Wealth International, Limited

Finance Digest for Week of December 18, 2006

Note:  This week’s Offshore News Digest may be found here.


The credit creation process is at the heart of what drives our present-day economy. When we think about the credit creation process, I think it really boils down to supply and demand (as in all markets). The demand for credit is fundamentally driven by the price of credit – the interest rate. I believe the supply of credit to be fundamentally driven by the profit margin earned on supplying that credit – which at this time seems to be inextricably linked to the yield curve spread, or the difference between short term and long term interest rates. In essence, the “carry trade”, which entails borrowing at a lower short term rate in order to lend at a higher long term rate, is driving the supply of credit. If the yield curve becomes negative, then the incentive for supplying additional credit diminishes rapidly.

There are two additional new elements that have been facilitating the credit creation process. The two most important risks that every financial institution faces are interest rate risk, as a result of mismatching the duration of their assets and liabilities through the carry trade, and default risk. We have observed enormous growth in outstanding derivatives contracts over the past 10 years. I see the growth in the use of these contracts as being parallel to expansion of the carry trade, which is funding the creation of credit. The financial institutions are hedging their interest rate risk created by “duration mismatch” by using these contracts. Now secondly, they hedge default risk by using Fannie Mae/Freddie Mac, private credit insurers (MBIA, Ambac, et al), and now also credit default swap derivatives.

In a nutshell, I see credit supply as driven by the yield curve, credit demand as driven by the long-term interest rate, while all of this is further facilitated by credit “insurance” and interest rate “insurance”.

The creation of credit is what drives the value of assets. The economy as a whole is like one giant balance sheet with assets on one side and liabilities on the other. It only stands to reason that as the stock of liabilities expands, then this in turn provides the financing for elevating asset values (real estate, stocks, etc). What is remarkable is how few people in the investment community actually comprehend this basic relationship. The value of assets in turn is driving consumer spending. It is well known that the personal savings rate has collapsed over the past 10 years at the same time as asset values have risen. If asset values were to start falling, due to a contraction of credit, then this process would reverse accordingly and consumer spending would fall. So in essence, we have a credit-driven, asset-driven economy at the present time.

Now even at this late stage in the evolution of financial markets and financial knowledge, the fundamental concepts of “money” and “inflation” seem to remain unclear to even the most educated members of the financial community – including to our central bankers who are mandated with the task of managing precisely these things. Money as we normally try to measure it is in essence a subset of the available stock of assets (savings accounts, term deposits, money market funds). These measures have increasingly little relevance. I can keep my “money” in U.S. Treasuries or Fannie Mae agency bonds, but those will not be counted as “money”. We essentially need to discard the very concept of “money” and focus on “credit” in its place. Thus one would be totally justified in looking at the growth in mortgage credit, where the bulk of credit is created, as a measure of how much potential inflationary pressure is being created.

Now I would like to now address the concept of “inflation”. Many people are inclined to define inflation as being “too much money chasing too few goods/services.” I propose a different way of looking at this problem. Goods and services themselves are produced using three basic inputs (labor, land and natural resources). I propose that we need to look at inflation as being “too much credit chasing too few resources.”

In the past, when the international movement of capital and labour was more restricted, if too much money was created then the cost of labor would start to escalate as the expanding money supply chased a finite labor supply. Inflation would start to accelerate and then the central bank was forced to raise interest rates, often resulting in a recession. This defined the “traditional” business cycle. However, with the removal of restrictions on the movement of capital and labor over the past 15 years, businesses in the USA have now gained access to a new, almost “infinite” supply of labor in Asia. Labour is no longer the “constraining resource” limiting economic growth. The supply of credit can continue expanding unabated for a much longer period of time without the inflationary consequences as it had in the past. As a result, asset values can also continue expanding for a much longer period of time as well (creating our present-day “asset bubble”).

This is the gift of chance which allowed Greenspan to pursue an unprecedented loose monetary policy for the longest time and not face the consequences of doing so. But the problem is that while it is now possible employ increasing amounts of labour overseas – resulting in the global economic boom that we are now witness to – this will eventually result in natural resources becoming the “constraining resource” which will cause inflation. This explains why commodity prices – and most importantly, oil prices – have accelerated upward in price so much over the past three years. Even though the cost of natural resources pales in comparison to labor costs for businesses, the much more rapid percentage increases that can occur with commodity prices when supplies become constrained – like now – can result in quite significant inflation.

China has essentially been the enabler for the USA to continually expand credit without inflationary consequences over the past 10 years. The trade deficit represents the “relief valve” for the U.S. labour supply that helps prevent it from becoming constrained and causing inflation. The interesting aspect of this process is that the introduction of low-cost Asian labour causes downward pressure on U.S. wages and job creation at the same time at which it causes U.S. debts and asset values to increase. Consumers keep spending money in the U.S. in spite of downward pressure on real incomes because they are becoming “wealthier”. In the process, the ratio of debt-to-income and assets-to-income will keep increasing, causing the risk profile of the economy to keep increasing as it becomes more leveraged.

Normally the growth of outstanding stock of debts and assets is ultimately constrained by the growth of total income in the economy. Debts and asset values are ultimately supported by income. However, we are now faced with this unprecedented anomaly whereby this critical linkage is broken and the two elements actually move in opposite directions. Of course, eventually the debt and asset levels will become insupportable relative to income levels.

Everything so far has been theory no doubt. But to corroborate this theory, if you actually compare three key charts over the past 10 years – mortgage credit growth, the trade deficit and the oil price – one can see just how truly strong is the relationship between these variables. It is very clear that they have all followed each other.

The expanding U.S. trade deficit would normally cause the Chinese yuan exchange rate to appreciate, resulting in Chinese labor becoming more expensive for U.S. companies, and eventually reducing the trade deficit. However, we know that the Chinese central bank has been preventing this process by printing money in order to exchange Chinese yuan for U.S. dollars. The U.S. dollar bond purchases act to lower interest rates and raise mortgage demand. As China ramps up its industrial production, it is developing an increasing appetite for oil imports. The oil exporting countries have reaped huge windfall revenues over the past 2 years, which they have now been recycling back into the U.S. bond marke. It is these “petro-dollars” that now act to support the U.S. bond market much more than the Asian countries.

At this point, I would like to revisit the issue of the yield curve (which I see as the driver of credit supply). While the Japanese carry trade must be very large, the amount of dollars invested in the “U.S. carry trade” must be far greater than that. The Japanese carry trade is probably the domain of the hedge funds, whereas the U.S. carry trade is “mainstream”, generating the bulk of profits for the broad array of U.S. financial institutions. Ergo, if the U.S. yield curve inverts, I believe that the supply of credit will then tank and we enter a deflationary scenario with a decreasing stock of credit and assets.

The Federal Reserve may very well be aware of the huge threat that a negative yield curve would pose to the world financial system – all their protestations to the contrary – and act to thwart this process by halting their current program of increasing (short) interest rates, and even go back to lowering the rate. In this case, the positive yield curve spread will be maintained and the credit will keep flowing. What happens then? The economy would continue to grow, and this would place increasing demands on the world’s finite natural resources. Rapidly escalating oil prices would feed into rapidly accelerating inflation. That in turn will cause the U.S. bond market to sell off hard and foreign capital to flee, with the attendant dislocations to interest rates, the real estate market and the world economy.

So the world economy as I see it is now presented with a fork in the road. Both paths lead to very unpleasant outcomes, and Fed chairman Ben Bernanke will be forced to choose. Option A, keep raising the Fed Funds rate and cause a negative yield curve, would affect credit supply and result in a deflationary scenario. Option B, stop raising the Fed Funds rate and prevent a negative yield curve, eventually results in inflation and a huge spike in long term interest rates ... and would disrupt the demand side of the credit creation process. At this time, it would appear that Mr. Bernanke has chosen Option A and as such, we are currently seeing the resulting deflationary consequences (the November core CPI reading came in at 0.0%). All this is appears rather ironic given Bernanke’s previous stated commitment to use whatever means necessary to combat deflation in his infamous “printing press” speech.

Link here.

“Financial Sphere” profits highlight economy’s distorted nature.

Combined Goldman Sachs, Lehman Brothers, and Bear Stearns Q4 Net Revenues were up 37% from comparable 2005 to a record $16.4 billion. Combined Net Income for the quarter was up 63% from Q4 2005 to a record $4.5 billion. The epic inflation in Wall Street profits is better illuminated in the annual data. Goldman, Lehman and Bear combined for 2006 net revenues of $64.5 billion, up 36% from record 2005 revenues. Combined 2006 net income surged 51% from the previous year’s record level to $16.7 billion. Since 2002, net revenues have inflated 157% and net income 300%.

The profit motive is fundamental to free-market capitalism. Profits motivate risk-taking, investment, credit expansion and economic development. Yet the corrosive distortion of asset prices and system profits fomented by runaway credit and speculative excess is contemporary capitalism’s paramount vulnerability. The current global profits boom is unmatched for its scope, intensity and peril. The primary source of the boom is an unsustainable expansion of non-productive U.S. debt, predominantly originating in mortgage and securities finance. Especially because of the power of “Wall Street” financial alchemy to transform increasingly risky U.S. credits into perceived safe and liquid instruments, there is today no effective check on the credit bubble – either in the marketplace, by U.S. monetary authorities or through global currency adjustment. And we see today that the greater the credit expansion the more alluring the asset price and profits inflation – that motivates only greater speculative excess and global financial and economic maladjustment.

When contemplating contemporary “profits”, it may be helpful to think in terms of the Financial Sphere/Economic Sphere framework. Traditionally, economic profits reined supreme throughout the system, providing the predominant motivation for investment and credit expansion. While this mechanism certainly did not prevent self-reinforcing credit booms, it did at least tend to inhibit those most pernicious credit inflations that evolve over prolonged periods to severely distort underlying economic and financial structures. Importantly, bountiful economic profits impel investment and increased capacity. Added output coupled with heightened boom-time input prices tend to over time weigh on economic profits, in the process occasioning self-correction and adjustment.

Financial profits predominately flow from credit expansion. Thus they are a much different beast. Credit inflation – the creation of additional purchasing power/liquidity through the expansion and dissemination of new financial claims – boosts financial profits through a variety of channels. For one, lenders and investment bankers will take, as their “service fee”, a slice of newly “minted” credit instruments. Financial profits are also boosted mightily by credit-induced asset inflation, offering opportunities to gain from speculation, brokerage services, and asset-based financing. Additionally, asset bubbles provide great opportunities to profit from a booming financial services industry – including offering “wealth” management and advisory services and providing insurance.

As we are witnessing these days, rampant credit inflation drives a Financial Sphere profits bonanza that only incites greater credit inflation, risk embracement, and speculative excess. There is little in the way of self-correction or adjustment; quite the opposite of the Economic Sphere. Indeed, inflating profits seemingly validate and legitimize audacious practices, certainly including the proliferation of new financial instruments, strategies and leveraging techniques. Heightened leverage then creates additional system financial profits that promote only further leveraging (Minsky’s Ponzi Finance).

The powerful propensity for financial profits to foster progressive credit inflations is today a much more pressing issue than ever before. From a Financial Sphere perspective, we live these days in an (experimental) environment of unlimited and permanently cheap finance. Global finance operates without a stabilizing monetary regime such as the gold standard or Bretton Woods – systems that would have provided some measure of discipline to U.S. or others’ financial profligacy. “Wall Street” finance and the “Moneyness of Credit” issue are now taking the world by storm.

Eventually, Financial Sphere profits become the commanding influence over system credit expansion and investment, along with being a powerful influence over spending generally (fueling income growth and gains in financial wealth). This is where things get dangerous. The financial boom incites a self-reinforcing investment boom, as well as general liquidity excess and asset inflation. Financial excess masks the underlying vulnerability of profitability in the real economy. A strong case can be made that this fateful credit bubble “blow-off” phase evolved out of the Fed’s overzealous response to faltering corporate profitability and resulting debt problems back in 2001/02. And this year’s gross global liquidity excesses have been very much an outgrowth of a bloated and energized Financial Sphere’s push to capitalize on the U.S. bubble economy’s susceptibility to a housing bust (get ahead of the next easing cycle!). The upshot has been another banner year of credit expansion of sufficient scope to artificially inflate economic Profits at home and abroad. And these inflated Profits coupled with the loosest global financial conditions imaginable have fueled this year’s global M&A boom.

For sometime now I have been failing in uncharted analytical waters. It has been a case of contemplating and conjecturing how far the confluence of unrestrained credit, momentous financial innovation (including Wall Street “money” alchemy), pivotal technological and communications advancements, and contemporary economic “output” – all on a global scale – could run before it hit the wall. As Wall Street earnings clearly demonstrate, the only wall hit thus far has been a wall of Financial Sphere profits. But the stakes are inflating right along with credit, liquidity and general financial excess. Wall Street will now be occupied with creating sufficient credit, liquidity and speculative excess to maintain grossly inflated global equities, bonds, real estate, (compressed) credit spreads, along with inflated Economic Sphere profits for the coming year. The Financial Sphere is clearly geared up for the endeavor, although the enormous scope of the required global credit expansion ensures escalating monetary disorder, including tumultuous currency markets going forward.

Link here (scroll down to last heading in the left/content column).

Fed giving green-light to risk taking.

Thanks Ben! That appears to be the response from yield-seeking investors who are taking advantage of the Federal Reserve’s decision to hold interest rates steady for the fourth straight time. Since the Fed characterized the housing market slowdown as “substantial”, but acknowledged that the economy “seems likely to expand at a moderate pace on balance over coming quarters,” investors in recent days have taken that to mean interest rates could remain at current levels for some time.

“People love certainty and Bernanke basically is telling us that we are on hold for a period,” said Jeffrey Gundlach, chief investment officer at the TCW Group in Los Angeles. Gundlach said when the Fed is on the sideline for a period, “the perception that you are going to have a bad volatile risky event goes down. Bernanke basically gave the markets a green light for risk-taking.” The market’s fear-factor measure, the Chicago Board Options Volatility Index, or VIX, touched a 13-year low last Friday, sinking to 9.56, just as the Dow Jones industrial average hit a record high. The last time the VIX reached such a low level was December 1993. Gundlach had been thinking about scaling back his high-yield “junk” bond holdings, “but this type of thing makes you say, ‘OK we can hold on.’”

Not only has the Dow climbed to fresh highs, investors have taken the Russell 2000 index of smaller companies and emerging markets, long considered volatile asset classes, to all-time highs as well in early December. “This is a year where risk takers did very well,” said Margaret Patel, portfolio manager of the $4.8 billion Pioneer High-Yield Fund. “It’s going to go on for a while.”

Corporate debt defaults, or the lack thereof, have given investors like Patel and Gundlach reason that riskier assets such as junk will stay solid going into the new year. Standard & Poor’s reported that the global issuer default rate remained benign, at 1.19% for the trailing 12-month period ending November 2006. “When the stock markets are roaring ahead to new highs, it’s usually not exactly a sell signal for credit,” said Gundlach.

Link here.


Our latest research shows that American consumers are out of cash and up to their eyeballs in debt. However, it is possible for consumers to keep pushing the economic envelope. The growth of real-estate based debt is slowing and is causing lower consumer liquidity. The slowdown in household mortgage debt flow SHOULD lead to a recession – BUT the Federal Reserve is determined to prevent one.

The latest economic statistics show that consumers depended on new debt for 90% of their cash flow during 2006. Any decline in debt flow will constrain liquidity and should cause a decline in the growth of consumption and household investment. We demonstrated in our March 2006 update, and confirmed in our June and September 2006 updates, that consumer liquidity was falling sharply. Consumers could be setting historic liquidity lows on all of our measures by January 1, 2007.

Our preferred measure of consumer liquidity already shows dramatic deterioration over the last 2 years. This measure shows that consumer liquidity is about 20% below the liquidity level at the start of the last recession in 2001. It also shows that liquidity is still declining! The consumer needs mortgage market access in order to maintain liquidity. If home prices fall or 10-year Treasury interest rates rise, then mortgage access will diminish quickly. Mortgage debt growth for consumption purposes should diminish. Increasingly, mortgage refinancing will be used only to restructure debt and replenish cash resources.

The interaction of declining liquidity and declining mortgage access should cause a recession by cutting consumer spending growth. With profit levels so high, we might avoid a true recession if lower profits are the cushion between lower spending growth and economic growth. As a result, we expect the Federal Reserve will be even more aggressive in 2007 as they try to reliquify households. We expect falling consumer liquidity will force much lower corporate profits. 2007 should be an economically interesting year.

Link here.


Money supply growth continues unabated across the globe.

The late Nobel Economic laureate Milton Friedman once remarked, “Money is too important to be left to central bankers. You essentially have a group of unelected people who have enormous power to affect the economy. I’ve always been in favor of replacing the Fed with a laptop computer, to calculate the monetary base and expand it annually, through war, peace, feast and famine by, perhaps, a predictable 2 percent.

Financial chiefs from the Group of 20 industrialized and emerging economies could hardly believe their good fortune, as they huddled behind closed doors on November 19th. Central bankers from Great Britain, Canada, France, Germany, Italy, Japan and the United States, and 13 emerging economies, including Australia, Brazil, China, India, Russia and South Korea, implemented a joint strategy six months ago to derail the “Commodity Super Cycle”, and they hit pay dirt in the Fall of 2006.

Central banks from a dozen countries worked in close synchronization to either raise their short term lending rates, or lift bank reserve requirements, in a concerted effort to drain the global liquidity swamp that had lifted the “Commodity Super Cycle” to its highest level in 25-years. The strategy worked for awhile, as frightened hedge fund traders unloaded a wide array of commodities, from crude oil, copper, unleaded gasoline, gold, silver, and natural gas over the next few months. The most ambitious tightening among the G-20 nations, which account for 85% of the world’s economic output, came from the Bank of Japan, which dismantled its 5-year ultra-easy money policy, and drained ¥26 trillion from the banking system. The BoJ capped its historic effort with a rate hike to 0.25% on July 14th, just when crude oil prices were hitting all-time highs of $78.40 per barrel in the spot market.

Whether by sheer luck or apt skill, the BoJ rate hike above zero percent, the first of its kind in six years, triggered an unwinding of the “yen carry” trade, and partially contributed to the 30% plunge in crude oil to as low as $54.86 on 11/16. A $15 per barrel Iranian “war premium” also evaporated from oil prices. In turn, the plunge in crude oil overrode concerns of a slightly tighter G-20 money policy, and ignited a powerful 16% rally in the Morgan Stanley All World Index, which measures blue chips stocks in 43 stock markets.

The plunge in crude oil also suggested that global economic growth would reach 5% in 2006, extending the longest period that growth rates held above 4% since the early 1970’s. But the baby-step rate hikes by members of the G-20 were deceptive, because short term interest rates are still pegged at or below inflation rates, and did not cap the explosive growth of the world’s money supply. Behind the smiles at the 11/19 G-20 meeting were underlying worries about a revival of the “Commodity Super Cycle” and a weaker U.S. economy, which accounts for 28% of global GDP. “At a global level, we have a level of real rates that is quite low,” said G-10 spokesman Jean “Tricky” Trichet. “We have a correct anchoring of inflation expectations. But there’s absolutely no time for complacency. Being credible in price stability is extremely important.”

Undoubtedly, the G-20 noted the strong rebound in global commodity prices in October and November, and OPEC’s moves to put a floor under the crude oil market, with significant production cutbacks. At the same time, global manufacturing growth fell in November to its lowest level in 15 months as U.S. factory activity shrank for the first time since 2003, resurrecting the ghost of “Stagflation”. The G-20 is also worried about a fall in the value of the U.S. dollar, which can exert upward pressure on global commodity prices, and undermine export oriented economies in Asia and Europe. On 12/11, former Fed chief “Easy” Al Greenspan told a Tel-Aviv business conference, “I expect that the U.S. dollar will continue to drift downwards until there will be a change in the U.S. balance of payments.” The weaker U.S. dollar is eroding OPEC’s petro-dollar purchasing power. The dollar hit a 20-month low against the Euro, and a 14-year low against the British pound, punishing OPEC producers who sell their oil for U.S. dollars, but buy most of their goods and services from Europe.

Jean “Tricky” Trichet talks a tough game when it comes to “vigilance in fighting inflation,” but the ECB’s repo rate hike to 3.50% on 12/11, is still pegged about 0.5% below the Euro Zone’s 4.1% producer price inflation rate. Negative interest rates in Europe are designed to help prevent the Euro from exploding higher against the $U.S. and yen, but are also leading to serious side effects, such as embedding inflation into the Euro zone and global economy. Across the English Channel, Britain’s M4 money supply expanded 0.9% in October, compared with a 1.7% rise in September. That took the annual rate down to 14.0% from September’s 14.5%, which was the highest since September 1990. Bank of England policymakers have tolerated long periods of low UK interest rates and an excess supply of cash and rampant borrowing, which is stoking inflation pressures. The U.K. housing market is showing no signs of slowdown even with the base rate at a 5-year high. The BoE is afraid that further rate hikes above 5% to control money growth could push the British pound above the psychological $2.00 level.

South Korean Finance Minister Kwon O-kyu held a meeting with his Japanese counterpart Koji Omi on the sidelines of the G-20 meeting on the recent weakness of the Japanese yen to the Korean won. Kwon called for Bank of Japan actions to control an excessive fall of the yen to the won, which is feared to hurt South Korean exporters. The South Korean won rose to a 9-year high vs. the yen at 7.92 won per yen. Kwon said modest intervention designed to slow down the speed of the $U.S.’s and yen’s decline against the won is probable. The $U.S. to a 9-year low of 915-won last week, representing a 10% loss this year, following an 18% loss for the previous two years. Yet South Korean exports jumped 15% for the first 11 months of this year over a year earlier, after soaring a combined 47% over the previous two years. On 11/23, South Korea’s central bank hiked the reserve ratio on bank deposits by 2% to 7%, the first such move in 16-years, in order to reduce the explosive growth of the M3 money supply which hit a 3-year high of 9.5% in October.

Central banks might hold more of their reserves in non-traditional currencies such as the Russian ruble and South Korean won, said He Fan, a top economist at the Chinese Academy of Social Sciences. Fan expects a further strengthening of the yuan. “For the rest of the year, the yuan’s 3% limit against the U.S. dollar will be breached and the yuan is likely to rise 15% over time to reach an equilibrium level.”

On 12/7, the People’s Bank of China (PBoC) issued a second warning about the risks of big slide in the U.S. dollar, seeking to head-off U.S. Congressional protectionist legislation this year. “If external capital stops flowing into the United States, a significant drop in the US dollar may occur with consumption and investment shrinking, interest rates rising and financial markets experiencing turbulence, and endangering global financial and economic stability,” the PBoC said. Financial markets are awash with speculation that foreign central banks will spread their portfolio risk by shifting part of their dollar holdings into other currencies, such as the Euro and British pound.

Beijing has already suffered a 10% loss on its depreciating U.S. Treasury notes, including the dollar’s devaluation against the yuan since July 2005. Beijing has inflated the supply of its yuan by 16% to 18% for each of the last 3-years, to keep its currency artificially low against the dollar. The hand writing is on the wall. Beijing must accept a sharply higher yuan, crack down on counterfeiting and piracy of U.S. products, and eliminate its barriers to imports of industrial and agricultural goods, or face the risk of Democratic retaliation on its imports next year.

The Reserve Bank of India (RBI) is heeding the call of the G-20, and is asking its banks to set aside the cash equivalent to 5.5% of deposits from 5% previously. The move is aimed at curbing the explosive Indian M3 money supply, which is expanding at an annualized 19.5% rate. Wholesale price inflation in India accelerated at 5.45% clip in November, just slightly below the central bank’s 6% reverse repo rate. Still, it will be difficult for the central bank to rein in the M3 money supply growth rate, expanding at an annual 19.5% rate, unless it stops intervening in the currency markets. India’s foreign-currency reserves rose by $8 billion last month to a record $175.5 billion on 12/1. The Bombay Sensex index hit a record high of 14,035 on 12/6, but has since lost 7% of its value in a broad-based sell-off, triggered by the surprise RBI tightening move.

The Bank of Brazil is not following the G-20 game plan, and lowered its Selic lending rate 0.50% to 13.25% on 11/29. The BoB has cut interest rates 12 times in a row, the longest period of rate reductions in Brazil’s history. Borrowing costs have fallen by 6.5% points from 19.75% in September 2005. Selic rate futures contracts signal expectations of another BoB rate cut in December. The BoB is putting a floor under the U.S. currency at 2.14 reals. So far, the rate cutting campaign and the 18.2% expansion of the Brazilian M3 money supply have not been able to give the U.S. dollar a sustained bounce above 2.14 reals. Thus, in a reversal of fortunes, the Brazilian government, which was on the brink of defaulting on its debt just 3-years ago, is now working overtime to prevent the U.S. dollar from falling under its own weight, and parking its dollar purchases in U.S. T-bonds.

Link here.
Asian central banks may spook investors in 2007 – link.

Major currencies involved in a race to the bottom.

Hold the British pound up to the light before you hedge your dollars this Christmas. Check the watermark. Make sure the metallic strip is intact. Then read the “promise to pay” signed by Mervyn King, Governor of the Bank of England. It is just as empty as the promise on U.S. Treasury notes. Nothing but more fiat promises back it up – which will work fine so long as everyone accepts sterling in payment of debt. But the pound is set to fall hard, according to two big U.S. investment banks. Goldman Sachs says the pound is 13% overvalued on a trade-weighted basis. Lehman Brothers are gloomier still. Their chief UK economist, Alan Castle, sees sterling falling to $1.82 next year, before sinking to $1.68 by Christmas 2008.

Wall Street’s reasons are simple. They might give you déja vu, too ... for the U.K. and U.S. have much more in common than merely the mess in Iraq. Just like America, Britain is currently running a huge trade deficit with the rest of the world. The largest shortfall in Western Europe, it reached a near 18-year record this fall. And just like America, Britain also has a mountain of government debt. Then there is consumer debt – only here, Britain is way ahead of the States. The British now owe $2 trillion in housing debt, much of it held as a naked call – otherwise known as interest-only home loans with no money down.

“[T]he surprise is that the Pound has been so strong,” gasps Lehman Brothers. But c’mon! What took Lehmans so long? None of this trouble is new. And other U.S. investment banks have called the pound lower before. Trouble is, they were wrong. “As a top trade for 2005, we recommend going short AUD, GBP and NZD,” said Morgan Stanley in January 2005. By their expert math, these three Anglo-Saxon currencies were all “overvalued [and] no longer trading on fundamentals.” That bit was right, but the trading idea was not.

And all this while, the pound has grown weaker on all fundamentals. Britain’s broad money supply has exploded 25% since the start of 2005 – the fastest growth by far amongst the G7 and nearly twice the rate of world money growth. Moreover, in early April this year, dollar interest rates overtook pound rates for the first time since 2001. This did not bode well for sterling based on history.

It is a good thing that sterling broad money has risen so fast, because the pound has become the “anti-dollar” of choice for the world’s central bankers. “There are not many places to go once you decide to get out of the dollar,” shrugged an official from the Banca d’Italia in August. Italy’s monetary wonks had just said that Sterling accounted for 24% of their foreign currency reserves. They did not hold any in 2004. “Japan is always a question mark. At least the British economy is humming along okay and UK bonds offer a decent yield ...” In other words, sterling is better than a poke in the eye. The UK currency – underpinned by record inflation of the money supply, record house-price inflation, and near-record trade deficits – is now the world’s third reserve currency, second only to the dollar and euro.

What is to love about sterling in this beauty contest of misshapen half-wits? Put simply, it is not the dollar or euro. The same sorry logic is at work on Wall Street. Lehman, Goldman, and Morgan Stanley all say the “fair value” of the pound is lower than it is. But what if the dollar keeps falling, and sterling falls too? Where will central banks turn next as they try to spread their currency risk from one fiat money to another?

“In the 1980s,” the BIS says, “the yen had begun to erode the U.S. dollar’s share [of central bank currency reserves]. At its peak the yen accounted for over 10% of reserves. By 2006, it accounted for less than 5%.” Funny, but the UK economy looks uncannily like late ‘80s Japan Inc today ... only in miniature and minus the trade surplus. Yet central bankers have piled in regardless. Even the Swiss have bought sterling, pushing it to 10% of their foreign exchange reserves! The BIS cannot be sure what China, Japan and Russia have done. But Sterling’s strength in the currency market says it cannot all have been destined for dollars or euros. All central bankers now share this headache. When the pound hits the skids, the stampede out of sterling will send the next-best-thing soaring. In fact, the glut of central bank pound buying may in fact have already ended.

If furtive officials in Beijing, Tokyo or the Kremlin have chosen to stop buying sterling, they will find the four other major currencies in a race to the bottom. Japanese inter-bank lending pays less than 0.4% today. Eurozone bankers have got all the euros they want – the “Esperanto Experiment” now yields two percentage points less than the dollar. The Swiss franc pays even less, and the dollar itself ... well, you already know how ugly the dollar now looks. What about the commodity currencies, the Korean won, or the newly convertible Russian rouble? There is a snag. The dollar, euro, yen, sterling and Swiss franc account for 83% of the world’s debt issuance in total. Most likely that leaves non-major securities too tight. The big central banks cannot seriously increase their holdings without freaking the market.

Finally, of course, there is gold. Since it pays no interest in a world always seeking out yield, it now accounts for just 0.5% of all government reserves by value. But now the five major currencies all look as bad as each other, then who knows? Gold might just find favor. “It is unfortunate how much [India] has lost by ... holding on to the antiquated belief that gold transactions in the market by the Reserve Bank of India are bad, while frequent transactions in USD, euro, yen and sterling are good,” said former RBI Deputy Governor S.S.Tarapore late in November. “[G]old invariably moves inversely with the U.S. dollar and also rises in value when international inflation gathers momentum. Thus, there are strong reasons for holding a reasonable proportion of Indian foreign reserve exchange reserves in gold.”

Central bankers in gold-buying shock? You read it here first ...

Link here (scroll down to piece by Adrian Ash).

Three strikes against the dollar.

Though it has been given scant coverage in the U.S., Iran’s decision to drop the dollar in favor of the euro has been receiving widespread attention in Europe. Iranian government spokesman Gholam Hossein Elham told news reporters, “The [Iranian] government has ordered the central bank to replace the dollar with the euro ... in commercial transactions,” repeating exactly what Saddam Hussein did in September 2000. Lest there be any misunderstanding, Elham went on to say, “Foreign income sources and oil revenues will be calculated in euros, and we will receive them in euros in order to put an end to our dependence on the dollar.” This change will lessen the demand for dollars, which will cause the value of the dollar to drop. Strike one.

The U.S. Mint implemented a new regulation that bans the melting down and exporting of pennies and nickels. It is sound economics to harvest the metallic value of these coins, because the value of their base metal content is greater than the coin’s face value. There are many lessons that we can garner from monetary history, but one of them is unmistakable. When debasement becomes so extreme that even the base metal content of circulating coins is greater than the coin’s face value, that country’s currency is headed for the currency graveyard and will soon be buried there. Strike two.

Three weeks ago London’s Daily Telegraph reported that “Airbus could trigger ‘nuclear option’ of currency controls.” The article says that “Brussels may lawfully freeze capital flows in and out of the EU ...” The rationale is that Washington should not be allowed to export the consequences of its own reckless spending policies through a “beggar-thy-neighbor” devaluation vs. the euro. “The idea was to stop money coming in, though it could equally be used to stop money leaving.” The really interesting question is why would the EU want to stop money from leaving? Simple. If capital controls are imposed, they would come with compliance from other countries, particularly the U.S. and Japan, which would impose controls complementary to those implemented in Europe. The reality is that these countries’ central banks are joined at the hip. They would drop the value of their fiat currencies more or less in concert so that they all end up losing purchasing power against gold and other tangible assets, but more importantly, these currencies would drop in unison against the Chinese yuan. In theory bringing down China’s trade surplus and also reducing the investment money flowing into China. So strike 3 is against the U.S. dollar, the euro and Japanese yen.

In summary, the outlook for the U.S. dollar is worsening.

Link here (scroll down to piece by James Turk).


The dollar, a blog post (we cannot remember where we found it) suggested, is like an Internet stock circa 1999. Specifically it is like Pets.com – one of the last Internet concept stocks to go public before the dot-com bubble burst in 2000. “Why buy pet supplies on line?” the company’s advertisement asked. “Because pets can’t drive!” Flush with IPO cash, the company shelled out $1.2 million for an ad during the Super Bowl of 2000. But less than one year later, Pets.com lost its listing on Nasdaq and the company went out of business.

Once Pets.com started to unravel, very few investors managed to exit the stock without incurring substantial losses. Almost anyone who held a large position in Pets.com would have been reluctant to be the first to sell. But once the absurd spell which induced investors to buy too much of a stupid thing is broken, all hell breaks loose and panicked, undisciplined, disorderly, deeply destabilizing selling begins. If the dollar is like Pets.com, the sell-off that is coming is going to make the dot-com bust look like a day at Disneyland.

Link here.


The Dow industrials closed at a new record high week. Friday was “quadruple Witching” – a day that will be dominated by option and futures expiration. This expiration clearly influenced the market all week, and it will get back to normal and be driven by more natural forces on Monday. The Nasdaq-100 (NDX) rallied too, but not to a new high. The NDX is still consolidating under its late November high, while wrestling with its 20-day moving average, and has also broken its trendline from the August low. This would normally be considered a clearly bearish situation, but the consolidation over the past month has been tight and could break either way: Watch 1,770 on the downside and 1,820 on the upside.

This rally has obviously gone on much longer than we anticipated. On the one hand, for reasons we have been highlighting over the past few months, this rally has defied the weight of the fundamentals and many of the intermarket indicators we follow. On the other hand, this rally has really just been powering on for a few months, which is too short a time frame to make any judgments about long-term trends or trend changes. We have mentioned before that the Dow Theory nonconfirmation in 1999-2000 lasted about as long as we are seeing the current nonconfirmation continue, as did the nonconfirmation at the 2002-2003 low – so what we are seeing now is not unprecedented.

The NDX is now underperforming the S&P 500 after outperforming since August. This is just one more sign we are watching that suggests the rally is near an end – these signs have been piling up for a while now, but so far, the market has kept it together. There will undoubtedly be a correction soon, and we will then see what the market has to say about the long-term trend.

As a final thought, we will leave with an analysis of Caterpillar, 3M, American Express and AIG. These are four of the 30 components of the Dow industrials, and clearly illustrate the difference we are seeing within the market. CAT and MMM are diverse manufacturers. AXP and AIG are financial companies. CAT has been declining since its May high, and MMM has just recently ended its rally from its July low – a rally that failed to take out its May high. In contrast, AXP and AIG are powering ahead and lifting the Dow to new highs. How long can these divergences between sectors last before the market succumbs to the fundamentals? We know that it has lasted this far, so it can surely go further. Depending on how the market fully responds after this rally from the July low, we will know whether it is done or whether it will go on well into 2007.

From most recent weekly Survival Report update.

Stock strategists raise alarms with unanimous call for rally.

Strategists at 12 of the biggest Wall Street firms agree that U.S. stocks will rally next year. The last year that happened was for 2001, when the S&P 500 Index dropped 13%. Merrill Lynch’s Richard Bernstein and Bear Stearns’s Francois Trahan, two of the most bearish forecasters in the current 4-year rally, both estimate the S&P 500 will surge to a record next year.

The unanimous view among the strategists tracked by Bloomberg that have made 2007 forecasts is just one signal of growing complacency about the market. An option-based index of investor concern dropped to a 13-year low last week, when the S&P 500 rose to its highest since November 2000. A survey of newsletter writers showed the least pessimism this year. “Everybody lining up in the bull camp makes me more than a little nervous, and I was nervous anyway,” said Malcolm Polley, who helps manage $1.3 billion as president of Stewart Capital Advisors. “There are enough potential pitfalls to take us to the downside.” Polley said he is finding few stocks worth buying now.

Since the current bull market began in October 2002, at least two strategists every year have estimated declines for the S&P 500 in their annual forecasts. “I’m an old believer that when everyone believes something is going to happen, the opposite happens,” said David Kotok, who oversees $850 million as chief investment officer at Cumberland Advisors Inc. “That causes me concern because I’m bullish too.”

Link here.


According to Martain Hoffert, physics professor at NYU, we would need more than 10% of the world’s landmass, or the equivalent of all the land currently under cultivation, to grow enough biomass to meet the world’s energy needs. That does not make a good case for corn, but consider this. Corn is primarily used for feed for livestock. And demand for corn’s role in producing chickens and cattle will only grow, considering there are approximately 2.4 billion people (roughly 36.5% of the world population) living in both China and India, and who are all quickly changing their diets from grains to protein. And as these countries get richer, they will begin consuming more and more meat. You can see it already in places like Beijing and Shanghai, where people line up around the corner and wait more than an hour just to eat at a Kentucky Fried Chicken.

Producing enough livestock to feed that part of the world will require massive amounts of corn. And that may be a problem for China. Coastal lands once used for cultivation have been sacrificed to accommodate China’s industrial machine. But there may be an even bigger problem. An extensive drought sweeping across borthern China wreaks havoc for corn and soybean crop yields. The lack of water has made dust storms capable of choking visibility to less than 100 yards common in Beijing. What does this all mean?

Asian central banks may be nearing the crossroads with their dollar reserves. The more they pile up dollars, the greater the eventual losses when their respective currencies rise relative to the greenback. This problem is especially troubling for China and its more than $1 trillion in foreign exchange reserves, of which 70% are in U.S. dollars. A mere 20% increase in the yuan against the dollar would reduce the value of China’s estimated $700 billion in U.S. treasuries by $140 billion – roughly 6.3% of China’s 2005 GDP. And many estimate the yuan to be undervalued by upwards of 40%.

Analysts estimate China would need roughly $400 billion in reserves to stabilize the country in the event of another financial crisis similar to the fiasco that hit the region in 1997. Consequently, the Chinese have too many eggs in one proverbial basket ... the American dollar. Shifting some of those eggs away from the greenback seems to becoming more and more than just an academic exercise. The point? If you knew China was about to go on a shopping spree, you would want to own the assets they intended on buying. Many, including myself, have argued the Chinese will shift their fiat paper into tangible assets like gold and oil.

I would not be surprised to see China convert some of those dollars to gold. I too believe that China will continue stockpiling oil. But there is a commodity even more valuable than either gold or oil that the Chinese cannot live without. I am talking about food, as it relates to feeding more than a billion people. Just as Americans deem oil dependence from foreign suppliers to be a critical obstacle to this nation’s security, I believe the Chinese will deem long-term sustainable food suppliers to be of critical significance to their own domestic serenity.

I believe they do not want to rely on places like the U.S., France, South Africa, and Brazil to supply their country with grains like corn to keep their people fed. What is to stop the French or the U.S. from leveraging their meat and grain supplies to apply diplomatic pressure as well? I tend to believe the Chinese will use their Forex reserves to begin buying up a diversified portfolio arable land across the globe to address this problem. Buying this arable land will ensure that the sun will never set on the Chinese empire. So that is my theory. I am searching for specific areas the Chinese would most likely target. While the world keeps focusing on energy security, I am going to begin to turn my attention to food and water security.

Link here.


In a span of 24 hours, the Bank of Thailand first outraged investors by slapping a Chilean-type tax on capital inflows and then tried to placate them by taking equity investments outside the purview of the levy. The capital lockup rules revived memories of what Malaysia had done in 1998, although curbing the profit potential of new money entering Thailand is nowhere near as draconian as Mahathir Mohamad’s trapping of existing foreign investment by fiat. Nevertheless, the Bank of Thailand’s actions have raised the specter of more widespread use of monetary shock therapy in Asia.

The Thai authorities’ flip-flop shows the level of desperation with a world awash with money. Policy makers in emerging markets can see the risks to the stability of their financial systems from a surfeit of liquidity, but they cannot do a thing to regulate money supply at its source. If these countries give the slightest indication that their appetite for global funds is limited, and so only more long-term money is preferred, they are told they cannot pick and choose. It is either all or nothing. That is the message that Tuesday’s 15% decline in stocks gave to the Thai authorities, who then had to back down.

Clearly, the Bank of Thailand had not anticipated the ferocity of the stock-market reaction to its new rules. With ebbing private investments and lackluster consumer spending, Thailand is basically an underperforming Asian market supported by foreigners. It is cheap because it has reason to be. International investors have purchased about $6 billion of Thai stocks since the beginning of 2005, more than 10% of which they have lapped up since the military coup of Sept. 19. Before the fall, the SET Index had gained about 20% in U.S. dollar terms over two years, among the world’s 10 worst-performing benchmarks. The Thai economy is neither so small (or closed) that speculators will not care to put it in play, nor so large (and strong) that they will not dare touch it.

The Bank of Thailand’s move was a desperate attempt to prevent its monetary policy from being compromised by capital inflows that had, until last week, caused an intolerable 16% surge in the baht, making it this year’s best-performing Asian currency. If Thailand had persisted with capital controls on equity investments, its economy may also have lost the benefits of cheaper capital and deeper markets that come with financial globalization. Before any of that could happen, the authorities blinked. The carnage on the stock market must have convinced them that in the process of stemming inflows, Thailand could end up encouraging capital flight.

Thailand’s immediate requirement is stability. The country is in a flux. It does not even have a permanent constitution at the moment. The last thing it needs is financial turmoil. But since global investors have no aversion for risk right now, they will not allow Thailand to have any, either.

Link here.


Last week we were informed that, according to the U.S. Mint, based on current metals prices, the value of the metal in a nickel is now 6.99 cents, while the penny’s metal is worth 1.12 cents. “The nation needs its coinage for commerce,” U.S. Mint director Ed Moy said in a statement. “We don’t want to see our pennies and nickels melted down so a few individuals can take advantage of the American taxpayer. Replacing these coins would be an enormous cost to taxpayers ... Under the new rules, it is illegal to melt pennies and nickels. It is also illegal to export the coins for melting. Travelers may legally carry up to $5 in 1- and 5-cent coins out of the USA or ship $100 of the coins abroad for legitimate coinage and numismatic purposes.”

Note the irony in the mint for being concerned about those who would “take advantage of the American taxpayer,” when the actual production cost for each penny is now up to 1.73 cents, according to the Houston Chronicle. Year in and year out, The U.S. Mint wastes money by coining pennies. The Mint produced $78,612,000 worth of pennies at a cost of $135,998,760, thereby wasting $57,386,760 of taxpayer money through November 2006. Worse yet are the continued handling charges (and time wasted) by merchants and banks sorting and counting the damn things.

Oddly enough, it is quite likely that The Mint will bring upon the very conditions it hopes to prevent! The Mint had to be crazy to announce that a nickel is worth 7 cents. I got to thinking about this a bit more, and a nickel is really $0.05 plus a call option on the price of copper and nickel (the metals) in the nickel. If that option is in the money enough, the mint cannot prevent people from hoarding them, which will in turn drive up the cost of producing them. In fact, the mere expectation that metal prices will get high enough could cause hoarding. Of course, the Mint tried to negate that call option by making it illegal to melt the coins, but that will not stop hoarding if the expected or actual price of copper and nickel gets high enough.

All the Mint really accomplished was telling everyone that a nickel is backed up by something useful, even if a dollar is not. Eventually, this is likely to force the mint to debase the nickel by replacing the copper and nickel in the nickel with steel or aluminum. Right now, a nickel is the closest thing to “honest money” we have. We are in the ironic situation where the value of the dollar is falling, but the value of a nickel is rising. In what time frame will the current (and probably soon-to-be confiscated) nickel be worth more than a dollar?

Recall that the Mint long ago replaced much of the nickel in “nickels” with copper, just as it removed the silver in “silver dollars” and replaced the copper in pennies with zinc. In the short term, it is likely the value of a nickel drops to a nickel or less because of the falling price of copper. Here is a weekly chart of copper. I have been bearish on copper for quite some time, simply because so much of it is used in housing. My target remains the 220 level, but 160-180 is not out of the question. Technically, copper is broken. Can it blast higher anyway? Yes, it can. I just do not think it is likely. For grins, here is a chart of lumber prices. Exactly what are Dr. Copper and Lumber telling us? To me, it is obvious. This economy is in trouble.

Let us now return to my previous question: In what time frame will the current (and probably soon-to-be confiscated) nickel be worth more than a dollar? Aaron Krowne gave a couple of possible answers to that question on AutoDogmatic.com: “If base metal values continue to increase by 5% per year on average, and the dollar continues to depreciate by about the same, then in about 26½ years, a nickel will be worth a dollar in inherent value. If the rates are 10% per year, then in a bit over 13 years, this milestone will be reached.”

Some might think Aaron is asking too much, others too little, and in the short term, I am still calling for a pullback in copper prices. But what is to lose by hoarding nickels? Oddly enough, hoarding nickels is a hedge against both hyperinflation and deflation. If hyperinflation kicks in, a nickel might be worth more than a quarter (in metal content) in no time flat. If deflation kicks in as I suspect, cash will be a good thing to have. If you are going to hold cash (change), it may as well be in nickels.

Link here.


What is private equity? Dan Amoss offers this succinct definition: “Private equity, or leveraged buyout (LBO), deals involve a group of outside investors raising debt in order to make an offer for all of the outstanding shares of a company that they consider to be undervalued. Usually, the target companies have net cash positions and valuable assets that throw off sustainable cash flows.” But there is a seamy underside to all this, as noted in an article from Bloomberg columnist Michael Lewis.

The upper class is now serviced by a vast and growing industry, loosely called Private Equity. The job of the private-equity investor is – again, speaking loosely – to exploit the idiocy of the ordinary investor, and the corporate executives and mutual-fund managers who purport to serve him. In effect, the smartest, best-connected money has separated itself from the rest of the stock market, and has gone into the business of trading against that market. It seeks to buy from the stock market cheap, and sell to the stock market dear, and if you need evidence that this is possible you need only look to the returns on private equity, which have been running three times the returns of the public stock market.

With the shrewdest and most sophisticated investors armed with essentially unlimited capital, any company that is available to the public is almost by definition an inferior asset, i.e., an asset that the private-equity people have no interest in. We may not have arrived at the point where the publicly traded shares in a company are a sure sign that those shares are a poor investment. But that is the obvious, ultimate destination.

Link here.

Comments on pirate equity.

Chris Mayer checks in: I think it is interesting to look at where the money goes. For example, a good slug of it is heading for infrastructure assets. People are paying absurd multiples to own airports, toll roads, and marine ports. Nearly every investment bank has started an infrastructure fund. There is more than $150 billion lined up – which when you factor in leverage, means $750 billion in purchasing power. Private equity is playing a big role in all of this, too.

Dan Denning writes from Australia: This is going to be the big story of 2007 for two reasons. First, a very few people are going to get very rich, but they are going to make it look like everyone is getting rich because the indexes will go up. Then, most everyone else in “the market” is going to get royally screwed. Let’s say Private Equity ramps up and buys anything it can with a 15-20% premium (no big deal if it is not your money). If you tack on an arbitrary 20% premium to the market – any market – it is not hard to see nominal levels of 15,000 on the Dow and then another $3 trillion or so to total U.S. market cap (Wilshire 5,000) of $14.3 trillion.

The Wilshire is still below its 2000 level of $14.7. We could take that out by the New Year. It is an impressive accomlishment, making a new high with the Nasdaq still at half of what it was. The market has somehow slipped another $7 trillion in market value somewhere else since the tech bust wiped it out. How has the composition of total market cap changed since 2000? Without doing a lot of homework, I would guess that some has gone into energy and resources and the rest into fiancials.

So if Pirate Equity levers up to engage in more acquisitions, that alone will increase market cap. As PE takes public companies private, the total market cap should go down, but the PE strategy is to disassemble the parts of a company and then re-float multiple entitities at new, higher, multiples! That is where you get your 20% premium to current market cap. Of course no new wealth has been created. But it is an impressive shell game, and creates impressive profits for lawyers, accountants and investments bankers.

In the end, it will make the S&L crisis look like a really trivial game of tic-tac-toe. PE is borrowing heavily to finance all this acquisition ... so who ultimately is left holding the risk? I would say the shareholders through mutual funds are most likely to get the most screwed, which is what Lewis says. In effect, this is a giant Wealth Transfer from the poor to the rich. Pretty clever if you know how to get in on it. Pretty disastrous if you have no idea what is going on.

Link here.

What drives private equity?

Dan Denning demolishes a Fed Head who has evidently confused this sort of money manipulation with actual productivity and prosperity: Just yesterday we read that the world’s largest casino operator, Harrah’s (HET) is entertaining a bid by private equity outfits Apollo and Texas Pacific that values the company at $16.7 billion (HET has a current market cap of $14.7 billioin.) Here is my question: What does Harrah’s have in common with every other major private equity takeover target of the last year? Cash.

Private equity transactions usually involve a lot of leverage (debt). The organizers of the transactions look for a company that throws off regular cash which be used to service the accumulated debt. That is the one single most important attribute a company must have to be attractive to private equity. There are others. But if you only started with that one and say, companies that sold a low price to sales multiple, you would have in front of you a list not that different from what private equity mangers who make ten millions of dollars a year look at when making decisions.

Richard Fisher, the President of the Dallas Fed, says that the agent of reorganization is not the government or the central bank but the talent of our business managers. These managers of our businesses are the key to our continued adaptation and growth, and allegedly are our greatest comparative advantage. He says that the managers in our business community serve as the nerve endings in Adam Smith’s invisible hand, stretching capitalism’s fingers into every corner of the world to extract value at the lowest cost – in order to enhance productivity. “They are the people who enable us to finance our external deficits, and inevitably redress them. They are the key to our transforming what some perceive as a weakness into a fundamental strength. ... They are the masters of the best manifestation of ‘creative destruction’.”

The idea that these private equity guys are superior allocators of capital is a huge load of bull****. Some of them are smart. But they are not smart because they know how to spot a great business better than you or I. They are smart because they have learned how to buy a dollar’s worth of earnings with fifteen cents of someone else’s money – and they get paid millions to do it! I know a 26-year old guy in Sydney – smart, sociable, looks good in a suit, who makes $250k for Macquarie bank as an analyst. Analyze what? Balance sheets? I guess. He says he cannot figure out how he got paid so much to do what he does, but he is not complaining. Nice work if you can get it.

You know what, I do think all this is very bullish, in the strict mathematical sense. There is going to be a buying boom, via leverage. The indices are going to soar. Buy call options. (End Denning comment.)

“Creative destruction?” I have not seen this obscene a corruption of Schumpeter’s famous expression since the neocon Michael Ledeen appropriated it to justify his insatiable lust for world-improving wars.

Link here.


[Penny Stock Fortunes is being revived under a new editor by Agora Book Publishing, publishers of the invaluable Daily Reckoning website – the source of many ideas for the W.I.L. Finance Digest. The outgoing editor reports that the incoming editor has been revamping the five-point system “that finds the fastest growing penny stocks in the universe. ... Penny Stock Fortunes is not concerned about ‘value’, balance sheets or cash positions. This is all about pure greed. When one of these companies takes off, it could make you a fortune.” The “beta” designation of the issue “release” is accurate, in our opinion.]

Monogram Biosciences

Since 1981, AIDS has killed more than 25 million people. The AIDS death toll also has a tremendous social and economic impact in Africa. U.N. Secretary General Kofi Annan said between 1999 and 2000, more people died of AIDS in Africa than in all the bloody wars taking place on the continent. Many of these African nations that are most affected by AIDS are seeing their quality of life dip even lower. As AIDS continues to spread, life expectancies in some African countries have dropped dramatically.

The search for a miracle to save these millions of AIDS patients from an early death has reached a critical stage. I believe the medical miracle is here. It is a revolutionary HIV testing system that could help some of the biggest drug companies administer new, advanced treatments to AIDS patients around the world. The test can determine the exact pattern of each individual’s virus, allowing the use of amazing new treatments that would otherwise be virtually useless. The keys are held by an unknown $220 million biotech company, Monogram Biosciences (MGRM: NASDAQ). Doctors and executives from most of these drug giants have persuaded their respective companies to quietly invest resources in these tests.

“Personalized medicine” will change medicine. Major drug companies are using personalized tests to develop new and better medicine that will target diseases that are specific to individual patients. MGRM’s patented testing solutions enable doctors to tailor their treatments to the precise needs of each patient. This next generation of medical tests has proven to be 100% accurate. The best any of the less-advanced mainstream tests could get was a 65% accuracy rate. That is why MGRM will soon emerge as a leader in personalized medicine. With the technology to make personalized medicine mainstream, this company will not be trading at $1.60 a share for too much longer.

Soon, physicians across the globe will be using personalized testing techniques to treat patients will all sorts of diseases. Not just HIV. MGRM has partnered with more than 60 pharmaceutical, biotech and research organizations. This includes almost every company with a significant HIV drug development program. The bottom line is that any company that wants to gain a foothold in HIV treatments needs this unknown company to survive.

This past May, Pfizer and Monogram teamed up to make Monogram’s Trofile test available globally. The diagnostic was used to select patients for Pfizer’s trial of maraviroc – a new class of drug to treat HIV. Once the FDA approves maraviroc and Pfizer makes the drug available outside the U.S., the company will market Monogram’s tests to physicians. Now that Pfizer’s clinical trials are winding down, Monogram’s stock is in a bit of a holding pattern. Revenue dipped this past quarter on what Monogram CEO Bill Young called a natural transition as the result of the completion of the clinical trials of maraviroc. Now Monogram is transitioning from primarily helping drug companies to making its tests available to doctors worldwide. Now that enrollment is completed for the clinical trial, Pfizer expects to submit a New Drug Application for maraviroc to the FDA by the end of this year. This could be huge for Monogram.

Monogram is also helping Merck. In February 2006, Monogram’s tests were being used in a Phase 3 trial of a new HIV drug Merck is developing. And Monogram is partnering with more than 60 organizations, including almost every single company with a significant HIV drug development program, some drugs of which are considered to be the most advanced treatments ever tested. In the U.S. market, Monogram is well placed with a sales and marketing force. The company also recently created a medical affairs group, as well as a commercial operations group. Company executives are making sure they are ready when the drugs are granted approval. Hoping to build on top of its state-of-the-art HIV diagnostic systems, Monogram has developed a test to foster personalized care for cancer patients. Monogram’s eTag technology basically does for cancer treatment what the Trofile test does for HIV. All together, Monogram has a powerful advantage in a very important industry.

Action to take: Buy shares of MGRM under $1.95. Do not chase the price. If the price dips below $1.30 per share, sell your shares. (When it comes to penny stocks, it is always a good idea to set stop losses as an insurance policy for your portfolio. You should limit your losses to 25% should a stock take a fall. It keeps your losing positions from overtaking your winning ones.)


Intervoice (INTV: NASDAQ) makes software that automates and personalizes access to information. Its software includes useful features like automated password reset, survey automation and authenticator. This last one is a voice authentication system for access to confidential information. Essentially, it offers an entire software suite for major corporate call centers around the world. Intervoice products help some of the biggest companies in the world provide better customer service. Customers include Citibank, Wal-Mart and Sony. A quality voice automation system takes the hassle out of customer calls. No more endless touchtone messages when you call Sears looking for the automotive department. You simply say the name of the department you want and your call is directed. Trust me, it is a heck of a lot easier than sitting through another long list of menu options that do not specify what your looking for. It saves time for the person calling, which in turn saves the company staff time on the phone and money.

The company’s backlog is growing and its work-in-progress inventory was up to $7.4 million, from $5.5 million the previous quarter. Business is growing. But Wall Street made a shortsighted mistake and you have the opportunity to buy shares that are off more than 16% from just a few weeks ago. Intervoice acquired Nuasis, a company that provides Internet enabled customer contact software, for $2.5 million in cash on Sept. 1. The Nuasis customer contact center applications include Web chat and e-mail response applications. Intervoice hired many Nuasis employees and continued to serve Nuasis’ customers after the acquisition. And while the added products Nuasis provides should ultimately compliment Intervoice’s own technology, it will take a little time to properly integrate the operations.

Intervoice not only makes money by selling its software solutions, but also by managing its systems for its clients. It records these charges as recurring services on its income statement. In its most recent quarter, Intervoice’s recurring services sales of over $26 million topped its $24 million in sales of its products. This means that for every new customer Intervoice gets, it brings with it the promise of continued business.

Meanwhile, Intervoice is transitioning out of its old services such as message and payment solutions as its voice automation and interactive voice response (IVR) sales ramp up. The company has moved from internally developed hardware and software solutions to open-standard architecture such as VoiceXML and SALT. The company is also implementing a new company-wide enterprise resource planning (ERP) system. If the new ERP system goes as planned, investors can expect better integration of Nuasis and another acquisition – former competitor Edify Corp. – as well as reduced costs and improved profit margins. Once the integration of new acquisitions, transitions in its products, and implementation of the ERP are complete, INTV is poised to make a comeback.

Intervoice sells its products in more than 75 countries, and international sales were 45% of total sales last year. Intervoice sells its products in more than 75 countries, and international sales were 45% of total sales last year. Two company directors and the chief operating officer have recently bought 58,000 shares of Intervoice between $6.30 and $7.33.

Action to take: Buy shares of Intervoice (INTV: NASDAQ) under $7.05. Do not chase the price. If the stock drops below $5.05 per share, sell your shares.

Alternative Energy Journal

Here at The Penny Sleuth, we recognized how small alternative energy ventures could benefit from the pressures of finding a cure for America’s oil addiction. With this in mind, I decided to publish an alternative energy guide outlining the benefits and setbacks related to ethanol, biodiesel and the hybrid car industry. The information has been compiled from a series of published Sleuth columns and other research I conducted earlier this year. Some of the ideas are updated here.

Select small-cap securities working in the alternative energy sector are also listed in this report. While no direct recommendation was ever made to purchase shares of these stocks, updates on share prices and pertinent news will be added on a regular basis. It is also important to recognize the volatility of many of these small securities. In April 2006, a wave of media attention and higher gas prices drove up the share prices of many of these companies. Since the hysteria has died down, share prices have settled back to more reasonable levels in most cases. Here is a look at three alternative energy companies I will profile later in this piece. The buying interest earlier this year, followed by the settling in share prices, is clearly visible.

If you determine one of the securities mentioned worth purchasing, expect to hold for a few years before it realizes its true value. Remember, the “alternative energy age” is still in its infancy. It will be some time before the world will see how these ideas play out as far as practicality and profit are concerned. Research thoroughly and be patient.

Link here.


At the moment, the world of penny stocks is dotted with several interesting semiconductor firms. I know that some people cringe when they see the word “semiconductor” – but don’t let this industry scare you off. The fundamentals are compelling.

According to a semiconductor market forecast compiled by Gartner Inc., semiconductor revenue should be reaching $257.7 billion by the end of this year – an almost 10% increase over 2005, when the market only grew 7%. This is a market that has grown 17 consecutive quarters. As today’s electronics pack more functions that require faster, more powerful processors, the semiconductor market will likely continue to grow to meet the needs. However, obsolescence is both a catalyst for growth and one of the reasons that semiconductors can be such a risky investment. There is always a niche for new technology to fill, but it is anyone’s guess as to how long it stays relevant.

Advanced Analogic Technologies (AATI: NASDAQ) designs semiconductors called voltage regulators. These are the chips that regulate how battery power is used and distributed to various cellphone or PDA functions. As the number of features on phones grows, the subsystems that require voltage regulation have also grown. It might seem boring to some, but this is an important facet of the semiconductor market. In fact, the voltage regulator market is expected to grow at a compound annual rate of 17.3% through 2009. Looking at just these stats, Advanced Analogic’s immediate future looks bright. However, there are some factors that could hold back this $230 million company in 2007.

First, AATI is a relatively young company. It began operations in 1998, obtained profitability in 2003, and went public in 2005. Since 2001, the company experienced rampant growth. Its revenue grew from a measly $1 million in 2001 to more than $68 million in 2005. It is highly unlikely that Advanced Analogic sustains this growth as the company begins to mature. And if growth slows too much in 2007, investors could react negatively and send the share price plummeting. However, over the course of its short life, AATI has won over some very prominent customers. It supplies its cutting-edge products to LG Electronics, Samsung and Motorola.

While a lot of this may look great, it is important to remember how this particular sector behaves. The semiconductor industry is highly cyclical. When semis are in high demand, companies can barely keep up with the demand. But if demand for the electronics that use these chips drop, then these companies can get slammed. The semi business in your sights could be the best around, but outside market forces could still crush any hopes you had to make a profit. That alone should be enough to convince you to stick to short-term plays on this sector. Buying and holding for the long haul could end up costing you big in this industry.

Link here.


“Amortization” is a big, 5-syllable word that many homeowners cannot define. When you put the word “negative” in front of it you get a confusing, 8-syllable phrase that many homeowners cannot understand. And when you tack the word “mortgage” to the end of this confusing phrase, you get a very risky loan that many homeowners cannot repay. Because negative amortization (neg-am) mortgages have become increasingly popular, and because delinquency rates on all forms of high-risk mortgages are becoming alarmingly high, the “recovering” housing market might soon suffer a debilitating relapse. A very sick housing market would also infect the entire U.S. economy.

Negative amortization mortgages, which also go by the name of “pay-option” mortgages, permit borrowers to pay less than their entire monthly payment. Whatever amount the borrower chooses not to pay can be added to the loan balance (up to a point). Whenever the borrower pays less than the full monthly payment, the unpaid balance on the mortgage increases, instead of decreases. In other words the loan-amortization runs in reverse. Hence the name. As recently as three years ago, neg-am mortgages were little more than curiosities. In 2003, less than 1% of people buying a home or refinancing a mortgage in California used a neg-am loan, according to First American LoanPerformance. Last year however, one in five California borrowers relied on neg-am financing, and year-to-date in 2006, a whopping one in three borrowers have opted to take out a neg-am mortgage.

In theory, the growing popularity of neg-am mortgages testifies to the marvels of financial innovation. In practice, however, the growing popularity of neg-am mortgages testifies to the desperation of homebuyers and/or the desparation of mortgage lenders. Whatever the root causes, the growth of neg-am mortgage issuance is probably a disaster in the making. Neg-am financing, by virtue of its very structure, contains the seeds of its own undoing. These loans enable individuals to “buy” homes they cannot really afford, then to continue borrowing against this unaffordable asset. Inevitably, as the mortgage balance grows bigger, the unaffordable house becomes even more unaffordable.

“Foreclosures in October topped 115,000, 42% higher than a year earlier,” observes James Grant, editor of Grant’s Interest Rate Observer. “And, to date in 2006, according to RealtyTrac, more than one million properties have been started on the foreclosure conveyor belt, 27% more than in the same span in 2005.” Subprime loans – of which neg-am loans are the most treacherous – are leading the charge toward rising delinquencies and foreclosures. Subprime loans, as their name implies, refer to loans held by borrowers who cannot qualify for traditional mortgages. Hence, subprime loans are held by the least credit-worthy borrowers. Not so long ago, subprime loans represented a small sliver of the overall mortgage market, but today they represent a whopping 23%. What is bad for subprime borrowers, therefore, is bad for the entire housing market. And what is beginning to happen to subprime borrowers is quite bad indeed.

“We project that one out of five (actually 19%) subprime mortgages originated during the past two years will end in foreclosure,” a just released report (PDF file) from the Center for Responsible Lending (CRL) predicts. “This rate is nearly double the projected rate of subprime loans made in 2002, and it exceeds the worst foreclosure experience in the modern mortgage market, which occurred during the ‘Oil Patch’ disaster of the 1980s. ... [W]e project that 2.2 million borrowers will lose their homes and up to $164 billion of wealth in the process.” The report goes on to say that when distressed prepayments are added to the foreclosure rate, the total “failure rate” for subprime loans approachs 25%.

This shockingly high “failure rate” stems directly from the shockingly imprudent lending practices of the late-stage housing boom. A few years ago, as home prices began escalating sharply, mortgage lenders devised ever-more-creative – and dangerous – ways for homebuyers to purchase homes they could not genuinely afford. Hence, exotic loans evolved from 5-year adjustable-rate mortgages (ARMs), to one-year ARMs, to interest-only loans, to no-equity loans, to pay-option loans, etc. – each variation more dangerous than the predecessor. All of these “flexible” loans provided some version of low initial payments, followed by much larger payments “down the road.” At a minimum, the borrower was betting the housing market would be better in a few years than when the load was originated, making it possible to refinance and the day of reckoning can be put off.

“Homeownership has become like auto leasing, where the price of the car doesn’t matter,” explains Rick Soukoulis, chief executive of LoanCity, a San Jose lender that funded $7 billion in mortgages in 2005. “All that matters is the size of your monthly payment.” Unfortunately, for many neg-am mortgage holders, the size of the total monthly payment is simply unaffordable. But this grim reality will not become widely apparent until sometime in 2007 or early 2008. A few of the unfortunates who drowned in their subprime debts are bobbing to the surface already. But many more are certain to appear as the recent bulge of subprime loans ages. “I guess we are a bit surprised at how fast this has unraveled,” says Tom Zimmerman, head of UBS asset-backed security research.

Zimmerman’s colleague at UBS, David Liu, relates that the 2006 vintage of subprime loan collateral is about as bad as it gets. In other words, a worsening housing market may already be baked in the cake.

Link here.
The mortgage bust goes on – link.


Thomas Friedman expressed the view that if the Republicans had remained in control of the House and the Senate, the U.S. would have become a banana republic. But a banana republic is not characterized only by a rotten political system, ruled by a small, wealthy, and corrupt clique, but also by huge wealth and income inequities, poor infrastructure, backwardness in many sectors of the economy, low capital spending, a reliance on foreign capital, money printing and budget deficits, and of course a weakening currency. A banana republic is also characterized by a ruling class that curtails people’s personal freedoms and is moving towards a heavyhanded military dictatorship under the excuse of fighting guerrilla (or terrorist) opposition groups or enemies. What is relevant is the determination of the elite, irrespective of which party its members belong to, to shift wealth from the majority of the people (the masses) to themselves, usually through simply printing money and incurring chronic budget deficits, and frequently also through senseless warfare.

I am not insinuating that the U.S. is already a banana republic, but the trend is undoubtedly there. The physical infrastructure is more often than not totally insufficient. Not a single flight I took in the U.S. was on time, with one arriving 10 hours late, another 12 hours late, while two were canceled altogether. As I have written before, the productivity of corporations has risen, but the productivity of the consumer is down as he is constantly waiting in lines and has to suffer from insufficient service and support staff. Also, compared to Asian and European cities, the streets tend to be filthy, except, of course, in the “ghettos” where the super-rich live. In the meantime, members of the American elite are enjoying the asset inflation, the printing of money, and the trade and current account deficits, because they keep the “lower classes” reasonably happy and content by allowing them to continue to consume and buy “cheap” foreign goods.

The weakening currency, which is also brought about by capital flight – another characteristic of banana republics – does not bother the elite much because they have the ability to easily transfer their wealth overseas or to fully hedge their exposure to the declining foreign exchange rate. (The aristocrats of banana republics are usually Swiss banks’ best customers.) This is particularly true in the case of moneyed elites, which are relatively fixed asset poor and hugely financial asset rich. Basically, what I am suggesting here is that the financial sector – with some exceptions – really does not care much for the overall long-term health of an economy. It is only interested in asset prices moving up, no matter how unsound the economic policies might be that inflate those asset prices. So, when things really turn bad, the money shufflers – like so many former leaders of banana republics have done before them – just pack their bags, hop in their private jets, and move to another society where they can start playing the same game all over again!

Still, I was very gratified to see that there are still some socially responsible companies in the U.S. And although there are ominous signs of the U.S. drifting towards the status of a banana republic, the polarization of wealth is not due only to the disproportionate growth of the financial sector. The five richest Americans all made their money themselves, and while financial types are very predominant on the Forbes 400, there are also a large number of “new economy” entrepreneurs on the list, such as the founders of Yahoo, eBay, Amazon, and Google. This goes to show that there is still ample social mobility in American society. Still, the list of America’s richest people gives me the impression of a relatively lopsided economy consisting of asset inflation beneficiaries and entrepreneurs who know how to encourage and capitalize on Americans’ seemingly insatiable appetite for consumption.

Finally, I also have to point out that there are two socially different Americas: the money and asset shufflers in the coastal areas, and the conservative but extremely friendly and hospitable inland and southern population. The types of Americans who live outside the coastal regions are also those most likely to retard the slide of American society into banana republic-hood. These people tend to have high ethical values (although admittedly sometimes misdirected), and they are very concerned about and proud of their small communities.

I found wages for less-skilled workers in the U.S. to be extremely low when compared to wages for similarly skilled workers in Switzerland and most of the EU. Based on the low level of wages compared to both Western European wages and U.S. asset prices, I am inclined to think that either U.S. wages might continue to rise or asset prices could adjust down to the wage level. Also, whereas the U.S. dollar may adjust on the downside against Asian currencies and precious metals, it may be less vulnerable against the euro.

At the expense of being called anti-American, I found that, with the exception of the areas where the wealthy people live, as I mentioned above, the streets are filthy. I have also never seen anywhere in the world as many police cars as I saw patrolling the streets of New Orleans. (The more police cars required to patrol the streets, the closer a region or a country is to being a banana republic.) Above, I referred to the insufficient physical infrastructure in the US. Not only are airlines late, but the types of old aircraft that are frequently in service would not be used by even budget Asian air carriers. Late, unreliable, and uncomfortable flights, as well as poor airport facilities, then motivate wealthy people, corporate executives and, of course, politicians to travel by private plane. We have huge wealth and income inequities in Asia, but whereas in Asia people are accustomed to these conditions, in the U.S. this growing two-class system will lead to disappointed expectations and, at some point, in all likelihood, to social strife.

All is rotten and bad in the U.S. There are many pockets of incredible inventiveness, innovation, technology, research and development, education, knowledge, and high moral and ethical values. But the trend I am observing, after having been a regular visitor to the U.S. since 1970, is certainly not very encouraging. It will take very strong determination and sacrifices by all classes of the American nation to reverse this relative social and economic decline when measured against the newly emerging economies of the world.

There is growing evidence that U.S. consumption is slowing down, based on the weakness in the housing industry and slower credit growth. However, there are a few issues we need to address. First, it is far from certain that the U.S. consumer will cave in. Second, we will need to address the investment implications of a slowdown or decline in U.S. consumption. I mention this because it is one thing to forecast economic trends, and another to draw the correct investment conclusions.

Most strategists and economists correctly forecasted the global economic expansion, especially the strength in Asia, following 2001, but they totally failed even to mention industrial commodities as the preferred asset class for capitalizing on such a global economic recovery. Others were misled into believing that strong corporate profit growth in the U.S. would lead to a strong U.S. stock market performance, when in fact the increase in U.S. equities in the last four years significantly lagged the performance of emerging market and European equities and was flat in Euro terms, as rising U.S. financial asset prices were offset by a weak dollar – not to mention the continuous decline of U.S.US asset prices in gold and silver terms. So, to conclude that a weakening U.S. consumer will inevitably lead to a lower stock market is tenuous at best.

I confess that I am at a loss to see exactly what event will act as the catalyst to unravel the current unstable and, in the long run unsustainable, equilibrium. It could be accelerating inflation, a total loss of confidence in the U.S. dollar, or a sharp retrenchment in consumption. It could also be an exogenous event – such as war, the interruption of oil supplies, a major terrorist attack (it is only a matter of time before terrorists will be in possession of nuclear or biological weapons) or a pandemic – that derails the Goldilocks scenario. Something is bound to happen, but then we also have to take into account that Mr. Bernanke and Mr. Paulson will be standing by with their money printing machines to bail out their bodies on Wall Street and in government.

From our remarks about the polarization of wealth in the U.S., one could construe that the typical household in the U.S. is vulnerable, whereas the Forbes 400 will continue to thrive. This would imply avoiding stocks such as Wal-Mart and Home Depot, and buying any company that has to do with the economy of the superrich, such as auction houses, brokerage stocks, publicly traded hedge and LBO funds, luxury goods retailers, and high-end hotel chains, or investing in top-end properties around the world. Indeed, if we compare the performance of luxury department stores to the performance of low-end stores, it is evident that the economy of the super-rich has done far better than that of the median household. However, when payback time comes, it is likely that the economy of the super-rich could be hurt rather badly. I would not be surprised to see wage inflation accelerating and shifting some income back from Wall Street and corporations to the labor force.

In the late 1980s, the super-rich did very well in Japan. In the mid-1990s, the super-rich creamed off all the money in Southeast Asia. Both periods were characterized by asset accumulators becoming rich and being highly leveraged. But the bear market in asset prices in Japan and the Asian crisis hurt the asset shufflers the most. Ordinary people, especially those living in the countryside, were hardly affected. As a contrarian bet, I would look at shorting at some point companies that have benefited the most from the shift in wealth from the masses to the asset shufflers.

In 2007, either the Fed will finally decide to implement tight monetary policies, which would strengthen the U.S. dollar and weaken all asset prices except bonds, or it will continue with its expansionary bias. In that case, asset prices will continue to rise and the dollar will continue to weaken. But under easy monetary policies, dollar assets (U.S. equities, bonds, and real estate) will, as has been the case for the last few years, underperform foreign assets and commodities. Since Mr. Bernanke was appointed Fed chairman, the S&P 500 is up by 14.6% in dollars, but only by 7.5% in euro terms. Over the same time frame, gold is up 40%, silver 80%, and copper 68%. Year-to-date, the S&P is up 11% in dollars but only up 0.2% in euros and, of course, it is down against gold and silver. The worst investments were U.S. dollar cash and bonds. Therefore, I advise investors who wish to have an equity exposure to overweight foreign markets, especially the Asian stock markets, and to significantly underweight U.S. assets.

Near term, asset markets are mostly over-extended and the contrarian play is to reduce exposure to all asset markets. Moreover, after its recent weakness, the dollar could stabilize, but a strong rally should not be expected. Euro-area monetary and debt growth has been strong over the last 12 months and may force the ECB to increase interest rates, which should support or even strengthen the euro. Also, given the record short positions that exist in the Japanese Yen, I would consider buying Yen against the U.S. dollar. As of late November, asset markets became extremely overbought. I recommend deferring any buying and to await the shape and the severity of the expected correction.

I wish my readers a Merry Christmas and a Happy New Year. I hope that my readers know that giving money away is not the only way to help those who are less fortunate. As Abigail Van Buren remarked, “The best index to a person’s character is how he treats people who can’t do him any good, and how he treats people who can’t fight back.” At the same time, I hope that my readers enjoy their lives and have some fun and laughs. At the same time, on a more sobering note, do not forget the words of Mahatma Mohandas K. Gandhi: “The things that will destroy us are: politics without principle; pleasure without conscience; wealth without work; knowledge without character; business without morality; science without humanity; and worship without sacrifice.” [Ed: Sounds good to us here at W.I.L., too.]

Link here.
Previous Finance Digest Home Next
Back to top