Since early this year, the new wave of petroleum development has been driving the economic development. The momentum not only comes from the large Nanbao oilfield in Chaofeidian, Tangshan City, Hebei Province but also the Puguang oilfield in Yihan County, Dazhou City, northeast Sichuan Province.
Puguang oilfield, located northeast to Chongqing City, is a large field of natural gas in the marine strata. According to the geological classification, marine strata is caused by consolidation of marine environment. Continental strata is caused by consolidation of continental environment, such as river, lake and marshes. In the 9.6 million square kilometres national territory, the area of marine strata covers 4.5 million square kilometres.
Puguang oilfield is the first discovered natural gas field of marine strata. According to the Department of National Land and Resources, its capacity reaches nearly 360 billion cubic metres. It is the biggest natural gas field of marine strata… …
The discovery and development of the Puguang oilfield will bring a lot of business opportunities to the Chengdu-Chongqing economic region. The industries of manufacturing machines, telecommunication, logistics, infrastructure and services related to the oilfield construction will benefit from it… …
The discovery of Nanbao and Puguang oilfields make many people be optimistic about the supply of oil. But it is not true. One of the reasons is that investment in fixed asset and automobile demand a huge amount of oil. In recent years, the supply is still tight. Another reason is that the waste of energy is enormous. Last year, China failed to meet the indicator of saving energy (4%).
In the coming 3 or more years, China will keep importing energy. The first season of this year, there is the first net import of coal with the amount as high as 3 million tons. China is the sixth biggest country of consuming oil with net import of gas products including crude oil, oil shale and natural gas for many years. Last year, the total consumption of crude oil is 320 million tons, 180 million from domestic production and 140 million from import. The ratio of dependence on foreign import is 44%, near the alert line. It is estimated that it will reach 60% in 2020.
30 May 2007
Make way for the Chinese giant
By Walter T Molano
The emergence of China as a global superpower occurred much faster than anyone imagined. China is the new giant on the block, with enormous resources at its disposal. An exporting powerhouse, China displaced the United States last year as the largest exporter to the European Union.
Chinese exports to the EU jumped 21% year on year in 2006, reaching 255 billion euros (US$336 billion), versus an 8% year-on-year increase in US exports, which totaled 176 billion euros. Chinese exports continue to expand aggressively, driving up shipping prices around the world. The Dry Freight Index on the Baltic Exchange was up 41% year-to-date, with no end in sight. The earnings from trade are becoming a headache for the Chinese central bank. International reserves recently passed the $1.3 trillion mark. China's current-account surplus is expected to reach $400 billion this year - representing 12.8% of gross domestic product (GDP). The heady expansion of the Chinese economy is putting it in a leadership position, allowing it to move to center stage in the global arena.
China is having a positive effect on the global economy, which in 2006 grew 5.4% year on year. Developed countries expanded 3.1% year on year, while non-Japan Asia grew more than twice as much - expanding 7.9%. China's GDP growth was 10.7% year on year and India expanded 9.2%. The Chinese effect on the developing world was remarkable. The former member states of the Soviet Union surged 7.7% year on year, sub-Sahara Africa expanded 5.7% and Latin America grew 5.5%.
The commodity boom is changing the economic landscape across the developing world. The volume of global trade rose 9.2% year on year in 2006, and emerging-market countries increased their international reserves by $738 billion. This explains the emerging-market boom. This is not a fad or a reflection of global liquidity. The $256 billion of net private inflows into the emerging markets reflect the credit strength of these economies and their ability to grow.
At the same time, the United States is withering away under the weight of its enormous debt load and various asset bubbles. The US economy grew an anemic 1.3% year on year during the first quarter of 2007. Unemployment is picking up and the dollar is collapsing. The unemployment rate in the US increased to 4.5% in April. Indeed, April saw the weakest pace of job creation in two years. The impact of the housing slowdown is starting to appear in the employment data. The tightening of lending standards is reducing the availability of mortgages, forcing further slowdowns in the construction sector.
The economic slowdown in the US is accompanied by serious concerns about the health of the financial sector. With more than $700 trillion in derivative contracts floating in the marketplace, and much of it tied to the mortgage market, an accident is definitely on the way. Some analysts attribute the steady rise in gold prices to concerns about a looming crisis in the US financial sector.
The changes in the global economic order are also realigning the planet's geopolitical structure. China is starting to set the tempo in the international arena. It has the indisputable lead in Africa, committing $20 billion over the course of the next three years to develop infrastructure and trade. It is shepherding the reconciliation between North and South Korea, easing tensions on its eastern flank.
The growing irrelevance of the multilateral institutions, such as the World Bank, International Monetary Fund and World Trade Organization, is providing a greater opportunity for China to exert a more prominent role without appearing to be a usurper of power. Fortunately, the changes are for the better, at least for most emerging-market countries. China's insatiable appetite for commodities is breathing new life across the developing world.
Last of all, China is providing a bonanza of cheap manufactured goods to developing nations - fueling an unprecedented consumer frenzy. The Chinese behemoth is rapidly displacing the US as the world's main source of capital, manufacturing and commodity demand, leading to a decoupling of the waning North American giant from the rest of the marketplace.
The emergence of China as a global superpower occurred much faster than anyone imagined. China is the new giant on the block, with enormous resources at its disposal. An exporting powerhouse, China displaced the United States last year as the largest exporter to the European Union.
Chinese exports to the EU jumped 21% year on year in 2006, reaching 255 billion euros (US$336 billion), versus an 8% year-on-year increase in US exports, which totaled 176 billion euros. Chinese exports continue to expand aggressively, driving up shipping prices around the world. The Dry Freight Index on the Baltic Exchange was up 41% year-to-date, with no end in sight. The earnings from trade are becoming a headache for the Chinese central bank. International reserves recently passed the $1.3 trillion mark. China's current-account surplus is expected to reach $400 billion this year - representing 12.8% of gross domestic product (GDP). The heady expansion of the Chinese economy is putting it in a leadership position, allowing it to move to center stage in the global arena.
China is having a positive effect on the global economy, which in 2006 grew 5.4% year on year. Developed countries expanded 3.1% year on year, while non-Japan Asia grew more than twice as much - expanding 7.9%. China's GDP growth was 10.7% year on year and India expanded 9.2%. The Chinese effect on the developing world was remarkable. The former member states of the Soviet Union surged 7.7% year on year, sub-Sahara Africa expanded 5.7% and Latin America grew 5.5%.
The commodity boom is changing the economic landscape across the developing world. The volume of global trade rose 9.2% year on year in 2006, and emerging-market countries increased their international reserves by $738 billion. This explains the emerging-market boom. This is not a fad or a reflection of global liquidity. The $256 billion of net private inflows into the emerging markets reflect the credit strength of these economies and their ability to grow.
At the same time, the United States is withering away under the weight of its enormous debt load and various asset bubbles. The US economy grew an anemic 1.3% year on year during the first quarter of 2007. Unemployment is picking up and the dollar is collapsing. The unemployment rate in the US increased to 4.5% in April. Indeed, April saw the weakest pace of job creation in two years. The impact of the housing slowdown is starting to appear in the employment data. The tightening of lending standards is reducing the availability of mortgages, forcing further slowdowns in the construction sector.
The economic slowdown in the US is accompanied by serious concerns about the health of the financial sector. With more than $700 trillion in derivative contracts floating in the marketplace, and much of it tied to the mortgage market, an accident is definitely on the way. Some analysts attribute the steady rise in gold prices to concerns about a looming crisis in the US financial sector.
The changes in the global economic order are also realigning the planet's geopolitical structure. China is starting to set the tempo in the international arena. It has the indisputable lead in Africa, committing $20 billion over the course of the next three years to develop infrastructure and trade. It is shepherding the reconciliation between North and South Korea, easing tensions on its eastern flank.
The growing irrelevance of the multilateral institutions, such as the World Bank, International Monetary Fund and World Trade Organization, is providing a greater opportunity for China to exert a more prominent role without appearing to be a usurper of power. Fortunately, the changes are for the better, at least for most emerging-market countries. China's insatiable appetite for commodities is breathing new life across the developing world.
Last of all, China is providing a bonanza of cheap manufactured goods to developing nations - fueling an unprecedented consumer frenzy. The Chinese behemoth is rapidly displacing the US as the world's main source of capital, manufacturing and commodity demand, leading to a decoupling of the waning North American giant from the rest of the marketplace.
24 May 2007
The Hard Facts about Parabolic Spikes
by Doug Wakefield
Living through a mania is supposed to be a once in a lifetime event. For example, the French, who lived through the implosion of the Mississippi Scheme, and the English, who lived the South Sea Bubble collapse in the 1720s, did not see the same parabolic rises again during their lifetimes. Or for a more recent example, consider the parabolic rise of the Nikkei to its all time high in 1989, the aftermath of which has since changed the disposition of the Japanese toward their stock market. As we mentioned in The Nikkei: Raiders of the Lost Ark, Japanese nationals have a different view of their stock market than foreign hedge fund managers.
"Although there is a problem in that its [Japan's] stock market is supported primarily by foreign investors, Japanese nationals make up 95% of its government bond market." ¹
And yet, while the NASDAQ is still valued at less than 50 percent of what it was seven years ago, investors seem more than willing to get in or stay in "for the long term." For those, like us, who "can't see the collective wisdom of the market," who think that things like debt, sharply falling retail sales, sharply falling housing sales, and wars with no end matter, we need to get over our worries and realize that the Dow is going up and that nothing else matters but... price. After all, the Dow is hitting all time highs, and if we missed out on its 13 percent, 1600 point rise over the last ten weeks, we must be fools. There's no time to ask questions - just fire the trader, manager, or newsletter that does not "get it," and move on. As in all credit induced manias, at the end of the day the only thing that matters is recent - and I do mean recent - performance.
Jeremy Grantham explained this mindset in his recent quarterly letter to his institutional clients:
"The more leverage you take, the better you do; the better you do, the more leverage you take. A critical part of a bubble is the reinforcement you get for your very optimistic view from those around you." ²
As all true contrarians know, this is when making decisions opposite of the herd is the hardest, and yet, as history has shown, this is when it often proves most rewarding. So let's look at three variables that all investors should be evaluating right now to resist the siren's song of higher equity prices as we pass through this ever-rising sea of debt.
Parabolic Rises: Lessons from 2004 to 2006
In June of 2004, we released Special Edition: Parabolic Rises with this chart, produced by Elliot Wave International, clearly revealing a parabolic spike in the price of silver.
As the chart below shows, after hitting $8.50 two weeks later, silver dropped 36 percent in just five weeks to $5.45, and would not surpass its previous high until December of 2005.
Then, in another parabolic move silver went to $15.21 into May 11th of 2006. It then decline 38 percent in a little over four weeks, and has not reached that price since.
Now, don't get me wrong - this is not about bashing silver. Frankly, right now, I can see some compelling arguments for being long or short silver.
The main purpose of these charts is to show that when the price of anything goes parabolic, even though it's fun to run to your computer screen every day, it is a clear warning to employ contrarian thinking and resources. Bullishness has run to extremes and price levels could experience a sharp enough downdraft to warrant severe caution.
In July of 2005 we released a newsletter called Teenage Investing, displaying a number of charts and pictures from a wide variety of sources. As you can see above, the parabolic rise in housing stock was clearly unsustainable. After topping at 1325 on July 20th of 2005, the index fell 47 percent to 702 one year later, and currently trades around 765.
Parabolic Rises: A Look at 2007
So, what parabolic rises today tell investors that markets could change violently? The Shanghai Stock Exchange in China would certainly qualify. Since the middle of 2005, its annualized rate of growth has increased from 70 to 291 to 526 percent! Clearly, unsustainable.
And though its growth is dwarfed by the Shanghai, the S&P500 has begun to move in parabolic form. As shown below, its annualized growth rate has gone from 14 ½ to 34 to 74 percent annually. Sustainable? We think not.
And as these rises are taking shape, rather than address the unsustainable nature of parabolas, many bearish advisors believe that as long as the Fed inflates the money supply, which is currently growing at an annualized pace of 13 percent, this flood of credit will continue to drive up equity prices.
Yet, history and science show that nothing could be further from the truth. For example, on April 16th Greg Weldon, of Weldon's Money Monitor, cited a report from the People's Bank of China revealing the largest growth of commercial lending in China's history. In the fourth quarter of 2006 China's commercial loan volume was 425 billion Yuan. During the first quarter of 2007, it topped 1, 423 billion Yuan, a 335 percent increase in 90 days! How likely is this performance to repeat for several more quarters?
You see, just like the housing market, eventually bubbles grow so large that they require enormous reserves just to maintain their current shape. They become so large that they are unable to grow, much less grow at their previous astronomical rate. For those who doubt, I ask, how much would the dollar need to depreciate and inflation need to rise to move the Dow to 20 or 30 thousand? How much of a decline in consumer savings or a rise in housing prices and a decline in inventory would it take to bolster retail or auto sales? At some point, the stress on the system will become too great and a rapid reversal will begin.
The Black Swan
In his new book, The Black Swan, Nassim Nicholas Taleb expands on a concept he addressed in his first book, Fooled by Randomness. In the opening, Taleb addresses three attributes of the Black Swan:
"First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable." ³
And when we understand this concept, we realize why anticipating the rare event is critical, and that any model that does not address this risk is dangerously incomplete. Parabolic rises contain within themselves the warning of a price breakdown. As such, I strongly encourage you to help your clients and friends to stop extrapolating our current conditions into the indefinite future, and to stop repeating the phrase, "Well you have been saying that the markets were going to decline for a long time, and nothing has happened yet." The real science of price movement and the pragmatic restrictions of debt overhang reveal the fallacy of such a mindset. But, emotions can cloud our judgment and make us rationalize the most reckless of actions.
Sources:
1 Balance Sheet Recession: Japan's Struggle with Uncharted Economics and its Global Implications (2003), Richard Koo, page 73
2 GMO Quarterly letter, "It's Everywhere, In Everything: The First Truly Global Bubble," April 2007, Jeremy Grantham
3 The Black Swan: The Impact of the Highly Improbable (2007), Nicholas Taleb, pages xvii & xviii
Living through a mania is supposed to be a once in a lifetime event. For example, the French, who lived through the implosion of the Mississippi Scheme, and the English, who lived the South Sea Bubble collapse in the 1720s, did not see the same parabolic rises again during their lifetimes. Or for a more recent example, consider the parabolic rise of the Nikkei to its all time high in 1989, the aftermath of which has since changed the disposition of the Japanese toward their stock market. As we mentioned in The Nikkei: Raiders of the Lost Ark, Japanese nationals have a different view of their stock market than foreign hedge fund managers.
"Although there is a problem in that its [Japan's] stock market is supported primarily by foreign investors, Japanese nationals make up 95% of its government bond market." ¹
And yet, while the NASDAQ is still valued at less than 50 percent of what it was seven years ago, investors seem more than willing to get in or stay in "for the long term." For those, like us, who "can't see the collective wisdom of the market," who think that things like debt, sharply falling retail sales, sharply falling housing sales, and wars with no end matter, we need to get over our worries and realize that the Dow is going up and that nothing else matters but... price. After all, the Dow is hitting all time highs, and if we missed out on its 13 percent, 1600 point rise over the last ten weeks, we must be fools. There's no time to ask questions - just fire the trader, manager, or newsletter that does not "get it," and move on. As in all credit induced manias, at the end of the day the only thing that matters is recent - and I do mean recent - performance.
Jeremy Grantham explained this mindset in his recent quarterly letter to his institutional clients:
"The more leverage you take, the better you do; the better you do, the more leverage you take. A critical part of a bubble is the reinforcement you get for your very optimistic view from those around you." ²
As all true contrarians know, this is when making decisions opposite of the herd is the hardest, and yet, as history has shown, this is when it often proves most rewarding. So let's look at three variables that all investors should be evaluating right now to resist the siren's song of higher equity prices as we pass through this ever-rising sea of debt.
Parabolic Rises: Lessons from 2004 to 2006
In June of 2004, we released Special Edition: Parabolic Rises with this chart, produced by Elliot Wave International, clearly revealing a parabolic spike in the price of silver.
As the chart below shows, after hitting $8.50 two weeks later, silver dropped 36 percent in just five weeks to $5.45, and would not surpass its previous high until December of 2005.
Then, in another parabolic move silver went to $15.21 into May 11th of 2006. It then decline 38 percent in a little over four weeks, and has not reached that price since.
Now, don't get me wrong - this is not about bashing silver. Frankly, right now, I can see some compelling arguments for being long or short silver.
The main purpose of these charts is to show that when the price of anything goes parabolic, even though it's fun to run to your computer screen every day, it is a clear warning to employ contrarian thinking and resources. Bullishness has run to extremes and price levels could experience a sharp enough downdraft to warrant severe caution.
In July of 2005 we released a newsletter called Teenage Investing, displaying a number of charts and pictures from a wide variety of sources. As you can see above, the parabolic rise in housing stock was clearly unsustainable. After topping at 1325 on July 20th of 2005, the index fell 47 percent to 702 one year later, and currently trades around 765.
Parabolic Rises: A Look at 2007
So, what parabolic rises today tell investors that markets could change violently? The Shanghai Stock Exchange in China would certainly qualify. Since the middle of 2005, its annualized rate of growth has increased from 70 to 291 to 526 percent! Clearly, unsustainable.
And though its growth is dwarfed by the Shanghai, the S&P500 has begun to move in parabolic form. As shown below, its annualized growth rate has gone from 14 ½ to 34 to 74 percent annually. Sustainable? We think not.
And as these rises are taking shape, rather than address the unsustainable nature of parabolas, many bearish advisors believe that as long as the Fed inflates the money supply, which is currently growing at an annualized pace of 13 percent, this flood of credit will continue to drive up equity prices.
Yet, history and science show that nothing could be further from the truth. For example, on April 16th Greg Weldon, of Weldon's Money Monitor, cited a report from the People's Bank of China revealing the largest growth of commercial lending in China's history. In the fourth quarter of 2006 China's commercial loan volume was 425 billion Yuan. During the first quarter of 2007, it topped 1, 423 billion Yuan, a 335 percent increase in 90 days! How likely is this performance to repeat for several more quarters?
You see, just like the housing market, eventually bubbles grow so large that they require enormous reserves just to maintain their current shape. They become so large that they are unable to grow, much less grow at their previous astronomical rate. For those who doubt, I ask, how much would the dollar need to depreciate and inflation need to rise to move the Dow to 20 or 30 thousand? How much of a decline in consumer savings or a rise in housing prices and a decline in inventory would it take to bolster retail or auto sales? At some point, the stress on the system will become too great and a rapid reversal will begin.
The Black Swan
In his new book, The Black Swan, Nassim Nicholas Taleb expands on a concept he addressed in his first book, Fooled by Randomness. In the opening, Taleb addresses three attributes of the Black Swan:
"First, it is an outlier, as it lies outside the realm of regular expectations, because nothing in the past can convincingly point to its possibility. Second, it carries an extreme impact. Third, in spite of its outlier status, human nature makes us concoct explanations for its occurrence after the fact, making it explainable and predictable." ³
And when we understand this concept, we realize why anticipating the rare event is critical, and that any model that does not address this risk is dangerously incomplete. Parabolic rises contain within themselves the warning of a price breakdown. As such, I strongly encourage you to help your clients and friends to stop extrapolating our current conditions into the indefinite future, and to stop repeating the phrase, "Well you have been saying that the markets were going to decline for a long time, and nothing has happened yet." The real science of price movement and the pragmatic restrictions of debt overhang reveal the fallacy of such a mindset. But, emotions can cloud our judgment and make us rationalize the most reckless of actions.
Sources:
1 Balance Sheet Recession: Japan's Struggle with Uncharted Economics and its Global Implications (2003), Richard Koo, page 73
2 GMO Quarterly letter, "It's Everywhere, In Everything: The First Truly Global Bubble," April 2007, Jeremy Grantham
3 The Black Swan: The Impact of the Highly Improbable (2007), Nicholas Taleb, pages xvii & xviii
WSJ scoop on Litvinenko
The piece by Moscow-based Journal reporter Alan Cullison is sourced to a 1998 videotape done by Litvinenko and fellow intelligent officers who said they feared for their lives. The tape was never intended to be broadcasted, they said. Although the video was briefly seen in Russia in 1998, it has not been seen since.
Video link
Video link
23 May 2007
A stretched credit cycle, a more savage downturn -FT
High finance has never been more sophisticated. Bankers have never been more clever. Yet in the US subprime lending boom, banks fell over themselves to advance 100 per cent loan-to-value mortgages to out-of-pocket deadbeats. According to industry folklore, even an insolvent arsonist was given accommodation.
Lending standards to private equity are collapsing just as risks rise and returns are being competed away. "Cov-lite" loans are the order of the day, meaning that restrictions on a borrower's interest cover and balance sheet leverage cease to apply. This has prompted Anthony Bolton, Britain's most admired fund manager, to warn of impending doom. So what is the explanation for such apparently aberrant behaviour? At one level, it is simply that banks no longer have to worry about loan quality in securitised markets where the loans they originate are immediately sold. So the more pertinent question is, why do investors buy from the banks? The answer, as Henry Maxey of the Ruffer fund management group argues in a forthcoming paper for the Centre for the Study of Financial Innovation, is that Wall Street has solved their most pressing problems with its invention of structured products. Take the hedge funds, in which conventional investors such as pension funds invest increasingly via hedge fund of funds. These intermediaries typically aim for positive returns of 1 per cent a month, net of fees, with low volatility. If the hedge funds they back fail to deliver on 3- to 6-month performance figures, they are culled.
The hedge funds need to make about 20 per cent gross a year, before a welter of fees, to provide that 1 per cent a month for their backers. Such a spectacular return can be gained either by market outperformance, which is beyond most fund managers, or by taking on leverage through borrowing, or trading in derivatives. For most, that means adopting leveraged strategies in illiquid assets, to avoid leaving capital values hostage to market volatility.
Structured credit products are tailor-made for this task. Collateralised debt and loan obligations (CDOs and CLOs) invest in poor-quality assets such as subprime mortgages or loans to super-leveraged buy-outs, and sell matching liabilities to investors. Yet the sale involves an alchemical transformation. The package is sliced and diced into high- and low-risk tranches, with usually up to 80 per cent being rated Triple-A or AA and the residue being very lowly rated or unrated.
For pension funds and managers of official reserves, the resulting high-grade paper is a boon in a world where the number of Triple-A corporate borrowers has dwindled to a handful.
For hedge funds the low-grade paper, which provides a cushion against default risk in the high-grade tranches, is likewise a boon, especially since, as Mr Maxey points out, it lends itself to arbitrage whereby hedge funds take long positions in the high-risk tranches and short positions in the low-risk tranches, which are relatively expensive. This ought to increase market efficiency since more investors can buy into a given pool of low-quality credit-enhanced assets.
The peculiarity of this trade is that profit is never arbitraged away in the benign phase of the credit cycle because positions are not constantly marked to market. Their illiquidity requires them to be marked to a model approved by credit rating agencies. As we saw after Enron and the subprime mortgage fiasco, rating agencies, who are paid by those who they rate, do not adjust ratings to reflect deteriorating economics. They close stable doors after profligate horses have bolted.
It follows, as Mr Maxey notes, that relaxing lending standards is perfectly rational. To increase lending volume, banks could either reduce their interest rates or reduce underwriting standards. Given the hunt for yield, this is a no-brainer. So collapsing standards will now stretch out the credit cycle while ensuring the delayed downturn will be more savage when the defaults finally happen. This subverts the argument that structured products uniformly enhance market efficiency. Credit is being mispriced, courtesy of credit rating agencies that are insensitive to market risk. Stand by for systemic consequences in due course.
Lending standards to private equity are collapsing just as risks rise and returns are being competed away. "Cov-lite" loans are the order of the day, meaning that restrictions on a borrower's interest cover and balance sheet leverage cease to apply. This has prompted Anthony Bolton, Britain's most admired fund manager, to warn of impending doom. So what is the explanation for such apparently aberrant behaviour? At one level, it is simply that banks no longer have to worry about loan quality in securitised markets where the loans they originate are immediately sold. So the more pertinent question is, why do investors buy from the banks? The answer, as Henry Maxey of the Ruffer fund management group argues in a forthcoming paper for the Centre for the Study of Financial Innovation, is that Wall Street has solved their most pressing problems with its invention of structured products. Take the hedge funds, in which conventional investors such as pension funds invest increasingly via hedge fund of funds. These intermediaries typically aim for positive returns of 1 per cent a month, net of fees, with low volatility. If the hedge funds they back fail to deliver on 3- to 6-month performance figures, they are culled.
The hedge funds need to make about 20 per cent gross a year, before a welter of fees, to provide that 1 per cent a month for their backers. Such a spectacular return can be gained either by market outperformance, which is beyond most fund managers, or by taking on leverage through borrowing, or trading in derivatives. For most, that means adopting leveraged strategies in illiquid assets, to avoid leaving capital values hostage to market volatility.
Structured credit products are tailor-made for this task. Collateralised debt and loan obligations (CDOs and CLOs) invest in poor-quality assets such as subprime mortgages or loans to super-leveraged buy-outs, and sell matching liabilities to investors. Yet the sale involves an alchemical transformation. The package is sliced and diced into high- and low-risk tranches, with usually up to 80 per cent being rated Triple-A or AA and the residue being very lowly rated or unrated.
For pension funds and managers of official reserves, the resulting high-grade paper is a boon in a world where the number of Triple-A corporate borrowers has dwindled to a handful.
For hedge funds the low-grade paper, which provides a cushion against default risk in the high-grade tranches, is likewise a boon, especially since, as Mr Maxey points out, it lends itself to arbitrage whereby hedge funds take long positions in the high-risk tranches and short positions in the low-risk tranches, which are relatively expensive. This ought to increase market efficiency since more investors can buy into a given pool of low-quality credit-enhanced assets.
The peculiarity of this trade is that profit is never arbitraged away in the benign phase of the credit cycle because positions are not constantly marked to market. Their illiquidity requires them to be marked to a model approved by credit rating agencies. As we saw after Enron and the subprime mortgage fiasco, rating agencies, who are paid by those who they rate, do not adjust ratings to reflect deteriorating economics. They close stable doors after profligate horses have bolted.
It follows, as Mr Maxey notes, that relaxing lending standards is perfectly rational. To increase lending volume, banks could either reduce their interest rates or reduce underwriting standards. Given the hunt for yield, this is a no-brainer. So collapsing standards will now stretch out the credit cycle while ensuring the delayed downturn will be more savage when the defaults finally happen. This subverts the argument that structured products uniformly enhance market efficiency. Credit is being mispriced, courtesy of credit rating agencies that are insensitive to market risk. Stand by for systemic consequences in due course.
Nanotech used in 500 products
The number of consumer products using nanotechnology has more than doubled, from 212 to 475, in the 14 months since the Project on Emerging Nanotechnologies launched the world's first online inventory of manufacturer-identified nanotech goods in March 2006, reports the Project on Emerging Nanotechnologies. Clothing and cosmetics top the inventory at 77 and 75 products, respectively.
A list of nanotechnology products that also includes bedding, jewelry, sporting goods, nutritional and personal care items is available free at www.nanotechproject.org/consumerproducts.
Nanotechnology Consumer Products Inventory Highlights:
-- The food and beverages category, including containers and dietary supplements, doubled to 61 products since last year.
-- Nanoscale silver is the most cited nanomaterial used. It is found in 95 products or 20 percent of the inventory. Carbon, including carbon nanotubes and fullerenes, is the second highest nanoscale material cited.
-- Merchandise from 20 countries is now represented. The United States leads internationally with 52 percent or 247 consumer products that contain nanotechnology. East Asia now boasts 123 products, a 58 percent increase over last year.
-- New products in the inventory include the Corsa Nanotech Ice Axe which uses an innovative Sandvik Nanoflex steel alloy that's 20 percent lighter than normal steel and up to 60 percent stronger. There's also MaatShop Crystal Clear Nano Silver--a clear liquid dietary supplement which peddles protection against colds, flu and hundreds of diseases, even anthrax.
A list of nanotechnology products that also includes bedding, jewelry, sporting goods, nutritional and personal care items is available free at www.nanotechproject.org/consumerproducts.
Nanotechnology Consumer Products Inventory Highlights:
-- The food and beverages category, including containers and dietary supplements, doubled to 61 products since last year.
-- Nanoscale silver is the most cited nanomaterial used. It is found in 95 products or 20 percent of the inventory. Carbon, including carbon nanotubes and fullerenes, is the second highest nanoscale material cited.
-- Merchandise from 20 countries is now represented. The United States leads internationally with 52 percent or 247 consumer products that contain nanotechnology. East Asia now boasts 123 products, a 58 percent increase over last year.
-- New products in the inventory include the Corsa Nanotech Ice Axe which uses an innovative Sandvik Nanoflex steel alloy that's 20 percent lighter than normal steel and up to 60 percent stronger. There's also MaatShop Crystal Clear Nano Silver--a clear liquid dietary supplement which peddles protection against colds, flu and hundreds of diseases, even anthrax.
22 May 2007
Craig on an interesting conceptual framework
Of course there does exist an absolute truth but can it be known by man when there is yet much to be known.
Look at any period in history and the absolutes of the time have turned out to be relative to the time. So from history we learn that what we believe to be the truth in our time is likely to be relative to our time. So the absolute truth is that our present truths will be judged relative when viewed as history .
Thats not to say we should sit on our hands, we must make decisions from this relative truth as best we can during our times.
Human nature has emerged along a developmental path from one equilibrium state to the next. These can be viewed as stages wherein each layer adds new elements to all that came before; in turn, each stands in preparation for a next phase which may or may not come.
Every "level of human existence" offers a particular viewing point for 'the real world' as defined by its unique set of perceptual filters, our concepts of truth are just one form of how this reality might differ from individual to individual, society to society, generation to generation.
These diverse views of the realtive truth lead to very different decision-making approaches, organizing principles for business, economic and governance models, and ideas of what appropriate, effective living means.
Witness the changing values, mores and outlooks of any decade in American history and you will see these factors of change at work. People talk of capitalism, wealth, money, happiness in different ways depending on where and when they came and what environment they came into. These concepts are relative to the context of their times
Clare Graves built "the emergent, cyclical, double-helix model of adult biopsychosocial systems of development. He used pairs of letters to designate the interaction of conditions-without and latent systems-within known as Memes. Memes grouped together the conditional and latent systems that seem to collect together from one social sphere to another back through the ages.
So in the context truth is different to different people and times and American capitalism defines its ideas of wealth at level 5 in graves model.
One of the interesting things about the emergence of the memes and their parallel expressions in the exteriors such as civilization forms, economic systems etc, is how, they are emerging at an ever increasing speed. Rough estimates are that Level One Survival Clans emerged around 100,000 years ago, Tribes around 10,000 years ago, Nation States around 1,000 years ago, Value Communities around 100 years ago and we beginning to see Harmony patterns emerge about 30 years ago. If that is the case, then we can be pretty sure that Mutuality and Wisdom already within our our structures.
For instance you might define wealth by a Level 5 criteria and I might define wealth along the lines of Level 8 . Many of the troubles we have in the world are between Level 4 Truth and Force Absolutistic (the Muslims) rub up against Level 5 Strive (Drive Materialistic) (unfortunately GWB seems to have allot in common with 4). . There are many of these models and this serve as but one illustrative function , that is to speculates on the nature of social evolution and integrative manner that of adaption and innovation . One can speculate that the environment and energy issues might well place all of society in a position where it is compelled to seek equilibrium and shelter in civilization managed upon the principles of the Humanistic Level 6 value set.
Vaihinger argued that the primary purpose of mind and mental processes is not to portray or mirror reality, but to serve individuals in their navigations through life circumstances. Vaihinger said that we live our lives by means of "functional fictions." These functional fictions are the schemer by which our opinions, ideas and ideals are founded upon. The materialistic free market capitalism of America serves as one but functional fiction that's usefluness is all but at an end.
World-economies, then, present a pattern of concentric spirals around a center, defined by relations of subordination. Besides this spatial structure, Wallerstein and Braudel add a temporal one: a world-economy expands and contracts in a variety of rhythms of different lengths: from short term business cycles to longer term Kondratiev. While the domination by core cities gives a world-economy its spatial unity, these cycles give it a temporal coherence: prices and wages move in unison over the entire area.
Prices are, of course, much higher at the center than at the periphery, and this makes everything flow towards the core: Venice, Amsterdam, London and New York, as they took their turn as dominant centers, became "universal warehouses" where one could find any product from anywhere in the world. And yet, while respecting these differences, all prices moved up and down following these nonlinear rhythms, affecting even those firms belonging to the antimarket, which needed to consider those fluctuations when setting their own prices.
It reached a bifurcation and a periodic attractor emerged in the system, which began pulsing to a fifty year beat. The crucial element in this dynamics seems to be the capital goods sector, the part of the industry that creates the machines that the rest of the economy uses. Whenever an intense rise in global demand occurs, firms need to expand and so need to order new machines. But when the capital goods sector in turn expands to meet this demand it needs to order from itself.
In the first core of the European world-economy, thirteenth century Venice, the alliance between monopoly power and military might was already in evidence. The Venetian arsenal, where all the merchant ships were built, was the largest industrial complex of its time. We can think of these ships as the fixed capital, the productive machinery of Venice, since they were used to do all the trade that kept her powerful; but at the same time, they were military machines used to enforce her monopolistic practices. When the turn of Amsterdam and London came to be the core, the famous Companies of Indias with which they conquered the Asian world-economy were also hybrid military-economic institutions.
Not to mention the role that French armories and arsenals in the eighteenth century, and American ones in the nineteenth, played in the birth of mass production techniques. Frederick Taylor, the creator of the modern system for the control the labor process, learned his craft in military arsenals.
We we are today is at the beginning of a new evolution in capitalism that has no parallel, that the Americans have arguable military might while the Japanese, Europeans and increasingly the Chinese and Indian have the wealth. Clearly the inability of the US to act militarily (I would argue that the US has less "will" to act than almost any military power of the past).
The concept of wealth (or the asset base) as "the foundation of generating well-being". This definition of national wealth takes on a much broader definition and is embodied in natural capital, social capital, and produced assets.
Empirical studies of the consumption-wealth relationship often assume a framework in which aggregate household spending depends linearly on wealth, the underlying state variable. These studies have given rise to many estimates of the wealth effect. In a general equilibrium setting, however, both consumption and wealth react to "shocks" impacting the economy. Therefore, without any independent movements in wealth, the marginal propensity to consume out of wealth is hard to define.
Clarification of this point can be found in the relationship between consumption, savings, and equity within the framework of a real business cycle model with investment adjustment costs. The behavior of consumption and wealth depends crucially on the nature of the "shocks" affecting households, government and business.
The form of the shocks and whether they are anticipated alter not only the magnitude of the wealth effect but also the direction of the response. That is, in the context of this conventional model, net worth (or wealth) and consumption actually move in opposite directions.
So truth or BS is whatever your intelligence, social and ethical stage has reached. Its different in every case and that's why we have economic revolution and evolution . New product, place, markets and ways are contextual to the civilization they are realized in the mistake I think allot make assumes that we have found the 'ideal' within so called 'free market' capitalism.
When I reality this re defined by each generation. One generation of American's were savers and the next generation are consumers then they might learn to save again, they each saw "wealth" spiritually, materially and economically different.
Albert Einstein once said: "Strange is our situation here upon earth. Each of us comes for a short visit, not knowing why, yet Mutuality sometimes seem to divine a purpose. From the standpoint of daily life, however, there is one thing we do know: that man is here for the sake of other men - above all, for those upon whose smile and well-being our own happiness depends, and also for the countless unknown souls with whose fate we are connected by a bond of sympathy. Many times a day I realize how much my own outer and inner life is built upon the labors of my fellowmen, both living and dead, and how earnestly I must exert myself in order to give in return as much as I have received."
Look at any period in history and the absolutes of the time have turned out to be relative to the time. So from history we learn that what we believe to be the truth in our time is likely to be relative to our time. So the absolute truth is that our present truths will be judged relative when viewed as history .
Thats not to say we should sit on our hands, we must make decisions from this relative truth as best we can during our times.
Human nature has emerged along a developmental path from one equilibrium state to the next. These can be viewed as stages wherein each layer adds new elements to all that came before; in turn, each stands in preparation for a next phase which may or may not come.
Every "level of human existence" offers a particular viewing point for 'the real world' as defined by its unique set of perceptual filters, our concepts of truth are just one form of how this reality might differ from individual to individual, society to society, generation to generation.
These diverse views of the realtive truth lead to very different decision-making approaches, organizing principles for business, economic and governance models, and ideas of what appropriate, effective living means.
Witness the changing values, mores and outlooks of any decade in American history and you will see these factors of change at work. People talk of capitalism, wealth, money, happiness in different ways depending on where and when they came and what environment they came into. These concepts are relative to the context of their times
Clare Graves built "the emergent, cyclical, double-helix model of adult biopsychosocial systems of development. He used pairs of letters to designate the interaction of conditions-without and latent systems-within known as Memes. Memes grouped together the conditional and latent systems that seem to collect together from one social sphere to another back through the ages.
So in the context truth is different to different people and times and American capitalism defines its ideas of wealth at level 5 in graves model.
One of the interesting things about the emergence of the memes and their parallel expressions in the exteriors such as civilization forms, economic systems etc, is how, they are emerging at an ever increasing speed. Rough estimates are that Level One Survival Clans emerged around 100,000 years ago, Tribes around 10,000 years ago, Nation States around 1,000 years ago, Value Communities around 100 years ago and we beginning to see Harmony patterns emerge about 30 years ago. If that is the case, then we can be pretty sure that Mutuality and Wisdom already within our our structures.
For instance you might define wealth by a Level 5 criteria and I might define wealth along the lines of Level 8 . Many of the troubles we have in the world are between Level 4 Truth and Force Absolutistic (the Muslims) rub up against Level 5 Strive (Drive Materialistic) (unfortunately GWB seems to have allot in common with 4). . There are many of these models and this serve as but one illustrative function , that is to speculates on the nature of social evolution and integrative manner that of adaption and innovation . One can speculate that the environment and energy issues might well place all of society in a position where it is compelled to seek equilibrium and shelter in civilization managed upon the principles of the Humanistic Level 6 value set.
Vaihinger argued that the primary purpose of mind and mental processes is not to portray or mirror reality, but to serve individuals in their navigations through life circumstances. Vaihinger said that we live our lives by means of "functional fictions." These functional fictions are the schemer by which our opinions, ideas and ideals are founded upon. The materialistic free market capitalism of America serves as one but functional fiction that's usefluness is all but at an end.
World-economies, then, present a pattern of concentric spirals around a center, defined by relations of subordination. Besides this spatial structure, Wallerstein and Braudel add a temporal one: a world-economy expands and contracts in a variety of rhythms of different lengths: from short term business cycles to longer term Kondratiev. While the domination by core cities gives a world-economy its spatial unity, these cycles give it a temporal coherence: prices and wages move in unison over the entire area.
Prices are, of course, much higher at the center than at the periphery, and this makes everything flow towards the core: Venice, Amsterdam, London and New York, as they took their turn as dominant centers, became "universal warehouses" where one could find any product from anywhere in the world. And yet, while respecting these differences, all prices moved up and down following these nonlinear rhythms, affecting even those firms belonging to the antimarket, which needed to consider those fluctuations when setting their own prices.
It reached a bifurcation and a periodic attractor emerged in the system, which began pulsing to a fifty year beat. The crucial element in this dynamics seems to be the capital goods sector, the part of the industry that creates the machines that the rest of the economy uses. Whenever an intense rise in global demand occurs, firms need to expand and so need to order new machines. But when the capital goods sector in turn expands to meet this demand it needs to order from itself.
In the first core of the European world-economy, thirteenth century Venice, the alliance between monopoly power and military might was already in evidence. The Venetian arsenal, where all the merchant ships were built, was the largest industrial complex of its time. We can think of these ships as the fixed capital, the productive machinery of Venice, since they were used to do all the trade that kept her powerful; but at the same time, they were military machines used to enforce her monopolistic practices. When the turn of Amsterdam and London came to be the core, the famous Companies of Indias with which they conquered the Asian world-economy were also hybrid military-economic institutions.
Not to mention the role that French armories and arsenals in the eighteenth century, and American ones in the nineteenth, played in the birth of mass production techniques. Frederick Taylor, the creator of the modern system for the control the labor process, learned his craft in military arsenals.
We we are today is at the beginning of a new evolution in capitalism that has no parallel, that the Americans have arguable military might while the Japanese, Europeans and increasingly the Chinese and Indian have the wealth. Clearly the inability of the US to act militarily (I would argue that the US has less "will" to act than almost any military power of the past).
The concept of wealth (or the asset base) as "the foundation of generating well-being". This definition of national wealth takes on a much broader definition and is embodied in natural capital, social capital, and produced assets.
Empirical studies of the consumption-wealth relationship often assume a framework in which aggregate household spending depends linearly on wealth, the underlying state variable. These studies have given rise to many estimates of the wealth effect. In a general equilibrium setting, however, both consumption and wealth react to "shocks" impacting the economy. Therefore, without any independent movements in wealth, the marginal propensity to consume out of wealth is hard to define.
Clarification of this point can be found in the relationship between consumption, savings, and equity within the framework of a real business cycle model with investment adjustment costs. The behavior of consumption and wealth depends crucially on the nature of the "shocks" affecting households, government and business.
The form of the shocks and whether they are anticipated alter not only the magnitude of the wealth effect but also the direction of the response. That is, in the context of this conventional model, net worth (or wealth) and consumption actually move in opposite directions.
So truth or BS is whatever your intelligence, social and ethical stage has reached. Its different in every case and that's why we have economic revolution and evolution . New product, place, markets and ways are contextual to the civilization they are realized in the mistake I think allot make assumes that we have found the 'ideal' within so called 'free market' capitalism.
When I reality this re defined by each generation. One generation of American's were savers and the next generation are consumers then they might learn to save again, they each saw "wealth" spiritually, materially and economically different.
Albert Einstein once said: "Strange is our situation here upon earth. Each of us comes for a short visit, not knowing why, yet Mutuality sometimes seem to divine a purpose. From the standpoint of daily life, however, there is one thing we do know: that man is here for the sake of other men - above all, for those upon whose smile and well-being our own happiness depends, and also for the countless unknown souls with whose fate we are connected by a bond of sympathy. Many times a day I realize how much my own outer and inner life is built upon the labors of my fellowmen, both living and dead, and how earnestly I must exert myself in order to give in return as much as I have received."
20 May 2007
China – An Historian’s View
The China story is one of the most amazing tales of our time. From the incredible turmoil of civil war and war with Japan arose a Marxist State that bemused boomers like myself as we pondered the “Great Leap Forward” and the famine that followed, the happy smiles of contented workers on model farms and iconic images of millions of Chinese waiving the “little red book” on the television.
Real GDP per capita grew 17% in the Sixties, 70% in the Seventies, 63% in the turbulent Eighties and 175% in the Nineties. While this development has been concentrated in the coastal and southern provinces, efforts have been made in recent years to expand the prosperity to the inner provinces and the industrial North East.
Since the start of the “China story” we often hear how it will all end badly in civil disorder or economic collapse, whereas, Jim Rogers, the commodity guru has argued that the next big correction in China will be a massive buying opportunity, for both commodities and Chinese equities.
Well then, what’s the real deal on China?
Perhaps it might be useful to consult an historian and I found a strong opinion was held by a great one, a man who was awarded the Pulitzer Prize for literature and the highest award granted by the United States government to civilians, the Presidential Medal of Freedom. (President Ford in 1977).
William James Durant (November 5, 1885–November 7, 1981) was an American philosopher, historian, and writer. He is best known for his authorship (and co-authorship with his wife Ariel Durant in the later volumes) of “The Story of Civilization”.
Will Durant received his doctorate in 1917 and worked as an instructor at Columbia University.
The Story of Philosophy was published in 1926 by Simon & Schuster and became a bestseller, giving the Durant’s the means to travel the world several times and allowing Will Durant to spend four decades writing the eleven volume opus “The Story of Civilization.”
This is what Durant wrote sometime in the 1920’s as he concluded his history of China and reflected on its future. (the emphasis is mine).
This nation, after three thousand years of grandeur and decay, of repeated deaths and resurrections exhibits today all the physical and mental vitality that we find in its most creative periods.
There are no people in the world more vigorous or more intelligent. No other people so adaptable to circumstance, so resistant to disease, so resilient after disaster and suffering, so trained by history to calm endurance and patient recovery. Imagination cannot describe the possibilities of a civilization mingling the physical, labor and mental resources of such a people with the technological equipment of modern industry. Very probably such wealth will be produced in China as even America has never known and once again, as so often in the past, China will lead the world in luxury and the art of life.
No victory of arms or tyranny of alien finance can long suppress a nation so rich in resources and vitality…… Within a century China will have absorbed and civilised its conquerors and will have learnt all the techniques of … industry..
Roads and communications will give her unity, economy and thrift will give her funds and a strong government will give her order and peace. Every chaos is a transition. In the end disorder cures and balances itself with dictatorship. Old obstacles are roughly cleared away and fresh growth is freed. Revolution, like death and style, is the removal of rubbish, the surgery of the superfluous; it comes only when there are many things ready to die. China has died many times before and many times she has been reborn.
The History of Civilisation: Our Oriental Heritage Volume One Will Durant
I conclude, therefore, that only a fool would bet against China at this point and we can therefore surmise that Rogers is correct, driven by huge structural change in the global economy – in this case the strong growth and industrialisation of China, the current boom is part of a supercycle that will last for years to come.
I unconditionally recommend Will Durant’s work to readers and await the next major China correction to establish a position.
Real GDP per capita grew 17% in the Sixties, 70% in the Seventies, 63% in the turbulent Eighties and 175% in the Nineties. While this development has been concentrated in the coastal and southern provinces, efforts have been made in recent years to expand the prosperity to the inner provinces and the industrial North East.
Since the start of the “China story” we often hear how it will all end badly in civil disorder or economic collapse, whereas, Jim Rogers, the commodity guru has argued that the next big correction in China will be a massive buying opportunity, for both commodities and Chinese equities.
Well then, what’s the real deal on China?
Perhaps it might be useful to consult an historian and I found a strong opinion was held by a great one, a man who was awarded the Pulitzer Prize for literature and the highest award granted by the United States government to civilians, the Presidential Medal of Freedom. (President Ford in 1977).
William James Durant (November 5, 1885–November 7, 1981) was an American philosopher, historian, and writer. He is best known for his authorship (and co-authorship with his wife Ariel Durant in the later volumes) of “The Story of Civilization”.
Will Durant received his doctorate in 1917 and worked as an instructor at Columbia University.
The Story of Philosophy was published in 1926 by Simon & Schuster and became a bestseller, giving the Durant’s the means to travel the world several times and allowing Will Durant to spend four decades writing the eleven volume opus “The Story of Civilization.”
This is what Durant wrote sometime in the 1920’s as he concluded his history of China and reflected on its future. (the emphasis is mine).
This nation, after three thousand years of grandeur and decay, of repeated deaths and resurrections exhibits today all the physical and mental vitality that we find in its most creative periods.
There are no people in the world more vigorous or more intelligent. No other people so adaptable to circumstance, so resistant to disease, so resilient after disaster and suffering, so trained by history to calm endurance and patient recovery. Imagination cannot describe the possibilities of a civilization mingling the physical, labor and mental resources of such a people with the technological equipment of modern industry. Very probably such wealth will be produced in China as even America has never known and once again, as so often in the past, China will lead the world in luxury and the art of life.
No victory of arms or tyranny of alien finance can long suppress a nation so rich in resources and vitality…… Within a century China will have absorbed and civilised its conquerors and will have learnt all the techniques of … industry..
Roads and communications will give her unity, economy and thrift will give her funds and a strong government will give her order and peace. Every chaos is a transition. In the end disorder cures and balances itself with dictatorship. Old obstacles are roughly cleared away and fresh growth is freed. Revolution, like death and style, is the removal of rubbish, the surgery of the superfluous; it comes only when there are many things ready to die. China has died many times before and many times she has been reborn.
The History of Civilisation: Our Oriental Heritage Volume One Will Durant
I conclude, therefore, that only a fool would bet against China at this point and we can therefore surmise that Rogers is correct, driven by huge structural change in the global economy – in this case the strong growth and industrialisation of China, the current boom is part of a supercycle that will last for years to come.
I unconditionally recommend Will Durant’s work to readers and await the next major China correction to establish a position.
19 May 2007
Republicans despair at Bush -- Washington Post
"This is the most incompetent White House I've seen since I came to Washington," said one GOP senator. "The White House legislative liaison team is incompetent, pitiful, embarrassing. My colleagues can't even tell you who the White House Senate liaison is. There is rank incompetence throughout the government. It's the weakest Cabinet I've seen." And remember, this is a Republican talking.
A prominent conservative complains: "With this White House, there is loyalty not to an idea, but to a person. When Republicans talked about someone in the Reagan administration being 'loyal,' they didn't mean to Ronald Reagan but to the conservative movement." Bush's stubborn defense of Gonzales offends these Republicans, who see the president defiantly clinging to an official who has lost public confidence, just as he did for too long with former defense secretary Donald Rumsfeld.
When a presidency is as severely damaged as this one, the normal drill is to empower a strong and politically adept White House chief of staff to make the necessary changes. That's what the Reagan administration did, bringing in former senator Howard Baker and then political operative Ken Duberstein to repair the damage of the Iran-contra scandal. That's what Bill Clinton did in appointing John Podesta to manage the White House after the Monica Lewinsky debacle.
The current White House chief of staff, Josh Bolten, needs to mount a similar salvage mission, argue several prominent Republicans. They question whether he's politically adept enough. But most of all, they question whether Bolten or anyone else can break through Bush's tight, tough shell and tell him the truth. What's starting to crack isn't the obdurate Bush, but the country.
A prominent conservative complains: "With this White House, there is loyalty not to an idea, but to a person. When Republicans talked about someone in the Reagan administration being 'loyal,' they didn't mean to Ronald Reagan but to the conservative movement." Bush's stubborn defense of Gonzales offends these Republicans, who see the president defiantly clinging to an official who has lost public confidence, just as he did for too long with former defense secretary Donald Rumsfeld.
When a presidency is as severely damaged as this one, the normal drill is to empower a strong and politically adept White House chief of staff to make the necessary changes. That's what the Reagan administration did, bringing in former senator Howard Baker and then political operative Ken Duberstein to repair the damage of the Iran-contra scandal. That's what Bill Clinton did in appointing John Podesta to manage the White House after the Monica Lewinsky debacle.
The current White House chief of staff, Josh Bolten, needs to mount a similar salvage mission, argue several prominent Republicans. They question whether he's politically adept enough. But most of all, they question whether Bolten or anyone else can break through Bush's tight, tough shell and tell him the truth. What's starting to crack isn't the obdurate Bush, but the country.
17 May 2007
what if the bears are right?
NEW YORK - On a sultry spring day in Manhattan, the contrarians -- bears and goldbugs -- are in on the prowl.
The 100 or so bankers, money managers and investors gathered at the Union League Club in New York City last week to hear how today's highly leveraged, derivatives-entangled global financial system is about to come crashing down about their ears. Organized by the Committee for Monetary Research & Education, a nonprofit organization dedicated to educating the public about markets and "sound money," the evening would not be for the faint of heart.
The theme: "A time of Financial Fragility and Latent Instability."
Some may write off such a collection of downbeats as the financial equivalent of a loopy off-the-grid movement, preparing to work the land and create their own power when the oil runs out.
Many in the dark-panelled dining room see financial Armageddon around every corner. Many believe the financial system started on the road to ruin when the world went off the gold standard once and for all in 1970s, switched to fiat-based currencies and started to inflate its way out of its problems.
They believe escalating debt will cause the U.S. dollar to crash and they probably keep gold bars under their beds. Heck, some, such as Chris Powell of the Gold Anti-Trust Action Committee, believe central banks have been actively colluding to keep the gold price down.
And yet with every tick higher in global stock markets, with every newfangled CDO, CDS or ABS that offloads risk ever further, their warnings about the folly of spiralling debt, paper money and inflation provide a sobering view.
They are certainly well-educated and experienced money men. At the risk of spoiling a perfectly good party, here's what they have to say, beginning with the official historian for the Bank of England, Forrest Capie.
FORREST CAPIE
Official historian of the Bank of England, speaking in his own capacity
Mr. Capie is currently on secondment from the bank, writing the next installment of its commissioned history. History has shown that when asset-backed money is abandoned for fiat-based money, inflation invariably follows, he says.
For close to two centuries and until the 19th century, gold was the basis of the world monetary system.
"The gold standard in its classical form provided price stability and allowed the economy to do what it could with uncertainty reduced to a minimum," Mr. Capie says.
By the 20th century, as the world abandoned the gold standard, inflation reared its ugly head. In the 1920s there were five cases of hyperinflation: Russia, Hungary, Austria, Poland, and in Germany prices rose a billion-fold across 1923-24. In the 1940s, there was hyperinflation in China, Greece and Hungary.
"Stories circulate of how in some department stores in Budapest a bell would ring and that would indicate as of that moment, prices had doubled." he says. "In all these experiences, it was unbacked paper money of the kind we now have everywhere. A vast expansion of paper money preceded or accompanied all these inflations. What's also common to these inflations is there's large and growing fiscal deficits. Deficits of these kinds ultimately require monetizing."
In the second half of the 20th century, controlling the supply of money to control inflation fell out of favour. The trendy idea became wage and price controls. Inflation soared, peaking in the U.K. at 30% in the mid-1970s.
With the current targeting of inflation, price stability does seem to prevail Mr. Capie concedes.
"But it does allow considerable discretion in monetary policy ?and the use of discretion has come unstuck in the past," he says. "The great danger then is, if inflation should begin to edge up and if inflation expectations were to change, it may be difficult to contain the new inflation and take some time to alter expectations. Surely it's better at least to keep an eye on the monetary aggregates and prepare to see them as useful indicators of underlying inflationary pressures."
JAMES TURK
Founder and chairman of GoldMoney, a payment system where gold can be used as online currency, author of The Coming Collapse of the Dollar
No explanation required as to where Mr. Turk thinks the dollar is headed.
"When we talk about money, we talk about the supply of money," he says. "What we don't talk about and what in my mind is even more important is the demand for money. Currency crises start with a collapse in demand, he says. If people lose faith in the currency for whatever reasons --either they don't trust the backing or there's not enough gold backing the currency, or they don't trust the government and its policy to maintain a stable purchasing power or to keep the currency strong so it can be used as an effective means for communicating value in everyday commerce-- they move away into other alternatives."
Mr. Turk says central banks almost daily talk about diversifying away from the dollar or creating their own currency zones. In a recent interview with a Russian journalist, the journalist said even Russians, which have long coveted greenbacks, are now beginning to question the supremacy of the U.S. dollar.
Investors, too, are beginning to shun it, with none other than Warren Buffett leading the pack.
"Look, too, at the stock market," he says. "The stock market is not going up because of economic fundamentals. People would rather own a million dollars of Exxon than have a million dollars in the bank. It's also true people would own a million dollars of copper than have a million dollars sitting in the bank. All these things cumulatively are suggesting to me we are probably on the final slippery slope for the dollar. I do think the next several months are going to be very, very tumultuous."
"We're buying from China," he says. "They're lending us back the money. It's unsustainable. It cannot go on forever because we're eroding our net worth. Just like individuals can have too much debt, companies can have too much debt, nations can have too much debt."
PETER WARBURTON
'Director of Rhombus Research, author of Debt and Delusion
"You could say the central banks, particularly the Fed, have been killing us with kindness," Mr. Warburton says. "They've wanted to prevent bad things happening to us, but in the process they have made assurances and taken steps to help us misprice the risks in the system and emboldened us to take bigger risks."
As far back as the Mexican peso crisis of 1994, an asymmetrical bias began to creep into U.S. monetary policy allowing equity rises to go uncorrected but sharp falls to be cushioned, he says.
There were powerful indications the decade-long credit cycle was close to exhaustion in 2000-01 with bond yields rising back up to their late-1990s peaks.
But it was arrested in 2002 by the U.S. Fed slashing rates and making policy statements that it had numerous tools at its disposal to fend off any deflation risk.
"The opportunity was missed for the system to correct," he says.
Instead the Fed helped create an ever-expanding risk universe, with derivatives, asset-backed instruments, insurance markets, credit protection securities and catastrophe bonds all pushing out the outer front of risk.
"This all works wonderfully well," he says. The risk universe expands by 20% per annum, credit by say 10%, the economy by 6% or 7%." But it all relies upon the credit staying good."
He sees an unwinding in any number of usual ways: a natural or man-made disaster; a spill-over of inflation from asset markets into CPI which would prevent interest rate cuts; a grass roots credit tightening due to lower collection of debt, late settlements or a postponement of capital expenditures.
Eventually, you could see foreclosures, capital losses or break in the hedge fund or derivatives market, as with LTCM in 1998.
"My concern is we have already entered the latter stages of this process," he says. "The price we may yet pay for the fix in 2002 is to have an extended period of underperformance."
HENRY C.K. LIU
Visiting professor at the University of Wisconsin and Asia Times online commentator, has provided unofficial advice to several Chinese governments
"Today, the dollar is the world's prime reserve currency. While depreciating against most assets, it continues to be really overvalued in terms of gold," he says.
To give an idea of how indebted the United States is, Mr. Liu outlines what the U.S. Treasury would require if the dollar was still backed by gold.
The U.S. treasury now owns 261 million ounces of gold. At its peak in in December, 1941, it owned 650 million ounces.
As of March 12, 2007, the price of gold required to pay back the national debt was US$33,864 per ounce. The rise in the price of gold needed to keep up with the rise in U.S. national debt would be US$8.15 per ounce per day.
To back the U.S. monetary base with gold, which was about US$800-billion in February, the price of gold would have to be US$3,763 per ounce.
Unlike many at the dinner, Mr. Liu says gold does not have enough elasticity for a modern global economy.
[With that kind of debt, there may not be enough gold in the ground!]
He believes global financial markets have become completely detached from underlying economic fundamentals. "The old concerns of industrial capitalism, which is production, employment and so on have become byproducts," he says.
With trade becoming an increasingly key engine of the global economy, other aspects such as domestic development have been overlooked.
In a recent column, he said virtual money created by structured finance has reduced central bankers to the status of mere players rather than key conductors of financial markets.
As inflation picks up, the liquidity boom and asset inflation will draw to a close, leaving a hollowed out economy devoid of substance.
Mr. Liu says with financial crises seeming to occur in a regular 10-year pattern-- the October, 1987 crash, the Asian financial crisis starting in July, 1997 -- the world is due a slump.
KEVIN DUFFY
Principal of Bearing Asset Management, which runs the Bearing Fund, a long-short macro hedge fund currently long gold, short financial stocks and Japanese government bonds
"We had the late-1980s bubble in Japan, the biotechnology bubble in 1991, we had the first LBO bubble of '89, of course the technology bubble of 2000 and more recently the housing bubble," Mr. Duffy says. "As you get these asset bubbles, it takes greater and greater doses of credit just to keep the game going. In doing so, you invite more and more borrowers or you extend greater credit to existing borrowers. This is what happened recently with the subprime problem."
Mr. Duffy likes to look for contrarian indicators in popular culture. In June 2005, one month from the top in homebuilding stocks, Time ran a cover about the real estate bonanza.
Another great contrarian indicator is stadium names. In 2000, tech companies had 12 stadium names; 10 of those companies are now bankrupt. Today, 14 stadiums have bank names.
Beneath each bubble is a gargantuan credit bubble.
"What is making this credit cycle so terrifying is the amount of leverage that's being deployed, and Wall Street is applying a lot of that," he says.
Since 2001, the U.S. Federal Reserve's balance sheet has expanded US$300- billion, or 50%, the money supply has grown by 60% while the balance sheets of the top five banks on Wall Street have expanded 160%.
Money in venture capital peaked at US$90-billion in 2000. Some US$160- billion poured into private equity last year and that amount will probably double this year, he says.
The housing bubble has now been replaced by a professional speculator bubble: commercial real estate, hedge funds and private equity, Mr. Duffy says.
But he says the same exotic mortgages are starting to be found in commercial real estate.
"All indicators of a massive top," he says.
Quoting James Stack, editor of InvestTech Research, he says: "Never confuse an economic miracle with a liquidity bubble."
The 100 or so bankers, money managers and investors gathered at the Union League Club in New York City last week to hear how today's highly leveraged, derivatives-entangled global financial system is about to come crashing down about their ears. Organized by the Committee for Monetary Research & Education, a nonprofit organization dedicated to educating the public about markets and "sound money," the evening would not be for the faint of heart.
The theme: "A time of Financial Fragility and Latent Instability."
Some may write off such a collection of downbeats as the financial equivalent of a loopy off-the-grid movement, preparing to work the land and create their own power when the oil runs out.
Many in the dark-panelled dining room see financial Armageddon around every corner. Many believe the financial system started on the road to ruin when the world went off the gold standard once and for all in 1970s, switched to fiat-based currencies and started to inflate its way out of its problems.
They believe escalating debt will cause the U.S. dollar to crash and they probably keep gold bars under their beds. Heck, some, such as Chris Powell of the Gold Anti-Trust Action Committee, believe central banks have been actively colluding to keep the gold price down.
And yet with every tick higher in global stock markets, with every newfangled CDO, CDS or ABS that offloads risk ever further, their warnings about the folly of spiralling debt, paper money and inflation provide a sobering view.
They are certainly well-educated and experienced money men. At the risk of spoiling a perfectly good party, here's what they have to say, beginning with the official historian for the Bank of England, Forrest Capie.
FORREST CAPIE
Official historian of the Bank of England, speaking in his own capacity
Mr. Capie is currently on secondment from the bank, writing the next installment of its commissioned history. History has shown that when asset-backed money is abandoned for fiat-based money, inflation invariably follows, he says.
For close to two centuries and until the 19th century, gold was the basis of the world monetary system.
"The gold standard in its classical form provided price stability and allowed the economy to do what it could with uncertainty reduced to a minimum," Mr. Capie says.
By the 20th century, as the world abandoned the gold standard, inflation reared its ugly head. In the 1920s there were five cases of hyperinflation: Russia, Hungary, Austria, Poland, and in Germany prices rose a billion-fold across 1923-24. In the 1940s, there was hyperinflation in China, Greece and Hungary.
"Stories circulate of how in some department stores in Budapest a bell would ring and that would indicate as of that moment, prices had doubled." he says. "In all these experiences, it was unbacked paper money of the kind we now have everywhere. A vast expansion of paper money preceded or accompanied all these inflations. What's also common to these inflations is there's large and growing fiscal deficits. Deficits of these kinds ultimately require monetizing."
In the second half of the 20th century, controlling the supply of money to control inflation fell out of favour. The trendy idea became wage and price controls. Inflation soared, peaking in the U.K. at 30% in the mid-1970s.
With the current targeting of inflation, price stability does seem to prevail Mr. Capie concedes.
"But it does allow considerable discretion in monetary policy ?and the use of discretion has come unstuck in the past," he says. "The great danger then is, if inflation should begin to edge up and if inflation expectations were to change, it may be difficult to contain the new inflation and take some time to alter expectations. Surely it's better at least to keep an eye on the monetary aggregates and prepare to see them as useful indicators of underlying inflationary pressures."
JAMES TURK
Founder and chairman of GoldMoney, a payment system where gold can be used as online currency, author of The Coming Collapse of the Dollar
No explanation required as to where Mr. Turk thinks the dollar is headed.
"When we talk about money, we talk about the supply of money," he says. "What we don't talk about and what in my mind is even more important is the demand for money. Currency crises start with a collapse in demand, he says. If people lose faith in the currency for whatever reasons --either they don't trust the backing or there's not enough gold backing the currency, or they don't trust the government and its policy to maintain a stable purchasing power or to keep the currency strong so it can be used as an effective means for communicating value in everyday commerce-- they move away into other alternatives."
Mr. Turk says central banks almost daily talk about diversifying away from the dollar or creating their own currency zones. In a recent interview with a Russian journalist, the journalist said even Russians, which have long coveted greenbacks, are now beginning to question the supremacy of the U.S. dollar.
Investors, too, are beginning to shun it, with none other than Warren Buffett leading the pack.
"Look, too, at the stock market," he says. "The stock market is not going up because of economic fundamentals. People would rather own a million dollars of Exxon than have a million dollars in the bank. It's also true people would own a million dollars of copper than have a million dollars sitting in the bank. All these things cumulatively are suggesting to me we are probably on the final slippery slope for the dollar. I do think the next several months are going to be very, very tumultuous."
"We're buying from China," he says. "They're lending us back the money. It's unsustainable. It cannot go on forever because we're eroding our net worth. Just like individuals can have too much debt, companies can have too much debt, nations can have too much debt."
PETER WARBURTON
'Director of Rhombus Research, author of Debt and Delusion
"You could say the central banks, particularly the Fed, have been killing us with kindness," Mr. Warburton says. "They've wanted to prevent bad things happening to us, but in the process they have made assurances and taken steps to help us misprice the risks in the system and emboldened us to take bigger risks."
As far back as the Mexican peso crisis of 1994, an asymmetrical bias began to creep into U.S. monetary policy allowing equity rises to go uncorrected but sharp falls to be cushioned, he says.
There were powerful indications the decade-long credit cycle was close to exhaustion in 2000-01 with bond yields rising back up to their late-1990s peaks.
But it was arrested in 2002 by the U.S. Fed slashing rates and making policy statements that it had numerous tools at its disposal to fend off any deflation risk.
"The opportunity was missed for the system to correct," he says.
Instead the Fed helped create an ever-expanding risk universe, with derivatives, asset-backed instruments, insurance markets, credit protection securities and catastrophe bonds all pushing out the outer front of risk.
"This all works wonderfully well," he says. The risk universe expands by 20% per annum, credit by say 10%, the economy by 6% or 7%." But it all relies upon the credit staying good."
He sees an unwinding in any number of usual ways: a natural or man-made disaster; a spill-over of inflation from asset markets into CPI which would prevent interest rate cuts; a grass roots credit tightening due to lower collection of debt, late settlements or a postponement of capital expenditures.
Eventually, you could see foreclosures, capital losses or break in the hedge fund or derivatives market, as with LTCM in 1998.
"My concern is we have already entered the latter stages of this process," he says. "The price we may yet pay for the fix in 2002 is to have an extended period of underperformance."
HENRY C.K. LIU
Visiting professor at the University of Wisconsin and Asia Times online commentator, has provided unofficial advice to several Chinese governments
"Today, the dollar is the world's prime reserve currency. While depreciating against most assets, it continues to be really overvalued in terms of gold," he says.
To give an idea of how indebted the United States is, Mr. Liu outlines what the U.S. Treasury would require if the dollar was still backed by gold.
The U.S. treasury now owns 261 million ounces of gold. At its peak in in December, 1941, it owned 650 million ounces.
As of March 12, 2007, the price of gold required to pay back the national debt was US$33,864 per ounce. The rise in the price of gold needed to keep up with the rise in U.S. national debt would be US$8.15 per ounce per day.
To back the U.S. monetary base with gold, which was about US$800-billion in February, the price of gold would have to be US$3,763 per ounce.
Unlike many at the dinner, Mr. Liu says gold does not have enough elasticity for a modern global economy.
[With that kind of debt, there may not be enough gold in the ground!]
He believes global financial markets have become completely detached from underlying economic fundamentals. "The old concerns of industrial capitalism, which is production, employment and so on have become byproducts," he says.
With trade becoming an increasingly key engine of the global economy, other aspects such as domestic development have been overlooked.
In a recent column, he said virtual money created by structured finance has reduced central bankers to the status of mere players rather than key conductors of financial markets.
As inflation picks up, the liquidity boom and asset inflation will draw to a close, leaving a hollowed out economy devoid of substance.
Mr. Liu says with financial crises seeming to occur in a regular 10-year pattern-- the October, 1987 crash, the Asian financial crisis starting in July, 1997 -- the world is due a slump.
KEVIN DUFFY
Principal of Bearing Asset Management, which runs the Bearing Fund, a long-short macro hedge fund currently long gold, short financial stocks and Japanese government bonds
"We had the late-1980s bubble in Japan, the biotechnology bubble in 1991, we had the first LBO bubble of '89, of course the technology bubble of 2000 and more recently the housing bubble," Mr. Duffy says. "As you get these asset bubbles, it takes greater and greater doses of credit just to keep the game going. In doing so, you invite more and more borrowers or you extend greater credit to existing borrowers. This is what happened recently with the subprime problem."
Mr. Duffy likes to look for contrarian indicators in popular culture. In June 2005, one month from the top in homebuilding stocks, Time ran a cover about the real estate bonanza.
Another great contrarian indicator is stadium names. In 2000, tech companies had 12 stadium names; 10 of those companies are now bankrupt. Today, 14 stadiums have bank names.
Beneath each bubble is a gargantuan credit bubble.
"What is making this credit cycle so terrifying is the amount of leverage that's being deployed, and Wall Street is applying a lot of that," he says.
Since 2001, the U.S. Federal Reserve's balance sheet has expanded US$300- billion, or 50%, the money supply has grown by 60% while the balance sheets of the top five banks on Wall Street have expanded 160%.
Money in venture capital peaked at US$90-billion in 2000. Some US$160- billion poured into private equity last year and that amount will probably double this year, he says.
The housing bubble has now been replaced by a professional speculator bubble: commercial real estate, hedge funds and private equity, Mr. Duffy says.
But he says the same exotic mortgages are starting to be found in commercial real estate.
"All indicators of a massive top," he says.
Quoting James Stack, editor of InvestTech Research, he says: "Never confuse an economic miracle with a liquidity bubble."
Hot stock - Oxiana
What's new? The deal-hungry market has turned its attention to the resource sector, which is hardly surprising, considering finance remains easy to obtain and resource stocks are cheap.
This has lead to a renewed focus on the large diversified miners such as Oxiana. It is not without risk but Oxiana has one of the best growth profiles around for a large resource company. This growth potential can be attributed to the company's ambitious management team. Under the direction of Owen Hegarty, managing director and chief executive, Oxiana has come a long way. Before 2005 the company produced only gold but it has added copper and zinc to its production.
A diversified production base and higher commodity prices have seen strong gains in the stock price. Oxiana has a current market capitalisation of about $5.3 billion. Hegarty aims to increase the company's market value to between $10 and $15 billion over the next three years. This is ambitious but the company is off to a good start - it is the fastest growing of Australia's top 10 miners. To keep the momentum going, management will continue to develop existing operations while pursuing acquisition opportunities. In the current takeover and merger frenzy, however, there is the possibility Oxiana could itself become a target.
The outlook Given our bullish views on resources, Oxiana's outlook appears strong. In the short term, the company's production profile is unspectacular, however a number of projects under development provide significant long-term potential. The company recently completed the acquisition of former West Australian gold miner Agincourt Resources. Catching management's eye was Agincourt's Martabe Project in Indonesia. The undeveloped site is quite a catch, containing 5.5 million ounces of gold and 57 million ounces of silver.
The Agincourt acquisition also added uranium exposure to Oxiana's burgeoning portfolio of resource assets, although some time away from production. Other developments in the pipeline include expansion of the Golden Grove base and precious metals project in WA, the Prominent Hill gold copper project in SA and expansion of operations in Laos.
All projects currently under development should be operational within a few years and Oxiana is targeting annual production levels of 500,000 tonnes of base metals (copper and zinc) and 500,000 ounces of gold and silver by 2010. Production remains unhedged, providing full exposure to commodity prices.
Price Aggressive expansion, combined with a timely increase in commodity prices, has seen Oxiana's share price rise significantly since 2005. However, short-term production and commodity price concerns saw it stagnate for much of the past year. More recently renewed investor enthusiasm has seen the stock rise from the March low of $2.60 to about $3.40.
Worth buying? Oxiana represents an attractive investment opportunity. Production should rise significantly in the coming years and the company's resource base will likely sustain such levels. It has long-term potential.
This has lead to a renewed focus on the large diversified miners such as Oxiana. It is not without risk but Oxiana has one of the best growth profiles around for a large resource company. This growth potential can be attributed to the company's ambitious management team. Under the direction of Owen Hegarty, managing director and chief executive, Oxiana has come a long way. Before 2005 the company produced only gold but it has added copper and zinc to its production.
A diversified production base and higher commodity prices have seen strong gains in the stock price. Oxiana has a current market capitalisation of about $5.3 billion. Hegarty aims to increase the company's market value to between $10 and $15 billion over the next three years. This is ambitious but the company is off to a good start - it is the fastest growing of Australia's top 10 miners. To keep the momentum going, management will continue to develop existing operations while pursuing acquisition opportunities. In the current takeover and merger frenzy, however, there is the possibility Oxiana could itself become a target.
The outlook Given our bullish views on resources, Oxiana's outlook appears strong. In the short term, the company's production profile is unspectacular, however a number of projects under development provide significant long-term potential. The company recently completed the acquisition of former West Australian gold miner Agincourt Resources. Catching management's eye was Agincourt's Martabe Project in Indonesia. The undeveloped site is quite a catch, containing 5.5 million ounces of gold and 57 million ounces of silver.
The Agincourt acquisition also added uranium exposure to Oxiana's burgeoning portfolio of resource assets, although some time away from production. Other developments in the pipeline include expansion of the Golden Grove base and precious metals project in WA, the Prominent Hill gold copper project in SA and expansion of operations in Laos.
All projects currently under development should be operational within a few years and Oxiana is targeting annual production levels of 500,000 tonnes of base metals (copper and zinc) and 500,000 ounces of gold and silver by 2010. Production remains unhedged, providing full exposure to commodity prices.
Price Aggressive expansion, combined with a timely increase in commodity prices, has seen Oxiana's share price rise significantly since 2005. However, short-term production and commodity price concerns saw it stagnate for much of the past year. More recently renewed investor enthusiasm has seen the stock rise from the March low of $2.60 to about $3.40.
Worth buying? Oxiana represents an attractive investment opportunity. Production should rise significantly in the coming years and the company's resource base will likely sustain such levels. It has long-term potential.
16 May 2007
New York Post on an FOI re the PPT
My request for information about the actions of the secretive Working Group on Financial Markets at the Treasury Department "seems to have fallen through the cracks," according to the wording of an internal government document I just got my hands on.
That document, dated April 5, 2007, indicates that the Treasury's Disclosure Services division spent quite a lot of time discussing the request I made last summer under the government's Freedom of Information Act.
In fact, "Spotlight on New York Post FOIA Request" is the final issue on a seven-item agenda. And the 13-page PowerPoint presentation titled "Bottom Line" devotes a page and a half to the Post's request.
One of the "lessons learned and the way ahead," according to this presentation, is to "process and respond to Mr. Crudele's requests ASAP."
It's now more than a month since that meeting and I still haven't received documents or even an official letter. I guess ASAP might mean something other than "as soon as possible" in government lingo -- perhaps "as soon as pigsfly."
For those of you who haven't been following this saga, let me fill you in.
Back when Goldman Sachs Chairman Henry Paulson took over as Treasury secretary nearly a year ago, I did a multi-column investigation of the Working Group on Financial Markets, which is also endearingly nicknamed the Plunge Protection Team.
As far as I can tell, variations of the group have been in existence since the late 1980s. The PPT operates in that shadowy space between the government's desire to keep the market safe for national security reasons and Wall Street's desire to keep prices up for selfish reasons.
Other newspapers have since reported that -- unlike his predecessors -- Paulson calls frequent meetings of the Plunge Protection Team, which now seems to include Wall Street big shots as well as top officials such as Federal Reserve Chairman Ben Bernanke and New York Stock Exchange Chairman John Thain.
It's nice that all these folks have time to get together. And it is wonderful that the naive media think these meetings of government and finance brains are innocent. But I'm suspicious.
Of what?
I believe the Plunge Protection Team has emergency powers to protect the stock market if the situation warrants it. (Incidentally, I wholly support such action.)
But I also believe that the Plunge Protectors -- left unchecked -- could cause a tremendous loss of confidence in our financial markets. And they could create the very national security problems they think are fixing.
That's why I've asked for the minutes of meetings of the Plunge Protection Team on very specific dates when the stock market pulled a couple of rabbits out of its hat.
I didn't want to get greedy, so I kept the scope of my search narrow.
But apparently I must have guessed right and asked about sensitive enough issues because the Treasury ignored that first request and hasn't been any more obliging in response to follow-up letters.
It was only after I wrote an open letter to Paulson and published it in this column on April 3 that Treasury seemed to get the message. Two days later I was on the agenda of its FOIA Operations Overview.
At that meeting it appears that the folks at Treasury decided that my "request does not meet the criteria for an expedited request and asked the OGC [Office of General Counsel][for] concurrence on April 4."
Expedited! The request for this information was made last July!
I also got the impression when I spoke with a Treasury official last week that my request was about to be turned down.
A spokesman at Treasury told me that the government was trying to determine who the "appeals officer" was for this case -- an indication, I imagine, that I'm going to be asked to beg someone else for the information to which we are legally entitled.
I'm not surprised. Congress has tried to crack the mystery of the Plunge Protection Team and failed.
After my first FOIA request was filed, Rep. Ron Paul, R-Texas, last fall asked for the very same things I did -- the minutes of the Working Group's meetings.
"An informal inquiry to Treasury from our office yielded nothing. They claim such minutes are not taken and don't exist," one of Paul's people told me in an e-mail last September.
Very interesting! This intriguing group of government officials and private financiers meets regularly under Paulson and nobody keeps a record of what they discuss or do.
Why am I so interested?
If the Plunge Protection Team is doing what I suspect -- namely, coming to the rescue of stocks whenever it deems it necessary -- this would not only change the entire nature of investing in this country but would be the biggest financial story ever.
* * *
That document, dated April 5, 2007, indicates that the Treasury's Disclosure Services division spent quite a lot of time discussing the request I made last summer under the government's Freedom of Information Act.
In fact, "Spotlight on New York Post FOIA Request" is the final issue on a seven-item agenda. And the 13-page PowerPoint presentation titled "Bottom Line" devotes a page and a half to the Post's request.
One of the "lessons learned and the way ahead," according to this presentation, is to "process and respond to Mr. Crudele's requests ASAP."
It's now more than a month since that meeting and I still haven't received documents or even an official letter. I guess ASAP might mean something other than "as soon as possible" in government lingo -- perhaps "as soon as pigsfly."
For those of you who haven't been following this saga, let me fill you in.
Back when Goldman Sachs Chairman Henry Paulson took over as Treasury secretary nearly a year ago, I did a multi-column investigation of the Working Group on Financial Markets, which is also endearingly nicknamed the Plunge Protection Team.
As far as I can tell, variations of the group have been in existence since the late 1980s. The PPT operates in that shadowy space between the government's desire to keep the market safe for national security reasons and Wall Street's desire to keep prices up for selfish reasons.
Other newspapers have since reported that -- unlike his predecessors -- Paulson calls frequent meetings of the Plunge Protection Team, which now seems to include Wall Street big shots as well as top officials such as Federal Reserve Chairman Ben Bernanke and New York Stock Exchange Chairman John Thain.
It's nice that all these folks have time to get together. And it is wonderful that the naive media think these meetings of government and finance brains are innocent. But I'm suspicious.
Of what?
I believe the Plunge Protection Team has emergency powers to protect the stock market if the situation warrants it. (Incidentally, I wholly support such action.)
But I also believe that the Plunge Protectors -- left unchecked -- could cause a tremendous loss of confidence in our financial markets. And they could create the very national security problems they think are fixing.
That's why I've asked for the minutes of meetings of the Plunge Protection Team on very specific dates when the stock market pulled a couple of rabbits out of its hat.
I didn't want to get greedy, so I kept the scope of my search narrow.
But apparently I must have guessed right and asked about sensitive enough issues because the Treasury ignored that first request and hasn't been any more obliging in response to follow-up letters.
It was only after I wrote an open letter to Paulson and published it in this column on April 3 that Treasury seemed to get the message. Two days later I was on the agenda of its FOIA Operations Overview.
At that meeting it appears that the folks at Treasury decided that my "request does not meet the criteria for an expedited request and asked the OGC [Office of General Counsel][for] concurrence on April 4."
Expedited! The request for this information was made last July!
I also got the impression when I spoke with a Treasury official last week that my request was about to be turned down.
A spokesman at Treasury told me that the government was trying to determine who the "appeals officer" was for this case -- an indication, I imagine, that I'm going to be asked to beg someone else for the information to which we are legally entitled.
I'm not surprised. Congress has tried to crack the mystery of the Plunge Protection Team and failed.
After my first FOIA request was filed, Rep. Ron Paul, R-Texas, last fall asked for the very same things I did -- the minutes of the Working Group's meetings.
"An informal inquiry to Treasury from our office yielded nothing. They claim such minutes are not taken and don't exist," one of Paul's people told me in an e-mail last September.
Very interesting! This intriguing group of government officials and private financiers meets regularly under Paulson and nobody keeps a record of what they discuss or do.
Why am I so interested?
If the Plunge Protection Team is doing what I suspect -- namely, coming to the rescue of stocks whenever it deems it necessary -- this would not only change the entire nature of investing in this country but would be the biggest financial story ever.
* * *
11 May 2007
Rules for speculation
1. Create a sound money-management strategy.
This one flies in the face of the conventional image of a speculator. But
believe me, all consistently successful speculators start with a plan. It
doesn't have to be anything too involved - just make sure you're clear on
your objectives, and set some guidelines for yourself. Figure out your entry
and exit strategy for each play, starting with how much to invest, how many
open positions you plan to have, how you will monitor positions, what kind of
stop-losses you will use to preserve capital, etc.
A sound money management strategy is the most important factor in successful
speculation and it allows you to stay in the game.
2. Know your broker and monitor your investment
When choosing a broker make sure to ask as many questions as necessary and
that you get the appropriate answers before simply giving over your money. If
you are a beginner, find out about the broker's history and references, and
speak to them frequently to establish a relationship. Make sure that either
your broker or you will be constantly monitoring your investment - today's
markets are very volatile and with options the price can shoot up 30% or more
in just a few hours...so it is necessary that your broker is able to see the
option is performing and be able to execute an order in a timely manner, to
ensure that your capital is protected.
With so many discount Internet brokers out there, it seems like more and more
people aren't doing their homework before opening an account. It's OK to try
and go it alone... unless you don't know what you're doing. In that case,
it's well worth the time and money to explore more experienced flesh-and- blood brokers.
3. Stick with your exit strategy if a trade goes against you
With a good money-management plan, there should never be any surprises. No
matter what price your trade is at, the action you need to take should be
clear.
That doesn't mean you have to be inflexible, however. Just because an option
has met your profit target, you don't have to automatically sell. But there
has to be a compelling reason to stick with the trade - something more than a
feeling that the trade will continue climbing above your target price. (After
all, you selected that target price for a reason.) And always use a stop-loss
or a trailing stop order to make sure you're ready for any reversal that
might pop up.
For a losing trade, however, you need to be a little more harsh. Options are
wasting instruments, and their value dies a little each day. Sometimes it's
better to stick to your strategy and settle for a loss than it is to wait it
out and hope for a miracle. That's money you could be plugging into another
play.
4. Always, always, always, ask questions
The Internet age is creating a generation of independent investors. But some
are still too proud to admit that there are things they don't know. In the
speculation game, what you don't know can hurt you.
If you've taken my advice about finding a good broker, you've already got a
ready source of info to turn to. Dozens of Web sites also offer complete
details on options trading. So there's just no excuse for ignorance any
more... and losing money because of ignorance makes even less sense.
5. Learn from your mistakes
Find out what works for you. There will be losers along the way - but just
make sure you know what you did wrong in previous trades (e.g. you set a stop
loss of 15% and were stopped out too early and the option rebounded to 56%
profits). Take every trade as a lesson and use it to improve as you continue
trading.
6. Remember that knowledge is power
You can never know too much... strive to learn as much as you can about
options and their inner workings, strategies, fundamentals, everything... so
that you will be better equipped to profit with options trading.
As I've said in the past, options trading is more accessible than ever
before. And the profit potential hasn't diminished a single cent. Going out
of your way to learn the myriad of ways they can boost your bottom line is
the easiest way to discover what works for you.
This one flies in the face of the conventional image of a speculator. But
believe me, all consistently successful speculators start with a plan. It
doesn't have to be anything too involved - just make sure you're clear on
your objectives, and set some guidelines for yourself. Figure out your entry
and exit strategy for each play, starting with how much to invest, how many
open positions you plan to have, how you will monitor positions, what kind of
stop-losses you will use to preserve capital, etc.
A sound money management strategy is the most important factor in successful
speculation and it allows you to stay in the game.
2. Know your broker and monitor your investment
When choosing a broker make sure to ask as many questions as necessary and
that you get the appropriate answers before simply giving over your money. If
you are a beginner, find out about the broker's history and references, and
speak to them frequently to establish a relationship. Make sure that either
your broker or you will be constantly monitoring your investment - today's
markets are very volatile and with options the price can shoot up 30% or more
in just a few hours...so it is necessary that your broker is able to see the
option is performing and be able to execute an order in a timely manner, to
ensure that your capital is protected.
With so many discount Internet brokers out there, it seems like more and more
people aren't doing their homework before opening an account. It's OK to try
and go it alone... unless you don't know what you're doing. In that case,
it's well worth the time and money to explore more experienced flesh-and- blood brokers.
3. Stick with your exit strategy if a trade goes against you
With a good money-management plan, there should never be any surprises. No
matter what price your trade is at, the action you need to take should be
clear.
That doesn't mean you have to be inflexible, however. Just because an option
has met your profit target, you don't have to automatically sell. But there
has to be a compelling reason to stick with the trade - something more than a
feeling that the trade will continue climbing above your target price. (After
all, you selected that target price for a reason.) And always use a stop-loss
or a trailing stop order to make sure you're ready for any reversal that
might pop up.
For a losing trade, however, you need to be a little more harsh. Options are
wasting instruments, and their value dies a little each day. Sometimes it's
better to stick to your strategy and settle for a loss than it is to wait it
out and hope for a miracle. That's money you could be plugging into another
play.
4. Always, always, always, ask questions
The Internet age is creating a generation of independent investors. But some
are still too proud to admit that there are things they don't know. In the
speculation game, what you don't know can hurt you.
If you've taken my advice about finding a good broker, you've already got a
ready source of info to turn to. Dozens of Web sites also offer complete
details on options trading. So there's just no excuse for ignorance any
more... and losing money because of ignorance makes even less sense.
5. Learn from your mistakes
Find out what works for you. There will be losers along the way - but just
make sure you know what you did wrong in previous trades (e.g. you set a stop
loss of 15% and were stopped out too early and the option rebounded to 56%
profits). Take every trade as a lesson and use it to improve as you continue
trading.
6. Remember that knowledge is power
You can never know too much... strive to learn as much as you can about
options and their inner workings, strategies, fundamentals, everything... so
that you will be better equipped to profit with options trading.
As I've said in the past, options trading is more accessible than ever
before. And the profit potential hasn't diminished a single cent. Going out
of your way to learn the myriad of ways they can boost your bottom line is
the easiest way to discover what works for you.
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