Wealth International, Limited

Finance Digest for Week of May 17, 2004


It now requires a fortune of £40 million to break the threshold onto the hallowed list. In the last four years their collective wealth has almost doubled from the £115 billion recorded in 2000. The richest 50 people in Europe increased their wealth over the past year by a slightly less spectacular 22%. And significantly, the world’s top 50 enjoyed much smaller gains of 3.8% compared to those based in and around London.

This veritable wealth explosion and the coalescence of the international super-rich in the British capital are the outcome of a number of interconnected factors. The City of London financial district is emerging as a key command centre of global finance; Britain is now one of the world’s most popular tax havens; and birds of a feather tend to flock together when the nesting is so luxurious and the political climate so amicable. Under British law foreigners may only be taxed on their UK incomes, rather than their international incomes. Consequently the super-rich from around the world can live in London and pay a pittance in taxes.

Link here.

Moscow has the most billionaires.

Moscow now boasts more billionaires than any other city in the world, according to a survey by Forbes magazine. The study also estimates that a quarter of Russia’s wealth is now concentrated in the hands of just 100 people. Topping the list with an estimated fortune of $15.2 billion is Mikhail Khodorkovsky, the former head of the oil firm Yukos, who is presently in jail facing charges of fraud and tax evasion. The 37-year-old oil and aluminium tycoon, Roman Abramovich, who last year bought London’s Chelsea Football Club, is Russia’s second wealthiest man, worth $12 billion.

Some businessmen were unhappy to appear on the list, local newspapers reported. “Appearing on such a list is bound to make the entrepreneur a prime target for the law enforcement authorities,” one businessman said. In the spring of 2003 Forbes published a list of 100 richest people in China, which, reportedly, led to some of them being arrested.

Link here.


All across the Pacific, even in Japan, officials are vying to net the elusive, wealthy Chinese tourist, seen as the big-spending successor to the Arab tourists of the 1970s, fueled by oil dollars, and the brandaholic Japanese shoppers of the 1980s and 90s. In fact, China and Japan traded places as tourism powers last year, according to statistics from the two countries. About 15 million Chinese tourists traveled overseas, a 47% jump from the previous year compared with 13.2 million Japanese, a 19.5% decline.

“The numbers are overwhelming,” said Bartley A. Jackson, general manager in Guam of the Pacific Island Club, a resort with a branch in Saipan. “If just 1 percent of the population can afford to come to Guam or Saipan, that is a tremendous market to draw from.” The Chinese now dominate or account for a large slice of foreign tourism in Hong Kong, Macau, Singapore, Taiwan, Malaysia, Thailand, Vietnam and Indonesia. They are also starting to flow into more expensive destinations like Japan and Hawaii.

Behind the forecasts of growth in Chinese tourism are China’s booming economy and two crucial moves by the government last fall to placate the growing middle class. Instead of just a restricted pool of residents of Beijing, Shanghai and Guanzhou, residents of about 100 second-tier cities also were allowed to travel abroad. The government also increased the amount of foreign exchange a person may take out of the country, to $6,000 from $2,000.

More on this story here.


Indian shares have recorded their biggest-ever fall in a single day’s trading amid fears the new government could stall economic reform. The Bombay Stock Exchange plummeted more than 700 points, a 15% drop, before recovering slightly. Traders have fears about the economic plans of the new government, set to be led by Sonia Gandhi after her Congress party’s surprise election win. The widow of assassinated former Prime Minister Rajiv Gandhi will become the fourth member of the Nehru-Gandhi dynasty to hold the premiership.

Analysts say the market crashed after foreign institutional investors, who had invested some $10 billion in the Indian stock markets over the past year, began to sell heavily. “Their expectations from India were very high,” market analyst Debashis Basu told BBC News Online. “Now they are jittery about the new government’s direction on reforms and are pulling out.”

After months of self-congratulatory government propaganda about how “India is shining”, the election upset is an embarrassment for almost every pundit and pollster in the country. A Bharatiya Janata Party victory had supposedly been inevitable, yet the party lost more than 40 of its 182 seats.

Link here and here.

India may have solved the oursourcing issue for us.

The Hindu nationalist party, which had been in power since 1998, strongly supported India’s high-tech industry. But last week, it was thrown out of office by the left-wing Congress Party, which ruled India during the heyday of socialism in the 1950s and 1960s. It capitalized on resentment by the poor against the growing middle class. The Congress Party promised to slow reform and redistribute income. Fearing the worst, the Indian stock market has fallen sharply since the election.

Should India’s new leaders follow through on their campaign promises, there will be a lot fewer businesses there doing outsourcing or anything else. Thus India’s voters may unwittingly have solved the outsourcing problem here in a way that America’s protectionists never could.

Link here.


A fascinating drama is about to be played out in the world’s biggest country. China’s economy is growing too fast for comfort, and the countr’qs leaders know it. In recent weeks they have promised forceful measures to cool things down, but it is not clear what they will or can do. Rumors are rife that China’s central bank may raise interest rates for the first time in nine years.

The authorities have tried to restrain investment, prices and lending through administrative fiat. The challenge facing them would be difficult for policymakers anywhere: to slow the economy enough to ensure sustainable growth, but not so much as to cause a damaging crash, the much-feared hard landing. China’s policymakers have far fewer tools at their disposal than their counterparts in developed countries. Thousands of state-owned firms, as well as the banking system, do not respond much to pricing signals or interest rates. It is not only 1.2 billion Chinese who should hope that their leaders succeed despite these handicaps. The rest of the world also now has a huge stake in China’s continued economic health.

If China’s economy slows sharply, commodity prices will fall everywhere, especially hurting producers in countries such as Russia, Brazil and Australia, which have gained so handsomely from China’s boom. The biggest losers from a hard landing in China would be its Asian neighbors. A slump in China would have a much smaller impact on America and Europe, but some companies would be hurt.

Link here.


According to bi-monthly industry magazine Alternative Fund Services Review’s administrator survey, assets rose to $1.16 trillion by the first week of May, up from around $800 billion in September 2003, and significantly higher than the current received industry estimate of $700 billion of assets under management. While AFSR noted that the participation of nine new firms in the survey has helped to boost the figures, it also reported that existing administrators witnessed a mean growth in assets under management of 32% since the 2003 survey.

The survey’s analysis of the geographical spread of hedge funds in terms of domicile shows that the industry continues to favor offshore jurisdictions, with the Cayman Islands the clear leader at 42%, followed by Bermuda with 11%, Luxembourg with 10% and the British Virgin Islands with 6%. Meanwhile, Hong Kong, Singapore, the UK offshore dependent territories and the UK itself, were all reported to have a “negligible” hedge fund domicile presence. However, AFSR noted that Jersey, Guernsey and the Isle of Man in particular have the potential to substantially increase their share of fund domiciliation after recently passing hedge fund-friendly regulations. In terms of the physical location of hedge fund assets and the location of actual hedge fund managers, the US continues to dominate, playing host to well over half of the survey’s managers (56%) and just under half of fund assets (49%).

Link here.


US regulators are moving to rein in Wall Street’s sale of complex financial products that have at times been used to help companies massage earnings or avoid paying taxes. The proposed rules are designed to make it more difficult for bankers to claim they were unaware their products were being used for abusive purposes when confronted by regulators or aggrieved shareholders. “[This] is a case of the law catching up with Enron-style abuses,” said Democrat Senator Carl Levin. “It essentially tells US banks and securities firms to get out of the business of making money off complex deals that aid or abet deceptive accounting or tax evasion.”

So-called structured financial products provide an innovative way for companies to raise cash, often through vehicles separate from their balance sheets, sometimes with the goal of ring-fencing the financial risk associated with certain ventures. But the business entered murky territory over the years as banks began to devise increasingly complex transactions that exploited legal and tax loopholes in order to massage their clients’ reported results.

Citigroup and JP Morgan last year settled claims that they had designed misleading transactions for Enron that helped the Houston energy company disguise billions of dollars of loans as commodities trades. The new proposals call for banks to create independent committees to review rigorously and sign off on such transactions; supply regular reports about their use to the board of directors; open themselves to periodic outside reviews; and retain all documents associated with such deals, among other things.

Links here and here.


Picasso’s portrait of a boy with a pipe, a charming, if somewhat sentimental painting from Picasso’s figurative period before the First World War, was for sale at Sotheby’s last week, and went for more than $100 million, including the buyer’s premium. I suppose that it is a masterpiece, though if anyone were to describe it as “mawkish”, I should know what they meant. It is the first painting ever to be sold for more than $100 million, which is still a very respectable sum of money -- enought to endow a small college... if that was what one wanted to do... and would finance a run for the US Senate, if not for the Presidency.

Apparently the painting was purchased for $30,000 in 1950. By my calculation that means that the investment doubled nearly twelve times in the period. That may not be as extraordinary as it sounds. If my sums are right, the Picasso had to double every four and a half years. A compound investment at 15% will achieve that. In any case, this was a nominal, not a real, gain. I am not sure how much the dollar depreciated between 1950 and 2004, but it must have been of the order of a 90% depreciation. That means that $30,000 in 1950 dollars is $10 million in 2004 dollars. So in real terms, the Picasso only doubled ten times, which is only about a 12.5% real return.

Pretty good, but no better than some stock market investors -- including, I suspect, Mr Warren Buffett... But in short, paintings are not a short cut to becoming a billionaire.

Link here.


About two years ago I learned something very valuable. If you visit a hospital emergency room and want instant attention, two words will do the trick: “Chest Pain”. In less than five minutes I had a nurse and about three diagnostic machines gathering information about my heart muscle, which (fortunately) proved not to be the source of my discomfort. Sometimes an emergency is “routine”, in that there is nothing new about it. Literally millions of previous cases of chest pain have provided a vast collective experience, and in turn, training for today’s ER professionals. They know what to do when you say “chest pain”.

Other emergencies are rare or even unique, thus the reverse applies: There is nothing routine about it. By definition, the “remedy” is experimental. It may trigger the law of unintended consequences, and prove to be no remedy at all. It could make the problem worse. Financial journalist James Grant discussed this latter sort of emergency in the New York Times, describing the Federal Reserve’s decision to drive the fed funds rate to its lowest level in 46 years: “One percent is an emergency rate, unseen before the institution of the Fed and only rarely since. It was the rate intended to raise the economy from the Great Depression and to see it through World War II...”

Grant notes that the law of unintended consequences (among other ironies) is indeed unfolding before our eyes, as Fed officials “keep saying that there is no emergency -- that, on the contrary, the United States economy is a paragon of strength, lacking only an acceptable rate of job creation. Yet they have kept their rate at the emergency setting, thus fomenting a real-estate boom on Main Street and a stock-and-bond boom on Wall Street.... Now the 1 percent era is fast closing, and financial markets worldwide are shuddering.... Just the prospect of a slightly higher borrowing rate has brought about disturbances in the temples of high finance.”

We have immense respect for James Grant, though we would not give the Fed the same credit for “fomenting” the boom. Still, he is clearly right on two counts: 1) the Fed’s words and deeds do not agree, and 2) rising interest rates have made a lot of financial heavyweights very, very nervous.

Link here.


Guest Commentary from Mark Cuban, the owner of the Dallas Mavericks

I love going on CNBC. All day long all the so-called experts parade through the studio or satellite feeds and let fly with their best sales pitch. They may be selling a stock, the direction of the market (I’m so bullish or bearish), or themselves, but they all want you to buy something. Of course they offer the obligatory disclaimer of what they own, or who is paying them, as if it is an enema. It does not change reality. CNBC and its competitors have become shopping channels for stocks, bonds and mutual funds.

One one appearance I brought up my position that the “investment theme” of buy and hold is nothing more than a sales pitch and the best way for sales reps and brokers to get upset customers off the phone. “I know the fund is down 12 percent Mr. Doe, but that happens in a buy and hold strategy. Over the last 80 years...” What nonsense. Mario Gabelli disagreed. He responded with the omnipresent retort to all things stocks, “Warren Buffet buys stocks.” Yes, at that time he did. But he does not buy 100 or 1,000 shares at a time as you have suggested the typical investor should consider doing, or should trust you to do for him or her. Mr. Buffet buys enough shares to have influence and in many cases control. Can the average investor do that? Can the typical fund do that?

I have said it many times, I do not think the average investor should be buying stocks. I do not think the vast majority of fund managers are anything special either. Something a buddy relayed to me a long time ago when I started buying and selling stocks has stuck with me: “When you sit at the business table you always look for the sucker or fool. If you don’t see one, it’s you.” The same concept applies whether you are buying or investing in a company, or buying a stock or bond. Most business deals are win win, but even then there is someone at a disadvantage. It is worse in stocks. There is always someone on the other side of the trade. Why are they taking that side? Do you know something they do not, or do they know something you do not? You go to work and check the stock prices during the day and when you get home. Maybe you call your broker at lunch. What does the person or company on the other side do? Do you have an edge, or do they?

Which leads to my investment philosophy and a point. I have gotten to the point where I only buy stocks under several circumstances. First, is the company strategic to my other companies. Second, can I buy enough to get the ear of the CEO. I am not looking for information on what their numbers are, or where the stock price is going. I am investing in this company because it matters to my other companies. Can I get enough stock where I consider myself to be a true owner of the company and can work with them to create win-win situations? Do I want the stock price to go up? Of course I do, but if it does not, there is still considerable value to me. Of the companies I have taken a 5% or greater position in, I have yet to sell a share of any of them. Ever.

Small investors do not have this option. In fact, small investors have no options other than to buy or sell. People buy stocks with their only hope that they go up. Sometimes they do, sometimes they do not. While they move up and down over time, one thing happens with almost everyone. They fall in and out of love with the stocks they own. The stocks become part of their family. It is stupid, and we all have done it. I swear people are more protective of their stocks than they are of family members.

Link here.


Linux may be free software, but shares of Linux providers have become very expensive as investors bet that the fast-growing operating system can chip away at the dominance of Windows. Over the past year, shares in Red Hat Inc. (NASDAQ: RHAT) and Novell Inc. (NASDAQ: NOVL) have nearly quadrupled in response to strong investor interest in the growth of Linux. Red Hat and Novell are trading at close to 100 times earnings for their upcoming fiscal year, based on analysts forecasts collected by Reuters Research. By contrast, Microsoft is trading at a PE multiple of about 20 while the broader software sector is currently trading at a multiple of 30.

Link here.


Parmalat Finanziaria SpA, the insolvent Italian dairy company, proposed placing debt and assets in a new company that could be partly owned by creditors. The new entity is part of a proposed deal with creditors to be issued by state-appointed insolvency commissioner Enrico Bondi in the coming weeks. Also, Parmalat said it had decided not to sell the off the main activities of U.S. dairy operation Farmland Dairies LLC, and that it was looking for a new CEO for the company. Parmalat said institutions financing Chapter 11 bankruptcy reorganization protection for its U.S. dairy businesses support a plan to continue operations.

The Parmalat scandal exploded in December when the Italian conglomerate acknowledged it did not have nearly $5 billion in funds it had claimed was in a Bank of America account. Parmalat then went into bankruptcy protection. An audit this year put the company’s debt at about $18 billion -- eight times more than Parmalat had claimed in September. Prosecutors have been investigating criminal charges against many members of the management and their senior advisers.

Link here.


As world markets worry about tighter money in America, overheating in China and dearer oil everywhere, Europe and Japan are, contrary to tradition, providing havens for optimists. This is welcome news from an unexpected quarter. But some fear that the euro area may be a late arrival at a party that is almost over. Interest rates are at historic and unsustainable lows, while oil prices are uncomfortably high. This combination of cheap money and expensive oil strikes many as a dangerous, inflationary cocktail.

China and the United States in particular are awash with liquidity and thirsty for petroleum. The oil world relies on Saudi Arabia, with its large reserves and spare capacity, to act as its “swing producer”, pumping a little more when prices rise too high, a little less when they drift too low. But Saudi Arabia urged OPEC to cut production quotas in February for fear of a price crash this spring. That decision now looks like a serious miscalculation. Any extra Saudi oil released now will be too late in arriving and too heavy a grade to keep America’s drivers happy.

Meanwhile, the financial world relies on Alan Greenspan to act as its swing producer, pumping a little more liquidity into the system when prices are soft, a little less when they drift too high. The markets are in no doubt which way he will swing. The futures market suggests that American interest rates, still at 1%, will double before the end of the year, and reach 3.5% by the end of 2005. As he plots the first moves of his new term, his pace, as he promised in the Fed’s most recent statement, is “likely to be measured”. Will a measured pace be quick enough? Now, some are asking whether the Fed has fallen “behind the curve”, and will be too late in tightening.

The Chinese monetary authorities cannot afford such patience. In recent months, they have pulled on one lever after another in an attempt to stop the overlending and overinvestment that threaten to destabilize the economy. But raising rates could break China’s brittle state enterprises and lure in more speculative capital from abroad. China’s monetary policy must also be guided by the need to maintain the yuan’s peg to the dollar. Until Mr Greenspan raises interest rates, Chinas monetary authorities will find it difficult to do so.

Link here.


For decades now, America’s health care system has been migrating toward socialism. Your well-being, shape, and condition have increasingly been deemed matters of “public health”, instead of matters of personal responsibility. Our lawmakers just enacted a huge entitlement that requires some people to pay for other people’s medicine. Sen. Hillary Clinton just penned a lengthy article in the New York Times Magazine calling for yet more federal control of health care. All of the Democrat candidates for president boasted plans to push health care further into the public sector. More and more, states are preventing private health insurers from charging overweight and obese clients higher premiums, which effectively removes any financial incentive for maintaining a healthy lifestyle.

We are becoming less responsible for our own health, and more responsible for everyone else’s. Your heart attack drives up the cost of my premiums and office visits. And if the government is paying for my anti-cholesterol medication, what incentive is there for me to put down the cheeseburger? This collective ownership of private health then paves the way for even more federal restrictions on consumer choice and civil liberties. We will all make better choices about diet, exercise, and personal health when someone else is not paying for the consequences of those choices.

Link here.


Money. Everybody wants it, and you can always use more. But what is money? Where does it come from? Is it really the “root of all evil” as the Bible and Pink Floyd have said? Do we really need it? How did we all come to value little slips of paper with portraits of dead presidents on them? Why can’t they just give everybody a million dollars and make us all rich? And why is any of this important to those who are concerned about human liberty?

I will anticipate some conclusions here: Money is vital to a prosperous society, without it mankind could do no better than a primitive agricultural society. Money originates and evolves privately, in the market, as a solution to the problems presented by direct barter. Governments (in collusion with large Banks) around the globe have forcibly taken over and monopolized the creation of new money, and abolished the natural gold standard for the sole purpose of expanding their own power and confiscating wealth. All other “justifications” for government money are lies based on completely discredited economic hogwash. The unprecedented and artificial “fiat money” imposed on us now represents a grave threat to civilization itself.

Link here.

Nicholas Oresme and the First Monetary Treatise

The practical offshoot of the Austrian theory of money is that the production of money should best be left to the free market. Government interventionism does not improve monetary exchanges; it merely enriches a select few at the expense of all other money users. And on the aesthetic side, the disaster is of course complete: rather than deal with beautiful silver and gold coins, the citizens are compelled by law to hold unbecoming paper notes.

Present-day Austrian economists are not the first to point out that interventionism makes money unsightly and unreliable. Rather, they uphold a tradition of many centuries that includes illustrious economists such as Murray Rothbard, Ludwig von Mises, Carl Menger, Frédéric Bastiat, William Gouge, John Wheatley, Etienne de Condillac, and Thomas de Azpilcueta. In fact, this tradition can be traced back right to the very founding father of monetary economics, the great Nicholas Oresme.

Oresme was born around 1320 near Caen in France. After a distinguished career as a scholar and confessor of king Charles V, he became Bishop in 1377 and died in Lisieux in 1382. Oresme was a brilliant mathematician, physicist, and economist. At some point before 1355, he wrote a treatise on the ethics and economics of money production. The book had the title Treatise on the Origin, Nature, Law, and Alterations of Monies, and it established his fame as an economist for all times.

The most adequate modern rendering of the title would be “Treatise on Inflation”. Indeed, Oresme pioneered the political economy of inflation; he set standards that would not be surpassed for many centuries, and which in certain respects have not been surpassed at all. A closer look at the book reveals that monetary thinking has been sound at its inception and that present-day Austrians are the heirs of monetary orthodoxy in the true meaning of the word.

Oresme arrived at essentially the same conclusion about the critical role that inflation had played in the decline of ancient civilization as Ludwig von Mises in his “Observations on the Causes of the Decline of Ancient Civilization”. And it is likely that our own civilization, which cherishes learning by doing more than learning, will take the same course.

Link here.


It was around three years ago that commodity prices began to climb, with precious metals eventually playing the most conspicuous role in the trend. Much of today’s talk about inflation relates directly to this trend -- in fact, the inflation chatter goes back at least to the start of this year. And in its famously predictable way, the current conventional wisdom says it is smart to invest in “things”.

Yet you can back even further than the start of this year -- for instance, to the time in 2001 when the rise in commodity prices began. What you will find is that the cost of a basket of commodities (as measured by indexes like the CRB) stood near the lowest levels in a generation. Was anyone talking about investing in commodities THEN? Not on your life.

Now, naturally, “things” are a hot idea. But, have you looked at a commodity index recently? The trend has headed downward for two months. As for precious metals... well, let us just say that if stock market prices fell that far that fast, most folks would use words like “crash”. This is a contrary perspective on inflation, and there is a lot more to say. If you would like to read more, pick up a copy of this week’s Barron’s magazine. It features an article about the inflation/deflation question written by Bob Prechter and Pete Kendall. For the most complete explanation of all, read Bob Prechter’s bestseller, Conquer the Crash.

Link here.


A total of three write-downs since January 9, 2004 have resulted in the instant consumption, sans revenue, of 4.35 billion barrels of oil, reducing Royal Dutch/Shell’s total reserves by 22%. Forest Oil (FST), Nexen (NXY), Husky Energy (HSE.T), and El Paso Energy (EP) all followed with downward reserve estimate revisions. Someone should have told those companies about the events that took place in Texas and Canada in the mid-1990s...

Maybe Shell and the others are to be commended for undefinedfessing up now. It appears that in writing down Shell’s reserves, too few drill bits and too many tool-bag bureaucrats seem to have been involved. As a result, who really knows how much oil and gas Shell has today, and how much Shell really had last year? Not me, and not anybody I trust. And investing in an oil and gas company is a statement of trust, and an acknowledgement -- conscious or otherwise -- of risk.

It only makes sense, then, that petroleum reserves -- the one and only source of an oil company’s value -- should be reviewed by an independent, outside auditor. And to avoid the development of Andersen/Enron levels of coziness, one might even employ several different audit firms over the course of several years. Or you could go one better, like some other investor-conscious oil and gas companies do. To be quite technically correct, these select few do not use mere reserve audits or reviews. They provide the basic drilling and seismic data to outside consultants. The outside consultants then tell the oil companies what their reserves are, via complete, detailed evaluations from that basic data.

In the post-Enron financial era, it is inexcusable for companies in any sector to be overstating the value of their assets. But for the world’s second-largest oil company to overstate its reserves by 22% goes beyond criminality... it is downright incompetence, nothing less than shoddy, careless management.

Link here (scroll down to piece by Dan Ferris).


If you are like 99% of the world, you expect the Fed to raise rates. But somewhere along the way, in its perfect plan to “reflate” the American economy and prevent a Japan-style soft depression, the Fed made a fatal miscalculation: It caused a simultaneous asset bubble in stocks, bonds, commodities, housing, and real estate. We stand on the edge of the great collapse of the “reflation rally”. Some assets will come through relatively unscathed. Others will deflate. What the Fed is about to reap is a lot different than what it thought it was sowing.

The Fed thought it could make money cheap and keep the stock market high (and households feeling wealthy). It thought it could keep money cheap and force savers to abandon money market funds and CDs. It thought it could keep home prices rising by keeping interest rates low (and mortgage rates low in sympathy). It also thought it could create so much money that raw material prices would rise. Right on all counts so far. The Fed’s cheap money caused a series of “flash bubbles” in the commodities sector, especially in base materials, and even in gold. It also thought it could keep money cheap and force up producer prices. Producers have to buy raw materials, after all. Right again.

And the Fed thought that the whole chain of inflation -- or the ladder, if you prefer -- would be completed in the form of rising consumer prices. It thought it could prevent deflation by first forcing up raw materials prices, then producer prices, and finally consumer prices. If the Fed could not make consumers borrow, it thought it could make them spend by inflating. It was wrong.

The American government has made three unique blunders. First, it has taken the good will of the rest of the world for granted. Second, it has preached the benefits of globalization, namely lower prices and more choice. What they did not mention is that true globalization means a permanent change in the structure of the American labor market. This is how free markets work. Third, however, and greatest of the policy blunders is the assumption that monetary policy can cause wage inflation. The Fed has succeeded in causing inflation nearly everywhere in the economy EXCEPT in consumer wages. But without rising wages, consumers cannot afford to pay rising prices. This, ironically, is deflationary. As prices rise, consumers cut back on spending. The more prices rise on the margins, the less consumers consume. It is nothing less than the end of the consumption-driven American model -- the model the rest of the world has tolerated because Americans have been buying on credit. The credit crunch is coming.

The Fed has thus made it possible for a huge spike in prices, leading to the deflationary collapse of the American consumer. The normal policy response to skyrocketing inflation would be to raise rates (what the market expects). But raising rates puts the consumer in even worse shape than he is now and threatens the main source of household balance sheet wealth: the house. If it seems to you like the Fed does not have any good choices left, I agree. A dollar sell-off is coming. Standards of living are going to fall. Land values will suffer, all because... The American government was just another government that could not pay its bills.

Link here (scroll down to piece by Dan Denning).


Most economists and Wall Street analysts operate with a discernable bullish bias. They tend to overplay “good” news, even as they rationalize or ignore “bad” news. Naturally this bias makes its way into the financial media: Day after day, the same circle of “experts” restates the same ideas to the same audience. The tendency feeds on and sustains itself. It is not a conspiracy, but a shared psychology. A two-decade bull market created a powerful collective optimism that has (so far) outlasted the hard facts of the past four years.

Thus the rationalizations of “bad” news grow more acute by the day. A case in point is a junk bond story in a major financial daily. More so than corporate bonds, “junk” (or high-yield) bonds are supposed to “hold their own as the economy strengthened, despite rising rates that generally drive down bond prices.” In fact, junk bond prices have followed a path similar to the S&P 500 in recent years, such that some saw the trends in junk bonds as a leading economic indicator. So you can imagine the dismay during the past couple of weeks, as junk bond indexes have declined precipitously; last week saw the second largest ever outflows from junk bond mutual funds.

And alas, the article was nearly flailing its arms trying to explain “why” -- the leading candidates are “the Fed”, “fear of rising interest rates”, and “rising oil prices”. How this squared with junk bonds “holding their own ... despite rising rates” is a question that went unanswered. We have followed junk bonds for years, because they unfold in clear Elliott wave patterns. Junk bonds DO say something about the future of the economy, but most investors will not get the message until it is too late.

Link here.


The skyrocketing price of gasoline might have the odd side effect of increasing business for tax-preparation outfits like H&R Block and Turbo Tax software maker Intuit. That is because more and more taxpayers who hit the road are likely to realize that it is more beneficial to forego the standard mileage rate for business use of their personal vehicles and instead navigate complex IRS rules concerning actual car expenses. But this definitely is not a job for the unschooled.

The IRS periodically increases the standard mileage rate, but many think it is further than ever behind the true cost of operating a vehicle. For 2004, the agency set a rate last October of 37.5 cents a mile, up 1.5 cents from 2003. But the American Automobile Association’s annual Your Driving Costs study, published in early April, figures that the average cost of driving a new passenger car is 56.2 cents, up 4.5 cents over the 2003 calculation of 51.7 cents -- and 50% higher than the IRS standard mileage rate. The one-year increase was by far the largest in ten years, although AAA said it had revised its methodology to better reflect the allocation of costs for 75,000 miles of driving over five years. Since the AAA study was released, the price of gasoline has risen even more.

Link here.


I met Bob The Plumber when I refurbished my house in Florida about three years ago. Since that time, I have referred him to many of my friends and family. Why not? Bob is a talented plumber and -- with a 10% friends and family discount -- his hourly rate is only $65. The only problem with Bob is that he likes to talk. So whatever discount I get is eaten by the many extra minutes that Bob spends on the job. But a good plumber is hard to find and much harder to let go off.

Bob is very smart. He is mathematically inclined and frustrated in his profession as a plumber. Instead of plumbing he would rather gamble at a casino (he is a card counter) or day trade stocks. When does Bob trade stocks or practice counting cards? Bob is an after-the-market-closes plumber. He starts his plumbing day at 4 p.m. and works until 2 in the morning. Some nights he finishes by midnight.

So, I asked Bob why he bothers with cards and stocks when plumbing is a respectable, moneymaking profession? Bob confessed that after 30 years of plumbing he has very little to show for it. You see, after paying taxes, workman’s comp, and keeping his truck tuned, Bob really does not make very much money after tax. He is looking for the easy way out. Bob is a great barometer for the norm.

When I first met Bob he had just finished losing his shirt day trading the Internet bubble. Bob has since moved to Las Vegas. Last week, when I was there, we met for lunch. He was very excited about the stock market. He was making a lot of money using this new system that worked solely by using standard deviations and trading in the first ten minutes of the day. I pretended to care. I was actually upset. “Bob, I thought you gave up day trading after getting killed in the tech-bubble.” I prodded.

“This time it’s different.”

I asked him how he was making ends meet, considering he was going to dealer school full-time and not plumbing. He answered that, apart from day trading, both houses he had purchased had appreciated by more than 40% each, and that he had decided to take out a home equity loan to meet the bills. After all, Bob reasoned, home prices in Vegas have never crashed. Is the second house empty? No, apparently it is being rented to a fellow member of his day trading group... month by month, of course. After lunch Bob sped me to McCarran Airport -- in a brand-spanking new Mercedes Benz Convertible -- for my flight back to reality... and sanity.

Link here (scroll down to piece by Karim Rahemtulla).


By this past Monday’s close, Indian shares were some 30% below their peaks of earlier this year, spooked by a combination of local and international concerns. But it is not just in Mumbai that investors are glum. The mood in financial circles across Asia seems to darken by the day. Generally speaking, the change from last year and earlier this year, when the mood was so bright, could not be starker. Then, low dollar interest rates propelled a tidal wave of money around the world in search of higher returns. Asia became a magnet for foreign money, largely thanks to the lure of China’s rapid expansion. Portfolio investment in Asian shares and bonds rose to $29 billion last year, from $3 billion the year before. Asian shares reached a point 72% above their lows of 2002.

The panic in Mumbai on Monday was sparked by domestic politics -- namely the defeat of the ruling, reformist BJP in the marathon general election that ended late last week. But disenchantment with Indian shares also reflects wariness of risky assets in general and Asian shares in particular. Four fears weigh heaviest: the tense situation in the Middle East and more general concerns about terrorism; a surging oil price (Asian economies are especially intensive users of energy); the threat of higher interest rates in America, which would lessen the need for investors to seek higher returns elsewhere; and, last but by no means least, a fear that the Chinese authorities will pour cold water on the country’s overheating economy. As the region’s economies benefited from China’s rude health, so they will catch a chill when China does. These worries are unlikely to go away any time soon.

Just as investors were too optimistic about China on the upside, they are perhaps too pessimistic on the downside. This is particularly true of Japan, which has instead sputtered. This scribbler is not deterred. Most economic statistics point to an economy growing at a fair old clip. According to figures released on Tuesday, Japan’s real GDP grew by an annualised 5.6% in the first three months of the year; deflation is easing; Japanese companies are raking in cash and paying off their debts; and the big banks have eaten away their mountain of bad loans. Moreover, the stockmarket is relatively cheap: the Topix, a broad index of Japanese shares, trades on a modest 14 times last year’s earnings and 1.4 times book value. A bad few days need not spoil the whole year.

Link here.


But the more damage a president does, the more the voters love him. Bush has not yet equaled America’s biggest catastrophes -- Lincoln’s war between the states, or Wilson’s entry into WWI -- but if he keeps going at the present pace, he might still get his mug on Mount Rushmore.” -- Bill Bonner, the Daily Reckoning

The present U.S. effort in the Middle East may be the high water mark of America’s post-WWII effort to make and keep a world order suitable to its liking and national interests. In the future, we may look back at the receding tide of American primacy, traceable to the fall of Baghdad on 10 April 2003 and the toppling of the statue of Saddam. Had we packed up the Army and left, handed the keys to the kingdom to some assemblage of Learned & Wise Men, and applauded ourselves for a job well done, the future of the world might be quite different... even favorable to the U.S. But that is not what happened.

Post-conquest, the U.S. stayed in Iraq to occupy the place. But it was inevitable that we would have to fight the occupants. A loss of face by the U.S. in the Middle East, through death of a thousand cuts at our people and interests, could end the willingness of the American people to go abroad “looking for dragons to slay,” in the words of John Quincy Adams. After 90 years, G.W. Bush might preside over the undoing of the Wilsonian drive in American foreign and military policy.

And what of the future of the U.S. economy, suffering from its advanced-stage national strategic maladies of debt, depletion, decline and demographics? What if even some of the predictions of the Daily Reckoning’s host of writers prove to be true? What if the economic bubbles begin to pop? The dollar crashes, housing tanks, stock markets tank, costs of goods and services skyrocket... all in a debased popular culture, where politics has been poisoned by the battle of blue state values versus red state values.

Imagine faith in popular governance in the U.S. vanishing in the face of national economic calamity. With the U.S. dollar badly wounded, and possibly no longer a nationally accepted means of exchange and settlement, the nation would be back to its pre-Hamilton colonial roots, settling debts by using a variety of specie for money... pounds, francs, pieces of weight, gold nuggets, whatever people would accept in trade... “Goods-producing” states would be reluctant to export real things (grain, electricity, water, minerals, you-name-it...) to “consuming” states without payment in hard currency. Here is the end of national commerce, and the national unity-myth as well... after 140 years, G.W. Bush might preside over the undoing of the Lincolnian effort of saving “the Union”.

Preposterous? Science fiction? Impossible? Or is this a future waiting to be revealed?

Link here.
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