Wealth International, Limited

Finance Digest for Week of November 26, 2007

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


Peter Schiff and David Tice do not do what they do for the love it gets them. They are two of the most bearish investment professionals in America. Their outlook for the U.S. economy and stock market is beyond grim.

Schiff, who heads brokerage Euro Pacific Capital in Darien, Connecticut, sees the dollar and stock market collapsing and the value of American per-capita economic output falling below that of Greece. Tice, who manages the Prudent Bear mutual fund in Dallas, likewise predicts that U.S. markets will crumble and says the economy could face something akin to the Great Depression.

Forecasts like these are not the way to make a lot of friends in this country, let alone on Wall Street. Some would call being bearish on America unpatriotic, even treasonous. And that means many investors long have automatically tuned out the likes of Schiff and Tice. Besides, the doomsayers have been wrong forever, right?

Yet this year, with the debacle in housing and its toxic fallout in markets and in the financial system, the bear’q warnings about the future may no longer seem quite so far-fetched. The risks to U.S. prosperity have risen markedly – even many stock market bulls will admit that much today.

Schiff, 44, and Tice, 53, have no connection except for their outspoken pessimism about where the U.S. is headed. They share the same basic thesis: America is facing its comeuppance for 25 years of borrowing and spending, saving little and relying increasingly on foreign capital to support its standard of living. Now, the bursting of the housing market bubble, the surge in mortgage defaults and the plunge in the dollar have exposed what Schiff and Tice believe are serious structural weaknesses in the U.S. economy.

Schiff’s tactic for preserving his clients’ wealth, he says, is to send it all abroad. He hunts for dividend-paying stocks of large foreign companies that are focused on their home markets – such as Swiss telecom giant Swisscom and the parent firm of Hong Kong utility China Light & Power Co. In theory, Schiff’s strategy will protect the purchasing power of the money if the dollar follows his script and continues to melt down.

Schiff concedes he was too early with his overseas-only stock strategy in the late 1990s. With the dollar’s slide since 2002, however, foreign stocks have been spectacular performers for U.S. investors. Schiff says his firm’s client base has grown to more than 8,000 individuals with a total of $1 billion in assets. He and his brokers make money off the commission income from the trades they make.

The idea of global portfolio diversification is one that many people have taken to heart in the last few years. Month after month, the lion’s share of Americans’ net new investment in stock mutual funds goes to foreign portfolios, not domestic. Even so, most U.S. investors are not abandoning their domestic holdings. That is where Schiff’s acerbic views diverge from the mainstream. The common perception is that the rest of the world needs the U.S. economy as a growth engine. Schiff says that is outdated thinking, given the rise of emerging-market economies such as China, India, Russia and Brazil. Because of America’s heavy borrowing needs, “We’re a burden on the rest of the world,” he asserts. “China is not export-dependent. They are exporting because Americans are consuming.” Ultimately, “the Chinese are going to buy more of their own products.” As their consumption rises and their savings rate falls, “they are not going to lend to us anymore.”

One potential flaw in his strategy, however, is that a U.S. market and economic crash could drag the entire planet into recession or depression. Schiff thinks the rest of the world can overcome an American economic decline, though he says that, initially, foreign stock markets probably would fall along with Wall Street.

Tice’s survival scheme for the U.S. economic and stock market downturn he foresees is to go short: borrowing stock and selling it, betting the price will fall. If a short bet is correct, the seller eventually can repurchase the stock for less than the sale price and pocket the difference.

Tice has been a well-known short seller since the mid-1990s via his Prudent Bear fund. He earned hefty returns in the bear market of 2000 to 2002. But the bull market since 2002 has made life tough for short sellers. They can lose big if the stocks they are targeting rise instead of fall. This year, Tice’s $800-million fund is raking it in again. The portfolio is up about 15% year to date, compared with a 4.2% rise for the average U.S. stock fund. Tice has shorted stocks such as Starbucks and Harley-Davidson, as well as many banking issues, he says.

He believes the American consumer is tapped out. “Real estate is just imploding,” Tice says. Hundreds of billions of dollars in home equity have been pulled out in recent years to support Americans’ spending, he notes. That binge now is over.

“The consumer looks like he’s dying a slow death,” Tice says. He expects that to lead the economy into a morass that will feed on itself. “This is the big one,” he says.

Wishful thinking on the part of someone who stands to lose a lot if the stock market zooms anew? Maybe.

Tice has two daughters, ages 18 and 21. He admits they do not share his dismal view of the future. “They say, ‘It can’t be that bad,’” he says. “They think we will muddle through.”

The majority of Americans probably share that sentiment. The U.S. economy is, after all, very dynamic. We may well look back on this period in a few years and marvel at how well it all worked out.

And if the bears’ darkest predictions come true, the performance of your investment portfolio may be the least of your worries. The more important question may be whether you have stored enough canned food and ammo.

Link here.


The rout on Wall Street is no longer confined to financial stocks. Fault lines are now visible for virtually every type of stock, a shift that could portend a more serious downturn for the broad U.S. market.

When problems in the mortgage and credit markets first surfaced this summer, there was a belief that they would be contained to companies directly affected by the housing bust, such as banks, mortgage lenders and home builders. But that thesis no longer seems valid after stock indexes fell below key levels, suggesting the market has turned bearish, says Denis Amato, chief investment officer at Ancora Advisors.

The Standard & Poor’s 500, which was up 10.4% for the year six weeks ago, has given up all its 2007 gains and is now down fractionally. The Dow Jones industrials fell 211 points last Wednesday to 12,799, knocking it below its low point in August, when the credit crunch first rattled markets. The Nasdaq composite is down 10.4% from its October high, which puts it into “correction” territory. Both the Dow and S&P are half a percentage point from their first 10% correction in almost five years.

There is growing fear that mortgage defaults caused by loans that will reset at higher interest rates will continue to mushroom next year, putting tremendous pressure on the economy – and perhaps cause a recession. “These coming [mortgage] resets are akin to a tropical storm off the coast,” says Jack Ablin, chief investment officer at Harris Private Bank. “Everyone is trying to figure out the magnitude of the losses. They don’t know if it will remain a tropical storm or turn into a Category 5 hurricane. Right now, we are pricing for a hurricane.”

When the Dow industrials closed Wednesday below the August 16 low of 12,846, it triggered a bearish signal from a more than 100-year-old forecasting system called Dow Theory. The weakness in the industrials (which make goods) confirmed weakness in the Dow transports (which ship goods), signaling a shift in the long-term trend from bullish to bearish. “Odds are, we are already in a bear market,” says Amato.

Perhaps that is why risk-averse investors are piling into government bonds, driving yields down. The 10-year Treasury note yields 4.01%, a two-year low.

Link here.


Hold the doomsday talk just yet. Stocks are cheap, says Kenneth Fisher.

What does “new era” mean to you? There was a New Era Philanthropy that turned out to be a scam. There was a New Era in technology at the turn of the century that said the Internet was worth an infinite amount of money. That turned out to be flimflam. And then, sometime near the market’s double bottom in October 2002 and March 2003, the bears came up with their own New Era: We were entering a New Era of below-average returns. Bunk, just like the other two eras.

Since the epoch of supposedly subpar returns got under way, the global stock market has been enjoying markedly above-average returns. This has been true over the past five years taken together, when the Morgan Stanley World Index has averaged an 18.3% annual return, and also in every calendar year except 2005, when the return was shy of its historical (post-1926) performance by a whisker.

What gives? At first post-2002 bulls were dismissed by academics and Wall Street sourpusses as not with it. Well, those who uttered the bearish New Era babble were the ones who were not with it and should be relegated to the Siberia of commentators. But note that five years of above-average returns have not yet generated any groundswell of thinking that we are now in some New Era of above-average returns.

That’s bullish! It means sentiment has not turned euphoric, as it did in the late 1990s. Thus, there is room for more of a bull market ahead. I want to be the first to say we definitely are in a New Era of above-average returns. I will keep buying stocks until we hear multiple pundits say we are entering a new period of high returns. That will be a time to sell. When will this happen? I do not know, but I doubt it will be before 2009 starts. Hence, I am expecting another above-average year ahead, an easy one.

Here are a few factors I do not fear as we enter 2008, either because they will not happen or do not matter: further collapses in the mortgage market, a credit crunch, Hillary as president (or whomever we elect), $125 oil, inflation, rising long-term rates, folly from the Federal Reserve (although I expect folly there), Iranian idiocy, or anything you read in BusinessWeek. What do I worry about? My biggest fear is of a rising yen. The U.S. and European markets are being propped up by speculators who borrow in yen.

But otherwise, buy stocks and be happy. It is still easy, five years into this bull market, to find above-average companies selling at below-average valuations. And this when valuations are in general low compared with the cost of long-term capital.

Ones like these: Canada’s CAE (12, CGT) is the world leader in flight simulators and pilot training. Germany’s Allianz (21, AZ) is one of the world’s largest insurers, particularly strong in property and casualty outside America. The Netherlands’ Aegon (19, AEG) is a leader in life insurance with a huge American presence. Singapore’s Flextronics (12, FLEX) is now the world’s biggest electronics contract manufacturer. With two-thirds of its business overseas and 400,000 customers worldwide, Manpower (64, MAN), provider of temp workers, has lots of upside.

Link here.


The market’s roller-coaster ride is unlike anything I have experienced in 27 years of investing. So far in 2007’s second half the Dow Jones industrial average has had 38 days of triple-digit gains or losses, leaving investors reaching for the Dramamine.

Uncertainty breeds fear, and there is plenty of uncertainty in the air engendered by subprime mortgage losses, the ouster of chief executives and multibillion-dollar math errors, not to mention the term “rescue fund” (a consortium of big banks that seek to stabilize tanking debt instruments). I feel we are still in the early innings of a significant correction.

There are three things making this instability worse than it ought to be:

(1) Regulation fd, which stands for fair disclosure. This reform was supposed to put the investing public on a level information playing field with the pros. Unfortunately, companies equalized the two camps not by increasing disclosure to the small investors but by decreasing it to the large investors. Because public company executives now use only quarterly earnings calls to disseminate information, when the news is unexpected, it hits the market with a bang. Small stumbles are often punished and minor successes can be excessively rewarded.

(2) Hedge funds, with $1.67 trillion in assets, wield tremendous influence. More like renters than owners, their turnover averages 300%, compared with 89% for the typical mutual fund. These wheelers and dealers now make up half the daily volume of the New York Stock Exchange.

(3) Wall Street’s love affair with automation. Electronic trading has brought us lower transaction costs but has diminished the calming influence of NYSE floor specialists. In the past, specialists acted like shock absorbers, smoothing out volatility by selling hot stocks and buying ones that were cooling down. While the NYSE still has specialists, they have less on the line than they used to. Nasdaq is entirely electronic. I worry that trading decisions are made more by algorithmic models than by experienced minds.

During the market’s wild ride this year, a few of my favorite picks have gotten jostled, making them even better deals: Pitney Bowes (38, PBI) is a leader in mailroom management. IMS Health (24, RX) is a global provider of heath care data. Credit-rating juggernaut Moody’s (40, MCO) has been pummeled by analysts who think it should have foreseen the collapse of the subprime market. The stock has dropped precipitously, and lawsuits may start flying. Nothing new here. In every market heartache, Moody’s gets slammed. Moody’s has a First Amendment defense: It was offering opinions on the merits of securities, and it has as much right to publish opinions as Forbes has to publish my column or analysts have to critique bond-rating firms.

Link here.


Irish funds over-exposed to the Irish stock market.

Mercer Consulting says that many Irish pension funds have lost 7% or more of their value in the last month due to over-exposure to the Irish stock market, which has itself lost 15% of its value during the last few weeks.

Noel Collins, senior consultant at Mercer, says that the Irish stock market is overweight in financial and housing-related stocks, sectors which have been affected by falling demand for housing and by the global credit crunch. Mercer estimates that the average Irish pension managed fund is down about 5% this year, having been up over 4% at mid-year. This would represent a swing of €9 billion in the second half of the year.

Irish equities, to which many Irish schemes are heavily exposed, are down by over 20% year to date, and down 30% from their 2006 highs, largely due to weakness in the share prices of the retail banks.

Brian Griffin, Senior Investment Consultant with Mercer said, “Recent events highlight once again the importance of broad diversification – both geographically and across industry sectors – for Irish pension funds. Many pension funds have moved to address this issue in recent years but for many other schemes they continue to be negatively impacted by over concentration in the Irish market and the stock and sector risks inherent in this approach.”

The Irish equity market performed exceptionally well in comparison with global markets last year. The 28% increase in 2006 in the ISEQ Overall index outperformed indices such as the Eurostoxx 50, FTSE, NASDAQ and the Dow Jones Industrial Average. The index reached a lifetime high of 9,453 on December 28.

Link here.


When Domenico Colombo saw that his monthly mortgage payment was about to balloon by 30%, he had a clear picture of how bad it could get. He feared ending up like so many neighbors in Ft. Lauderdale, Florida, who defaulted on their mortgages and whose homes are now in foreclosure and sporting “For Sale” signs. Colombo did manage to renegotiate a new fixed interest rate loan with his bank, and now believes he will be OK – but the future is less certain for the rest of us.

In the months ahead, millions of other adjustable-rate mortgages like Colombo’s will reset, giving them a higher interest rate as required by the loan agreements and leaving many homeowners unable to make their payments. Soaring mortgage default rates this year already have shaken major financial institutions and the fallout from more of them, some experts say, could spread from those already battered banks into the general economy.

The worst-case scenario is anyone’s guess, but some believe it could become very bad. “We haven’t faced a downturn like this since the Depression,” said Bill Gross, chief investment officer of PIMCO, the world’s biggest bond fund. He is not suggesting anything like those terrible times – but, as an expert on the global credit crisis, he speaks with authority. “Its effect on consumption, its effect on future lending attitudes, could bring us close to the zero line in terms of economic growth. It does keep me up at night.”

Some 2 million homeowners hold $600 billion of subprime ARMs that are due to reset at higher amounts during the next eight months. Not all these mortgages are in trouble, but homeowners who default or fall behind on payments could cause an economic shock of a type never seen before. Some of the nation’s leading economic minds lay out a scenario that is frightening. Not only would the next wave of the mortgage crisis force people out of their homes, it might also spiral throughout the economy.

The already severe housing slump would be exacerbated by even more empty homes on the market, causing prices to plunge by up to 40% in once-hot real estate spots such as California, Nevada and Florida. Builders like Chicago’s Neumann Homes, which filed for bankruptcy protection this month, could go under. The top 10 global banks, which repackage loans into exotic securities such as collateralized debt obligations (CDOs) could suffer far greater write-offs than the $75 billion already taken this year.

Massive job losses would curtail consumer spending that makes up 2/3 of the economy. The Labor Department estimates almost 100,000 financial services jobs related to credit and lending in the U.S. have already been lost, from local bank loan officers to traders dealing in mortgage-backed securities. Thousands of Americans who work in the housing industry could find themselves on the dole. And there is no telling how that would affect car dealers, retailers and others dependent on consumer paychecks.

Based on historical models, zero growth in the U.S. GDP would take the current unemployment rate to 6.4%. That could wipe out about 3 million jobs from the economy. In the 2001-03 downturn, some 2 million jobs were lost, according to the Labor Department. The dot-com bust early this decade decimated the technology sector, while the September 11, 2001, terror attacks hurt the transportation and allied industries. The aftermath stretched to 2003.

There is increasing evidence that another downturn has begun. Borrowers who took out loans in the first six months of this year are already falling behind on their payments faster than those who took out loans in 2006, according to investment bank Friedman, Billings Ramsey. That is making it even harder for would-be buyers to get new mortgages – a frightening prospect for home builders with projects going begging on the market, and for homeowners desperate to unload property to avoid defaulting on their loans.

Meanwhile, the number of U.S. homes in foreclosure is expected to keep soaring after more than doubling during the 3rd quarter from a year earlier, to 446,726 homes nationwide, according to RealtyTrac Inc. That is one foreclosure filing for every 196 households in the nation, a 34% jump from just three months earlier.

Such data suggests more Americans could lose their homes than ever before, and those in peril are people who never thought they would welsh on a mortgage payment. They come from a broad swath – teachers, pharmacists, and civil servants who were lured by enticing mortgage terms. Some homebuyers gambled on interest-only loans, which allowed buyers to pay just interest at a low rate for two years. But with that initial term now expiring, many homeowners find they cannot make the payments.

Colombo, who lives in the planned community of Weston just outside Ft. Lauderdale, said the reset on his home would have “destroyed” his financial situation. He went to Mortgage Repair Center, one of hundreds of debt counselors trying to bail out desperate homeowners, to work with his lender. “But many people in my neighborhood didn’t get help, and some have literally just walked away from their homes,” said Colombo. “There are over 133,000 homes on the market in Broward-Miami-Dade counties, and some of them were actually abandoned. People in this situation don’t like to talk about it, and end up getting hurt because they don’t.”

Many Americans are unaware that a borrower defaulting on a loan can have an impact on everyone else’s well-being and that of the nation. The amount of mortgages due to reset is just a fraction of the U.S.’s $14 trillion economy. But the series of plunges that Wall Street has suffered in past months prove that no one is immune when mortgages turn sour.

Today’s financial system is interconnected. Mortgages are sold to investment firms, which then slice them up and package them as securities based on risk. Then hedge and pension funds buy up such investments. When home prices kept rising, these were lucrative assets to own. But the ongoing collapse in housing prices has set off a chain reaction: Lenders are tightening their standards, borrowers are having a harder time refinancing loans and the securities that underpin them are in jeopardy.

This has resulted in more than $500 billion of potentially worthless paper on the balance sheets of the biggest global banks – losses that could spill into the huge pension and mutual funds that also invest in these securities and that the average worker or investor expects to depend on. There is more pain left for Wall Street: “We are nowhere close to the end of the collapse,” said Mark Patterson, chairman and cofounder of MatlinPatterson Global Advisors, a hedge fund that specializes in distressed funds.

The subprime wreckage could dwarf the nation’s last big banking crisis – the failure of more than 1,000 savings and loans in the 1980s. The biggest difference is that problems with S&Ls were largely contained, and the government was able to rescue them through a $125 billion bailout. This situation is far more widespread, which some experts say makes it more difficult to rein in. “What really makes this a doomsday scenario is where would you even start with a bailout?”, asked Thomas Lawler, a former official at mortgage lender Fannie Mae who is now a private housing and finance consultant.

Sen. Charles Schumer, D-N.Y., a key member of Senate finance and banking committees, said borrowers are the ones who need relief. The playbook to bail out the economy would not be applied to the banks and mortgage originators, but money could be funneled through nonprofit organizations to homeowners that need help, he said. Federal Reserve Chairman Ben Bernanke said in recent comments he has no direct plans to bail out the mortgage industry, but to instead offer relief through cheap interest rates and further liquidity injections into the banking system.

There has also been talk of letting government-backed lenders like Fannie Mae and Freddie Mac buy mortgages of as much as $1 million from lenders, pay the government a fee for guaranteeing them and then turn them into securities to be sold to investors. This would extend the government’s support, and its exposure, to the mortgage market to help alleviate stress.

Either way, the impact of a fresh round of subprime losses remains of paramount concern to economists – especially since there is little certainty about how it would ripple through the U.S. economy. “We all know that more hits from these subprime loans are coming, but are having a devil of a time figuring out how it will happen or how to stop it,” said Lawler. “We have never been in this situation before.”

Link here.


In 1992 Hurricane Andrew stunned insurance companies. After paying out more than $22 billion in claims in inflation-adjusted dollars, they began rewriting policies to protect themselves as much as homeowners. They also developed computer programs intended to limit payouts on claims. As a result, American homeowners are having to make do with much less coverage at steadily rising prices. In Miami and other places along the coast, insurance prices have skyrocketed, deepening the national slowdown in home sales.

The insurers say they have had to take defensive measures to stay in business and pay claims as operating costs have climbed. Cutbacks in coverage, consumer advocates say, have contributed to the slow recovery of the Gulf Coast from Hurricane Katrina and will most likely hamper recovery from the recent wildfires in California.

The property insurance industry, including home, auto and commercial coverages, reported a record profit of $44 billion in 2005, even after paying $41 billion in damages from Katrina. The industry set another record for profit in 2006 at $64 billion. And as a second hurricane season is coming to an end without a hurricane hitting the coasts, 2007 is shaping up to be another lucrative year.

10 years ago the average cost of home insurance in America was $455 a year. Today, it is an estimated $886 for much less insurance. Along the coastlines, annual premiums on houses routinely run into the thousands of dollars. Contending that even those premiums are not high enough for the risk they face, the insurers have canceled or declined to renew several million policies.

Before Andrew, the insurers sold home insurance as a loss leader and loaded the policies with lavish benefits to attract customers for their car insurance and to build up capital in their investment portfolios. “It was a kind of avuncular, sleepy line of business,” said William R. Berkley, the chief executive of W. R. Berkley, a commercial insurer in Greenwich, Connecticut. “Then losses started to outstrip even what investment income might have been able to make up.”

The insurers say that in a time of more powerful and more frequent hurricanes, they have to tailor their coverage and prices for overwhelming jolts. The huge increase in condo towers and homes along the coasts, they say, have multiplied their potential losses. “I guarantee you,” Mr. Berkley said, “as we move down the line, the profits you are seeing in the business today are going to take a significant hit.”

“One meteorological wobble,” he said of Hurricane Dean, which tore through the Caribbean and Mexico in August, and the storm “would have hit Miami. And that’s a $100 billion hit.”

Link here.


Forget price-to-earnings. Price-to-sales is the best way to find cheap stocks to buy, says money manager.

What is the best measure of whether a stock is a bargain? The traditional starting point of stock research has been the price/earnings ratio. Money manager James O’Shaughnessy, who oversees $11 billion from an office in Connecticut, says he has a better measure: Compare a company’s market value with its revenue. This price/sales ratio (PSR) should be your starting point in screening stocks.

It has worked for him. Over the past decade, he says, his small-cap growth accounts have averaged a 13.6% annual return after fees, seven points better than the market.

If you have $250,000, you can avail yourself of the talents of O’Shaughnessy Asset Management through Bear Stearns and other brokers for fees ranging from 2.5% to 1% annually, depending on asset size. If you do not, use this strategy in your stock picking. To be purely mechanical about it, find the 50 stocks in your database that are cheapest by PSR and buy them all. O’Shaughnessy leans to smaller companies, but his research suggests that the approach would work against a universe that includes big companies.

O’Shaughnessy himself uses PSR only as a first cut. He does other kinds of analysis to make his final selections. But the validity of low PSR investing, he says, is borne out by a study he did of Compustat data, stretching from 1951 to 2003. To avoid contaminating his list with illiquid minnow-size issues, he chopped out everything with a market value below an inflation-adjusted $185 million. In this back test he reshuffled every year to keep the roster current.

Conclusion: His 50 low PSR collection beat the market by an annualized 16% to 13% over that half-century. He also tried out a hypothetical low price/earnings strategy. That one averaged only 14%. Buying cheap stocks as measured by price/book, another well-known metric, tied low PSR over the full period but was not as consistent. The PSR strategy beat the market in 88% of the 10-year periods, the price/book strategy in only 72%.

All these strategies have in common a value flavor. Meaning: You buy boring banks, utilities and steel companies, while passing up software, the Internet and biotech. And why does value work on Wall Street ratio might be just part of a package of indicators that a stock is relatively cheap and primed for higher returns, says Kenneth R. French, a professor at Dartmouth’s Tuck School of Business. With his colleague Eugene Fama at the University of Chicago, French explained in 1996 that ratios such as price/earnings and price/sales are all proxies for the same attribute. French is not sure just what that attribute is, but there is something about second-rate companies and industries that makes investors shy away.

Shy away more than they should, that is. A rational market will of course have Google’s capitalization higher than General Motors’. The question is how much higher it should be. The low PSR theory says that the market tends to overprice the Googles relative to the GMs.

One hypothesis is psychological. Perhaps investors have vivid memories of Google and Amgen, fading memories of Interwoven and Enzo Biochem. So they overpay for growth and glamour. They also underestimate the tendency of businesses to regress to average profitability. A company with a fat profit margin (and thus, in all likelihood, a high PSR) will attract competition. A company with weak profitability will eventually replace its inept managers. The low PSR strategy capitalizes on this phenomenon.

We asked Wilshire Analytics researchers to replicate the O’Shaughnessy study for the past 25 years, up through the end of September. Sure enough, the lowest-valued 50 (again excluding very small issues) bested the S&P 500 handily, 19.3% annually versus 13.6%.

Some market savants used to adore PSR and have soured on it. Money manager and Forbes columnist Ken Fisher first popularized the price/sales ratio with his 1984 book, Super Stocks, but grew less enthusiastic by the early 1990s after further research showed the concept works best with tiny, illiquid issues – and when value stocks are rebounding anyway.

All that said, O’Shaughnessy, 47, is a guy worth listening to. He is well known as a proponent of the “Dogs of the Dow” strategy, which focuses on the highest-yielding (and usually unglamorous) stocks of the Dow Jones Industrial Average. He is the author of several bestselling books, including What Works on Wall Street (1996) and Predicting the Markets of Tomorrow (2006).

O’Shaughnessy and other PSR partisans certainly do not feel this is the perfect metric – just the best of the lot. When he does his PSR screen, he does not want any stock with a PSR of more than 1.5, which is the average for the S&P 500. Then he eyes this initial cut to see if the selections are indeed on the upswing. Earnings should be up over the past year and the stock price up over the past two quarters. When he gets done, he has a portfolio with a little more of a growth flavor than a pure low PSR portfolio (see table). Also, O’Shaughnessy leans toward smaller companies, like Geo Group and PriceSmart.

What does this guy have against the classic P/E ratio? Two things. One is that the earnings figure is more easily manipulated than the sales one. The other is that companies on the rebound may have earnings that are temporarily depressed, distorting the P/E multiple. O’Shaughnessy likes 1-800-Flowers.com, which has had its problems yet now is showing double-digit revenue growth.

And what is wrong with price/book? Fans of this ratio argue, as P/S fans argue about sales, that book value is hard to fake. The problem is that P/B works best for hard assets like factories and equipment, says Charles Mulford, accounting professor at Georgia Tech College of Management. Book value falls short for high-tech firms, whose assets tend to be intangibles like research and development. Ditto for consumer products companies such as Coca-Cola and their precious brands. As for the success of P/B in O’Shaughnessy’s look-back study, it is quite possible that price/book would have worked well beginning in 1951, when assets were measured in smokestacks, but will not work in this century, when they are measured in lines of code.

One seeming weakness in the PSR calculation is that it ignores debt. Take two companies, each with $1 billion in sales, one that has a market value of $1 billion and no debt, the other that has $100 million of stock and $900 million of bonds outstanding. To an acquirer the price tag on either is $1 billion – the so-called enterprise value. To a fan of raw PSRs, however, the debt-laden company seems to be 10 times as cheap as the other one. Why does O’Shaughnessy not use enterprise value instead of market value in his numerator? He tested it, and it did worse than the other three metrics.

For O’Shaughnessy, the key to getting good results is discipline, especially during manic stretches like the late 1990s, when people clutching low PSR stocks seemed to have “loser” stamped on their T-shirts. In 1999, as the technology-dominated Nasdaq index soared 86%, the low PSR portfolio was up a measly 3.2%.

O’Shaughnessy’s method can lead in some unpredictable directions. After the dot-com collapse in 2001, for example, his screens picked up a collection of steel companies. “We scratched our heads,” he recalls. He bought them anyway, just in time to catch a Chinese-driven boom and a slew of acquisitions by foreign steelmakers. Many doubled in price between 2002 and 2005. He caught a similar wave when he bought Nortel Networks (NYSE: NT), a stock he had avoided during the telecom bubble. He got it in January 2003 at $2, or 0.73 times sales; he sold it for a 76% profit 11 months later.

His portfolio nowadays is an oddball collection that includes Casella Waste Systems (NASDAQ: CWST), trading below one times revenue as earnings recover from two quarters of losses earlier this year, and GameStop (NYSE: GME), whose shares have rallied on rising sales and an expanding store network.

Why the favoritism for small stocks? Have they not already had a good run recently? Yes, but over the past 20 years their returns are just moving back to even with those of large-company stocks. Over the past century small companies have beaten big ones. If things return to pattern, O’Shaughnessy says, small stocks will do well over the next 20 years.

Link here.


The war is raising oil prices, stimulated substitition into alternative energy forms.

Under Saddam Hussein, Iraq was one of the world’s largest oil producers. Many experts predicted that with Hussein out of power, Iraqi oil production would only rise. This has not been the case. If anything, the war with Iraq has significantly harmed the production of oil and raised the price to record levels. Tensions in the area continue to grow, and recently the threat of an invasion by Turkey sent the price to its highest mark.

That is the bad news. Despite what many people think, there actually is good news coming from Iraq. This is news that should delight the very people who have been opposed to the war from the beginning. According to Gallup, the majority of Americans who oppose the Iraq war are Democrats. The same can be said for the majority of Americans who believe global warming to be a major problem. Based on those facts, it may be safe to assume that the same people who oppose the war are the ones asking for changes when it comes to global warming. Many of these people want the government to do something significant about this problem, but the free market should be figuring it out for them.

As more and more people talk about global warming, millions are looking for alternative forms of energy that are cleaner and more environmentally friendly than oil. The technology for alternative fuels is there. The solutions are just way too expensive.

Take hybrid cars. The Honda Civic sedan starts at $15,010. The popular family vehicle gets 36 miles per gallon. The hybrid version of the Civic starts at $22,600. The hybrid operates at 45 miles per gallon. Are the savings in gas consumption and environmental effects worth it for the average customer to pay over $7,000 more for the “green” vehicle? Based on an average of 12,000 miles driven per year and paying $3.09 for every gallon of gasoline, the savings you get by choosing the hybrid car are only $207 per year. It would take over 33 years to make up for that extra cost. Hardly sounds worth it.

One of the only ways these hybrid cars will become more affordable and then be used by more people will be if oil prices begin to rise. Not only will rising prices balance the differences between oil and alternative energies, but the more expensive oil gets, and the greater a national emergency it becomes, the more incentives to improve energy technology rise. The incentives will also rise when further political pressure is put on the government – subsidies for alternative energy programs will increase. If political unrest continues in the Middle East and the countries that control OPEC refuse to step up production, Americans will have no choice but to curb their use of oil and will then be forced by the market to become part of the ecological solution.

According to the National Venture Capital Association, startup companies that focus on clean technologies attracted more than $800 million in venture capital last quarter alone. That shows that there are plenty of investors willing to put up their money hoping the winds are changing toward clean products. Just last week, the world’s most famous environmentalist, Al Gore, became a partner in Kleiner Perkins Caufield & Byers, a successful VC firm that backs many eco-friendly startup companies. Many believe that Gore will be used for his vast connections in Washington.

What stands in the way of these companies is the threat that oil could somehow become cheap again. What if the U.S. leaves Iraq and tensions in the world begin to ease? What if that led to Iraqi oil production on the levels we saw before 2003? If such a thing would happen, then the American people would continue to drive their gas-guzzling cars and polluting the environment. That is the exact opposite of what many global warming activists want.

Of course, this rationale sounds absurd when compared with the money that could have been saved had we not gone to war. That money could have been used by the government to directly subsidize alternative energies sooner. But would they have used it that way? Probably not. Governments usually tend to respond to problems only when they become a crisis.

By creating an oil crisis, the government may finally be able to solve it. It may be hard to swallow, but believe it or not, people interested in America cutting down on its use of oil and stepping up cleaner initiatives may have George W. Bush and the Iraq war to thank.

Link here.


Most people are a bit unsure about hybrid car technology. In fact, most people think that it is a relatively new phenomenon. With the Toyota Prius only 10 years old, how far back can the history of hybrid cars go? The answer may shock some people.

A man named Robert Anderson of Aberdeen, Scotland built the first electric vehicle in 1839. Dr. Ferdinand Porsche created the first, true hybrid at the turn of the century. That model could travel nearly 40 miles on its battery alone. So why has it taken hybrids another century to take off? Instead of starting a political or ethical debate, let us just get down to a unique story that starts back in 1974.

From 1970 to 1976, as the price of oil was taking off, the Environmental Protection Agency (EPA) ran a secret research study, called the Federal Clean Car Incentive Program. There were eight applications accepted. Only one was a hybrid. That hybrid was well before its time. Or so the EPA eventually ruled ...

In 1974, Dr. Victor Wouk and his partner, Charlie Rosen, created the first hybrid prototype to ever meet the EPA’s requirements. The duo used a 1972 Buick Skylark, one of the biggest gas-guzzlers of the era, and swapped its engine with the first petroleum-electric hybrid. The new hybrid worked beautifully. But one EPA official single-handedly stopped this revolution dead in its tracks.

Eric Stork, head of EPA’s Mobile Source Air Pollution Control Program from 1970 until 1978, was against hybrids from the start. The now-78-year-old recently stated, “It’s just not a very practical technology for automotive. That’s why it’s going nowhere. It certainly wasn’t then. Even today, it’s marginal.”

Now, without getting into it too deep, what kind of research program would have any kind of success with that kind of attitude running it? The program suddenly ended in 1976, and the company that Wouk and Rosen started to build this hybrid prototype fell apart when it ran out of money.

Wouk did not stop there though. He spent the next 30 years writing technical reports and petitions to get a second chance for hybrids. All for naught, though. No one in Detroit was paying attention. The other side of the world was a different story. In 1997, Japanese auto manufacturer Toyota released its still-industry-leader Prius. So, yes ... Wouk was a proud Toyota owner.

Since 1997, Toyota has sold 1.2 million hybrids worldwide. Compare that to the 17 million cars and trucks sold in the U.S. in just 2006, and you can see that hybrids have a long way to go. But, things are about to change. Until today, modern hybrids use a nickel metal hydride (NiMH) battery. This type of battery is large, heavy and expensive. No wonder hybrids look so awkward and cost so much. The entire automobile industry agrees that we are on the verge of a brand new technology that will change it all.

Every hybrid maker, from Toyota to General Motors, agrees that Lithium-Ion (Li-Ion) is the future of hybrid batteries. Li-Ion batteries can be produced far cheaper, 35% lighter and 55% smaller than current NiMH batteries. Be sure to keep an eye out for the first model to implement this technology.

Link here.


To be successful, you must portray an image of success. One good way to appear successful is by appearing to be popular. The more in demand you seem, the more in demand you will be. This is true in many aspects in life and is evident in the stock market as well. If a company does not have many available shares on the open market, it seems like an in demand and sought after investment. Share prices will certainly go up.

Many corporations will do anything to improve their stock price. Instead of going about this the natural way, many are simply buying back their own shares in a way to reduce the supply on the open market. This seems like it would make sense, but the strategy does not always pan out. One of the worst cases was that of Ambac, which borrowed money to buy back shares right before it collapsed. While the company was buying back its own shares right before the price fell, the CEO and former CEO were able to dump millions of dollars worth of shares just before the collapse.

However, it is not just a handful of companies involved in poor decisions. The Wall Street Journal reports:

“Driven by billions of dollars in share buybacks, record-setting buyouts. and a wave of mergers, the amount of stock in the market shrank by hundreds of billions of dollars in the past four years.

“With the supply of stock down and demand strong, the market rallied. Now, as the economy slows and credit markets buckle, high-profile companies are cutting back on buybacks, and some wish they held onto the cash they gave back to shareholders ...

“Shares of Freddie Mac fell 29% on word that the mortgage company may halve its dividend and seek a capital infusion amid a record loss. Freddie might not be in this position if it hadn’t bought back at least $1 billion of common stock earlier this year and replaced it with preferred shares. ...

“Countrywide Financial Corp., which spent $2.4 billion in the past year to repurchase its shares, was forced to sell a chunk of its stock to raise money.

“Office Depot Inc., which bought back 5.7 million shares for an average price of $35 a share, said on its earnings call yesterday that it would like to buy its shares at the current price of $17.49, but can’t. Office Depot fell 7% yesterday.

“Home Depot Inc. said it will delay the rest of its massive stock buyback plan, while investors in Citigroup Inc. have turned nervous about the health of the bank’s balance sheet and capital levels, prompting management to say it isn’t in the position to repurchase shares ...

“From the third quarter of 2002 to the second quarter of this year, more than $1.5 trillion of shares in non-financial companies has disappeared from the stock market through buybacks, mergers, or buyouts, according to the Federal Reserve. The number hit a peak during the second quarter of this year, when non-financial companies retired a seasonally adjusted net $192.5 billion of shares ...

“Banks already are scaling back stock buybacks to conserve capital for other uses, like making loans to clients and setting aside money for bad loans. Further, the nation’s largest financial institutions may need to use their balance sheets to fund loans for private-equity deals, because anticipated buyers for those loans have dried up, leaving the banks on the hook.”

The AP reports that “Investors Need to Look Closer at Share Repurchases, as They Don't Always Enhance Holder Value”:

“Repurchases, which some companies use borrowed money to pay for, don’t always reduce share counts significantly, according to S&P equity analysts and study authors Stewart Glickman and Todd Rosenbluth.

“For every 100 shares bought back during the study period from January 1, 2006-June 30, 2007, 78 shares were added as a result of the exercise of stock options, shares issued to fund acquisitions, or for follow-on stock offerings ...

“The study found that 20 billion shares were repurchased during the period, which contributed to a mere 22% reduction in the total outstanding stock – or 4.4 billion shares – for the companies that were actively buying back stock.

“Also, companies don’t always buy their shares at a low price. More than one-third of companies have seen their stock price fall since repurchasing shares – meaning they paid a premium. ... Most of the 423 companies that repurchased stock during the study period would have done better investing the cash in an S&P 500 index fund, or even more conservative holdings.”

A list of the worst offenders would give a list of 423 companies. The most galling thing is that 78% of buybacks went for insider options. Shareholders got a mere 22% of the pie, and much of that was wasted.

For all this corruption and graft, shareholders look the other way as executives grant themselves and the boards they sit on enormous salaries and perks. To top it off, insiders were massively bailing on their own shares while squandering shareholder money. Nice work if you can get it.

Link here.


It is a tough time to be in the death-care business – or what all us nonundertakers refer to as “funeral homes”. At Service Corp. International (NYSE: SCI), the Houston-based giant with 2,000 homes, the number of services conducted in the second quarter fell 2,131, or 4%, from last year. And revenue per funeral barely kept pace with inflation, rising just 2.7%. At the Batesville Casket, a unit of publicly held Hillenbrand Industries (NYSE: HB) and one of the largest U.S. coffin makers, sales in the first nine months of 2007 were flat vs. 2006.

In theory, death care should be immune from short-term economic swings. Death is one of only two sure things in life, and the U.S. population is aging. But costs for raw materials (wood, flowers) are rising, while the flow of customers has slowed. “There’s been a decrease in the death rate over the last six to eight years,” says Phil Jacobs, chief marketing officer at SCI, who is too polite to note this is bad for business. According to the National Center for Health Statistics, the U.S. death rate fell from 8.8 per 1,000 in 1999 to 8.5 per 1,000 in 2005. In 2005, fewer people died than in 2002, despite an increase in population.

And while Americans do not necessarily spend more on funerals during boom times, a slowing economy makes people think twice about opening their wallets for wreaths and high-end caskets. And the fact that more customers are opting for a cheaper option is also helping to kill margins. Cremation is, well, on fire. The cremation rate rose from roughly 15% in 1985 to 27% in 2001, and to about a third of all deaths in 2005 and 2006, according to the Cremation Association of North America. Compared with full-on casket burials, cremation is less expensive, requires less labor and fewer materials, and does not involve purchasing a plot. As such, it is perfect for an era in which consumers are trading down. “I am finding that people that spent $8,000 to $10,000 on a funeral are now spending $4,000 to $6,000 on a cremation,” says Mike Nicodemus of Holloman-Brown, a 10-operation chain in Virginia Beach, Virginia, where cremations account for about 43% of business, compared with 20% a decade ago.

But the rise of cremation is not simply a matter of economics. Powerful social forces suggest the trend toward cremations, which are cheaper (and less profitable), may be rising. First, there is been much greater acceptance of the prospect. The Roman Catholic Church, which ruled cremation to be an acceptable alternative in 1963, in March 1997 said cremated remains could be present at a Catholic funeral mass. This sanction has contributed to sharply higher rates of Catholic cremation.

Second, as mobility has greatly increased – older Americans frequently retire far from their original homes, while their children are likely to disperse throughout the country – a greater number of people no longer feel the need to be interred in a particular spot. Among the states with the highest cremation rates are those that have experienced large influxes of population, such as Arizona (60%) and Nevada (65%).

Third, concern over land use is helping tip the scales in favor of cremation. “The idea of taking up space in cemeteries when it could be used for other purposes is contributing to people’s decisions,” Nicodemus says. Some of the highest cremation rates are in ecofriendly coastal states like Hawaii (66 %) and Washington (64%). In California, where SCI has a significant presence, more than half of 2005 deaths resulted in cremations.

With such megatrends working against it, the old-fashioned burial business seems to be facing trouble. But there are some causes for optimism (at least if you are an undertaker). Baby boomers will begin to die at some point. The U.S. death rate is projected to rise to 8.9 per 1,000 in 2010 and 9.3 per 1,000 in 2020. Phil Jacobs says the rapidly growing Hispanic-American population places a significant emphasis on “memorialization” (translation: Hispanics are more likely to spend money on a funeral). And for many Americans, regardless of their faith or ethnicity, it still seems anathema to scrimp on a loved one’s last life-cycle event.

Link here.


There must be 50 ways to leave your private equity acquisition target (apologies to Paul Simon).

Private equity firms regard themselves not as asset-flipping gigolos, but as sophisticated serial monogamists, always on the prowl for profitable long-term relationships. But their willingness to take a longer view is largely dependent on the supply of cheap money. When cash becomes more expensive and loans arrive with too many strings attached, a beautiful deal can transform overnight into an ugly hag. And so in recent months, as the effects of the credit crunch have rolled through the economy, private equity firms have balked at consummating high-profile deals. In 1975, Paul Simon identified “50 Ways To Leave Your Lover”. Today, buyout barons like Henry Kravis of KKR and Steve Schwarzman of the Blackstone Group are singing a different tune: There must be 50 ways to leave your private equity acquisition target.

Just blame the bank, Hank. In March, Blackstone and GE Capital Solutions, a unit of General Electric, teamed up to acquire PHH, a fleet-management and mortgage company. (The plan: GE Capital would buy PHH and then sell the mortgage operations to Blackstone.) However, as the spring wore on and PHH’s mortgage unit racked up losses, JPMorgan Chase and Lehman Brothers, the banks that had agreed to fund Blackstone’s purchase, grew anxious. And so in September, as Reuters reported, “PHH said Blackstone told GE in a letter that it received revised interpretations on debt availability for the deal from J.P. Morgan Chase & Co. and Lehman Brothers Holdings Inc. that could result in a shortfall of up to $750 million.” Translation: The banks yanked the Persian rug from under Blackstone’s feet. Now, for Blackstone’s partners, a mere $750 million may be the cost of a few birthday parties, but if Blackstone could not pay with borrowed money, it could not justify the deal. PHH’s stock now trades at a 30% discount to the GE-Blackstone offering price, which means investors have little faith the deal will come good.

See you in court, Mort. In April, JC Flowers, the private equity shop that specializes in financial-services companies, agreed to buy student-loan profiteer Sallie Mae for $25 billion, with the assistance of JPMorgan Chase and Lehman Brothers. But paying top dollar for a lending business seemed less viable as the credit crisis worsened. And Congress was considering reducing the interest rates Sallie Mae could charge on federally guaranteed loans. And so Flowers, eager to date other financial services companies (like Britain’s collapsing Northern Rock), tried to invoke the so-called material adverse effect clause – a provision written into most transactions that allows an acquirer to walk way from the deal, if the target business suffers a significant setback, without having to pay the a breakup fee. Sallie Mae strenuously called bull**** on this maneuver, concluding that the new law would reduce net income only “between 1.8 percent and 2.1 percent annually over the next 5 years.” Nonetheless, in September, just before President George W. Bush signed the act into law, the investors told Sallie Mae they would not go through with the deal. Sallie Mae then appealed to the honor of Bank of America and JPMorgan Chase. (Try to restrain your laughter.) In early October, after Flowers offered to complete the deal at a lower price, Sallie Mae sued Flowers and the lenders, seeking to make them either live up to the original terms or pay the $900 million breakup fee.

Buy a minority stake, Jake. In the spring, when KKR and Goldman Sachs’s private equity arm teamed up to buy electronics company Harman International for about $8 billion, Henry Kravis lauded the company as “one of the world’s outstanding providers of audio equipment and infotainment systems.” But by early September, having got a better look at Harman’s poor outlook for 2008, Kravis had undergone a change of heart. Invoking the material adverse effect clause, KKR and Goldman said they would not go forward as planned. But the original barbarians acted like comparative gentlemen. Rather than just leave Harman stranded at the altar, KKR and GS Capital Partners agreed to invest $400 million in the company and take a seat on Harman’s board.

Pay the breakup fee, Lee. And set yourself free. Cerberus, the secretive private equity firm, bought GMAC, General Motors’ financing arm, in April 2006, just in time to get nailed by the subprime mortgage mess. In July, it agreed to buy United Rentals, which rents construction equipment, for $4.4 billion, just as the housing morass was getting deeper. Oops. Last month, Cerberus curtly told United Rentals: “It’s not you, it’s me.” Rather than cite the material adverse effect clause, Cerberus simply admitted that it no longer wanted to go through with the deal at the original price and essentially offered to pay the $100 million breakup fee. Notwithstanding the comparatively gallant gesture, United Rentals is now suing Cerberus.

Sure, that is only four. But the credit crunch is just starting, the slumping stock market is making the premiums offered for deals earlier this year look less sustainable by the day, and private equity firms are still waiting in vain for bridge loans over troubled waters.

Link here.


Bruce Flatt, CEO of Brookfield Asset Management (BAM: NYSE), calls it “the backbone of the global economy.” It includes things such as transmission lines, dams, roads, bridges, etc. Often neglected, rarely appreciated, except when they fail – these things are vital.

As investments, infrastructure assets offer long-term and sustainable cash flows, like trees that never fail to bear fruit. Infrastructure assets possess a number of very attractive attributes: (1) They usually (but not always) require minimal ongoing capital expenditure. (2) They possess high barriers to entry, limiting potential competition. (3) They often appreciate in value over time and provide a nice hedge against inflation. Infrastructure assets also last a long time, up to 100 years on some assets. So return on investment tends to increase over time.

Yet for all of these virtues, the big institutional money has only just started getting into this area. Today, institutional investors on average commit only 1% of their capital to infrastructure investments, versus about 6% to traditional real estate. Flatt, a talented investor with vision (and a great track record), says the opportunity in infrastructure is similar to that of real estate a couple of decades ago. In fact, he asserts that infrastructure is “the next real estate.” In other words, values for the assets will boom, at the same time that investment interest also booms.

For example, Flatt notes that the market value of publicly traded real estate securities was only about $20 billion in 1990. Today, real estate stocks worldwide boast a market capitalization above $700 billion. Flatt believes the market for infrastructure stocks will expand in similarly dramatic fashion.

Brookfield has already been an outstanding performer since I recommended the stock in February 2005. But I believe a lot of good news lies ahead still. Sometime in early 2008, BAM shareholders will receive new shares of a company called Brookfield Infrastructure Partners (BIP) – an entity dedicated to the operation of infrastructure assets. BAM shareholders will receive one unit in this new company for every 25 shares they own. Brookfield will retain a 40% interest in Brookfield Infrastructure Partners (BIP) and will manage the company under a long-term contract. BIP will possess two main assets:

  1. Transmission lines – Over 5,000 miles of transmission lines in Chile, serving 98% of the country’s population. Also, another 1,300 miles of transmission lines in Brazil and 340 miles in Canada. The Canadian lines are an important part of that country’s grid.
  2. Timber – Approximately 634,000 acres of timberland located principally on Vancouver Island, mostly high-value Douglas fir, hemlock and cedar. BIP will also hold another 588,000 acres of similar timberland in Oregon and Washington. Though timber may not normally be thought of as an infrastructure asset, it has all the financial characteristics of an infrastructure asset.

So about 62% of BIP’s assets will be transmission lines, while 38% will be timberlands. About 48% of book value is in South America and 52% in North America. The hydroelectric assets (i.e., the dams) stay with BAM. Going forward, BIP will be the vehicle Flatt will use for any new investment in infrastructure assets – such as highways, pipelines, ports, rail lines, airports, water utilities or other utilities.

Brookfield estimates that it would price BIP at 14 times its annual cash flow of $70 million – or about $25 per unit (there are 40 million units, all told). The partnership should provide about a 5% annual yield based on its expected payout of 65-75% of cash flow.

The idea behind this spinoff is to better showcase the company’s infrastructure assets and get a higher value for them in the stock market, rather than burying them in BAM’s vast empire. Overall, though, the spinoff should have little impact on BAM directly. I peg BAM’s net asset value (NAV) somewhere between $35-43 per share, compared to a current share price of $38.00. The effect of the BIP spinoff should knock around $1 off BAM’s share price.

More than one quarter of BAM’s NAV comes from its power assets. The company is the largest independent provider of hydropower in North America. One third of BAM’s NAV comes from its rapidly growing investment management business. The company manages over $70 billion in assets. Bruce Flatt and his team have been growing the company’s NAV every year.

I like BIP as a long-term income play. That 5% yield will be nice with plenty of opportunities to grow ... as infrastructure becomes the next real estate.

Link here.


Stampede into euro ignores reality that Europe is in no better shape the U.S.

The die is now cast. As the euro brushes $1.50 against the dollar, it is already too late to stop the eurozone hurtling into a full-fledged economic and political crisis. We now have to start asking whether the EU itself will survive in its current form.

It takes 18 months or so for the full effects of currency changes to feed through, so the damage will snowball late next year and beyond into 2009. Although “damage” is a relative term. As Airbus chief Thomas Enders warned in a recent speech to the Hamburg workers, Europe’s champion plane-maker – the symbol of European unification, in the words or ex-French president Jacques Chirac – is now facing a “life-threatening” crisis.

So much for all those currency hedges that analysts like to cite. Have they ever tried to buy a currency hedge? They would discover how expensive these instruments are. Hedges cannot protect a company with $220 billion in delivery contracts priced in dollars, when the euro/sterling cost-base is leaping into the stratosphere.

The sudden rocketing in sovereign bond spreads this week between core German Bunds and Club Med debt – Italian, French, Spanish, Portuguese, Greek, as well as Irish, Belgian and Slovenian – is a clear sign that markets are starting to price in a break-up risk for the single currency, however remote. Italian spreads have risen beyond the danger point of 40 basis points. This is less than the 100 basis points or so seen in Quebec (viz Ontario debt) when it looked as if the separatists might prevail, but it is dangerous nevertheless.

Moreover, these bond spreads are telling us that liquidity is drying up and that monetary policy is now too tight for the eurozone, as it is across much of the developed world. Two-year bond yields are collapsing in the U.S., Britain, and the Anglo-Saxon states, a signal that markets are now discounting possible recession. The whole central banking fraternity seems behind the curve, spooked by residual (lagging) inflation – and prisoners of a defective economic model (Neoclassical/New Keynesian synthesis). This is how the 1930 recession metastasized, although one doubts that Ben Bernanke will allow Part II to unfold this time. He has spent half his life studying the blunders of the Fed in 1930-1932.

One thing is sure, President Nicolas Sarkozy will not let Airbus go bankrupt, nor see decimation of the French industrial core, without an almighty fight against those countries deemed to be engaging in a beggar-thy-neighbor strategy of currency devaluation – benign neglect in Washington, less benign in Beijing. He will have allies soon enough, once the housing bubbles collapse in Spain and across the Med. A new political order will soon take hold in much of Europe, bringing in a new wave of prickly national populists.

So, how will they fight? Will Mr. Sarkozy and his allies resort to 1970s-style exchange controls to stem the rise of the euro? They have the power to do so. Any decision would be taken by EU finance ministers under qualified majority voting. Britain would have no veto, even though the effects of such a move on the City of London would be catastrophic – and trigger the certain withdrawal of Britain from the EU (and good riddance, some might say in Paris).

A “disturbing” capital movement is occurring right now. Portfolio inflows into the eurozone reached a record €46.2 billion in September. China, Asian wealth funds, Petrodollar sheikdoms, and now even Nigeria, have all joined a stampede into euros, utterly disregarding the underlying reality that Europe is in no better shape the United States itself. It is in worse shape, though this is disguised by the cycle. It is much worse in terms of economic dynamism and demographics.

Confidence has cratered in Germany, and the Netherlands, not to mention Belgium – which has not had a government for 165 days, and is now sliding towards disintegration. Since Belgium is a metaphor for the EU – an arranged marriage of squabbling tribes, speaking different languages, who do not love each other, and never did – this in itself amounts to a tremor for the EU system. EU industrial orders fell 1.6% in September. Spanish, French, South Italian, and Irish house prices are already all falling.

Spreads on the iTraxx financial index of 25 European bank and insurance bonds have jumped to a fresh record, worse than during the depths of the August crunch. The iTraxx Crossover of low-grade corporates is back to crisis levels above 400. The European Covered Bond Council suspended trading in covered bonds this week because the spike in spreads had become disorderly, and 3-month Euribor rates have gone through the roof again, and that is the rate that sets Spanish and Irish mortgages. Bond issuance in Europe is frozen.

France is in the grip of a national strike costing €2 billion a day. The railways are paralyzed. The country’s 5.2 million public workers are staging walk-outs. Is this a currency bloc that should be now be deemed the ultimate safe-haven, the repository of trust in a dangerous economic world? This hodge-podge of disputatious clans, lacking a central Treasury, government, debt union, and guiding philosophy? Let alone the sacred solidarity of a nation?

Exchange controls is the nuclear option, but Europe’s politicians could equally invoke Article 104 of the Maastricht Treaty giving politicians the power to set fixed exchange rates (by unanimous vote) or a dirty float for the euro (by majority). The document is annexed to the Commission’s 2003 EU Economic Review. Nobody paid any attention at the time, just as the Commission had hoped – at least that is what one of the authors told me. This is the EU’s Monnet Method, one silent fait accompli after another.

French President Nicolas Sarkozy certainly seems inclined to go this route. He has again invoked his ideas for “Community Preference”, i.e., a closed trade bloc, in a speech this month to the European Parliament. Contrary to claims, he is not letting go of his mercantilist plans.

The ECB may or may not intervene in the currency markets to cap the euro. But this is a red herring. Europe’s retort – if and when it comes – will be far more political, and far more dramatic. We are at one of History’s “inflexion points”.

One recalls the months leading up to the collapse of the Gold Standard in 1931. That was triggered first by Credit Anstalt in Austria and then by a British naval mutiny in Scotland. Any bets on what will trigger the collapse of Bretton Woods II? I wager that it will be a decision by the Gulf states to break their dollar pegs, leading to a temporary surge of euro purchases. That will tip Mr. Sarkozy over the edge.

Just idle speculation.

Link here.


Watch currency market charts long enough and you will see them everywhere: those moments on a chart when the market first swings wide up and down, then less so, then the swings narrow even more ... Then for a while it seems the market is stuck, going only sideways, until – boom! – it launches into a wild spike that takes it far, far, and away.

Triangles are what Elliotticians call those contracting swings in the charts. One of the triangle patterns in Elliott wave analysis is called a “contracting triangle”. It is usually a sideways move comprised of 5 waves, A-B-C-D-E. They most commonly form in 4th waves. And when one ends, the resolution is usually sharp and swift.

In forex, you most often see contracting triangles around the time when economic numbers are released. The media usually attributes the swift post-news moves to the news itself, but the news is rarely the real reason. A triangle that precedes a news release reflects a balance of forces, and this tug-of-war between the bulls and the bears simply has no other choice but to resolve in a violent price spike.

Triangles appear in all time frames. A longer-term example is that for the whole of 2005 the Japanese yen “tumbled despite many bullish indicators: a big stock market rally in Tokyo, big foreign purchases of Japanese stocks and burgeoning optimism that Japan’s economy.” (The Wall Street Journal) The yearlong decline came as a surprise to most analysts because they presumed that since Japan’s economy was getting stronger, so should the JPY. That makes sense – but common sense is not what moves the markets. To an Elliott Wave trader, the expectation for the yen’s weakness in 2005 was obvious. In January 2005, long-term USDJPY charts showed a multi-year A-B-C-D formation shown in this chart.

On ays when major news or economic data come out, the forex market often moves in the opposite direction of where the news suggests it should. Forex analysts use the word “despite” a lot. Once you learn to spot triangles, you will learn to forecast the market move before the news gets released, and regardless of what it says. The trick is to remember that triangles usually resolve in the direction of the larger trend. Because contracting triangles most often appear in wave 4 (always corrective), just look which direction, up or down, waves 1 and 3 (always impulsive) were headed, and you will have a good where wave 5 – the post-triangle impulsive thrust – will likely go, too. This intraday USDJPY chart helps explain this concept.

Contracting triangles are a useful and simple chart pattern that does a great job of warning you of impending market breakouts. You can learn more about them in Chapter 1 of The Elliott Wave Principle – Key to Market Behavior.

Link here.


The U.S. Dollar has plummeted over 35% against a basket of world’s leading currencies, including a new, all-time low against the euro. And, in the spirit of Thanksgiving, let us be the first to say, the greenback is about as popular right now as the Church of England on Plymouth Rock, circa 1620.

But do not just take our word for it. On November 16, the oil ministers of both Iran and Venezuela held what was meant to be a “private” meeting to discuss an alternative pricing reserve to the “weak dollar”. Confidentiality was breached when the conversation was accidentally recorded for live broadcast television AND a frantic security guard ran into the room screaming, “Kill the Cable! Kill the Cable!” At the official OPEC summit on November 18, however, Iran’s President and Venezuela’s leader made no attempt at keeping their own anti-dollar sentiment secret.

One might wonder about the ulterior motives of such comments – but, what about the emerging dollar-bashing-bears who have no political aspirations, but instead, herald from the world of Hip-Hop and High Fashion?

A November 19 International Herald Tribune spills the inside scoop: In the most recent music video by Rap sensation Jay-Z, he flashes a fistful of euros to signify his exorbitant wealth ... not U.S. dollars. In a similar move, Brazilian bombshell model Gisele Bundchen demanded she be paid in euros – not bucks – for certain advertising campaigns. In the words of the Tribune reporter, the realization that the “dollar has lost its dominance” has entered the “new territory of Pop Culture.”

Not so “new”, really.

Try December 2004. At the time, the U.S. dollar had plunged 36% to a then record low against the euro. By then, dollar bearishness had become so ingrained that non-financial publications and the entertainment media alike were joining in the dollar doomsday chorus: A 2004 Newsweek cover story exclaimed “The Incredibly Shrinking Dollar”. A groundbreaking Saturday Night Live skit depicted a bullied buck being teased and taunted by its brawnier counterparts.

Right as the final nail was being hammered into the greenback’s coffin, though, the currency came alive. On December 30, 2004, the dollar took step one of a 12-month long, 15% rally to its highest level in 19 months. Flash ahead to today and the wheels of the dollar doomsday bandwagon roll their way onto the oil cartel, to the catwalk, and to the Rap music-recording studio. Whether they are also about to roll their way off the side of a cliff ...

Link here.

Money ain’t a thang.

As the dollar continues to lose favor around the world, we may have seen the biggest decline in the popularity of the once universal currency. As reported in several different news publications over the past few weeks, rap star Jay-Z has recently showed fans that he no longer believes in the almighty dollar, either.

In the video for “Blue Magic”, the lead single off his new album, American Gangster, Jay-Z is seen thumbing through stacks of €500 notes. That is what it has now come to – euros are cool; dollars are not. Jay-Z told us so, and now we must listen.

It did not take long for the dollar’s slide to reach the level of pop culture. But just as foreign governments and high-powered investors have turned their attention away from the dollar, so too has this powerful rap mogul told the world that the real money is the euro. Remember, hip-hop had previously told us that it was “all about the Benjamins.”

Jay-Z does not specifically come out and denounce the dollar in the lyrics of the song, but the imagery cannot be coincidence. The video takes place in the heart of Manhattan. American dollars are still the unit of exchange in New York, but you would not know that from this video. It is there that the superstar, who has made himself plenty of dollars over the past decade, shows the world that he now has no need for them.

If you think that Jay-Z’s endorsement of the euro over the dollar should have no serious effect on the world, think again. Jay-Z, as well as other rap stars, has shown that his influence can be very important when it comes to the popularity of one particular product. This is also true outside of the hip-hop community, as it has recently bled into other products.

Are millions of American kids who idolize Jay-Z now going to be asking that Abercrombie & Fitch pay them in euros instead of dollars? Probably not. But it does show the remarkable way that the world operates out of trends. We have already heard the stories about Gisele Bundchen requesting to be paid in euros, or Bette Midler being paid in South African gold coins in the 1970s. What is next?

Many savvy investors have already turned to investing in other foreign currencies and taking their money out of the dollar. Billionaire Warren Buffett has advised investing in companies that pay in foreign currencies.

People may not want to take advice from Jay-Z on how to plan their retirement, but his willingness to show the euro as a currency associated with wealth and prestige may be a sign of things to come. Since the beginning of this year the dollar has been living a hard-knock life, while the euro appears to be big pimpin’.

Link here.


Just who would want to buy yesterday’s fiat paper?

“As international investors wake up to the relative weakening of America’s economic power,” says The Economist, “they will surely question why they hold the bulk of their wealth in dollars.” Indeed, “The dollar’s decline already amounts to the biggest default in history,” notes the venerable weekly, “having wiped far more off the value of foreigners’ assets than any emerging market has ever done.”

But the U.S. government pulled off a far greater debt default more than three decades ago – an absolute default that somehow, incredibly, allowed the bankrupt to continue growing his debts at an ever-quickening pace. Whatever you think of gold as a measure of value or price today, Richard Nixon reneged on the terms of U.S. borrowing – as they then existed – when he shut the “gold window” at the New York Fed on August 15, 1971. The U.S. dollar was no longer redeemable for gold, a crucial commitment under the Bretton Woods Agreement signed amid the rubble of World War II. Foreign governments, not least in Europe, found the terms of their lending were void.

The immediate outcome – and the obvious aim – was to usurp gold as the world’s premier monetary asset. The dollar had secured Bretton Woods’s stability, but it was still just the chain, not the anchor. And it had faced trouble from gold as early as 1965, when French President Charles de Gaulle baulked at “America’s exorbitant privilege” of issuing paper that no one else could refuse.

The paper-made dollar has now measured all things, and paid for them too, for more than 36 years. The #1 currency held in central bank reserves, it has been greeted by cheering crowds during most of its reign. And across much of its empire, the dollar still has client kings only too happy to applaud it in public.

Zhou Xiaochuan, head of the People’s Bank of China, told Henry Paulson at a meeting of G-20 economic leaders in Johannesburg last week that China supports a strong U.S. dollar. Chucking Paulson’s throwaway phrase right back in his face – the U.S. Treasury secretary again said, “A strong dollar is in our nation’s interest,” on November 19 – must have raised a laugh from the other central bank delegates. Either that, or it gave them heartburn. The U.S. Treasury loves a strong dollar. Beijing loves it too. So how come the damn thing now looks all puny and weak?

“Buying currency is like buying a little bit of an economy,” says Germany’s Süddeutsche Zeitung newspaper. “That’s why the fall of the U.S. currency has political and economic implications far beyond the present financial market crisis.”

“They get our oil and give us a worthless piece of paper,” Iranian president Mahmoud Ahmadinejad spat. But for now – and unless Iran really wants the USS Enterprise to divert its bomber flights from Afghanistan to Tehran – worthless paper is all the U.S. has to offer. That leaves America’s biggest creditors, like all big-time lenders, stuck with a quandary.

China, Saudi Arabia, South Korea and Japan all want it both ways. They would like their debtor – the U.S. – to both settle up now ... but also keep spending more money. If the dollar were to strengthen on the back of, say, higher U.S. interest rates, the resulting loss of U.S. consumer spending could destroy their economies.

But in the EU, the drop in the dollar is really starting to hurt – not least because the massively weaker dollar is weaker only in terms of the euro. That means exports from China are also cheaper thanks to the dollar-linked yuan. That is why the Chinese currency, the yuan, remains closely pegged to the U.S. dollar. Allowing it to float freely instead would just invite hedge fund speculators and investment funds to buy a piece of the Middle Kingdom’s future. They would sell the current world #1 to achieve it, long before China got a chance to spend its $1.43 trillion in foreign currency reserves.

Hence the unstoppable rise of the euro. “It could easily climb to $1.60,” reckons Peter Bofinger, “an appreciation of another 10%, which would eat into annual economic growth [in the eurozone] to the tune of half a percentage point.”

What to do? I do not doubt that the U.S. subprime crisis will continue to go global. So central banks the world over will soon try to fend off recession by devaluing their currencies alongside the dollar. “I think we’re now at the point where other central banks will join the U.S. Fed in cutting interest rates,” said Benedikt Germanier, currency strategist at UBS in Zurich. “The Bank of England will join, and we also, in fact, expect by the second quarter of next year the ECB will join. ... So while it keeps the dollar weak for now, there’s scope for other central banks to cut rates too, and that could eventually put a floor under the dollar.”

Such a race to the bottom, however, might come too late for the eurocrats in Brussels. EU commissioner Peter Mandelson warned Beijing on November 23 that China may face “anti-dumping” trade tariffs if it fails to address its ballooning trade surplus. Jean-Claude Trichet, head of the European Central Bank, is set to officially request that the PBoC let the yuan float more freely against the basket of currencies that have already replaced its dollar peg, easing pressure on the euro as the world’s #1 long for its growing short-dollar position.

But what can the eurocrats offer Beijing in return for no longer pursuing its national interests on the currency markets? To soothe China’s fears of a rout of the dollar – and a rout denominated in yuan, rather than euros, at that – might they drop Bofinger’s crazy scheme into conversation, we wonder.

“It is not just enemies of America like the presidents of Iran and Venezuela who are ridiculing the United States,” the Suddeutsche Zeitung tells its German readers. “In Europe too, some dream of the end of the superpower. They should remember that just seven years ago, the euro could buy only 82 American cents and there was speculation over the end of the EU’s currency. [Now] the dollar may well lose its role as the world’s unofficial currency. As long as the shift is not too abrupt, that could be good news for the global economy.”

Oh really? Just how could King Dollar abdicate his throne without unleashing open revolt?

“During the third quarter of 1999, European central banks had become increasingly concerned at the danger of an uncontrolled fall in the gold price that would reduce the value of their own holdings,” explained Philip Klapwijk, head of the GFMS consultancy in a 2003 paper for the London Bullion Market Association. “This fear, coupled with the need to provide a framework for Swiss and British gold sales, plus other intended disposals, led to the deal announced in Washington [in September 1999] to limit sales to 2,000 tonnes over five years and to cap lending and derivatives activity at existing levels.”

You can guess why “Wise Men” like Peter Bofinger think the Central Bank Gold Agreement (CBGA) offers a model to Asian and Arab governments looking to move beyond the dollar standard. Since the CBGA began a little over eight years ago, the gold price has not only found its floor. It has soared nearly three times over against the U.S. dollar. The CBGA, therefore, stands as a paragon of crossborder co-ordination. And if sales quotas and agreed ceilings could work for the gold market, why can they not work for the dollar? Hmmm ... let’s see now:

Once the dollar loses its role as the supreme “reserve currency”, on the other hand, just what other uses might it be put to exactly – wallpapering the inside of central bank vaults? Rolled up for use in the People’s Bank restrooms? Just who in the hell would want to buy yesterday’s fiat paper?

Link here.


Housing bubble had nothing to do with him, so we are told.

Bloomberg (Robin Wigglesworth and Craig Stirling): “Former Federal Reserve Chairman Alan Greenspan said he has ‘no particular regrets’ about his time at the central bank, adding that the deepening U.S. housing-market slump isn’t a result of his policies. ‘Markets are becoming aware of the fact that the decline in house prices is not stopping,’ Greenspan said ... ‘I have no particular regrets. The housing bubble is not a reflection of what we did, as it is a global phenomenon.’”

Bloomberg (Anthony Massucci): “Former Federal Reserve Chairman Alan Greenspan said the dollar’s decline hasn’t affected the global economy and is a ‘market phenomenon.’ ‘So long as the dollar weakness does not create inflation, which is a major concern around the globe for everyone who watches the exchange rate, then I think it’s a market phenomenon, which aside from those who travel the world, has no real fundamental economic consequences’ ...”

I do not know which of the two above quotes this week from Alan Greenspan I find more astounding. They are somehow equally despicable. The Greenspan Fed’s fingerprints are all over the housing Bubble – at home and abroad. And they are everywhere when it comes to heightened global dollar and currency market tumult. Our much revered former Fed Chairman is making a fool of himself, a spectacle not all too supportive of confidence in our policymakers, credit system, or currency.

Whether he will admit it or not, mortgage credit inflation was central to the Fed’s post-tech bubble reflationary strategy. It really was a “Great Experiment” in inflationist monetary policy and, predictably, it failed miserably. The Fed and some notable Wall Street “strategists” feigned a system-wide “price level” that the Fed was obligated to adeptly manipulate to ensure that that evil “deflation” was not allowed to take root. What a crock. The risk was, then as now, U.S. credit collapse – and certainly not a somewhat deflating price level. Accommodating history’s most reckless credit expansion over the past six years then ensured that the risk of collapse grew significantly greater while countermeasures turned increasingly unavailing.

I will assume that the Fed simply lost control of mortgage Credit excesses. And as the risk of a devastating housing bust escalated, the Greenspan/Bernanke Fed became more ideologically intransigent in their opposition to pricking asset bubbles. In this regard, Dr. Bernanke was Greenspan’s ideal surrogate. Unfortunately, we are about to experience the consequences of the fundamentally flawed policy of ignoring bubbles while they are inflating, choosing instead to wait for post-bubble “mop up” duties.

It was Greenspan himself decades ago that placed responsibility for the Great Depression on the Fed for repeatedly inserting “coins in the fusebox” during the Roaring 20s. How differently would the world look today had the Fed not cut rates to 1% and left them at ultra-low levels for several years? How different would it be if the GSEs had kept their power dry, retaining financial resources to assist the mortgage market during this downturn instead of shooting all their bullets and more perpetuating the fateful mortgage finance bubble? How differently would it be today if the dollar were fundamentally strong, instead of a currency carelessly debased to perpetuate an economic bubble?

As gatekeeper for the world’s reserve Credit system and currency, to pass off our unfolding housing and financial messes as “global phenomena” would be laughable if it were not so serious. “No particular regrets”? Somewhere along the line the Fed lost sight of its fundamental mandate and responsibility – to protect the soundness and stability of our financial system and economy. Doubling our entire stock of mortgage debt in just over six years is certainly not consistent with price stability, financial stability, or economic stability – no matter what the reading on “core” CPI. And $800 billion current account deficits are an abomination and talk of a global “savings glut” shameful economics.

Moreover, it was our credit system that led the world in the proliferation of securitizations, derivatives, leveraged speculation, credit guarantees/insurance and highly tangled debt structures. And throughout his 18-year reign, Mr. Greenspan was the most vocal proponent of “Wall Street finance”. If he were any kind of statesman, he would today at least be willing to admit where mistake were made.

U.S. mortgage excesses blighted the world. Credit systems around the globe adopted Wall Street securitization and derivatives practices, while incorporating uniform “risk management” strategies. Wall Street cut loose leveraged speculation to overrun financial systems around the world, while our current account deficits were often “recycled” back to high-yielding “structured products”. And while not commonly recognized, U.S. mortgage credit excesses and attendant current account deficits concurrently debased the dollar while unleashing credit systems globally. A complete lack of discipline, evolving into outright recklessness, at the “core” nurtured rampant credit and speculative excesses at the “periphery”. And, let there be no doubt, monetary toxicity has progressed to the point where it has severely affected global economic structures. The situation will not be rectified by central bankers and an even greater bout of credit inflation.

It is no coincidence that Greenspan made such ridiculous comments this week. As it has become increasingly apparent to the world that U.S. mortgage finance and the dollar are impending fiascos, our former Fed chairman is compelled to disavow responsibility. The housing Bubble is a “global phenomenon” and dollar weakness a “market phenomenon” with “no real fundamental economic consequences.” It is stunning, and I can only contemplate how such nonsense sits with central bankers at the ECB, The People’s Bank of China, The Reserve Bank of New Zealand, other European central banks, in the Middle East, and in Asia.

Outside of radically shifting financial, economic and geopolitical power away from the U.S. to the rest of the world, perhaps our policymakers’ neglect of our currency has not been of real consequence. Historians will look back at this period and have difficulty comprehending how a nation could have so indecorously squandered the benefit and privilege associated with reigning over the world’s reserve unit of exchange.

Especially when it comes to energy resources, dollar devaluation has had momentous real consequences. Our vulnerabilities have been further exposed, while the standing of our competitors has been enhanced and our enemies empowered. Worse yet, the leading beneficiary of U.S. inflationism has been the most unstable tinderbox region of the world. It is precisely these types of momentous inflation and economic consequences that manifest into financial and economic upheaval and calamitous global conflicts.

Thanksgiving week was short but eventful. The credit disaster unfolding at the GSEs came into clearer focus with the release of earnings from Freddie Mac. Agency debt and MBS spreads widened markedly. The mortgage implosion was at the brink of a major turn for the worst, with liquidity concerns spurring significantly wider credit default swap prices for Rescap, GMAC, Countrywide, the Credit insurers, and financial institutions generally. The dominoes are lined up. Yet it is this type of acute stress that has always in the past extorted aggressive policymaker action. The Fed’s traditional tool box, however, is woefully deficient to deal with impending credit collapse.

Link here (scroll down).


Love means never having to say you are sorry, wrote Erich Segal in his 1970 best-selling book, Love Story. But bull markets operate on the opposite belief – that when people feel more tied into the world around them, more magnanimous, open and free, they find it easier to apologize to one another for past transgressions.

In a bear market, though, it is Love Story all over again. No one feels like they need to say they are sorry anymore. The latest Elliott Wave Theorist includes a piece about this phenomenon, written by Mark Galasiewski of the Socionomics Institute. Socionomics is the science of history and social prediction based on the Wave Principle.

The Elliott Wave Theorist identified the relationship between the financial mania and the trend toward forgiveness as early as 1995:

In bear markets, anger, fear and the urge to destroy overcome the social conscience. Remorse, on the other hand, is a bull market trait born of the larger trend toward inclusionist impulses ... The peaking social mood has brought apologies for a host of transgressions that are decades, generations, and even centuries old. After years of bickering, the Japanese government reached a “compromise” apology for its part in World War II. At a recent press conference, President Clinton resisted considerable public pressure to ask forgiveness for bombs dropped on Japan eight administrations ago. A group of ethicists and historians has decided that financial compensation and a formal government apology is due victims of secret human radiation experiments conducted in the U.S. during the Cold War ...

Apologies in 1998, 1999 and 2000 made the greatest 3-year total within the topping years, and there was a record one-year spike in 2002, when other measures of sentiment, such as the number of S&P 500 futures contracts held by small traders, also made their all-time peaks. Since then, however, annual apologies have not kept pace with price, suggesting that the wave of reconciliation that took off in the early 1990s is almost exhausted. Once the bear market resumes, expect the public’s willingness to acknowledge past wrongs to become itself a thing of the past. In its place will be an impetus to act in ways that will require apologies later.

Historical apologies have increased dramatically in the past 15 years, along with the stock market. The coincidence is not random. Both are driven by the wave of positive social mood that took off in 1982.

Other aggrieved parties seeking apology or compensation would be wise to push their causes swiftly, while historical wrongs still garner the public’s sympathy. With the stock market on the verge of a major collapse, the window of opportunity for the redress of grievances is rapidly closing.

Link here.
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