Finance Digest for Week of March 20, 2006

RUSSIAN TYCOON BUILT A FORTUNE BY TURNING MIDDLE-CLASS RUSSIANS INTO DEBT-ADDICTED CONSUMERS

Moscow was a dreary place when Roustam Tariko arrived in 1979, at age 17, from a small village in far-away Tatarstan. He saw food shortages, homelessness and rampant alcoholism. “Everyone was afraid about everybody and everything,” he recalls. Yet Tariko also saw excitement and opportunity. He rode the city’s Metro for hours, observing the throngs in their daily lives. He took classes to prepare for enrollment at a Moscow college. He cleaned streets in return for an apartment in the center of town.

Everything has changed since then. The city is marked by ostentatious displays of consumerism – billboards for Rolex and other luxury goods surround even the Kremlin – and Tariko has amassed an estimated $1.9 billion fortune. Tariko made this fortune, and acquired his toys, by seizing on the insight that even ordinary Russians want a taste of the good life. Just as the nation began to open to the West, Tariko started importing Italian chocolates and liquor. Then, under the banner of Russian Standard Group, he created a brand of his own: the $10 Russian Standard vodka (a lot for most Muscovites). And amid the misery of the 1998 Russian banking crisis he founded Russian Standard Bank, a pioneer in consumer credit that gave millions of his countrymen their first opportunity to buy dishwashers, TVs and refrigerators.

These companies have all reaped the benefits of Russia’s natural resources-fueled economy, humming at 6.5% annual growth since the end of the financial crisis. He is selling 1 million cases a year of his vodka. Russian Standard Bank has issued 9.1 million credit cards and holds $4 billion in credit card and other loans – at interest rates of up to 40%, and a nonperforming loan rate of up to 5% – making it the nation’s biggest consumer lender. But still bigger fortunes – and perils – lie ahead. Last April Tariko signed a deal with American Express to become the exclusive Russian issuer of its branded cards. He plans to sell Russian life insurance and expand his bank into mortgages, as well as further into Russia’s hinterlands and beyond its borders. And he wants to turn his vodka business into Russia’s first consumer-focused multinational. Last year it entered the tough U.S. market under the name Imperia (at $28 to $34 a bottle), and Tariko vows he will outspend anyone there to succeed. “We will do everything to make it happen in America,” he says.

To finance Russian Standard, Tariko floats medium-term, junk-rated bonds denominated in rubles and euros, with $1.2 billion outstanding as of last June, at an average rate in dollar terms of 7.9%. Repaying the debt will require lots of new customers. But there is plenty of room for growth. As Barclays Capital recently noted, consumer lending equates to just 3% of Russia’s annual GDP, compared with 66% in the U.S. Two years ago the French bank BNP Paribas offered to pay Tariko an estimated $300 million for 50% of his shares. The sale fell through – the betting is that Tariko realized he was selling too cheaply. Still, the offers continue. Tariko is sitting on a collection of pitch books from investment firms in Europe, Russia and the U.S.

Can anything stop him now? Competition, perhaps. In consumer lending he faces threats from Citigroup, Société Générale, the Austrian Raiffeisen Bank and better capitalized Russian outfits. And the Russian economy is still something of a wild gamble. Any sort of downturn could make repayment of those junk bonds awfully tough.

TYPICAL U.S. FAMILY IS SHY ON SAVINGS

Meet the typical American family. With about $3,800 in the bank, no one has a retirement account. Mutual funds? Stocks? Bonds? Nope. The house is worth $160,000, but the family owes $95,000 on it to the bank. The breadwinners make more than $43,000 a year but cannot manage to pay off a $2,200 credit card balance. Only 49.7% of American families even had a retirement account in 2004. That is the portrait of the median American household as painted by the Federal Reserve Board’s 2004 Survey of Consumer Finances. The survey, the latest figures available, does not distinguish between sizes of families, but it offers the most detailed look available of the balance sheet of U.S. households. The data comes from a survey of 4,522 American families.

The Washington Post asked a half-dozen financial planners to review the Fed data about what different groups of Americans own and what they owe. They were asked what advice they would give someone confronting the financial situation faced by the average American, using median numbers. The median is the midpoint at which half of the population is above and half is below each indicator. They do not like what they see. “This is awfully sobering,” said Peter Speros, managing director of Sullivan, Bruyette, Speros & Blayney, a Virginia wealth-management firm. “These numbers are just so much worse than I would have thought. It’s a real eye-opener.”

HOMEBUYERS CAN LOSE MONEY EVEN IF HOUSE PRICES DO NOT FALL

There have been a lot of moves up and down The Economist’s global house-price league in the past couple of years. In 2003 Australia and Britain topped the table with 12-month rises of around 20%. But prices there have since leveled off and in the past year have broadly kept pace with inflation (see table). Hong Kong has also tumbled down the league: after a 30% jump in 2004, prices have risen by only 5.8% in the past 12 months and since last summer have even fallen. In the past year house-price inflation has also fallen by more than half in South Africa and China, and slowed from 17% to 13% in Spain. The new high flyer is Denmark, where prices are 17.7% higher than a year ago, followed closely by New Zealand (16.8%).

America’s boom also remains strong, with prices up by 13% in the year to the fourth quarter. But there are signs that the market is cooling. Sales of existing homes fell for a fifth month in January, to the lowest for nearly two years, Stocks of unsold homes rose to 5.3 months’ supply (from 3.7 a year ago), the most since 1998. Ian Morris, an economist with HSBC bank, calculates that about half of America’s housing market is experiencing a bubble, with prices overvalued by almost 40% even after taking account of low interest rates. Homes in California and Washington, DC, are overvalued by 50%.

That house prices in Britain and Australia have flattened rather than slumped has encouraged most commentators to expect a soft landing in America too. However, that could still mean a hard bump for the economy and for many homeowners. As British property prices have levelled off, the annual growth rate of retail sales has plunged from 7% to 1%. Mr. Morris calculates that even a perfect soft landing in America, with flat house prices across the country, could cause home sales to drop by 30-40%. In turn, mortgage equity withdrawal, which has been financing much consumer spending, would then dry up, creating a drag on growth equivalent to more than 3% of GDP.

British homeowners may comfort themselves that, contrary to The Economist’s predictions, prices have not fallen. With homes still remarkably dear, prices could yet fall. Or they could stagnate for a long time. And even then, housing investors could lose because transaction costs and taxes are so high. Suppose you bought a flat in London for £500,000 ($870,000) and sold it five years later for the same amount. If you put down a deposit of £50,000 and took out an interest-only mortgage, then stamp duty, legal fees and other costs on the purchase were almost £20,000; five years’ maintenance cost £10,000. Your selling costs were then, say, £15,000. Of your £50,000 deposit, you now have £5,000 – a 90% loss. Had you simply put the cash in the bank, you would have made 20%. Because rental yields are so low, you have paid more in interest over the five years than you would have done in rent. In most other countries, where transaction costs are typically twice as large as in Britain, the loss could be bigger still. Investors be warned: even if prices do not fall, housing is not, so to speak, as safe as houses.

Boston minority and immigrant homeowners stretched perilously.

If the nation’s real estate boom collapses, its first victims may well be low-income minorities and immigrants in a big U.S. city like Boston. That is the picture emerging there as foreclosures rise and the housing prices falter. More than one-quarter of Boston’s mortgage-holders appear to be stretched thin financially, spending at least half their income on housing, according to an analysis of census figures. That is more than twice the national average and the highest of any major city except Miami.

The trend is especially worrisome, the analysis shows, because these vulnerable homeowners tend to be minorities and immigrants who, experts say, often hold the riskiest mortgage loans. The threat has implications not only for Boston, whose population would have shrunk without an influx of immigrants, but for the U.S. A real estate slump could erode America’s rate of homeownership, which has reached record levels in the past decade. “Getting homeownership up is a good thing,” says Andrew Sum, director at the Center for Labor Market Studies at Northeastern University in Boston. Many minorities and foreign-born residents became homeowners during this real estate boom. But boosting home ownership is not worth it for those at “risk of losing financial control,” he adds.

Typically, homeowners should spend no more than 30% of their income on housing, financial planners say. “Carmen” is one of many Boston homeowners who are stretched much further. A native of Puerto Rico, she and her husband, from El Salvador, bought a $342,000 home in the city’s East Boston neighborhood in 2002. They could manage the mortgage. But then unexpected taxes in their contract pushed up their monthly payments – twice in a single year. Her husband lost his job as a chef. “It all came at once,” Carmen recalls. “We were crying so much. We almost lost our home.” Then she took on more hours as a nursing assistant, and her husband found work as a marble-cutter. Now, they limit their cellphone calls. They rarely eat out and have cut out the weekend trips they used to take. Still, mortgage payments soak up almost all their income. “I am telling all the Spanish-speaking people, don’t do it,” says Carmen of homeownership. “If I lose my house, I will get out of here. It’s not worth it.”

Other Bostonians are under similar pressures. Fully 27.1% of the city’s homeowners with a mortgage spent at least half their gross income on housing in 2004, according to the latest census figures available. Those costs, which include utilities and insurance as well as mortgage payments, were more than double the national rate of 11.7% and topped New York (25.9%), Los Angeles (26.5%), San Francisco (20.4%), and Chicago (20.3%). Of the 25 biggest cities, only Miami had a higher rate (35.8%). A shift in market forces is now putting many of these vulnerable Boston homeowners into a double bind. Rising interest rates are pushing up the costs for those who have adjustable mortgages. At the same time, these homeowners are finding it harder to sell. The number of homes sold in Massachusetts dropped a whopping 21% in January compared with a year ago, the largest year-to-year decrease in monthly home sales in a decade. As a result, home values have begun to soften. Statewide, they actually fell slightly in January compared with a year ago.

Such pressures are forcing a rising number of homeowners to erase their debts by forfeiting their homes. Foreclosure filings in the county that includes Boston nearly doubled in January from a year ago, ForeclosuresMass. says. Homeowners “call us and are heartbroken,” says Robert Pulster, executive director of the Ecumenical Social Action Committee, which works with Boston residents on the brink of losing their homes. “They thought it was their dream.” More trouble lies ahead, some experts warn. “I would suspect that as home prices soften, you are probably going to see a ramp-up in defaults, delinquencies, and foreclosures,” says Nicolas Retsinas of the Joint Center for Housing Studies at Harvard University. “It is not that they were not stretched before, but if you couldn’t make the mortgage payments, you would sell. If the market is softer, it is not as easy to do this.”

The pressure appears greatest for minorities and immigrants, says Dr. Sum, who conducted the census analysis. Mortgages are also riskier for many today. When 30-year, fixed-rate mortgages were standard, a rise in interest rates would have little effect on current homeowners. But in an era of adjustable-rate loans, it can exact a toll. The toll is especially difficult for minorities, housing experts say, because they are most likely to hold higher-cost subprime loans. Without immigration, the state’s population and labor pool would have shrunk since 2000, according to a report released last year by the Massachusetts Institute for a New Commonwealth, a nonpartisan think tank, and the Center for Labor Market Studies.

The number of homeowners with mortgage trouble is rising, says Saul Perlera, who owns a real estate firm in East Boston. Some were scammed by lenders, he says. Others were too quick to buy. “A lot of them just do not listen. They want a house,” he says. “I try to advise them: You can get a house, but you might not be able to stay in it.”

For home loan broker, troubles come with creative refinancing.

Real estate has been a swell deal for just about everyone who owned a home in California during the last few years. For hundreds of Orange County homeowners, it has been even better. Thanks to their mortgage broker, they essentially get paid to borrow money. Mark Gallagher, the founder and president of Park Place Funding in Laguna Hills, uses a technique that unscrupulous brokers employ to bilk clients. Gallagher’s innovation was to cut his customers in on the action, giving them a share of the premium he earns for placing loans with high interest rates. The homeowners receive cash on a regular basis they can use for vacations, remodeling or to pay off that expensive house faster. Not surprisingly, they love their broker. Mortgage lenders were once fond of Gallagher too, helping him become one of the biggest independent brokers in the state.

Recently, however, the relationship soured. No one disputes that Park Place’s system is completely legal, but it has suddenly become controversial as well. Is Gallagher the consumer’s champion, as he bills himself? Or do his mortgages, which are refinanced almost as soon as the ink is dry, make implicit promises to lenders and investors they do not keep? In an attempt to clear his name, the broker has filed suit against some of his former partners. The case opens a window on a bigger issue: In a mortgage system that is loosely regulated but increasingly complicated, who is responsible for ensuring its integrity?

In the last five years, lenders have become increasingly ingenious in their effort to get people whose finances may have seemed dubious into homes. At the height of the boom, borrowers got loans for 100%, or more, of the value of their property. They got loans without having to prove their income. They got loans with no requirement to pay the minimum interest due each month. Park Place, by refashioning another part of the mortgage business, stoked demand for its exotic “structured refinancings” from both the loan suppliers and borrowers.

“In boom times, all sorts of crazy things happen,” said James Croft, executive director of the Mortgage Asset Research Institute near Washington. “New programs are invented that have no history. You say, ‘This is going to work,’ and then you find out three years later it wasn’t such a great idea.” With the housing market cooling off, the evaluation period Croft is talking about seems set to begin. The mortgage industry, and some mortgage holders, may be in for an extensive period of second thoughts.

SLOWING HOME MARKET TO RIPPLE THROUGH JOB MARKET

With the allure of easy money, thousands of Americans flocked to jobs in the real estate industry during the boom years. “You saw it – there were dollar signs in their eyes,” recalls Nick Vayonis, a former real estate agent in Los Angeles, where median home prices rose 145% in four years. He left the business a year ago, just in time, he says. Home sales have declined nationwide for the past five months, and sales in Southern California fell to their lowest level in five years in February. “I could see the ebb and flow. It wasn’t going to be like that forever,” says Vayonis, 40, who just opened a coffee shop in Canton, Georgia, near Atlanta with his wife Anne-Marie, also a former agent. As the housing market slows, there will likely be a lot of stories of people who are bailing out of their real estate jobs and other professions related to housing – appraisers, mortgage brokers and home construction workers – and many not by choice. This could send shock waves through the job market and the economy.

That is because housing helped drive the economy out of the last recession. Almost four out of every 10 jobs created in the past four years were in housing-related fields. At the end of last year, a record 9.8% of U.S. workers were employed in the real estate industry, up from 8.2% a decade ago, according to Moody’s. Only the health care industry added more jobs. “Job growth is the main engine for consumer spending,” says Scott Anderson, senior economist at Wells Fargo in Minneapolis. “If we don’t get the job creation that we need to sustain spending, the economy could be in trouble as we get into ‘07,” he says. “If we don’t get any help from these other (non-housing) sectors, longer-term the implications are slower job growth, which means slower consumer spending, which would eventually discourage businesses from spending. You’d have this downward spiral in growth.”

While it is too early to tell how deeply the housing industry will contract, many companies are already seeing some business evaporate. Last month, Washington Mutual said it would close 10 mortgage processing centers and fire 2,500 employees. In November, mortgage company Ameriquest handed out 1,500 pink slips. The housing industry is braced for more belt-tightening. So far, the economic impact of the downturn in housing has been soft. Other sectors of the economy are adding jobs. In February, employers added workers in a broad number of industries, such as retail, health care, restaurants and bars and state and local government. If that continues, those jobs will help take up some slack if people in housing-related fields find themselves out of work. Plus, many economists expect housing to slow, but not to slide dramatically. There are also a few trends that could reduce the blow to the economy.

Toney Goucher closed his restaurant in Arkansas and became a mortgage broker in 2002. Last summer, the market started drying up. Goucher threw in the towel and put on an apron. After traveling to St. Louis for a conference, he opened Fat Toney’s barbecue restaurant there in January. Goucher says he has already gotten a couple of calls from mortgage brokers he knew in Kansas asking about possible franchise opportunities for his barbecue restaurant. “They say, ‘You’re lucky you got out.’”

Homeowners may cut spending in 2006.

Homeowners pulled a record $279 billion in cash out of their houses last year through refinancing and home-equity borrowing. This year, home-equity extraction will drop 50%, according to Freddie Mac, the second-biggest buyer of U.S. mortgages. Incomes and credit-card borrowing will not increase enough to compensate, meaning consumer spending will slow and hold back economic growth. “We’ve been sustaining consumption by taking money out of housing,” said Joseph Stiglitz, a professor at Columbia University and winner of the 2001 Nobel Prize in economics. As home borrowing cools, “we will not be able to maintain the increases in consumption that we need to sustain growth at 3 or 4% a year,” he says.

Consumer spending, lifted by rising home values, accounted for about 70% of GDP since 2002, the highest level in the post-World War II era. Economists attribute the spending spree both to direct home-equity borrowing and to the so-called wealth effect – people’s tendency to spend more when they are confident their assets are appreciating. That alone boosted consumer spending $120 billion in 2005, contributing a full percentage point to economic growth, according to a Merrill Lynch report. “The glue that kept the consumer market together the last few years was the wealth effect from the housing boom,” says David Rosenberg, chief economist for North America at Merrill Lynch in New York.

Mark Warshawsky, the Treasury department’s assistant secretary for economic policy, said the administration is confident that business investment and rising wages will offset any decline in spending that the cooling of the housing market triggers.

Low- and middle-income families see rate of home ownership falling even as overall ownership rates rise.

The rate of home ownership for low- to moderate-income families with children is lower than in 1978, even as the overall rate of home ownership increases, according to a study from the Center for Housing Policy. The study found that only 59.6% of working class families owned their homes in 2003, the most recent year for which figures were available, down from 62.5% in 1978. Meanwhile, home ownership in the overall population has risen to 68.3% in 2003 from 65.2% in 1978. The study is based upon Census Bureau data.

The study defines working class families are ones whose earnings range from $10,700, or the equivalent of working 40 hours a week at minimum wage, and up to 120% of the median income in their area. The study cites a combination of factors for the divergent trends, including soaring housing costs that have overshot wage increases, higher health care bills and a rise in the number of single parents. Barbara Lipman of the Center for Housing Policy, the research arm of the National Housing Conference, a housing affordability advocacy group, told the paper that the trend likely has persisted since 2003 in the face of sharp increases in real estate prices and more modest gains in earnings, particularly among low wage jobs.

CREDIT DERIVATIVES ROCKED BY LOSS AT GM FINANCE ARM

The discovery of huge hidden losses at General Motors’s finance arm have raised fresh fears of bankruptcy at the world’s biggest carmaker, sending tremors through the credit derivatives markets. The struggling group asked for a filing delay after admitting to an extra $2 billion in accounting errors at its finance arm GMAC, raising total losses last year to $10.6 billion. The news triggered a sharp spike in the cost of default insurance on GMAC’s bonds, rising 75 basis points overnight. Car-parts supplier Dana Corporation defaulted last week on $2.5 billion of debt, following Delphi and Tower Automotive last year.

Concern that GM may now be sliding towards the brink – linked to an estimated $200 billion in credit derivatives – has renewed fears that the over-heated credit swap market could seize up in a crisis. Global investors are already jittery after the crash of the Icelandic krona, which sparked flight from hot assets as far afield as Hungary, Turkey and New Zealand. There is concern that monetary tightening in Europe, Japan, and America in unison might drain much of the excess liquidity fuelling the global asset boom.

Timothy Geithner, president of the New York Federal Reserve, warned in a recent speech that the $300 trillion derivatives market had raced ahead of the infrastructure needed to support it. He said the plethora of new instruments may have led to a more dangerous concentration of risk. “They have not ended the tendency of markets to occasional periods of mania and panic. They have not eliminated the possibility of failure of a major financial intermediary. And they cannot fully insulate the broader financial community from the effects of such a failure. There are aspects of the latest changes in financial innovation that could increase systemic risk in some circumstances, by amplifying rather than dampening the movement in asset prices.”

Credit derivatives are an easy way to bet on credit quality without having to buy actual bonds, which are less liquid. Mr. Geithner said the risk was very heavily concentrated, with America’s ten biggest banks holding $600 billion in potential credit exposure (on $95,000 billion of notional trades), equal to 175% of their financial reserves. Market traders are scathing about such warnings, accusing the watchdogs of basic ignorance. “Regulators have been going on like this for five years now,” said one veteran. Unconvinced by such blithe assurances, investor Warren Buffett has been warning since 2003 that derivatives are a ticking “time bomb”, although his new metaphor is New Orleans’ burst levee.

A RESPONSE TO FEDERAL RESERVE GOVERNOR DONALD KOHN ON ASSET BUBBLES

Federal Reserve Governor Donald Kohn yesterday presented his views on “Monetary Policy and Asset Prices”, at a conference in Frankfurt: “Monetary Policy: A Journey from Theory to Practice”, a European Central Bank Colloquium held in honor of Otmar Issing. Interestingly, he took the opportunity to clarify the Fed’s view of managing asset inflation and bubbles, one that contrasts markedly from those of the retiring Otmar Issing and the ECB. No issue is today more critical to central bank policymaking.

I have, for some time, strongly objected to the Fed’s shallow analytical perspective and complacent stance with respect to asset bubbles. It is my view that the contemporary approach to analyzing the highly complex interplay between monetary policy, credit system dynamics, asset prices and economic activity/development is dangerously flawed. When it comes to recognizing and investigating asset inflation and bubbles, the fundamental focus should be with credit growth and speculative dynamics – the nature and prevailing course of the underlying credit mechanism generally. The Fed seems to go out of its way to avoid this fruitful analytical framework.

At its core, the Fed has fashioned a strategy of asset inflation and bubble acquiescence, with the stipulated policy objective of orchestrating aggressive “mop up” exercises come the inevitable onset of bursting. Admittedly, this approach appears today – at the exuberant blow-off phase of multi-decade credit and leveraged speculation bubbles – all-together reasonable and even, perhaps, brilliant policy. It is most definitely neither. The bottom line is that such a “benign neglect” approach to bubbles continues to play an instrumental role in nurturing their expansion and course of development.

I certainly disagree with Dr. Kohn’s assertion that the Fed’s approach is less activist than the ECB’s “leaning against the wind of incipient Bubbles”. Unsound booms inevitably go bust, and it is the Fed’s manifest determination to employ inflationary policies (to sustain the boom) is tantamount to the ultimate in activist central banking. The Fed wants it both ways: It embraces the manipulation of financial profits/incentives and asset prices as “at the heart of the transmission of policy decisions to real activity and inflation,” yet it is content to operate in an asymmetrical analytical and policy vacuum with respect to inevitable excesses and consequences. If anything these days is apparent to the discerning, it is that it is paramount that bubbles be recognized and restrained as early as possible, while if a central bank provides assurances that markets will remain liquid and buoyant, speculation and resulting asset bubbles will be cultivated to unmanageable excess.

Effective asset inflation and bubble policymaking requires a clear policy framework, determination and discipline. In this regard, a focus on the quantity and character of credit expansion is fundamental. A central bank will never have sufficient knowledge and understanding to assure “a fairly high probability that a modestly tighter policy will help to check the further expansion of speculative activity.” A major issue today is that system leveraging and speculative excess have been nurtured to the point of creating acute financial fragility, thus restricting perceived policy options. entral bankers will never fully anticipate the degree of restraint required to check excesses. It is at the same time crucial for long-term system stability to retain the capacity to mete out significant pain when necessary. Never should policymakers fall into the quagmire of having lost the wherewithal to remove the “punchbowl”.

A major credit inflation – of which the mortgage finance bubble has been one of historic magnitude – has the potential to profoundly alter entire credit system dynamics and the nature of financial intermediation, in the process radically distorting the flow of finance throughout both the financial and economic spheres. The upshot will be a fundamental and highly unstable inflationary recasting of asset prices, right along with financial and economic profits, incomes and relative prices generally (monetary disorder). Once unleashed, it is wishful thinking for a central bank to contemplate controlling the process (become hostage to it, sure).

Ironically, the Fed’s strategy of bubble acquiescence and “mopping up” – redressing each deflating bubble with a larger and more comprehensive one – is precisely the prescription for the type of unmanageable all-encompassing credit bubble that virtually ensures systemic currency and debt crisis – at some point. And, to be sure, the global nature of recent credit and speculative excess, along with sweeping and indiscriminate asset inflation, creates precarious bubble underpinnings: the more extreme the excesses; the greater the vulnerability to financial dislocation; the more timid the policymaker – and the more indomitable the speculative impulses within a community that has never made so much “money” with such ease.

As I believe we witnessed last week, extraordinarily speculative global financial markets took comfort from inferences of a lack of nerve from the Fed and the Bank of Japan. Global bond markets (generally) abruptly retraced some of recent declines, spurring the resurgence of global equity market speculation (and short covering). Currency markets vacillated, the dollar index was hit for 2%, and the energy and metals complexes rallied back smartly. Middle Eastern equity bubbles lurched toward collapse then retreated. All in all, it has the look and feel of a major topping process, as players assess and reassess the prospects for a continuation of, or destabilizing interruption to, the global credit and asset bubbles.

I can imagine that the Fed today takes comfort from its amassed war chest of 450 basis points of reflation ammo. But the enemy is often not as anticipated. There is a critical issue of which I am left unclear. How does “mopping up” – or perhaps better stated, what is to be “mopped up” – in the middle of a currency crisis?

MINING: BACK WITH A VENGEANCE

The big news (and if you do not currently think it is big news, you will) is the announcement that Japan will end their longstanding zero-interest-rate policy!! Note the two exclamation points that I cleverly used to indicate emphasis. At Bill Fleckenstein’s Daily Rap we read, “Overnight, the Bank of Japan officially ended its quantitative easing policy, with the announcement that it would cut the amount of reserves available to the banking system by about 80%.” Cutting reserves in the banks by 80%! I am astounded! And frightened! Where in the heck are the banks going to get money to lend?

The Japanese zero-interest-rate policy is the basis of the whole carry trade: Borrow money from Japanese banks at zero percent, and buy T-bonds, which pay four percent! Jim Willie CB, of the GoldenJackass.com site, writes, “The yen carry trade unwind is probably the biggest potential change factor in the financial world this year, whose unwind will last for at least two years with fits and starts. When it unwinds, the damage will be pervasive to investments bought with speculative borrowed money.” He then quoted another guy, an HSBC analyst, who said, “[The yen carry trade] is going to come to an end later this year and it’s going to be ugly, even if we haven’t reached the shake-out just yet.” And an economist from Monument opines, “The world has never been through this before, so there is a high risk of mistakes.” Of course, the world has never been through this before! Nobody has ever been this stupid before! Jim Willie continues, “Down the road a vicious secondary cycle is certain, marked by rising rates, housing pain, economic strain, price inflation pressures, gold gains, and U.S. dollar suffering.”

But, the flight into gold has already begun, as Roger Wiegand, of TraderTracks.com, reports, “The World Gold Council’s GFMS report update said gold demand hit a record of $53.6 billion in 2005 with a 26% rise in investment tonnage demand. Jewelry demand was overall 14% higher, in spite of those higher prices. What impresses us very much is the institutional demand, which means the big boys and the big money are coming into the gold game.” Marc Faber, of the Gloom, Boom and Doom Report, hears this and says, “My target is for gold prices to rise to between US$5,000 and US$10,000 in the next 10 years.”

None of this is lost on the miners, as David Bond, of SilverMiners.com, reports that the 74th annual Prospectors and Developers Association of Canada convention at the Toronto Metro Centre drew “Fourteen thousand people, people! Seven hundred exhibitors. Mining is indeed back! And with a vengeance.”

And so, people have been asking me, “What the heck is going on with gold?” Of course, I laugh at them for thinking that I could possibly know anything about anything. I reply, “Think of rats trapped in corners. To think that they would not resort to extremes doesn’t make sense to a cornered rat!” They have been manipulating gold all these years by selling gold short, are now on the hook for more gold than actually exists in the world, and you think they are, now, just going to stop and take their lumps? Hahaha! Toni Straka at PrudentInvestor.blogspot.com, suggests that the fall in price lately has been the result of central banks selling. “In the week ending March 3, three Euro area central banks sold gold for 133 million Euros after they had gotten rid of gold for 75 million Euros a week earlier.” But, they are doomed to failure.

Peter Spina, of the Gold Forecaster newsletter, says that he believes that the fall in the price of gold recently “is a healthy correction presenting ‘buying’ opportunities.” And, I think that the whopping rise in silver is a buying opportunity, too, as the pleasant price increases in that particular metal is just getting started. So, I say, “Buy ‘em both!”

DOWN WITH DOWN MARKETS

Different investors have different approaches to dealing with stock market sell offs. Some buy more. Some sell out. Some hang on and hope. And then are those who march around government buildings demanding action. That is just what Kuwaiti investors did last week after their stock market made a fresh 6-month low. Unhappy market players gathered around the Kuwaiti parliament in what news reports described as a rare but peaceful protest in the oil-rich country. Nonetheless, France’s AFP quoted one unhappy stock picker demanding, “We want a complete probe into what has happened in the market since Wednesday.”

The AFP did not report if there were any investigations into the market over the last five years while Kuwaiti stocks screamed 600% higher. In fact, stock markets all around the Gulf region have been in super bull mode for years. The gains in some countries made playing the Kuwaiti market tantamount to watching grass grow in the desert. Dubai stocks jumped 500% in just two years. The Saudi market, the biggest in the region, was up 280% in two years. But 2006 has been a rough one so far, with Saudi stocks down 16% in two weeks.

Aside from going up, up, up, all together, what the Gulf markets have in common are loads of small investors. AFP reports that Egyptians were quitting their jobs to play stocks while Reuters reports that Saudi teachers and their students cut class to watch their stock options. It will come as no surprise to bubble watchers that initial public offers have been as numerous as grains of sand in the desert. Like the Kuwaitis, Saudi investors also have called for the government to step in and slow their market’s descent. So far, the monarchy with a history of controlling the price of the oil has decided to let the stock market take its course.

Speaking of markets that are only supposed to go up, housing prices in the San Francisco Bay area have drifted below their 2005 peaks. Still, home prices are up year over year, but the acid test will come this spring, typically a seasonally strong period. That is what realtors are betting on as they pooh-pooh year-over-year declines in unit volumes which have been in the 20% range (20 percent!). The government’s Office of Federal Housing Oversight Enterprise compiles an index of housing by region, and its numbers show that home prices in the San Francisco, San Mateo, Redwood City MSAD peaked in first quarter of 1990, and did not surpass that peak until the fourth quarter of 1997.

But unlike the Saudis with their stock market, the California government has done something to prop up home prices. Way back in 1978, California passed Proposition 13, which limited the amount that property taxes could increase on a particular property each year. But if the property is sold, the cap is removed and the taxman gets to value and tax the property at the market rate. Some Californians think this incentive to stay put has artificially dampened the supply of homes for sale (and fueled the remodeling market) since it often makes more sense to add on rather than to move, at least within the state. Unfortunately, as first time homebuyers in Oregon will tell you, Californians do not just move within the state.

BUFFETT PREDICTS EROSION OF DOLLAR

Billionaire Warren Buffett, who posted Berkshire Hathaway’s first annual losses from foreign currency investments last year, is still predicting the U.S. dollar will erode. “I think over time the dollar will weaken,” Buffett told reporters after ringing the opening bell at the New York Stock Exchange on Monday. “I have no idea if it’ll be this year or five years from now.” Between 2002 and 2004, Berkshire made $2.96 billion on Buffett’s bet against the dollar. Last year the company had $955 million in losses as the U.S. Dollar Index advanced 13%.

Buffett, chairman of the insurance and investment firm, has been betting the U.S. trade deficit would weaken the nation’s currency since 2002. The 75-year-old also said he hopes his retirement “isn’t too soon” and predicted returns for Berkshire investors would average 6 percent to 8 percent a year. “I don’t expect any enormous returns at all, either for Berkshire Hathaway or the market,” he said.

Buffett attended the opening ceremony to mark Berkshire’s acquisition of Business Wire, a distributor of press releases. “It’s the consumer action in the end. We have no governmental policies to counteract that we are sending a couple billion dollars a day abroad,” Buffett said. “We are buying goods and selling capital.” To compensate for the current-account deficit and maintain the value of the dollar, the U.S. needs to attract about $2.5 billion a day from overseas, or about $75 billion a month. The dollar index, which measures the dollar against six major currencies, has fallen 2.2% so far this year. The dollar dropped 2.6% against the euro and 1.1% against the yen.

Economy could withstand sharp dollar drop, says Bernanke.

The chronic U.S. trade gap need not fuel a “precipitous” decline in the dollar, but the economy may be able to shrug it off if it did, Federal Reserve Chairman Ben Bernanke said. “Although U.S. trade deficits cannot continue to widen forever, these deficits need not engender a precipitous decline in the dollar, nor should such a decline, were it to occur, necessarily disrupt financial markets, production or employment,” Bernanke said in a letter to Rep. Brad Sherman, a California Democrat.

U.K. CHANCELLOR UNDER FIRE FOR PAST GOLD SALES AT LOW PRICES

Forecasts that gold prices are set to smash through the $600-an-ounce barrier, after its recent rise above $500, saw Gordon Brown come under renewed pressure over his controversial decision to sell the majority of Britain’s gold reserves. Last month the precious metal hit a 25-year high of $579.50 an ounce amid concern among investors that America’s huge trade gap would force a weakening of the dollar. The Chancellor sold 395 tonnes of Britain’s gold reserves between 1999 and 2002, generating $3.5 billion. At yesterday’s London closing price of $554.10 he would have generated more than $7 billion (£4 billion).

Vincent Cable, the Liberal Democrat treasury spokesman, said, “The decision to diversify Britain’s foreign reserves away from gold is a sensible one and one I have supported but the Treasury’s impatience over timing has obviously been very costly.” The sale of Britain’s gold reserves was attacked even in 1999 for poor timing. Gold prices fell $5 an ounce on the news and swiftly tumbled to a 20-year low. The scheme was also suspected by some of being a stealth plan to ease Britain’s entry into the European single currency. The criticism. of Mr Brown came as worse than expected public finances data left the Chancellor’s chances of fulfilling deficit forecasts in tomorrow’s Budget as “touch and go”.

SUCCESSFUL TRADERS TAKE LOSSES ON THE CHIN AND LEARN

Traders who want to be successful must believe that they are responsible for the outcomes of their trades – both losers and winners, says Bob Prechter. They particularly have to learn how to deal with losses, since losses are part of the trading terrain. You have got to be able to take it on the chin and get up to trade again.

There are many evasions of responsibility that automatically disqualify millions of people from joining the ranks of successful speculators. For instance, to moan that “pools”, “manipulators”, “insiders”, “they”, “the big boys”, “program trading” or Fed chairmen are to blame for one’s losses is a common fault. People who utter such convictions are doomed before they start trading. They have philosophically conceded that the market is random or “fixed”. If they believe that, then there is no case to be made for trying to make money at it. Take every gain and loss as your due, and you will retain control of your ultimate success to the extent that the market will allow.

Accept losses. You need the mental fortitude to accept the fact that losses are part of the game. My observation, after 30 years in the business, is that most people’s biggest obstacle to successful speculation is a failure even to recognize and accept this simple fact. Expecting, or hoping for, perfection is a guarantee of failure. Speculation is akin to developing a batting average in baseball. It will never be 1.000, but the higher it is, the better you are. A player hitting .300 is good. A player hitting .400 is great. But even the great player fails to hit successfully 60% of the time!

You do not have to be perfect to win in the markets, either. You “merely” have to be better than almost everybody else, and that is hard enough. The amazing thing is that people accept this idea with respect to baseball without a second thought, but they do not accept it in investing. When they lose, they immediately question their ability or the value of their method or advisor, even though they may have a great percentage of success overall.

The coping part should come before the loss. If you take a position large enough to inflict serious financial damage upon yourself, you are a loser going out of the gate. You should determine an appropriate amount of risk in advance. It is important to be honest with yourself. Most people cope with losses by lying to others and sometimes even to themselves. If you cannot be honest, you are probably not handling losses well. Practically speaking, you must include an objective money management system when formulating your trading method in the first place. Some methods use stops. I prefer using analysis to change opinion.

BIO-DIESEL A PROMISING ALTERNATIVE ENERGY INVESTMENT IDEA

Money does not grow on trees, but diesel fuel does … sort of, which partly explains the growing popularity of bio-diesel. If the world can “grow” its fuel instead of sucking it our of the ocean floor, the theory goes, we could produce a “renewable” supply. What is more, bio-diesel is much cleaner than most competing forms of fuel. These two happy thoughts, combined with “green legislation”, government subsidies and, of course, a profit motive, are powering a worldwide effort to ramp up bio-diesel production.

Cummins Inc. (NYSE:CMI) is loving it. As the leading global manufacturer of diesel engines, Cummins seems to have found itself in exactly the right place at exactly the right time. As Lou Bass, editor of the Takeover Trader, pointed out to his subscribers last fall, “While the rush for energy-efficient (and environmentally friendly) engines is reaching mania proportions, many investors are turning a blind eye to an attractive investment, namely diesel engine manufacturers … Producers of diesel engines can be picked up at bargain-basement prices. One of particular interest is Cummins …”

As the nearby chart illustrates, Cummins’s sales to China and India have been accelerating over recent years. The company expects its combined sales to these two rapidly growing economies to top $5 billion by 2010. Meanwhile, in the “developed world” economies of the U.S. and Europe, Cummins should capitalize nicely on the increasing use of bio-diesel. Since Bass’s November 18th missive about Cummins, the company’s shares have advanced 23%. But even so, the stock still trades for less than 9 times estimated earnings for 2006.

Corning Inc. (NYSE: GLW) might offer another avenue into the bio-diesel boom. In our January 10, 2006 issue, Justice Litle, co-editor of Outstanding Investments, made a fascinating case for Corning as a “clean diesel” play. “Corning Inc. – the ‘fiber optic company’ – has developed an exhaust-filtration technology that could dramatically boost demand for diesel-powered vehicles.” Corning’s new-age filters reduce tailpipe emissions from diesel engines. Any trend, therefore, that boosts diesel usage, could boost demand for Corning’s tailpipe filters. “By 2007, emissions from buses and trucks sold in the U.S. must be up to 90% cleaner than 2002 models,” Thomas R. Hinman, vice president and general manager, Corning Diesel Technologies, recently explained. “On a more global front, regulations impacting both diesel passenger cars and heavy-duty vehicles continue to be enacted, representing a greater than 90% reduction in allowable emissions by 2010.” In other words, Corning awaits the years beyond 2007 like a 5-year old awaits Christmas.

Meanwhile, halfway around the world, many of the Malaysian plantation companies are creating joint-ventures to convert palm oil into bio-fuels. While most of these efforts remain in their infancy, they are very clearly gaining traction, largely because the Chinese are eager to develop this fuel source. A few months ago, IOI Corp. (IOI MK), one of Malaysia’s biggest plantation companies, began selling palm stearine, made by fractionating refined palm oil, to Biox N.A, a private Dutch power company. IOI also invested €40 million in a joint-venture to operate Europe’s largest palm oil refinery in Rotterdam. Although these new ventures have not yet contributed to IOI’s bottom line, the company should benefit – directly or indirectly – from the growth of bio-diesel production. European consumers, alone, could take a big bite out of the palm oil supply. Even without any kicker from bio-diesel production, IOI’s stock seems fairly cheap. It trades for about 15 times next year’s estimate earnings and yields more than 3%. Unfortunately, the stock trades only in Kuala Lumpur – there are no ADRs.

Lastly, our own Dan Denning, editor of Strategic Investments, suggests Rentch Inc. (AMEX: RTK) as a possible alternative energy play. Although this somewhat speculative enterprise loses money every quarter, its coal-to-diesel technology may put an end to its money-losing legacy. It is too early to know if Rentech’s ambitious plans will succeed, but we are intrigued by the effort.

“GREEN IS GREEN” IS GENERAL ELECTRIC’S NEW CATCHPHRASE

ExxonMobil is America’s largest conventional energy company. But General Electric is fast becoming America’s largest non-conventional energy company. Strange as it may seem, these two corporate giants are on opposite sides of the same coin. As super-major oil companies like Exxon struggle to replace their oil reserves at a reasonable cost, the demand for alternative energy and clean technology will only grow stronger. Furthermore, due to the growing anxiety about global air quality, clean energy sources seem certain to steal market share from fossil fuels. GE is positioning itself to take full advantage of this shift. GE CEO Jeffrey Immelt is moving the company out of the financial engineering business and embracing the environmental technology business. Immelt’s new catchphrase, “Green is green”, captures the spirit of GE’s aggressive push into clean technology, alternative energy and eco-friendly infrastructure.

This is not just about doing well by doing good. The shift is rooted in hard-nosed business sense. There is money to be made in the environmental space. Getting out in front means leaving rivals behind, and all 17 of the various initiatives have been deemed commercially viable independent of their “green” angle. Is the change meaningful, you ask, or is it just smoke and mirrors? The question is a fair one. Many industrial companies have tried casting themselves as green-friendly over the years, in a cynical effort to improve their public image and generate positive press. But in GE’s case, this is no mere PR posturing. Words are being backed up by visible action, coherent long-term strategy, and some very big bets. In regard to the new “green is green” direction, The Economist observes that “Mr. Immelt is embarking on the most ambitious and risky strategy for GE since the 1980s,” when Immelt’s predecessor Jack Welch earned the nickname “Neutron Jack” for laying off 100,000 workers and rebuilding the company from the ground up.

GE has a long history of creative destruction and strategic rebirth. Based on the company’s history, it is practically an obligation for each new leader to dismantle and recast the vision that came before him. Has GE once again picked the right man in Jeff Immelt? It would seem so. While Jack Welch was perhaps the most celebrated CEO in history, his track record is not without flaws. Under Welch’s reign, GE developed a reputation for managing earnings, a process in which detailed estimates and aggressive growth targets were met like clockwork quarter after quarter. Such perfection was clearly artificial, i.e., too good to be true, but Wall Street loved it. After the dot-com debacle and telecom implosion, artificial precision went out of style. Questions about Welch’s legacy arose, and GE’s stock price went from a high of $60 in August 2000 to a nadir of roughly $22 in 2002. Part of that decline could be assigned to the broad market, but there were also growing accusations of financial hanky-panky. The company’s powerful financial arm, GE Capital, was looking too much like an opaque hedge fund for some investors’ taste, and Welch’s aggressive insurance acquisitions were smelling more and more like an earnings-smoothing tool. Bill Gross of PIMCO Asset Management, an influential money manager known as “The Bond King”, rubbed more salt in GE’s wounds by making public accusations of dishonesty and refusing to buy the company’s commercial paper.

There was more legacy tarnishing yet to come. GE investors looked on in shock and disgust as the details of Welch’s lavish retirement package were revealed by the courts. Welch voluntarily rescinded the perks to spare his company from further grief. Welch’s track record of shareholder wealth creation surely counts as one of the greatest business achievements of all time, but the company he handed over was not in the best of sorts when he left. As if that were not enough, Immelt happened to take the reins three days before Sept. 11, 2001. An early point of order for Immelt was paring back the insurance side of things, an area that Welch had aggressively built up through acquisitions. It has taken a few years to get rid of the undesirable bits. While a few small pieces remain (slated to be sold), Immelt is visibly pleased to be mostly out of insurance, a business he described as “a real burden” for GE. In further effort to restore GE’s reputation, Immelt jettisoned the high-precision earnings targets of the Welch era, choosing to emphasize longer-term strategy instead. As a key part of that effort, Immelt embarked on an ambitious plan to recast GE as one of the world’s leading environmental technology companies.

In 2002, Immelt snapped up Enron Wind for the bargain-basement price of $300 million (give or take). Thus began GE’s “green is green” transformation. Since then, GE’s wind division revenues have quadrupled, from $500 million to over $2 billion. The rapid growth of the wind division illustrates GE’s commitment to emerging markets as well as alternative energy: Two of the firm’s four technology R&D centers are located in Bangalore and Shanghai. Goldman Sachs estimates that more than half of GE’s revenue growth could come from India, China and the like over the next decade. Eco-friendly and alternative energy infrastructure will certainly be a major portion of the bottom line. Next to civil unrest, pollution and water issues are the two biggest problems that China and India face. By committing to an aggressive greenhouse-gas emissions reduction program, GE simultaneously puts pressure on its rivals, prepares in advance for the arrival of a strict regulatory environment, and establishes its “green” credentials early in the game.

The payoff for Immelt’s strategic shift is still a ways off in the future. Though things got started with the purchase of Enron Wind back in 2002, most of the “ecomagination” initiative is still young. Wall Street has not yet paid heed to this bold change in course. The focus is still on GE as an industrial and financial conglomerate, not as an environmental powerhouse. GE stock recently saw its largest decline in nearly three years on news of an earnings shortfall. $2.9 billion was plugged into the reinsurance unit to shore up reserves before the Swiss Re handoff – a tacit admission that financial claims may indeed have been understated in past years – and analysts were disappointed by slowing revenues and lower-than-expected profits in plastics and real estate sales. Revenue weakness and disappointing growth were the primary areas of concern.

With the energy and metals markets getting so much attention from investors and speculators, it is rare these days for a new recommendation to be available at any type of short-term discount. GE may be a rare instance of this. As a long-term investment, GE is attractive for two reasons: First, Immelt is putting GE’s financial engineering past behind it, positioning the company for strategic growth in emerging markets and eventual dominance in alternative energy and green infrastructure. Second, the general consensus still views GE as “The House That Jack Built” and has not yet recognized the long-term wisdom behind Immelt’s creative destruction. For the patient investor, the ultimate payoff should come in the form of both accelerated earnings growth and a “perception premium” that kicks in when Wall Street sees the beauty of “green is green”.

CASH SQUEEZE MEANS PENSION FREEZE

Most companies would probably freeze their defined-benefit pension plans if the costs start eating large chunks out of corporate cash flow, a new survey of 109 senior finance executives finds. Indeed, 60% of the respondents said their companies would likely deny pensions to new workers or stop adding benefits for current ones if the plans start making inordinate cash demands, according to the Towers Perrin study of mainly CFOs, treasurers, and vice presidents of finance for U.S. and U.K. companies with pension assets over $100 million.

According to Towers Perrin, 48% of the companies surveyed are likely to freeze their plans if they produce a hit to earnings, 43% are likely do so in response to a rise in cost of capital or a lower credit rating, and 33% will probably take action in the face of a dropping share price. 32% of the companies surveyed had already closed their plans to new entrants. (Towers Perrin did not specify whether a “freeze” refers to halting current employees from receiving new credit for future benefits, refusing pension benefits to new employees, or both.)

In general, the trigger for freezing plans appears to be a drain on cash flow so severe that other cherished corporate programs are threatened with cuts. Things have gotten serious when “the pension plan becomes a competing interest for cash within the organization,” says Cecil Hemingway, who heads the pension-legacy solutions department at the actuarial and risk-management-consulting firm. In particular, pension plans would not be allowed to continue if they began to drain funds away from share buyback programs or investments in plant and equipment, he adds. And if Congress passes a law mandating that plan sponsors fund 100% of pension obligations, as it is likely to do, then many companies could be freezing their plans soon. Under current law, pension sponsors must fund 90% of their plans’ obligations.

If Congress and President Bush do tighten funding requirements, 62% of the companies Towers Perrin studied would consider freezing their plans. Another point of pension anxiety is the Financial Accounting Standards Board’s current project to study – and likely overhaul – the current pension accounting system. The overhaul could include the elimination of smoothing, the practice of spreading out the estimated value of pensions over a period of time as a way to counter rate volatility. If FASB were to jettison smoothing, 72% of the executives surveyed would mull pension freezes.

HEDGE FUNDS WILL HAVE TOUGHER TIME MAKING MONEY, SAYS FOUNDER OF LARGEST HEDGE FUND

David Shaw, founder of the world’s largest hedge fund firm, said investment returns probably will worsen because of all the money pouring into the industry. “There’s an enormous amount of capital now chasing a smaller amount of investment opportunities, so it’s made it easier for people to go into business but harder to make a profit once you’re there,” Shaw, 54, said in an interview yesterday at a conference at Stanford University in California. “It’s a much more difficult environment” than when D.E. Shaw & Co. was started in 1988, he said. D.E. Shaw today manages more than $20 billion for clients. The industry’s assets have more than doubled since 2000 to $1.1 trillion and the number of funds has doubled to about 8,660 in the past five years, according to data compiled by Chicago-based Hedge Fund Research Inc.

As the industry grew, performance dwindled. The average hedge fund rose 9.3% last year after fees, slightly ahead of 2004’s 9% and well below the average annual gain of 16% compiled during the 1990s, Hedge Fund Research reported. D.E. Shaw is known for using sophisticated computer programs to analyze different asset-classes to pick up price inefficiencies in the market. “The easy sorts of anomalies have been driven out by other people discovering them and betting on them, so it’s necessary to look for more elaborate, more complex mathematical techniques,” said Shaw. “Right now, it’s hard to find things that are demonstrably cheap.” D.E. Shaw plans to add to its stakes in undervalued and financially strapped companies, in some cases acquiring control and taking steps to improve performance, Shaw said. He also expects to increase the firm’s investments in so-called distressed securities and alternative energy sources such as ethanol and wind power projects.

WHAT IF GOLD NEVER CAN GO HOME AGAIN?

A few nights ago, my wife and I were at a dinner party, and my wife happened to be seated next to an ex-investment banker. Before long, the conversation turned to the fact that I was scheduled to give a talk on gold. His response was immediate and enthusiastic: “Oh wow, that’s great! Gold is really hot right now! Precious metals are the place to be!” The point of that little anecdote is that the word is clearly out. When you get that kind of response at a dinner party, people know. It is no longer our job to “evangelize” anymore. We do not have to go out and pound the table for investing in energy and metals. As recently as a year ago, we did, telling everyone and their brother to buy gold and oil stocks, but now people get that. They see the opportunity is here. But does that mean our job is done? Not at all. In fact, our job is just getting started, just like these trends.

There are only a few ways for the bull market in gold to play out, and supposedly a fixed ending in all cases. The yellow metal’s dollar price will violently launch into orbit at some point, arc into a near-vertical crescendo and ultimately burn itself out supernova style. Either that or a long, drawn-out grind – a steady sloshing higher over the course of years, punctuated by occasional hiccups and countertrends to keep us on our toes. Or perhaps a combination of both, in homage to the disco era – a multiyear rise capped off with a blaze of glory.

But no matter how it happens, gold will eventually return to Earth. The fixed ending is a return to normalcy, which in gold’s case equates to dormancy. After all, what goes up must come down. Right? That is what everyone expects. Yet, what if, this time, the future does not look like the past? What if gold were to climb to new highs, breaking the $1,000-an-ounce barrier, and never return from whence it came? With apologies to Thomas Wolfe, what if the bankers cannot go home again?

Now that would be something. This talk will discuss exactly that possibility. In the long run, I believe, the fiat money bankers will not be able go home again. The role of gold in the 21st century is not just to act as a barometer of financial anxiety, but to ultimately return to the fore as sound money. Even with gold at 25-year highs, only a modest%age of the population continues to insist – and to remember – that gold and silver are money. It is surprising, and sometimes breathtaking, how quickly modern man forgets his past. Born of Nixon’s infamous utterance, fiat currency is little more than a brief experiment in the grand scheme of things – still shy of its 40th birthday. Gold and silver, on the other hand, have functioned as money for roughly 98% of recorded financial history.

Some dismiss gold as “just another commodity.” Those who say that gold is just another commodity either have a hidden agenda, a blindness to human nature, or both. Some things are just bred into us. Certain habits die hard, or never die at all. Modern suburban man, for example, has a deep attachment to his lawn. There is just something about owning a piece of fertile land, even if it is barely the size of a postage stamp, that makes a guy feel like king of his castle. Gold inspires a similar primal connection. It is not just another commodity. It is money you can sink your teeth into, hide under your mattress, store up in your vault. Real money.

In our modern world of bits and bytes, money is brushed off as an abstract concept. Talking heads regularly maul and distort its meaning at will. Yet money is one of the most important “abstract concepts” in history. Ultimately, money is linked to something even older and more abstract: the concept of trust. So how is it that when you follow modern money to its birthplace, you wind up in a politician’s headquarters – a place utterly devoid of trust if ever there was one? This does not make sense. It is an anachronism of 20th-century government, a byproduct of industrial oligarchy and short-lived economies of scale.

The only things absolutely certain are death and taxes, but some other things come close. A few major cycles, rooted deeply in human nature, have the predictability of gravity or the sun rising each morning - but only over the very long term. In discussing the return of gold as money, this talk is clearly focused on the long run – where the current trends we are seeing will ultimately lead us as far as gold is concerned. The evidence to support our conclusions is right before our eyes … but in terms of how long everything will take, we cannot know. When you have conviction, patience is your ally. It is easier to get through the valley when you know the mountain is in the distance.

SUBURBISTAN: HERE COMES THE FISCAL FIRESTORM

Over five years ago, Addison Wiggin and I sat at our desks in Baltimore and had a right good laugh over the term “Suburbistan”. We knew the boomers would begin retiring soon. We knew the government would not have the money to pay for it. We knew that when you pit a generation of young taxpayers against a generation of retiring pensioners, you would get some conflict. But Suburbistan? Is it really possible that when cities, states, and the federal government can no longer pay their bills or keep their promises, you will see more strident political fights between the generations? More conflict?

If you leave it up to politicians, you can almost guarantee it! Just ask Hillary Clinton. She spent a few days shilling for votes at the United Auto Workers Convention, where delegates sought a Marshall Plan for the U.S. Auto Industry. Don’t get me wrong. I think America has made a serious strategic error selling off its industrial assets, or allowing them to rust away, to say nothing at the loss of real manufacturing skill that is accompanied the loss of three million jobs to China and India. Part of this is the auto industry’s inability to adapt to a world where labor is cheap and oil is expensive. The UAW is complicit in its own demise. But what does this all mean?

Do you remember what it was that caused oil to bounce off $25 in 2003? Following the commencement of hostilities in Iraq, the oil price fell. But then it started climbing. And it kept climbing. And it is still climbing. What happened? Somewhere along the way, markets realized that something important had changed in the world. It was not just speculative traders and geopolitical traders. It was not just the loss of Iraqi production and the growth of Chinese demand. It was, for lack of a better word, a silent tipping point. Since then, we have begun to discuss and absorb the realities of the global energy market, namely the likelihood that global oil production has peaked, and that from here on out oil is going to be harder to find and costlier to get out of the ground.

This year could be the year where we see a silent tipping point in American politics. It will be a point of no return, where interest rates rise as America’s borrowing costs no longer seem so easily manageable. Political rhetoric will be more strident, as it was at Corretta Scott-King’s funeral. After all, it is an election year. But more than that, people will begin to feel in their guts that not everyone is going to get through this equally. Do the maths, as the British say. They do not add up. America cannot pay for all its guns and all its butter.

You have heard this before. But this year is different. And yes, this time is different. The U.S. Treasury market is the most liquid on the face of the planet. It is the natural destination for the world’s surplus savings and capital. But what seems to be changing before our eyes, is that foreign creditors are realizing that while the return on U.S. bonds is getting better all the time with rising rates, it might not be as safe as it looks. And with major global energy projects to invest in, investing in hard assets and energy might be a much better destination for global savings.

If and when that happens, it will set off a domino effect in American political and economic life. It will unleash Suburbistan, as American government – at all levels – is unable to borrow in order to pay for the promises it has made to a population that now demands government “help”. What will happen? Will payroll taxes be increased? Will GM and Ford get bail-out packages from the next president? One thing we can be certain of is that as political strife in America increases, so will volatility on the stock markets.

IF YOU BUILD IT, WILL THEY WILL COME?

An acquaintance just told me a weird story yesterday. Let us call him “E”. He runs an Internet consulting company here in Saratoga Springs, Florida. It employs about 25 people in a downtown building E put up a few years ago. Last month, a freak windstorm ripped through and took down the electric power for three days. E lost communication with the payroll service (a separate company) that issues his employee’s salaries. The storm happened in the middle of the day, Friday, payday. The power came back on Sunday night, and on Monday two of E’s employees each asked for private meetings with the boss. Because of the storm, they said, the payroll company had failed to make electronic salary deposits in their checking accounts. They were concerned because they were late on their mortgage payments and without the past week’s electronic paycheck, they could not pay their mortgages.

E told me that these were “high-level employees” with substantial salaries who were both living in “very high-end homes”, which around here would mean around a half-million dollars. He said he was shocked to discover that his executives were living from paycheck to paycheck, in houses that by normal criteria (i.e., pre-bubble standards) they probably could not afford. “What if something happened to me?” E said. “What if I was hit by a bus? That would be it for the company. That would be the end of their paychecks, and what if they didn’t find another job almost immediately? I don’t want to interfere in their personal affairs, but I can’t help feeling that I really need to talk to them about this.”

Meanwhile, our cretinous, pandering local newspaper, the Saratogian, published a special real estate section on Sunday under the banner “Progress 2006”. The headline under the banner said, “If You Build It They Will Come”, and the accompanying photo showed a rank of beige McHouses in a new subdivision. The subhead said, “Growth is the name of the game across the county.” Spring here in the North Country brings with it a ripe expectation that the winter real estate doldrums will soon yield to raptures of zippy sales. I do not think so. I think that what we are getting here is stupendously delusional behavior. Nothing is moving. Outside of town, in the suburban asteroid belts that only 10 years ago were cornfields and cow pastures, there is a much more lavish supply of new houses. I detect an odor of bloodshed.

For years following the two oil crises of the 1970s, the real estate market in Saratoga fell stone dead because the fear of rising gasoline prices and long lines at the filling stations remained so vivid. We are headed back to scary gasoline prices again, only this time it will not be a temporary crisis. And this time, there will be a huge surplus of unsold houses. There will also be a substantial number of house owners getting in trouble with their mortgage payments, and one way or another, their houses may end up adding to the supply of available houses.

It makes my head hurt to imagine the coming carnage on the real estate scene here. Nationwide, the latest figures are not reassuring. Even hot markets cool off when evil economic winds blow. Meanwhile, housing “starts” (under construction) jumped 14.5% in January of 2006. Permit approvals were up 6.8%. That old dawg, momentum. House “affordability” reached a 14-year low according the U.S. Department of Commerce. Foreclosures are up 27% so far in 2006. You wonder, finally, how many current homeowners will lose their houses? How many developers will lose the shirts off their backs? How many banks will get stuck with foreclosed property? And how will the U.S. economy function without a phony-baloney real estate bubble market driving it?

THE REAL EL DORADO: REAL ESTATE OR GOLD EQUITIES?

The Cardinal Question of the new Millennium is: What has been the best investment in the past 5 years: Real Estate or Gold Equities? Before answering this monumentally important question, it is imperative to appreciate the following: To guarantee the economic stability of his family, it is vitally essential the prudent family head should first have a home, health and life insurance to protect his dependents against the vagaries of life. In this regard a “home” per se can never be considered an investment. Likewise health and life insurance are sine qua non necessities to ensure one’s family a tranquil lifestyle and long-term peace of mind existence. Consequently, annual variations in the value of his “home” are immaterial and irrelevant to his family’s physical stability. The “home” is for living … not for speculating.

Once the family bread winner has guaranteed his family’s long-term economic stability (ie home, health and life insurance), he necessarily seeks to employ his savings via investments that promise a reasonable return in excess of inflation in order to preserve the purchasing power of his toil. Based upon the past 5 years performance, two outstanding investment vehicles leap to mind: Real Estate and Gold Equities. Let us review the former first.

To be sure Real Estate (RE) investments have commanded the greatest media attention during the past decade. One hears about RE investments on the radio, newspapers, magazines, TV, the Internet, telephone, word of mouth … the local barbershop, beauty parlor, cocktail parties, etc., etc., ad nauseam. In fact up until early last year all money thrown at any form of RE reaped double digit yearly appreciation. It was a raging RE Bull Market. Heretofore, impossible to lose money. A virtual bonanza. A perfect indication of the exciting return on RE investments is the Vanguard REIT Index Fund (VGSIX), which is one the nation’s largest RE mutual funds, whose Investment Objective is to acquire properties throughout the USA to diversity risks – its total assets top $8 billion. VGSIX may be thought of as a surrogate for average RE investments in the country. $10,000 invested 5 years ago would be worth approximately $20,000 today (see VGSIX chart). A good return in anybody’s book, no? But this begs the question: Could the investor have done better at the same level of risk?

One of the most widely followed Gold Equities Indices is the HUI, which is considered by most market analysts as the surrogate for the precious metals mining industry. HUI Index is composed of 15 of the world’s largest gold producers. During the last 5 years HUI appreciation has blown everything else out of the water (see chart) … indeed far surpassing VGSIX RE Fund Index. The comparative chart highlights the Herculean difference in total return. Consider the eye-popping difference in total return in the last 5 years: +500% appreciation for HUI vs. a mere +100% appreciation for VGSIX.

But you skeptically and correctly say, “That was the past five years, what about the next five?” Well, let us take a look at the relative risk of both going forward. The vast majority of most RE investors do NOT invest in REITS, but prefer to acquire a speculative second home or apartment, which they rent to a third party. The RE investor therefore expects two returns, monthly rent plus annual appreciation of his property. It is well documented RE has been in a bull market for over 20 years. However, not a few experts conclude raging double-digit RE appreciation in the past two years demonstrate a classic “blow-off” phase of an aging bull market, which is dangerously long in the tooth. To be sure RE across the country shows increasing evidence a new RE bear market is emerging. The Fed will not act to preserve high home prices: “The Federal Reserve has no intention of preserving all of the recent gains in home price values,” said Federal Reserve board governor Donald Kohn. RE’s prognosis for the next 5 years is grim at best.

Precious metals were in a protracted bear market from January 1980 to early 2001. Since then gold and silver have been in an evolving secular bull market, with years to maturity in this protracted cycle. Presently, only one investor in 1000 has any form of precious metal investment. As gold and silver bull markets gather steam, the momentum will attract literally millions of investors from all corners of the global. This will be the necessary fuel to propel HUI to 500 (vs. apx. 300 now) … and possibly to 1,000 in years to come, before the inevitable blow-off stage commences (as is now the case for RE).

RE investments have had their day in the sun. The 20+ year RE bull exaggeration is greatly over extended. RE values cannot long be maintained at these fictitiously astronomical heights. Reality will soon sweep the market, as investors come to their sanity … as they did in the Tulip Mania of 1634, and the infamous Florida Land Bust of the 1920s. Moreover, hapless RE investors will sadly become aware that gold and silver equities have produced 400% more total return in the past 5 years than RE investments. Furthermore, gold and silver equities are liquid, whereas RE physical investments are not. And we all know physical RE investments have their owners chained to a burgeoning 20 to 30 year mortgage.

We must not forget the Chinese (1.3 billion population) and Indians (1.1 billion population) with rapidly rising incomes, who traditionally are large investors in gold and silver. Together they represent a growing demand for precious metals. In the near future global demand should rise exponentially vis-à-vis a flat supply, thus eventually and inevitably catapulting prices.

THE YEN “CARRY TRADE” GRAVY TRAIN COULD BE COMING TO A SWIFT END

The lights are starting to flicker in one of the most player-friendly casinos that investors have frequented in the past few years, although it will be quite a while yet before it gets too dim to keep gambling. The casino is the so-called “carry trade”, where you borrow money at low rates in one country to invest for higher returns in another – with the “carry” being the difference between the rate you pay and the return you earn. The flicker came in the form of signals from the Bank of Japan early this month that it plans to stop pumping oceans of freshly minted yen into the Japanese economy and also is contemplating a hike in its benchmark interest rate for the first time since slashing it to a hair above zero in early 1999.

This means hedge funds, investment banks and other high rollers have been put on notice that they cannot count indefinitely on borrowing untold billions of yen – the overwhelming favorite carry trade currency – at almost no cost to invest for fat returns elsewhere. “They’ve had a shot across the bows, so you would expect people to be monitoring these trades pretty closely and unwinding the ones that are vulnerable to Japanese interest rates going up,” said Martin Barnes, managing editor of the Bank Credit Analyst magazine. “Anybody who has put on highly speculative trades on borrowed yen has to become more concerned about the viability of those trades.”

In fact, with interest rates in many countries around the world starting to converge, the window on the carry trade is starting to close, even as investors are also having to ratchet down their expectations for global equity and bond returns. “A lot of countries are realizing that they’ve been running [monetary] policy too easy for too long, so they are starting to tighten conditions, as opposed to … a couple of years ago when everybody was stepping on the accelerator,” said David Watt, BMO Nesbitt Burns Inc. senior economist. In a commentary early this month, he listed 19 jurisdictions where such action is under way, ranging from Japan, the U.S., Canada and Europe to Taiwan, Thailand, Malaysia and Botswana.

The convergence of rates, or even just the potential for convergence, will make the carry trade less of a slam dunk. “It becomes a riskier transaction from both sides, because you have the interest rates [in the country] you’re investing in, but also the Japanese interest rates, and that can cause a lot of uncertainty,” Mr. Watt said. “So a lot of these people who have had these trades on, for however long, are going to start saying, ‘It’s time to start lightening up and wait and see how markets react in this new era.’”

The danger is, of course, that everyone will try to head for the exit at the same time. “The assets which have been the big beneficiaries would suffer huge price markdowns as people tried to get out,” Mr. Barnes said. The yen-funded carry trade has already blown up once, back in 1998, a year after Thailand’s devaluation of its currency, the baht, unexpectedly triggered an Asia-wide financial crisis. Adding to the fallout in September, 1998, was the collapse of Long Term Capital Management LLC, a U.S. hedge fund with a $100-billion portfolio. There was a brief flurry of concern late last month that a run on the currency of tiny Iceland following a ratings downgrade of the country, whose benchmark central bank rate of 10.75% had made it a destination market for some carry traders, could knock over dominoes elsewhere.

The biggest risk is that investors will be blindsided. Still, there appear to be few worries that the Bank of Japan, at any rate, will risk blowing up the carry trade by raising interest rates too much too fast. “The shift in Bank of Japan policy is going to be very well telegraphed because they don’t want to cause any financial turmoil,” Mr. Barnes said. “So nobody that has a [yen] carry trade position on is going to get caught off guard on this, unless they’re Rip Van Winkle. … There’s no excuse for anybody to be blown up by this.”

GOOGLE TO JOIN S&P 500 AFTER MORE THAN QUADRUPLING SINCE IPO

Google will be added to the Standard & Poor’s 500 Index following a 4-fold surge in the shares. Shares of Google may get a lift as managers of funds that use the index as a benchmark purchase the shares. More than $4 trillion tracks the S&P 500, according to S&P. About $1.1 trillion in index funds mimic the index exactly. Google surged $25.40, or 7.4%, to $367.29 in extended trading in New York following the announcement.

FROM BEIJING TO DUBAI

My travel schedule is planned months in advance. It was only by happenstance that I found myself in both Beijing and Dubai this past week – two of the more recent flashpoints in a U.S.-led pushback against globalization. What I found in both cities unsettled me – disappointment and frustration over America’s attitude toward two of its major providers of foreign capital. The U.S. has been having a good deal of trouble with its overseas image in recent years. The feedback from Beijing and Dubai is that this image is going rapidly from bad to worse – something a saving-short U.S. economy can ill afford.

China is deeply troubled over the outright hostility from an increasingly xenophobic U.S. Congress. The senior officials I spoke with this week in Beijing protested on two counts – China’s fragility – despite 25 years of 9.5% real GDP growth – and America’s penchant for scapegoating. China’s strain of market-based socialism is still far too fragile to stand on its own. China also feels that it is being victimized for America’s structural problems. If Washington – or beleaguered U.S. manufacturers – really wants China to give, then it needs to make that argument from a position of a macro strength and boost America’s national saving rate. Until, or unless, that happens, U.S.-led China bashing is nothing short of political hypocrisy. In the meantime, Washington could well be about to compound one of America’s most serious structural problems – at considerable expense both to the U.S. and Chinese economies. These are the “lose-lose” outcomes of globalization that can only end in tears.

In Dubai, I was met by a similar sense of consternation. Fresh from the wounds of the rejected Dubai Ports World transaction, several major private equity investors in the UAE were blunt in expressing their sudden loss of appetite for U.S. assets. “The bulk of our dedicated offshore money is now going elsewhere,” said one seasoned investor in US companies and properties. The comment that unnerved me the most took this exasperation to an even deeper level. One investor asked, “What can we do to push back, to send a signal?” I do not want to make too much out of an unscientific survey of a few private equity investors in Dubai. But up until recently, this was one of the Middle East’s most pro-American investment communities. The political shock wave from Washington has come from out of the blue, and now they see little reason to go back to the same well – especially given the wide menu of less contentious alternatives available elsewhere in the world. To the extent that the Dubai backlash is emblematic of similar distaste from other Middle East investors – hardly idle conjecture – the repercussion cannot be minimized.

From Beijing to Dubai, there is a growing undercurrent of economic anti-Americanism. The irony of it all is truly extraordinary: The U.S. has the greatest external deficit in the history of the world, and is now sending increasingly negative signals to two of its most generous providers of foreign capital – China and the Middle East. The U.S. has been extraordinarily lucky to finance its massive current account deficit on extremely attractive terms. If its lenders now start to push back, those terms could change quickly – with adverse consequences for the dollar, real long-term U.S. interest rates, and overly indebted American consumers. The slope is getting slipperier, and Washington could care less.

THE BIG LIE: CEO’S AND SHAREHOLDER INTERESTS ARE ALIGNED

There seems to be “prevailing wisdom”, or we could call it a school of thought, that if the CEO of a public company owns stock, that their interests are aligned with shareholders. The underlying logic is that all shareholders want the price of the stock they own to go up. So if management owns stock, and they work to get the price up, then management and shareholders have achieved a meeting of the minds and everyone is happy. Right? Wrong. There is one primary disconnect that makes this completely untrue and at its heart, the reason why executive pay has gotten so out of line and why individual shareholders are being taken advantage of every single day. Let us start with shareholders and their interests.

Let us look at the perspective of the corporate insider, in particular the CEO. There are two types of CEOs, those who are the founders or co-founders of their companies, and those who were hired to do the job. The difference is important because those involved with the founding of their companies not only have a different personal connection with the company and its employees, but more importantly, since they founded the company, they most likely already own a lot of stock. The motivation of a founding CEO will be money, but there will be other considerations. Sometimes.

Then there are those hired to be CEOs. Their goal is to make as big a chunk of money as they possibly can in the shortest amount of time. No one in their right mind is going to take on a job with the amount of pressure, stress and away from family time that comes with being the CEO of a public company without getting paid incredible sums of money. Similar to professional athletes, they realize that there are limited opportunities to make the big financial score, and if they do not make it this time through, they may never get the opportunity again.

There is not a CEO in America with the opportunity to take the helm of a public corporation that did not run the numbers in their head and play “what if”. What if the stock went to this price? Then based on the total number they needed to get to the networth they always dreamed of, and using the CEO pay totals of men or women who had already done the same thing to get their current jobs as comps, they negotiated their deal from there. Any CEO in this position who tells you otherwise is lying.

Which is why the concept of CEO and shareholders interest being in alignment because they both own stock is a big lie. The CEO wants to hit the homerun of their career when they take the job, the shareholder just does not want to strike out with their life savings.

THE HYPERINFLATIONARY DEPRESSION

The U.S. economy is not growing, it is shrinking, says Walter J. Williams. We are already in recession. Forget stagflation, he adds. What we need to prepare for is “hyperinflationary depression”. We knew the Feds’ numbers were bogus. Now, along comes an honest economist, the aforementioned Mr. Williams, with a serious reckoning of how bogus they really are: Unemployment is not 5% or 6%. Computed the way it used to be, it is twice as high. And the U.S. deficit? If the Feds did not use Enronesque accounting techniques, it would be around $11 trillion. As for the national debt, Williams says, “The fiscal 2005 statement shows that total federal obligations at the end September were $51 trillion; over four times the level of GDP.” There will be hell to pay for all these statistical prevarications, Mr. Williams believes. And the first payment is likely to be in the imperial currency itself – the dollar. But yesterday, Ben Bernanke spoke and the dollar rose.

There is the problem, dear reader. Despite the repeated alarum sounded in these pages, more “market participants do not harbor significant reservations about the economic outlook.” What are these market participants thinking? Significant reservations are exactly what they most desperately need and most recklessly lack. You can buy a junk bond and get only 3% more yield than you would get from a U.S. Treasury. Surely, the treasuries are time bombs, but what are the bonds of Iraq or a dreamy dot.com? They do not even have timers. They could blow up at any moment. But who knows? And who cares? Both junk and non-junk are calibrated in dollars. The dollar itself is the currency about which one should harbor the most significant reservations.

Here, we turn the microphone over to an old man – Warren Buffett. The Sage of Omaha is 75. As far as we can tell, he still has his wits about him. But, there are some markets to which youth is better suited than age, recklessness is better rewarded than prudence, and ignorance pays off better than wisdom. This Fin de Bubble period is one of those times. You would have to be a fool to buy many of today’s popular investments, but being a fool is the only way to make money. Fortunately for the bubble people, there are a lot of fools, and a lot of investors whose ignorance is not merely spotty, but encyclopedic. Poor Buffett is neither ignorant, nor reckless, nor young. He does not seem to fit in. Earlier this week, a popular financial columnist declared him “out of touch” with modern market forces. Why? Well, because he, almost alone, harbors significant reservations – notably about the dollar. Yesterday brought news that Buffett is still out of touch. Bloomberg reports, “‘I think over time the dollar will weaken,’ Buffett told reporters, after ringing the opening bell at the New York Stock Exchange on Monday. ‘I have no idea if it’ll be this year or five years from now.’”

The dollar has barely moved for a long time. But, in terms of gold, it is worth only half what it was in 2000. This is where history will be made, we think. But what history? Against gold, the dollar is collapsing and people scarcely notice, except the English, who have finally realized what bunglers their central bankers are. You can make a lot of money by watching bankers, we long ago concluded. You see where they are lending money and sell the borrowers short. Or, you look at what they are selling and buy it. In the late ‘90s, so many banks wanted to sell gold that they had to collude to avoid glutting the market. Britain led the way with its massive sale of nearly 400 tons, driving the price of gold down to a 20-year low.

But, bankers – especially central bankers – like politicians, can generally be counted on to do the wrong thing. At the end of the millennium, they did not let us down. If Buffett, Williams, and we are right, this history has only begun. The dollar will lead the economy into a “hyperinflationary depression”. If we are right, there will be dollars, dollars everywhere, but not a drop of real liquidity. Eventually, the Bank of Ben Bernanke will do just what it has promised: increasing the money supply as fast as it can, but people will still not be able to pay their bills.

Inflation and deflation side by side. The dollar will plummet on world markets, and yet, in the hands of American lumpenconsumers, it will be more precious than ever. How is it possible? What does it mean? Ah, dear reader, that history … that coy tease … she will reveal all, but only when she wants, and only at great expense.