels/day [mb/d] in the summer of 2006, crude oil
production has since entered its irreversible decline. This exceptional reversal
alters the energy supply equation upon which life on our planet is based. It
will come to place pressure upon the use of all other sources of energy -- be it
natural gas, coal, nuclear power, and all types of sundry renewables, especially
biofuels. It will eventually come to affect everything else under the sun.”

“Everything else under the sun”? That sounds like quite a lot, but Dr. Bakhtiari has done his background work, to include reviewing numerous models for oil extraction on a worldwide basis. In a paper delivered to an oil conference in Italy in March 2007, he concluded that in 2006, overall depletion subtracted about 3.5 mb/d of oil extraction from the daily global total of oil output (plus or minus 10%), and that a maximum of 2.5 mb/d of “new” oil production came on line, which includes new and expanded oil fields, as well as new projects in the Canadian tar sands areas. Thus, according to Bakhtiari, in 2006, depletion was greater, by more than 1 mb/d, than new discoveries and reserve growth, including oil produced from unconventional sources such as the tar sands.

Dr. Bakhtiari’s conclusion, presented to the Italian conference in March, was that “the peak of global oil production has been reached.” Bakhtiari now sees the world entering a phase of irreversible decline in daily oil output, moving down from the current 82mb/d toward daily oil extraction of only 55 mb/d by the year 2020. He discussed this with me in some comments he made last year, as well:

“T1 has a very benign gradient of decline, and it will take months before one
notices it at all. But T2 will be far steeper...My World Oil Production Capacity
model has predicted that over the next 14 years, present global production of 82
million barrels per day will decrease by roughly 32%, down to around 55 million
barrels per day by the year 2020.”

Event of the Century

Dr. Bakhtiari believes that this state of affairs, the peaking of global oil extraction, is truly the “event of the century,” which he explains thus:

“The 21st century is still young, as there are another 93 years to go. So it
might sound overambitious to claim that 'The Event of the Century’ is already
behind us. But I'll gladly take the risk, for I seriously believe that the
peaking of the global production of crude oil -- commonly know as 'Peak Oil’ --
has occurred in 2006 and will be 'The Event’ bound to dominate the history of
the 21st century: one of those 'historical inflection points,’ which abruptly
change fundamentals in the course of world history. I cannot foresee any other
event coming to eclipse Peak Oil, not even the world wars which might be
unleashed in the Peak's aftermath and further fueled by widespread resource
scarcity. Unless, of course, humanity decides upon collective suicide with the
massive use of weapons of mass destruction; but such an annihilating event would spell the word ‘end’ for most, if not all, of mankind.”

Dr. Bakhtiari believes that almost all of what are considered to be major current trends of humanity will be altered by Peak Oil. Here is what he says about one key trend, the future of population growth:

“Take, for example, population. In the 'Post Peak’ era, population growth
will gradually decrease before becoming stagnant (following crude oil) and
passing a Peak of its own -- my early projections show a 'population peak’
occurring some time around 2025 (a 20-year lag respective to oil) at a global
level of around 7.5-8.0 billion people. There is little doubt that crude oil is
our world's 'master domino’: when it thrives, all other dominoes flourish, and
when it tumbles, it does topple all of the others too. Thus, interestingly,
'Peak Oil’ will not usher in a revolution, but rather an evolution 'en sense
contraire’ ('in reverse gear').”

“Every Nook and Cranny”

Dr. Bakhtiari has this to say about both the future, as well as the nature of mankind:

“Peak Oil', however, is now in the past, and we are presently left facing the 'Post Peak’ era. There is little doubt that in this brand-new period, massive changes are bound to occur. The usage of relatively cheap crude oil has invaded every nook and cranny of our modern world economy -- sometimes without the wasteful invasion being fully realized. Moreover, the ubiquitous oil products have created addictions (especially in the transport sector) which will be extremely difficult to uproot. And not only is the addiction to motorcars common throughout the developed world, it has also begun making deep inroads in China, Russia, and even India: a very dangerous development, indeed, because as American physician and poet Oliver Wendell Holmes [1809-1894] judiciously
remarked:

‘Man's mind, once stretched by a new idea, never regains its
original dimensions’”

Mortal Danger

Dr. Bakhtiari continues on a profound pathway, and I will simply quote him at length:

“In 'Post Peak,’ all of our systems of habits are in mortal danger. Due to
the relative cheapness of crude oil (in relation to other, more expensive daily
needs), people don't exactly realize the pivotal role played by its products in
their daily routines -- as these products have invaded every nook and cranny of
our modern life. It is only when the brakes will be pulled (as they inevitably
will have to be) that the general public will come to gradually realize the
critical importance of 'black gold’ -- which currently provides no less than
two-fifths of world energy -- and of ‘energy’ in general in their living habits.

“Thus, at present, the global masses seem totally unprepared for the two
shocks which will inevitably occur in 'Post Peak.’ On the one hand, no major
institution or medium is willing to inform them seriously on the not-so-palatable consequences of 'Post Peak’; and, on other hand, specialized institutions (such as the International Energy Agency [IEA], the Energy Information Administration [EIA] and OPEC) as well as some major energy consultancies (e.g., the Cambridge Energy Research Associates and the Edinburgh-based Wood Mackenzie research outfit) will go on denying 'Peak Oil’ by issuing rosy future oil output predictions.

“So that the twin shocks are now inevitable on a global scale, as there is no time left to prepare public opinion for 'Post Peak’ sequels. The shocks will first surprise, then jilt, and finally entangle swaths of people worldwide. Those better prepared will be less inclined to react in a disorderly way and panic when the shocking truth will be unveiled.”

Two Main Types of Shock

Dr. Bakhtiari delves into the state of preparation of major nations and populations for what is about to ensue and concludes as follows:

“In the large majority of countries, no one has prepared (or wanted to prepare) the general public to the historical 'Peak Oil’ event and to its momentous consequence in their daily lives. Thus, most probably, the popular masses will be directly exposed to two main types of shock:

A material shock;
A psychological shock.
“Due to the benign decline gradient in crude oil production during the early 'Post Peak’ period -- only 3 mb/d over the first transition period spanning 2007-2010 -- the material shock will not pose insoluble problems and accommodation will prove possible with minimal gradual pain. Moreover, sizeable amounts of wastage in most developed societies will provide a welcome cushion for the initial cuts to be made.

“Not so for the psychological shock. This shock, in stark contrast, will be electric and abrupt. Stress, fear, depression, despairs, and nightmares will be the order of
the day -- as people come to face the not-so-palatable facets of 'Post Peak.’ When confronted with this series of unknowns, with the trauma of change, people will try to protect themselves by automatically reverting to their past, to the known, to what they believe to be "real and true" -- in a word, to their reassuring 'roots'”

The Need to Cope and Adapt

Dr. Bakhtiari has more to say on Peak Oil and the future of mankind, and we will discuss his views in future articles in Whiskey & Gunpowder. But this recent perspective that we are past Peak Oil, based on Dr. Bakhtiari’s analysis of oil data from 2006, is entirely consistent with what he told me last year. In previous correspondence, Dr. Bakhtiari stated to me that the “gradation in decline (between T1, T2, T3, and T4) is a genuine blessing for those having to cope and adapt.”

I noted in my articles last year that, indeed, any gradation that becomes evident, and which leads to an understanding of the dire implications of Peak Oil, is a blessing. But this is so only if informed people and the industrial and political policymakers of the world actually take Peak Oil as a serious matter and set policy accordingly. Will this happen? Is Peak Oil yet a topic of discussion among the high and mighty, as well as a matter of individual and local concern? Hardly, although I believe that Peak Oil is certainly a completely valid investment paradigm. Aside from merely making money, however, there is much more to accomplish, and the time is growing short.

When it comes to his effort to explain Peak Oil to a worldwide audience, Dr. Bakhtiari is a prophet. (A humble prophet, I should add. He is embarrassed when I say such things about him.) But Bakhtiari has both predicted something, and given a 14-year time frame for its occurrence. On this score, he is envisioning the future.

Dr. Bakhtiari’s efforts, his writings, and his work embody the old saying that "Time takes no holiday." Once again, as with my previous articles, allow me to end by expressing my deepest thanks to Dr. Bakhtiari for sharing his thoughts with me and trusting that I will present them to our readership at Whiskey & Gunpowder, and wherever they go from there. Also, once again, I offer the words of the great Dante Alighieri, who wrote in Purgatorio, Canto III, "It is the wisest who grieve most at the loss of time."

Until we meet again...
Byron W. King

For Whiskey and Gunpowder

Byron 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 current 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.

Whats behind the Euphoria in Asian Stock Markets and Gold? - Dorsch

by Gary Dorsch

For a few tumultuous hours on April 19th, it seemed like deja ‘vu all over again. Global commodity and stock market operators held their collective breathe, as the Shanghai Stock Index tumbled as much as 7.2% to the 3,400 level, reviving fears of yet another gut wrenching global shake-out. Beijing had delayed the release of two key economic statistics until after the close of trading, heightening fears of bearish news that could derail the Shanghai freight train.

After the close of trading, Beijing said consumer inflation had hit 3.3% in March, its highest in more than two years, and far above 2.7% in February. China's economy is overheating, expanding at an 11.1% annualized clip in Q'1, and factory output is 18.5% higher from a year ago. The news of above target inflation, jolted China's 5-year bond yields upward by 50 basis points to 5.25%, to its highest in two years, on fears the People's Bank of China (PBoC) might actually tighten liquidity.

And what happens in Shanghai is of great interest to global commodity and stock market operators, because China is the locomotive of global economic growth, and its staggering factory output is matched by its demand for industrial commodities. China's share of global demand growth for commodities between 2002 and 2005 was: 51% for copper, 48% for aluminum, 87% for nickel, 54% for steel, 86% for tin, 113% for zinc, and 30% for crude oil.

The PBoC began its pseudo tightening campaign to absorb billions of dollars of excess funds pouring into Shanghai's money markets from its ballooning trade surplus, foreign direct investment, and hot money flows into yuan denominated securities. But traders weren't fooled by the psuedo tightening. Bond yields stayed near historically low levels, and the stock market tripled, because the central bank focused mostly on soaking up excess liquidity rather than raising interest rates.

Chinese Traders take Government Threats in Stride

What briefly spooked the markets on April 19th was the idea that this pattern might change. The last PBoC rate hike in March left the benchmark one-year deposit rate at 2.79 percent. That means real deposit rates, when compared to a 3.3% inflation rate are negative 61 basis points, which encourages a flood of hot money into China's frothy stock and real estate markets, which authorities say they want to prevent.

Chinese Premier Wen Jiabao said on April 19th, that Beijing needed to take pre-emptive steps to prevent the economy from overheating in the face of excessive credit and money growth. "We need to prevent the economy from shifting from relatively fast growth to a state of overheating and to prevent big ups and downs. We will work hard to keep basic stability in the overall level of prices," he said.

But Jiaboa has a major credibility problem. Over the past four years, the Chinese premier has vowed at least a dozen times to rein in the explosive growth of the M2 money supply, and to slow the economy towards 8-9% growth. But each year, Beijing fails to deliver. Instead, it inflates the M2 money supply at an average 18% clip, to keep the yuan undervalued and expand its economy at a 10% rate.

The net result was a $232 billion trade surplus with the United States last year, and the loss of 3.2 million US manufacturing jobs, since the Bush administration took office. On the flip side, Chinese retail sales in Jan-Feb were 14.7% higher than a year ago, and industrial and bank profits are surging to record highs. Chinese exports soared to a record $252 billion in the first quarter, up 27.8%, while imports rose to $205.7 billion, up 18.2% from the same period a year earlier.

China and India's enormous appetite for raw materials have lifted global freight costs for dry commodities to record highs, with congestion at Australian coal and mineral ports at a record 20-days. The Baltic Exchange's Cape-Size Freight Index, an indicator of global minerals demand, added 190 points to 8,795 on April 23rd, within easy reach of the December 2004 record of 8,911. India's industrial output was 11% higher in March from a year ago, accounting for 25% of its economic activity.

Clandestine Agreement between US Treasury and Beijing

In return for free and unfettered access to the US consumer market, China recycles much of its trade surplus into US Treasury, agency, and corporate bonds, helping to keeping US mortgage rate 100 basis points lower than otherwise. China's holdings of US Treasuries climbed to $416 billion.

The Bush Administration has allowed the United States to become increasingly dependent on foreigners to finance the federal budget deficit, and future US national income will be depressed by interest payments to foreign holders of US debt.

Beijing also owns more than $300 billion in US agency and corporate bonds, but suffers a loss on its massive portfolio, every time it allows the US dollar to trade lower against the yuan. Since Beijing unhinged the dollar /yuan peg in July 2005, the US Treasury 10-year Note has declined by 10.6% against the Chinese yuan.

China's reserves have ballooned in recent years as the central bank, in order to hold down the yuan, has bought most of the dollars generated by a growing trade surplus, inflows of foreign direct investment and speculative capital. The central bank said on April 12th, that it FX reserves mushroomed by $135.7 billion to $1.2 trillion between January and March, more than half the $247.3 billion reserves accumulation for the whole of 2006. About 70% of China's FX reserves are held in US bonds.

But while Beijing's has steered towards safe and stable investments, Chinese leaders might start to diversify the hoard into commodities or non-US dollar currencies. China might decide to dump some of its US dollar holdings, setting off a tidal wave of T-bond sales and imperiling the US economy. Instead, Beijing might buy oil fields, copper mines or even agricultural land to help sustain the country's development. US Treasury chief Henry Paulson played down such concerns, noting that China's $416 billion of Treasuries are less than the value of an average day's trading.

"US credit markets should be able to absorb without great difficulty any shift of foreign allocations," wrote Federal Reserve chief Ben Bernanke in a letter to Sen. Richard Shelby, on March 16th. "And even if such a shift were to put undesired upward pressure on US interest rates, the Federal Reserve has the capacity to operate in domestic money markets to maintain interest rates at a level consistent with our economic goals," Bernanke said.

Thus, Bernanke indicates he's prepared to print US dollars to buy back the debt that is sold to China. The net result of such actions could be the collapse of the US dollar on foreign exchange markets, higher gold prices, and spiraling inflation in the United States. The trigger for Chinese sales of US bonds could be "veto proof" protectionist legislation by the US Congress, aimed at Chinese imports.

Two leading US Senate critics of China's cheap yuan policy said on March 28th, they expected Congress to pass a "veto-proof" bill forcing Beijing to raise the value of the yuan against the dollar. "Well-crafted legislation, WTO-compliant and strong and effective is likely to pass with a veto-proof margin during this Congress," said Sen. Charles Schumer, a New York Democrat. "That's the message I hope the Chinese and the Bush administration take away from this hearing."

The US Business & Industry Council, which represents small and mid-size US manufacturers, has attacked the Bush administration's empty rhetoric about the need for a stronger yuan, calling it "chit-chat diplomacy and a complete sham."

But on April 22nd, Wu Xiaolian, deputy governor of the People's Bank of China, rejected calls for a quicker increase in the flexibility of the yuan's exchange rate.

At current growth rates, China's economy would surpass the US in 25-years. But Chinese leaders worry that stiff US tariffs on Chinese imports could derail the world's fastest growing economy, and burst the Shanghai stock market bubble. When push comes to shove with "veto proof" trade legislation in the second half of this year, Beijing would probably relent and allow the yuan to climb higher at a faster rate.

But until the political posturing turns into action, the Shanghai bubble could try to match the last great Asian stock market bubble – the Nikkei-225 of 1986-89. Chinese retail investors opened more than one million new trading accounts during the third week of April, bringing the total for the first four months of 2007 to more than 10 million. This figure is greater than that of the previous four years combined, even as signs of a bubble are getting clearer by the day. The Shanghai stock index has risen 50% so far this year, after tacking on a 130% gain in 2006.

Chinese broker, Citic Securities, has tripled in value since early November, and is a good barometer of speculative sentiment in China. Citic Securities 600030.ss, Shanghai's first listed broker, said its net profit in the first quarter of 2007 rose more than 12 times from the same period a year earlier. Revenue for the three months ended March 31st, was close to that for all of 2006.

Speculative fever is running very high in China, and it's not wise to stand in the way of an Asian stampede. The Shanghai Securities News said the number of new brokerage accounts established in a single day hit a record 282,000 on April 19th, the day of the market's 7.2% plunge, bringing total accounts to over 90 million. This is a strong signal that market setbacks are not scaring Chinese traders away.

And another PBoC interest rate hike might not scare speculators, because it would only adjust real interest rates from being sharply negative. Traders do not expect a sudden jump by the Chinese yuan, and believe authorities will hold appreciation for the rest of the year to around 3% to avoid hurting China's export sector.

Bank of Korea Takes aim at "Yen Carry" Traders

While China is the engine of global economic growth, Tokyo is the ultimate source of inflation in global commodity and stock markets. The infamous "yen carry" trade, which involves borrowing in low yielding Japanese yen at less than 1% to invest in risky commodity and stock markets, is on the Bank of Korea's (BoK) radar screen. On April 23rd, the BoK warned that "yen carry" traders are inflating its asset markets, and pushing the Korean won to uncomfortably high levels against the yen.

But even as the Korean Kospi Index hit an all-time high of 1,554 points, the Bank of Korea understands that much of the impressive gains are linked to leveraged bets, financed with loans denominated in low yielding Japanese yen. Koreans borrowed $47.7 billion in foreign currencies last year, for a total $113.6 billion of outstanding debt, up 72% from a year earlier. Yen loans are also used to finance purchases of Korean real estate, and local home prices are up 11.6% from a year ago.

While the BoK is not revealing the composition of the foreign currency borrowing, it's safe to assume that the Japanese yen is at the top of the list. So far this year, foreigners have bought a net 2.9 trillion won in stocks as of April 22, including purchases financed in Japanese yen. But on April 20th, Seoul indicated it would take aim against "yen carry" traders, thru direct FX intervention.

South Korean T-bond prices extended their recent losses, lifting 5-year yields to as high as 5.10%, their highest in 11 weeks, when Seoul said it will sell 3.5 trillion of foreign currency stabilization bonds, using the proceeds for ammunition against "yen carry" traders. Seoul plans to dump the 3.5 trillion Korean won on the foreign exchange market, to slow the rise of the won against the yen and US dollar.

Nearly 40% of Korea's economy is linked to exports, with China and the United States taking a combined two-fifths of the total. Electronics and autos account for about 45% of Korea's exports, and chip exports account for 10 percent. Because exports to the US have stagnated over the past three years, sales to China which reached $6.4 billion last month have become the key driver for the Kospi.

Somehow, South Korea's total exports grew to a record $30.6 billion in March, up 14% from a year earlier, despite the won's unrelenting strength against the dollar and yen. But South Korean exporters compete with their Japanese counterparts in key markets for similar products, so Seoul is worried that the "yen carry" trade could eventually put Kospi exporters at a big disadvantage.

Still, it's going to be difficult to knock the Korean won lower against the yen, unless the Bank of Japan lifts its interest rates. The won enjoys a hefty interest rate advantage of 433 basis points above similar deposits for the yen. Furthermore, the BoK is under pressure to lift its overnight loan rate to 4.75%, with Korea's M3 money supply exploding at an 11.3% annual rate, and home price inflation spiraling at 11.6%, in Asia's third largest economy.

In order to discourage a further rally in the won against the yen, the BoK decided to keep its powder dry on April 12th, leaving its overnight loan rate unchanged at 4.50%. Thus, the Bank of Japan's super-easy money policy is exporting inflation to South Korea, by keeping the yen weak and preventing the BoK from hiking its loan rates. Without a further tightening in BoK policy to contain the money supply, Korean stock and real estate markets are expected to remain frothy in the near future.

Australian Traders Tracking the Aussie /yen Exchange Rate

The "yen carry" trade has permeated into all corners of the globe, and is especially attracted to higher yielding currencies, like the Aussie dollar. It's been a wild rollercoaster ride, but Australia's Stock Exchange (ASX-200) Index has been catapulted to astronomical heights, in large part, due to the endless flow of cheap capital from Tokyo. The Aussie dollar climbed 50% against the yen from its lows in 2001, but found resistance at the psychological 100-yen last week.

The Aussie dollar also reached 84 US-cents, its highest in 17-years, helped by speculation the Reserve Bank of Australia (RBA) would raise its lending rate by a quarter-point from a six-year high of 6.25 percent. Last month, the RBA passed up a chance to lift its loan rate to 6.50%, despite explosive growth of the Australian M3 money supply, which is accelerating at a 14.3% clip, its fastest in 17-years.

Much like the Bank of Korea, the RBA is reluctant to raise interest rates further, to prevent the Aussie dollar from climbing above 100-yen. Japan is Australia's largest trading partner, and Australian Treasurer Peter Costello is trying to talk down the Aussie dollar to help local exporters. Earlier today, the Australian government provided the central bank with at least three months of breathing space, by conjuring-up a surprisingly low +0.1% inflation rate in the first quarter.

That translates into a 2.4% annual inflation from +3.3% in Q'4, and is now within the RBA's 1% to 3% target range for the first time in 12-months, taking pressure off the central bank for an immediate rate hike. The government's fuzzy math showed a 34% plunge in fruit prices offseting a 13.3% spike in pharmaceutical costs, a 7.1% increase in school tuition fees, and higher home rents which climbed 1.4 percent. The drop in fruit prices was led by a whopping 73% plunge in banana prices.

But while government apparatchniks were lowering the consumer inflation statistics, the central bank admitted in February that the Aussie M3 money supply is out of control, expanding at an explosive 14.3% annualized rate, it's fastest in 17-years. That had led to expectations of an RBA rate hike to 6.50% in April or May to rein-in M3. But the Aussie dollar's strength against the yen, handcuffed the RBA.

The RBA had been gradually lifting its overnight loan rate for the past five years, from as low as 4.00% in Q'1, 2002 to as high as 6.25% in November 2006. But the RBA's slow-motion baby-step rate hikes didn't contain the run-away M3 money supply. Neither did the RBA slow down bank loan demand, which is 13.2% higher from a year ago. Without a further tightening in RBA monetary policy, inflation pressures in the Aussie gold market could continue to simmer at the boiling point.

Last year, the RBA intervened on a regular basis in the foreign exchange market, by selling A$3.6 billion, anxious to hold the Aussie dollar below the psychological 80 US-cents level. But "yen carry" traders and the Federal Reserve's shift from a tightening bias to a neutral bias on March 21st, overwhelmed the RBA's intervention efforts.

The stronger Aussie dollar against the deficit ridden US dollar and the ultra-low yielding Japanese yen, persuaded the RBA to keep its powder dry at 6.25% on April 3rd. But Sydney gold traders aren't swayed by the government's fuzzy math on inflation, and instead, are watching the growth of the M3 money supply.

Gold ended 0.8% higher in Sydney to A$634 /oz, following the surprisingly low inflation data, tracking a 14-basis point surge in Australian T-bill futures, which lowered the implied yield for June to 6.42%. The inflation report was a shocker for Sydney T-bill futures traders, leaving a huge gap on the daily charts, while scaling back expectations of an RBA rate hike to the fourth quarter.

Treasury chief Costello said Australian inflation hit a peak in the middle of last year and appears to have decelerated. "The headline inflation rate will go lower. You will see a headline rate next quarter below 2 per cent," he declared. Ironically, with the RBA handcuffed on rate hikes by the Treasury chief, Sydney gold traders have a green light to bid the yellow metal higher in the weeks ahead.

Ordinarily, sharply lower interest rates would be construed as bullish for blue-chip stocks. But the ASX-200 ended 20-points lower after the benign CPI report, because "yen carry" traders unwound long positions in Aussie stocks, while the Aussie dollar came under selling pressure vs the yen. The ASX-200 Index is in the hands of "yen carry" traders, and the psychological 100-yen level for the Aussie$, proved to be a barrier for the ASX-200 Index at the 6,250-level, an all-time high.

With so much riding on the Aussie /yen exchange rate, it's interesting to note, that the interest rate differential between the six-month Aussie Libor and the Japanese yen Libor shrank to +560 basis points from +588 basis points after the release of the CPI data. Still, the Aussie dollar retains a wide interest rate advantage over the yen, and carry traders could look to buy the commodity currency again at the next support level. The next Bank of Japan rate hike to 0.75% is not expected until June.

Tokyo Gold Bubbling at 26-year high

In Tokyo, the big story is not about the Nikkei-225 index, but rather the gold market. With the Japanese yen hovering at a 21-year low against a basket of foreign currencies of its top trading partners, it's not surprising that Tokyo gold prices are bubbling at a 26-year high. On March 26th, Bank of Japan chief Toshihiko Fukui warned, "there could be side effects if interest rates are kept low for too long. But for now, the BOJ will maintain easy monetary conditions ensuing from very low interest rates while monitoring economic and price conditions," Fukui added.

Four days later, Tokyo financial warlords handcuffed the BoJ from raising interest rates in Q'2, with a report that consumer prices were -0.2% lower in February from a year earlier, suggesting that the world's second largest economy had slipped back into deflation. But Tokyo gold traders were not duped by the doctored inflation data, and bid the yellow metal 5% higher to 82,000-yen /oz.

The BoJ's Atsushi Mizuno, the lone hawk at the central bank warned, "A policy of yen weakness and may increase protectionism among Japan's trading partners, and cause distortions in global asset prices by speeding up capital outflows from Japan," he said. Most likely, the "yen carry" trade and the Shanghai bubble will greatly influence trends in global currency, commodity, and stock markets this year.

The possible unwinding of the "yen carry" trade makes the Asian and European stock markets skittish. But what's behind the unrelenting strength of the Dow Jones Industrials? Which global markets are most impacted by the Shanghai bubble? What's the outlook for the "Commodity Super Cycle?" These questions and much more were answered in the April editions of Global Money Trends, published each Friday mornings, for a total of 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.

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“The Government’s New Math: 3.5% - 5.1% = 1935” - Sheehan

by Fred Sheehan

Inflation is like the proverbial elephant in the parlor. The idiom gains texture since this elephant is trumpeting and charging with tusks pointed at the butler’s abdomen. Other than bad economists who write seductively about substitution and a hundred other gimmicks, does anyone really believe their costs are only going up at 2% annual rate? When Fed board members publicly debate whether the Federal Reserve should target a 1.5% or 2.0% inflation rate, do they believe they can dictate such precision? Do they believe the government Consumer Price Inflation numbers? Do they really have any idea of what constitutes inflation?

Skeptics may fall in two broad categories: those who want to know how the CPI calculations distort inflation, and, those who simply know inflation is understated. The latter category is too busy leveraging up and making money, so it neither needs to know nor wants to understand the shenanigans. It plugs in some arbitrary inflation figure of around 10% and gets back to work.

Markets (and most everything else in life) are driven by what is believed to be true, not by what is true. A more realistic calculation of inflation shows this is the sixth consecutive year of contraction. In 2005, house inflation was understated by 2.4% (see below). The Boskin Commission’s geometric calculation understated inflation by 2.7% (see below). Adding the two: 2.4% + 2.7% = 5.1%. Real GDP growth in 2005 was 3.5%. Thus, the economy contracted 1.6% in 2005 – before considering the quality adjustments for cars, medical care, clothes, computers, television sets, microwave ovens, washing machines, clothes dryers, and on and on it goes until we arrive at – college textbooks. Substituting what is for what is believed: how would the Body Politic in the U.S. have acted (borrowed and spent, bought stocks and bonds) if it was understood all along the U.S. never emerged from the 2001 recession?

Recession is defined, by-and-large, as a certain amount of quarters of negative “real” growth (e.g., two consecutive quarters). Real growth is calculated by subtracting the CPI from the “nominal” Gross Domestic Product. “Nominal” is the figure without adjusting for prices. (Assume the entire economy is orange juice. The price of orange juice rises 6% in 2007. There is no change in the amount of orange juice produced or bought. Therefore, the nominal GDP rises from $100 to $106 – 6.0%. The “real” GDP eliminates the 6% inflation; thus, the real GDP in 2007 remains at $100 – a 0% change.) If inflation is higher than the nominal GDP, then “real” GDP is negative and the economy contracted during the period (e.g., the orange-juice market collapsed.)

If it is commonly understood the real GDP has been negative almost every quarter since 2001, then the average, struggling middle-class household would not be so confused by why budgetary serenity seems always beyond its reach.

Assuming that is more than enough information for private-equity investors, we will move on. In fact, LBO financings may incorporate these premises. If they presume inflation is double the 5% borrowing rate, the excessive leveraging looks reasonable. For instance, debt payments exceed the rental income on the purchase of Sam Zell’s Equity Properties. This looks like lunacy, but may appear a foresighted speculation if rents rise 10% to 15% a year with 5% fixed debt payments.

Most everyone would at least acknowledge the government cannot measure inflation. Even the definitive Boskin Report says so: “[T]he problem [with] focusing on the “average” or “representative” consumer [is that] different consumers have tastes and time costs.”) Faced with such a problem the Commission then ignored the enigma and never mentioned it again. Obviously, we all buy different things and pay for different services. Not so obviously, the CPI calculation does not compare the changes in prices from one period to the next; it regularly strips out items whose prices are rising (in March, milk and cheese were AWOL); it reduces the proportion allotted to more expensive items (steak) and raises the weight of less expensive substitutes (chicken) and – the CPI is not meant to measure the change of prices.

This is the most important grievance with the Bureau of Labor Statistics (BLS), which makes the calculations. The CPI does not measure what anything actually costs us; it does not measure how many dollars we must hand to the gas attendant at the filling station. By not doing so, it fails to acknowledge that a dollar spent is a dollar that cannot be saved, invested or spent on something else. By claiming that quality adjustments translates a shirt that cost $60 at the cash register into the “$50” typed into the CPI model, it misses the point that the consumer either could not afford to buy the shirt or, did so, but fell deeper into credit-card debt. The Consumer Price Index is a fantasy that blends with minds hooked on video games, iPods, reality TV and the unreality of Donald Trump wrestling in Las Vegas along with midgets and drooling devils. Or, maybe that was reality. The very existence of Donald Trump may be the definitive example of both inflation and miscalculation.

These modifications of price measurements are there for anyone to read in Bureau of Labor Statistics papers. The BLS website is superficially a treasure trove of data, but stamina and stubbornness are required to make head, if not tail, of calculations. The intention here is to demonstrate the CPI number vastly understates price inflation. This does not require an across-the-board analysis, which is the patriotic duty of some trained statistician to produce. Instead, we will concentrate on two calculations: houses and substitution bias.

Funny games with the inflation figures have a long history. Stephen Roach reviewed his participation in a Morgan Stanley Global: Daily Economic Commentary: “After the quadrupling of oil prices in 1973, the redoubtable Arthur Burns, Fed chairman and renowned business-cycle scholar, called his staff together and demanded they present him with a CPI stripped of energy costs [Burns’ rationale was the blazing Yom Kipper War, over which the Fed had no control.] Statistics had triumphed again. We had surgically removed the diseased side of the CPI, enabling the Fed to focus on that portion of inflation that it could - and should - control. Alas, it didn’t turn out to be quite that simple. A few months later, Burns called us back again and noted an alarming pick-up in the rate of food inflation. Weather conditions had turned severe and the Fed chairman was particularly distraught over the disappearance of the anchovies off the coast of Peru - a development that he felt long held the key to agricultural price cycles.

But the Fed can’t react to weather Burns argued. So he instructed us to take food out of the CPI, as well. And, of course, we did.”

One of Burns’s major works was “Prosperity without Inflation,” published in 1957. Unable to accomplish that feat as Fed chairman, he went on to produce inflation without prosperity. Burns reputation suffers for his political motivations but his qualifications as an economist are not in question. This is to our misfortune. The August 27, 1973 edition of Time magazine quoted a far more able economist: “Chicago housewife Jean Salmon” told Time, “I don’t understand what’s happening. It seems to me that when one raises his prices, the other raises his in turn. It’s a vicious cycle.”

This was not the first time the Consumer Price Index was mangled in the interests of national unity. During World War II, the CPI managed to look benign. Given that wage-and-price controls inhibited markups, this was as it should be. Given that black-market transactions were common, prices were rising much faster than disclosed. This put the government in a fix - to record real price changes, it would then acknowledge a good portion of Americans were breaking the law. So, the statisticians performed their bureaucratic duty by recording the legal ceiling of prices. They published a CPI figure that was probably in keeping with the statistical practices of America’s wartime ally, Uncle Joe Stalin.

In Burns’s defense, he reported two figures: the traditional figure and a second that exempts food and energy – which are still recited each month today. The Bureau of Labor Statistics’ current operations are more covert. It makes “adjustments” that have gone on for so long, are so removed from actual prices, are so immersed in theoretical studies pig-piling for status at government seminars, and are so encumbered by political motivations, that their relation to reality is accidental.

Since the CPI does not intend to measure the change of the price of goods and services, we should blame ourselves for pretending it does so. However, the government makes no effort to remind the taxpayers its measurement is theoretical. All of the reinterpreted prices are in the government’s favor: that is, they understate inflation. These civil servants (who, it is often forgotten, work for and are paid by the People) might miscalculate now and then. That is the human condition, and errors in calculations should be expected. But when all the calculations work towards the understatement of inflation, the burden of innocence falls on the BLS.

A reinterpretation already mentioned: In 2005, the change in the cost of purchasing a house rose 3.1% - according to the BLS. According to OFHEO, another government agency, house prices rose by 13.3% in 2005. (According to the National Association of Realtors, a non-government source, but also not a disinterested party, prices rose 12.9%. Choose your poison.) Houses accounted for 23% of the CPI. Substituting the OFHEO price change, the CPI was understated by 2.4%. This is just houses.

CPI as a cost-of-living measurement is meaningless to both LBO funds and housewife Jean Salmon. (One might wonder how this decision was made. That is beyond the purpose here. For those interested, Messrs. Johnson, Reed and Stewart, employees at the BLS, presented a paper in June 2005, “What Has Happened To Price Measurement Since the Boskin Report?” which might be read in conjunction with the Boskin Report. This probably will not enlighten the reader since a vacuous circularity develops in which the BLS Handbook of Methods is trumpeted as the authority and this requires no explanation.)

It is clear, whether a handbook existed in 1973 or not, that Arthur Burns was not interested in a cost-of-goods index: why in the world did it matter to Jean Salmon whether the Fed controlled the anchovies that supposedly caused the rise of grocery prices?

An additional complication, or rather, a first complication, was the BLS’ decision to stop looking over Jean Salmon’s shoulder in 1978. Before this date, “the basic component index for, say, refrigerators in the San Francisco area was the change in the average price of a matched sample of refrigerators in this city in the two months.” (Triplett) Afterwards, the BLS started using probability methods to perform “random samplings of varieties and quality levels [which] precluded continued average use of averages of prices.” (Triplett reports very few countries outside the U.S. use such sampling – compare cross-border inflation rates at your peril.)

Even at this early juncture of abstraction, the index had strayed from the prices themselves. They were derived from models constructed by math whizzes at the BLS. In the real world, we can see the consequences of faulty derivative modeling such as portfolio insurance performance in the 1987, stock-market crash. Since there is no market-clearing mechanism for the CPI, the compounding of errors magnifies the distortions. In the words of a man who faced market-clearing mechanisms every day, Edward C. Johnson II, father of the current chairman of Fidelity Investments, “[Y]ou can’t get complicated anywhere in this business without getting lost; each complication begets ten others and so on.” So true. The exploration that led to geometric averaging was caused by the 1979 sampling methods. These caused “formula bias.” Once hatched, the sampling has created a Frankenstein’s monster.

The Boskin Report is as good a place as any to introduce recent legerdemain since it definitively answers questions of motivation. The Consumer Price Index is of great interest to the government. It is a cornerstone to central planning. Its greatest import is probably adjustments to Social Security checks each year. The payments are increased annually at the rate of inflation, that is – the government’s CPI calculation. In 1983, Alan Greenspan headed a commission that purportedly “solved” the impending social security crisis. The commission’s recommendations delayed insolvency for a few years, but Social Security was again in crisis by the early 1900s.

Senator Moynihan ranted about social security causing deficits “as far as the eye could see.” Then the worm crawled out of his hole, so to speak. Federal Reserve Chairman Alan Greenspan testified before the Senate and House Budget Committee on January 10, 1995. He told the Committee the inflation rate was probably overestimated by 0.5% to 1.5%.

This was a godsend. Imagine being able to cut benefits when the Congressional constituencies would never know it happened! The Boskin Commission was duly formed. Michael Boskin was the right man for the job. He had served as chairman of the President's Council of Economic Advisers (CEA) from 1989 to 1993, a post formerly held by such government functionaries as Arthur Burns and Alan Greenspan. The Boskin Commission found that inflation was overstated by 1.1%. Several recommendations were made by the Commission to the Budget Committee. These were instituted with great efficiency by the Bureau of Labor Statistics. Too much efficiency.

There was no pretense on the Boskin Commission’s part that its mandate was other than to reduce the CPI rate. The “Boskin Commission Report” is on the Social Security website (www.socialsecurity.gov ) under “Reports and Studies.” A synopsis of the Commission’s mandate precedes the Report: “The Advisory Commission To Study The Consumer Price Index” (aka The Boskin Commission) was appointed by the Senate Finance Committee to study the role of the CPI in government benefit programs and to make recommendations for any needed changes in the CPI.” The report is then sub-titled: “Toward A More Accurate Measure Of The Cost Of Living”

Note the objective was not to improve – or even address – the accuracy of the change in prices. The only purpose was to measure the influence of the CPI on the cost of government programs.

Witnesses to the charade agree that the mandate went further – it was not an objective study of how government price calculations affected programs, but intended to reduce government costs. Greg Mankiw, Chairman of George Bush’s Council of Economic Advisers from 2001-2003 said at the time “the debate about the CPI was really a political debate about how, and by how much, to cut real entitlements.” Barry Bosworth of the Brookings Institute called the revised CPI an “ ‘immaculate conception’ version of deficit reduction in which spending is cut without Congress taking the blame.” (“The Politics of Immaculate Conception,” The Brookings Review, Spring 1997, pages 43-44)

Jack Triplett of the Brookings Institute extended the argument: “…What I liked least about the Commission Report was exactly what made it so influential – its guesstimate of 1.1 percentage points of bias….The Commission (and others that have followed) used ad hoc reasoning to come up with a number…. But this seemingly so precise 1.1 percent number caught the eyes not only of the press and the politicians, but also of economists in the U.S. and in other countries. Jacob Ryten wrote right after the report: ‘…for the first time ever, a blue ribbon commission dared give a number for the estimate of total bias and detailed each of the contributing factors.’ Without the guesstimates, the Commission Report was just another dry, academic study to be perused by professionals….Without the guesstimates, the report would likely have had little impact. Conversations with Committee members suggest that some, at least, were ill at ease themselves with guesstimates, but I take it they felt in their mandate from the Senate Finance Committee compelled them to brew one….My personal preference is to resist the seductive blandishments of politics and politicians…”

Triplett went on to chide the Report as succumbing “to the lure of political statements in its choice of language to describe the effect of CPI measurement errors on Social Security expenditures….Professionals at any rate, should understand that improving the accuracy of the CPI is not the same thing as improving the basis for allocation to the dependent population….” And what have the spineless wonders wrought? Richard Karn, author of Emerging Trends Report, calculates Social Security checks would have been 43% higher in 2006 without the change to geometric averaging.

The findings of the Boskin Commission have done much more than decrease annual government-reported consumer price inflation by 1.0%. One simple change reduces the Consumer Price Index by around 50%. (The CPI is measured quarterly. The effect varies, according to the base rate. The numbers used here are annualized percentages that are extrapolated from the quarterly figures.). If this arbitrary change had not been made, today’s bond yields would be lower than government-reported, consumer-price inflation. We might then infer that today’s bond yields would be quite a bit higher without government adjustments.

Before the Boskin Commission, period-to-period CPI changes were calculated arithmetically. The Boskin Commission recommended they be calculated geometrically. The change was made to account for “substitution effects”. (An example of how these differ: The price of a hog rises from $100 to $161 over five years. The “annualized” rise – this is the geometric calculation – is 10% a year. The change each year – the arithmetic calculation – is a little over 12% each year: 61 divided by 5.) John Williams, who has reconstructed and made the comparison, calculates the geometric figure reduces the CPI by about 2.7% annually. (He is author of the monthly publication Shadow Government Statistics: Analysis Behind and Beyond Government Economic Reporting, which accomplishes what its title suggests.) Other papers roaming around the Internet estimate the geometric reduction at between 2.5% to 3.0%.

To review: adding Williams’ 2.7% New Math calculation to the 2.4% understatement for house prices, the CPI in 2005 was understated by 5.1%. The Bureau of Economic Analysis claims real GDP was 3.5%. If the 5.1% had been subtracted in 2005, the economy would have officially contracted by 1.7%. The stock market might be at a quite different level just now. By historical analogy, the sixth year of the Depression was the third year of the New Deal - 1935. Retirees living on Social security checks today may just think it is 1935.

It is worth recalling that the economy functions exactly the same whether the BLS had used the arithmetic or geometric methodology. (That is, leaving aside how a higher reported inflation rate changes consumption and market behavior, as well as the wardrobe of retirees.) This and other changes are not of the real world, but exist in an abstract, mathematician’s universe.

Triplett writes: “It is merely a mechanical fact that an unweighted arithmetic mean of positive quantities will be greater than an unweighted geometric mean. The difference between the two is not evidence of substitution bias. No inference… can be drawn from the fact that the geometric mean basic component gives a lower estimate of price change than the arithmetic mean, since this will always be the case…”

Triplett goes on to explain the mathematical leaps of faith in employing the geometric averaging. This involves an understanding of an “index for average prices” (RAP), an “average price ratio” (APR) the “Laspreyres price index”, “the Cobb-Douglas behavior”, “the well-known Konus substitution,” “the famous Stigler Committee on price indexes in 1961” and, of course, the even more famous Reinsdorf paper of 1993 that nearly overshadowed the O.J. trial. This author, being less equipped than many readers to enter the dialogue, will push on to alternative explanations. But first, note how divorced from comprehension are the arguments about proper index measurements. Without the specialized knowledge, even the best equipped are intimidated from getting into such a debate over government calculations of any stripe – GDP, National Income and Product Accounts and productivity calculations are incomprehensible. Thus, they become impossible to refute, since no one other than a specialist would understand the debate. One must rely on common sense.

According to Triplett: the BLS “produced some long and complicated analyses” of which “some economists seized on… apparent parallel[s]” to adopt the geometric. Triplett does not say so, but it is not difficult to infer that said economists stayed up past their bedtime. They probably thought Laspreyes and Konus played goalie for the New York Rangers before the love-in commenced.

The substitution effect itself is, you may have guessed, complicated. There are three levels, of which we will only discuss the first: upper level substitution bias. This is the only one of the three incorporated into current CPI calculations. However – there is a problem. Triplett writes the BLS did not understand the application of the formula, their grasp of first vs. second level is fuzzy, but we will go no further than Triplett’s comment: “Classifications are kernels of economic statistics, [they] are vital to economic analysis because the way the data are grouped limits the analysis that can be done with them. It is accordingly surprising how little attention economists pay to their classifications – unlike biologists, who understand that the classifications need to be done according to theory.”

The economists (at least, that’s what Triplett calls them) also seem a most incurious lot. “Upper level substitution” is the type of substitution in response to the relative change among the components of the CPI. Now, what component has changed the most in price over the past few years? Energy receives the vote here.

The Energy Information Agency website shows that from March 1999 to March 2005 the price of gasoline at the gas pump doubled, from $1.01 to $2.04. The amount of gasoline delivered to gas stations rose from 8.4 to 9.0 million barrels a week. From March 2005 to August 2006, the price of gasoline rose by 50% - from $2.04 to $3.08. Consumers, whose real decisions obviously are not considered in the matter of “substitution bias,” increased their consumption – gasoline deliveries rose from 9.0 to 9.7 million barrels a week.

The Boskin Commission provided a similar example of substitution: “For example, if a ten percent increase in the price of granny smith apples were associated with a ten percent reduction in the quantity purchased, geometric means would be the appropriate way to capture the market response. If there were no quantity change associated with the price increase then arithmetic means would be appropriate.”

Purists will note the Boskin example is of a lower-level substitution, but the example is of how a consumer supposedly substitutes when prices rise. The Boskin Commission and Bureau of Labor Statistics were not interested in real price changes outside the BLS cafeteria. Stooped, elderly ladies substitute cat food for chicken. To compensate for their impoverishment, another substitution is proposed: all federal-government mathematicians, statisticians, crank theorists and economists were short-changed a tour in basic training. To remedy this deficiency – off to Baghdad they go, attired with rifles and helmets. The return flight reserved for the overtaxed National Guard.

Regards,
Fred Sheehan

For Whiskey and Gunpowder

Fred Sheehan is columnist and economist with Marc Faber's Gloom, Doom and Boom Report.

Inflation and Metals - Saxena

by Puru Saxena

INFLATION/DEFLATION - Analysts and economists seem to be divided over this issue. According to some market observers (including me), we are living in a highly inflationary environment. After all, money supply growth is extremely strong in most countries (Figure 1) and this represents inflation.

Figure 1: Explosive inflation!

Source: The Economist

The other camp argues that since prices of certain consumer goods are either stable or in decline, we are indeed witnessing genuine deflation. In my view, these "deflationists" seem to miss the point that falling consumer prices (due to improvements in technology or the relocation of manufacturing to relatively inexpensive developing nations) have nothing to do with deflation and everything to do with economic progress. In fact, I would argue that in the current economic environment; due to technological advances, rising productivity, free trade and cheap labour, prices SHOULD be declining. After all, this is the whole point of genuine economic development!

In an ideal world with a stable monetary base (zero monetary inflation), prices of almost everything (with a few exceptions) would be in decline. That would be a sign of real economic progress as people's savings would buy them more goods with every passing year. In our far from ideal world however, the factor preventing this from occurring IS monetary inflation. Due to central-bank sponsored inflation, prices of assets (whose supply is relatively limited when compared to money) are going through the roof! As a result of the ongoing inflation, even basic commodities which are critical for human survival (land, energy and food) have become very expensive, hence scarce for the average person. So, next time when someone tells you that we are witnessing deflation, tell them to look no further than the escalating cost of housing, energy, food, education and medical care.

Finally, if we were indeed witnessing genuine deflation (contraction in the money-supply), all asset-prices would be declining rather than flirting with multi-year highs!

PRECIOUS METALS - We are in a primary bull-market which is currently undergoing a healthy medium-term correction - everything else is "noise". Such corrections are normal and serve the purpose of shaking out the latecomers and the "weak hands". More importantly, such periods of weakness give us the ideal opportunity to increase our positions. I am not sure about you, but I always prefer to buy assets when the sentiment is negative and there is widespread fear amongst the investing public. Furthermore, I never purchase anything after a big rally. This is the reason why despite the brutal sell-off in commodities over the past several months, our managed accounts have held up reasonably well.

I have no doubt in my mind that both gold and silver will appreciate considerably over the coming years. Here are the reasons why:

• Terminally-ill US Dollar
• Rampant monetary inflation = debasement of currencies
• Record-high US trade and current-account deficits
• Major top in the US bond-market and rising interest-rates (which will hurt housing)
• Sky-high debt levels in developed nations; only option is to inflate the currencies
• Rising geo-political tensions and increasing resource wars
• A major bull-market in crude oil due to rising demand and tight supplies
• Gold and silver are inexpensive in real-terms (inflation-adjusted basis)
• Extremely cheap in comparison to financial assets (stocks and bonds)

As I explained in my previous reports, I do not expect gold and silver to surpass their May 2006 highs in the near future. I am of the opinion that both gold and silver are likely to decline into the summer months before embarking on a huge rally towards the end of this year. This action will shake out more weak hands and set the stage for a big advance.

However, if we do get a major conflict in Iran, you will be really glad that you own precious metals.

At present, Asian central banks hold a miniscule 1.5% of their total reserves in gold (Figure 2). You can imagine what will happen to the price of gold when Asian countries start diversifying into the yellow metal. Recently, China announced that it plans to invest US$200 billion of its US$ 1 trillion reserves in strategic assets. So, this move out of "paper" is already underway.

Figure 2: Asian reserve holdings

Since the commencement of this bull-market, precious metals mining shares have provided a leverage of 300% compared to physical bullion. However, over the past few months, physical bullion has outperformed the mining shares. These changes in relative strength are normal and I would advise you to utilise any near-term weakness in mining stocks and invest heavily.

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

Bullish HUI Technicals 2 - Hamilton

by Adam Hamilton

The flagship HUI gold-stock index has had quite a run over the last six weeks or so. It has already rallied 17% just since it swooned with general stocks in response to the late February selloff in the Chinese stock markets. But this week the HUI returned to the technically-feared 360 level that has stymied it for nearly a year now, leaving us at a key technical crossroads.

Thus gold-stock investors and speculators are keenly watching the HUI today with a mixture of excitement and trepidation. On the greed side of the coin, the HUI could be poised right on the verge of a major breakout higher. But on the fear side, it could be ready to collapse back down after it loses yet another battle with its 360 resistance nemesis. Which fork in the road are we headed down?

Although we mere mortals can never know the future in advance in order to answer such a question with certainty, I believe probabilities definitely favor the road higher today. Not only do the gold stocks enjoy a highly-favorable fundamental environment with gold again approaching $700, but the HUI technicals still look quite bullish today from a variety of perspectives.

In fact, there are a lot of similarities between today's HUI technicals and those of early autumn 2005. I wrote the ancestor of this essay in September 2005 during a period of time much like now where enthusiasm for the HUI was rather tepid at best. Yet nevertheless from that very week until the May 2006 high, the HUI ended up soaring 83.4% higher in the second half of a massive upleg.

Back in late 2005 before that stunning run, the HUI had been grinding sideways for two years and its 200-day moving average had flatlined. It was at 225 resistance which had beaten it back mercilessly earlier in the year. Not surprisingly without any big gains or new highs for such a long period of time, gold-stock sentiment was pretty ugly. Bearish theories abounded about why the HUI was heading back down under 180, about 20% lower than where it was trading at the time. Now fast forward to the present.

Today the HUI has been grinding sideways for nearly a year, and its 200dma has flatlined suggesting its secular bull has run out of steam. And it is struggling with 360 resistance which has steadfastly repelled all attempts to break through. After a year with no big gains or new highs, investors and speculators are standoffish and lukewarm towards this sector and loath to commit serious capital. Bearish theories are ubiquitous arguing the HUI has to fall back under 280, 20% lower from here, before it can make any more real bull-market progress.

Déjà vu, no? In late 2005 I used the HUI/Gold Ratio and composite HUI volume to argue that our then-unloved upleg was just getting started. Provocatively today, the HUI/Gold Ratio is once again near secular support suggesting that a period of gold-stock outperformance relative to gold, or a major HUI upleg, is due. Our newsletter subscribers can find current HUI/Gold Ratio charts in the private Subscriber Charts section of our website to review the uncanny similarities.

Over my years of speculating I have both learned from others and created from scratch a broad array of technical tools. The really wild thing about the HUI today is its technicals look bullish almost across the entire spectrum of these tools. When one technical perspective looks bullish but a host of others look bearish, it isn't worth getting excited. But when most of them are bullish and confirming each other, then we have to take their bullish accord very seriously.

It is not just the HUI/Gold Ratio that helped us throw aggressively long during this stage in the last major upleg, but simple technical analysis, the Relative HUI, and the HUI's bull-to-date upleg rhythms and precedent that are arguing for further gains. From most perspectives, today's HUI technicals are resoundingly bullish.

Now at first glance, this simple technical snapshot of the HUI's performance over the past year is not exactly awe-inspiring. From a strategic perspective this index has just been grinding sideways, unable to even approach its highs of last May. This lack of big rallies and new highs is the primary contributor to the ambivalent sentiment the HUI faces today even from long-time gold-stock investors and speculators. They want it to rally, but they don't have much hope that it will.

This view arises from a common psychological distortion in interpreting technical analysis. During secular bull markets, traders naturally look to high prices as landmarks on charts. When new highs are being made they are happy and assume all is well. They usually don't even bother considering the rest of the chart buried beneath the surface of the exciting peaks like an iceberg under the sea. The farther in the past the last bull-to-date high recedes, the more traders' interest in a sector fades.

But just as an oceanographer wouldn't presume to draw broad conclusions about an iceberg by merely observing the top fraction of it poking out of the ocean, prudent technicians won't write off a sector solely based on its interim highs. Indeed the center of mass of a trend, where a price usually meanders and where it is usually headed, is far more valuable for traders to consider than concentrating on extremes. There is a lot under the surface in this HUI chart.

For example, note the HUI trend since the index's early October lows. It has been climbing relentlessly higher at a nice pace on balance despite some significant psychological setbacks. Remember the early January panic out of commodities and the late February Chinese stock market selloff? While gold stocks were sold on these events, rather irrationally in my opinion, they only retreated back down near their latest support line at worst.

And this solid uptrend in the HUI's support over the past year, especially since October, is a very bullish omen. Bull markets are not just a series of higher highs, but a parallel series of higher lows too. When the latter occur without the former, it kind of feels like a stealth bull. Higher lows are not sexy and do not command the attention that higher highs do, but nevertheless they are crucial as they build the base from which attempts at higher highs launch.

This little-watched-but-very-bullish higher-low trend started last June. The HUI essentially crashed off of its bull highs, an event that was not unexpected since the euphoria had grown so great at its May top. Interestingly the week gold and the HUI topped in May I had to write an essay fighting the absurd popular notion of the time asserting that "corrections are impossible". Corrections are inevitable from time to time and one was certainly overdue and expected in May.

So the HUI corrected sharply in May and early June, just as it has done many times before in its secular bull in order to bleed off excessive greed and rebalance sentiment. Technically the HUI hit its absolute lowest point in June and started its long climb higher. But despite this sharp move lower and V-bounce, the HUI's sentiment still remained unbalanced to the greed side in June. Time too must pass in order to rebalance sentiment, and one month wasn't enough.

So sometimes after particularly massive uplegs, which the one ended last May certainly was, a major consolidation is necessary. A consolidation is a long period of prices moving sideways on balance. It has the dual function of gradually eroding greed due to lack of excitement as well as establishing a new base, getting traders comfortable with new higher price levels before the next upleg can launch.

The HUI's consolidation period ended in early September. As you can see on this chart, the HUI was heading higher in July and August despite gold trending lower. This disconnect was caused by residual greed, traders remaining too optimistic after the May tops. But when gold corrected sharply in early September, the HUI finally collapsed for good and the excessively optimistic were driven out of the market. This proved to be a really devastating psychological event that led to the true sentiment low in the HUI.

Note above that this sentiment low of early October was higher than the technical low of mid-June, despite gold making a slightly lower October low. Thus even in the midst of the wicked sentiment carnage wrought by last summer's consolidation and collapse, the higher-low trend in the HUI was already subtly starting.

This higher-low trend is now becoming readily apparent when comparing the interim lows of early October, early January, and early March. They are marching higher nicely to form a solid upleg uptrend, a strong support line. But this has not happened on the high side, as disgruntled and irritated gold-stock traders will be quick to tell you. In early September, early December, and late February, the HUI was beaten back rapidly by its 360 resistance. These failures have really sapped the wills of many bulls.

But provocatively, note that this vexing flat 360 resistance on top and the rising support line have created a tightening wedge. As the HUI's support zone climbs higher, the distance between it and the 360 resistance contracts. Thus at each subsequent breakout attempt, the HUI does not have to climb as far to attack 360 again. Coming off a higher support base, sooner or later the 360 line will crack.

In fact, the best attempt we have seen at breaking out above 360 just happened this week. Not only did the HUI hit its highest close since last May's bull-to-date highs, but it spent the most time above 360 that we have seen in the last year or so. Every single day the HUI trades at or over 360 weakens this number's psychological intimidation factor for traders and creates confidence that leads to buying to drive a true breakout. In a week or two we'll know whether this particular 360 breakout is the real deal or not, but sooner or later the fall of 360 is inevitable.

Another bullish observation arises from the HUI's black 200dma line. All bull markets flow and ebb, soaring upwards away from their 200dma in an upleg before collapsing back down to it in a correction. Thus the 200dma is a kind of mathematical anchor around which a secular bull gradually powers higher. The closer to its 200dma that a price retreats, and the longer it remains near, the greater the odds it is due to once again surge higher and away in a new upleg.

Since the HUI's lower support line is trending higher, each subsequent pullback doesn't drag it as far under its 200dma as the previous one. This will work to get traders comfortable again with buying the gold stocks when the HUI is near its 200dma, which is statistically the highest-probability-for-success time to add long positions within any secular bull.

And in the coming weeks, the HUI's new uptrend support line and its 200dma will merge, creating a kind of super-support zone that will probably provide the base from which 360 will be assaulted and finally shattered. The HUI's behavior relative to its 200dma over the last seven months or so has been excellent. This interaction is a typical early-upleg signature, not what we'd likely see if the HUI was heading significantly lower.

One of my favorite technical tools for trading secular bulls is Relativity, or dividing a price by its own 200dma. Over time this construct creates a general horizontal trading range. Traders should expect an upleg when a relative price is low in its trading range and expect a correction when it is high in its trading range. Today the Relative HUI, or rHUI, remains quite low within its very-well-established relative trading range, a bullish technical sign.

Since its secular bull launched back in late 2000, the rHUI has generally run between 1.00x on the low side to 1.50x on the high side. In other words, most of the time the HUI has oscillated in a range running from right at its 200dma to 50% higher than its 200dma. If you are looking for a new upleg, the highest probability for one launching occurs when the HUI is at or under its 200dma, under 1.00 relative.

On the right side of this chart, check out the rHUI action over the better part of the past year. Since its early October sentiment low, at best the HUI has only been able to trade 11% to 12% above its 200dma. These are very low relative values totally devoid of all euphoria, suggesting we are nowhere near a major top. If you carefully examine the past years in this chart, you'll note that each time the HUI traded between 1.00x to 1.10x relative following a sub-1.00x post-correction low was a fantastic opportunity to throw long. This time around ought to follow precedent too.

Before all the past major uplegs in this index, including the monster ones topping in 2002, 2003, and 2006, the HUI traded under 1.00x relative. While the very best time to buy was when the HUI was the farthest under its 200dma, traders who waited until the HUI recovered back up to being 10% above its 200dma also did incredibly well. Since the HUI doesn't tend to top until it extends 50%+ above its 200dma, buying in at 1.10x relative still leaves a lot of room to run.

Now if the HUI is still in a secular bull, which is almost a certainty since the gold price ultimately drives the gold-stock bull and the metal is still powering higher for global fundamental reasons, then the best time to buy it is when it is low in its relative range. Traders buying gold stocks in the past when the rHUI traded at the same levels as today following a correction were richly rewarded. We'll probably reap similar big gains again by buying in today.

Besides the HUI's low and bullish relative position today, there are a couple other technical observations from this long-term chart that are worthy of considering. First, note the initial secular support line drawn above called "Support One". If this old support zone is extended to today, it ends up near 280. This is why some traders are expecting a sharp correction to 280 (or lower if the line is drawn through the mid-2005 lows) before the HUI's next real upleg can begin.

This thesis is problematic though because throughout the lives of secular bulls, they do not remain locked to their initial shallow secular support lines. As the bull marches higher and more capital floods in, prices start climbing more steeply. This creates new support lines that have sharper slopes that supersede earlier ones. Since all bulls outgrow old shallow support lines and gradually morph into progressively steeper ones, it doesn't make much sense to expect an old shallow one to extrapolate out into infinity.

Second, note the major basing zone the HUI has carved over the past year between 300 and 360. Just two years ago the notion of the HUI trading in this range would have seemed ridiculously optimistic, but now we are all bored with it thanks to this solid basing. Because the HUI has traded sideways for a year, it has created a perfect base from which it will almost certainly launch to much higher highs in the months and years ahead.

Traders are seldom willing to commit serious capital in anticipation of higher levels until they are really comfortable with current ones, and this comfort with today's HUI levels now exists thanks to the past year. Yet despite this new higher base and increased comfort with 330ish (middle of this range) levels being normal, HUI sentiment still remains lukewarm at best. I suspect this is because our current upleg has been so slow and subtle.

My final chart indexes the mighty HUI upleg that topped last May, the sixth in its bull to date, in order to compare it to our current seventh one. Both uplegs are indexed at a starting value of 100 at the major interim bottoms from where they launched, and the horizontal axis represents trading days after those points. With each calendar month running 21 trading days on average, each horizontal chart square essentially represents one month.

Since there are two possible starting points for our current upleg 7, its true technical low in June or its slightly-higher sentiment low in October, upleg 7 is indexed from both points for comparison. When this current upleg is observed in perfectly-comparable terms against last year's huge upleg 6, it really highlights why HUI sentiment remains so uninspired. Upleg 7 has just been too anemic so far to generate any excitement.

Although our current upleg looks pathetic compared to the last one at first glance, there are some subtle similarities that are very bullish and provocative. Looking at the gray rendering of last year's upleg 6, note that it carved two distinct support lines. In its first stage support rose gradually and in its second it rose much more aggressively. This comparison is interesting as it highlights the fractal nature of the markets, similar patterns appearing at many scales. Just as secular bulls see support slope increases, so do the relatively short major uplegs within those bulls.

Within uplegs, these slope increases correspond to different levels of belief and commitment by traders. Early on in a new upleg, traders are wary as they remember the preceding correction. They bid on gold stocks only sparingly which leads to a shallow climb initially. But after a long-enough period of shallow climbing, old fears start to fade and traders get excited again. At some point they really start to believe in the new upleg and want to participate. This leads to accelerating price increases.

In upleg 6, this slope inflection point is marked above. It divided that mighty upleg almost in the middle, a slow initial run higher when few believed followed by a sharp secondary run higher once traders started to believe and flocked back to gold stocks. Before that inflection point upleg 6 was unimpressive and doubtful, but after that inflection point it became one of the greatest uplegs in recent memory.

Now compare the blue line above, which is our current upleg 7 indexed from its October sentiment lows. Its initial uptrend has been slow and modest, even tracking the early days of upleg 6 almost perfectly in its initial three months. Although upleg 7 has lagged upleg 6's progress in the second three months, it is now near the point in time where last year's upleg hit its inflection point and really started powering higher.

I suspect we are near a similar psychological inflection point today, a moment in time when overall gold-stock traders' sentiment shifts from majority bearish and skeptical to majority bullish and hopeful. And the catalyst for the scales of sentiment finally shifting in our favor again will probably be the HUI's breakout above 360. As soon as this vexing level falls, perhaps in the coming weeks, traders are really going to start to believe and want to buy into the HUI once it clearly breaks out of its year-long trading range.

Interestingly the lion's share of the total gains in upleg 6, by far, occurred in the second strong half, not the weak first half. If we are indeed on the cusp of the second half of upleg 7, the HUI should really start accelerating higher soon. While all the true contrarian buying has already been done in this upleg since October when few believed in its potential, big momentum gains can still be won going forward if this upleg unfolds like previous ones.

While it is impossible to tell exactly how high the HUI will ultimately climb in this upleg, consider this. Of the HUI's six completed uplegs in this bull so far, their average gain was a staggering 104% per upleg! If this current upleg 7 is just average, and achieves a similar 104% gain from its lower June lows, then we are looking at a potential interim top above 550. Yes, that is 550, not 450! Please don't get hung up on this specific number, just realize that today's HUI levels are still very low compared to its recent-past upleg-gains precedent.

At Zeal, we have been actively adding high-potential gold-stock positions since the dark contrarian days of October, when few were bullish. While some of our trades have been stopped out at modest losses and gains during the HUI's couple of pullbacks since then, the remaining majority are thriving. This week our unrealized gains in gold-stock trades recommended in Zeal Speculator since early October range up to 80%.

And if this HUI upleg 7 we are experiencing today has a strong second half as precedent suggests it should once traders start to believe it is the real deal, the best gains in this upleg are still to come. With most technicals remaining bullish, we are still adding elite gold-stock trades on weakness in anticipation of a major HUI rally in the months ahead. Please subscribe to our acclaimed monthly newsletter today to mirror our trades and shoot for these potential big gains!

The bottom line is the HUI technicals look very bullish today despite the lukewarm sentiment. While the HUI hasn't made new highs for a year, it has been carving higher lows and is positioning itself to break above its 360 prison soon. This event will probably get investors and speculators excited about gold stocks again and spawn major buying. They'll believe in this sector's great potential once more.

This buying should lead to the typical psychological inflection point where our current upleg starts maturing into its more powerful and steeper second half. The higher the HUI goes, the more capital it will attract creating a virtuous circle of strength. And if this upleg even proves to be merely average in magnitude compared to the HUI's bull-to-date precedent, the gains ahead will be awesome.

Adam Hamilton, CPA
Zeal LLC.com

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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.

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Armies of Geologists - Byron King

I HAVE DISCUSSED in previous articles that I attended the recent annual convention of the American Association of Petroleum Geologists (AAPG), held in Long Beach, Calif. It was a gathering of about 5,200 geologists from around the world, and many others who work in related fields dealing with the world’s oil and gas industries. In addition to the formal members of the AAPG, the convention hosted many hundreds more individuals from related industries (such as the oil service companies, geophysics companies, and the like), as well as from government and academia.

One of the things that struck me about the assembled throng was just how collectively well educated the whole group was. I say that in all humility, because a very large number of the AAPG membership holds more and higher levels of academic degrees than I. That is, there are many members of AAPG with one or more master’s degrees in scientific and technical fields. The numbers of Ph.D. holders, combined with the broad spectrum of research fields in evidence, was entirely impressive if things like that impress you. So the point is that the Long Beach Convention Center was just dripping with academic wax and ribbons.

Mr. Wang, Marine Geologist

I had the pleasure of spending some time with a delightful man named Mr. Wang, from an institution called the “University of Geoscience” in Wuhan, China. Mr. Wang is a marine geologist, and teaches the subject at the university level. He is very smart, as I rapidly discerned after we sat down next to each other on a bus, and during a field trip to look at the rocks of the Palos Verdes Peninsula. Mr. Wang and I discussed numerous subjects of a geological nature, subjects of which he has an excellent grasp, in both English and Chinese. Here is some of what we discussed.

I asked Mr. Wang how many students attend the University of Geoscience in Wuhan.

“About 20,000,” he replied.

“You have 20,000 students majoring in geology?” I asked, stunned at the number.

“Oh, no,” he replied with a smile. “Many of our students study in other fields of science, such as physics, chemistry, biology. And we even have a few students who study art and theater.”

No doubt, I thought, the “few” artists and theater majors in a Chinese university are probably the ones who are actually good at it. “So how many people do you have studying geology?” I asked.

“Hmmm…. About 10,000,” he replied.

“10,000? In what fields of geology do the students pursue their studies?” I asked.

Mr. Wang replied, “We teach basic scientific background such as math, chemistry, and physics. Then we teach geological concepts like stratigraphy and mineralogy and structural geology. Then we take the students into specific fields such as oil and gas geology, petroleum engineering, mineralogy, mining geology and engineering, civil engineering, geological engineering, marine geology, geochemistry, geophysics, and whatever other fields branch out from those subjects.”

“Do your students have jobs when they finish their studies?” I asked.

“Oh, yes,” replied Mr. Wang. “Our students graduate, and many go to get advanced degrees in China, as well as in Australia, Europe, and the U.S. We also send many students into the oil and gas industry, the mining industry, engineering fields, and the like. We have graduates working at geological projects on every continent of the Earth, in the mining industry and in the oil extraction industry, building roads and dams across China, and as far away as Arabia, Africa, and South America, and even performing research in Antarctica.”

“So,” I asked Mr. Wang, “since you have 10,000 students, is your school the main school for the study of geology in China?”

“Oh, no,” he replied. “Ours is one of three geoscience universities in China. The other two universities are comparable to ours. And many other universities have their own college of geology. Beijing University, for example, is a very great school that is attended by many of the best students in China. It has a college of geology with about 4,000 students.”

“So,” I asked, “can you give me some idea of how many students are studying geology in China today?”

Mr. Wang thought for a moment. “If you add it all up,” he said, “there are about 40,000 or 50,000 students studying geology in China today at the university level. Maybe more, but I do not want to give you a number that is too high. Many of these students might not become geologists, because they will go into civil engineering or some related field. The Premier of China, Wei Jiabao, is a geologist, by the way, and worked as a geological surveyor in his youth. And many other students, such as those studying chemistry or physics in the university, might eventually become geochemists or geophysicists. But we are currently training about 50,000 or so geologists in China, across the nation.”

Are You Impressed Yet?

Are you impressed yet, dear readers? 50,000 students are studying geology in China today. That number is well over 25 times the number of college students who are studying geology in the U.S., which includes foreign students enrolled at U.S. institutions, and that is after something of a surge in enrollments in geoscience departments in the past two or three years. Back in 2004, according to statistics published by the U.S. National Science Foundation, there were fewer than 500 degrees granted in geology and petroleum engineering by all U.S. universities combined, and about half of those degrees were awarded to foreign nationals. The Chinese have 100 times that number in the pipeline.

It may help to make a military comparison. Consider that the U.S. is training geologists by the squad, or maybe by platoon, at the university level. The Chinese are cranking out geologists by the division.

Why Is This Important?

This is an important development. There is a revolution occurring in the scientific approach to understanding the Earth. The fields that make up geology, and related Earth and space sciences, are currently undergoing major advances that promote understanding of our planet as a number of interrelated systems. Many new realms of scientific investigation are emerging through the study of the connections and interactions between the atmosphere, hydrosphere, biosphere, cryosphere, solid Earth, and near space. Furthermore, geoscientists are playing critical roles in recognizing the extent and magnitude of human impact on the entire Earth system. And this understanding is gaining new context via the growth in knowledge of processes on other planets. So the more people who are out there and who understand at least the basics of geology (let alone the really hard stuff), the better for that nation.

Dave O’Reilly, chairman of Chevron, signs his name to many advertisements that state that the “easy” oil and gas has been found. If you are a frequent reader of Whiskey & Gunpowder, you know what we agree entirely with Mr. O’Reilly, and we carry the Peak Oil argument even further. Just as people say that the “easy” oil and gas has been found, so has almost all of the other “easy” mineral, energy, and water resources of the Earth been located and tapped. The future of modern civilization depends on how well any given group of people, from any given nation or organization, can understand how best to extract or harness the resources of the Earth that are not “easy” to access. So going forward, there had better be some geology majors coming out of the academic sweatshops, and the more the better.

100-to-1 Ratio

By way of comparison with the number of geology graduates, in recent years, U.S. law schools have awarded an average of about 40,000 law degrees annually to aspiring lawyers. So for each geologist that U.S. academia cranks out, the law school industry mills something between 50-100 lawyers. At the extreme end of the ratio, there are 100 new lawyers graduating from U.S. universities for every new geologist coming out into the work force.

Why is it that China is training armies of geologists while the U.S. is training armies of lawyers? And is there something ominous about that fact? Let’s examine a few aspects of this situation. What is going on?

What Is Going On?

The U.S. and China are about the same size in terms of land area so it is not that China needs more geologists to cover more ground. By the criteria of raw acreage, Russia and Canada should be graduating divisions of geologists. But Russia and Canada, the largest and second largest nations in the world by land area, are not doing this. The Chinese are leading the world in the training of large numbers of geoscientists.

In terms of population, China has 1.3 billion people and the U.S. has something over 300 million. So China has slightly over four times the population of the U.S. On a per capita basis, it might make sense for China to train more geologists. But still, there is a difference between China having four times the population and 50 times the geologists in training.

The U.S. is, of course, a developed nation with an advanced (some say “too advanced”), postindustrial (some say “too postindustrial”) economy. And “the world,” says Thomas Friedman, the famous columnist from The New York Times, “is flat.” Another way of framing the concept is to note that things that are on the uphill side will start to roll downhill in this “flat” world of ours. I am sure that you get the idea, dear readers.

The U.S., for example, has essentially built out its interstate highway system, much of which is now clogged with automobiles and trucks speeding (well, crawling at times and in places) hither and yon, while China is just building the beginnings of its own system of national highways, and filling up the roadways with its own domestic version of motorized carriages. If China were to burn as much gasoline on a per capita basis as does the U.S., China alone would require the entire world’s daily oil output and then some. But that is just extrapolating the present into the future, and things are going to change dramatically long before something like that could occur, if it were even possible.

And the U.S. has built up many great cities, while China is still building out its own collection of urban metropolises. Shanghai, for example, has seen the construction of over 300 new skyscrapers during the past 20 years. (One Chinese fellow once told me that it was too bad China did not use that steel to construct 300 offshore oil production platforms.) Overall, China is constructing buildings and roads and infrastructure that is the equivalent of a “new Houston,” about every month. And last year, in 2006, China added more electrical-generating capacity than exists in the entire state of California, where they have been building generating capacity for 100 years. So China is growing, and growing fast.

What Does China Need?

But still, what does this tell us about why China trains so many geologists and the U.S. trains so many lawyers? One might be forgiven for thinking that in a nominally communist state such as China, which is modernizing and evolving politically, the need would be for more lawyers to enforce basic human rights that have not been in place or effect for many decades. (Actually, China is training a relatively small cadre of lawyers too.) And one might think that in an advanced postindustrial state, such as the U.S., which has exhausted a significant fraction of its national energy and mineral resources over the past two centuries, the need would be for more geologists to locate and assist in securing new energy and mineral supplies. Yes, indeed. One might think that. But such is not the case.

One important way to differentiate the U.S. and China is to note the obvious point that the U.S. is a “rich” nation, certainly as measured in its own currency, the dollar. The U.S. can buy what it wants on the markets of the “flat” world, and use its uniquely situated dollar, the so-called “reserve currency” of the world economy, to pay for it. And China is, as its leaders like to remind the world, a “poor” nation that wants to get rich. “To get rich is glorious,” said former Premier Deng Xiaoping.

So can we say that rich nations need more lawyers? After all, much of what lawyers do is argue and fight over money. And where does this leave the poor people of the world? “The poor shall always be with you,” said Jesus in a famous comment. And yet another comment I have heard is that “What the poor people of this world need is not more lawyers.” This is according to an on old acquaintance of mine who is a federal judge. “They need more money,” he added.

So far, so good. And do poor nations need more geologists? After all, much of the work that geologists do is locate and define resources within the crust of the Earth, so that they can come back with other people and exploit those resources. Whether it is oil and gas, gold and silver, iron ore, sand or gravel, or falling water, this is what makes for an advancing, if not an advanced, civilization.

What was it that made for great civilizations in the past? In ancient Egypt, great civilizations arose out of the ability of a small group of people to understand and harness the powers of the Nile River. And in ancient Rome, it was the water-bearing aqueducts and the ores from the mines that permitted a great civilization and culture to flourish. In other words, these were civilizations that relied on people whom we would today call geologists and civil engineers. For a while, at any rate, it worked for the Egyptians and the Romans. Then the water aqueducts wore out and the minerals ran out and there was no replacing these things within a foreclosed time scale.

The Clash of Civilizations?

In his book A Study of History, Arnold Toynbee identified 21 major civilizations over recorded time. As Harvard professor Samuel Huntington pointed out in his famous essay, published in 1993, The Clash of Civilizations, “only six [of those 21 civilizations] exist in the contemporary world.”

“Civilization identity will be increasingly important in the future,” wrote Huntington, “and the world will be shaped in large measure by the interactions among…major civilizations.” Huntington went on to state that “The most important conflicts of the future will occur along the cultural fault lines separating these civilizations from one another.”

In much of the rest of his essay, Huntington went on to explain his thesis of “why civilizations will clash.” One of Huntington’s key points was that “Western civilization is both Western and modern. Non-Western civilizations have attempted to become modern without becoming Western...Non-Western civilizations will continue to attempt to acquire the wealth, technology, skills, machines, and weapons that are part of being modern. They will also attempt to reconcile this modernity with their traditional culture and values.”

You can agree with Huntington’s thesis, or you can disagree. But China’s massive educational effort to train geologists and related scientific personnel for the future indicates a national desire to, on the one hand, adopt the best scientific knowledge of the West. Yet China also intends, in its own unique way, to be among the civilizations that remain on any list of survivors compiled by any Arnold Toynbee of the future.

We live in a world in which the “easy” oil is gone, where Peak Oil looms, where the need for basic industrial resources and commodities is the key to the future existence of Western (and other) civilizations. And we live in a world in which the Chinese are training the scientific and technical cadre that will go out into the world and, one way or the other, find what their country needs and bring it home. There are armies, and then there are armies of geologists.

Until we meet again…
Byron W. King

For Whiskey and Gunpowder

Byron 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 current 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 Followers of ISMAIL - Jonsson

David J. Jonsson
April 20, 2007

In recent weeks we have seen resurgence in the followers of the Ismaili sect of Shia Islam. Libyan leader Mu'ammar Qaddafi called, in a speech in Niger to Tuareg tribal leaders, for the establishment of a second Shi'ite Fatimid state in North Africa, after the model of the 10th-13th century empire that ruled North Africa, Egypt, and parts of the Fertile Crescent. It is worthwhile to review some of the background and origins of this sect and also to see how it may be impacting current events. The Ismailis are the followers of the seventh caliph Ismail and are know as seveners vs. the followers of the twelfth Imam or twelvers as Iran's President Mahmoud Ahmadinejad. The Ismaili Students’ Association operates on many campuses.

Origins of the Conflict

Until about 900, the centers of Islamic power remained in the Fertile Crescent, a semicircle of fertile land stretching from the southeastern Mediterranean coast around the Syrian Desert north of the Arabian Peninsula to the Persian Gulf and linked with the Arabian heartland. After the 9th century, however, the most significant political centers moved farther and farther away--to Egypt and India, as well as to what is now Turkey and the Central Asian republics. Intellectual vitality eventually followed political power, and as a result, Islamic civilization was no longer centered in Mecca and Medina in the Hijaz.

Arabia was also the site for some of the conflicts on which the sectarian divisions of Islam are based. The major Islamic sect, the Shia (from Shiat Ali or "party of Ali"), is still represented in Saudi Arabia but forms a larger percentage of the populations in Iraq and Iran. The conflicts in Iraq arise largely from the ongoing hostilities between the Shiites and Sunni populations.

One Shia denomination, known as the Kharijite movement, began in events surrounding the assassination of Uthman, the third caliph, and the transfer of authority to Ali, the fourth caliph. Those who believed Ali should have been the legitimate successor to the Prophet refused to accept the authority of Uthman. Muawiyah in Syria challenged Ali's election as caliph, leading to a war between the two and their supporters. Muawiyah and Ali eventually agreed to an arbitrator, and the fighting stopped. Part of Ali's army, however, objected to the compromise, claiming Muawiyah's family were insincere Muslims. So strong was their protest against compromise that they left Ali's camp (the term khariji literally means "the ones who leave") and fought a battle with their former colleagues the next year.

The more orthodox Shia sect originated in circumstances similar to those of the Kharijite movement. Shia believed that Ali should have led the Muslim community immediately after the Prophet. They were frustrated three times, however, when the larger Muslim community selected first Abu Bakr, next Umar (died in 644), and then Uthman as caliph. When Ali finally became caliph in 656, the Shia refused to accept claims to the caliphate from other Muslim leaders such as Muawiyah.

The killing of Husayn provided the central ethos for the emergence of the Shia as a distinct sect. Eventually, the Shia would split into several separate denominations based on disputes over who of Ali's direct male descendants should be the true spiritual leader. The majority came to recognize a line of twelve leaders, or Imans, beginning with Ali and ending with Muhammad al Muntazar (Muhammad, the awaited one). These Shia, who are often referred to as "Twelvers," claimed that the Twelfth Imam did not die but disappeared in 874. They believe that he will return as the "rightly guided leader," or Mahdi, and usher in a new, more perfect order.

The most remarkable aspect of Mr Ahmadinejad's piety is his devotion to the 12th Imam --- the Hidden Imam, the Messiah-like figure of Shia Islam, and the president's belief that his government must prepare the country for his return.

The Shia minority in Saudi Arabia, like the Shia in southern Iraq, traces its origin to the days of Ali. The Ismailis are a Muslim Shiite sect that holds Ismail, the son of Jafar as-Sadiq, as its imam. On the death of the sixth imam of the Shiites, Jafar as-Sadiq (d. 765), the majority of Shiites accepted Musa al-Kazim, the younger son of Jafar, as seventh imam. Those who remained faithful to Ismail, the eldest son, soon evolved the belief that Ismail was endowed with an infallible gift for interpreting the inner meaning of the revelation. Ismailism developed an understanding of Islam and promoted it through an active missionary system. Although the early history remains obscure, Ismailism incorporated elements of Gnosticism, Neoplatonism, and Hindu thought to explain its concept of the imam. An offshoot, the Assassins, established a state in NE Iran, which survived until the 13th cent. In 1094 the Ismailis split into Nizaris and Mustalis. Today, though a minority community that is not politically active, the Ismailis are spread in small pockets in parts of the Middle East, central and S Asia, and increasingly North America and Europe. The family of the Aga Khan, the Nizari imam, traces its descent from Ismail. See S. M. Stern, Studies in Early Ismailism (1983); F. Daftary, The Ismailis (1990).

The current (49th) Imam, The Āgā Khān IV, or His Highness Prince Karīm al-Hussaynī Āgā Khān IV, who is active in international humanitarian efforts, is a direct descendant of Ali. He is a direct descendant of the Prophet Muhammad through the Prophet's daughter, Fātima, and her husband, `Alī ibn Abī Tālib, the first Shī`a Imam.

The Aga Khan Foundation is a non-denominational, international development agency established in 1967 by His Highness the Aga Khan. Its mission is to develop and promote creative solutions to problems that impede social development, primarily in Asia and East Africa. Created as a private, non-profit foundation under Swiss law, it has branches and independent affiliates in 15 countries. It is a modern vehicle for traditional philanthropy in the Ismaili Muslim community under the leadership of the Aga Khan.

So there were two faces of Arabia. To the west was the Hijaz, which derived a cosmopolitan quality from the foreign traffic that moved continually through it. In the east was Najd, which remained relatively isolated. During the eighteenth century, Wahhabi ideas, vital to the rise of the Al Saud, would originate in Najd.

The Virginia Massacre

Apparently, on the morning of April 17, an express mail package was sent to NBC containing a rambling note and videos about Cho Seung-Hui. According to posting on the Michael Savage website <http://www.savage-productions.com/cho_envelope.html> showing a sender address as A. Ismail. It is well known that when people convert to Islam they often take on new Islamic/Arabic names. Example include: Malcolm X born Malcolm Little. Malcolm X was also known as also known as El-Hajj (Referring to the Pilgrimage to Mecca.) Malik (A word meaning “king” in Arabic.) El-Shabazz, was a Black Muslim Minister and National Spokesman for the Nation of Islam. Cat Stevens - Yusuf Islam a prominent convert to Islam. Stevens retired from the music world soon after accepting the faith of Islam. He subsequently married, had five children, auctioned off his possessions, and founded a Muslim school in London. A vocal opponent of the war in Iraq, Yusuf Islam is on a U.S. government security watch list and is barred from entering the United States. Although this is not a Qur’anic requirement, many do change their names to reflect conversion to Islam. Many men select Islamic related names such as Ali, or Ahmid…etc.

There are many theories being proposed as to the meaning of the words -- ISMAIL AX found written in red ink on the inside of one of Cho Seung-Hui, a 23-year-old senior’s arms, the gunman suspected of carrying out the Virginia Tech massacre that left 33 people dead. See: VA. TECH KILLER REVEALED

In his "multimedia manifesto" he spewed anti-Christian rhetoric.

I would propose for consideration that the ISMAIL AX or A. Ismail on the letter may have reference is to Ismaili - a member of a branch of Shiism that follows a living imam and is noted for esoteric philosophy. It may take a while before the motives are known and if there is any relation between Cho and the Islmaili sect of Shiism. Others have proposed that it is the reference to Ismail the son of Muhammad. Ismail is a common name including that of the Palestinian Authority Prime Minister and Hamas leader Ismail Haniyeh and prominent Azerbaijani poet and statesman Shah Ismail Khatayi.

Connections between the Los Angeles Ismaili Community and Hillary Clinton and Barbra Boxer

The Leftist Islamist Alliance remains in tact.

On April 15, 2007, Chuck Neubauer and Robin Fields writing in the Los Angeles Times article Campaign donor's cash arrived with real baggage

“On a sun-dappled October afternoon, Ray Jinnah stood beside his Bel Air swimming pool to address 60 guests gathered for his latest fundraiser, a 2004 affair for New York Sen. Hillary Rodham Clinton.”

“Jinnah belonged to Los Angeles’ small Ismaili community, Shiite Muslims whose spiritual leader is the Aga Khan. Other Ismailis said he used political connections to raise his status, inviting them to his events.”

“Then-Los Angeles Mayor James Hahn was there, along with then-City Council President Alex Padilla. Both had received backing from Jinnah, a Pakistani businessman positioning himself as a player in Democratic fundraising and organizer of support for Pakistan on Capitol Hill.”

“As captured on a DVD he distributed to guests, Jinnah introduced Clinton, whose political action committee would take in $45,000 through his efforts.”

“By 2004, Jinnah had cemented his party ties. He and his family, who had moved to Bel-Air, personally contributed $122,000 to Democratic candidates and causes that year alone.”

"I'm just recalling how close I've been with the Clinton family and those nights, movies, dinners, lunches in the White House," he said in unsteady English.

“At about the same time, the Justice Department began investigating allegations that Jinnah’s fundraising on behalf of Clinton and others was illegal. He would later be charged with violating federal law by reimbursing employees and associates for contributions made in their names to Clinton’s HillPac and the Friends of Barbara Boxer campaign. Today, having fled the country, Jinnah is on the FBI’s “featured fugitives” list.”

The Assassins – The Grand Master

Bernard Lewis in his book The Assassins: A Radical Sect in Islam tackles and persuasively debunks most of the popular legends about the Assassins, such as the claim that their Grand Master secured the fanatical loyalty of his young followers by drugging them with narcotics and then conveying them for short periods to an artificial "paradise" of his own creation that was staffed by sensuous and accommodating young women. Lewis instead finds that a more straightforward (and plausible) explanation for the willingness of the Assassins' fida' is to offer themselves up for suicidal missions: religious passion and commitment to the Nizari community.

Lewis's elegant account will thus introduce you to an intriguing period of medieval Islamic history, one populated by a collection of memorable figures - the brilliant and ascetic Assassin leader Hassan i-Sabah, the real founder of the Order; the "Old Man of the Mountain," Sinan, who commanded the Order's Syrian branch during the most critical years of the Crusades; Saladin, who was at different times both a target and an ally of the Assassins; Hulegu, the grandson of Genghis Khan, who finally succeeded where the Seljuks had failed, rooting out the Order from its mountaintop fortresses and then ordering mass exterminations of its communicants; and last but not least, Marco Polo, to whose vivid tales can be ascribed much of the lingering fascination that continues to surround the Assassins.

Libya Promotes the Establishment of a Second Shi'ite Fatimid State in North Africa

On March 30, 2007, Libyan leader Muammar Gaddafi said that it was a mistake to believe that Christianity was a universal faith alongside Islam according to the Reuters correspondent Salah Sarrar writing from AGADEZ, Niger. See: Gaddafi says only Islam a universal religion.

It should be added that on April 19, 2007 “Turkey's tiny Christian minority is under attack. In the latest spate of violence, persons unknown tied up three people at a publishing house that distributes Bibles in Turkey then slit their throats on the same day that the so-called "multimedia manifesto" of Virginia Tech mass murderer Cho Seung Hui was televised with the 23-year-old Virginia student staring into the camera and spewing anti-Christian rhetoric.” See: Article by Judi McLeod on Canada Free Press -- Christians slaughtered in Muslim-dominated Turkey.

Quoting Gaddafi: "There are serious mistakes -- among them the one saying that Jesus came as a messenger for other people other than the sons of Israel," he told a mass prayer meeting in Niger.”

"Christianity is not a faith for people in Africa, Asia, Europe and the Americas. Other people who are not sons of Israel have nothing to do with that religion," he said at the prayer meeting, held to mark the birth of the prophet Mohammed.

Gaddafi, who is seeking to expand his influence in Africa, said his arguments came from the Qur’an. He led similar prayers last year in Mali.

On March 31, 2007, Libyan leader Mu'ammar Qaddafi called, in a speech in Niger to Tuareg tribal leaders, for the establishment of a second Shi'ite Fatimid state in North Africa, after the model of the 10th-13th century empire that ruled North Africa, Egypt, and parts of the Fertile Crescent. In his speech, Qaddafi denounced the division of Muslims into Sunni and Shi'ite as a colonialist plot, and rebuked the Arab League members for "hating Iran" according to the article In Overture to Iran, Qaddafi Declares North Africa Shi'ite and Calls for Establishment of New Fatimid State by MEMRI Special Dispatch Series – No 1535 of April 6, 2007.

The History of the Fatimid State

"The Fatimid state arose in the beginning of the 10th century, and it formed an umbrella over North Africa, and under its banner all of the tribal, denominational, political, and ethnic differences fused, and they all became one single Fatimid identity, which lasted 260 years and extended as far as the Arab East.

Islam has a long history of using terror as a political instrument. The most famous of these was the ‘Fort of the Assassins’ of the founder of the Ismaili order.

Terrorism, by which we mean the threat and use of violence against innocents, has a long tradition in Islam going back to Prophet Muhammad himself according to N.S. Rajaram in the article: Grandmasters Of Terror.

The most famous of the Islamic terrorist organizations was the Nizari Ismailiyun, a Shiite politico-religious sect, founded in 1094 by Hasan-e Sabah. He and his followers captured the hill fortress of Almaut in northern Iran, which became their base of operations. Hasan styled himself Grand Master and went on to set up a network of terrorist strongholds in Iran and Iraq. He had trained assassins, most of whom according to Marco Polo were drug addicts. According to Marco Polo, young boys captured by the Grand Master were turned into addicts by giving them progressively large doses of the drug hashish. This way they were totally dependent on him and would do anything in return for hashish. They came to be known as hashishin, from which get the word ‘assassin.’ So the use of narcotics in terrorism is nothing new.

Some historians doubt Polo’s account, but it is difficult to believe that he made up the whole thing. What is not in doubt, however, is the fact that Hasan-e Sabah and his successor Grand Masters commanded an army of assassins who spread terror among the people in Iran and Iraq. According to the Encyclopedia Britannica, The Grand Master had “a corps of devoted terrorists, and an unknown number of agents in enemy camps and cities, who claimed many victims among the generals and statesmen of the Abbasid caliphate as well as several caliphs.”

The Nizari Ismaliyun or the Order of the Assassins expanded into Syria after its founder’s death. In the 12th century, Rashid ad-Din as-Sinan, famous as the ‘Old Man of the Mountain,’ set himself up as an independent Grand Master of the Assassin Order in the impregnable castle of Masyaf in Syria. For over a century and a half, from 1094 to 1256, these Grandmasters and their assassins spread terror throughout the Middle East. Their end came at the hands of the Mongol warriors of Haleku Khan—the grandson of Chengis Khan. He captured and destroyed assassin strongholds in Iran one by one, and finally Almaut itself in 1256. Two years later, in February 1258, Haleku’s soldiers sacked Baghdad itself and ended the Caliphate by executing the Abbasid Caliph al-Mustasim and his sons. So, the main result of the activities of the Assassins was the end of the Caliphate.

In more recent times, terror was used to gain political ends by Mohammed Ali Jinnah. In 1946, his call for ‘Direct Action’ in support of his demand for Pakistan led to street riots all across North India. The Congress party, which had won the election by promising that it would not allow India to be divided, capitulated and agreed to the Partition of India.

In all this, there is an almost religious belief that terrorism pays. In the Pakistani official manual The Quranic Concept of War by Brigadier Malik, it is explicitly stated: "Terror struck into the hearts of the enemy is not only a means; it is the end in itself. Once a condition of terror into the opponent's heart is obtained, hardly anything is left to be achieved... Terror is not a means of imposing decision upon the enemy; it is the decision we wish to impose upon him.”

One major point to ponder, when thinking about The Quranic Concept of War, is the title itself. The Quran is presumed to be the revealed word of God as spoken through his chosen prophet, Mohammed. According to Malik, the Quran places warfighting doctrine and its theory in a much different category than western thinkers are accustomed to, because it is not a theory of war derived by man, but of God. This is God’s warfighting principles and commandments revealed. Malik’s attempts to distill God’s doctrine for war through the examples of the Prophet. By contrast, the closest that Clausewitz comes to divine presentation is in his discussion of the trinity: the people, the state, and the military. In the Islamic context, the discussion of war is at the level of revealed truth and example, well above theory—God has no need to theorize. Malik notes, “As a complete Code of Life, the Holy Quran gives us a philosophy of war as well. . . . This divine philosophy is an integral part of the total Quranic ideology.” From Parameters, US Army War College Quarterly, Winter 2006-07, pp. 108-27.

The authority for this is the Qur’an (Anfal 8:59-60): “And let not those who disbelieve suppose that they can outstrip (Allah's Purpose). Lo! they cannot escape. Against them make ready your strength to the utmost of your power, including steeds of war, to strike terror into (the hearts of) the enemies, of Allah and your enemies, and others besides, whom ye may not know, but whom Allah doth know. Whatever ye shall spend in the cause of Allah, shall be repaid unto you, and ye shall not be treated unjustly.” (Yusufal)

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

"Relax, the Over-all Market Probably Won't Tank" - Faber

Introduction

Although I read and collect information and ideas every day, whenever the day comes each month when I actually have to start writing this report, the words of Gene Fowler (an extremely successful screenplay, sports, and humorous writer) come to mind: "Writing is easy. All you do is stare at a blank sheet of paper until drops of blood form on your forehead."

On these occasions, I then usually turn to works of science, politics, history, or philosophy in the hope of calming down and finding some inspiration. Since so many investors look to investment advisers such as myself, whom they often call "gurus", for guidance on the future of the markets, I think it is appropriate to remind my readers of these words of Lao Tzu (the sixth-century Chinese sage): "Those who have knowledge, don't predict. Those who predict, don't have knowledge."

I have mentioned this because I was recently invited by my friend Manish Chokhani, of Enam Financial Consultants in Mumbai (the most successful investment bank in India), to give a presentation. The founder of the company, Vallabh Bhanshali, introduced me by saying that his staff consider me to be a hero for having correctly predicted the bull market in Indian equities in 2002, and for having called in 2006 for the 30% May/June sell-off. I felt deeply embarrassed by this, as I know only too well that I have made just as many, or even more, poor and erroneous market calls as correct ones in the course of my life, and not only about economics and asset markets but also about people... Moreover, I know people who are far more knowledgeable about the financial markets than I am - people such as Henry Kaufman and Peter L. Bernstein - who focus on presenting well-researched facts in their excellent papers, publications, and presentations, and refrain from making predictions.

In fact, addressing large audiences makes me feel uncomfortable - not because of the size of the audience, but because, as a contrarian, it is not desirable for my views to be popular and because assets that I consider will perform well in the future seldom attract large crowds. Two friends of mine, Jon Thorn and John Shrimpton, who manage, respectively, the India Capital Fund and the Vietnamese Dragon Fund, used to have tiny audiences when they presented at investors' conferences. But as their markets more than doubled in size, so did their audiences.

In 1981, I was invited to speak about bonds at a gold conference that had attracted over 500 participants. Just one person came to my presentation. (September 1981 saw the end of the bond bear market, which had begun in 1942.) A small audience can sometimes be distressing for a speaker, but at such times they would be wise to remember Victor Borge, a Danish pianist with a sharp mind and humorous bent, who fled to the United States in 1940 and made a name for himself with his brilliant blend of musicianship and humour. One evening, in Flint, Michigan, Borge performed to a sparse audience. The sight of so many empty seats might have discouraged the average performer, but the witty Borge looked out over the audience and exclaimed: "Flint must be an extremely wealthy town. I see that each of you bought two or three seats." (Lateral thinking at its best!)

As an investor looking for guidance from newsletters, blogs, financial publications, and conferences, I would also be mindful of Ralph Waldo Emerson's words: "Do not go where the path may lead; go instead where there is no path and leave a trail." Unfortunately, in today's high-liquidity driven global investment environment, I find it hard to identify an asset class "where there is no path". There are far too many smart - and not so smart - treasure hunters who have bid up every imaginable investment class right around the world. It is only in the most unusual places that I can find true value (often, however, in assets that are difficult to invest in), as opposed to relative values, which certainly do exist. The problem for investors is that, as the German theologian Dietrich Bonhoeffer wrote, "If you board the wrong train, it is no use running along the corridor in the other direction." (Bonhoeffer opposed Nazism and was executed in prison for his involvement in a plot to overthrow Hitler.)

I mention this because it will become increasingly important for investors not only to decide which asset class train they want to board, but also, and even more importantly, whether they want to board any of the asset trains. If we look at the economic and financial history of capitalism, we can see that over periods of five to ten years there were always some assets that performed well. But there were times, such as in the early 1930s and the 1970s, when very few assets appreciated. Gold and gold shares performed well in the early 1930s. And in the 1970s, precious metals, and energy and energy-related shares, appreciated dramatically. But what were the chances that, in 1929, an investor would have had all his assets in gold, or, in the 1970s, in energy and precious metals-related investments? Moreover, in both cases, these investments had to be liquidated at some point because, as is always the case, "over-staying" eventually leads to huge losses. And this is where I see the biggest problem in the current investment environment. At the beginning of a bull market in an asset class, there are very few participants. But by the tail end of the boom the vast majority of market participants have become convinced that the boom will last forever or that a greater fool will soon emerge and take them out at a higher price. (This is likely to be the thinking among private equity fund managers.) So, in every boom, the majority of investors eventually get caught when the investment bubble bursts, as was the case in 2000 with high-tech stocks and in 2006 with US homes.

In last month's report, entitled "When Too Many Investors Think Alike, Nobody is Thinking", I pointed out that a peculiar feature of the bull market in asset prices since 2002 has been that all asset prices around the world have appreciated in concert as a result of highly expansionary monetary policies, which has led to excessive credit growth and a credit bubble of historic proportions. Therefore, if my theory of slower credit growth in future holds, it is conceivable that, for a while at least, all asset markets (with the exception of bonds and cash) could come under pressure, albeit with different intensities.

In fact, asset markets would come under pressure even if credit growth continued at the present rate and didn't accelerate. In this instance, investors would be better off not boarding any investment train at all and, instead, staying at the station loaded up with cash. (However, they would still have to decide what kind of cash to hold.)

An Attempt to Pierce Through the Investment Mist

I have mentioned in the past that the first signs of credit tightening would be visible in the performance of US brokerage stocks. Recent pronounced weakness not only of brokerage shares, but also of other financial stocks and, in particular, sub-prime lenders, would seem to confirm that the "irreparable cracks in the financial system", about which we wrote in the January issue of this report, are now spreading. These cracks are now causing some "illiquidity", not only in the household sector but elsewhere in the system as well. First, it is important to understand that mortgage debt has begun to grow at a slower pace largely because home prices are no longer appreciating. The growth in the mortgage market was about equal to nominal GDP growth between 1980 and 2000. But, in the 2000 to 2006 period, a massive breakout from the trend occurred and, combined with a decline in the saving rate, drove consumption and GDP growth. But, as home prices began to decline in 2006, and as problems in the subprime lending market became evident, lending standards were tightened to their highest level in 15 years. Declining home prices and tighter lending standards brought about a slowdown not only in mortgage debt growth but also in overall debt growth. Mortgage debt, which grew at an annual rate of 10.2% in the second quarter of 2006, declined to an annual growth rate of 8.6% in the third quarter and to 6.4% in the fourth quarter. It is likely that mortgage debt growth slowed down further in the first quarter of 2007, and will decline even more in the second quarter given the problems in the sub-prime lending industry and the tight lending standards.

In the meantime, household debt growth in the United States has declined from a peak of 11.9% in the third quarter of 2005 to 6.6% annual rate in the fourth quarter of 2006. According to David Rosenberg, the fourth-quarter 2006 annual credit growth was the slowest since the third quarter of 1998 and the sixth consecutive quarterly deceleration, "which hasn't happened since 1956" (emphasis added). Now, ceteris paribus, this significant slowdown in mortgage and household debt accumulation would have already brought about a significant slowdown, or even a decline, in US consumption. However, because of the stock market rally in the fourth quarter of 2006, equity wealth increased by 4.2%, or an annual rate of 18%.

Moreover, as David Rosenberg notes, "just as households are beginning to curb their appetite for debt, the once-dormant corporate sector stepped up its borrowing sharply in Q4 (M&A related perhaps?). Net debt raised by the nonfinancial corporate sector steamed ahead at a 10.9% annual rate in Q4, almost double the Q3 pace (of 5.9% annualized) and the strongest pickup in seven years. You have to go all the way back to the cashburn era of 2000 Q2 to see the last time that the corporate sector outdid the household sector in terms of debt buildup." And as David Rosenberg correctly suspects, corporate borrowings have been rising along with M&A activity. But corporate borrowings are far smaller than household debt; therefore, while corporate debt growth has increased by around US$100 billion since the second quarter of 2006, household borrowing has grown since then by around US$300 billion. (Note also how, in the late 1990s, debt growth took off.)

Now, this deterioration in household debt growth hasn't yet led to a consumer spending decline; but, very clearly, retail sales are now growing more slowly. Continuous consumption growth was therefore driven less by household debt growth in the fourth quarter of last year and the first quarter of this year, than by the continuation of an increase in household wealth and the selling of US equities by the household sector. But herein lies the problem. If declining home prices are now joined by equity prices that are either declining or no longer rising, it will only be a matter of time before consumer confidence declines and the consumer either slows down their spending further or stops spending altogether.

Slower consumption growth, as a result of tighter lending standards and flat or declining equity prices, should have the following consequences. The US trade and current account deficit will no longer expand at an accelerating rate. This should lead to a relative tightening of global liquidity, which would likely be unfavourable for asset prices but could temporarily strengthen the US dollar and even more so the Yen.

The full extent of the sub-prime lending problems isn't known. However, since at least 12% of the mortgage market - whose total size is over US$1.2 trillion - is comprised of sub-prime loans, the fall-out could be considerably worse than expected. This certainly seems to be indicated by the recent poor performance of banking stocks and, as indicated above, brokerage shares. My friend Gerard Minack of Morgan Stanley recently published a figure showing how financial sector earnings have exploded in recent years. Figure 12 depicts earnings growth for the financial and nonfinancial sectors indexed to a common base (1990 = 100).

As can be seen, the financial sector's earnings rose 14-fold since 1990 to an annualised US$251 billion, whereas the rest of corporate earnings experienced only a fourfold increase, to US$636 billion. I have mentioned in earlier reports that if we were to include in the financial sector's earnings financial profits from speculating in all kinds of derivatives and financial products by industrial and multinational companies, the profit contribution from financial earnings to S&P 500 total earnings would be more like 45%. Also, the recent contribution to profit growth would amount to around 70%. Therefore, I suppose that if asset markets failed to appreciate further, financial earnings would begin to decline and likely pressure S&P 500 earnings. (Aside from the financial sector, the energy and material sectors have in recent years also boosted S&P earnings. Never before have energy and financials contributed so much to the S&P profit pool.)

Click on the image to enlarge

In the past, poor performance of financial stocks has always been an unfavourable indicator for the entire stock market. In an economy that has become addicted to credit growth, this should be even more so! The other point to remember is that if corporate profits no longer expand, the ammunition used by the corporate sector to take over other companies and to buy back their own shares is likely to diminish. Last year, a record US$548 billion worth of shares were retired by corporations buying back their own shares and by acquisition-minded private equity funds. Any reduction of this activity in 2007, when simultaneously the increasingly "illiquid" household sector is likely to diminish its equity purchases further, is going to have an unfavourable impact on the stock market. I may add that, sooner or later, private equity funds will place the acquired companies back on the stock market and so increase the supply of equities through high IPO activity.

If the assumption is correct that global liquidity is tightening - at least relatively - as a result of a stagnating US trade and current account deficit, the asset markets that benefited the most from surplus liquidity should come under some pressure. I am thinking here in particular of the extended emerging stock markets, which in this scenario could be vulnerable to corrections of between 20% and 40%. In turn, a decline in these peripheral markets should have an impact on Japan and, in particular, on the Yen.

Regards,
Marc Faber, PhD

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.

Containment Is Spreading - Mish

by Mike "Mish" Shedlock

In spite of Bernanke's claims that problems in housing are "well contained," most of the evidence appears to be contrary.

State Tax Revenues Slump

In "Housing Slump Pinches States in Pocketbook," The New York Times is reporting on tax shortfalls:

• In Florida, tax revenue is "projected to drop this year for the first time since the energy crisis of the 1970s"
• "New Jersey could face a $2.5 billion shortfall by mid-2008," according to Gov. Jon S. Corzine, and "may lease its turnpike or its lottery to a private company to raise money"
• In California, "income tax receipts in January were $1 billion less than forecast"
• "Maryland's real estate transfer tax revenue has tumbled by 22% this fiscal year"
• "Connecticut's real estate transfer tax revenue, which state budget analysts predicted would fall by 3.6%, is down by 13.3% so far."

"'It's the year of the housing hangover,' said Sean M. Snaith, director of the Institute for Economic Competitiveness at the University of Central Florida."

Lower Earnings, Less Capital Spending, Less Hiring

MarketWatch is reporting, "Lower earnings could cut into capital spending, hiring":

"U.S. corporate profits fell in the fourth quarter of 2006, signaling the end of one of the greatest profit cycles in postwar era, economists say.

"Economic growth is slowing, hurting corporations' top line. Meanwhile, costs are rising, squeezing profit margins.

"'Profits growth has turned decisively down, and the end is not yet in sight,' wrote Gabriel Stein, an economist for Lombard Street Research.

"'As the expansion matures and unit labor costs rise, profit margins will be under pressure,' said Stephen Stanley, chief economist for RBS Greenwich Capital...

"'The deceleration of profits may be dramatic,' wrote Mickey Levy, chief economist for Bank of America, in a research note. 'If so, weaker profit growth may affect business hiring and capital spending decisions, and will likely influence financial markets.'

"'Weaker profits may undercut any rebound in capital spending,' Levy said."

Pink Slips Litter Loan Industry

The Chicago Tribune is reporting, "Turmoil in the subprime mortgage sector hits some workers as hard as borrowers":

"The tumult in the subprime mortgage sector has hit some of the industry's employees as hard as its borrowers.

"Nationwide, job losses in the category that includes mortgage lending, real estate, and construction climbed 346% in the first quarter, to 21,245 from 4,764 in the same period last year, according to outplacement firm Challenger, Gray & Christmas Inc.

"'It's a whole sector of the economy that's leaking,' Chief Executive John A. Challenger said.

"In California, the 3,679 mortgage industry jobs lost in the quarter pales compared with the 70,000 construction jobs that economists figure could disappear over the next two years. When considered individually, though, the loss of a higher-paying white-collar position can be more significant for the economy.

"'Each one of these finance jobs is worth at least two construction jobs,' said Ryan Ratcliff, an economist with UCLA's Anderson School of Business.

"Added Esmael Adibi, director of the Center for Economic Research at Chapman University in Orange: 'The ripple effect is significant.'

"The layoff wave began about a year ago, when Ameriquest Mortgage Co. fired one-third of its employees. In December, Ownit unloaded 800 workers. Last month, the Orange-based parent of Ameriquest Mortgage and Argent Mortgage Co. announced major layoffs, as did Fremont General Corp. of Santa Monica. General Electric Co.'s WMC mortgage unit, a major player in the subprime business, said it would snip 20% of its payroll.

"'We went on a big real estate bender,' Ratcliff said. 'And this is sort of the beginning of the hangover.'

"Shelly Dusing of Aliso Viejo, who lost her $48,000-a-year job at Ameriquest last month, said she would not return to the industry. In fact, she said she would work 'anywhere but' because mortgage lending was too volatile, 'whether you're prime or subprime.'

"For Dusing, who's nearly eight months pregnant, the situation at Ameriquest became so tense that getting fired was a relief.

"'You go to work every day and you don't know if you're going to have a job or not. You don't know if your badge is going to open the door,' she said. 'We knew bad things were coming and it was just a matter of time'"...

"The abrupt end is a bitter memory for Tamika Williams, her family's primary breadwinner when Ownit collapsed shortly after she bought a home in Phoenix.

"The 29-year-old mother of four lost a job that paid $21 an hour, plus commissions. Williams landed a new job March 2, making $12 an hour handling collections for a bank.

"'I'm surprised I haven't called myself yet,' she said.

"The end came quickly at Ownit, said Lisa Seeley, another former employee.

"'Now you wake up every morning and wonder, "Who's wheezed their last today?,"' she said. 'If there's anybody who isn't wondering about their job today, they're not paying attention.'"

Property Tax Soup

The Orange County Register is asking, "Are Property Taxes in Subprime Soup?":

"If you've got a mortgage from a subprime lender in deep financial trouble -- and that's a good-sized bunch -- you may want to gulp.

"The county's tax collector is concerned that some ailing lenders may be unable to get borrowers' payments to their rightful place, such as prepaid property tax payments.

"'This is a very serious issue,' says [tax collector Chris] Street, who adds the unsettling notion that property owners are still liable for a tax bill -- even it goes unpaid due to a lender's failure to forward your cash to the tax collector.

"Street's not yet seen evidence in his tax collecting efforts of such mistakes or misappropriations. Still, O.C.'s overall late tax payments are already running at an 11-year high. But one company in the subprime game claims they've witnessed borrowers' mortgage payments go awry.

"Wall Street banker UBS sued New Century Financial, the once subprime giant now mired in bankruptcy. The UBS beef? That the Irvine [Calif.] lender failed to forward $3.8 million in borrowers' payments -- plus $1.7 million in escrow payments for house expenses -- to UBS-sponsored owners of certain mortgages.

"A New Century spokeswoman would not comment on the UBS allegations. She did say that protections are in place to keep borrower payments separate from New Century's other financial obligations. Court filings indicate that New Century has the right to continue forwarding prepaid bills to tax officials.

"'I'm just being prepared that one, two or many of these lenders will have used the money that should have been set aside,' says Street, who notes that New Century forwarded its borrowers' tax payments to his office on Friday. The current installment of tax bills is due Tuesday."

Imagine you are a subprime borrower who paid taxes to New Century Finance or some other now bankrupt subprime lender and you wake up and find that those tax escrows you made were not paid. Subprime being what it is, exactly how are you going to come up with $2,000-4,000 or more to pay tax bills you have already paid?

Some borrowers have avoided escrow payments simply because they could not afford those on top of a mortgage. Where are those borrowers going to come up with the money to pay property taxes?

California Foreclosure Sales Near $2 Billion in March

The Central Valley Business Times is reporting, "Unprecedented' foreclosure activity":

"Foreclosure sales are now 15% of all home sales in California."

"5,316 homes were lost to foreclosure sales in March in California, according to figures compiled by Foreclosure Radar, a Discovery Bay-based foreclosure listings and software company.

"The homes sold at auction last month represented a 27% increase from February and a 264% increase in the last six months, the company says. Of the $2 billion worth of properties sold in March, 4,796 went back to the lender after receiving no bids, representing $1.82 billion, it says."

4,796 homes out of 5,316 homes at foreclosure sales received no bid. That is a pretty stunning 90% of homes at foreclosures auctions receiving no bid. Obviously, those homes have a bigger mortgage than what they are worth.

Hot Employment Numbers?

In regards to the highly touted 180,000 March payroll numbers, there are some anomalies that need to be addressed. I talked about this in "March Employment Numbers & Leading Indicators," and Paul Kasriel talked about the job numbers in "An Autopsy on the March 2007 Employment Situation Report." From the latter:

"With regard to the 35,800 person increase in general merchandising retail, it seems odd that this accounted for all but 100 positions in the net monthly increase in total retail payrolls. Something very volatile appears to be going on in general merchandizing hiring.General merchandise employment in relation to total retail employment has gone from 18.81% in November 2006 to 19.25% in March 2007, a very sharp reversal, as shown in Chart 5 [below]. I wonder if there are not some seasonal adjustment issues in play here. Whatever the case, if a lot of our job growth is occurring in retailing in general, then this is unlikely to result in strong consumer spending from income growth inasmuch as the average hourly wage in this sector is only $12.74, with only leisure and hospitality paying less ($10.19 per hour). If Circuit City's hourly pay cut plan is successful, other retailers might opt for a variation of it, which will lower the wages in this hotbed of employment growth even more.

"Now, let's turn to the March 2007 Household Survey, which also provided a surprise in the form of a 0.1 point decline in the unemployment rate, to 4.4% -- matching a cycle low. In terms of age groups, the largest decline in the unemployment rate occurred among teenagers, where the rate fell to 14.5% in March, from 14.9% in February. But the 'adult' unemployment rate also fell a tick, to 3.9%, matching its cycle low. Did teenage employment increase in March? No, it declined by 59,000. What was driving force behind the sharp decline in the teenage unemployment rate? A 0.6 point decline in the teenage participation rate to a cycle low 41.6%. In fact, as shown in Chart 6, the March 2007 teenage participation rate of 41.6% is a post-WWII low"...

Judging from the enormous drop in the teenage participation rate, the latest drop in the unemployment rate is a complete fabrication of reality. While Kasriel and I focus on different aspects of the payroll numbers, we both reach the same conclusion, expressed by Kasriel: "In sum, an autopsy of the March 2007 Employment Situation report suggests that labor market conditions are not nearly as robust as the headlines that accompanied the report."

Now factor in the fact that 2.1 million homeowners missed a mortgage payment in 2006, according to USA Today. Does that look like containment? I suggest that the containment is spreading, even as Bernanke and others deny its existence.

Regards,
Mish

For Whiskey and Gunpowder

Michael Shedlock (Mish) worked in the financial services industry for 20 years at some of the top institutions in the country including Harris Bank, the Bank of Montreal, Bank One, First National Bank of Chicago, and First Data Corp. Mish is currently doing economic and investment research for a number of clients and is the co-editor of The Survival Report. In addition, Mish runs one of the more popular stock boards on the Motley Fool, Investment Analysis Clubs/Mishedlo and one of the more popular boards on Silicon Investor as well, Mish's Global Economic Trend Analysis.

New Rules for Global Investing in 2007 - Gary Dorsch

by Gary Dorsch

Jesse Livermore, widely regarded as one of the greatest stock market operators of all-time, considered himself a humble student of the market until his last day in 1940. "I study the market, because it's my business to trade. In the forty years which I have devoted to making speculation a successful business venture, I am still discovering new rules to apply to that business," he once remarked.

"Experience has taught me the way a market behaves is an excellent guide for an operator to follow. Observation gives you the best tips of all, and the behavior of a certain market is all you need at times. You observe, and then experience shows you how to profit by variations from the usual, that is to say, from the probable."

Had Livermore been operating in today's markets, he might have found it intriguing that the direction of the Japanese yen would become a key driver of the Dow Jones Industrials. Traditional indicators such as the health of the US economy, company earnings, cash flow, and future sales forecasts are all taking a backseat to forecasting the direction of the heavily manipulated Japanese yen in the foreign exchange market, in order to predict the Dow Jones Industrials.

The infamous "yen carry" trade, which involves borrowing in Japanese yen at less than 1% to invest in riskier assets like commodities and stocks, has mushroomed to an estimated $500 billion to $800 billion in size. It's made the Bank of Japan, the world's top central banker, and the US Treasury and the Federal Reserve are key collaborators with Tokyo in guiding the dollar /yen and the Dow Jones Industrials.

Someday, the Dow Industrials' obsession with the dollar /yen exchange rate will fade into oblivion. But for now, it's the endless flow of cheap capital from Tokyo that is pumping up the DJI Index to record highs, at a time when the US economy is slowing towards zero percent growth, and S&P 500 earnings growth is expected to slow to +6 to 8% YoY in Q'1, after 4-½ years of straight double-digit profit gains.

The DJI's 416-point plunge on February 27th, the seventh largest daily point loss in history, ignited by a sudden plunge in the US dollar from 120.75-yen to 118-yen, is just a fading memory. Five weeks later, the DJI is once again riding high, recouping most of its panic stricken losses from the Feb 27th to March 13th shakeout, the shortest and shallowest correction from a record high in history.

Instead, it's the US dollar's recovery from a low of 115.25-yen on March 5th to 119.25-yen on April 10th that has revived bullish sentiment on Wall Street. Higher stock prices at a time of slowing earnings growth can raise S&P 500 P/E ratios to dangerously high levels. But it's the Bank of Japan's 0.50% overnight loan rate and the Fed's purchases of long-dated bonds in the Treasury market, that are the primary obsession of US and global stock market operators these days.

US Labor Apparatchniks Prop-Up the US Dollar

The "yen carry" trade appears to be a "risk-free" trade, with both the Japanese ministry of finance and the US Treasury working for a stronger dollar against the yen. However, the "yen carry" trade did blow-up on February 27th, from unexpected meltdowns in shares of US sub-prime lenders. Top US mortgage lender Countrywide Financial (CFC.N) extended its recent losses to $32.50 /share on April 2nd, after top sub-prime lender New Century Financial filed for Chapter 11 bankruptcy.

The demise of New Century came less than two months after it had first disclosed problems with delinquent and defaulted loans. It stopped making loans last month, after having made nearly $60 billion in 2006. "Sub-prime woes are not a small issue," said the 81-year-old former Fed kingpin "Easy" Al Greenspan on March 16th. "Much of the strength in consumer spending over the past five years could be traced to capital gains, both realized and unrealized, on surging housing prices."

"If home prices keep falling, there could be more of an impact on the broader US economy's momentum," Greenspan warned. But the US Plunge Protection Team has been working overtime with Japan's ministry of finance, to repair the damage to the global stock markets, by downplaying the risks to the US economy from the sub-prime loan meltdown, and pursuing policies to keep the yen weak.

After "closely tracking" the slide CFC.N in February and March, the dollar /yen exchange rate began to diverge from CFC.N in April, as currency traders bet on a rosy US employment report on April 6th. "Observation, experience, and memory, are what a successful trader must depend on. He must not only observe accurately, but remember at all times, what he has observed," said Livermore.

"He cannot bet on the unreasonable or the unexpected. He must always bet on probabilities and try to anticipate them. Years of practice at the game, of constant study, of always remembering, enable the trader to act on the instant when the unexpected happens, as well as when the expected comes to pass," said Livermore.

Fuzzy Math and US Jobs Reports

US Labor apparatchniks have a history of tinkering with employment reports. Last August, Labor revised an original 128,000 increase in payrolls into a gain of 230,000 jobs and September's 51,000 increase was revised upwards to a 148,000 gain. Last November, Labor apparatchniks raised a lot of eyebrows, when their fuzzy math produced an extra 810,000 jobs from April 2005 through March 2006 than originally reported, all with the simple stroke of a pen.

So traders bet correctly, when Labor reported a "stronger-than-expected" 180,000 new jobs for March with the jobless rate slipping to 4.4%, a six year low, implying the US economy remains resilient despite a slowdown in housing. Labor went two steps further and revised upward the estimate for jobs created in January and February by 16,000 each month to 162,000 and 113,000 respectively.

Still, the most glaring irregularity in Labor's latest employment report was a 56,000 increase in construction jobs to a near record 7.7 million workers, and offsetting a decline of 61,000 in February. One might have suspected that the sizeable loss of construction jobs in February was the beginning of a trend, and not a one-time fluke, given the 33% slide in housing starts since January 2006.

Overall, construction jobs have shown no net growth since peaking in September 2006. Until then, the housing industry was the key engine of job growth in the USA, and had accounted for more than half of private payroll jobs created since 2001. But Labor's fuzzy math is not subject to the same audits or accounting standards as home builder's earning reports that will be forthcoming in the weeks ahead.

Labor's claim that US construction employment remains unchanged from a year ago doesn't jive with industry reports. Luxury-home builder Toll Brothers TOL.N said its first-quarter profit dropped 67% from a year ago, and Lennar LEN.N, the #3 home builder, posted a 73.4% plunge in profit, saying the industry's spring selling season has failed to bloom and its outlook for the rest of 2007 does not look bright.

"While some markets are performing better than others, the typically stronger spring selling season has not yet materialized," said Stuart Miller, Lennar's CEO. "These soft market conditions have been exacerbated by the well-publicized problems in the sub-prime lending market," he said. It defies all logic that hemorrhaging US home builders are retaining idle workers and not initiating layoffs, as Labor's stats suggest.

Many bond traders do not trust Labor's fuzzy math, and instead rely on private surveys, such as the NAPM report on manufacturing employment, which showed a contraction in factory jobs in March, matching Labor's claim of a 16,000 job loss. However, the ISM index on service sector employment stood at 50.8 last month, compared with December's 53.1, and August 2005's 59.9, when US home builder share prices topped out, before their 50% year long slide. Together, the private surveys show stagnant to contracting US jobs growth.

Bank of Japan keeps its Powder Dry

The Bank of Japan sat tight on monetary policy on April 10th, reluctant to follow up on its February interest rate hike due to fear of another unwinding the "yen carry" trade. That keeps the overnight call rate target at 0.50% for the second month in a row, in a unanimous vote, and is likely to lead to a clash with European finance ministers at the upcoming April 13th G-7 meeting in Washington.

The BOJ said year-on-year changes in consumer prices are moving around zero percent and are likely to stay there for the near term, reflecting recent falls in crude oil prices. That's led to expectations the BOJ will keep its powder dry at 0.50% until the July-September quarter or possibly longer. But clearly, with Japan's economy expanding at a 5.5% annualized rate in Q'4, the BoJ's overnight loan rate of 0.50% is far out of alignment with the rest of the world, and creating bubbles worldwide.

BOJ hawk Atsushi Mizuno warned on Feb 28th, "The side effects of keeping low interest rates regardless of economic conditions could prompt yen weakness and may increase protectionism among Japan's trading partners. It could also cause distortions in global asset prices by speeding up capital outflows from Japan."

Tokyo's financial warlords are manipulating the inflation data, and claim that Japan is still suffering from deflation, after an 86% surge in the Dow Jones Commodity price Index to 20,500-yen, from five years ago. Last week, Tokyo said consumer prices were -0.2% lower in February from a year earlier, while the rest of the world is grappling with inflation, even according to heavily sedated government statistics.

It might only be a matter of time, until the "yen carry" trade lifts commodity prices to new record highs in Japan. BoJ deputy Toshiro Muto said on April 4th that inflationary pressures will likely increase in the future and the central bank will gradually nudge up interest rates. "As we have said before, we have no predetermined schedule for future policy changes in mind," he said.

But the ruling LDP party, led by the radical inflationist Shinzo Abe, is staunchly opposed to rate hikes, to keep Japan's debt payments low. As of March 31st, Japan's national debt was $6.7 trillion, and the annual interest expense totaled $177 billion. A 1% increase in 10-year bond yields would push up Tokyo's debt-servicing costs by 1.6 trillion yen ($13.6 billion), the Ministry of Finance has estimated. Debt-servicing costs already eat up about a quarter of spending in the annual budget. So without enormous political pressure from Europe, Tokyo won't budge on interest rates.

Euro /Yen Carry Traders wreck Havoc on ECB

Because of Tokyo's refusal to raise its interest rates, supported by the US Treasury, European central bankers find themselves in a dilemma. The Euro M3 money supply is exploding at a 10% growth rate, and requires a tighter ECB money policy to head-off inflationary pressures in the Euro zone economy. Yet unilateral ECB rate hikes that are not matched by the BoJ could send the "Euro /yen" rate much higher.

European finance ministers are staunchly opposed to Tokyo's cheap yen policy, and drew a line in the sand for the Euro at 160-yen at the Essen G-7 meeting. European finance ministers view Tokyo's weak yen policy as a clandestine attempt to aid Japanese exporters in grabbing market share around the globe at the expense of European exporters. On March 20th, EU finance chief Jean-Claude Juncker said the Japanese yen must reflect the fundamentals of the Japanese economy.

"The fact that the Bank of Japan didn't raise interest rates hardly surprises me," after the BOJ left its overnight call rate target at 0.50% on March 20th. "I think that some people in Europe and elsewhere had got their hopes up after the recent interest rate rise. We stick to the message that we sent at the Essen G-7 meeting," Juncker said.

"We think that Japanese growth is without doubt picking up. We think that the exchange rate must reflect the fundamental facts of the Japanese economy. Our Japanese friends know that. And we are watching them," Juncker warned. But without higher Japanese interest rates, European "jawboning" is losing its potency.

It won't be the first time that Tokyo has broken a pledge to cooperate with the G-7 on foreign currency issues. On Sept 20, 2003, the G-7 finance ministers called for Japan to reduce its sales of the yen, after it had already sold an unprecedented 9-trillion yen ($76.8 billion) from January through July 2003. But Tokyo resumed massive yen sales within a few weeks, dumping 26 trillion yen on the market from November 2003 thru March 2004, to prevent the dollar from tumbling to 100-yen.

The "Euro /Yen" carry trade is starting to turn the ECB's monetary policy upside down. The Euro's recovery from 151-yen on March 5th to a record high of 160-yen on April 10th, enabled gold to rebound from a low of 480 euros /oz to 506 euros /oz. European traders can borrow yen at roughly 1% and buy gold, while pocketing the Euro's gains against the yen. At the same time, Germany's 10-year bund yield briefly rose to a 3-½ year high of 4.15%, reflecting higher gold prices.

The Euro's strong recovery to a record high of 160-yen is linked to ideas that the European Central Bank will hike its repo lending rate by 50 basis points in the months ahead, and won't be matched by the Bank of Japan. Thus, in a strange twist of logic, signals of a tighter ECB money policy are actually elevating European gold prices, because of the distorting impact of the "Euro /yen" carry trade.

Gold would be about 3% higher if the ECB hadn't stepped up its sales in March, by dumping 45.5 tons into the gold market. Yet gold still managed to climb against the Euro last month, despite the ECB's stepped up sales. In Sept 2006, when the ECB dumped 50 tons of gold in the spot market and sold 100 tons in the forward market, gold plummeted by 40 euros to 440 euros /oz. In May 2006, when the ECB dumped 75 tons, gold plunged 120 euros /oz to 430 euros.

What's fascinating about the Euro /yen exchange rate these days, is that tiny moves in interest rate differentials between Europe and Japan are leading to explosive moves in the cross rate. The Euro's recovery from 151-yen to as high as 160-yen today, was accompanied by a mere 16 basis point increase in the Euro Libor rate over the Yen Libor rate. If the ECB has to lift its repo rate by at least 50 basis points to control the M3 money supply, without a similar increase by the Bank of Japan, the Euro /yen rate could soar, and in a strange twist, lift gold prices and German bund yields much higher, just the opposite of what the ECB would like to accomplish.

Shanghai Bubble Expands to Record Proportions

Jesse Livermore would have been intrigued by the Shanghai red chip market, which is reminiscent of the middle stages of the Nasdaq 1998-99 bubble. Left unchecked, the world is witnessing one of the greatest stock market rallies in history, ranked alongside Japan's Nikkei-225 of 1986-90 and the Russian Trading System Index. The Shanghai Composite Index closed at 3,444-points, a record high, and has gained 25% since its widely reported 9% dive on February 27th.

All lip service and tightening measures by Chinese authorities to keep Shanghai red chips from surging higher haven't turned back the Asian stampede. It's highly doubtful that Livermore, who made $100 million during the 1929 stock market crash, would try to pick a top or start short selling this market. Foreign money is flooding into China, with its trade surplus doubling to $46.4 billion in the first quarter.

On April 6th, the Chinese central bank hiked bank reserve ratios by 0.5% to 10.5%, ordering lenders to set aside more money in reserve for the sixth time in less than a year, removing about 170 billion yuan from the banking system.

But unless the required reserve ratio is raised to more than 13%, which isn't likely, the PBoC's efforts to slow explosive loan growth and the money supply are just cosmetic overtures. China's banks still have an average excess reserve deposit ratio of 3%, and its largest banks have the highest capital ratios, providing them with a sizeable cushion when they're ordered to increase reserves.

M2, China's broadest measure of money supply expanded at an annual 17.8% clip in February, and outstanding bank loans climbed 17.2 percent. New lending was 981 billion yuan for the first two months combined, almost a third of the total for all of 2006. Factory output in January and February combined grew 18.5%from a year earlier, blowing past the 16.2% rise logged in the first two months of 2006.

The PBoC drained 655 billion yuan from the banking system in March with T-bill sales, and guided the widely watched 7-day repo rate from as low as 1.5% in mid-March to 2% today. The Chinese central bank can issue one-year yuan T-bills at 3% in Shanghai to soak-up excess cash and deposit the funds in US 1-year bills at 5.25%. Thus, the PBoC has become the world's largest "yuan carry" trader.

But the 7-day repo rate remains far below the 2.7% consumer price inflation rate, indicating that China is still pursuing a super-easy money policy. Beijing has only allowed the yuan to appreciate by 1% so far this year, by printing enormous amounts of yuan to keep its currency artificially low.

Seeking to stay ahead of monetary inflation, Chinese investors are bidding up red-chips, and turnover in Shanghai A shares ballooned to a record 152.3 billion yuan ($19.7 billion) on April 10th. Baoshan Iron and Steel 600019.SS, China's top steel maker, said it expects to post a 150% jump in 2007 first-quarter net profit from a year earlier, boosted by higher steel prices. BaoSteel plans to raise its steel prices by 5 to 7% in the second quarter.

Strong demand from Chinese steel mills, the largest consumers of nickel, and tight supply have lifted nickel prices into the stratosphere, hitting a new record high of $50,000 per ton, up from $15,000 /ton a year ago. China produced 23.1% more crude steel in the first two months, or 74.25 million tons, after output grew 19.7% in 2006 to 422.7 million tons. China steel mills will become increasingly dependent on imports of lower-cost iron ore, which could rise by 60 million tons this year.

Livermore used to say there is nothing new under the sun in the stock market. But the "yen carry" trade is turning some long held fundamental beliefs about investing upside down. The Shanghai bubble has been seen before in different clothing, and it's possible that it might never come back down to earth, much like the Brazilian and Russian stock markets. But to keep in touch with the latest news and analysis of these markets and more, subscribe to the Global Money Trends newsletter.

Global Money Trends is now published weekly on Friday mornings (44 issues per year). Here's what you will receive with a subscription,

Insightful analysis and predictions for the (1) top dozen stock markets around the world, Exchange Traded Funds, and US home-builder indexes (2) Commodities such as crude oil, copper, gold, silver, the DJ Commodity Index, and gold mining and oil company indexes (3) Foreign currencies such as, the Australian dollar, British pound, Euro, Japanese yen, and Canadian dollar (4) Libor interest rates, global bond markets and central bank monetary policies, (5) Central banker "Jawboning" and Intervention techniques that move markets.

GMT filters important news and information into (1) bullet-point, easy to understand analysis, (2) featuring "Inter-Market Technical Analysis" that visually displays the dynamic inter-relationships between foreign currencies, commodities, interest rates and the stock markets from a dozen key countries around the world. Also included are (3) charts of key economic statistics of foreign countries that move markets.

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Gary Dorsch
http://www.sirchartsalot.com/

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.

Copyright © 2005-2007 SirChartsAlot, Inc. All rights reserved.

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.

The Federal Reserve Monopoly over Money - Ron Paul

by Dr. Ron Paul ( U.S Congressman )

Recently I had the opportunity to question Federal Reserve Chairman Ben Bernanke when he appeared before the congressional Joint Economic committee. The topic that morning was the state of the American economy, and many of my colleagues raised questions about how the Fed might better "regulate" things to ease fears of an economic downturn. The tenor of my colleagues' questions suggested that Mr. Bernanke's job is nothing less than to run the U.S. economy, like some kind of Soviet central planner.

Certainly it’s true that Mr. Bernanke can drastically affect the economy at the drop of a hat, simply by making decisions about the money supply and interest rates. But why do members of Congress assume this is good? Why do we accept without objection that a small group of people on the Federal Reserve Board wields so much power over our economic well-being? Is centralized, monopoly control over our money even compatible with a supposedly free-market economy?

Few Americans give much thought to the Federal Reserve System or monetary policy in general. But even as they strive to earn a living, and hopefully save or invest for the future, Congress and the Federal Reserve Bank are working insidiously against them. Day by day, every dollar you have is being devalued.

The greatest threat facing America today is not terrorism, or foreign economic competition, or illegal immigration. The greatest threat facing America today is the disastrous fiscal policies of our own government, marked by shameless deficit spending and Federal Reserve currency devaluation. It is this one-two punch-- Congress spending more than it can tax or borrow, and the Fed printing money to make up the difference-- that threatens to impoverish us by further destroying the value of our dollars.

The Fed’s inflationary policies hurt older people the most. Older people generally rely on fixed incomes from pensions and Social Security, along with their savings. Inflation destroys the buying power of their fixed incomes, while low interest rates reduce any income from savings. So while Fed policies encourage younger people to overborrow because interest rates are so low, they also punish thrifty older people who saved for retirement.

The financial press sometimes criticizes Federal Reserve policy, but the validity of the fiat system itself is never challenged. Both political parties want the Fed to print more money, either to support social spending or military adventurism. Politicians want the printing presses to run faster and create more credit, so that the economy will be healed like magic- or so they believe.

Fiat dollars allow us to live beyond our means, but only for so long. History shows that when the destruction of monetary value becomes rampant, nearly everyone suffers and the economic and political structure becomes unstable. Spendthrift politicians may love a system that generates more and more money for their special interest projects, but the rest of us have good reason to be concerned about our monetary system and the future value of our dollars.

Dr. Ron Paul

Project Freedom

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.

Gold, Silver, and Stock Bears - Adam Hamilton

by Adam Hamilton

Contrarian precious-metals enthusiasts find themselves in a difficult position today psychologically. On one hand, global precious-metals fundamentals remain incredibly bullish with demand growth far outpacing supply growth. But on the other hand, what if the precious metals are sucked into the black hole of another worldwide stock-market selloff?

How can investors and speculators weigh the relative risks of a precious-metals bull powering higher for fundamental reasons versus the PMs plummeting for sentimental reasons? Stated in more direct terms, will precious metals and PM stocks be a good place to park capital if the general stock markets are entering a bear?

The latter stock-bear-market concern is certainly very valid. Today's US stock markets are near the same point in time in their current Long Valuation Wave cycle where a particularly brutal cyclical bear market erupted about this time in the last valuation wave a third of a century ago. The comparison between the stock action leading up to this point in the last few years and the corresponding point of the early 1970s is disturbingly uncanny.

Because the financial markets are ultimately driven by the competing human emotions of greed and fear, and because these emotions never change regardless of era or technology, examining the past is a great way to increase insight into probable market behavior in the present. If we are in fact near the same point in our current cycle that last hit in the mid-1970s, then taking a look at those years should offer insight into the present.

In particular the behavior of gold and silver during the infamous 1973 to 1974 stock bear is very intriguing, because the primary driver of PM stocks is the price action in gold and silver. If PM prices are rising on balance, so will PM stock prices. This is due to the tremendous profits leverage that gold and silver miners have to the underlying prices of gold and silver.

Time and time again, in past and present bear markets, PM stocks have defied the persistent general-stock weakness to rise with gold and silver. In fact, back from 2000 to 2002 the primary reason most contrarians flocked to the young PM-stock bull in the first place was to find refuge from the accelerating general-stock bear. Believe it or not, only five years ago PM-stock investors used to wish for general-stock bear markets!

But I digress. PM stocks follow PM prices, their primary driver. So how did gold and silver fare in the wicked 1973 to 1974 general-stock-market bear, which was the spiritual ancestor of where we are today? The answer is phenomenally well! In fact, I can't imagine any better place to be invested than in the precious metals during those years.

My charts this week superimpose gold and silver, and their various technicals, over the Dow 30 in 1973 and 1974. In the 1970s the S&P 500 wasn't very popular yet even among professionals so the flagship Dow 30 dominated headlines as the stock-market measuring rod of choice. Like today, back then the gold and silver bulls remained young and faced a towering wall of worries and endless skepticism.

Before we delve in though, one attribute of a stock bear erupting at this stage in a valuation wave cycle is crucial to understand. These stock bears are slow and gradual, grinding lower on balance for years. They could not be farther from a crash. On the red Dow 30 lines below, note that the US stocks really only fell steeply during 2 months out of 24. The rest of the time was largely a measured slow boil that gave bulls just enough hope to stay fully invested until the bottom.

In a study I did a couple months ago on our previous bear, 2000 to 2002, I found that PM stocks were largely immune to stock-market selloffs unless they got really steep. And even then, as soon as the short-lived fear-laden sentiment storm blew past, the PM stocks resumed their march higher on balance.

So if PM stocks only tend to get caught up in the bear-market hype at the darkest moments, but those are few and far between in a bear at this stage in the valuation waves, then the probability of general fear spilling over into PM stocks and blasting them out of the water is vanishingly low. Precious metals, and their miners, are refuges of choice during long slow bears and they tend to thrive as alternative investments in such times.

So while the Dow 30 shed 45% in 1973 and 1974, an enormous and devastating loss, did gold plunge in sympathy like it did for a few days five weeks ago in the latest mini-panic? Heck no! Gold soared in a majestic and powerful bull market and more than tripled while the general stocks swooned. The curious popular belief today that precious metals will suffer during a general-stock bear is a total myth, pure fabrication.

This red Dow 30 line from 1973 to 1974 represents a very typical cyclical bear market. Although there are some periodic sharp moves down, numbered above, most of the time prices just kind of drift lower. This gradual decline is a diabolically exquisite example of bear-market psychological warfare. Without many sharp plunges lower to spawn intense fear, most investors are tricked into holding on as the bear slowly feasts on their capital.

But the blue gold line shows how the Ancient Metal of Kings held up in such a dangerous general-market environment. Gold actually climbed up in a beautiful and powerful uptrend, carving higher highs and higher lows in a well-defined channel. The longer the stock bear lingered, the more investors grew interested in gold as an alternative investment and safe haven and the higher they drove its price.

Now overall, gold rose 205% at best within these two years. But even if the gold prices on the very days the general-stock bear began and ended are considered, gold was still up 177% in less than two years during one of the worst bear markets in modern history. Stock bear markets don't starve the gold price as is widely believed today, they feed it!

Gold's uptrend in 1973 and 1974 was nice and linear but it wasn't continuous. As in all bulls, gold would rise in an upleg and then retreat in a necessary and healthy correction to rebalance sentiment. Bull markets move two steps forward followed by one step back, it was always thus. This is critical to realize because there are times within stock bears when gold seems to be unduly influenced by stock declines.

For example, in late February and early March of this year gold swooned with general stocks and seemed to be trapped within their gravity well. There were times like this three decades ago too. Note that gold corrected from June 1973 to November 1973, seemingly following the Dow 30. Gold was in another correction from April 1974 to July 1974, drifting lower in correlation with general stocks.

Now a stock bear trends down, no big surprise here. And a correction within a bull trends down too. So when one price is drifting lower in a bear and another is correcting, they are moving in the same direction. This is correlation but not necessarily causation. Gold wasn't drifting lower in these corrections because its fundamentals were bearish, but because it needed to bleed off some temporarily overbought sentiment from its previous upleg.

I am belaboring this point because countless folks today will look at the stock markets and gold over some ridiculously small period of time, like one week, and see that they have both moved lower. Then they will take this small sample and extrapolate it out into infinity. "Well, gold sold off with the stocks last week, so therefore gold is doomed in a general-stock bear. Woe is me!"

Since myopic observations lead to faulty views and bad trades, expanding one's perspective corrects these deadly errors. Note in the chart above that there were also plenty of times, during the gold uplegs, when the metal climbed sharply higher despite a declining stock market. From January 1973 to June 1973, for example, gold soared 97% while the Dow 30 fell 13%. From November 1973 to April 1974, gold blasted another 99% higher while the Dow 30 fell one-half percent.

So when you are analyzing gold's behavior relative to the stock markets in the months ahead, especially if a new cyclical bear has indeed begun, please realize that it is foolish to extrapolate too small a sample out into infinity. Gold and the stocks sold off sharply together for one day? Who cares. One week? Yawn. One month? Still too short of time to draw a valid conclusion. Trends carved over years matter, not mere months.

As traders one of the greatest risks we face is succumbing to the tyranny of the present. Whatever is on our minds right now tends to expand and gnaw on our psyches and fill our thoughts until we can consider nothing else. In the markets, the way this dysfunctional trait manifests itself is by assuming the present conditions are going to last forever. Nothing could be farther from the truth.

Gold can fall with stocks from time to time, no doubt. But if the metal's underlying global supply and demand fundamentals remain bullish it will rise on balance regardless of whether the general stock markets are rising, falling, or trading sideways. Over time gold marches to the beat of its own drummer and it will climb higher as long as global mined-supply growth continues to lag global investment-demand growth.

Interestingly the biggest risk for gold getting caught up in general-stock selling hype happens when the general stocks fall the fastest. Out of the 24 months or so of the 1973 to 1974 stock bear, there were only 2 where the Dow 30 really slid sharply and mightily stoked the fires of fear. While the icy fingers of this fear squeezed investors' hearts in November 1973 and August 1974, how did gold fare?

During both plunging months, gold sold off with the stock markets. Yes, the metal still can get caught up in a temporary panic just like it did five weeks ago. But the key thing to note is that gold's declines during these two worst months of the 1973 to 1974 stock bear really weren't all that exciting. In November 1973, the Dow 30 fell 14% but gold only bled 8% at worst then rapidly recovered. In August 1974, the Dow 30 fell 10% while gold was off just 3% at worst.

And if you examine these two months visually in this chart, it is readily apparent that gold soon recovered and started marching higher. In the first case the stock markets stabilized too but in the second they continued lower. So sure, gold can get caught up in mainstream bearishness for a spell, but it never lasts as long as gold's fundamentals remain bullish. We will have to weather general-stock-induced gold selloffs from time to time, but they ought to be pretty mild when considered within strategic context.

So based on gold's performance the last time general stocks were at this particular point in their long valuation cycle, I suspect we have nothing to fear this time around. Gold investment demand is rising worldwide, yet mined supply is actually declining in the top-producing countries due to low-grading and existing mines being depleted. It can take a decade for a new deposit to be brought into commercial production, so gold production responds very slowly to higher prices signaling producers to mine more. This is why secular gold bulls last so long and gold prices climb so high.

Silver's behavior during the 1973 and 1974 stock bear is similar to gold's in some regards, and different in others. With a vastly smaller market than gold's, silver is much more volatile and moves much more rapidly. Speculators can drive blistering fast rises in silver and devastating plunges depending on whether their capital is flowing in or out. Silver has always been a speculators' playground and never for the faint of heart.

Silver's 1973 and 1974 uptrend is not as clean as gold's, but it isn't bad either. Silver had a common support line throughout this entire stock bear that was relentlessly rising. To the very days when the stock bear began and ended, silver was up 106%. This is really pretty darned good when general stocks' prices have nearly been cut in half. Only a fool would pass up this kind of return.

But silver is a speculator's metal, and it tends to explode vertically from time to time when speculators flock to it. Just such a surge happened in January and February 1974. During those two months alone, silver rocketed 104% higher at best! At the top of this textbook parabola, silver was up a whopping 241% from its lows of early 1973. By this time the Dow 30 had already ground 18% lower.

This silver parabola deep in the bowels of a wicked stock bear is very illuminating on multiple fronts. First, it looks remarkably like the silver parabola of early 2006 as well as the one before that in early 2004. Extreme silver volatility is nothing new and should be expected. Silver traders, especially the leveraged ones, have to be psychologically and financially ready for blistering moves higher or lower at any time.

Second, even though silver had a parabola its secular bull was not over in early 1974 by any means. It would ultimately climb to $48 in January 1980, roughly 10x above where it ended in 1974! While parabolas can be spawned by excessively greedy sentiment within secular bulls, their aftermaths are relatively mild and not bull-ending as long as the fundamentals still support the bull after the parabola has collapsed.

In 1974 this was certainly the case, silver ground sideways in a high consolidation in a range roughly twice as high as it traded in during 1973. So even with this general downward trend in 1974 as the markets got used to the new higher silver prices initially driven by the parabola, investors and traders who bought silver in early 1973 when the stock bear started lower still made out like bandits even after silver corrected.

While gold ran up in an orderly fashion while general stocks burned, silver's gains were much wilder and more exaggerated, and its corrections as well. But on balance both metals performed extremely well during one of the worst stock-market bears in modern history. Investors and speculators alike could have doubled or tripled their capital in precious metals at the same time the stock markets were cut in half. They could then buy back between 4x to 6x more blue-chip shares at the bottom than they would have commanded if they had instead rode the stock bear down like a mainstreamer.

Now in an analysis like this, the first objection that arises is "this time it is different", the five most dangerous words in investing according to Warren Buffett. Yes, many aspects of today are different from the 1970s and I am well aware of that. But many aspects are the same too, such as the Long Valuation Wave contraction now underway as well as the secular commodities bull driven by global fundamentals. And greed and fear never change.

I am not arguing that the gold and silver action will play out over the next two years, which will probably be bearish in the US stock markets, exactly like in 1973 and 1974. History never repeats exactly, but it does rhyme. Whenever general stocks are relentlessly grinding lower, investors seek alternative investments and places of refuge in which to protect and grow their capital. Gold and silver, after six millennia of performing these crucial functions beautifully, are always near the top of the list.

Gold and silver tend to thrive the most when mainstream investors focus their attention on them, and these mainstream investors usually only look to the precious metals when their beloved general stocks are not performing well. And precious-metals prices drive the profits and hence ultimately the stock prices of PM miners. So when gold and silver are driven higher as alternative investments during general-stock bears, PM stocks follow their metals higher on balance.

If a new stock bear is really dawning, gold, silver, and PM stocks are an ideal place to ride out the bear. While the metals are easy to buy at your local coin shop, in the futures markets, or via the new ETFs, stock picking is far more challenging. We spend a great deal of our time at Zeal researching countless stocks to find our favorites and we just published a new report on our 20 favorite silver stocks. If you want the fundamental lowdown on some of the most promising silver stocks in the world today, please buy our report.

We also publish an acclaimed monthly newsletter where we buy and sell elite precious-metals stocks as technical market timing allows. We weathered the last general-stock bear from 2000 to 2002 with fantastic realized profits by harboring in the PMs and PM stocks and we are going to do it again in this probable new cyclical bear. Please subscribe today so you don't miss our coming high-potential-for-success trades.

The bottom line is gold and silver tend to thrive in stock bears, not wilt. While there are certainly short periods of time, usually weeks at most, where the precious metals can be sucked into a particularly scary stock selloff, overall they rise on balance throughout general-stock bears. While the stock markets are burning, precious metals and PM stocks become some of the best places available to protect and multiply capital.

Although many popular theses today claim that the precious metals and especially PM stocks are doomed in a new stock bear, if you dig deep to their cores you will find they are all based on very small sample sizes. Yet prudent traders model probabilities off of broad strategic trends lasting years, not isolated multi-week spells with little if any long-term relevance. And in this context, stock bears have been no threat to PMs historically.

Adam Hamilton, CPA
Zeal LLC.com

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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.

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The Los Angeles Oil Patch - Byron King

by Byron King

"LA is a great, big freeway," go the words to the song. It is also one of the world's great oil provinces, with historical oil extraction over the past 110 years of something near 9 billion barrels, and still counting. This volume easily places the oil production from the Los Angeles Basin in the ranks of Prudhoe Bay, Alaska (near 10 billion barrels), and about 50% greater than the East Texas field (about 6 billion barrels). So in this article, let's discuss Los Angeles and oil.

First, Los Angeles

First, let's discuss Los Angeles. I have been here before and I know what to expect, but the place never ceases to amaze me.

Just flying into the region, one encounters one of the busiest air traffic corridors in the world. The air controllers land giant airplanes two abreast on parallel runways at Los Angeles International Airport (LAX), with the rest of the airport work force moving about 78 million passengers per year through the jetways. This movement of humanity is the equivalent of about one out of every four people in the United States, although many of those 78 million are from foreign lands. And outside LAX, the freeways are even more crowded, at times and in places just wall to wall with cars and trucks, six lanes in each direction. Who are all these people? Where are they coming from? Where are they going? Driving their hummers to the store to buy some lipstick, maybe? Haven't they heard about Peak Oil? I guess not, but they will.

The Port of Long Beach, south of LAX, is similarly congested, with just plain miles of waterfront lined with pier facilities, steel forests of massive crane systems, and the adjacent and necessary railroad and heavy road infrastructure. This is all to the purpose of unloading the immense containerships that dock here. The biggest of the big vessels, larger than the old RMS Queen Mary that is now a tourist attraction at Long Beach, are carrying upward of 10,000 20- and 40-foot containers from foreign nations. Can you guess from which foreign nation most of these cargoes originate? Hint: Many of the ships belong to the China Ocean Shipping Co. (COSCO). Oh well, at least the Chinese lend us the money with which to buy their stuff. Or at least they have done so up to now. Something tells me that this also is related to Peak Oil.

And of those 10,000 containers on the large carriers, one port official told me that an average of 7,000 are loaded on rail cars for transport across the country, with about 3,000 containers loaded on motor trucks for the over-the-road, long haul that commences on I-710 and then eventually ends at a Wal-Mart or other fine store near you. And 3,000 trucks is one heck of a lot of trucks. Really, dear readers, the merge point where passenger traffic from Long Beach joins I-710 out of the port area is just a long line of fast-moving 18-wheelers, on occasion totaling something over 100 per hour, according to a uniformed representative of the California Highway Patrol.

And for any road-weary truck drivers who are paying attention, not far up from the Long Beach highway merge point one can see a billboard that the Burlington Northern Santa Fe Railroad (BNSF) has displayed, advertising for locomotive engineers. "It is like having a corner office with a view, except that it moves," states the house-sized help-wanted posting. Need a job? Want to drive a train? They are hiring down at the railroad.

And where else but in Los Angeles could you see none other than Evel Knievel, that daredevil of the road and master of the leaping motorcycle, give himself over to God and be baptized on Palm Sunday at the Crystal Cathedral by the Rev. Dr. Robert Schuller? Yes, dear readers, it is true. Evel Knievel is now among the saved. But does this mean that for all those years, as he was launching himself over dozens of parked school buses and speeding his way through flaming hoops, Evel was not quite right with God? Wow! Talk about a man who took chances and tempted fate. So now Evel is about 80 years old and suffering from a degenerative lung disease. He said that Jesus visited him in a dream and told him to get baptized. Thus, it was off to LA. It is never too late, I suppose, and you are never too old to do the Lord's bidding. And when you wish to do so, the City of Angels beckons.

The Early Oil Patch

So Los Angeles is a place of many people, a place of much industry, and a place of much of everything else, often to excess. And in that vein, I can say that LA is also a place of much oil.

Oil was certainly not unknown in Southern California long ago. The famous and geologically fascinating La Brea Tar Pits of Los Angeles have been bogging down, trapping, and preserving unwary animals since Pleistocene times. On one wall of the museum at La Brea, there is a display holding the skulls of 1,600 dire wolves, the remains of predators from long ago who thought that they spotted an easy meal trapped in the tar. But the predators quickly found themselves stuck in the goop and fast departing the gene pool as well. Nature had laid an oily trap for the complacent alphas at the top of the food chain, a message that probably has some contemporary meaning. But I need not belabor that point, certainly not to the Peak Oil scholars who read Whiskey & Gunpowder.

And within the archaeological past, the record is that for something over 10,000 years previous to our modern era, the ancestral Native Americans of SoCal collected oil from seeps. These proto-Californians did this in much the same way as did the Seneca tribes of what later became Pennsylvania. The Indians used the tarry oil to waterproof baskets and preserve rope and fishing lines, as well as as an early form of glue. And there was a variety of other uses, chronicled in numerous fine museums in and around LA.

The first "modern" oil well in the Golden State was drilled in Northern California in 1861, a mere two years after Col. Drake pounded down his hole at Titusville, Pa. Things slowed down during the Civil War, but by 1866, oil was being produced in commercial quantities in Humboldt County, north of San Francisco.

In the fall of 1892, a down-on-his-luck prospector named Edward Doheny drifted into Los Angeles from his previous failed adventures elsewhere. Doheny noticed that LA residents were gathering the "brea" (Spanish for "tar") from tar pits to use as fuel in place of scarce coal or lumber. Doheny applied his miner's knowledge and began to dig pits and follow the oil traces. Before long, LA of the 1890s was in the throes of an oil boom to rival that of Titusville in the 1860s, if not the Gold Rush of 1849. Speculators bought leases, tore down houses, erected derricks, and began to produce the oil from shallow rock formations. Parts of Los Angeles began to resemble a forest of derricks that rivaled any oil boomtown from back East. The coastline, along what would become the Pacific Coast Highway, was in many areas a line of oil derricks. California was on the oil prospector's map.

The Los Angeles Basin

Oil exploration in the early days of the 20th century pretty much consisted of prospectors following the shows and seeps and drilling the obvious structural features, particularly the folded rock sections called "anticlines." Fortunately for the early prospectors, the Los Angeles sedimentary basin is among the richest oil provinces on the planet, and is filled with shows, seeps, and anticlines.

These shows, seeps, and anticlines are the surface representations of more than two miles worth of layered Miocene and Pliocene sediments filled with a rich, organic, and petroliferous heritage. Adding to the mix, the relatively recent geologic, tectonic, and structural history of the region has provided an almost perfect thermal history to bring the organic matter into what is called the "oil window." That is, the source rocks have been buried within the depths of the Earth and heated to a point at which oil and gas formed. Then the oil and gas migrated into literally thousands of "traps" that are layered like pancakes from near the surface, down more than two miles to the crystalline basement rock that underlies LA. We cannot neglect to mention the extensive faulting of the region. This has been the source not only of the famous earthquakes, but also has contributed to bringing much of the oil and gas into existence, by aiding in its entrapment.

Aside from the hard work involved in finding and lifting out the oil and gas, there are hundreds of lifetimes worth of geologic and other scientific study just in the Los Angeles Basin alone. And there is a small army of geologists, engineers, and other researchers who do exactly that to earn their daily bread. So Los Angeles is not all just movie stars and fancy divorce lawyers. It is a scientific treasure house.

Back to the Oil Biz

With many people following in the oily footsteps of Doheny, by the 1920s and 1930s, there were numerous oil and gas discoveries in Los Angeles that were, by any standards, simply immense.

The Signal Hill oil field, for example, east of Long Beach, was discovered in 1921. The original reserve volumes are estimated at more than 1 billion barrels, and the number will never really be known, due to poor record keeping over many decades up until the 1950s. Early in its development, the locals called it "Pin Cushion Hill," due to the literally thousands of wells that went down to produce oil. The place had more wood on it than many mountains of the Sierra Nevada; the trees of the Sierra Nevada were cut down and used to erect derricks and pumping facilities. Today, the oil operations are still being carried out by a company called, appropriately enough, Signal Hill Petroleum Inc. Oil wells are located side by side with $1 million homes, and peoples' backyards have easements crossing them for gathering pipelines and water injection lines. Unlike in the past, however, the modern operations are pumping large volumes of water to obtain the relatively smaller volumes of oil. Still, this pays for itself, and overall produces quite a bit of petroleum.

The Wilmington Oil Field, for another example, discovered in 1936, is utterly gigantic. It stretches from Torrance in the northwest to offshore Long Beach and farther to the southeast. It is 16 miles long and 4 miles wide, with original reserves of over 1.4 billion barrels onshore and 1.2 billion barrels offshore, for a total of 2.6 billion barrels. Oil-producing beds have been located at depths between 2,000-10,000 feet, and there are probably additional oil-producing zones that have not been accessed. The field may extend to the southwest, under Pacific Palisades, but we cannot say for certain, because there has been little drilling in that pricey locale over the years. The homeowners in the area have kept the drillers out. Again, much of the original oil has been removed, but there is still a lot left to recover.

There are other oil fields in places that are well known to many people familiar with Los Angeles, but the locales are not exactly known for their oil production in the public perception. There are oil fields beneath such high-end locales as Huntington Beach, Newport Beach, El Segundo, Los Angeles downtown, Century City, Cheviot Hills, and even Beverly Hills. Beverly Hills High School has oil wells right next to the football field. One drill site with more than 60 wells, drilled directionally to as far as a mile from the surface entry and casing, is located in what looks like a 10-story office building, all of two blocks from the Beverly Hills city line. Director Steven Spielberg's mother lives down the street. And lore has it that the "Jed Clampett" of the TV show The Beverly Hillbillies fame was named after a local Los Angeles mineral rights owner of that same name ("J.D. Clampett") who is now immortalized by the whim of a scriptwriter.

All in all, there are 55 known oil fields in the Los Angeles area, with something over 30,000 producing wells and an equal number of older, plugged, and abandoned wells. (There may be far more than 30,000 wells, but the number is not known, due to poor record keeping in the good old days.) Something like 9 billion barrels of oil has been extracted from the rocks over the past century or so. Much of the contemporary oil production involves pumping "oil-stained water," but as I noted above, it adds up to quite a bit of extraction per day.

There are probably more oil fields that could be found beneath the streets of LA, because almost all of the past exploration in the urban part of the basin was performed before the mid-1960s. By the late 1960s, the public perception of the oil industry had turned negative, and even the likes of the well-connected Armand Hammer and his Los Angeles-based company Occidental Petroleum could not get drilling permits in most parts of the Los Angeles region. So the past 40 years have been a time of oil companies extracting product from existing wells, maintaining what wells they have, and very occasionally extending or redrilling an aging well. There is virtually no "modern" seismic work going on, and very little drilling. Even redrilling old wells takes a lengthy permitting process, and there is quite a bit of political opposition from people who don't think twice about turning the keys and starting the engines of their nice cars.

The potential for new oil discovery is there, though. There is really no way that the early oil exploration found "all" of it. The hydrocarbon traps are far too subtle and stacked, deeply buried, and truncated by extensive faulting and permeability pinch-outs. So the older forms of exploration found only the obvious deposits, not the more clandestine deposits. In the modern oil industry, advances in the field of sequence stratigraphy, structural modeling, and seismic methodology, coupled with directional drilling and what is called "extended reach drilling," have made it possible to find and extract such deposits. And it would be quite possible, from a technical standpoint, to drill the oil deposits even in a built-up urban area such as Los Angeles. But these oil deposits will probably never be drilled, due to modern city development, coupled with NIMBY attitudes and political opposition.

The Wealth Beneath the Streets

Los Angeles is an immensely wealthy area. There is money from the entertainment industry, manufacturing, transportation, banking, and many other lines of work, both legal and illegal. LA is an immense city, filled with people from every corner of the world. But most people have no idea of the vast oil wealth beneath the streets of metropolitan Los Angeles -- even most Angelinos, to include many Angelinos who live literally next door to an oil pump. Why is this? I suppose because all are busy living their own lives and worrying about their own issues.

But one way or another, we are all products of the Oil Age. No one can escape this fact. Oil makes modern society what it is. You drive it, you fly it, you wear it, and you eat it. In Los Angeles, you certainly breathe it. Even NIMBYs drive hummers, and in tony, high-rent Beverly Hills, people live on the oil patch, and I don't just mean the mythical Jed Clampett.

Until we meet again...
Byron W. King

for Whiskey and Gunpowder

Bio: Byron 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.

Stalin Lives! - Byron King

by Byron King

YES, DEAR READERS, Stalin lives on Russian television. The Los Angeles Times recently published an article on the late-deceased absolute leader of the late-deceased Union of Soviet Socialist Republics (USSR), and on that I will comment shortly. But first, allow me to explain the byline.

I am in Long Beach, California this week, attending the annual convention of the American Association of Petroleum Geologists (AAPG). Why not? I have been a dues-paying member of AAPG for 30 years (even during my Navy days) and have learned quite a bit about the world of oil and gas by participating in the organization and reading its many excellent publications.

As for the annual convention, a lot of the premier oil finders in the world are here in Long Beach, as well as people from many of the critical vendors who sell articles and services to the oil industry. Everyone is gathered together to talk shop and compare notes about what is going on in the energy industry, from remote sensing to seismic, from exploration prospects to drilling decks, from total depth to the pipelines.

So this convention is exactly where I ought to be, considering that my beat is oil and other natural resources. And yes, it means that I must travel to sunny Southern California. It's a tough job and somebody has to do it. But I do it all for you, dear readers. As the week wears on, I will be writing about the AAPG convention, and you can be certain that the best of the information that I pick up here will find its way into future articles in Whiskey & Gunpowder, as well as into the other Agora Financial publication for which I write, Outstanding Investments.

The Man of Steel

I mentioned above that last week the LA Times published an article about a television series currently being broadcast on Russian television concerning Joseph Stalin. This prompts some thoughts about the late comrade and generalissimo, and what the revival, if not the rehabilitation, of Stalin's legacy may tell us about what is happening in Russia.

The man's real name was Iosif Vissarionovich Dzhugashvili, born 1878 in Georgia, and died 1953 in Moscow. Early in his adult life, Dzhugashvili studied for the Russian Orthodox seminary. But not long into his godly pursuits, he gave up notions of sacrificing material things on Earth for the prospect of gaining them in heaven. Instead, young Dzhugashvili pursued material things on Earth, adopting and embodying a hard line of Marxism and communism in the process. Through his own brand of that ideology, the man pursued these material things with a vengeance. "The death of one person is a tragedy," he once commented. "The death of a million is a statistic." You have to be a hard, cold person to think like that. And the Georgian adopted a name that suited his character. He called himself Stalin, which in Russian means "man of steel."

One would truly have to be a child who was, as the modern expression goes, "left behind" in school not to have heard about and to know at least something of Stalin. Stalin was one of the key players in the Bolshevik Revolution of Russia in 1917. He worked with Vladimir Lenin to found the USSR out of the remains of the Russian monarchical government. After Lenin's death in 1924, a death in which some scholars believe that Stalin played a role, Stalin rose rapidly to power in the USSR and ruled that nation with a grip of...well, with a grip of steel, until his own demise due to complications from a stroke. Yes, a stroke. At least that is what the Soviets said about how Stalin died, back in 1953. Not long afterward, they blamed a conspiracy of Jewish doctors.

Stamp out Religion in Russia

After seizing power in the 1920s, Stalin, the former seminarian, moved to stamp out religion in Russia, a place where Orthodox Christianity had traditionally been thought of as part of the very soil. Thousands of churches were destroyed, and the clergy sent away, which in Russia is very far away (to Siberia). As the 1920s and 1930s wore on, Stalin presided over the collectivization of property in Russia, to include establishing state ownership of essentially all resources both natural and man-made. Stalin collectivized Russian agriculture and drove off or killed any who opposed him, and many who did not. Similarly, Stalin forced a pattern of massive heavy industrialization on Russia, at something approaching a breakneck speed. And he broke many necks in the process. Stalin's secret police arrested and imprisoned anyone who was considered an enemy of the state, and of those there were many. Stalin was responsible for the deaths of well over 20 million of his fellow Soviet citizens, "a statistic" in his words, but a statistic that staggers the mind.

Brethren

In the late 1930s, Stalin purged his army of tens of thousands of its most senior and experienced officers. And then, in 1939 through his foreign minister Molotov, Stalin signed a nonaggression pact with Germany and its leader, Adolph Hitler. When Hitler's German armies attacked Russia in June 1941, they sliced through the ineptly led Russian formations and battered their way to the gates of Moscow. When, in July 1941, Stalin initially addressed his Soviet people to urge resistance to the Germans, the first word out of his mouth called his millions of listeners "brethren," a devout reference back to his seminarian days, and to the ancient Orthodox religion that he had done so much to destroy. When all else was failing, Stalin attempted to enlist God into the Red Army.

A Common Soviet Soldier

During the war with the Germans, Stalin's son Yakov was captured by the invading troops. At one point, the Germans sent a message offering to bargain with the Soviets over the return of Yakov. Stalin replied with words along the lines that the leader of the Soviet Union does not concern himself with the fate of a single "common Soviet soldier." Yakov eventually died in German captivity. The Man of Steel had settled the issue.

The fate of this "common Soviet soldier" concerns us in this article because a rather idealized and sentimental, even maudlin, version of Stalin's relationship with his son forms part of the background to a 40-part series currently running on Russian television, called "Stalin Live." The theme of the show is a rather flattering portrayal of an elderly Stalin, a few weeks before his death, recalling and flashing back to events from the past. The show is presented as a history of the Stalinist period in the USSR, as recalled by the "Best Friend of Soldiers" himself.

The Legend of Stalin

To admirers of Stalin, of whom there are many in Russia today, the show is an educational and informative vehicle by which to bring the legend of Stalin to a younger generation of Russians. To many critics, however, the show is a long campaign of historical distortion and outright propaganda that glosses over and whitewashes the inexpiable crimes of a horrific dictator.

Georgian actor David Giorgobiani, who plays Stalin in the series, states that "Many more years have to pass before we can make an unbiased judgment on that great man [sic]...One hundred years from now, no one will pay attention to the fact that so many people perished and the costs were so terribly high." In reference to the war against the Germans, Giorgobiani states that "Everyone will remember that such a great country was saved" by Stalin.

However, Danill Dondurey, editor of a film-themed Russian newspaper, states that "In the show, Stalin is portrayed as the savior of the people, the country, and all of civilization, the leader who destroyed fascism...Not for a split second do we see Stalin soaked in blood up to his elbows, as he really was." And because the TV series is focused on Stalin just before his death, there is no plot device through which to offer the perspectives of Stalin's contemporary critics. There were, of course, those who knew Stalin well, such as Nikita Khrushchev who as Soviet premier later gave the famous "anti-Stalin" speech that denounced much of Stalin's legacy and sowed the seeds of the illegitimacy of the founding myths of the USSR.

"The message is clear," states Dondurey. "Russia needs a wise leader...The main goal of this show is to preserve and nurture in the people the desire to obey a supreme leader, to take pride in having a supreme leader, to see no alternative to this model in the development of society."

Apparently, this message is getting through, if not touching nerves. The LA Times article quotes one satisfied Russian who has a fond recollection of the good old days. States one fan of the series, a viewer named Viktor Kurenkov, "Under Stalin, we had the best weapons, the best planes, the best tanks. He built the country that was first to send a man into space. As for the repressions attributed to him, their scale was always exaggerated."

Mr. Kurenkov's sentiments are not exactly a minority view in Russia. In fact, no less an authority and scholar of the USSR than Russian President Vladimir Putin has called the demise of the USSR "the greatest geopolitical disaster of the 20th century."

A Word From the Sponsor

Interestingly, the Russian network NTV, which broadcasts the Stalin series, is owned by the state-controlled entity Gazprom, the massive energy company that has effective monopoly control over the vast natural gas resources of Russia. According to editor and critic Dondurey, by sponsoring and broadcasting such a program that glorifies the Stalinist past, the Russian state is essentially promoting and encouraging the trend toward authoritarianism in contemporary Russian political life. So the broadcast of the "Stalin Live" show is not exactly the equivalent of, say, Texaco sponsoring the New York Metropolitan Opera over the past many decades.

The show's producer, Grigory Lyubormirov, states that his goal is to portray both the historical Stalin and the myth of Stalin. "Our Stalin is not only Joseph Dzhugashvili. It is Comrade Stalin, (whose) myth is still alive in the minds of Russian citizens." No doubt it is.

Lyubormirov goes on, "I categorically refuse to show Stalin as a paranoid, bloodthirsty wolf, because everything Stalin did had ironclad logic to it...Stalin was doing all that for logical reasons. Stalin was responsible for everything that happened in the Soviet Union after 1924, everything good and everything bad."

The Medium and the Message

So we see in Russia a popular television program, sponsored by energy giant Gazprom, which tends to glorify Stalin and the days of his dictatorial reign over the USSR. The show depicts Stalin in the context of using communism and political repression to build a strong nation, defend Russia against foreign invasion, and save the Soviet state, if not the world, from German fascism. The series glosses over the almost bottomless, decades-long brutality of the Stalinist period. The series also elevates Soviet Communist cultural myth over historical reality, and recalls how a supreme leader was able to offer some semblance of what the producer depicts as domestic stability and security from external threat to the Russian people.

All of this may well be emblematic of the current political evolution within Russia. There is no question that Stalin was a critical player on the history of the 20th century, and understanding Stalin is helpful to understanding how our world came to be in its present state. But the message of the Russian series "Stalin Live" is ominous, particularly because it fits with so much else of what we are currently seeing in Russia, particularly in the area of Russian resource nationalism.

That is, the Russians are going out of their way to rewrite and reform, if not simply to renege and abrogate, agreements from the 1990s. Their goal is to recover Russian state sovereignty and control over natural resources from any semblance of foreign control, particularly foreign control over energy resources. The recent well-publicized troubles that Exxon and Shell have had with their projects on the Russian island of Sakhalin, or BP and the Sakhalin gas project in northern Russia, fit neatly into this new political paradigm. To the extent that any foreign business interests are permitted to operate in Russia, especially energy interests, it is only so long as they play the game, suffer along with whatever indignities are hurled their way, and look the other way when the Russian state displays its iron fist.

As more than one nation has learned to its eventual sorrow, the Russians will go their own way in this world. And it is not as if we in the West could (let alone, should) ever muster, let alone apply, sufficient resources to change the fundamental trajectories of Russian history. But we should at least understand the risks inherent in where the world's largest country is headed. And wherever that trajectory is headed, it is not reassuring to learn that a show distorting history and glorifying Joseph Stalin is among the most popular items on Russian television.

Until we meet again...
Byron W. King

for Whiskey and Gunpowder

Byron 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.

The 2008 Federal Budget - Ron Paul

by Honorable Dr. Ron Paul

The fiscal year 2008 budget, passed in the House of Representatives last week, is a monument to irresponsibility and profligacy. It shows that Congress remains oblivious to the economic troubles facing the nation, and that political expediency trumps all common sense in Washington. To the extent that proponents and supporters of these unsustainable budget increases continue to win reelection, it also shows that many Americans unfortunately continue to believe government can provide them with a free lunch.

To summarize, Congress proposes spending roughly $3 trillion in 2008. When I first came to Congress in 1976, the federal government spent only about $300 billion. So spending has increased tenfold in thirty years, and tripled just since 1990.

About one-third of this $3 trillion is so-called discretionary spending; the remaining two-thirds is deemed “mandatory” entitlement spending, which means mostly Social Security and Medicare. I’m sure many American voters would be shocked to know their elected representatives essentially have no say over two-thirds of the federal budget, but that is indeed the case. In fact the most disturbing problem with the budget is the utter lack of concern for the coming entitlement meltdown.

For those who thought a Democratic congress would end the war in Iraq, think again: their new budget proposes supplemental funds totaling about $150 billion in 2008 and $50 billion in 2009 for Iraq. This is in addition to the ordinary Department of Defense budget of more than $500 billion, which the Democrats propose increasing each year just like the Republicans.

The substitute Republican budget is not much better: while it does call for freezing some discretionary spending next year, it increases military spending to make up the difference. The bottom line is that both the Democratic and Republican budget proposals call for more total spending in 2008 than 2007.

My message to my colleagues is simple: If you claim to support smaller government, don’t introduce budgets that increase spending over the previous year. Can any fiscal conservative in Congress honestly believe that overall federal spending cannot be cut 25%? We could cut spending by two-thirds and still have a federal government as large as it was in 1990.

Congressional budgets essentially are meaningless documents, with no force of law beyond the coming fiscal year. Thus budget projections are nothing more than political posturing, designed to justify deficit spending in the near term by promising fiscal restraint in the future. But the time for thrift never seems to arrive: there is always some new domestic or foreign emergency that requires more spending than projected.

The only certainty when it comes to federal budgets is that Congress will spend every penny budgeted and more during the fiscal year in question. All projections about revenues, tax rates, and spending in the future are nothing more than empty promises. Congress will pay no attention whatsoever to the 2008 budget in coming years.

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.

Global Threats Leading to the Leftist/Marxist – Islamist Takeover

by David J. Jonsson

In order to understand the issues faced by the West 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 worldwide.

The future enemies of Europe and the United States will be a mutation of current and past foes both domestically and internationally. In confronting these forces, knowledge of their ide­ologies, objectives and determination will make all the difference. The domestic foes may be either sympathizers or via actual operatives. In the period following the downfall of the Soviet Union, this is the first time that favorable conditions have emerged on the side of the Leftist and Islamists around the world to challenge the hegemony of the West.

The USS Nimitz and its support ships will be departing San Diego Monday, April 2, to join the John C. Stennis Strike Group in the Persian Gulf. The nuclear carrier is due to relieve the USS Dwight D. Eisenhower , but military sources in the Gulf believe all three US carriers will stay put if tensions continue to climb or if fighting breaks out involving American, British and Iranian forces. The mighty American armada is further supported by the USS Bataan and USS Boxer strike groups. See: DEBKA File of March 30: US financial sources in Bahrain report American investors in Bahrain advised to pack up business operations and leave.

The Iranian hard-line faction of President Mahmoud Ahmadinejad and Gen. Rahim Safavi, commander of the Revolutionary Guards whose naval wing performed the seizure of the British Sailors have gained the upper hand after British premier Tony Blair’s initial passive, semi-conciliatory response. The escalating row has pushed oil prices higher and hence increased funding to Iran and their alliance – a win for the enemy. The U.N. Security Council agreed to a watered down statement expressing "grave concern" and calling "for an early resolution of this problem, including the release of the 15 personnel. Britain had wanted a tougher stance, but after hours of negotiations, Russia blocked a statement that would have demanded an immediate release of the British crew.

Washington has refused to risk of a full-scale war confrontation with the Revolutionary Guards for the sake of the British sailors. The actions of the Pelosi Democrats in the U.S. Congress actions on Iraq funding has also emboldened the Iranians and King Abdullah of Saudi Arabia making an unprecedented public attack on America, condemning the "foreign occupation" of Iraq by his oldest ally. In the article: Evil Americans, Poor Mullahs: published in Spiegel online March 29, “Forty-eight percent of Germans think the United States is more dangerous than Iran, a new survey shows, with only 31 percent believing the opposite. Germans' fundamental hypocrisy about the US suggests that it's high time for a new bout of re-education…The German political establishment, which will no doubt loudly lament the result of the poll, is largely responsible for this wave of anti-Americanism.” On the Iranian’s wish list is the annihilation of Israel. See also: Will Arab Muslim "Allies" Support the West in a Time of Crisis? by David J. Jonsson

The lack of attention to plan and address the dangers of dependence on imported oil from the Middle East and Venezuela has allowed the transfer of enormous financial reserves to these countries to fund their development for control. Europe’s nightmare is further compounded by the potential for a world natural gas cartel. The Leftist/Marxist — Islamist Alliance through joining together a global cabal of nations for the control of the world’s energy infrastructure, finance, media and transportation assets present a real and current danger to the West.

Russia has effectively created a noose around Europe controlling their import of natural gas. The threat is as equally potent as their nuclear weapons. It is important to recall the events leading to the Euro-Arab Dialog (EAD), Oil Embargos, and European appeasement of the Islamic world following the Yon Kippur War in 1973 which lead to export of Islamization to Europe. See: Islamic Economics and the Final Jihad – The Muslim Brotherhood to the Leftist/Marxist – Islamist Alliance by David J. Jonsson pg. 204-210.

The world’s natural gas exporting countries will gather in Doha on April 9 for a forum that may set the grounds for a new natural gas cartel built on the rules of OPEC. The cartel, which for a start would bring together Russia, Iran, Algeria, Qatar and Venezuela, aims at becoming the most important energy player worldwide. See: Europe's nightmare: A world natural gas cartel.

The most important supporter for such a cartel is Iran, the world’s second largest natural gas producer, which is forced especially by political reasons to create a mechanism of control over the international resources market. Iran and Russia can form an OPEC-like organization because these countries hold some half of the gas reserves in the world; Ayatollah Ali Khamenei was recently quoted as saying.

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 joined by Islamists, 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.

We have lived for some years of peace following the “End of the Cold War” and we are now facing the prospect of moving to a disordered world from which the West cannot hide.

All of us would prefer years of repose to years of conflict. But history will not allow it. And so it once again rests with us to do what we have done in the past: it is our duty. We must win and we will win.

Questions That Need to Addressed

1. What do you the people of Europe and America want our future to be?

2. What do you leave behind?

3. Who are the potential enemies?

4. What are the goals of our enemies?

When we have answered these questions, we can then discuss a strategy to maintain our faith, culture, freedom, liberty and Western Democracy as we know it.

Threats for Consideration

1. The Conflict of ideologies

2. Pacifism, Self-hatred, and Complacency

3. The Increasing Number of Countries with Ballistic Weapons

4. Nuclear Proliferation

5. Increasing Military Strength of Russia And China and Now Joined by Middle East Countries and Even The Non-Aligned Nations.

6. The Rise and Increased Strength Transnational Entities Utilizing Political Action and Potentially Weapons of Mass Destruction

7. The Rise and Increased Strength Transnational Entities Utilizing Political Action and Potentially Weapons of Mass Destruction

8. Conflicts Arising Over the Control of Natural Resources – Energy, Raw Materials

9. The Disordered World Beyond

Conflict of Ideologies

Samuel Huntington wrote the popular book The Clash of Civilizations a few years ago. He spoke of the coming conflict between the West and Islam. As I see it we are now facing an even greater threat with the clash of ideologies. The conflict of ideologies extends beyond the conflicts with Islam and extends to the battles we are facing even within our own culture.

The Clash of Ideologies is often overlooked in both our political conflicts here in America as well as within the Jihadist movement.

The Jihadists drive to instill Islamic law into Muslim society, and ultimately recreate that society under their interpretation of the law, which often translates into an endorsement for violent jihad as practiced by bin Laden and others. Ideology is often overlooked and is considered separate from the strategic and operational aspects of Islamist militancy. The ideology of this movement is similar to, or even worse than, the Nazi ideology, and that it should be dealt accordingly. Therefore, I still believe that one of the primary missions of the international community today is to repeat its experience with Nazism and to deal with this dangerous barbarian culture exactly as it dealt with the Nazi culture. If this does not happen, the near future is liable to bring many events, the consequences of which will be far more severe for all of humanity than the consequences of World War II. See also: The War Against Global Jihadism by Peter Wehner deputy assistant to the President and director of the White House’s Office of Strategic Initiatives.

Now let’s go to the ideological movements in the U.S.

Dinesh D’Souza the Rishwain Fellow at the Hoover Institution commented in the article Pelosi’s crew and Osama bin Laden share common goal “The Pelosi Democrats sometimes appear to be just as eager as Osama bin Laden for President Bush to lose his war on terror. Why do I say this? Because if the Pelosi Democrats were seeking Bush’s success, then their rhetoric and actions now and over the past three years are pretty much incomprehensible. By contrast, if you presume that they want Bush’s war on terror to fail, then their words and behavior make perfect sense. From the point of view of new House Speaker Pelosi and her fellow liberal Democrats, bin Laden today is, well, a small problem…Listen to Pelosi and her colleagues on the left speaking about Bush, however, and it’s clear they regard him as a very big problem.”

“Sen. Robert Byrd compares Bush to Hermann Goering and the Nazis. Hillary Clinton accuses him of “turning back the clock on the 20th century ... systematically weakening the democratic tradition. ... There has never been an administration more intent upon consolidating and abusing power.” Sen. Ted Kennedy charges that “no president in America’s history has done more damage to our country than George W. Bush.””

“Whether it realizes this or not, the Bush administration is facing a kind of liberal-Islamic alliance: a sympathetic relationship that leading leftists in America have with Islamic radicals around the world. I’m not suggesting the two groups actually like each other. Actually, they despise each other. Leftists like Pelosi, Barney Frank and Michael Moore despise bin Laden and his fellow radicals because they are religious fundamentalists who want to impose Islamic [Shariah] holy law. That means goodbye to women’s rights and gay rights and, in all candor, goodbye to people like Pelosi, Frank and Moore. By the same token, Islamic radicals like bin Laden detest the American left because, as they see it, the left is the party of atheism, family breakdown and cultural depravity. The left is in the vanguard of imposing secularism and libertine social values not only in America but also abroad.”

“But the man who threatens the Islamic radicals and the American left even more than either group threatens the other is Bush. Leftists don’t like radical Muslims like bin Laden but they absolutely hate Bush. Why?

“Because from the Cultural left’s point of view, bin Laden threatens to impose Shariah in Baghdad but Bush threatens to impose Shariah in Boston. Bin Laden is the far enemy but Bush is the near enemy.”

To quote Dinesh D’Souza in the introduction to his book: THE ENEMY AT HOME:

“What they hate is conservative America. [They] are fiercely loyal to the American values that they cherish, and it is in the name of those values that they are ready to take on the Bush administration. The lesson of these examples is that the cultural left is unwilling to fight a serious and sustained battle against Islamic radicalism and fundamentalism because it is fighting a more threatening political battle against American conservatism and American fundamentalism. The left cannot support Bush’s efforts to promote liberal democracy abroad because it is more important for the left to reverse the nation’s conservative tide by defeating Bush and his socially conservatives allies at home. In other words, the left’s war is not against bearded Muslims who wear long robes and carry rifles; it is against pudgy white men who wear suits and carry bibles. While the left is certainly not comfortable with Islamic mullahs, it is vastly more terrified of George Bush, Dick Cheney, Antonin Scalia, James Dobson and Rush Limbaugh.”

See also Michael Medved’s article of March 21 The Essence of Liberalism: Embracing Life’s Losers which described what constitutes the essence of modern liberalism.

Fr. John Malloy, pastor of Saints Peter and Paul Church in San Francisco, penned an “Open letter to Nancy Pelosi,” on February 1, in the letter he commented:

“Nancy, you are fooling yourself and I fear fooling many good Catholics. You are simply not in sync with the Catholic Church. Until you change your non-Catholic positions, you should stop calling yourself Catholic. Your record shows that you support embryonic stem cell research, Planned Parenthood, contraception, family planning funding, allowing minors to have an abortion without parental consent, and are against making it a crime to harm a fetus, etc. etc.”

“Do we not elect politicians to make laws that help people honor their responsibilities, such as protecting life itself? Can politicians not tell someone else not to kill? If you can kill a baby in the womb, Nancy, why not outside of it? Oh wait, you are in favor of partial birth abortion, so-called because the baby sticks out of the “mother” about halfway, while the “doctor” sucks out the baby’s brain. That seems comparable to the choice the Nazis made killing six million Jews.”

“Yes, Nancy, we (together with your pro-life family) would all like it if you were not so vocally pro-choice, i.e. pro-death. Until your choice is in line with Catholic doctrine, please, Nancy, do not receive the Eucharist when you attend Mass.”

Why? From the vantage point of many cultural liberals, Christians are as dangerous as Islamists, and President Bush is no less a threat than Bin Laden.

Dr. Ayman al-Zawahiri Echoes the Mantra of the Cultural Liberals

There was a time after 9/11 when the release of an al-Qaeda videotape would create a major stir among Americans and would be covered by the major news networks. These days, many dismiss the tapes as little more than propaganda.

The voice of Dr. Ayman al-Zawahiri, the number two individual in al-Qaeda, is featured in a new twenty-one minute speech titled: “Palestine is Our Concern and the Concern of Every Muslim”, which was issued by al-Qaeda’s multimedia production arm, as-Sahab, on March 11, 2007.The SITE Institute has some relevant excerpts from the new tape.

In the tape Zawahiri argues “… for physical jihad [and] that American strength is waning and is suffering from defeats in Iraq and Afghanistan… Continuing to build a case against Western moral bankruptcy in its relationship with Muslims, Zawahiri cites hypocrisy in trials involving the International Criminal Court, particularly as it relates to genocide in Bosnia and war crimes in Darfur. He questions: “Who gave these murders the right to appoint judges to interfere in the affairs of Muslims? What right does the Security Council have to interfere in the affairs of Muslims, and set up the courts which acquit this one and condemn that one, when the hands of its criminal members drip with the blood of Muslims in Iraq, Afghanistan, Palestine, Algeria, Chechnya and East Turkistan? How can America refer the case of Darfur to an international court which it itself doesn’t recognize and refuses to be subject to? What sort of tyranny is this world ruled by?”

Zawahiri calls upon Muslims to reject politics and engage in jihad against the enemy. He states: “they must continue their Jihad in Allah’s path until the liberation of every land of Islam invaded by the infidels, from Spain to Iraq, and until the Word of Allah is supreme and the Caliphate returns to protect the sanctuary of Islam and spread its Shariah.”

President Bush’s plea for more patience with the Iraq war on March 19, as House Speaker Nancy Pelosi said the nation has lost confidence in the president’s “failed approach.” Senate Majority Leader Harry Reid added that Democrats won’t give up on efforts to bring an end to the war. Nancy Pelosi and Harry Reid and the despicable John Murtha announce to the nation that we are losing the war, and moreover, can’t possibly win it. You really have to hate America and its people to lust after the defeat of your own country. Yet aside from Osama bin Laden and his crews of merciless killers, the people most dedicated to seeing the United States defeated in a battle for the future of the world are the liberal Democrats now feebly trying to run the Congress.

Decades from now, historians will discover that the United States, the West and the international community were being targeted by global ideologi­cal movements which emerged in the 1920s, survived World War II and the Cold War, and carefully chose the timing of its onslaught against democracy.

Pacifism, Self-hatred, and Complacency

If one looks at the military strength of the West compared to Iran, victory would seem to be inevitable, even if Iran acquires nuclear weapons. Iran does not have the military machine that the Axis powers had in World War II, nor the Soviet Union during the cold war. The Leftist/Marxist – Islamist Alliance may be more effective than the earlier totalitarian movements operating individually. They could even win. That’s because, however strong the Western hardware, its software contains some potentially fatal bugs. Three of them – pacifism, self-hatred, and complacency combined with the Oil Weapon could provide needed horsepower to succeed. See also: How the West Could Lose by Daniel Pipes December 26, 2006.

“It’s always amazed me how quickly the American left managed to twist the 9/11 attacks into a club with which to beat their own country. I recall watching the smoke from the towers late in the day, exhausted from stress and emotions I could scarcely identify, and thinking,” They’ll never be able to defile this.” It was the end of the postwar flirtation with apostasy, I thought, the end of political frivolity, the birth of a new kind of patriotism, one annealed by fire, one that would become part of framework of the country, one that would last.” See: Breaking the Hold of Hegemonist Doctrine by J.R. Dunn writing in Real Clear Politics.

“But after what in retrospect appears to be a pitifully short period, they were back, and in force, and they have never retreated since. Contrary to consensus belief, it didn’t begin with Iraq. It began with Afghanistan, starting only a month after the attacks, and built up from there. The Leftists Michael Moore, the Dixie Chicks, Cindy Sheehan, Cynthia McKinney, Durbin, Murtha... The list could go on for page after page, all of them speaking in identical terms, all repeating the same code words - Halliburton, blood for oil, Abu Ghraib - all tearing into their country in a fashion unseen even in the Vietnam era.”

Dennis Prager writing on Townhall on July 6, 2004 Michael Moore and the Problem of American (And Jewish) Self-Hatred commented:

Many on the American Left loathe America (they love the Constitution and their vision of what America could be) and have contempt for the average American. That is why most of the Left has such admiration for Michael Moore… Elsewhere, he speaks of America as bringing immeasurable misery and sadness to the world and as essentially deserving attacks on it.

I would add that the supporters with the three fatal bugs have joined forces in the Leftist/Marxist – Islamist Alliance and further they have joined in the supporting the apocalyptic ideologies. See: Iraq, Iran, Global Warming and The Apocalypse by David J. Jonsson. Both the Green and Islamist movements seek social transformation of society. The Islamist in seeking to establish the “Islamic kingdom of God on earth,” not necessary though military might but through gradual Islamization including economic means as described in the paper: Islamic Economics and Shariah Law: A Plan for World Domination by David J. Jonsson.

The Increasing Number of Countries with Ballistic Weapons

Iran’s push for nuclear weapons is accompanied by its development of ICBMs. The threat of a nuclear armed Iran is no longer just a problem for Israel and their Arab neighbors. Iran’s development of ICBMs that could reach Washington DC brings the threat home with added urgency. The nuclear Iran is not just a local issue.

Iran has just completed conversion of a powerful ballistic missile into a satellite launch vehicle. But the 25-30-ton rocket could be a wolf in sheep’s clothing to test longer-range Iranian missile technologies. The Bush administration will likely view the vehicle as a rogue rocket developed in a cabal of Iran and North Korea. The new launcher has recently been assembled and “will lift off soon,” says Alaoddin Boroujerdi, chairman of the Iranian parliament’s National Security and Foreign Policy Commission.” Said Aviation Week in their article of January 17, 2007, Shia Islamic satellite set for liftoff on ICBM cloaked as space booster,. And Iran did it!

An Iranian ICBM with a range of nearly 2,500 miles could reach as far west as Central Europe and well into Russia, China and India. The U.S. Defense Intelligence Agency has told Congress that Iran in fact may be capable of developing a 3,000-mi.-range ICBMs by 2015.

It is also troubling that Russia has provided $700 million in surface-to-air missiles to Iran and eight new aerial refueling tankers to China, according to a new Congressional study. A major strength of the U.S. military establishment is our ability to refuel our aircraft in flight and ships at sea. Russia is also providing weapons to Venezuela. The sales to improve Iran’s air-defense system are particularly troubling to the United States because they would complicate the task of Pentagon planners should the president order air strikes on Iran’s nuclear weapons facilities. The Russian weapon sales to improve Venezuela’s air-defense system are also troubling.

The Role of the Leftist

We can talk about ICBMs and all the other weapons being provided by Russia and China around the world. At the bottom line, the involvement of Mahmoud Ahmadinejad and the Iranian’s close relations with Chavez in Venezuela, his relations with Cuba and Nicaragua, places the threat just 90 miles from the shores of America. And, this relationship is supported by the Leftists with the likes of Chindy Shaheen and the anti-war activist organizations including Code Pink and United for Peace and Justice, and radical environmental organizations including Oxfam, Global Exchange and the RainForest Action Network. These groups have intent of destroying America from the inside.

As Americans enjoyed their Independence Day fireworks last year, Lieutenant General Trey Obering, the Pentagon’s Missile Defense Agency chief, was watching the pyrotechnics display that Kim Jong-il was providing thousands of miles away in North Korea.

The air force general thought the launch by Pyongyang of its previously untested Taepodong-2, an intercontinental ballistic missile with the potential to reach the US, could even provide the first live use of America’s ballistic missile defense system.

“We had turned the system on before but it was the first time that there was a credible threat,” says Gen Obering. The North Korean authorities “had put a missile out there that we felt was capable of reaching the U.S., and they were not telling us what was on top of that missile”.

The Taepodong-2 failed just seconds into flight. But eight months on, what refuses to die down is the controversy over the Pentagon program itself, in particular its roll-out to Eastern Europe. Despite enduring doubts about the scale of both the threat facing the US and the efficacy of missile defense, Washington’s wish to place interceptors for the system in Poland and radars in the Czech Republic has provoked a furious response from Russia and signs of cracks within NATO.

While the US argues that missile defense is essential to deal with the 21st century prospect of rogue states - such as North Korea or Iran - becoming armed with weapons of mass destruction, Moscow protests that the Pentagon’s scheme amounts to a remilitarization of Europe.

The Chinese Strategy for Sea-lane Denial

The Chinese strategy is control of space and sea-lanes. Therefore, it requires a sea-lane-denial strategy.

In January 2007, Aviation Week & Space Technology magazine, citing U.S. intelligence sources, has reported that China has successfully tested an anti-satellite (ASAT) system. According to the report, which U.S. officials later confirmed, a satellite was launched, intercepted and destroyed a Feng Yun 1C weather satellite, also belonging to China, on Jan. 11. The weather satellite was launched into polar orbit in 1999. The precise means of destruction is not clear, but it appears to have been a kinetic strike (meaning physical intercept, not laser) that broke the satellite into many pieces. The U.S. government wants to reveal as much information as possible about this event in order to show its concern -- and to show the Chinese how closely the Americans are monitoring their actions. This event opens up the totally new front to defend against. It is of the utmost concern to the United States military establishment. It is huge!

The Jan. 17 magazine report was not the first U.S. intelligence leak about Chinese ASAT capabilities. In August 2006, the usual sources reported China had directed lasers against U.S. satellites. It has become clear that China is in the process of acquiring the technology needed to destroy or blind satellites in at least low-Earth orbit, which is where intelligence-gathering satellites tend to operate.

Nuclear Proliferation

What is difficult to understand is that after the severe danger of nuclear war during the long decades of the Cold War, we are still only 30-minutes or less from nuclear incineration. The reason is that included among the 27,000 nuclear weapons stockpiled in the world, thousands of U.S. and Russian strategic nuclear warheads are on hair-trigger alert. The RAND Corporation reports these weapons could be launched in a few minutes notice destroying both countries in an hour.

Russia’s defense minister Sergei Ivanov on February 7 laid out a plan that aims to surpass Soviet-era military might. A rising tide of oil revenues has enabled Russia to boost defense spending following a squeeze on the military in the 1990s. Sergei Ivanov’s statements appeared aimed at raising his profile at home ahead of the 2008 election in which he is widely seen as a potential contender to succeed President Vladimir Putin. But they also seemed to reflect a growing chill in Russian-U.S. relations and the Kremlin’s concern about U.S. missile defense plans. See also the article: The Grand Chess Masters—The Bear and the Dragon by David J. Jonsson.

While Moscow has confronted fundamentalists at home head-on, it nonetheless pursues a policy of support for Iran and Syria—and, by extension, Hezbollah. In doing so, Russia’s foreign policy has become antithetical to its own national security.

The risk nuclear miscalculations is further increased by the expansion of the number of nuclear powers with the means available for delivery and transnational organizations such as Al Qaeda and Hezbollah acquiring nuclear materials.

Although some of the potential new entrants into the Nuclear Club are considered friendly, future regime change may make them unstable and future foes as occurred in Iran. Such a doomsday scenario could result from an accidental missile launch, an early warning system error, terrorism, miscalculation or simply desire for world domination.

The threat still posed by these stockpiles and the new entrants into the Nuclear Club, particularly in the wake of the Sept. 11 terrorist attacks, is so dire that Bulletin of the Atomic Scientists (BAS)--the keepers of the Doomsday Clock cited the issue as among their chief concerns last month when they moved the iconic measure of global security forward from seven to five minutes before midnight. The increasing danger is the proliferation of nuclear weapons states, now numbering eight or nine, along with the prospect of others joining this macabre club in the near future.

Nuclear arms races might emerge in regions other than the Middle East as well. Nuclear Armed Countries are arising in Asia. The Asian countries are becoming more nationalistic. Asia has many countries with major territorial or political disputes, including five with nuclear weapons (China, India, North Korea, Pakistan, and Russia). Japan and Taiwan could join the list. Most of these countries would have the resources to increase the size and quality of their nuclear arsenals indefinitely if they so chose. They also seem to be nationalist in a way that western European countries no longer are: they are particularly mindful of their sovereignty, relatively uninterested in international organizations, sensitive to slights, and wary about changes in the regional balance of military power.

Many of the components of the worldwide war with jihadism are con­centrated in Pakistan. So far, Paki­stan’s radical Islamists have been able to block their government from taking back control of the country’s western tribal areas and uprooting the funda­mentalist organizations in its east. But potentially even more dangerous is the possibility that jihadists could take control of Pakistan’s nuclear arsenal. In this context, the most seri­ous threat to the United States would be the collapse of the Musharraf gov­ernment and the Pakistani military at the hands of radical Islamists. Should this happen, the U.S. would be under direct nuclear threat from a nuclear-armed al-Qaeda regime—one that would have tremendous control over many other Muslim countries. See: The Truth About Talibanistan, Time August 2, 2006.

Asia might well be, “ripe for rivalry” -- including nuclear rivalry if the United States were to stop serving as guarantor of the current order. In that case, the region would raise problems similar to those that would be posed by a nuclear Middle East.

If and when the U.S. is able to lift its attention from the Middle East, it will be finding itself a much better placed and more formidable China.

Six states -- Morocco, Algeria, Tunisia, Egypt, Saudi Arabia, and the United Arab Emirates, according to the International Atomic Energy Agency are planning to go nuclear. In all six cases, they are talking only of developing civilian nuclear energy programs, as international law permits that. But no one doubts that this sudden interest in nuclear power has military implications.

Mark Fitzpatrick of the International Institute for Strategic Studies assumes these states want a “security hedge” vis-à-vis Tehran. “If Iran was not on the path to a nuclear weapons capability you would probably not see this sudden rush.” It also marks an abrupt reversal among states which until very recently had called for a nuclear-free Middle East, and for Israel to disarm.

Up to 30 more countries may develop atomic weapons if the proliferation of nuclear technology is not stopped, the IAEA—the UN’s nuclear watchdog has warned.

On February 6, 2007 according to the Burma Digest, Burma: A Potential Nuclear State (part-2) , the Foreign Minister of Burma claimed his support of nuclear proliferation of Iran. This is not the first time that the military regime of Burma openly mentions about its favor in nuclear technologies. It has announced to join the nuclear club since 2002.

Although its claims are based on civil use and medical research facilities, its actions to seek nuclear technologies and possible nuclear weapons are more obvious by means of sending the military engineers to Russia to study nuclear science and establishing the secret nuclear plants inside Burma.

Increasing Military Strength of Russia and China And Now Joined by Middle East Countries and Even The Non-Aligned Nations.

While we have addressed the buildup of weapons and military strength in the usually identified countries, the suppliers such as China, Russia, North Korea and Iran are providing weapons to the Non-Aligned Nations. Of particular importance to the United States is the buildup in Venezuela and Cuba.

While the Iraq crisis 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.

“Ever since the continents started interacting politically, some 500 years ago, Eurasia has been the center of world power…For America, the chief geopolitical prize is Eurasia—and America’s global primacy is directly dependent on how long and how effectively its preponderance on the Eurasian continent is sustained….How America manages Eurasia is critical. Eurasia is the globe’s largest continent and is geopolitically axial. A power that dominates Eurasia would control two of the world’s three most advanced and economically productive regions. A mere glance at the map also suggests that control over Eurasia would almost automatically entail Africa’s subordination, rendering the Western Hemisphere and Oceania geopolitically peripheral to the world’s central continent. About 75% of the world’s people live in Eurasia and most of the world’s physical wealth as well, both in its enterprises and underneath its soil. Eurasia accounts for 60% of the world’s GNP and about three-fourths of the world’s known energy resources.”

The U.S. faces potential conflict in Eurasia, the Mediterranean/Iraq/Iran, and the Horn of Africa and also in the Pacific with events in North Korea. With the backing of Venezuela and Cuba by Iran/China/Russia, conflicts could also erupt in the Caribbean.

Lionel Beehner, Staff Writer Staff Writer for the Council on Foreign Affairs on November 1, 2006 wrote in the article Russia-Iran Arms Trade: “Last year, Russia surpassed the United States as the developing world’s leader in arms deals, according to a new report by the Congressional Research Service (CRS). But Russia has increased military shipments to anti-U.S. states like Iran and Venezuela, not to mention potential adversaries like China, which concerns U.S. policymakers far more. Experts say Iran—as well as Syria—may have transferred some of these small arms to groups like Hezbollah and Hamas. Also, Russia’s arms relationship with Iran, the thinking goes, further complicates efforts to impose punitive sanctions against Tehran for its alleged pursuit of nuclear weapons.”

Russia, in addition to control of gas shipments to Europe from Central Asia, has also signed on to supplying weapons and security alignment with the Collective Security Treaty Organization, (CSTO). CSTO countries include Kazakhstan, Kyrgyzstan, Tajikistan, Uzbekistan, Belarus and Armenia. CSTO has also formed a military cooperation agreement with India. India and Russia have signed on August 20th, a far-reaching military cooperation agreement. Although not officially directed against the U.S., the purpose of this agreement is understood. The two countries have “agreed to focus on joint war games in services-to-services interaction, joint development of new weapons systems and training of Indian military personnel”, (Press Trust of India, 21 August 2006). Military-technical cooperation between Russia and India is worth $1.5 billion a year. The MiG Corporation is also taking part in an Indian tender to deliver 126 fighter aircraft valued at $6.5 billion. See also the article in Global Politician: Nuclear Proliferation — Options In A Perfect Storm by David J. Jonsson.

Beijing plans to build three aircraft carriers by 2016 and is putting the finishing touches with Rosoboronexport for the supply of 12 more SU-33s fighters, Ria Novosti reported. The contract can grow to 48 aircraft that would increase costs up to 2.5 billion dollars.

This agreement would be the second largest signed by Moscow in the field of military technical cooperation only surpassed by the authorized assembly, under license, of SU-30MKI fighters with India.

The Rise and Increased Strength Transnational Entities Utilizing Political Action and Potentially Weapons of Mass Destruction

Transnational entities such as al-Qaeda, Hezbollah, Hamas, the Muslim Brotherhood, the International Solidarity Movement (ISM) and their related organizations are gaining strength worldwide. They may achieve their goal of ultimately obtaining and ultimately using WMD. In some cases they are intimately linked with the Leftist/Marxist – Islamist Alliance. The mode of operation is to use terrorism, threats of terrorism, political action and participation in the “democratic process”. Their goal is to create a totalitarian new world order. The actions are occurring worldwide as seen in the elections in Lebanon, Palestine, Egypt, Pakistan, Bangladesh, and even in Spain.

Transnational Jihadist groups are operating worldwide. An example of such an organization is Hizb-ut-Tahrir -- Literally translated as “the party of liberation.” Reference: Critical Mass: Hiib rrt-Tahrir al-Islami and the Islamic Movement of Uzbekistan by Don Rassler at Columbia University December 3, 2006.

HT aims to reestablish an Islamic caliphate, which would be modeled after the unified Islamic State established by the Prophet during the seventh century. The method, “the only way to reestablish the kind of Islamic society promulgated by the Prophet,” al-Nabhani argued, “was to liberate Muslims from the thoughts, systems, and laws of kufr (nonbelievers) and replace the Judeo-Christian-dominated nation-state-system with a borderless ummah [community of believers] ruled by a new caliph.” [Creating the Islamic kingdom of God on Earth.]

Founded as a more nationalistic alternative to the Muslim Brotherhood by a Palestinian judge named Sheikh Taquiddin al-Nabhani the group defines itself as a nonviolent political organization, but allegedly “denounces all existing political systems."

The party’s general goal is to "resume the Islamic Way of Life and convey the Islamic call to the world. On a more specific level, however, HT aims to reestablish an Islamic caliphate, which would be modeled after the unified Islamic State established by the Prophet during the seventh century. The method, "the only way to reestablish the kind of Islamic society promulgated by the Prophet," al-Nabhani argued, "was to liberate Muslims from the thoughts, systems, and laws of kufr (nonbelievers) and replace the Judeo-Christian-dominated nation-state-system with a borderless ummah [community of believers] ruled by a new caliph.” See also: Caliphatism - Establishing the “Islamic Kingdom of God on Earth by David J. Jonsson.

Steps for the Destruction of the Existing International Order

Although authors differ about HT’s approach and commitment to a gradual and nonviolent process, it is clear that HT is dedicated to a radical goal: the destruction of the existing international order. In order to obtain their goal, the establishment of the caliphate and eventual Muslin rule, the leaders of HT believe they must follow three precise steps:

• First, the group must build the strength of the party by “cultivating individuals” through recruitment, propaganda and the establishment of study groups.

• Secondly, through more robust recruitment and encouraging “the ummah to embrace Islam” the group aims to covertly infiltrate government institutions and increase their efforts to create tension between society and those in power.

• The third and final step is the establishment of an Islamic state based on Shuria, which would unite the Islamic world, enabling it to spark a worldwide Islamic revolution.

The London website about Hizb ut-Tahrir is < http://www.hizb.org.uk/hizb/ht-britain.html>. On March 19, HTB launches Iraq report-exposing myths of occupation & charting new way forward for the Middle East. The report is being widely circulated amongst thinkers, academics, journalists, columnists, politicians and think tanks.

“The report also argues that “any discussion of withdrawal from only Iraq will not serve to end the legacy of Western colonialism in the Middle East” because “for the long term stability of the region it is essential that foreign troops withdraw from the entire region, for their meddling has led to almost a century of tyrannical rule, brutal occupation and instability.””

“The report advocates the withdrawal of all foreign military personnel in Iraq and the wider region, an end to the West’s support of dictatorial leaders in the region, allowing the Muslim world to decide its own political destiny without interference, freeing the region’s vast energy reserves from the control of monarchies and multinationals, recognition of the illegality of the occupation of Palestine and an end to double standards over nuclear power in the region.”

“In the light of this report, Hizb ut-Tahrir Britain and the Muslims of Britain call for the return of the Islamic Caliphate which will end the cycle of foreign occupation, dictatorship and war which has ravaged a region that previously prospered for over a thousand years under the stability of Islamic governance.”

According to Heritage Foundation in the article: Hizb ut-Tahrir: An Emerging Threat to U.S. Interests in Central Asia by Ariel Cohen, Hizb-ut-Tahrir is a “totalitarian organization, akin to a disciplined Marxist-Leninist party, in which internal dissent is neither encouraged nor tolerated.” A candidate member undergoes two years of indoctrination, becoming a full member only after he “melts with the Party.” Members belong to compartmentalized cells and know the identities of only the others in that cell. “When a critical mass of cells is achieved,” writes Cohen, “according to its doctrine, Hizb may move to take over a country in preparation for the establishment of the Caliphate.”

According to Zeyno Baran in the article Fighting the War of Ideas from the Foreign Affairs Journal November/December 2005:

HT is not itself a terrorist organization, but it can usefully be thought of as a conveyor belt for terrorists. It indoctrinates individuals with radical ideology, priming them for recruitment by more extreme organizations where they can take part in actual operations. By combining fascist rhetoric, Leninist strategy, and Western sloganeering with Wahhabi theology, HT has made itself into a very real and potent threat that is extremely difficult for liberal societies to counter.

“The original Columbus Free Press grew out of the anti-war movement on the campus of Ohio State University in Columbus, Ohio in October 1970. Inspired by the activism against the Vietnam War and the senseless killings at Kent State, the underground paper was published for a 25-year tumultuous history (1970-1995). Like other underground alternative publications around the country, the Free Press went through many changes through the years. It served as the voice of the students in the early 70’s, reporting on social justice issues such as sexism, racism, peace activism, corporate misdeeds, politics and the counterculture. Constantly struggling to survive on a shoestring budget, it encountered opposition from without and within. Internal ideological struggles were compounded, for example, when police arrested four of the editors in 1971 for “inciting riot.””

On March 7, 2005 they published an article Senator Byrd is correct to equate Bush with Hitler.

“Bush now holds some 2.2 million prisoners in the US gulag, the world’s biggest prison population since the Nazis both by absolute number and by percentage of population. At least 800,000 Americans are held for victimless “drug” crimes, including marijuana. Thousands die each year from torture, rape, suicide and treatable disease. The system is designed to remove from the political process and, in many cases, exterminate people of color, alternative life style and political dissidence.”

“Is this worthy of the Nazi label?”

“Fascism has long been clearly and simply defined as corporate control of the state, with strong totalitarian, militaristic, anti-feminist and anti-gay characteristics.”

“Both Mussolini’s Fascists and Hitler’s Nazis used acts of terror and alleged terror to grab absolute power. Ranting at Bolshevism as the GOP now does against Islam, the Nazis used the burning of the Reichstag much as the GOP has capitalized on the terror attacks of September 11.”

Senator Byrd’s invocation of the Nazis to describe the Bush regime may be considered impolitic. But it’s folly to ignore the important parallels.

“By all accounts American democracy is hanging by a thin thread which Bush/Rove is laboring mightily to cut.”

“Sen. Robert Byrd is a conservative, uniquely learned man. When he equates Bush with Hitler, he speaks with great sadness and scholarship -- and must be heeded.”

It is important to look at some of strikingly similar with banners displayed in the March along Edgware road to US Embassy, London, on 19 August 2006. See the photographs displayed in the article: HIZB UT-TAHRIR PROTEST AGAINST AMERICA <http://moonbatmedia.com/hizb_ut_tahrir_190806/> Here we see the banners also proclaiming “Bush is the real Fascist”, “America – Stop Your Warmongering”, Neo-Conservatives are the New Fascists”, “and Stop Israel’s Terrorism” and “Cut all ties with Israel.”

The Rhetoric For Political Gain Has Global Implications.

Just as the Hizb ut-Tahrir report advocates the withdrawal of all foreign military personnel in Iraq the US House of Representatives voted for the first time Friday to link funding for the Iraq war to a timeline for withdrawing combat troops by August 21, 2008, defying a veto threat from President George W. Bush. Are not these events are creating tension between society and those in power as called for in the strategy above?

On March 23, 2007 House Speaker Nancy Pelosi, D-Calif said “The American people have lost faith in the president’s conduct of this war,” “The American people see the reality of the war, the president does not.” “It’s a historic moment for our party and a historic moment for our country,” “If you want peace, stop funding this war,” said Rep. Dennis Kucinich, D-Ohio. Democratic Representative John Murtha, a passionate advocate of a US withdrawal from Iraq, said: “We are going to bring those troops home; we are going to start changing the direction of this great country.”

Conflicts Arising Over the Control of Natural Resources – Energy, Raw Materials

Conflicts over the control of natural resources will be a driving force in the world geopolitical events in the future. The major powers will seek control at any cost. The disordered spaces in the world are where states have lost the monopoly of force needed to sustain order and the rule of law, where poverty and disease are endemic, centers of extremism, insurgency and political violence, those regions with young and mobile populations and finally in the series delineates rich concentrations of natural resources - oil, minerals and the rest.

.And, yes, these troubled parts of the world are places upon which we, the inhabitants of ordered and prosperous countries depend for the raw materials to feed our economies. Unsurprisingly, the Middle East and Africa loom large.

The leading players seeking the natural resources include the United States, Europe, Russia, China and India. The events will result in potential wars and at the very least destabilizing the world.

The U.S. and Europe are reliant on imported energy and critical raw materials; we are living in a time of interdependence. The reliance on interdependence requires the defense of potential suppliers and most importantly the delivery systems and the transport lanes – sea lanes. The cost in monetary terms is huge, but the potential in terms of life may be even greater.

The companies seeking foreign supply of new sources are major investors in the countries that are potentially the greatest threat to the West, such as Iran. These investments will result in the countries using these funds to build nuclear weapons potentially to cause a nuclear holocaust.

We commonly only think in terms of oil and fuel for automobiles, but we are also importing energy in the form of the materials we commonly use such as plastics, aluminum, copper, steel and most importantly fertilizer. The U.S. currently imports over 50% of their ammonia—urea used to grow our crops. Increasing the production of ethanol jeopardizes both our energy and our food supply.

The U.S. also needs materials and metals, such as rare earths from China and titanium from Russia to maintain our weapons program. Unless we have plans for our security, we are at risk for defense. Shutting down a mining operation for Rare Earth in the U.S. because of an environmental concern can be just as devastating to security as the transfer of nuclear material to a rogue nation.

Similar conditions also exist for other basic materials.

The Disordered World Beyond

For 60 years the transatlantic alliance had been the pillar of European security, the bridge uniting the two great centers of Western civilization. Four years ago this month it nearly collapsed amid the diplomatic traumas that preceded the Iraq war. Diplomats on both sides say, and many even seem to believe, that the transatlantic partnership has been brought back from the brink, and is once again playing a central role in global security. They speak of progress in transatlantic efforts to defuse Iran’s nuclear program, to bring a lasting peace to Lebanon, and to move the Balkans steadily toward a lasting stability.

Last month in Seville, Spain, NATO’s defense ministers met to discuss an urgent request to commit more troops and equipment to the war in Afghanistan from General Bantz Craddock. The ministers heard a sobering assessment from Gen. Craddock of the stalled progress in Afghanistan and of the probability of a spring offensive against the United States and NATO forces by the Taliban and al Qaeda. The response, according to one official present, was negative. “They don’t share our view of the scale and nature of the threat that Afghanistan represents,” says a U.S. official who was there. This, remember, is not Iraq, which many European governments opposed, but Afghanistan, “the good war,” the fight against the people who gave us September 11. This is the struggle that was prefigured when the NATO governments invoked for the first time in the alliance’s history Article V, the collective defense clause, pledging to do what was necessary to defend their allies.

This gulf applies not just to Afghanistan. Consider European responses to the deteriorating situation in Russia. Last month Vladimir Putin marched into the very cockpit of the transatlantic alliance, the annual Munich Security Conference, and flipped a frosty Moscow finger at the assembled Europeans and Americans.

He attacked the United States as a bullying unilateralist that was tearing up international law. But just as the Europeans in the audience were nodding in approval, the Russian president turned on them too. He denounced NATO’s expansion to Russia’s borders and even found time to insult the Organization for Security Cooperation in Europe, the stately body that has been aiding and promoting democratic reform in the former Soviet bloc, as a “vulgar” institution. The carefully structured world imagined by the west’s leaders after the collapse of communism has proved a mirage.

The initial reaction, even from Europeans, was hostile. But on reflection, they seemed to decide that a supportive cringe would be more appropriate. A senior German official commented that there was much in what Putin had said that would resonate in Europe. The Süddeutsche Zeitung, a supposedly sober newspaper, blamed the United States for the new Cold War atmosphere, saying it had created “the opportunity for Putin to set himself up as the powerful voice of the growing number of countries and peoples who are stricken by doubt in the wisdom of Western policies.” This, sadly, for all the continent’s boastful claims of a new transatlantic partnership, is the true voice of modern Europe: a Europe that refuses to fight a war, to which it has pledged itself, against terrorists in Afghanistan; a Europe that declines to stand up to a Russian president who condemns its efforts to spread democracy even as his KGB friends eliminate their critics in European capitals. The transatlantic partnership may be back together again. Whether it stands for anything is much less clear.

Later the German government hosted celebrations to mark the 50th anniversary of the Treaty of Rome, the covenant that marked the birth of the institution that became the European Union. Chancellor Merkel and her 26 fellow heads of government used the occasion to launch the Berlin Declaration, a document intended to serve as the signposts for the future evolution of the E.U. The final details of the declaration are still under negotiation but the outlines are clear.

After the usual self-congratulatory preamble paying stirring tribute to the E.U.’s role in preserving the peace and generating prosperity over the last 50 years, the document will address the challenges of the future. What challenges are these? Terrorism, perhaps nuclear proliferation, the spread in Europe and the Middle East of Islamist ideology? Wrong on all counts.

On its 50th birthday, the E.U. will commit itself to fighting global warming, the economic dislocations caused by globalization and, most courageous of all, the institutional shortcomings of the union itself. This last means, by the way, at least in the German view, a resurrection of the European constitution, the blueprint for a nascent federal European state that was, you may remember, roundly rejected by voters in France and the Netherlands two years ago. Europeans will try hard to continue believing that they can huddle in their comfortable corner against the storms.

Opinion polls show that an overwhelming majority of European voters and a growing percentage in Americas believe “peace” comes before all else. Nothing wrong with that -- except when the inference is that Europe’s eternal role is that of the concerned bystander; and sometimes even Americans are not even overly concerned. Thoughtful policymakers have been struck, and dismayed, by apparent public indifference towards the plight of Darfur. As depressing, is a visible weakening in the resolve of European governments and Americans to defeat the ‘defeat of forces’ threatening to destroy Western civilization.

The Islamic radicals we are fighting know they are far less wealthy and far less advanced in technology and weaponry than the United States. But they believe they will prevail in this war, as they did against the Soviet Union in Afghanistan, by wearing us down and breaking our will. They believe America and the West are “the weak horse” -- soft, irresolute, and decadent. Al-Zarqawi once said Americans are the most cowardly of God’s creatures,”

The war against global jihadism will be long, and we will experience success and setbacks along the way. The temptation of the West will be to grow impatient and, in the face of this long struggle, to grow weary. Some will demand a quick victory and, absent that, they will want to withdraw from the battle. But this is a war from which we cannot withdraw. As we saw on September 11^th, there are no safe harbors in which to hide. Our enemies have declared war on us, and their hatreds cannot be sated. We will either defeat them, or they will come after us with the unsheathed sword.

They will discover otherwise. The west’s interests as it navigates this rugged geopolitical terrain are as they have ever been: to export security, prosperity and, yes, liberal democratic values beyond its frontiers. On this, moral impulse, and hard headed interests are one. As it happens, the rising powers will discover over time that they have the same stake in an ordered world. But getting from here to there will not be an easy journey.

“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 I and II and the Gulf Wars of 1991 or 2003–were in place.”

All of us would prefer years of repose to years of conflict. But history will not allow it. And so it once again rests with us to do what we have done in the past: it is our duty. We must win and we will win.

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