Functional Food Industry Plans

January is a special time of year. It's the time for resolutions and turning
over a new leaf. People take up jogging and yoga and try to give up
cigarettes and cut down on alcohol and "comfort foods". You tend to bump
into friends at the gym or healthy eating aisle of the supermarket rather
than in the pub. Some of these faddish changes of behaviour will not last,
but certain changes in lifestyle are more permanent.

Wander down the aisles of your local supermarket and you can't fail to
notice the increasing numbers of food stuffs aimed at the health-conscious
shopper. There's a whole host of branded products that lay claim to helping
with the likes of weight loss, lessening the risk of heart disease and
lowering cholesterol such as Yakult, Actimel and Benecol.

As health has crept up the agenda the public's appetite for these functional
and nutritional foods is creating a growing and highly profitable category
for both retailers and food manufacturers - and in the process is
potentially separating the future winners in the sector from the losers.

In the 20th century, food manufacturers concentrated on making tasty,
affordable products that were easy to store and cook. But with
obesity-related illnesses on the rise and governments limiting the sale and
advertising of sugary and salty snacks to children, food and drink companies
need a re-think.

Werner Bauer, head of research and development at Nestlé, will take up the
newly-created position of chief technology Officer next month to oversee the
acceleration of the food group's transformation into a "nutrition, health
and wellness" company. He said this century will see food playing a new role
that improves your quality of life before you need medication.

Last November, Nestlé signed a five year agreement with an institute of
technology in Lausanne to research the relationship between nutrition and
the brain. The company plans to invest over £2m a year to find ways of
creating foods that will slow or prevent degenerative diseases like
Alzheimer's. And there is plenty of demand for such products.

Dr Ralf Zink, technical director and global head of R&D at Dusseldorf-based
Cognis that develops functional food ingredients reckons that there has been
a sea change in the types of food that people are now willing to consume.

"Through food, customers are now willing to do something about their health.
Prevention is now on their minds when they buy foods whereas previously they
only bought on texture and taste," he says.

Accordingly there is a massive increase in the levels of innovation in the
food sector. And the most active in this area are the large multinational
food companies who have the ability to direct some of their R&D spending in
the direction of functional foods and new ingredients that have
health-improving characteristics.

Evidence of how seriously they are taking it is the move by Tate & Lyle
(T&L) to set up a dedicated venture capital fund. This is the first of its
kind in that it is run by external specialists and is investing purely for
T&L as a way for the company to tap into areas that it would previously have
shied away from as being far too risky.

The £25m fund will be investing between £1m and £3m in each of up to 10
companies in Europe and North America that are focused on renewable
ingredients (such as nutritional and functional foods), biofuels and
developing manufacturing innovations. It has just completed its first deal
with an investment in Cambridge University spin-out Lumora, which helps the
processes involved in testing of new food types.

Such activities represent a marked change among food manufacturers,
according to David Atkinson, managing partner at Tate & Lyle Ventures, who
describes the levels of R&D spending in the food industry in Europe to date
as "pitifully low".

Ironically, shares in Tate & Lyle suffered a severe setback last week -
falling over 15% in one day - after it announced that sales of one of its
core "value added"
products, Splenda Sucralose, would only modestly exceed those achieved last
year. The product is a fine example of how T&L has moved away from its heavy
reliance on commodity products and into higher value ingredients.
But this sugar substitute does not fall squarely into the functional foods
category so its setback is unlikely to impact the wider consumer trend
demanding healthier ingredients and food products.

With functional food now taking off Mr Atkinson believes we are now on the
cusp of experiencing a wave of serious spending by the food companies who
are desperate to develop new health-related products.

Most of this R&D activity will be performed by the large firms as the spend
levels on R&D by small firms involves a higher proportion of their sales
since the cost of a professor is the same regardless of the size of company.

This makes it more difficult for smaller companies to operate at the cutting
edge of food innovation.

One of the few quoted small players in this field is Provexis which has
developed heart health bioactive food ingredient Fruitflow. It uses this
bioactive in its Sirco branded juice drink and has also signed an agreement
with a major food company to introduce Fuitflow into food and dairy
products.

Developing such branded functional foods is a costly exercise for the likes
of Provexis especially now that the big food companies are showing an
increased interest in the area and can throw their weight around.

Nestlé is among the most proactive in this area.
Evidence of how seriously the company is taking the health foods market was
its purchase in December of the medical nutrition business of Novartis for
US$2.5bn, whose products include energy drink Nutrament and weight loss
beverage Optifast. In addition, in June it bought the California-based Jenny
Craig weight loss centres for US$600m as part of a move to up its
credentials in the health market and to gain a large amount of useful data
on customers.

Nestlé has also been involved in nutrition science in the area of diabetes
and weight loss, which led to the company funding primary research studies
on an extract of green tea (EGCG) that resulted in it developing US drink
Enviga that it jointly markets with Coca-Cola under the controversial
strapline "The Calorie Burner".

Chief executive, Peter Brabeck-Letmathe, recently stated that such moves are
all part of the group's "strategic transformation process into a nutrition,
health and wellness company".

Danone has also been manoeuvring itself in such a way.
At a presentation last year Philippe Guyard, sales vice president at Danone,
said the company had gone through a period of selling off parts of the
business to leave itself with what he described as "the best assets for the
next decade" which comprise businesses producing products with a health
angle such as Actimel. Indeed, Danone is seen as the poster child for the
food industry, with its strong scientific links giving its products
credibility. Actimel, the fermented dairy drink, launched in the early
1990s, now boasts annual sales of around €840m and has spawned a host of
imitators.

Among Danone's new innovations is the launch of a range of yoghurts that
provide skin benefits. They form part of a range of products that are
promoted as "skincare from within". According to Atkinson such activities
have given the company the perception in the market of being a true
innovator.

Such strategies are not surprising when you consider the attractive margins
that can be enjoyed in this part of the market. They typically weigh in at
over 15% compared with the 9% to 12% range usually found in the food sector
for regular processed foods. Although Nestlé does better than average with a
margin of 12.8%, this is still below what's achievable from wellness
products.

Not only are there juicy margins on these products but demand for them has
been on an upward trajectory.
Consider the figures in the US from research organisation Beverage Marketing
Corp that show sales in the nutrient-enhanced drinks market have shot up by
240% over the past five years - reaching a market value of US$1bn at
wholesale prices in 2006.

But despite this double whammy of hefty margins and growing demand there has
not exactly been a rush by all food companies to get involved in the health
food market. Part of this has undoubtedly been a result of the
price-conscious nature of the food sector.

Jeff Pearson, professor of molecular physiology at Newcastle University, has
had first-hand experience of how the sector has traditionally revolved
entirely around price and that this has to date held back innovation in the
industry. Pearson has been trying hard to work with some of the UK's large
food companies to incorporate the seaweed extract he has developed as a
functional food ingredient alginate with a high-fibre content. However,
talks with the bakery company Greggs and Northern Foods to incorporate this
into products such as bread have not come to anything to date.

Because of the additional few pence that it would add to the price of a
sliced loaf Prof. Pearson says the food companies have been unwilling to
invest in developing a more health conscious range of products. It is this
lack of foresight that could well separate the potential future winners from
the losers in the market as the effort currently being made by some
companies could place them in a particularly strong position for years to
come.

Among those recognised as creating the platform for growth in this area are
Nestlé and Danone, while the US food group that arguably has made the most
progress has been PepsiCo. The US group once had one of the least healthy
product ranges in the industry, with most of its business generated by two
of America's leading "junk food" brands: Pepsi Cola soft drinks and
Frito-Lay salty snacks. But PepsiCo was quicker than some of its peers at
identifying changing consumer habits, launching a series of acquisitions and
expanding into new products categories in the late 1990s. PepsiCo now owns
four of the seven most respected "health" brands among US
consumers: Quaker cereal, Dole and Tropicana juices and Gatorade sports
drink. Moreover, its portfolio would have been further strengthened had the
French government not blocked on "national interest" grounds its bid for
Danone.

For PepsiCo, the appeal of healthier brands is not limited to their strong
growth. Consumers are prepared to pay more for them. While non-carbonated
drinks account for only 35% of the group's US beverage volume, they generate
67% of the revenues. Almost every new product showcased by PepsiCo at its
recent investor conference in New York was promoted for its health benefits.
The most striking of these were crisps that, it was claimed, contained the
nutritional equivalent of a half serving of fruit or vegetable. And it seems
that investors have warmed to PepsiCo's transformation. The chart below
tracks its share price performance against its old rival Coca-Cola which
comparatively has, to date, failed to grasp the nettle and commit resources
to developing healthier products.

But if this innovation by certain companies is to really pay off and create
long-term value for investors then the current move by consumers towards
healthier food stuffs has to be more than just a passing fad. We believe
this to be the case and that functional foods have long-term sustainability.

What could also benefit the manufacturers that have developed functional
foods is that they end up wresting some power back from the major
supermarkets because a product that is backed with Intellectual Property
(IP) rights gives the manufacturer a defendable franchise.
For must-stock products this makes the manufacturer a particularly
attractive proposition to the major retailers.

And according to Atkinson the levels of IP-backed food products and
ingredients are increasing as innovations become more advanced and food
companies, not surprisingly want to protect their work and their creations.

If food companies are able to successfully manage this and are willing to
commit funds to pushing the boundaries of functional foods, then the
prospects for the future could be rosy as we might only be at the start of a
long-term trend by consumers, to put increasing amounts of healthier foods
in their shopping trolleys.

Regards,

Glynn Davis and Brian Durrant
for The Daily Reckoning
Bill Bonner, in Paris:

We run backwards through life.

Like old hippies still wearing the beads they put on in the 1960s, we hold
onto the familiar props that shaped our lives and ourselves. We give up our
illusions and fashions reluctantly. And we imagine things, not as they are,
but as they were when we first got to know them.

How else can you explain it, dear reader? The typical investor imagines that
he is investing in the era he just left, not the era he is entering. Aging
professors still read Sartre and Marx...and imagine they are the
intelligentsia leading the class struggle. And poor George Bush imagines
that he is John Wayne in WWII! None seem aware that times have changed.

"Embrace the suck," say the grunts in Iraq. Down on the ground in
Mesopotamia the idea of fighting for freedom and democracy must seem pretty
hollow. The suck is everywhere, according to news reports. Near as we can
tell, the whole place sucked even before the arrival of US liberators. But
then came a new chance for liberty - the ballot box - and a civil war.
Thirty-four thousand Iraqis were killed in 2006.

"I think," said President George W. Bush, "the Iraqi people owe the American
people a huge debt of gratitude."

Over the weekend, the 'Army of Heaven' went up against US backed troops. The
heavenly soldiers lost 250 troops, if you can believe the reports. We'd be a
little hesitant to do battle with an 'Army of Heaven,' but it didn't seem to
matter to our allies. In fact, the press didn't seem to know what Heaven
these fellows were fighting for. Were they Shiites? Sunnis? Unitarians?
Nobody seemed to know. All reporters could say was that they were
'militants' which seems like a strange way to describe a group of people in
a country where everyone is armed and ready to kill.

All we know is that a lot of ammunition was shot off and many people
embraced the suck widely and terminally, if not wholeheartedly.

And now, even our military leaders have picked up on the fashion of the
times. They speak of using 'stop losses'
in Iraq – just as they would on Wall Street. The whole world has moved
toward finance, dear reader – it is the Next Big Thing.

Meanwhile, back in America, there is a different kind of suck to embrace.
While the rich are getting richer, the poor are getting their houses
repossessed. Which sucks.
But probably not as much as you might think. Because the poor never really
could afford the houses anyway.

According to the weekend news, 1.2 million houses were foreclosed in 2006,
up 42% from the previous year. And even at the top of the market, a little
softness in property prices is creeping in. Billionaire Kirk Kerkorian put
his mansion in Beverly Hills on the market last year for $25 million. Now,
he's cut the price to
$18 million. He must be getting desperate.

But the real problems are not among billionaires, but among paupers who
can't make their housing payments.
They lose their houses and the people who lent them money take a loss.
Again, this may suck, but at least there is some rough justice to it.

The Orange County Register reports...

"Many of Orange County's boldest lenders are struggling to stay in the black
– and in some cases to stay in business – as their customers miss housing
payments in record numbers.

"These lenders, experts say, exercised poor judgment in a bid to maintain
loan volume last year. They lent money to borrowers with spotty credit,
known as the sub-prime market, without proper regard to their ability to
repay, experts say.

"'What's become clear is a whole bunch of people signed up for loans or were
sold a loan they really couldn't afford,' said Richard Eckert, an analyst
with Roth Capital Partners in Newport Beach."

No, dear reader, the 1950s and 1960s dream of home- ownership hasn't worked
out as planned.

And now, even capitalism's biggest supporters are wondering why this boom
doesn't seem like the ones we used to have...and why so many of today's rich
are not the same sort of rich people we used to admire.

"In capitalism, the most fundamental building block is trust," writes Ben
Stein. "When yeoman farmers sent their savings to banks in London and
Glasgow and Paris, they had to be able to count on it not being stolen.
That was what allowed capital to be accumulated and deployed, and for the
entire world economy to take off.

"When I see what the top dogs at all too many corporations are now doing to
that trust, I feel queasy.
Outrageous — yes, obscene — pay. Greedy backdating of stock options, which
in my opinion is straight-up theft.
Managers buying assets from their trustors, the stockholders, at pennies on
the dollar, then forestalling competing bids with lockups and insane breakup
fees.

"These misdeeds and many, many more are hammer blows at the granite
foundation of trust we built in the 1940s and 1950s.

"It's built on man's notion that he can trust his neighbour with his money,
and that if the neighbour misbehaves, the law will chase him and catch him,
and that the ladder of law has no top and no bottom.

More news...from Adrian across the Channel:

---------------------

Adrian Ash, tending the sick at home in Kent:

- It all seems so long ago now, gentle reader. But remember the start of
this month, when you couldn't get out of bed for tripping over some fool or
the other forecasting the 'End of the US Dollar'...?

- You might have found one or two analysts saying just that in your
favourite free daily reading, of course.
But just as everyone else started to share our prognosis for the world's
greatest ever experiment with paper- based money, the imperial Dollar has
coughed...sat up in bed...and started cracking jokes with the nurses.

- Okay, the greenback's current levels would have looked terminal a few
years ago. But the Dollar refuses to die.
Take the Two-Dollar Pound, for instance. Last week saw Sterling hit a new
15-year high above $1.990. But the magic $2 mark still looks as elusive as
ever.

- "I was and, to some degree still am, a fan of the $2 story for 'cable',"
says Tom Tragett, editor of the Forex Profit Alert. "But I have to say that
I am very disappointed that having taken out the 2006 high
(1.9850-ish) early this month and trading to 1.9920, we didn't at least have
a look at the 2.000 mark..."

- "My long-term chart really doesn't have any major resistance (apart from
psychological 2.00) until around 2.02," says Tom "and then major resistance
around 2.08- 2.1000." So why the hold up?

- Tom Tragett: "It is perhaps down to something as simple as too much press
coverage and the fact that everyone and their dog is talking about it.
Perhaps when all the pundits have forgotten about it and the public have got
bored with it, then it will happen."

- Ditto the Euro. Just after rising to $1.330 late in December, the
Esperanto found itself walking on thin air at the start of 2007. For as
Dollar interest rates threaten to rise – and Sterling rates have risen to
shock all the pundits - the European Central Bank (ECB) is simply shrugging,
despite rising inflation and soaring money supply on the Continent.

- Cue the Euro to tumble versus Sterling – all the way down to a four-year
low beneath 65.5 pence. It's now dropped four cents to trade below $1.300 to
the Dollar, too. Now this week the US Fed meets to vote on Dollar interest
rates for the first time this year. What to expect? What to do?

- "Although gold is not strictly a currency in the same way as, say,
Sterling is, the way it trades against the Dollar means it may as well be,"
says Tom Tragett. He advised his subscribers to go long of gold last week.
"If currency traders see a good opportunity to trade gold, they should take
it."

- Royal Bank of Canada now trades gold as a currency, we note. Instead of
employing commodity traders to deal in the metal, RBC runs its gold trades
off its currency desk.

- What's more, gold at these prices is showing greater strength versus the
rebounding Dollar than other currencies. "Despite weaker than expected
existing US home sales released last week," notes Tom, "the US Dollar
managed to strengthen across the board. But although the Dollar has
certainly recovered over the past two days, it has yet to make a lasting
impression versus the European currencies. Gold meantime broke above £330
and €500 per ounce."

- Gold slipped in early European trade today, dipping back beneath $645. But
the professional market continues to rate gold as a 'buy' this month.
Twenty-two out of 42 traders and analysts surveyed worldwide by Bloomberg
just before the weekend advised buying gold. Twelve said to sell, and eight
were neutral.

- Why the worrying trend towards a bullish consensus for gold? Oil and the
US Dollar continue to loom large in most analysis. Gold is characterised as
an anti- inflation hedge, and by definition it's the anti-Dollar, too –
priced as it is, in Dollars.

- But outside influences aside, the gold price looks good on its own merits.
"Mine production's been falling for some time," noted Jonathan Barratt,
managing director at Commodity Broking Services in Sydney, earlier today.
"At the end of 2006, we actually only had a very minor surplus in terms of
demand and supply. This year that might become more crucial when we don't
have enough supply to meet the new demand and production's falling...

- "That should say gold trades by itself and continues to trend higher."

- On Tom Tragett's technical reading of the gold chart, meantime, last
week's break higher put a stop to the 9- month downtrend beginning in July.
On the Daily Reckoning's longer-term take, we like gold at any price below
£300 per ounce today.

- Simply take the Dollar price and divide by the current Sterling exchange
rate. We'd buy the dips if we weren't already so 'long' of gold that it
hurts...

[Editor's Note: Want full details of a major move in the currency markets
that could strike any day now? Tom Tragett has spotted a 35-year old
currency trend nearing its end. The switch-over could prove more than
dramatic.
Read on now – here:

http://www.fsponline-recommends.co.uk/fpa35years?d1fpac1e

Spread betting may not be suitable for all customers.
Trades recommended in Forex Profit Alert have a high level of risk to your
capital. You may lose more than your original stake or deposit. Consult
your Financial Advisor if unsure. Fleet Street Publications Ltd.
Customer Services: 0207 633 3600.]

---------------------

And more news from Bill:

"If that trust disappears — if the system is no longer a system for the
ordinary citizen but only for the tough guys — how much longer can the
miracle last?"

*** Yes, dear reader, the times they are a'changin.' One age gives way to
another. One delusion is followed by another delusion.

Once people killed for religion, then they killed for politics...and now
what? This is the Age of Mammon, we believe. People will lie, cheat and
steal for money.
Will they kill too? Will they go to war over money?
According to some analysts that is why they always went to war.

But now, if you are hip, you are interested in money – not politics, nor
religion. Only retrograde, dimwitted, or culturally by-passed people are
interested in politics or religion now. Hilary Clinton, with her 'politics
of meaning'...the neo-cons with their dreams of world domination...the Army
of Heaven...the Marxist university professors...Osama bin Laden – they are
all reactionaries; relics of previous enthusiasms. Diehards, with the
illusions of previous generations that they refuse to give up.

We were sitting with Elizabeth, having breakfast at a café on Sunday.

"You know, our ideas don't come from out of nowhere,"
she remarked. "That new book you are working on, for example, the ideas
would have seemed extremely cynical - almost unbelievably cynical - 50 years
ago. But then, the book couldn't have been written 50 years ago. You can
write it now because we have lived through a time when we've seen almost all
the ideas we and our parents had – at least, about public life –
discredited.

"We grew up worrying about Communism taking over the planet...and then the
Berlin Wall just fell down. We marched in anti-war protests in the '60s. And
when the Vietnam War was over, we assumed that never again would any
government be stupid enough to do that again...and here we are!

"We believed in federal poverty programs and later found that they did more
harm that good. And even the war on drugs seems to have become a nightmare.
It's no wonder we are so cynical about what government can do. And cynical
about ideas in general. Our parents read Dr Spock...and took it seriously.

"Our parents didn't believe in breast feeding; they were told it was
old-fashioned and unsanitary. And then it turned out that it was actually
important for other reasons. Very important for the child's immune system,
apparently, and maybe for the emotional well-being of the child too. And
then, we lived through all those fads – such as taking out tonsils (who gets
tonsils taken out now?). And we all dressed in those silly clothes from the
'60s. And went to discos in the '70s. And believed all kinds of things that
turned out not to be true.

"We're now embarrassed by those things...and try to make sense of out them."

Every generation has its particular experiences. Each learns lessons.

"That's probably why people are so fixated on money now," Elizabeth
continued. "Because they feel a little silly proposing to change the world
with politics...or join a religion. They've seen too many disappointments.
And they've grown cynical. Smart people now go to Wall Street or the City,
not to Washington or Westminster.
Nor to Rome, for that matter. Money is all that is left."

Yes, dear reader, it is time for Mammon to have his day.
And then, people can be disillusioned with him too.
Then, where will they turn?


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The Daily Reckoning PRESENTS: As health has crept up the agenda the public's
appetite for functional and nutritional foods is creating a growing and
highly profitable category for both retailers and food manufacturers...

The Highway Men

"Behind every great fortune lies a crime."
- Balzac

You can tell a leopard by it spots. Can you tell a boom by its fattest cats? Maybe.

But, first, how do cats get fat?

It is not the goodwill of the baker that puts bread on a man's table. Thank god. Otherwise, we'd all go hungry.
Nor does the busboy bus for the benefit of mankind.
Instead, everyone schleps, humps, sweats and toils for reasons of his own.

This insight – that people can pursue their own interests, and in so doing improve the lot of everyone – is the central insight of modern economists, at least those who aren't idiots. The theory is simple enough; a man bakes bread not to put bread on others' table, but to put it on his own. That others have bread to eat too is merely the happy consequence of a virtuous system.
Likewise, the electrician doesn't fix your wiring because he likes to see sparks fly. He has to earn a living too, and he does it by providing something useful to others.

The symmetry of it is elegant. The morality of it is appealing. Do unto others, and they will do unto you.
And the more you do for others, the more you can expect them to do for you. That is why a properly functioning economy does seem to deliver something close to rough justice. Henry Ford brought the benefits of automobile transportation to the masses. He deserved to make a lot of money. Andrew Carnegie provided the nation with steel. John D. Rockefeller rolled up and rationalized an early market in oil. Who can say these tycoons of yesteryear did not deserve what they got?

Just look along the 'Gold Coast' of Connecticut in the US. By the early 20th century, you could find the mansions built by the kings of industry and commerce of the period. Greenwich was home to the Simmons family, who made a fortune in mattresses, the Phelps Stokes family, who made their money in copper products, the Milbanks of Borden Condensed Milk and 'Sugar King' Henry O. Havemeyer. Their grand houses were testament to their grand contributions; they were the people who built the wealth of America.

The rich got their money honestly back then, or at least most of it. They put their family names on their products and spent their loot grandly. Silk shirts, top hats, spats, great limousines with chauffeurs, grand balls with orchestras, and servants dressed in proper outfits.

But now, what's this? A new bunch of kings has taken its place in Greenwich, dressed in perma-pressed khaki pants with blue, open-collared shirts. They are richer and busier than any group of bees the honey-pot nation has every produced. Still, don't bother to look for their last names on your refrigerator, or on your armchair, or even on your liquor bottles.

Paul Tudor Jones, who lives in a house in Greenwich that resembles the mansion in 'Gone with the Wind,' we are told, is a very rich man. But what did he do for the money? He is not a king of industry. He does not bring milk to the masses, nor provide copper pipes for their water systems, nor mattresses to rest their weary bones.
Mr Jones is a Bubble King, who manages a $15 billion hedge fund.

In another little town favoured by the new moneyed classes, Norwalk, the granite mansion of steamship magnate and head of US Steel, James Augustus Farrell, has fallen into the hands of another Bubble King - Graham Capital Management, a hedge fund with $5 billion in assets and 150 employees. Graham's chief financial officer lives on the other side of Long Island Sound and is said to commute to work by boat. We wonder why. At this point in the credit cycle we are convinced that bubble kings can walk on water!

Last week we argued hat the present boom is a 'fraud.'
This week, we look at those whom the fraud is rewarding so generously. If they are so richly paid, says the theory of modern capitalism, they must richly provide.
But what?

Take Lloyd Blankfein. The Goldman Sachs man took the wheel at the firm after Hank Paulsen went on to greater glory at the Treasury Department. In the six months from the time he took the job until the end of the year, he is reported to have earned $53.4 million. Let's see, that is about $9 million per month, nearly $2 million per week, or about $400,000 every working day.

And here, our eyes roll up to heaven as we wonder; what hath this man done? This is where the theory of meritocratic markets begins to pinch the common man like a starched shirt at a summer wedding. He's sure it's what he wants to wear; but he's beginning to get uncomfortable in it. There is no better system than free and unfettered capitalism, he tells himself. He loathes the thought of mobs at Mr Blankfein's door...and thinks he is clever enough to resist the meddlers who want to put a limit on how much a man can earn. Still, he senses that there is something not quite right.

How is it that – in a free market system, where people are supposed to be rewarded according to how much they provide to others – today's biggest prizes go to those who provide so little? Mr Jenkins and Mr Blankfein do not add in any appreciable way to the world's wealth.
Instead, they merely move it around; from middle and lower class taxpayers to the super-rich, from householders to speculators and by loading up the world with debt, from the future to the present.

The answer is to be found in the details of modern finance.

Since 1995, the US money supply has risen at about 10% per annum. The world's supply of gold, meanwhile has risen at only about 2% per year. And the world's supply of goods and services only about 3%. A free market presumes that money itself is an honest measure.
Otherwise, all the "information" that free prices give is distorted and untrustworthy.

"The introduction of a non-market driven money controller into the financial system invalidates the assumptions on which free-market economic theory is based," writes Martin Hutchinson. "In 1929-32, as Milton Friedman and Anna Schwarz demonstrated in their 'Monetary History of the United States' that non-market player, the Federal Reserve system, kept money too tight and precipitated a depression of a duration and severity that should, under the classical theory have been impossible."

Central authorities have kept money too loose, deceived a whole generation, and redistributed more wealth than ever in history. Like a cosmetic surgeon moving fat around, they've fashioned a financial world so lumpy and lop-sided, its own mother wouldn't recognize it.

Hutchinson adds:

"Lax monetary policy has continued for far longer than would normally have been possible, fully 12 years, a period of monetary ease and low real interest rates entirely without precedent. For more than a decade price signals have been distorted and resources have flowed in artificial directions.

"Globalization and the greater ease of outsourcing have kept wages down at the bottom of the scale in the US and Europe (an effect which excessively lax immigration policy has compounded.) However at the top of the scale those able to benefit from IPOs, those with excessively large homes, the managers of hedge funds and private equity funds and above all the gatekeepers such as Goldman Sachs, who control access to the overwhelming flood of liquidity, have all benefited far more than they should have in a well-functioning economic system.

"The US and world economic system has been distorted in these people's favour for more than a decade, to the excessive benefit of their net worth. They have enjoyed a bubbling bull market for twelve years, and the wealth of the world has been artificially redistributed into their pockets. They have come to expect such benefits; the Goldman Sachs participation in the Initial Public Offering for the Industrial and Commercial Bank of China, in which the firm and its partners, mostly the latter individually, made a $6 billion profit due entirely to its insider position in the world financial markets, might have landed them in jail for insider trading in a more stringent environment but in this market only further fattened their bonus pool."

Neither central bankers nor bank robbers create wealth.
They merely redistribute it.

The mob idolizes hold-up men; then often, it lynches them. What they will do to the central bankers and their accomplices in the financial industry, we wait to find out.

Regards,

Bill Bonner

Them that has, gits.

Barron's cover story this week – "Rich Man, Poor Man" – illustrates our theme.

The top 1% of the US now has 190 times the wealth of the median American. This ratio has shot up from 131-to-1 in 1983. The core reason is the 'new inflation' over the last 20 years that has gone into financial assets, not into consumer prices. The easy money makes it possible for a group of investors to buy a business they don't really understand, with money they don't really have, at a price that is probably more than it is really worth.

The Feds, in their wisdom, no longer report the number for M3, the US money supply. Adrian van Eck, however, guesses that it is increasing at about a 10% rate. He figures that $1 trillion of additional 'money' will be put into the financial system in 2007 alone.

This is also why the people who control access to money – the people who run financial firms – are making so much of it. Goldman Sachs, for example, has never been more profitable.

That is also why the hottest game in the big casino is private equity.

We give you a personal example. An old friend of ours just announced that he sold his business, which he had started from his home about 35 years ago with almost no financial backing - a genuine American entrepreneurial success.

Now in his 60s, what was our friend to do? He might have run it for another 10 years or so himself. He might have passed it on to his family. Instead, he sold out – for $140 million.

To whom did he sell? Someone in the same business?
Another entrepreneur?

Nope. He sold to a group of investors, who, as near as we can tell, have little actual experience in his industry.

This, dear reader, is how the financial world works now.
Our friend was a rich man before he sold. Now he is very rich and his business has become "financialized." Now it is a financial asset, ready to be sliced, diced, repackaged, loaded up with debt, leveraged, derivatized, securitized and traded in the public markets as though it were a Jackson Pollock painting at an auction for blind people.

Let's imagine that the company made $10 million last year. But now, when the IPO comes out, it will probably reach a market capitalization of over $200 million. Dow stocks are trading at an average PE of 21; even at $200 million, the stock would be a bargain. The CEO and top executives would have stock options. And the venture capitalists and the investment bankers and Wall Street strategists and financiers, would all get a piece.

And where did the investment group get the money to buy the firm? They probably borrowed it, so money was made there, and made again when it was refinanced, and then again, when the refinanced debt was packaged into derivatives, against which swaps were bought and sold.

The whole thing makes our poor head spin. Upon this one company, this one stream of income, a whole industry of money shuffling can go to work.

More news, from Adrian outside The Big Smoke:

---------------------

Adrian Ash, from the snow-capped Weald of Kent:

- Don't whisper it too loudly, but gold suddenly seems all-too popular. The preserve of bloody-minded contrarians for more than 20 years, gold is now finding new friends every day.

- But that doesn't mean the bull run starting in 2001 has finished – not by a long way. This week so far gold has shot higher, breaking above $654 per ounce in New York yesterday, only to slip back from that five-month high when London closed for business.

- This sudden rally looks well-timed for the mainstream financial press – a fact that bloody-minded contrarians shouldn't like. Both the Times and the Telegraph in London just ran bullish reports on gold. The Financial Times notes that institutional money has a "growing love affair with the metal..."

- Deutsche Bank AG, the world's largest securities firm, expects gold to rise as the US dollar falls further, and individual traders and dealers are also backing gold to go higher this year. Bloomberg says that 22 out of 31 finance professionals surveyed earlier this month all advise buying the metal.

- Gold's right up there with Google, in fact! The top 100 amateur investors tracked by Marketocracy.com now recommend Goldcorp, a major gold mining stock, alongside shares in the internet search engine.

- Yet Google now trades for 64 times its 2006 earnings.
Both Goldman Sachs and Bank of America just reiterated their "buy" recommendations on the stock. What on earth did gold do to deserve this red-hot dotcom for company?

- "Now that everyone expects [gold] funds to continue powering ahead, expect a downturn," warns one City fund manager. There's too much "hot money" in the metal, says another.

- Could they be right? There's a lot of speculative money riding on the answer. Net longs in the US gold futures market rose 19% last week. For UK investors, gold broke above £330 per ounce for the first time since late November. It's now trading around €500 for European investors. The Canadian Dollar has now sunk to an 8- month low versus gold, just like the Japanese Yen.

- What's driving this sudden surge in gold demand, we wonder – clueless as ever. Well, the Russian central bank today reported that its gold and foreign currency reserves increased $1 billion to more than $302 billion in the week up to Jan. 19th.

- But even if the Kremlin is growing the portion of its reserves held in gold, that in itself wouldn't explain this week's surge.

- Mining companies are meanwhile buying back gold production they've already sold forward – before it was mined – adding to demand in the physical gold market.
"I'm hearing there are some buy programs," one Swiss fund manager told Reuters on Thursday. "That's why gold is quite well supported."

- But good support doesn't explain today's leap above $650 per ounce. Take Gold Fields, for example, the world's fourth-largest gold producer. It's spending $528 million to claw back gold sold before it was mined from the Western Areas, a mine it just bought. These forward sales were terminated at an average spot gold price of
$622 per ounce. Gold has since risen to $645 as we type...and the gap between those two prices represents a loss to the miners – and extra demand amid today's rising gold market.

- But the new surge in gold demand can't solely be down to Gold Fields. Against the Australian Dollar, gold is now trading at its highest price since Sept. Versus the Swiss Franc, gold has now hit its highest levels since June. Something else must be afoot.

- "I'm very bullish on gold," says Frank Holmes, chief executive officer of US Global Investors Inc. in San Antonio, USA. His firm manages the $876 million World Precious Minerals Fund, so you'd hope he knows what he's talking about.

- "Gold's in a long, secular bull market," he goes on.
"It's quite amazing to see that the gold ETFs are now bigger than all the gold-equity funds combined."

- But the exchange-traded gold funds still don't count for much versus the broader stock market. The US gold ETF, StreetTracks GLD, has the same market cap as Mattel Inc. In London, the LyxOr GBS is equivalent to Grainger Trust, the mid-cap real estate company.

- Meantime the famous Dow/Gold ratio says it would now take nearly 20 ounces of gold to buy the Wall Street stock market index. At the top of the DotCom Bubble in 2000, the ratio reached more than 43. At the top of gold's last bull market peaking in Jan. 1980, the ratio sank to a reading of just one. A single ounce of gold bought the entire Dow Jones Industrial Average.

- In other words, gold may have found lots of new friends. But they haven't all bet the farm on gold going higher – not yet. The time to sell will be when everyone's "long gold". That's a long way off today.

---------------------

And more views from Bill:

*** Oh my! Ford reported its worst year ever. In 2006, the automaker lost $12.7 billion.

*** "US home sales in 2006 have biggest drop in 17 years," says a headline in yesterday's news.

First, sales go down. Then, as buyers realize that the market ain't what it used to be, prices go down.
According to yesterday's report, the prices on the houses that were sold last year were actually slightly higher than the year before. But...this is a new year.

Meanwhile, David Lereah ought to get some kind of bonus...or at least a health check up. The man is chief economist for the National Association of Realtors and a fine shill for the industry. In his view, the US housing slump has "established a bottom." Now, wait a minute.
We're having trouble picturing it. A bottom that is higher than the top? What kind of strange animal is this? Oh, it is one standing on its head!

Hey...anything is possible.

*** Vanity...vanity...all is vanity.

Human vanity must have reached some epic peak. In today's 'Metro' newspaper, an article tells us what we can do to "Save the Planet." Widespread is the notion that the earth has been given to us...rather than we to it. We are expected to take charge of it, to protect it, to nurture it, as if it were an orphan. Presumably, we are all now masters of the universe. If something bad happens to the earth, well, we'll just have to move to Mars. And then we can destroy that planet too.

Maybe it is true. Maybe we are the crown of all creation. Maybe we are meant not merely to lord it over the fowl of the air and the fish of the sea...but over the entire solar system.

We don't know.

>From the dust of the earth have we arisen, dear reader.
We are part of it...we have evolved no further than any other species. Just differently. Perhaps the grace of God is upon us, or perhaps it is not. And even if it is, it is by no means a sure thing. God can change his mind about his chosen people. It wouldn't be the first time.

And as for the bubble planet. "The earth would stand by unmoved at the destruction of the entire human race,"
says the Marquis de Sade in "The Persecution and Assassination of the Marquis de Sade as Portrayed by the Inmates at the Asylum of Charenton."

*** And ah...the wages of vanity...

"Who the hell is shooting at us," an American sergeant wants to know. Quoted in the International Herald Tribune, Sergeant Biletski was under pressure. He and his men were trying to conduct an operation in Baghdad.
They were trying to suppress 'insurgents.' But they didn't know who the insurgents were, where they were, or what they were doing. Either the Sunnis were shooting at them. Or the Shiites. Or the Iraqi army. Or just people who are sick of having their doors smashed in by foreigners. All they knew was that people seemed to be shooting at them from all directions...and their Iraqi allies had vanished.

"This place is a failure," Biletski suggests.

If it weren't for people getting killed and maimed, the whole thing would be a farce. For reasons of pure vanity, the US invaded the place. All we had to do was to knock that wicked Saddam Hussein off his perch and white doves would come out everywhere in the mideast.
And now, poor Sergeant Biletski, sent to a dreadful place to do dreadful work, finds out the truth.

The Iraqis, even those who are supposed to be sympathetic to the invaders, don't fight like Americans.
Can you believe it, dear reader? These people fight, well, like Arabs! After all these generations; they have still not learned the 'western way of war.' Instead, they hit and run, they stab us in the back, they take pot shots and go back to drinking their disgusting tea.
They kill each other and then, when we intervene, they all turn on us.

Who would have imagined? Who could have guessed? Who could have known?

Even the war mongers are trying to wash their hands of the whole business...

"I for one have become disillusioned with dreams of transforming Iraqi society from the top down," says David Brooks in the New York Times. The delusional hawks now say they are moving on to new illusions.

That is how it works. The world improvers don't fight their own wars. That's for others. And let others pay the taxes, too. Then, when the whole adventure inevitably goes bad, they are on to the next new thing.

Soldiers...taxpayers...voters – somebody's got to hold the bag.

Sgt. Biletski, you're on your own now.

UK Gold Mines

UK GOLD MINES
by Brian Durrant

For the British, our homes have been more than dwellings, they have been
gold mines. Over the past 10 years real (inflation-adjusted) house prices
have doubled, while real disposable incomes have risen by only 29%. Latest
figures available show that in 2005, housing made up 53% of the total wealth
of UK households, compared with 39% 10 years earlier. Yet again we have been
told, the housing boom cannot last and the end is nigh.

A major contribution to the debate comes from David Miles, former advisor to
Gordon Brown. He says a UK housing bust is "likely in the next few years"
because house price growth has been grounded in unrealistic expectations of
double-digit annual increases. Once house price rises come down below
expectations, he thinks, significant falls are likely. But he is reluctant
to put his neck on the line regarding when this will happen. He says "A
sharp fall in real house prices is likely at some point in the relatively
near future, though it could be one or two years away".

Indeed Mr Miles himself admits that his model shows why trying to call the
housing market over the next year or two is "pretty much hopeless". So there
we have it, like those who tell the time from a stopped clock, the people
who predict that British house prices will tumble may be right one day. But
it has been a long wait and to date it has been wrong to take their advice.

Indeed, talk of a house price crash in the current cycle is already over 10
years old. In 1996 Bob Beckman, the self-styled property market bear,
predicted a 20-year fall in UK house prices. Then in 1997 some commentators
feared that a Labour win would hit prices hard. The September 11 attacks
persuaded many, but not us, that the housing market was about to dive.

Professor Oswald urged British homeowners to sell up in May 2003. Capital
Economics forecast that house prices would fall by 20% from 2004 to 2006.
Not to be outdone, in February 2004 stockbrokers Durlacher issued a report
warning of a 45% decline in house prices even if unemployment and interest
rates remained the same! But we have always maintained the view that the
housing market would have to be the victim rather than the assassin of the
British economy. Accordingly Durlacher's forecast turned out to be more
doomed than the property market.

Every previous crash in UK house prices, in the early 1930's depression, in
the stagflation years of 1973-76 and most recently the early 1990s were
accompanied by a severe recession. The crash of early 1990s followed a
doubling of interest rates to 15% and a near doubling of unemployment from
1.6m to 3m. So with Britain enjoying
57 successive quarters of growth there is no reason to believe that a house
price crash is imminent. History also tells us that the scale of house price
crashes, though painful for those that bought at the top, has been quite
modest. Both in the early 1930s and early 1990s the fall in house prices
from peak-to-trough was only 13%.

Mr Miles' thesis however does not require the economy to be the assassin of
the housing market. He believes that when house price inflation fails to
meet expectations, demand for housing will fall. But surely sellers will not
cut prices unless forced to do so by economic circumstances.

Most house moves are voluntary. If homeowners are faced with selling at a
price they consider to be too low, they are more than likely to withdraw the
property from the market. This is why when the property market is overvalued
the correction tends to take place by means of price stagnation rather than
a crash.

Asset bubbles emerge when the dominant motive for purchase is the
expectation of selling on soon to someone else (a bigger fool) at a higher
price. The dot.com bubble collapsed because the market ran out of bigger
fools. Now as far as housing is concerned, despite the growing popularity of
buy-to-let and second homes, the overwhelming majority of those who buy
property plan to live in it. The motives for buying are different from
dot.com stocks.

For five years now, the expert consensus that UK property prices are
overvalued has rested on one central observation that the ratio of house
prices to incomes is historically high. Of course you would expect a share
price on a demanding price-earnings ratio to revert back to its long -term
norm, but what about houses? Houses are different. They are both an asset
and a commodity.

Let me explain. The primary purpose of a house is to provide shelter.
Consider the market for real estate in Idaho or Nebraska. There is more land
there than anyone could wish to build on and usually there is not much to
choose between the prestige and convenience of different areas of spacious
cities. In these areas house prices are low, stable and tend to move in line
with income.
Now consider London or Manhattan. Most of the price reflects the location
rather than the accommodation.
Transfer a mews property in Belgravia to Paisley in Scotland and it would
lose most of its value.

You cannot make more houses in Mayfair or East 69th Street, so the prices of
properties in prestigious areas resemble the price of a commodity in short
supply. The aspirant rich do not displace the very rich from the most
prestigious locations but they make the very rich pay more for them. Unlike
a share in BP, houses in prime locations are also a symbol of status and
prestige and that is why the housing market does not conform to simplistic
valuation models. This is why forecasts of a house price slump are about as
useful as a stopped clock.

Regards,

Brian Durrant
for The Daily Reckoning

Bill Bonner from Paris, France:

"It's worth remembering that markets were very upbeat in the early summer of
1914", said former U.S. Treasury secretary Larry Summers.

Summers was warning the attendees to this year's upcoming World Economic
Forum in Davos, Switzerland, that there are precedents for such bountiful
seasons.
The trouble is history shows that such incredibly good times tend to be
followed by incredibly bad ones.
"Financial history demonstrates that the biggest liquidity problems always
follow the moments of greatest confidence," Summers continued. "Complacency
can be a self-denying prophecy", Summers says.

"A glut of cheap money and the strongest global economic growth in three
decades have encouraged banks, private- equity firms and hedge funds to bet
that the good times will keep rolling," says a Bloomberg report.
``It's too good to be true,'' adds Vittorio Corbo, head of Chile's central
bank, who will speak at a seminar in Davos about the dangers of derivatives.

``Tomorrow the mood could change. We have to be prepared."

These voices of warning will soon be echoed by Jean- Claude Trichet, head of
the European Central bank. They will all certainly be dismissed. The crowd
will remind itself that it heard similar warnings last year. And lo...
nothing bad happened. Last year too, the self-same Summers told Davos
attendees to watch out... to be more prudent in their financial affairs and
more modest in their projections. Of course, they did just the opposite -
which is why the Great Credit Boom continued.

Takeovers last year rose to a record $3.6 trillion, according to the
Bloomberg report. Morgan Stanley's Capital International World Index of
stock prices rose to a new record high on Jan. 3rd... and the head of
Goldman Sachs, the alpha male of Wall Street, earned a bonus of $53.4
million.

Prices of London's priciest digs - where the super-rich are roosting these
days - grew even more expensive last year. They rose nearly 30% in a single
year. And, bonuses for Wall Street's masters of the universe, its five
largest investment firms, rose too - by 30%.
Meanwhile, one of those firms - Morgan Stanley - announced another mega-deal
in the real estate sector, last week. The company says it bought CNL Hotels
& Resorts for $6.6 billion.

What's a New York investment house doing buying a hotel chain? What does it
know about running a hospitality business? Nothing. But gone are the days
when the owners of a business knew the business they were in. Now, the
economy has been financialized and the financializers are getting rich.

In the old days a family might run a hotel chain, trade the stock among
themselves - at, say, 5 times earnings - and put an ambitious nephew, cousin
or son at the top post. They would, of course, be careful not to pay him too
much... and be sure to put other nephews and cousins in the business too...
to give the enterprise more management depth and to keep control in family
hands.

But along comes a big investment firm with a buyout offer, backed by debt
financing. The offer is too good to refuse. So, a 'liquidity event' turns
the family into billionaires. The company is placed in the hands of
professional managers and goes public at 20 times
earnings. The investment firm makes millions on
the deal.

And now, the new CEO earns $10 million a year and thinks he is underpaid.
Meanwhile, the firm sells millions in bonds, which are then repackaged and
resold, with swaps and derivatives all over Wall Street. And the stock -
which is now held by millions of people who wouldn't know the hotel business
from a gas station - soars.

Before... there was just a family with a family asset, a hotel chain from
which it earned a living. But now, millions of people own a stock that has
gone up in price. Investment bankers can afford to build a bigger, swankier
house in Greenwich, CT. Hedge funds, pension funds and wheelers and dealers
all have multi-million dollar positions in the company's debt. And
investment industry pros can earn their own fortunes just by trading the
company's stocks, bonds, and derivatives.

Is this a great system, or what?

'Or what'... is what we wait to find out. In real terms, there is still a
hotel chain, with a certain stream of revenue and profits. But this new
financialization has created a whole industry... and a whole new flood of
liquidity. People have 'wealth' that didn't exist before. The only trouble
is, the 'wealth' is a fiction.

But when you get to the top of a liquidity bubble,
who cares?

Debt... debt... debt... nobody seems to worry about it going down. The gap
between good debt and bad debt - that is, between emerging market bonds and
those of the U.S. Treasury - fell to a record low last week. And hedge funds
in the U.S. are the most leveraged since 1998, the year that Long-Term
Capital Management collapsed, according to Bridgewater Associates.

The European Central Bank at least still keeps track of its money supply. It
reports that M3 was clocked last fall rising at nearly a 10% rate - its
fastest in 16
years. This prompted the ECB to raise its key
lending rate.

"Current risks are ludicrously underpriced", says Willen Buiter a professor
at the London School of Economics.
"At some point, someone is going to get an extremely nasty surprise."

So far, the surprise has been that no surprise has come.
But the longer it delays... the nastier it is likely to be.

More news from Eric Fry:

---------------------
Eric Fry...in California:

- The rain falls on the rich and the poor alike. That's symmetry. But after
the rain lands, the rich receive a much larger share of the water than the
poor. That's asymmetry. Indeed, some of the rich funnel as much water as
possible toward their own personal reservoirs... even
though they have more than enough water already.
That's greed.

- And some of the rich drain the wells of their neighbours and clients to
water their golf courses.
That's Wall Street and the City.

- Greed is one reason why brokerage stocks might be
dangerous stocks to own at their current
lofty valuations.

- No automatic connection exists between greed and poor stock market
performance. But bad things just seem to happen to the common shareholders
of companies that greedy managements oversee. Names like Enron, Tyco and
Worldcom come to mind.

- In this context, names like Merrill Lynch and Morgan Stanley do not yet
come to mind. But the big brokerage firms of Wall Street and the City have
veered perilously close to the shoals of excessive greed. And this course
endangers shareholders because it squanders capital that could be funding
productive activities, or providing a balance sheet buffer against future
unanticipated "adverse outcomes."

- As long as the financial markets remain robust, however, no one will care
how many billions of dollars might slosh into the brimming bank accounts of
elite traders. But financial markets are not always robust.
The same Citigroup that is today lavishing billions on its top employees was
once the Citibank that flirted with bankruptcy in the early 1990s.

- Bank and brokerage stocks are already risky enough, thanks to the
perennial risks of falling financial markets, rising interest rates and
exploding derivatives
books. Avaricious management teams do not lessen
these risks.

- The owners of brokerage shares, therefore, do well to remember that Wall
Street and the City are forever and always about money. They are about
making as much money as humanly possible, in as many different ways as
legally defensible. They are not about charity or altruism or the "greater
good."

- Wall Street and the City are also about survival of the fittest - the
"fittest" being those who manoeuvre themselves into obscenely
overcompensated positions. Do these alpha-bankers and alpha-traders deserve
their millions? In a primal sense, yes... just like a great white shark
deserves a slow-moving harbour seal... or a falcon deserves a hapless
bunny... or a coyote deserves the neighbour's dozing Pomeranian.

- But these metaphors become a bit sinister when one realizes that the
"hapless bunny" and the "dozing Pomeranian" are the common shareholders.

- The big brokerage firms make most of their money by speculating with
capital that does not belong to them, or by levying fees and commissions on
capital that their clients put at risk in the financial markets. In other
words, shareholders and clients bear most of the risks.
Yet whenever any form of success arrives, the elite of Wall Street and the
City always garner an outsized share of the rewards. That's asymmetry. And
in this case, asymmetry might just be another word for "greed."

- Consider the case of Morgan Stanley. The firm posted net income of $7.4
billion in 2006 - an impressive $3.7 billion more than 2003 earnings. But at
the same time, total compensation at Morgan Stanley last year topped
$14.3 billion - a whopping $5.8 billion more than in 2003. Does it not seem
odd that employee compensation is nearly twice the firm's net income? And
does it not seem odd that employee compensation has jumped 60% more than net
income since 2003, even though the number of employees has barely increased
at all? In fact the employee count has DROPPED since the end of 2002.

- Most of the individual recipients of year-end bonuses are not to blame, of
course. They are simply blessed.
And as blessed individuals, they enjoy the privilege of sharing their wealth
in altruistic and charitable ways... or not. Likewise, the stockbrokers who
toil for these firms deserve no scorn. They earn their keep like
entrepreneurs, and must conduct their activities in a very open and
competitive marketplace.

- But the leaders of Wall Street and the City - those who perpetuate the
status quo - might consider taking a minute of "quiet time" to consider the
propriety of their practices. Do these folks honestly believe that they
deserve their multi-million-dollar bonuses, simply for presiding over bull
market trading activity? And do they honestly believe that "star" traders
deserve their multi-million-dollar bonuses, simply for speculating with
someone else's capital.

- To re-phrase the question: Isn't it possible that Wall Street's and the
City's elite employees should receive a somewhat smaller share of corporate
cash flows than they do currently... and that the common shareholders should
receive a somewhat larger share?

- "Nobody who is hired help and who plays with other people's money
'deserves' to earn $100 million," gripes Steven Pearlstein in an article for
the Washington Post.
"That's certainly true in a moral sense. But it is also true economically...
Let's start with the fundamental asymmetry of risk in the investment
business.

- "If you were putting your own money at risk,"
Pearlstein continues, "there's the possibility of making lots more, but
there's also the possibility you could lose it all. The same, however, can't
be said if you are an investment banker, a hedge fund manager or a trader in
credit default swaps.

- "In that case, if you do well, you get a percentage of the winnings or the
value of the deal. But if you do poorly and your clients lose money, the
worst that happens is that your bonus is zero. You never have to give back
anything from the bonus you earned last year.
And you still get a base salary comfortable enough to keep up payments on
the Upper East Side townhouse, the summer place on Nantucket and the
tuitions at Brearley."

- No one cares about over-the-top compensation schemes when business is
booming... and when share prices are rising. But on the downside, everyone
cares. During the Great Bull Market of the late 1990s, almost no one
bothered to question the exorbitant option grants that Silicon Valley
companies lavished on their employees (and on their board members!)

- But once the Great Bull Market ended, and the Nasdaq imploded, a new bull
market in recrimination and litigation began. Class-action shareholder
lawsuits erupted from the smouldering remains of former Wall Street
darlings, as desperate shareholders tried to recover some small fraction of
their losses.

- Would it not have been much better for these abused shareholders to sell
when the selling was good? Would it not have been better to have raised a
sceptical eyebrow toward the questionable corporate practices of the era and
headed the other way... even though questionable corporate practices were
producing rising share prices?

- "Excess compensation in one area leads to excess compensation in others",
Pearlstein concludes. "And that, in the end, is how this arms race in
executive pay comes about. It's more about envy than economics. The
corporate executives complain they should make as much as the investment
bankers, the bankers are upset if they don't make as much as the
private-equity guys, the private-equity guys demand to make as much as the
traders and the traders won't sit still until they are paid like hedge fund
managers."

- Excess compensation also leads to sub-optimal shareholder returns. Greed
and capital preservation just don't seem to mix very well, especially when
the greed belongs to someone else and the capital belongs to you.

---------------------

And more views from Bill Bonner...

*** Oil bounced at the end of last week. Maybe the bottom for oil is in.
Gold rose strongly too - up $8.30.
The correction in the gold market seems to be over.
Could it be that the 'financialization' of the economy has other investors
worried? Gold is the traditional way to protect against financial surprises.
As we explained last week, it is not a perfect way to store wealth; but it
is better than any other way ever discovered. Most of the time, you will do
yourself no favour holding it.
Most of the time, it is as useless as life insurance.
But come that day when you need it, nothing is more useful, or more welcome.

"Real Estate Will Underperform Inflation for Decades,"
writes Dan Forshee.

Most people think that real estate is a safe, reliable place to put your
money. But that is just a trick of perspective. Once you have climbed to
the top of a mountain, everything appears to be downhill. In fact, there
could be many steeps hills between you and the bottom... and long periods
where you are not going down at all.

>From 1915 to 1965, says Forshee, property doubled in price, but rose only
about 1.32% per year. But the dollar gave way during this period, too.
Housing prices didn't keep up. So the typical house owner actually lost
about a third of his purchasing power.

In real terms, the prices of 1910 went down all the way to the 1990s. Only
recently did they begin to go up enough to offset inflationary losses. And
only in 2005 did they regain the heights last seen early in the last
century. From here, it looks as though they did nothing but rise, but in
fact, property prices in the U.S.
mostly went down for the last 100 years.

Another way to look at this is to recall Larry Summers'
warning about 1914. Liquidity and confidence were running at epic highs just
before WWI. When they crashed, they crashed hard. Property in the US did not
recover for another 91 years. You can also see the long trends in real
property prices simply by opening your eyes, says Forshee. The higher real
property prices go, the taller the buildings property developers put up.

"Higher prices of real estate make it profitable to build tall buildings
because the higher construction costs are offset by lower land costs. Most
major cities in the United States had tall buildings built between
1914 and 1933 during the real estate boom of that time frame. After the
tallest building was built, it typically took about 41 years for the real
estate prices to return to levels that would justify buildings of similar
height." Here is a data set of example cities:

Will 2007 be another good year for the global economy?

The mood among those gathered at Davos seems to be pretty cheerful when it
comes to the global economy. Jacob Frenkel, vice chairman of AIG, took a
swipe at those of a more bearish nature, saying, "the story of 2006 is the
story of what did not happen." Among things that didn't happen in 2006, "the
dollar didn't collapse" and "oil prices didn't reach $100".

But arguing that something won't happen, simply because it hasn't
happened yet, is a very weak way to back up your point of view. You could,
for example, argue that a global catastrophe caused by climate change is not
going to happen because it hasn't happened yet - but we doubt that argument
would get a sympathetic hearing in many corners of the world at the moment.

Meanwhile, you can practically get two dollars to the pound, and the
latest little bout of cold weather which has managed to paralyse half of the
UK (in January of all months? Who could have predicted it?) seems to have
injected new life into oil prices, which are headed back up to the mid-$50s
per barrel. So it seems a bit early to be dismissing either the dollar or
the oil price as potential problems.

Another potential worry, which the delegates were more exercised
about, is that of globalisation's losers - mainly the Western lower and
middle classes. Morgan Stanley's Stephen Roach pointed to the fact that the
share of national income going to workers in the West has fallen to historic
lows, even as the amount going to corporate profits is at a record high.

Professor Robert Shiller of Yale University warned a backlash could
lead to social unrest and a retreat into protectionism. He argued that
governments need to raise taxes on the wealthy to help those being left
behind. "Once inequality increases it's a problem that will be with us
forever."

Inequality is certainly a problem - but we're not entirely sure why
the solution most often proposed these days seems to be to raise taxes. The
tax system should definitely be more equitable than in the UK, where the
burden seems to fall most heavily on those somewhere in the middle - but you
could improve this by cutting taxes on the less well-off, rather than
raising them at the top of the scale.

This idea does seem to get some people very worked up, but that's
because we're still stuck with this mindset that tax should essentially be a
way to punish the rich for having more money than the rest of us. But that's
not the point of taxes. The point is for the government to raise money to
spend on improving public services - but despite a rising tax burden and
soaring public borrowing, the current government doesn't seem to have much
to show by way of improvements in education, health or law and order. So
maybe it'd be better if we all were allowed to keep more of our money and
then spend it as we see fit - after all, we all tend to be much less casual
with our own money than we are with other people's.

Another problem the delegates highlighted was also to do with money
and who has it - specifically the global derivatives trade. Zhu Min, the
Bank of China's executive vice-president said: "There is money everywhere.
You can get liquidity from the market every second for anything. Derivatives
are eight times global GDP and much of the money is flowing to Asia, where
people have no idea what risks they are taking."

And he's not the only one worrying. Ambrose Evans-Pritchard in The
Telegraph reports that Montek Ahluwia of India's planning commission "said
the derivatives revolution had allowed banks to 'park risk elsewhere',
disguising the danger."

As we've argued for a while, this money glut has fuelled asset
bubbles across the world. And one of the biggest - and the one which poses
the real threat this year - is the US housing bubble.

And this is where arch-pessimist Nouriel Roubini was on hand to
disrupt the happy Davos picnic. He pointed out that 16 sub-prime lenders
have already gone bust in the US, and argued that the US is headed for a
hard landing. We'll cover this in Money Morning again shortly - but there's
more on why the US property bust has yet to run its course in this week's
issue of MoneyWeek, out on Friday.

Turning to the stock markets...

The FTSE 100 broke through the 6,300 mark yesterday to end 87 points
higher, at 6,314. Investors were cheered by the latest Bank of England
interest rate minutes, which suggested that interest rates could have
peaked. The mining sector put in a strong performance, with shares in
Vedanta Resources climbing over 5% and Kazakhmys and Xstrata also making
good gains.

Elsewhere in Europe, the Paris CAC-40 closed 63 points higher, at
5,638. In Frankfurt, the DAX-30 ended the day 69 points higher, at 6,748.

Across the Atlantic, the Dow Jones hit a new record of 12,621,
having gained 88 points. Tech stocks were boosted by Yahoo, which has
introduced new search engine technology, helping the Nasdaq to a close of
2,466, a 35-point gain. The broader S&P 500 ended the day 12 points higher,
at 1,440.

In Asia, the Nikkei was hit by profit-taking and ended the day 49
points lower, at 17,458.

Crude oil was trading at $55.23 today, whilst Brent spot was at
$55.35 in London.

Spot gold was at $646.70 this morning, down from $657.20 in New York
late last night. Silver was unchanged at $13.18.

And in London this morning, shares in airline BA fell as cabin crew
moved a step closer to taking strike action after talks broke down. The
Transport and General Workers Union, which is threatening to strike next
Tuesday and Wednesday over BA's policy on sick leave and pay scales, said
that the 'door remains open' for a settlement. BA shares were down by as
much as 1.1% today.

And our two recommended articles for today...

Where next for the crude oil price?
- After holding in the $60s for many months, crude has recently
dropped towards $50 a barrel. It may have started to edge higher again in
the past few days, but what's the longer-term outlook? For more on why it
fell in the first place - and if it will fall again - read: Where next for
the crude oil price?

China's Unquenchable Thirst - oil and the rest

The Daily Reckoning PRESENTS: Africa has found more than a buyer for its raw
materials. It has found a new source of aid and investment. China is now
Africa's biggest source of aid...

CHINA'S UNQUENCHABLE THIRST
by Brian Durrant

In the Spring of 2004 there was a spate of thefts of manhole covers in
Gloucester and Aberdeen, the craze spread to East London, Montreal, Chicago
and Kuala Lumpur. As darkness fell, they would be levered up, sold to local
merchants who cut them up and loaded them onto containers. The motives for
the thefts were financial.

China's runaway economic growth had forced up the price of steel and scrap
metal prices followed suit. The 130 manhole covers stolen in Aberdeen were
worth £13,000 and the metal would be shipped to China and used to make
washing machines and the like. At the time this incident brought home to me
the growing influence of China on our way of life.

Then this autumn I read a news item about an outbreak of rioting in the
Zambian capital Lusaka in which supporters of the defeated opposition
alleged vote rigging. Nothing new here, you might say. But what really
caught my eye was that the opposition's anger had been targeted at Zambia's
rapidly growing Chinese community. Beijing had been investing heavily in the
country and Chinese firms, some of which came under attack, have been
accused of driving Zambians out of business. Just as the manhole cover
thefts were a symptom of China's voracious appetite for raw materials, was
this evidence of 21st colonialism another manifestation of the same thing?

The Chinese have had a stab at securing influence in Africa in the past. In
the 1950s Zhou Enlai backed left wing governments, giving aid and funding
lavish infrastructure projects. But the strategy was not very successful.
Maoist China was not wealthy enough to establish China as a leading force,
while the export of revolutionary ideas did not go down well with African
leaders. Now, rather than using ideology, China is using trade...with
impressive results.

While African trade with the EU and the US has been declining, its trade
with China has been booming, because unlike the west, China imposes no
duties on commodity imports. Europe's share of total trade with sub-Saharan
Africa has fallen from 44% to 32% over the past 10 years, meanwhile China's
has increased from around 2% to 10%. Over the same period trade between
China and Africa soared from $3bn in 1995 to $32bn last year. China is now
Africa's third most important trading partner after the US and France.

China's push for breakneck economic growth has resulted in an unquenchable
thirst for raw materials, including copper, cotton, platinum, lumber, iron
ore and most important of all, oil. This year Angola overtook Saudi Arabia
as China's largest supplier of crude oil. China realises the strategic
importance of oil supplies to its development plans. In January this year
the China National Offshore Oil Company paid $2.27bn for a 45% stake in a
Nigerian oilfield, trumping a $2bn bid from an Indian rival. China has shown
a similar interest in other oil producers like Sudan, Equatorial Guinea,
Gabon and Congo-Brazzaville, which already sells a third of its output to
Chinese refiners.

Moreover, Africa has found more than a buyer for its raw materials. It has
found a new source of aid and investment. China is now Africa's biggest
source of aid.
This year alone it has pledged more than $8bn in loans to sub-Saharan
Africa. By comparison in 2004, the US gave loans of $3.5bn, France $3bn,
while this year the World Bank is lending $2.7bn. This investment is often
an entry ticket. For example, in Nigeria, Chinese promises to invest $4bn in
refineries and power plants were conditional on securing oil rights. In
Angola a $4bn low-interest credit line to fund infrastructure rebuilding
after decades of war is repaid in oil.

African nations have found that dealing with China offers fewer
complications than with the IMF, where loans are sometimes conditional on
good governance and human rights records. China has also flooded Africa with
workers in straw hats from the Chinese Middle Kingdom.
There are an estimated 44,000 Chinese workers in Namibia. The Chinese are
building a railway line in Angola from the capital Luanda to the eastern
province of Malange. There are also numerous Chinese traders that sell cheap
electronics, plastic goods and textiles manufactured in China, undercutting
local traders and manufacturers.

However, given China's unsatisfactory human rights record it is not
surprising that it backs the vilest regimes in Africa. When Western nations
imposed sanctions on Robert Mugabe's Zimbabwe, China stepped in with aid,
arms and electronic communications technology for the corrupt tyrant. From
then on Mugabe launched operation Murambatsvina, in which 700,000 had their
homes or businesses destroyed. China neutered all attempts at discussion,
let alone condemnation, at the UN Security Council.

China's record in Sudan is just as bad. When in 2004 the Sudanese government
was said to be fuelling the genocide in Darfur, China resisted UN military
intervention and instead invested $150m in the country that year, three
times as much as any other donor. In turn China has become Sudan's largest
export market.

But China's aid and support for African nations at the UN comes with one
important proviso: the ditching of their recognition of Taiwan. To date 48
African countries paid due obeisance to Beijing, which brings us back to the
Zambian presidential elections. Given the suggestion that Michael Sata, the
main opposition candidate, would have recognised Taiwan, the Chinese
ambassador said he would consider cutting diplomatic relations if he won.
This is tantamount to a public intervention by China into the internal
affairs of a sovereign African country.

There will be plenty of hand wringing in the West about its impotence in
these issues, but the actions of its leaders are partly to blame. The war in
Iraq has preoccupied the West. Whether the mission was to secure oil
supplies for the West, give ordinary Iraqis security or spread freedom and
democracy in the region, it has failed dismally on all counts. And there is
a wider diplomatic and strategic cost to the West. While Bush and Blair got
the West bogged down in Iraq, China has stolen a march on the Western
interests in Africa. With the result that China has an increasingly tight
grip on oil supplies and political influence in the region. The West will be
regretting playing its first "regime change" card so ineptly.

Regards,

Brian Durrant
for The Daily Reckoning

Bill Bonner, at the wrong end of Blackfriars Bridge:

Was ever there a better time to work on Wall Street, or in the City of
London?

Probably not. Goldman Sachs employees made an average of $622,000 last year.
A group of 11 top executives carved up $150 million. All together, the firm
paid out $16.5 billion in salaries and bonuses.

Of course, you have heard all of this before...

The do-gooders are howling about it. The press is all over the story. Even
Congressional blowhards are beginning to blow on the issue. They see a
headline or two coming out of it...maybe a lift in their ratings.

The voters don't know what to make of it. On the one hand, they like to
press their noses to the glass and look in on the rich and famous. They like
to see rich people; it gives them hope for the future. And they know that in
America it doesn't take any special brains to become rich; they've seen
Paris Hilton and Ted Kennedy on TV. They imagine it must be some kind of
luck behind it. So they buy lottery tickets and stocks and still think it
might happen to them.

On the other hand, they sense that something is not quite right. How come
these fellows make so much money, they wonder? Where does it come from?

And then they turn to their own situation...and they feel a little left
behind.

"Retirees Up Against Debt," says the headline on today's USA Today
newspaper.

While the rich get richer, the poor seem to get poorer.

"From 1992 to 2004, the percentage of US households 55 and older with
overall debt grew faster than the rate of the overall population," says USA
Today. "Those 75 and older packed it on most quickly: The average load for
those households with debt shot up 160% to an average of
$20,234 during this time, according to research by the Employee Benefit
Research Institute, a non-partisan group that studies economic security.

"Among households 65 and older, the average amount of credit card debt more
than doubled from 1992 to 2004, to $4,907, according to Demos, a New York
think tank.
Seniors' debt levels are catching up to those of younger people.

"Seniors in and approaching retirement — such as the oldest baby boomers —
are carrying 'debt loads that their parents would not have considered,' says
Sally Hurme of AARP, the advocacy group for people 50 and older. 'This does
not bode well for financial health.'
A record number of old people are going bust, continues the report, with
people 65-and up the fastest growing group in the bankruptcy courts.

Their eyesight may not be what it was, but they can still read the paper.
And what they see is a strange
sight: all over the world, people are getting rich.

Yesterday, stock markets in Asia and Australia hit record highs. Even Tokyo
is at a 9 month high. And, of course, the Dow Jones average is near a record
high too.

Money...money...money...

Record prices for works of art. Record prices for houses, cars, antiques...

Sam Zell is no fool. He sees it too. US property prices are at a 95- year
high, in real terms. He aims to take advantage of it. He's put his entire
real estate empire up for sale. Opening bids are around $38 billion.

Liquidity...liquidity...liquidity...

When the price of one Jackson Pollock painting goes up, other people look at
their walls. If they too have a Jackson Pollock, they are wealthier. They
now have an asset that could be easily exchanged for dollars...that could be
then exchanged for stocks, or bonds, or houses...or whatever.

So too do the holders of Asian stocks look in the mirror this morning and
see richer faces. They can sell today and buy other financial assets. They,
too, have more money.

And think of the man who bought a house in Mayfair in the 1970s, or a beach
house on the coast of Florida, or practically any other property in the
world, outside of Paraguay; the guy is an investment genius. He can
sell...and swim in the big, warm pool of this new liquidity.

Ai yi yi, dear reader...it is almost overwhelming!
So much liquidity...so much money...so many fools and so little time to
laugh at them all.

But wait. What if liquidity were 'mean reverting' like everything else? What
if this gush of money, this tide of cash and credit, this well of new
wealth, suddenly dried up?

Is it possible?

Yes, dear reader, it is not only possible...it is inevitable.

How do we know?

How do we know that things always go back to 'normal?'
Well, if it weren't so, there would be no 'normal' and no abnormal. And if
there were no abnormal, everyday would be a new day, with no past and no
future, and nothing every out of whack, never anything out of order, nothing
ordinary and nothing extraordinary, and no reason to laugh or cry.

No, dear reader, there will always be a mean. And things, lacking anything
better to do, will always revert to it.

More news...from the Sunshine State:

---------------------

Justice Litle, in California:

- As far as the public is concerned, coal is the Rodney Dangerfield of
fossil fuels: It gets no respect. Coal is dirty, lumpy and unremarkable. It
is a game show booby prize, a punishment for bad children at Christmas. In
terms of our daily lives, coal is almost wholly out of sight and out of
mind.

- Yet the entire Industrial Revolution was founded on coal. (The steam
engine gets all the press...but think of the steam engine as the Lone Ranger
and coal as Tonto. Without his trusty companion, the Lone Ranger would never
have gotten any glory.)

- Oil may hog the limelight these days, but coal has not gone dormant. If
anything, today's world relies on coal more than ever before. According to
recent figures from the World Coal Institute, 24.4% of primary energy
consumption worldwide comes from coal.

- Coal's share of worldwide electricity generation is 40.1%. In the United
States, more than half the country's electricity comes from coal; in China
and Australia, the totals approach 80%; in Poland and South Africa, the
totals are above 90%.

- For perspective on how much physical coal the world eats up, consider
this: According to the science Web site, howstuffworks.com, the electricity
required to power a single 100-watt light bulb, if left on 24 hours a day,
would consume 714 pounds of coal over the course of a year. Most of us do
not leave our lights on round the clock, but we tend to have many going
simultaneously. (Never mind all the other doodads and gizmos around the
house.)

- As it turns out, the world's heavy coal users — folks like you and me —
don't even know they have a habit.
That ignorance is a luxury, provided by the blessings of modern technology.
For the majority of its history, coal has been a particularly nasty source
of urban pollution.

- Blackened lungs and reddened eyes go all the way back to the High Middle
Ages. In the year 1285, King Edward I — commonly known as Edward the
Longshanks — had two great battles on his hands. In Scotland, there was
William Wallace; at home in London, there was coal.

- The King tried, and failed, to curtail London's use of coal on public
health grounds. Harsh bans and brutal penalties were put in place, but acrid
smoke continued to foul the air. With the city growing rapidly and the
forests in retreat, London's pressing need for fuel and heat trumped all
else.

- Some 500 years after Longshanks, the potent combination of coal and steam
had transformed England and kicked off the Industrial Revolution. By the
1850s, Britain was officially urbanized, with 51% of the population living
in cities. And what living hells those early industrial cities were,
Manchester chief among
them: sky black with smoke, ground black with soot, the very air choked with
dust.

- Scores of Manchester children were struck with rickets, a vitamin
deficiency malady that softens the bones due to lack of exposure to
sunlight. Fifty-seven percent died before the age of five. Those children
who survived typically toiled the rest of their lives away in the factories
and the mines.

- All that misery is gone now (in the West, at any rate). Modern coal-fired
power plants are paragons of efficiency and discretion. Leviathan jets of
flame 10 stories high consume as much as 500 tons of coal per hour, hidden
in the confines of gigantic boilers that convert heat into steam and steam
into electricity. It all happens behind closed doors, on guarded grounds
outside city limits. We no longer see, smell or taste the coal. We only flip
on the light switch.

- Yet, for all the cleaning up the coal industry has done, we are still
paying a heavy toll for coal use.
Western coal plants no longer belch black smoke; their emissions have been
vigorously scrubbed and filtered, in accordance with the law. But these
scrubbed emissions still make a disturbing contribution to the likes of acid
rain and other "slow-fuse" environmental concerns like rising carbon dioxide
emissions.

- And in less fastidious jurisdictions – like the entire country of China –
"unscrubbed" emissions from coal- fired plants have produced some of the
most toxic cities in the world. Many Chinese cities resemble the Manchester,
England of old.

- The New York Times reports that China uses more coal than the United
States, Japan and the European Union combined. China's plants are older,
less efficient and produce more toxic emissions than their regulated Western
counterparts. China's massive pollution clouds have been known to travel the
breadth of oceans, clogging up filters as far away as Lake Tahoe. With India
following in China's sooty footsteps, a global pollution epidemic may be in
the works.

- So should we feel gratitude or disgust toward Old King Coal? It's hard not
to feel a mixture of both. On the whole, coal has been very good to us. As a
driver of the Industrial Revolution, however hellish initial conditions
were, coal brought about the rise of manufacturing and the high standards of
living the West now enjoys.

- As an ongoing source of cheap power, coal now gives China and India a
chance at continued rapid growth. But none of this is without cost. China
possesses seven of the world's ten most polluted cities, thanks largely to
the country's heavy reliance on coal-fired electricity.

- Even so, the world will not be going off coal anytime soon. Energy
economics tilt heavily in coal's favour, especially in the developing world.
New coal plants, still being built at a rapid clip, have operating life
spans of half a century or more. It wouldn't make sense to mothball them
prematurely. Countless existing plants have decades left to go.

- Last, but certainly not least, countries like China and India also have to
deal with an emerging middle class and the rise of consumption-based
lifestyles. They may need all the energy sources they can get their hands on
– both dirty and clean – to keep up with demand in future years.

- Meanwhile, coal-to-liquids technologies, as well as various "clean coal"
technologies, will continue to promote demand for coal throughout the
Developed World.
Given all these demand factors, $40-a-ton coal seems way too cheap.

- It is interesting to note that the price of coal, relative to the price of
crude oil, has slumped to its lowest level in a decade. This relationship
does not necessarily imply that coal prices are approaching an important
bottom, but it does suggest the possibility.
- Long-term investors take note.

---------------------

And more thoughts from Bill:

*** More thoughts...?

Well, we read the paper and notice that Iraq seems to have gotten much more
brutal and dangerous since it has enjoyed the benefits of democracy. One
hundred people died in Iraq on a single day last week. Thirty thousand died
last year, said the press reports. The numbers of dead and maimed keep
rising. So do the costs.

Nicholas Kristof notices that our president is in roughly the same position
as Alcibiades in ancient Athens. The man had led the country to war in
Sicily...after others had warned him that it was a dangerous waste of time
and money. Nicias said of the campaign that it was "a war that does not
concern us,"
according to Thucydides' account. But Alcibiades had insisted, claiming that
the Athenians would be welcomed as liberators...and that the 'rabble' would
be easily defeated.

As it turned out, the campaign went badly. And so the pro-war groups had to
go back to the Athenian people, asking for more money and more troops. What
they needed, they said, was a 'surge' that would finally overcome
resistance. At that stage, they couldn't honorably face the prospect of
defeat and withdrawal. So, against much internal opposition, the new troops
were raised - 5,000 of them - and sent, on 70 ships, to support the war
effort in Sicily.

The result - a catastrophic defeat. Not only was the Sicilian adventure a
total failure, it so weakened the Athenian state that its enemies ganged up
on it and the country was soon conquered by the Spartans. Thousands of
Athenians were killed. Thousands more were sold into slavery. And Athens was
now a vassal state, paying tribute to Sparta and its allies.

Back to the future...

Our own Alcibiades is scheduled to address the nation today. "If only the
people read the classics..." as Ezra Pound once remarked.

*** What will happen to pull the plug on this huge bath of liquidity? We can
think of several things...

Corporate profits will revert to their historical mean.
Investors will realize that stock prices are too high...that they have been
too optimistic. Stocks will fall; maybe they will crash.

Bond prices will collapse. Spreads between high quality bonds – Treasuries –
and junk bonds have never been thinner. When investors get worried, spreads
will narrow. Bond prices will fall. Billions in liquidity will be lost
overnight.

The property market is vulnerable too. Housing in America for example, is
soft. It will take years to squeeze the juice out, but the future has plenty
of years. It is not unlikely that at some point householders – who are
already feeling the squeeze – will begin a panic of saving. Consumption will
tumble.
The economy will grow cold.

Are there no geopolitical risks? What sort of a headline would it take to
cause speculators' blood to run cold?
We don't know, but we imagine there are many possibilities.

China's economy and its stock markets are plainly bubbles. Are there no pins
in China? Plenty of them, is our guess. There is always a leading market in
any bubble. Generally, the leading market is the one that gets the pin
first. And when it blows...the whole thing blows.

Private equity, structured finance, hedge funds, derivatives; there are a
lot of players and a lot of games going on in the financial world. Not all
the players are geniuses. Not all the games are straight.
And not all the casinos are run by Presbyterian ministers. There are bound
to be some stories, bound to be some scandals and bound to be some
spectacular losses. Will any be big enough to blow a hole in the great
bubble? Maybe...

Finally, all the Anglo-Saxon economies are deeply in debt. We wonder where,
how, when will they have to change course. You cannot really get rich by
going into debt. So when people appear to get rich, and appear to be going
deeply into debt, we sense that there must be a skunk in the woodpile
somewhere. Something just doesn't smell right. No one wants to dig around
and find out what it is, but somehow, someday, it is bound to turn up. Then,
people will hold their noses...and rush for cover.

What can you do to protect yourself, dear reader? A single, simple thought;
over the last 12 years, the supply of dollars has increased at roughly 10%
per year.
The world's economy has grown at roughly 3% per year.
And the world's supply of gold has increased at only 2% per year.

We buy gold...and wait to see what happens.