Wealth International, Limited

Finance Digest for Week of June 18, 2007

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


Inattentive investors can wind up with lumpy and lopsided portfolios. Six ways to get the balance back.

Money managers will trot out asset allocations galore for you. They will plug in your age, income and risk tolerance to arrive at the “right” mix supposedly designed to build your wealth. But maybe you do not need all these formulas or the formulaic answers they give. Maybe all you need is a little commonsense advice in restoring balance to a lopsided portfolio. Curtis Macnguyen, an accomplished hedge fund manager, follows some simple rules that can help investors insulate their portfolios against misfortune.

Macnguyen, 38, started his fund, Ivory Flagship Strategy (assets: $2.9 billion), in 1998. Since then, he says, it has returned a compound annual 14% after fees, versus 3% for the S&P 500. He says Ivory has lost only 2.6% in its worst month (September 2001), versus -14.6% for the broad market (August 1998). You cannot replicate his portfolio, which has up to 100 positions and a fair amount of turnover (between 100% and 150% in a typical year). But you can copycat his core philosophy, which is to avoid needless risk. Avoid risk, that is, that you do not get paid to take. And that risk often hides in plain sight.

Macnguyen used to be an analyst for a hedge fund run by Siegler, Collery. During his apprenticeship there he noticed that the firm tended to short momentum-driven growth stocks while owning unpopular old-school issues. He will not discuss his old employer’s trades, but a typical scenario he saw at the time was for an investor to buy a traditional bookseller like Borders Group while shorting then-hot Amazon.com. Taken individually, every position told a rational tale. “If you are right on the stock, you will make money on it over time,” Macnguyen says. “But in the short term, say 12 to 24 months, you can lose your business.”

In a new book, Capital Ideas Evolving, the noted Wall Street author Peter Bernstein describes the high art of risk management at Goldman Sachs, which has managed to trade for its account pretty successfully in fair times and foul. Goldman knows, Bernstein says, that your odds are better selecting the right individual securities than trying to time markets or make sector bets. But do not get so preoccupied with trees that you miss the forest. Here are some strategic mistakes that people make.

Overconcentration. This goes beyond tilting toward a hot sector like tech. In a 2007 working paper by Washington University finance professor Hong Liu, “A New Explanation for Underdiversification”, Liu says that the median number of stocks held by an investor with a stock portfolio is only three. Three? That is up from two in 2000. Why this is so low has vexed academics for years. One reason may be inertia: You inherit two stocks from your grandmother, buy two more, then lose one in a merger. The right number of stocks to own is more like 20.

Small-cap tilt. Since 2001 small companies (as measured by market capitalization) have outperformed large ones. In the last 6 1/2 years the S&P SmallCap 600 index has averaged a total return of 8.4% a year, compared with 3.1% for the large-company S&P 500. Investing, as they are wont to do, with a rearview mirror, people have crowded into small-company funds. Some celebrated portfolios have closed. So the money rushes into other funds with lesser pedigrees. Hedge fund managers, seeking to justify their fees by finding obscure stocks, have also been chasing the sector. Outperformance of small stocks is far from axiomatic. During the 1990s big companies did much better. Perhaps the next decade will be a repeat of the 1990s, not the 2001-07 period. Defining “small” as a capitalization below $2.5 billion and “large” as one that tops $12 billion, the U.S. market is 8% small, 72% large. If your portfolio has a small-company weighting well above that 8%, shrink it.

Too many or too few junky companies. In 2002 companies whose credit ratings are below investment grade, meaning junk bond level – got beaten down as default rates spiked to well above historical norms, according to Moody’s. Default rates tend to peak right after recessions, and 2002 was no different. In 2002, 19% of junk bond issuers defaulted, and Moody’s considered another 21% of them to be “distressed”, meaning they had a just-above-default credit rating of C. Though the junk default rate inched down only to 18% in 2003, Moody’s considered just 4.7% of high-yield issuers to be distressed. In 2003, says Macnguyen, the market rallied and indebted companies’ stocks were taken for the ride, even outperforming companies in better financial condition. You do not know about recessions in advance, so it is hard to time your entrance and exit from the junk universe. Instead, keep your presence there at a reasonable level. You can find free bond ratings by Fitch here.

Value bias. Since 2000, the end of growth stocks’ reign (and the start of a 2 1/2 year bear market), value stocks have outpaced growth stocks. The average value fund has a 10.5% annual return, compared with 2% for growth, says research outfit Lipper. This is somewhat related to the small-cap/large-cap issue. These things move in cycles, however, usually lasting 5 to 7 years. Growth got five years between 1995 and 2000. Now value has had seven years. It stands to reason that the ground will shift before too long. While Macnguyen is agnostic on how much to put in each, a heavy position on value now is likely unwise (see “Sell Your Value Stocks”).

Owning thinly traded stocks. Best to avoid them. Define this group as companies with market capitalizations below $400 million or an average daily volume below 50,000 shares. There are indeed some undiscovered gems here, but there is also a lot of overhyped garbage. The Pink Sheets, a price listing for smaller stocks, has seen its volume balloon 1,560% from five years ago. Irrational exuberance.

Going short. Short interest on the NYSE stands at 11.8 billion shares, up from 8.6 billion a year ago, according to Shortsqueeze.com. Why? The plethora of hedge funds. “Thousands of new hedge funds out there have no experience shorting,” says Macnguyen. “So they just shorted what everyone else was shorting.” A lot of those funds were clobbered when the market rocketed in 2003. A good number of individual investors try to latch on to this trend, to their ultimate sorrow. There is a temptation to dive into short-selling because that is what the pros do with their hedge funds. If you must play the bear game, look for a safer alternative. Buy either put options or else one of those new bearish ETFs from ProShares (see this article).

Link here.


Think about it for a moment. How far do housing prices have to fall before a slump becomes a bust? In the stock market, we have a pretty good idea what a crash is. Among stock market experts, there is a consensus that a 10% decline in a major index is a correction while a 20% decline is more significant – a crash or a bear market, depending on the time involved. But when it comes to declines in housing prices, there is no such framework. As experts debate whether we are headed for a housing bust, you would think that we should at least be able to define it.

The problem is that economists have not agreed on a definition. In part, that is because severe declines in housing prices tend to be rare events, not a common subject for discussion. The last really big decline in national housing prices occurred more than 70 years ago, during the Great Depression. Another reason is that the data measuring the housing market is far more opaque than that for the stock market.

But, working with the data we have, start with the worst housing market on record. During the 1930s, housing prices fell sharply across the nation. According to the S&P/Case-Shiller home price index, a measure of national housing prices, the average price of a home fell 24% from 1929 to 1933.

More recently, there have been severe price declines in regional markets. The most severe was in the so-called oil patch during the 1980s. In the late 1970s, as global oil prices soared, oil-producing areas of Texas, Oklahoma, Louisiana, Colorado, Wyoming and Alaska experienced an economic boom. As oil prices collapsed in the early 1980s, those economies crashed, and housing along with them. In the worst cases, nominal home prices fell 40% in Lafayette, Lousiana, and 33% in Casper, Wyoming, from 1983 to 1988, according to the Office of Federal Housing Enterprise Oversight. In Houston, prices fell 22%.

Then there were the sharp price declines in housing on both coasts during the early 1990s. At that time, a series of events including the recession of 1990-91, the military downsizing after the cold war and a commercial real estate collapse led to a housing downturn. For instance, in Los Angeles, Long Beach and Santa Ana areas of California, the average price of a home tumbled 19% from 1993 to 1998, while on the other side of the country, in the Hartford area, the average home price dropped 17% over the same period, according to the Office of FHEO.

Two economists with the FDIC, Cynthia Angell and Norman Williams, have studied housing cycles since 1978 and have come up with a definition of a housing bust. In a paper published in February 2005, they called it a decline of at least 15% in nominal prices, meaning not adjusted for inflation. While economists tend to focus on real prices over time, the authors argue that in housing, nominal prices are a better measure of distress because homeowners, rarely think in inflation-adjusted terms in assessing market conditions.

Other economists, however, argue that 15% may be too restrictive a definition. Mark Zandi, chief economist of Moody’s Economy.com, says a better one would be a decline of 10% or more from peak to trough. “When you see a decline in home prices of 10 percent, you get significant credit problems and it’s enough to wipe out equity in most cases,” he said. Mr. Zandi also said that once prices have dropped 10%, there tends to be a self-reinforcing downward cycle. Another reason Mr. Zandi argues for 10% is the tendency of housing-price measurements to underestimate declines. Sellers often provide discounts that may not show up in the measured price, but are still significant.

So how far have prices actually fallen? The median price of an existing home has declined 4%, on average, since the peak in October 2005, according to the National Association of Realtors. Yet in some areas, by Mr. Zandi’s definition, at least, the market is already experiencing a bust. In the 12 months that ended in March, for example, the median price of an existing single-family home in the Sarasota-Bradenton-Venice area of Florida fell by 12.4%, according to the NAR. In Louisiana, in the area of New Orleans, Metairie and Kenner, the average price fell by 11%. And in the Reno-Sparks area of Nevada, the average decline was 8.8%, not far from Mr. Zandi’s threshold. Over all, Mr. Zandi points out that 40% of metropolitan areas around the country are now experiencing declines in housing prices.

WHAT would a definition of a housing bust tell us? First, it would help explain why, despite all the focus on the possibility of a bust, many people may feel that the housing market really is not all that bad right now. On average, price declines have not been that severe. But if the pessimists are right that there is more to come, look out. A 10% decline in prices is likely to feel pretty awful. And then everyone might agree on what a housing bust is.

Link here.


REITs have had their run, says the grand vizier of real estate stocks, so you should short them.

If there is anybody who knows what he is talking about in the wonderful world of real estate investment trusts, it is Jon A. Fosheim. And he says REITs’ long run is coming to an end. Time to dump them, or if you are daring enough, short them. That is what he is doing.

REITs’ upward momentum has slowed, for sure. According to the FTSE National Association of REITs (Nareit) index, these trusts delivered a mere 4% in total return (appreciation plus dividends) this year through May. Last year they gained 35%. Over the past decade they have averaged a 15% annual return.

Fosheim, 56, earned his reputation for real estate analysis at Green Street Advisors, the Newport Beach, California firm he founded with Michael Kirby in 1985. The firm claims that its REIT buy recommendations, which started in 1993, have returned an average of 30% per year. (That number includes dividends but is before taxes or transaction costs.) Its sell picks gained just 3% per year, it says.

Green Street’s outperformance has come from its valuation model. While some real estate analysts discount expected net cash flows from commercial properties that REITs own, Green Street goes a several steps beyond. After coming up with a valuation for underlying real estate, for example, the firm calculates how much value management might add or subtract from that. Green Street’s analysis requires finding a capitalization rate for commercial buildings in a property portfolio – that is, the cash return divided by a place’s value. While cap rates vary around the nation, they have come down pretty consistently to midsingle digits. Values of real estate is getting very high for the income it generates.

Fosheim left Green Street in 2004, partnering with billionaire Robert Bass to form a hedge fund specializing in real estate, Oak Hill REIT Management. They have been shorting REITs lately, with not much success. But give them time.

REITs pay out 90% of earnings to shareholders. The high dividends let the REITs avoid paying corporate income tax. Downside? You do not get the favorable 15% tax treatment on the disbursements as do other kinds of dividends. As attractive as REIT yields are (if you ignore the tax treatment), they have a built-in damper on them. Paying out almost all their earnings is the condition REITs must satisfy to preserve their tax-free status (at the corporate level), but this limits their growth. During any 10-year period, Fosheim notes, rents have traditionally gone up only at the rate of inflation. Corporate earnings, in contrast, beat inflation over time. In the past few years, he says, “the S&P 500 has killed REITs in earnings growth. Killed them.”

Worse, REITs have gotten overvalued. In 2000 they traded at a third the earnings multiple of S&P 500 stocks. Now REITs trade at 25 times earnings, a higher multiple than the S&P’s 17. (In this P/E ratio, moreover, REIT earnings have depreciation minus upkeep costs added back in.) Fosheim says that the industry is not paying attention to those out-of-control valuations. At a Nareit conference in June, Fosheim questioned why everyone seems to think REIT prices cannot go down, as they are supported by high net asset values. “Who says NAVs can’t go down?”

Oak Hill has been shorting REITs since January 2005; 2/3s of its REIT holdings are for bets on price swoons. Unfortunately for him, REITs still have not dipped in that time. According to its biggest investor, Oak Hill’s short fund stayed out of the red, if barely, because of its long picks and also a position in an S&P 500 fund. That investor says he is pleased Oak Hill has not lost money – in fact, it has gained 9% in the last three months – and that he plans to add to his holding of the fund this year.

Unless you are an “accredited investor”, meaning you have $1 million in net investable assets, Oak Hill’s short-biased real estate fund is off limits. An alternative is to buy an ETF called ProShares UltraShort Real Estate fund. This ETF doubles on the upside any movement down in the Dow Jones U.S. real estate index, and vice versa, so you would lose money if the index rose. This index mixes in some home builders with REITs. Hence the Dow Jones real estate index has lost 7% since the ETF debuted in February, and the ETF is up 14%.

You could also try your hand at shorting individual REITs or REIT ETFs, but beware that this strategy has a special problem. As a short-seller you owe the lender of the stock any dividends declared on it. Offsetting that is – or should be – the interest earned on the proceeds of the short sale. Big hedge funds are usually allowed to keep most of this interest. But retail investors are, according to Wall Street custom, usually denied the interest. In short, you are at a tactical disadvantage to the pros when you sell short. If you are game nonetheless, we have a list of Fosheim’s most prominent shorts. In the table we show the modified earnings figure commonly used for REITs, called “adjusted funds from operations”, defined as net income (before nonrecurring gains) plus depreciation minus maintenance. We also show Green Street’s estimate of how much of a premium over net asset value the REIT shares trade at.

Link here.


I will celebrate my 50th birthday this fall. As I look back over the last 5 years, I am amazed at how many of my views on particular aspects of money, politics, and history have changed. With the added clarity that comes from reading experts in science, general history, financial history, individual and crowd psychology, fundamental and technical analysis, and ethics, my convictions, regarding the world in which I live, have become much stronger than in the 45 years prior to 2002. I have come to understand and ponder how our fast-paced, specialist-oriented, self-focused lives have lead us to a point where we view the world as a random collection of dots and noise, never considering how real world events interrelate with real financial and investment decisions.

While the characters presented herein are fictitious, I think you will find their discussion more realistic than many investors and advisors would care to admit.

Earl: Are you still as concerned about the financial markets as you were a couple of years ago?

Ed: Actually, I am even more concerned now than I was then.

Earl: Frankly, Ed. I think you spend too much time trying to figure this all out. Don’t you think if there was a Holy Grail, that someone would have found it by now?

Ed: You have got that right. What I have read and experienced over the last few years has convinced me, more than ever, that there is no Holy Grail. Still, there are a lot of things in the world around us that I think have made our financial markets riskier today than they were a few years ago.

Earl: Maybe so, but with information at our fingertips 24/7, there is no way that any one investor is any smarter than the rest of the players in the market. Besides, I just read a recent study by Standard and Poor’s on market tops. Their chief technical strategist said that “pretty much anyone who invested in the S&P 500 at any point in time is now sitting on a profit, assuming that person sat through the entire period.”

Ed: Yeah, I saw that article. Did you notice that the author of the article also said that “the profit would be minimal for an investor who bought an index fund after the previous closing high in March 2000, as the S&P 500 today stands a few points above that point.”

Earl: Well, I suppose you can always find some sort of exception if you look for it.

Ed: But, Earl, let me ask you something. If you were one of the most heavily marketed brands in the investing arena, would it not make sense that your “research” might be a little biased?

Earl: What is your point? You are just mad because your trading managers under-performed my indexers again last year.

Ed: Look. I agree that if you under-perform the Dow on the way up, hiring managers with decades of experience is seen as worthless. But, a study of history shows that, in deep bear markets, not having an exit strategy can be very costly to clients’ investments and to our businesses. And, neither one of us has to look any further than 2000 to 2002 to prove that. So while the Dow may seems disconnected from real world events, I believe that the amount of debt that we are carrying as individuals, corporations, and government entities, will have a significant impact on our economy.

Earl: If you keep going with that old fashioned view of debt, you will never understand why our companies and markets can continue to climb for years. I just read a great article by Ken Fisher called “Learning to Love Debt”. As you know Fisher is a billionaire and his firm manages over $30 billion in assets.

Ed: Yeah, I am familiar with Ken Fisher. Go ahead.

Earl: Well, Fisher stated that based on his calculations, he believes that if we tripled our debt levels, we would be closer to profit maximization and increase the amount of wealth in our society.

Ed: The only problem with what you or Mr. Fisher said is that I cannot find any historical evidence that shows that individuals, companies, or nations that continue to increase their debt levels are helping their long-term health. In fact, the more money, which today is a euphemism for debt, that comes into an economy, the more societies come to believe that inflation is always a good thing. But, the historical record proves otherwise. Have you ever read Dr. Murray Rothbard’s America’s Great Depression?

Earl: There you go again. I guess, once a naysayer always a naysayer.

Ed: Hey, I just thought that the way we are supposed to avoid problems in the future is to learn from the past. While you are at it, you might want to read Bailout: An Insider’s Account of Bank Failures and Rescues by Irvine Sprague or James Grant’s Money of the Mind.

Earl:Have those books been written in the last few years?

Ed: Nope, Irvine Sprague’s book was written in 1986 and Jim Grant’s was written in 1992. Keep in mind, Sprague was an FDIC Chairman and Director who supervised banks from the federal level for 18 years, and Grant has been writing about debt and debt instruments since 1983. Does it not sound like these guys might know something that we don’t?

Earl: Look, I can find plenty of old timers who are bullish, and you can find plenty of old timers who are bearish.

Ed: Let’s look at somebody else who would disagree.

Earl: And what investment guru is that?

Ed: Well he is not an investment guru, but his involvement in politics has certainly influenced a lot of the high level financial decisions of our government. I am talking about Brzezinski, National Security Advisor to the Carter Administration. In his new book, Second Chance: Three Presidents and the Crisis of American Superpower, which just came out this March, he said the following about America’s debt and deficits:

“Given America’s growing global indebtedness (it now borrows some 80 percent of the world’s savings) and huge deficits, a major financial crisis, especially in an atmosphere of emotionally charged and globally pervasive anti-American feeling, could have dire consequences for America’s well-being and security. The euro is becoming a serious rival to the dollar and there is talk of an Asian counterpart to both. A hostile Asia and self-absorbed Europe could at some point become less inclined to continue financing the U.S. debt.”

Earl: Listen. I agree that some of what Fisher said sounds a little out there, but we are not about to face any serious market crash anytime soon. I mean, the markets are going up, my clients are happy, I am bringing in more business, and besides, we have always had these kinds of concerns, and if it did happen, we have learned lessons from 1987 and 2000 to 2002 that would help us today.

Ed: Let me ask you something, Earl. In 2000, did you tell your clients that they should brace themselves for a 50% decline in the S&P 500?

Earl: Alright. I get your point. But I still say nobody really knows what is going to happen tomorrow. And, for that reason it is safer to buy and hold that to try to guess when the stock market is going to go up or down.

Ed: Then, I will leave you with this. One of the newsletters I read is by a guy named Gregory Weldon. He looks at money, or credit growth, around the world every week. Some of the numbers he has been presenting are pretty alarming. Now, I know we have been taught not to use words like “alarming”, but that word seems to fit. This week, he pointed out that the Fed’s most recent report on U.S. Commercial Banks, revealed that bank credit increased by $34 billion in a single week at the same time that deposits contracted by $68 billion. With the fact that debt has risen right along with asset prices, is debt really as benign as the “research” you presented to me earlier suggests?

Weldon also pointed out that, according to the Fed, there has been a substantial decline in the growth of mortgage debt. In Q3 2005 it grew at 14.8%, in Q2 2006 it grew at 9.5%. Now, in the first quarter of 2007, it only grew at 6.2%. Paul Kasriel, of Northern Trust, says that the Fed’s own models suggest that housing is overvalued. How can so many investors and advisors believe that the markets are efficient, and that no one should ever try to “time the market”, or sell, at the same time that the Fed’s models suggest that housing is overvalued?

Earl: Look, we may have a few bumps in the road, but in the long term, my business and my investors are in a good position. We are well diversified. We do not need to worry about all this stuff.

Ed: Alright. I know this conversation has not been very pleasant. But, after living through the crash of ‘87, the recession of 1990, the hard decline of the markets during Long-Term Capital’s collapse in 1998, and the crash of 2000 to 2002, I went back and thoroughly studied each of those events to see what caused those declines. Based on my experiences over the last few years, I can assure you that the majority of individuals and institutions out there today still do not study history. Even though, at the time they will probably see us as naysayers or just plain stubborn, this is where we can provide the best service to investors. As markets change, so also will peoples’ attitudes.

Link here.


Any journalist not working for FOX will tell you that there are two sides to every story. Take private equity. When U2’s Bono became a partner in a private equity firm last year, bears took it as a sign that private equity was getting bubbly. Many bears, no doubt, thought “This is just like Barbara Streisand day trading stocks at the peak of the internet bubble.” Meanwhile, the bulls were thinking, “Bono is into private equity, dude. This market rocks.”

So far, the bulls have been right. The private equity bubble has yet to implode, and along with its cousin, the share buyback bubble, has helped take stocks higher. And boy is their help needed. Everything housing related continues to crumble, earnings growth of the S&P 500 is largely accounted for by financial dealings, favorable currency translations, and reduced share counts associated with the buybacks. Bears think such things are slim support for new all-time highs, particularly when earnings growth has been unusually strong for so long. Surely, we bears think, a reversion to the more pedestrian historical earnings growth trend line is coming. And soon.

Bulls do not worry about the buy out boom (or anything else besides short term capital gains taxes). They simply enjoy it. Some even embrace it, rationalize it and extrapolate it. One columnist writing for a magazine catering to investment professionals argued that rampant merger and LBO activity signals that stocks are still cheap(!). As the storyline goes: Lots of companies are being bought out. Lots of shares are being repurchased. Therefore, by definition, stocks are cheap. Therefore, stocks should keep going up, up, up. This kind of thinking naturally implies the following:

  1. Managements who buy back stock rather than pay dividends or spend the cash on capital equipment are using that cash for its highest and best purpose, just as their corporate finance models are telling them. (They are not just buying back stock to boost the price of their stock options, or because they are too worried about future demand to boost capital spending.)
  2. There are so many leveraged private equity buyouts because there are so many good deals, even at ever increasing prices. (The bear’s sense is that it is not stocks that are cheap, but money. Money is not only cheap, but its purveyors are lined up at the door of every major U.S. corporation trying to lend them loan lots of it for big, big deals.)
  3. The LBO mania has nothing to do with private equity firms having to find something to do with the truck loads of money investors are throwing at them.

As is their nature, bulls are more interested in merger possibilities than is what is making mergers possible. And that catalyst is the bond market’s unwillingness to discriminate between what is risky debt and what is not so risky. Meanwhile, bears are getting the eye twitch reading that “Junk is the new black” as Financial Week put it recently. High yield debt is no longer esoteric, it is de rigueur. 43% of high-yield bonds issued year-to-date have been rated B- or lower (vs. 36% over the same period a year ago). There are not only few kudos that accompany an investment grade rating today, there are actually disincentives to remaining moderately leveraged, including being taken over another company that has taken on debt by the boatload.

Will it end? Of course. Otherwise we would not be referring to the “last LBO boom”, we would be referring to the “eternal LBO boom”. When will it end? It is anyone’s guess, but there are signs that the LBO mania is getting toppy. First of all, interest rates are rising, if anybody cares. In theory, this should make deals less doable, even those being done for the wrong reasons. The bullish counter argument is that higher economic growth will make it easier to service more expensive debt (even when corporate profit growth is chock full of the suspect contributors mentioned above).

Still, a bear can find plenty of signs that this buyout madness has a downside. Just last week the Wall Street Journal reported on done deals that are running into problems. While such problems are being dismissed as aberrations, debt service ratios of recently bought out companies are the slimmest in 10 years. Today’s 1.7x figure is half the 3.4x cushion of 2004.

And last week, S&P called for better disclosure on the packages of loans that include the most permissive sort of lending. S&P’s worry is that “covenant-lite” loans are being tossed into Collaterlized Loan Obligations with too little mention of how lite the entire CLO is. Here is how a banker might explain cov-lite lending to a private equity manager: “Okay, first we will loan you lots of money. Then we promise not to hold you to any of our pesky traditional banking standards. That means, we won’t know how that company you bought with our money is doing, and whether it pay us back. And you know what? We don’t care! We are selling off the loan so it can be packaged and sold to your mother’s pension plan. Yippee!” This don’t-ask-don’t-tell way of doing business sounds a lot like the “liar loans” that mortgage companies rolled out to win the business of shaky consumers.

Apparently S&P sees the similarity as it wants CLO managers to tell investors just how much cov-lite stuff is being crammed into each product. And its ratings will begin to reflect the increased risk of cov-lite lending. While institutional investors may not care about risk, some may care about bond ratings. A bear might tell you that once investors (and those who oversee them) shine a little light on the CLOs they already own, they will be more finicky about future purchases, thereby constraining private equity deals.

And what would a bull say? “Just put on your sunglasses and buy.”

Link here.


Carry trading goes retail.

Japanese businessmen, housewives and pensioners betting against the yen in their spare time are wrecking the forecasts of the world’s biggest currency traders. The yen has slumped 4.6% to a 4 1/2-year low against the dollar this quarter, making it the worst performer among 72 major currencies and confounding predictions by strategists at Deutsche Bank AG and UBS AG for gains of about 1%.

The banks did not reckon on the risk appetite of Japanese individuals, who are borrowing money like never before to buy currencies with higher yields. They tripled their trading in the year ended March to a record $11 billion a day, according to Tokyo-based Yano Research Institute Ltd., publisher of an annual report on the business. Globally, currency trading by retail investors rose 54% in 2006, according to research firm Greenwich Associates.

“Japan’s interest rates are too low,” said Hiroshi Ono, a 40-year-old sales clerk at a telephone company in Tokyo. Ono said he has made about $17,000 since March by borrowing $200,000 of yen and buying U.S. dollars to take advantage of the 4.75 percentage-point difference between Japanese and U.S. interest rates. Japanese investors are borrowing yen at the central bank’s 0.5% overnight lending rate and buying higher-yielding currencies in New Zealand, the U.K., Australia and even Brazil to increase returns on ¥1,536 trillion ($12.5 trillion) in savings.

The strategy is called the carry trade. Japan’s overnight rate, the lowest among major economies, is 7.5 percentage points less than New Zealand’s key rate and 3.5 percentage points below that of the European Central Bank. “The yen carry trade is still alive,” said Koji Fukaya, senior currency strategist in Tokyo at Deutsche Securities, a Deutsche Bank subsidiary. “Capital outflows from Japan remain steady and more than we expected.”

UBS and Deutsche Bank are sticking to their forecasts for a stronger yen, saying central bank curbs on money supply will starve the carry trade. “Tighter global liquidity will contribute to increased volatility and enable the yen to strengthen as the carry trade is unwound,” said Ashley Davies, currency strategist in Singapore at UBS. Retail investors' strategy of selling yen during rallies helped push volatility implied by one-month dollar-yen options on June 5 to 5.85%, the lowest since the Bank of Japan began compiling data in August 1992, compared with 10.15% on March 5. Lower volatility may encourage carry trades, as it implies smaller exchange-rate fluctuation risk.

“They are the bane of professional currency traders,” said Masanobu Ishikawa, who has been trading in Tokyo for 25 years. “It is becoming hard to make money as the dollar-yen does not move as it used to, because of their constant buying on dips.”

In an April report, the Bank of Japan highlighted the risk that investors may make imprudent decisions based on “favorable” assumptions about foreign-exchange and interest rates. Governor Toshihiko Fukui followed that with another warning, saying expectations that rates will stay low could invite “inefficient” investment.

When the carry trade collapsed in 1998 following Russia’s debt default, the yen jumped 20% in less than two months. The biggest challenge to the strategy this year came when Chinese stocks slumped on Feb. 27, prompting fund managers to cut riskier investment and pay back yen loans. The yen rose 2.3% in a single day, the biggest gain since July 2005.

Link here.


Last week, Fed Chairman Bernanke presented a paper, “The Financial Accelerator and the Credit Channel”, at the Federal Reserve of Atlanta’s conference on The Credit Channel of Monetary Policy in the Twenty-First Century. It is a technical discussion of issues near and dear to my analytical heart – and worth plodding through. I will excerpt and attempt an argument against conventional doctrine.

From Dr. Bernanke:

Economic growth and prosperity are created primarily by what economists call ‘real’ factors – the productivity of the workforce, the quantity and quality of the capital stock, the availability of land and natural resources, the state of technical knowledge, and the creativity and skills of entrepreneurs and managers. But extensive practical experience as well as much formal research highlights the crucial supporting role that financial factors play in the economy ... In the United States, a deep and liquid financial system has promoted growth by effectively allocating capital and has increased economic resilience by increasing our ability to share and diversify risks both domestically and globally.”

My comment: The dilemma today is that current forces supporting “economic growth and prosperity” are primarily of a financial nature. Credit growth and resulting asset inflation and financial flows dictate the nature of economic activity to a greater degree each passing year. The pricing mechanism and incentive structure have been debauched. To be sure, financial “profits” have come to command system behavior. Yet as long as sufficient system credit creation is maintained – readily providing ample new purchasing power throughout – the “services”-based U.S. economy plows right along, emboldening the New Era crowd and aggressive risk-takers in the process. Traditional frameworks and conventional thinking are in large part worthless, at best.

It is certainly not, as Greenspan and Bernanke insist, a case of “effectively allocating capital.” Instead, today’s (global) prosperity is the upshot of an unrelenting boom in new credit powering myriad bubble processes and dynamics. As such, Dr. Bernanke’s analysis is hopelessly archaic. Today, new credit is so readily available that the “effectiveness” of its allocation is beside the point. Contemporary credit systems have so far proved remarkably resilient. This dynamic is misinterpreted as economic “resiliency”, when in fact economic systems have become precariously dependent upon (addicted to) uninterrupted rampant credit creation and flows of speculative-based liquidity. We delude ourselves with fanciful notions of our newfound “ability to share and diversity risks,” when the issue is actually the postponement of the day of reckoning through ever greater risk-taking.

Bernanke’s approach is just little tweaks to the traditional bank-centric analytical approach, conveniently chucking the heart of contemporary finance into the nondescript category “non-banks”. Old paradigm frameworks will not suffice for the New Credit Paradigm.

Just as a healthy financial system promotes growth, adverse financial conditions may prevent an economy from reaching its potential. A weak banking system grappling with nonperforming loans and insufficient capital or firms whose creditworthiness has eroded because of high leverage or declining asset values are examples of financial conditions that could undermine growth. Japan faced just this kind of challenge when the financial problems of banks and corporations contributed substantially to sub-par growth during the so-called ‘lost decade.’”

The critical flaws in Dr. Bernanke’s framework at times shine through in this presentation. He instinctively sees the boom period as sound and, apparently with astute policymaking, sustainable. There is no recognition that a so-called “healthy financial system” may over time sow the seeds of boom/bust dynamics and inevitable financial and economic impairment. The primary role of activist policymaking revolves around rectifying “adverse financial conditions” that occasionally hold prosperity at bay. He believes “weak banking system” can and should be avoided by manipulating the inflationary process. Post-bubble policy errors were to blame for Japan’s “lost decade” – not spectacular inflationary bubble excesses. More grievous policy blunders – and not a more reckless boom – were to blame for the Great Depression.

Boom-time credit and speculative excess and resulting monetary disorder had precariously distorted asset prices, earnings, incomes and the flow of finance throughout the U.S. and global economies. The scope of the preceding bubble excesses ensured credit system impairment, “runs” from risky assets, and rather deep-seated disillusionment. The inflationary boom had severely corrupted the financial intermediation process.

It is fundamental element of macro credit theory that “the availability of collateral facilitates credit extension.” Surely, an increase in credit availability and the flow of marketplace liquidity will tend to support asset inflation. Higher asset prices, then, foster further augmented credit expansion and, almost certainly, greater speculative activity. Dr. Bernanke contends that “The ability of a financially healthy borrower to post collateral reduces the lender’s risks and aligns the borrower’s incentives with those of the lender.” In reality, credit booms inherently inflate asset prices, incomes and business “cash flows”, in the process creating a steady flow of so-called “healthy borrowers” willing to perpetuate an increasingly unwieldy bubble – surreptitiously increasing lender risk throughout the life of the boom. Lender risk grows exponentially as collateral values inflate most spectacularly. Only careful analysis of the underlying credit process will provide an informed view of the true health of most borrowers. MOreover, the further into bubble excess the greater the incentive for the financing community to loosen lending standards sufficiently in order to perpetuate the boom (think telecom ‘99 or subprime ‘06). Seemingly robust “borrowers’ cash flows and liquidity” abruptly turn suspect with the arrival of the inevitable bust.

With both credit system and monetary policy, developments since the 1960s and 1970s have been nothing short of momentous and historic. Today, asset-based lending (as opposed to financing business investment) and sophisticated market-based financial intermediation completely dominate the credit creation process. Myriad intermediaries issue basically unlimited quantities of credit instruments – in the unbridled extension of new credit. Bank deposits are today but a sideshow. As for policy, the Fed has gone to a system of openly transparent fixed short-term interest rates. Credit growth and asset prices are largely disregarded, while a narrow inflationary focus on an index of “core” consumer prices holds sway over policy. The interplay of marketable securities-based credit and highly accommodating monetary policy has created powerful inflationary dynamics that policymakers are ill-equipped to manage. Conventional doctrine is completely oblivious to prevailing inflation.

“[N]ondeposit sources of funding are likely to be relatively more expensive than deposits, reflecting the credit risks associated with uninsured lending. Moreover, the cost and availability of nondeposit funds for any given bank will depend on the perceived creditworthiness of the institution.”

This seemingly innocuous comment approaches the heart of today’s flawed central banking. First of all, it implies that the marketplace accurately assesses and prices risk, an assumption directly at odds with a backdrop of unfettered credit, marketplace liquidity, and speculation. Importantly, over-liquefied and high speculation environments inherently under-price and over-extend risk, and this dynamic tends to escalate over time. Instead of blind faith in the marketplace’s faculty for accurately pricing and regulating risk, the focus should be on the major systemic risks associated with a credit apparatus that will by its nature foster reinforcing credit and speculative excess.

Secondly, today’s securities-based finance juggernaut has evolved into the prevailing source of system credit and liquidity creation. As such, the creditworthiness of Bernanke’s “borrowing institution” is of minor importance in comparison to the market values (and liquidity) of the securities collateral supporting the borrowing. The booming “repo” market, for example, is dictated by the perceived safety and liquidity of the underlying securities – and not the credit standing of the borrower. And I will suggest that it is a dire predicament when “creditworthiness” for a large part of the credit system is dependent upon bubble-induced inflated securities and asset prices, incomes, cash flows, and over-liquefied markets generally.

Securitization and asset-based finance have been a radical departure from the traditional credit mechanism. The proliferation of agency and asset-backed securities, leveraged speculation, derivatives, CDOs and “structured finance” in general has acted as one momentous “financial accelerator”. Developments in monetary policy have aided and abetted the rise of “Wall Street finance” and the empowerment of credit bubble dynamics. Monetary “management” has been reduced to telegraphed “baby-step” adjustments to the interest rate “peg”. The Fed allowed itself to become hamstrung by bubble fragility and the inoperability of imposing actual system monetary tightening. And when it comes to a working framework for “financial accelerators” and credit channels, I suggest that Dr. Bernanke scrap his previous research and have his staff begin anew.

The bottom line is that the Fed is content to let bubbles run their course, while being ready to implement aggressive “mopping up” strategies. But the potent inherent “financial accelerator” attributes of contemporary asset-based “speculative” finance beckon for a radically different policy approach for the Twenty-First Century.

Link here (scroll down).
Tony Soprano diagnoses the economy – link.


5 or 6 years says says successful London hedge fund manager.

Tomorrow is already summer solstice – mid-summer, in celestial terms. How did it get here so fast? Where is the summer? This morning we walked along the Thames. It was freezing cold, with strong winds blowing across Waterloo Bridge as though a tempest was coming. Yesterday, too, the rain pelted down on London, and the wind whipped it against road-signs and windows.

But our beat is not the physical weather. No, instead, our métier is gloomier. It involves trying to take the temperature of the financial markets ... and to figure out its seasons. But like any good meteorologist, we begin by looking out the window! And what a view it is. Last night, we had dinner with a friend at the Savile Club. There, we met one of London’s most successful hedge fund managers.

“Well, there is no doubt that we have a worldwide liquidity boom,” he offered. “And there is no doubt that it will come to an end sometime. But a lot of money has been lost guessing when it will be. I do not mind guessing, of course. It is part of the job. And my guess is that this boom/bubble will run for another five or six years. There are just so many more players in the financial markets ... and so much more money coming in. None of the restraints of the past are in force now. Remember, many of them were just customary – people felt awkward taking too many risks ... or raising too much money ... or paying too high a price. Now, the new players don’t seem to have those kind of hesitations.”

The City of London, which is the equivalent of New York’s Wall Street, used to be run by stuffy old men in stuffy old suits in stuffy old offices. Then, how it all changed! The old boys were out. And the new boys were very different. And now they work around the clock, rather than 11 to 4. But what are they working at? That is a good question. You can stand in front of one of their office buildings all day. You will see no products coming out of it. Not even smoke rising from its chimneys. For all their sweat, the ultra-smart professionals seem to produce nothing – at least that you can see. Nothing you can eat. Nothing you can sit on. Nothing you can use to brush your teeth ... or read for amusement ... or kill a varmint with. The output of the City is intangible. But people must like it. They pay heavily for it.

Looking out our window, we see what it is. London is covered in molasses. Credit is flowing everywhere, pouring in from every corner of the globe. Rich, sticky ... a source of decay. Russians drive around in Lamborghinis. Arabs fill up restaurants. Japanese and Chinese shoppers raid the boutiques.

London is the second most expensive city in the world (Moscow is #1). No American burg even makes the top ten. Does that mean the dollar is undervalued? Or does it mean that Americans just do not have very much money, and cannot afford to have a really expensive city? We do not know. But we have a feeling that the winds of financial climate change are blowing ill to the U.S.A.

Link here.


One of the big questions now being debated is, “What would happen if China were to dump its entire Treasury portfolio in one fell swoop?” Caroline Baum addressed that question in “China Doesn’t Steer the U.S. Interest-Rate Ship”:

“Like a highly contagious virus, fear that foreigners will dump all their U.S. Treasury securities spreads through the market at periodic intervals.

“The fear is not totally unfounded. Foreigners own a little more than half of publicly held U.S. government securities, according to the Treasury Department. So if these foreigners – both central banks and private investors – woke up on the wrong side of the bed one morning and decided to give the Treasury portfolio the old heave-ho ... well, you can begin to understand the basis for the recurrent nightmare.

“‘When people say, What happens when foreigners dump U.S. securities, I say, Tell me why,’ says Jim Bianco, president of Bianco Research in Chicago. ‘It has never happened before’ on a long-term basis ...

“Last month, China announced it was investing $3 billion of its dollar reserves in Blackstone Group LP, manager of the second-largest buyout fund, to boost its returns. What if China were to shoot itself in the foot and dump its entire Treasury portfolio in one fell swoop?”

“It just so happens we have a real-world example of what it would mean, according to Bianco. The Bank of Japan bought $244 billion of Treasuries in the 12 months ended August 2004. During that time, U.S. long-term interest rates rose and the dollar fell versus the yen.

“By April 2006, the BOJ was a net seller of U.S. Treasuries (on a 12-month basis) to the tune of $26 billion, a swing of $270 billion. U.S. interest rates fell during that period while the dollar rose.

“‘The BOJ bought a quarter-trillion dollars of Treasuries and then abruptly stopped and no one noticed,’ Bianco says.

“Never let the evidence stand in the way of a popular obsession.”

While no one noticed last year when Japan stopped buying, that is not a valid model for what would happen if China (or Japan) were to dump its entire Treasury portfolio in one fell swoop. There is a big difference between stopping additional purchases (or selling them slowly over a period of time) and a massive dumping of everything at once.

Furthermore, given that Bianco states, “It has never happened before,” how can he (or anyone else) come up with a “real-world example”?? Nonetheless, I am sympathetic toward what I believe to be a key idea of the article: that China or Japan stopping additional purchases or divesting slowly over time does not necessarily spell disaster. There IS a real-world example of that, with falling Treasury yields to boot. On that score, it is as Caroline suggests: “Never let the evidence stand in the way of a popular obsession.”

Are dumping fears overblown?

Greenspan says there is nothing to fear: “Former Federal Reserve chairman dismisses fear of China dumping U.S. Treasuries”.

“While expressing concerns about China’s runaway growth rate and what he described as overvalued stocks, Greenspan played down the prospect that Chinese authorities would sell Treasuries in earnest, forcing a sharp spike in U.S. interest rates. ...

“Greenspan said the reason such a withdrawal was unlikely was that China would not have anyone to sell the securities to ...

“Greenspan said that a global liquidity boom, which he traced back to the end of the Cold War, would not go on forever.”

Now, there is a comfort ... China will not sell them because “China would not have anyone to sell the securities to.” So instead of accumulating more Treasuries, China is plowing U.S. dollars into inflated U.S. stocks, agencies (tied to horrendous fundamentals in the U.S. housing market), junk bonds, and other garbage. Why is it that foreigners always buy market tops (first Treasuries, now equities)? Regardless of the answer to that last question, there is always a buyer at the right price. That holds true for housing, Treasuries, and even CDOs.

Show of hands, please: Other than bond funds that deal in Treasuries, is there anyone anywhere that has anything positive to say about Treasuries? Has such pessimism at market bottoms ever in history been rewarded? There is no denying that China has cut back on Treasury purchases. In fact, avoidance of U.S. Treasuries in now approaching a near mania everywhere, even as funding can easily be found for the junkiest of junk offerings (not related to housing). But is there any reason for China to do a wholesale dump? I personally doubt it.

More to the point, is lack of foreign demand the reason for the recent bond sell-off? That is what everyone seems to believe, but if that were the reason, then what was the explanation for falling yields as Japan was selling?

Greenspan has been wrong at every major turning point his entire career. The fact that Greenspan states there would be no buyers could be yet another of a long series of contrary indications suggesting that internal demand just might be ready to soar. If that is the case, the real question, then, is, “How high do yields get in the meantime?” as opposed to these unlikely “what if?” scenarios. As an aside, the higher rates get in the meantime, the bigger the debacle in housing. It is a no-win situation for the Fed.

Link here.
Good money after bad – link.


Increased volatility calls into question widely used investment strategies.

More than 4,000 bankers congregated near the waterfront of Barcelona for a champagne-soaked conference to discuss structured finance – or the business of creating complex financial instruments, such as derivatives. On the surface, the mood was sunny. In the past year, structured finance has boomed, helping to create a bonanza in the City of London and Wall Street – and producing fat bonuses for many bankers.

However, as the financial whizz-kids sipped chilled bubbly under blue skies, there was an undercurrent of unease. For as bankers partied in Barcelona, on the other side of the Atlantic, a chill wind was suddenly blowing through the U.S. bond market. During most of this decade, the yields on Treasuries have been at unusually low levels, by historical standards. However, in recent weeks, these have started to rise – and last week, this stealthy trend turned into a rout. In the first three days yields suddenly surged 30 basis points to touch 5.33%, pushing the price of U.S. government bonds sharply lower. Although yields later closed the week at 5.18%, this is noteworthy given that yields were under 4.5% four months ago.

Unsurprisingly, the Treasuries swing has pushed up government bond yields in other markets, such as the eurozone. But it did not cause much obvious collateral damage in the equity market. Last week’s swing merely brought yields back to more “normal” levels. While this may be reassuring, in one sense, there is another crucial aspect that may have more unsettling implications: volatility has blown back into the picture.

This is significant because, in recent years, bond yields have not only been unusually low but also relatively stable. That has helped to promote low volatility across many other asset classes. Indeed, the climate has been so calm that some central bankers have dubbed this decade the era of the “Great Moderation”. Most investors had apparently expected this to last for the foreseeable future. Consequently, asset managers around the world have devised numerous strategies to cope with a low-yield world – such as purchasing complex and risky instruments to get better returns. That, in turn, is one reason the bankers in Barcelona were celebrating a bumper year.

But the squall has challenged the foundations on which some of these investment strategies were based. Investors have been reminded that the era of “Great Moderation” may not always remain moderate. That lesson was not, in itself, enough to dampen the party spirit in Barcelona. Nevertheless, it would be naive to expect the dust to settle too easily from this squall. For it is a fair bet that behind the scenes thousands of investors around the world are now furtively reassessing their strategies – not merely in relation to structured finance, but numerous other asset classes as well. Some of these may even be nursing significant losses from Treasuries.

That, in turn, could potentially create all manner of subtle changes in investment flows in the coming weeks. For one thing, investors may start to scale back their use of ultra-risky instruments. The financial weather is indeed changing. Better hang on to your investment umbrella.

Link here.


When looking at small-cap stocks, you are afforded some luxuries that are not given to those who spend their days scouring the blue chips. Armies of analysts do not cover the small stocks. This leads to piles of unread press releases, innovative new products and fast-growing businesses that go unnoticed by the investing community at-large. It is a treasure hunt filled with future high-flying companies that no one will bother to find until they become the next hot company on Wall Street.

Now, you can add a new tool to aid you in your quest for smaller stocks with share prices that might be lagging behind their growth potential. Studies show that any company that beats the number is more likely to do it again in the near future. And according to the Wall Street Journal, investors and analysts are both slow when it comes to reacting to the good news. If the Street is slow in reacting to the good news within the broader market, it would be safe to assume this lag is especially pronounced in the world of small-cap stocks. And there are plenty of small stocks that offer us earnings surprises every quarter. When I screened for small stocks on the NASDAQ showing a positive earnings surprise in the most recent quarter, almost 100 companies fit the bill.

Here is the screen:

Of course, these criteria will just get you started. You could narrow the field of 100 or so stocks by industry, price-to-sales, operating margin or net profit margin to get closer to what you might be looking for. Or, you could tack on this earnings surprise statistic to one of your proven screens.

Remember, it is those unexpected events, like surprise earnings, that can eventually cause a major price change in a stock. It may go virtually unnoticed once or twice, but investors will not shy away forever. If you beat them to the punch, you will walk away with the big gains.

Link here.


A few short decades ago, computers filled huge rooms and could only store a fraction of the data of modern PDAs, DVRs and even video game consoles. The data storage industry has certainly come a long way. Hard-disk drives (HDDs) are some of the most important pieces of technology developed over the past 50 years. Everything stored on any electronic device either uses HDDs or owes thanks to them. HDDs are data storage devices used in everything from computers to DVRs, iPods, and even cell phones.

The industry is growing at a record pace in recent years, and this growth is expected to continue. According to Coughlin Associates, the volume of HDDs are expected to go up almost 60% over the next three years due to enhancements in the personal video recorders, such as TiVo, and cell phones. Take for instance, iPods. Six years ago, Apple introduced the first HDD-based portable music player with 5GBs of storage. Nowadays, Apple sells 80+ GB iPods with video capabilities.

An obstacle to storage capacity growth is that the currently preferred HDD recording method, Longitudinal Recording, is struggling to get more capacity out of its disks. That is where Perpendicular Recording comes in. Instead of packaging the disks with the recording medium running parallel with the disk, the Perpendicular Recording method stacks the medium, creating more space on the disk. Most current HDD manufacturers do not have the machines that can perpendicularly record onto the disks.

Enter Intevac, Inc. (IVAC: NASDAQ) – the industry leader of “Hard Disk Drive Recording Machine Manufacturing”. We can thank this small group of machine manufacturers for almost all of the data storage in the world. Intevac separates itself from the competition with its already overwhelming 60+% share of the market and its newest product, the Intevac 200 Lean Disk-Sputtering System.

The “200 Lean” encompasses all of the currently used technology, including Longitudinal Recording and three sizes of disks, as well as the next generation of HDD making, with Perpendicular Recording and more room to use any number of future disk sizes. The current machines made by Intevac and many of its competitors have a 12-stage processing system, but this will soon be obsolete. The newest technology in this field requires a 13-stage system, which would require brand new machines. The Intevac 200 Lean comes with a 24-stage platform, giving the user the capacity to accommodate 11 stages in the future.

This machine is currently the state-of-the-art model in production. It is able to process both aluminum and glass disks of all sizes with a much smaller footprint, giving the user the maximum disks “manufactured per square-foot of factory clean-room space”. This is one of the most important factors when HDD makers decide on a disk-sputtering machine. It tells them the efficiency of the machine, which determines the productivity they can expect.

All of these characteristics of the 200 Lean will give the company a larger presence in the future of disk sputtering. This company goes far beyond this one product. On top of other HDD equipment, there is still a whole division of this company that will lead many new technologies into the future, including products designed for military special operations and NATO. More on that next week.

Wall Street has overlooked a small division with explosive upside potential.

Intevac produces and sells this $4 million 200 Lean machine to many of the top HDD makers such as Fuji Electric, Hitachi Global Storage Technology and Seagate. It sells another machine, which is also as vitally important in the growing HDD field. The DLS-100 is a post-sputtering, lubricating machine. The purpose of this machine is to cover the finished HDDs with a layer of lubrication to extend durability and reduce friction between the disk and the read/write head.

he DLS-100 is essential to all HDD manufacturers, especially the ones using the 200 Lean because of the compatibility of the two machines. This particular machine has a patented upper tank design, which is a great benefit to the company in this cutthroat industry. The company also improved the most important aspect of lubrication – shorter production cycles. These two machines have put the company in terrific positioning compared to its rivals. Intevac’s manufacturing facilities are mostly located in Asia, in order to service the Asian-based HDD manufacturing companies. There is also a U.S. headquarters in Silicon Valley. These locations are crucial to its sales force aimed at Silicon Valley and Asian-based HDD manufacturing companies.

What most people do not know is that along with its amazing equipment business, Intevac has a second division of products. Imaging equipment. Wall Street has simply overlooked this potentially enormous side of Intevac’s business. Only representing 4.4% of the company’s revenue, most of the products just are not ready for sale, yet. It is not going to stay that way forever. The company has many R&D contracts with the U.S. military and NATO for night-vision products, which are expected to go into production for the military in 2010, as well as many small commercial companies in the fields of astronomy, spectroscopy, life sciences and industrial products monitoring for a variety of digital imaging products.

Obviously, this side of Intevac’s business is broad, but I suspect that once a few of these R&D projects make the turn into production and sales, especially to the U.S. military, many investors will look at it as a catalyst to buy stock in this company, hopefully sending the price of its shares through the roof.

Intevac may represent a highly technical and complex industry or even a few industries, but with 60% of its market share and key locations, it does it well. Even if its imaging business never takes off, I have no doubt that its overall foothold in its industry will stay strong for years.

Link here.


We are addicted to oil. The world consumes about two barrels of oil for every new barrel it finds. To think this can continue in perpetuity is delusional. No other commodity grips the scales of a country’s economic welfare like crude oil. In oil, countries find safety and certainty. It is undeniably the main driver shaping policies today. The world is fighting for its limited supply. But to some degree, that must change.

Here is a potential solution. Light sweet crude is not the only commodity we can use to generate unleaded gasoline. There is another natural resource perfectly able to produce diesel, gasoline, heating fuel, plastics, fertilizer or pure hydrogen. And the U.S. holds more than a quarter of the world’s supply. We have not been utilizing this proven technology because oil was cheap. But as you know, that is no longer the case.

Coal-to-liquid (CTL) technology – more commonly known as coal-to-oil technology – was used by Germany during World War II to get oil from its massive coal reserves, CTL technology works by first converting coal to gas (carbon monoxide and hydrogen), and then converting those two gasses into diesel, gasoline, or any of the other products mentioned above. Depending on who you ask, the break-even point for CTL is somewhere between $30 and $40 a barrel. When the price of oil costs more than that figure, it is cheaper to make these fuels (diesel, gasoline, heating fuel) from coal.

But the real argument is securing a stable supply. That is why both the U.S. Air Force and the American commercial airline business have jumped on board. The Air Force considers coal as the most viable source for alternative fuel. The Air Force consumes 69 million barrels of oil a year. That means a $10 swing in the price of crude equates to a swing of $600 million dollars for the Air Force. Even for the Pentagon, that is not just pocket change. The U.S. Air Force has set a target to certify its entire fleet to be capable of burning synthetic fuels by 2010.

The Air Force represents 10% of the U.S. jet fuel consumption annually. Commercial airliners make up the other 90%. The Air Force is working with the commercial aviation industry and says that the synthetic fuel testing they are currently doing will be made available to the commercial sector. According to Secretary Anderson, the commercial sector feels they can have their fleets certified for synthetic fuel consumption by 2009. While the Air Force is not claiming that CTL offers the silver bullet, they are optimistic about the future of synthetic fuel. So are we.

The Pentagon estimates the U.S. has 22 billion barrels of oil, but enough coal to produce 964 billion barrels. The Middle East has about 685 billion barrels of oil. Washington seems to be jumping on the CTL bandwagon as well. The House version of a bill already introduced in the Senate offers tax incentives for investment and production of CTL technology. Every coal-producing state in the nation would embrace the idea. The coal-producing states have some pretty powerful names on Capitol Hill – like Rockefeller, Specter, Byrd and Obama.

Barack Obama fully supports the idea. “We already have the technology to do this in a way that is both clean and efficient,” he proclaimed in a recent speech. “What we have been lacking is the political will. This is common sense. Bipartisan legislation will greatly increase investment in coal-to-liquid fuel technology, which will create jobs and lessen our dependence on foreign oil.” What American politician will object to that?

Every oil consuming country would like to reduce its dependence on energy from other nations. And now that hope has become more than just, well, hope.

Link here.


For decades, we have been burning coal to generate most of our electricity here in the U.S. While burning fossil fuels is a cheap and relatively inexpensive way to generate power, its downsides are widely known. And the public dialogue is shifting toward finding better alternatives. Electricity generation is responsible for 38% of the United States’ carbon dioxide emissions. Whatever your stance on global warming may be, there is no denying that global warming has rocketed into the national spotlight.

This is why we turn our attention to renewable resources. The cost hurdles of wind, solar and other Earth-friendly power generation techniques will continue to plummet as new technologies are perfected. But another renewable resource that no one is talking about is a proven power-generating system. This system produces more than 25% of the power in Iceland, thanks to the country’s unique geology. And it could be an energy savior, even in parts of the U.S. Because Iceland is so volcanically active, this nation can feed its power needs through geothermal power. A geothermal power plant uses steam produced naturally from deep inside the Earth to power its turbines. This process does not produce any of the harmful emissions.

Of course, the effectiveness of geothermal power has depended largely on location. Iceland is one big volcano, with geysers and steam flowing up almost every crack in the ground. There are dry steam fields in the U.S., most notably The Geysers in Northern California. But some scientists believe they have found a way to extract power from the Earth’s heat no matter what the location. It is called an enhanced geothermal system. Essentially, this is a way to “enhance” the flow of water into the ground by pumping in water mixed with chemicals. Think of it as mining for heat, except the drill being used is water.

This may seem far-fetched. However, some of the sharpest minds in science see this as one of our best chances at clean, sustainable energy. A 2006 report issued by M.I.T. claims that it would be possible to affordably generate 100 gigawatts of electricity or more by 2050 with a $1 billion investment. Next week, I will write more extensively on the possibility of a major geothermal power project here in the U.S. I might even have a penny stock or two that could be the future of clean, renewable power in a nation hooked on coal and oil.

Link here.


The general press floods us with concepts like “bullish” and “bearish”, which refer to the effect of higher (bullish) or lower (bearish) prices in the financial markets. But also, we hear people saying, “I am bullish on Johnny” or “I am bearish on that guy Nassim in the back who seems incomprehensible to me,” to denote the belief in the likelihood of someone’s rise in life. I have to say that the notion of bullish or bearish are often hollow words with no application in a world of randomness – particularly if such a world, like ours, presents asymmetric outcomes.

When I was in the employment of the New York office of a large investment house, I was subjected on occasions to the harrying weekly “discussion meeting”, which gathered most professionals of the New York trading room. I do not conceal that I was not fond of such gatherings, and not only because they cut into my gym time. While the meetings included traders, that is, people who are judged on their numerical performance, it was mostly a forum for salespeople, and the category of entertainers called Wall Street “economists” or “strategists”, who make pronouncements on the fate of the markets, but do not engage in any form of risk taking. Their success is dependent on rhetoric, rather than actually testable facts. During the discussion, people were supposed to present their opinions on the state of the world.

To me, the meetings were pure intellectual pollution. Everyone had a story, a theory, and insights that they wanted others to share. I was once asked to express my views on the stock market. I stated, not without a modicum of pomp that I believed that the market would go slightly up over the next week with a high probability. How high? “About 70%.” Clearly, that was a very strong opinion. But then someone interjected, “But, Nassim, you just boasted being short a very large quantity of S&P 500 futures, making a bet that the market would go down. What made you change your mind?” I answered, “I did not change my mind! I have a lot of faith in my bet! As a matter of fact, I now feel like selling even more!”

The other employees in the room seemed utterly confused. “Are you bullish, or are you bearish?” the strategist asked me. I replied that I could not understand the words “bullish” and “bearish” outside of their purely zoological consideration. My opinion was that the market was more likely to go up, but that it was preferable to short it because, in the event of its going down, it could go down a lot. Suddenly, the few traders in the room understood my opinion and started voicing similar opinions.

Let us assume that the reader shared my opinion, that the market over the next week had a 70% probability of going up and 30% probability of going down. However, let us say that it would go up by 1% on average, while it could go down by an average of 10%. What would the reader do? Is the reader bullish or bearish? Bullish or bearish are terms used by people who do not engage in practicing uncertainty, like the television commentators, or those who have no knowledge in handling risk. Alas, investors and businesses are not paid in probabilities, they are paid in dollars. Accordingly, it is not how likely an event is to happen that matters, it is how much is made when it happens that should be the consideration. It is the magnitude of the outcome that counts. It is a pure accounting fact that, aside from the commentators, very few people take home a check linked to how often they are right or wrong. What they get is a profit or loss.

Outside of those meetings I have resisted voicing a “market call” as a trader, which caused some personal strain with some of my friends and relatives. I was not interested in markets (“Yes, I am a trader”) and did not make predictions, period. The best description of my lifelong business in the market is “skewed bets”. I try to benefit from rare events, events that do not tend to repeat themselves frequently, but, accordingly, present a large payoff when they occur. I try to make money infrequently, as infrequently as possible, simply because I believe that rare events are not fairly valued, and that the rarer the event, the more undervalued it will be in price. In addition to my own empiricism, I think that the counterintuitive aspect of the trade (and the fact that our emotional wiring does not accommodate it) gives me some form of advantage.

Why are these events poorly valued? Because of a psychological bias. People who surrounded me in my career were too focused on memorizing Section 2 of the Wall Street Journal to reflect properly on the attributes of random events. Or perhaps they watched too many gurus on television. Even some experienced trading veterans do not seem to get the point that frequencies do not matter. Jim Rogers, a “legendary” investor, made the following statement:

“I don’t buy options. Buying options is another way to go to the poorhouse. Someone did a study for the SEC and discovered that 90% of all options expire as losses. Well, I figured out that if 90% of all long option positions lost money, that meant that 90% of all short option positions make money. If I want to use options to be bearish, I sell calls.”

Visibly, the statistic that 90% (the frequency) of all option positions lost money is meaningless if we do not take into account how much money is made on average during the remaining 10%. If we make 50 times our bet on average when the option is in the money, then I can safely make the statement that buying options is another way to go to the palazzo rather than the poorhouse. Jim Rogers seems to have gone very far in life for someone who does not distinguish between probability and expectation (strangely, he was the partner of George Soros, a complex man who thrived on rare events).

One such rare event is the stock market crash of 1987, which made me as a trader and allowed me the luxury of becoming involved in all manner of scholarship. Many traders aim to get out of harm’s way by avoiding exposure to rare events – a mostly defensive approach. I am far more aggressive than those traders and go one step further. I have organized my career and business in such a way as to be able to benefit from them. In other words, I aim at profiting from the rare event, with my asymmetric bets.

Nassim Nicholas Taleb is an essayist principally concerned with the problems of uncertainty and knowledge. He also has an uninterrupted two-decade career as a mathematical trader. Specializing in the risks of unpredicted rare events (“black swans”), he held senior trading positions in New York and London, before founding Empirica LLC, a trading firm and risk research laboratory. The above was taken from his book, Fooled by Randomness. His latest, highly acclaimed book, The Black Swan: The Impact of the Highly Improbable, came out in April of this year.

Link here (scroll down to piece by Nassim Nicholas Taleb).


China buys a piece of Blackstone, a company that is perhaps the ultimate in capitalistic finance. When the Yellow Peril/Communists start buying the private equity players, something has certainly changed. Not too long after the gang in Beijing joined the rush to have their investments complemented by participation in leveraged buyout players, global interest rates started a significant climb. Coincidence? Time will tell but there has to be a suspicion that there is some congruity.

If you are a Kudlow & Co. disciple, the natural reaction is to continue to embrace “goldilocks” and utter or mutter, the old Mad character, Alfred E. Neuman’s phrase, “What! Me Worry?”

If ridiculously big numbers, comprising monstrous aggregations of capital/liquidity alarm you, the new acronym, SWF or Sovereign Wealth Funds comes very much to mind. Global reserve assets, including the pitiful $78 billion in the U.S., now total about $5.4 trillion. Of that total, approximately $2.5 trillion are in or headed for one of these SWF creations. The purpose of having such an instrument for the sovereign creator is to enhance return on the pile. This is not done by continuing to sit in U.S. Treasuries.

We had the dot-com/telecom bubble succeeded by the GSE induced residential bubble, succeeded by the structured finance/financial engineering residential bubble, succeeded by the CRE/financial engineering bubble, succeeded by the private equity/LBO/return of the conglomerateurs/no covenant, no guarantee bubble. They were all looking a bit exhausted. Are we now to witness the SWF buys all of the foregoing bubble? Since the total amount of reserves available for growth and movement into these SWF’s is more or less the annual amount of the U.S. current account deficit of $1 trillion, on top of the aforementioned $2.5 trillion already thrown in, this could be an incredible self-sustaining bubble – if only viewed from the aspect of resources and liquidity.

In some of the more obscure financial publications, there has recently been some cognizance of this possibility. All this in aid of finding the next bubble since our past thoughts that we would run out of big enough new bubbles to keep the game humming have obviously been in error. It is also worthy of note that a requisite of a successor bubble is to have resource and leverage sufficient to equal or exceed its fading predecessor. Also, for the last five years or so, beneficent interest rates globally have been, at a minimum, a strong aid, perhaps an inherent necessity to this leverage addicted wealth creation methodology.

Most of the liquidity/inflation generated by the massive $1 trillion+ U.S. annual foreign deficit has, so far, been channeled into first U.S. Treasuries and Agencies, and then corporate or other debt, with the local currency generated to purchase the $ going, until recently, into residential or commercial real estate and/or local equity markets. Neither the ROW (Rest of the World as it is called in the Federal Reserve Z1 report), nor the bubble blower (the U.S.) has had terribly painful domestic inflation at the consumer level. In fact, asset inflation in houses and investment indexes has been a pleasant trend for all of these nations.

As the ability to extend asset inflation bubbles reaches or exceeds market possibility, the inflation increasingly spills over into the more visible parts of the consumption economy. Central banks are increasingly forced to recognize the Hydra-headed monster they have accommodated, and raise rates/tighten liquidity. Some such as Kuwait and Syria have been so extreme as to sever their link to the $US. New Zealand shocked the markets with an 8% short term rate. Euro rates and other global rates are up and/or rising and, it can be argued, are pushing up U.S. rates concomitantly. This is the counter force that we would argue will constrain the potential glee in the markets in anticipation of the Petro states, and The BRIC (Brazil, Russia, India and China) nations, as well as reserve rich others, such as Korea, Taiwan, maybe even Japan, from all buying their very own Blackstones. Obviously, should they be such buyers, with the leverage the Blackstone’s can employ, the limits to an SWF bubble are imponderable but truly immense.

Another restraint to this emerging new global bubble is the question of to whom do the reserve rich players sell their enormous holdings of U.S. Treasuries and Agencies, purchased, at the best, at breakeven yields today, with much of the portfolio surely underwater with Greenspan rates in effect for many of the last five years. The SWF’s might back off their buying as they look for Yale Endowment yields.

Yet another potential problem for those embracing “goldilocks” is the perhaps invidious state of the longstanding global reserve currency, the United States $. Basically, at that point, the global reserve currency stands on “The full faith and credit” of the U.S. Government. We forswear politics in these ramblings but would not be surprised if “some of the people, some of the time” are not as completely convinced of the value of such full faith and credit.

After a series of successes from the 1987 dip onward at thwarting any economic downturn with lowered rates and tsunamis of liquidity, the Fedheads really went to an extreme with their 1% interest rates more than 5 years ago, ushering in the most massive global debt bubble in the history of mankind. This crescendo of debt permits the globe to have simultaneously expanding economies virtually everywhere, an unusual phenomena in the history of mankind.

This 5-year period of prosperity started from a pitiful foreign reserve assets number globally (much of which had been accumulated by Japan as it sought to recover from the bubble we taught them). The budget surpluses in the U.S. more than offset the then midget trade deficit, and the currency stood on a pinnacle. With the aforementioned exception of Japan and the inscrutable Swiss, the reserves and currencies of most of the rest of the world ranged from pitiful to disastrous. Argentina went on to a sovereign default and theft from creditors, Brazil devalued, Russia defaulted etc., etc.

Five years later, the players have the aforementioned $5.4 trillion in reserves and the U.S. currency is held aloft on generosity after an average fall in the 30% range. The domestic economy, driven by the afore-mentioned continuous bubble machines, has exhausted a debt laden U. S. consumer to continue to propel the machine. Foreclosures and defaults are hitting new records, not at the bottom of a recession but with record low unemployment rates. The only game still running at breakneck speed is the leveraged private equity play, still battening on low relative rates and tax advantages.

Five years ago, the financial sector, both within the U.S. and globally, while having small entries into some of the following fields of risk and finance, was struggling to recover from the blows of the Asian debacle, the Russian default, 9-11, the 2000-01 U.S. Recession and the afore-mentioned Latin imbroglios. Five years later, world finance has significantly and nearly totally changed. As an example, NY Fed Governor Corrigan only had to hit the Rolodex for a dozen and a half names to suck up $4 billion to stop the panic about LTCM. Today he admits that the number affected by a systemic event could go into very large numbers. There really is no infrastructure in place to deal with a contagional systemic financial crisis!

Who is holding the bag? A 10% drop in house prices wipes out the equity of the Financial Engineering/Structured Finance product insurers – the AMBACs, MBIAs, MGICs, RADIANs. We agree with the analysis that they are too slender a reed to support the ratings they carry and that there is going to be tremendous disillusionment when the axe falls. Then who is holding the bag? The ultimate buyers of these things are the ultimate bag holders, pension funds, the equivalent of Orange Counties all over the country, university endowments trying to emulate Yale, maybe the Gates Foundation, but certainly the foundation industry and others seeking the yield in alternative investments that will pay for their commitments.

What else has happened while the U.S. happily built houses, bought cars, and remodeled for the last five years as the financial sector, particularly Wall Street emerged as the most significant earnings stream in the S&P? The U.S. convinced itself that the most important problem internationally was something called “The War on Terror”. We do not seem to have done too good a job on that front. It has been expensive but not effective. The swing from a federal surplus to a deficit, the curtailment of a current account deficit before it headed into dangerous territory, the maintenance of a sound currency, the maintenance of world/global respect and, at least, reasonably cordial relations with sovereign states all have a value to be measured, before lost, in pursuit of consumption and the War On Terror.

During this semi-decade, the ROW, on its proverbial back when we began this crusade, reinvigorated. A possible “worldview” NOW must encompass a China with $1.3 trillion in reserves and an industrial/manufacturing base of unbelievable proportions. Courtesy of Chian Kai Shek, their WWII leader, they sit on the U.N. Security Council and are in a position to permit Iran to become what it wishes. Five years ago would have been a more propitious time for being bellicose about Iran. On the same Council is a Russia with $400 Billion in reserves, risen from the defaulting dead.

I do not know a thing about Putin’s “soul”, but I do know he and his Administration are ex-KGB, jingoistic about their nation, loaded with petroleum and still a powerhouse in terms of weaponry. We probably could have bought the weapons five years ago with a fraction of the funds since gone in the aforementioned War and its counterpart, the War on Drugs.

Net net, in the opinion of the writer, there is a very real danger that our worldview for the last five years has risked a century-long hegemony as the reserve currency nation as well as creating a credit bubble that has expanded far beyond the worst nightmares of the writer. It is also our opinion, as a long time credit troglodyte, that this bubble is leaking air and is in danger of bursting. With no infrastructure to deal with the first truly global bubble, we have an interesting time in front of us.

Link here.


Ukraine election is more critical than most appreciate.

The apparent revival of the Cold War by Vladimir Putin causes those of us nostalgic for the unpleasant certainties of a bipolar world to ponder whether the Domino Theory should also be revived. Indeed it should, and the domino currently wobbling most vigorously, magnificent in its precariousness, is Ukraine. Ukraine gets limited press in the West, but its fate over this long summer may well determine the geostrategic and economic outlook for the next generation.

Contrary to most Western reporting on Ukraine, the struggle there is not bipolar but tripolar. Favoring an economy dominated by publicly owned behemoths of heavy industry is the current prime minister Viktor Yanukovych, strong in the ethnically Russian eastern areas of the country and proponent of closer ties with Moscow. Putin regarded Yanukovych as the natural successor to Ukraine’s previous corrupt and economically stagnant president Leonid Kuchma, so when in 2004 his election was opposed by the “Orange Revolution” of pro-Western forces he was furious, believing that the West had no business interfering in an election so close to the Russian heartland.

“Orange Revolution” candidate Viktor Yushchenko, like so many East European leaders from Mikhail Gorbachev through the socialists currently running Hungary, believed in an a non-existent “Third Way” under which a nominally capitalist economy would avoid the disruption of rapid change and preserve existing business structures. When he won the election rerun in December 2004, the world outside the Kremlin rejoiced. It quickly became obvious that the Orange Revolution forces were far from united. Yushchenko appointed as prime minister his main ally, Julia Tymoshenko, but within a year had fallen out with her, to the extent that he dismissed her and called new elections in early 2006. These resulted in the revival of Yanukovych as leader of the largest party in parliament, with Tymoshenko second and Yushchenko’s forces reduced to third. Even though Yushchenko and Tymoshenko still had a parliamentary majority if their forces combined, Yushchenko chose to throw in his lot with Yanukovych.

Yanukovych pursued coalition in the traditional Russian fashion, by bribing Yushchenko supporters to obtain a parliamentary majority, thus removing the need for compromise. No doubt Russian gold was very helpful in this endeavor. Yushchenko responded by calling yet another election, and after competing riots in the streets of Kyiv, an election has now apparently been agreed for September 30. The stakes could hardly be higher, for Ukraine and for the world.

The EU now backs a coalition between Yushchenko and Yanukovych to govern after the election, although the last year should surely have proved that any coalition between the weak Yushchenko and the sinister Yanukovych must inevitably lead to Ukraine being effectively absorbed by the expansionist Russia. Julia Tymoshenko is the wild card. Incomparably the most glamorous major politician currently active, Tymoshenko made a large fortune in the 1990s in the oil business, doubtless by methods that would not pass close inspection but were inevitable for survival in the Ukraine of those years.

In spite of being a billionaire with proven business skills, Tymoshenko is now running as the anti-oligarch candidate. Since she is a strong enough personality to stand up to the Kremlin, and is presumably careful not to ingest any Polonium 210, she thus represents Ukraine’s best hope of breaking away into something resembling free market prosperity. While the Orange Revolution moved Ukraine for the first time in the direction of a true free market, it remains far poorer than by resources and education level it should be, with a GDP per capita (purchasing power parity basis) of $7,800 compared with Russia’s $12,200 and Poland’s $14,300.

To develop into the prosperous middle-income free market society it deserves to be, Ukraine needs small business above all, for which it needs a stable and nurtured base of middle class family savings. Western investment will be important also, to reform Ukraine’s heavy industries. Tymoshenko showed the way here as prime minister by selling the steel giant Kryvorizhstal to Mittal Steel for $4.8 billion. Just as U.S. Steel produced a world class steel company remarkably quickly in Slovakia, so Mittal can do it in Ukraine too, and should reap enormous and well deserved profits by doing so.

The current regime of high taxes (around 50% of GDP) frequent banking crises and domination by industrial behemoths has not achieved an environment of middle class security and encouragement to foreign investment and is not going to. Tymoshenko’s populist yet market-oriented approach promises to achieve this, if she is given a decent period of power in which to reform the system.

That is the stakes for Ukraine. Very high indeed. The stakes for the West may at first sight appear less. Ukraine has a GDP of only $82 billion and is not a major exporter of strategic materials. Yet with a population of 46 million, Ukraine is worth taking some trouble over. If it was able to achieve near-Western living standards it would have a GDP close to Spain’s, well within the world’s top 20 countries.

More important to the outside world than the upside of a successful Tymoshenko government is the downside of a weak Yushchenko/Yanukovych coalition or an outright Yanukovych majority. In that case, assuming that either Putin succeeds himself or his successor has similar ruthlessness and ambitions, a Ukraine that drifted back towards Russia would go far to restoring the Soviet Union in all its awful Evil Empire majesty. Other former Soviet satellites would be dragged back into compliance, whether willingly, as with Belarus, Armenia and some of the central Asian states, or desperately unwillingly, as with Georgia. They would have little choice. With Russia and Ukraine working together they would be small, mostly surrounded and far from any viable help. Only the Baltic states, tiny but absorbed into the EU, would be likely to escape. Conversely much of the Balkans, not members of the old Soviet Union, might be drawn in to the new one.

This time, however, the Soviet Union would not be held back by an idiotic and doomed economic system. It would be an economically efficient, resources-rich and strategically ruthless Nazi one, in its economic and foreign policy resembling the Third Reich more than anything we have seen since. With Europe strategically hobbled by dependence on its gas, its coffers filled by its reserves of oil, and an obvious powerful natural ally in China, it would present a huge political and economic danger to the West, even if open war could be avoided. Only its population, limited and ageing, would restrict its strength, but alliance with China and some of the high-population countries of the Middle East might well shore up that weakness. As in the 1930s, the emergence of such a powerful and ruthless bloc would devastate prosperity worldwide, causing trade to collapse and wasteful expenditures on armaments to soar.

So vote early and vote often, freedom-loving Ukrainians. The safety and prosperity of the world depends on your domino not falling!

Link here.
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