Not in my Name: Ethical Investing

Peter Temple looks at whether you can be both moral and profitabe with your
investment choices and asks what is an ethical investment anyway...

Not in my Name: Ethical Investing
by Peter Temple

It's a common jibe that you can be an ethical investor or a successful
investor, but not both. The facts show otherwise. But there is no denying
that ethical investment does restrict the choices you can make. It may
prevent you from investing in booming sector, and it may make your returns
more volatile.

There is no common agreement on what precisely constitutes ethical
investing. For some it is simply avoiding investing in shares that are
obviously
pernicious: drink, tobacco, gambling, and armaments are the most commonly
cited. Others adopt more exacting so- called 'deep green' criteria.
Investors like this only invest in companies that can be said to provide
positive benefits for humanity: food; water; heat and light; shelter;
medical care; education and so on.

You can overlay faith-based criteria onto this pattern of investing too.
Friends Provident, originally a Quaker organisation, was one of the earliest
ethical investors in the UK. Methodist organisations have also been
prominent ethical investors for more than a century. Islamic investing -
where alcohol, gambling,
armaments, pork, and companies involved in the
paying and receiving of interest are avoided – is another subset.

Ethical investors also have other decisions to make.
Some relate to the management organisation of the company in question.
Others relate to environmental and even political concerns. Does the company
conform to recognised standards of good corporate governance? Is it a major
polluter? Does it invest in areas that have repressive political regimes?

Nothing here is clear-cut. The choices can be tough.
What do you if your investment in a retailer (ethical) is taken over in a
share for share deal with a tobacco company? What do you do if your hotel
company (ethical) takes over a brewery? Is nuclear power (the cleanest
and cheapest form of energy) ethical or not? Are
wind turbines (which produce sustainable energy but create visual pollution
and pose a threat to wildlife) ethical or not?

Professional investors have a tough time with decisions like this, and many
cop out. Most fund managers subscribe, rather as they would to the virtue of
motherhood and apple pie, to vague phrases like 'constructive engagement' or
'socially responsible investing'. What this really means is that they feel
it's acceptable to invest in companies that may
not be ethical in the strict sense of the word, as long as they are trying
to improve themselves or are open to persuasion.

Another rather weak-kneed approach is for specialist funds that have to
invest in specific sectors or markets to do so 'ethically' by drawing up a
short list of preferred investments and then choosing, all other things
being equal, those that are the more ethical.

Investors wanting to invest ethically should view attempts to curry favour
like this with a sceptical eye. BP, for example, though it may have styled
itself as 'beyond petroleum', still makes its profits from extracting and
selling oil, thus contributing to pollution. Its relatively modest
investments in alternative energy do not really alter this fact.

Pharmaceutical companies may have, under pressure from activists, dropped
AIDS drugs prices in Africa but the cost of the gesture pales into
insignificance beside their muscular approaches to exploiting their
discoveries elsewhere and their market driven priorities that dictate more
marketing put behind anti- obesity and other lifestyle drugs than finding a
safe and cheap anti-malarial treatment.

An attempt to standardise criteria for ethical investing has been developed
by the index provider FTSE International. It now has an 'ethical' index
series including, for example, the FTSE 4Good UK 50.
Its specific exclusions are companies involved in tobacco, parts for nuclear
weapons, nuclear power, mining uranium, and armaments. Of the remaining
companies theoretically capable of inclusion, they must also demonstrate
that they are working towards environmental sustainability, developing
positive relationships with stakeholders and upholding and supporting
universal human rights.

Few would argue that these criteria are not important, but traditional areas
usually proscribed by ethical investors, such as drink, and gambling, are
conspicuous by their absence from the list of exclusions. In fact big oil
and pharma companies, and a couple of large brewers, make the cut.

Moreover, for FTSE, areas that many would consider super-ethical – such as
water, waste recycling and the like, are considered 'high impact' from an
environmental standpoint, while public transport is also considered 'medium
impact'.

The reality is that FTSE's index is more a measure of companies confirming
to environmental soundness, and stated support for equal opportunities and
human rights, than a measure of what most ethical investors would consider
acceptable. One can speculate on the reasons for this, but a not
unreasonable assumption would be that the criteria for inclusion have had to
be loosened in order for a representative sample of large companies to be
capable of being included in the index.

Few would question whether BP and Shell are good companies, but whether they
are suitable for strictly ethical investors is another matter. Both are in
the FTSE4Good UK 50 Index. Having said that, FTSE International does claim
that more than a third of the top 100 companies were excluded from the index
for a variety of reasons.

Even so, private investors wanting to invest ethically should probably have
no truck with indices like this, or funds based around them or tracking
them, but pursue a more distinctive approach. There are two straight
choices. One is simply picking stocks for yourself on personal ethical
criteria: the other is to invest in a fund that does it for you.

For the most part this points one in the direction of companies that are
relatively small; primarily based in the UK; where management has a
significant stake in the business; where governance is good and executive
pay modest; and that do something that you believe contributes positively
to, or at least does not detract from human welfare. An investment in
ethical stocks by and large consists of small and mid-cap growth stocks with
perhaps a few ethical large caps thrown in, although establishing the true
ethical credentials of large cap stocks is much more difficult.

Investing ethically via a fund is ostensibly an easier decision. This is an
established subset of the fund management industry and there is plenty of
choice.
According to EIRIS, the ethical investment research organisation, there are
now almost 90 ethical funds (defined in the broadest sense) available to UK
private investors, including a number that invest ethically in overseas
markets.

EIRIS figures show that in 1989 total ethical investment funds under
management amounted to £199m. At the end of 2005 that figure was £6.1bn and
almost certainly increased further in 2006. While part of the growth is
undoubtedly due to increases in the overall level of the equity market, the
growth in the number of funds, and in numbers of ethical investors, now
believed to be around 500,000 in the UK alone, suggests increasing awareness
of and interest in the topic.

Choosing ethical funds isn't as easy as it might seem.
Adding the ethical dimension complicates the decision- making process.
Choosing a normal fund requires you to balance historic performance, a view
on whether the historic performance can continue, fund charges and the like.
Add to this the ethical question - whether the fund conforms to your
personal view of what constitutes ethical investing – and the equation is
more difficult to resolve. Funds vary hugely in both performance an in the
ethical criteria they adopt.

Some are studiously vague; some use 'light green'
investing (excluding the most obvious 'bad boys'); some use positive and
negative criteria; some target environmental factors; some target ethical
and environmental; some track the FTSE 4Good UK 50. With some it is hard to
escape the conclusion that the ethical dimension, vaguely adhered to, is
simply a marketing ploy.

The best procedure to follow here is perhaps to start
with the best performers. On the whole charges tend
to be high (a 5% initial charge is typical) but these are often deeply
discounted by fund supermarkets.
Another good way of determining if a fund is likely
to be pursuing a policy broadly in sympathy with your
own ethical objectives is to look at the fund's top
ten holdings. If you disapprove of the selections, don't invest.

If you want to pick stocks yourself and make sure that they are ethically
acceptable, or have your existing portfolio vetted for its ethical
acceptability, EIRIS
(www.eiris.org) offers a paid-for service for affluent private investors
that will do just that.

Regards,

Peter Temple
For The Daily Reckoning

Our "Crash Alert" flag is still fluttering outside.

You'll recall that it was hoisted up there about three months ago. For a
long time, it looked silly. Who needs a 'crash alert' when the world is
booming?

But, just yesterday, as we were writing about the threat posed by collapsing
Chinese stock prices, it turned out that Chinese stock prices were - in the
process of collapsing. Some stocks were down the limit in Shanghai and
Shenzhen. The markets ended the day down almost 10% - the biggest drop in 10
years.

Other emerging markets fell too, emulating the Chinese example. And then,
when the tsunami got to New York, U.S. stocks were soaked too. The Dow was
down more than 500 points at one time during the trading day – the biggest
hit since 9-11.

And look at what is happening to the financial stocks.
Yes, even Goldman seems to have topped out – a company run by the smartest
financiers in the business...
perched on the biggest financial bubble of all time.

Does this mean the Chinese bubble is finally popping?
And if so, does that mean that the whole enchilada...
the whole worldwide liquidity bubble...is finally going to blow up? We'll
have to wait and see.

But we remind readers that the many lurking threats to their money are all
not equal: some are unpredictable...and others are unavoidable. Among those
that are unforeseeable are war and natural disasters.

Among those that are ineluctable are the popping of the credit bubble...and
the destruction of the U.S. dollar.
The first challenge for investors is merely to recognise the difference, for
different sorts of threats require different responses. The second challenge
for investors is to recognise the different
ways the market can do damage to them: while they
might lose a lot of money ignoring inevitable
threats...they could also lose a lot of money
chasing inevitable opportunities.

On the good side, when you speculate on the inevitable at least you are on
the right side of the trade. But, on the bad side, whether you make money or
lose will depend on your timing. "The market can stay irrational longer
than you can stay solvent," said Lord Keynes.
So, sometimes, it is better not to try to trade a trend – even if it is
inevitable. Just get in position so it won't do you any harm. You may not
get rich, but you'll still be better off than most investors.

On the other hand, there are some who say you should just ignore inevitable
threats in order to take advantage of the inevitable opportunities that
usually go along with them.

"Yes, I agree, the Chinese market is going to take a tumble. It's
inevitable," said our friend last weekend.
"But over the long term – and I'm talking about 10 years or more – China is
going to boom. I want to be a part of that boom. I want to be in it. So,
I'm willing to take some discomfort in the short term in order to
participate in the longer-term gains."

We think our friend is an optimist. By way of rebutting him, we call two
witnesses. Our first is the Ghost of '29. No economy was more successful in
the 20th century than the U.S. And never was it more successful than in the
'20s. America.....and America alone...emerged from World War I as the clear
winner. The rest of the world owed it money. Its industries were booming.
Its stocks were soaring. Its young, inventive and hard-working people were
creating new technologies and building new factories and new skyscrapers.
Europeans returned from visits to New York in the '20s like Americans now
return from Shanghai. The pace...the excitement...the commercial
activity...the liveliness...the energy – it was overwhelming. They could
scarcely believe their eyes. Many wanted a piece of it.

Over the long run, a European investing on Wall Street might have done
fairly well. But what if he had invested in the late '20s, when America's
promise and success seemed most inevitable? Just ask the Ghost of '29. If he
had invested his money just before the crash, he would have had to wait
until '56 to break even! That is, he would have had to hold on through a
Great Depression...another major world war...and practically until the end
of the Eisenhower administration – a period of 27 years! After that, he
would have enjoyed a good 10 years of capital growth – and then another
setback.

Our other witness is still living; he can speak
for himself:

"Isn't it true that Japan was the greatest success story of the post-war
period?"

"Yes...I believe that is correct."

"Isn't it also true that the Japanese made their money by selling goods and
services to Americans? Isn't it true that they realised huge foreign trade
surpluses in this manner – similar to what the Chinese are doing now? And
didn't they build up huge foreign currency reserves? And didn't the Japanese
economy boom...
especially after the Louvre agreement, when they tried to keep their
currency low by reducing interest rates and increasing liquidity – very
similar to the Chinese example now, in fact? And weren't investors so
excited by the prospect of getting rich in Japanese stocks – and I think
this includes you – that they rushed into the Tokyo market? And didn't
Japanese stocks and real estate reach an epic, zany high in January of
1989?"

"Yes, all that is true."

"Then would you mind telling us, in your own words, what happened after you
bought Japanese stocks in January of 1989?"

"Not at all It is very simple. The Nikkei index was over 39,000 when I
bought. Shortly thereafter it crashed. I didn't worry about it because I was
investing for the long term. And over the long term I believed Japan would
do well. It was, well, inevitable.

I had read the papers. I also read a few of those books about how smart the
Japanese were and how their management techniques were so superior to those
in America. So, it seemed to me that betting on Japan was a no-brainer. But
that was in '89. Then, when the Nikkei got down to 8,000, I began to have
second thoughts. And then, when it didn't bounce back I had third
thoughts...and fourth thoughts. Japanese stocks stayed down for the next 15
years. They're only starting to come back now. The Nikkei is now back to
almost 20,000. It's in all the papers that Japanese stocks are at a 15-year
high. But wait a minute, I'm still out half my money. Let's face it. I may
be dead before I get my money back."

"Thank you...no more questions."

Look up, dear reader. The 'Crash Alert' flag still flies. Oh, long may it
waver...

Now, more news:

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

Robin Mackrill surveying the damage:

*** Well hello volatility, where have you been all
this time?

- We've been becalmed here so long in the doldrums of a docile stock market
that we have quite forgotten the stomach churning, buttock clenching, green
palour- inducing sensations that come with being caught on the wrong side of
a financial market storm.

- Pick a stock market, any market in our globalised, homogenised,
sterilised, aneasthetised, dumbed down, interconnected ever shrinking
globe... and it tanked.
But the original epicentre was somewhere new...that emerging sleeping giant
that even Napoleon worried fleetingly about...China. Shanghai's A share
index – ie for Chinese investors only - slumped 9%.

- But if that was the smack in the mouth for Mr Global Market, weaker than
expected US data on durable goods orders followed up with a knee in the
groin. The Dow Jones gasped at the assault and shed 416 points, US
treasuries gasped some more and gave up 16 basis points to yield 4.47%.

- Indeed gasping a wheezing could be heard around the world's bourses as
their fattened husks had the stuffing knocked out of them.

London's FTSE 100 shed 148 points to close 2.3% down.
In Europe, the CAC lost a little over 3% and in Germany the DAX gave up a
little under 3%. The Hang Seng lost 360 points closing 1.7% down on the day
at 20,147 and the Nikkei gave up 95 points, down 0.5%.

- A note from Deutsche bank this morning points to a number of contributing
factors that prompted le grand fortune cookie Chinois to explode and shower
the rest of us with crumbs.

The next inflation number is likely to be bad and lead to a rise in interest
rates. The government is threatening a crackdown on stock market corruption
and is looking to bring forward the introduction of capital gains tax on
share dealing. Last but not least, it turns out we're not the only one
talking a load of bubbles. Zhou Xiaochuan, the governor of the The People's
Bank of China actively encouraged discussion as to whether there was a
bubble in the A share market.

- Emerging markets guru Dr Mark Mobius interviewed on Bloomberg, predicts
Chinese stocks will fall further.
No surprise to anyone listening to BBC radio 5 this morning. They report
that some Chinese were even trading their homes with pawnbrokers to raise
cash to stuff into the stock market. Next we'll be hearing about a rise in
homeless Chinese gamblers and Shanghai pawnbrokers entering the real estate
business.

- The gazillion dollar question on every market watcher's lips. Correction
or crash? Well after the broad based sell off yesterday it looks as though
markets are regaining some poise. European markets are off their lows and
the US market has opened higher.
Bob Parker of Credit Suisse reckons the sell off could last 2-3 weeks. Our
market watching crystal balls are more cloudy here at the Daily Reckoning,
so we merely sit on the sidelines huddled around our Crash Alert flag and
wonder what Confucius would have made of all this.

Could it be the Year of the Pig will turn out to be a pig of a year?

PS – Don't forget! You can now receive a FREE report simply for doing our
short survey on the Daily Reckoning.

We'd really like to know your thoughts on the service, and there are just 11
quick and easy questions to answer.
Straight afterwards you can download your free report "Proven Strategies of
the World's Greatest Investors,"
which reveals the secrets that have made these five investors, arguably, the
best of all time. Just click this link to start the survey:

http://www.questform.co.uk/user/takesurvey.php?cid=797&fid=757

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

And more views:

*** Oh...and what's this? Alan Greenspan – remember him? – says the U.S.
economy might go into recession before the end of 2007.

He may be right. The sub-prime mortgage market is getting whacked hard. And
when people can't buy at the bottom, it weakens the whole market structure.
Prices fall. Jobs are lost. Spending declines. What we're seeing so far is
that people who can afford to do so are taking their houses off the market.
This creates an invisible inventory of empty houses that will probably hold
down prices for many months to come. Steadily, but surely, the millwheel of
a correction will grind away.

*** A friend of ours from our old neighborhood in Baltimore is visiting us
at the beach. She brings a strange and sad story:

"Do you remember that black kid who used to work for you? His name was
Shawn, but they called him Pookie. He was a good kid in a bad situation. Our
neighbours Kathie and George liked him so much they practically adopted him.
He had a very good attitude. He liked to work...and learn. I remember you
had him helping you scrape wallpaper off the walls. That seems like so long
ago. Well, it was a long time ago – 25 years. But we were all pioneers in
that neighbourhood, weren't we?
Because the houses were so big and beautiful. But you remember, what the
neighbourhood was like. Drug dealers. Prostitutes. Layabouts. Bums. It was
just a typical inner-city slum. Maybe worse than most because people were
always shooting at one another. And most of the people were incorrigible.

"But Pookie was nice. We all tried to help him. His father was in prison,
remember? He had a brother, I can't remember his name. And I don't know
about the rest of the family, but I think he had a very hard time of it. So,
we liked him and tried to help him. I think Kathie and George even helped
him with his homework and that sort of thing.

"And then, when he grew up, you probably don't even remember this, but you
gave him a job in the business.
It was a great opportunity for him. Well, you know how
your business is. Nobody really cares where you went
to school or what your background is. So, we were
all hoping that this would be a good career path
for Pookie.

"But then he was fired. We heard he had stolen credit card numbers or
something. He wasn't prosecuted.
Nothing was ever proven, but naturally you couldn't have someone around the
credit card numbers you weren't 100% sure of...so he had to go. I remember,
Kathie and George were heartbroken. They treated him like their own son.

"And then one thing kind of led to another. Time went by. He never did seem
to find any work that he liked.
And then we heard that he had a lot of lifestyle issues...or problems. And
then he both he and his brother were in various treatment programs. They
were suicidal, we heard.

"And then, last week...Pookie hanged himself. The next day, his brother –
who was already in a mental hospital, I believe – hanged himself too."

*** In that mordant vein, we read that Vice President Dick Cheney was almost
blown up on Monday. He said attackers were trying "to find ways to question
the authority of the central government."

Predictably, our Veep is wrong. If the assassins had wanted to question the
authority of the central government they could have sent a letter to the
newspaper. What they were trying to do was to kill him.
But they were as incompetent as he is; instead of offing him, they only
managed to kill 23 other people who didn't deserve to die.

The Daily Reckoning PRESENTS:

Reversing the Joy of the Boom

Reversing the Joy of the Boom

by The Mogambo Guru

"It is price inflation that is the killer of economies; and price inflation
is manifested, of course, as higher prices, but which is the same as a fall
in the purchasing power of the money."

Among the vile, sulfurous things I am muttering to myself under my breath is
that the mind-control rays that the CIA is beaming into my head have
affected my golf game, and now I'm slicing my irons into the sand traps and
topping the ball off the tee! The bastards!

Even worse, the Federal Reserve increased Total Fed Credit by another $5.7
billion last week, thus creating more money (when loans are actually made by
the banks) and/or putting downward pressure on interest rates (by increasing
the amount of credit available), both of which are designed to entice people
to borrow money for one reason or another (anything will do, but stocks,
bonds and houses are preferred). The bastards!

The important part, from the Federal Reserve's point of view, is that
somebody is borrowing and spending money, and lots of it - the more the
better. Sort of like my family wants to do - and will do, if I don't watch
them every minute! Except the Fed gets to print their money, and I have to
earn it, which I can't do because I am lazy and incompetent, which, I
patiently explain, "Puts us back to square one, jerk, so shut up!"

And as for foreign central banks, who knows what the hell they are up to? I
mean, they speak foreign languages that we Americans can't even understand,
for crying out loud! Anyway, this suspicious group of outsiders bought up
another whopping $13.4 billion of American government and agency debt last
week, and stashed it into their accounts at the Fed. Even cash in
circulation got a little boost, up another $2 billion last week!

In short, our central bank is still creating excess money and credit with
both hands, thus deliberately trying to create both direct monetary
inflation and, as a consequence, price inflation in something, and then
price inflation in some things, and then price inflation in most things, and
then finally price inflation in all things as the money is eventually
maximally disbursed into all prices - either more or less, according to
their perceived relative value in the resultant new, inflated economic
system of prices.

Thus, I am encouraged by the fear of higher prices to add a whole new
protective layer of aluminium foil to the inside of the Famed Secret Bunker
Of The Mogambo
(FSBOTM) and make a fort out of the cushions from the couch in the living
room (as a sort of rough-and-ready Plan B against a surprise attack).

I subsequently spend a lot of time just sitting and hiding, whimpering about
the irresponsible monetary insanity these days, and how this will lead, as
it always does, to inflation in prices that drives people to acts of
desperation. This, of course, drives The Mogambo's paranoia level off the
freaking scale, which almost always results in random bursts of suppressive
fire in frightened response, which always results in the neighbours whining
and suing me about some mysterious new bullet holes in their stupid garage,
or their stupid washing machines, or their stupid kids'
playrooms, and then daring to argue with me about what's "acceptable
collateral damage" and what isn't!
See what I have to put up with around here?

Thinking and pondering like I do, fingers on triggers, waiting for the
economic earth to open up and swallow us all, I occasionally get up to check
the locks, put some fresh ammo in a machine gun or two, and maybe fire off
some fresh hate mail to the Federal Reserve ("Dear Morons, I hate your guts
because you destroyed my country's economy! Yours truly, Angry in Florida")
with a cc to Congress and the Supreme Court, whose guts I also hate, for the
same damned reason.

And somewhere in my vengeance-laden philosophical musings and venomous
correspondence, I realise that it all comes down to "willing stupidity".
Real Austrian economics (as opposed to the laughable, econometric
equation-based claptrap taught in almost all universities, and used by every
government) is actually quite easy to understand: If you let the banks act
stupidly by letting them create excess money and credit (a monetary boom),
you will soon get an inflationary boom in the economy (as the money is
borrowed and spent, increasing demand for things, and thus increasing the
demand for making more things), and
then you will also get inflation in prices, which
will end in a systemic bust, with all the attendant misery and suffering
that will dwarf the joy of the boom that caused it.

It's the one horrible, indelible, enduring lesson of all of known economic
history, and the reason why the founding fathers tried to make sure that our
money was not so debased from over-issuance by writing into the Constitution
that the dollar must be gold and/or silver.

And another big lesson from "the rest of history" is that the guys who opted
for gold and guns do NOT show up on the list of "guys who ended up penniless
and pissed." Actually, the people who are not on that terrible list are the
idle rich, as they have the ample leisure time to sit around creating lists
of guys who are on it! Hahahaha! That's how you suffer an economic collapse
in style, dude!

It is price inflation that is the killer of economies; and price inflation
is manifested, of course, as higher prices, but which is the same as a fall
in the purchasing power of the money. Knowing that, you are ready to hear
Rep. Ron Paul (hopefully the next President of the United States) writing at
LewRockwell.com, who reports that when you deflate/inflate 2006 dollars to
achieve buying power parity across different points in time, the buying
power of the current $5.15 per hour minimum wage translates to, "$9.50
before the 1971 breakdown of
Bretton Woods." This is, of course, the infamous
year that Nixon finally severed the official gold/dollar link.

And if you want some proof of his towering intellectual competence with
regards to economics, not only relative to his fellow dimwitted
Congresspersons, but also in absolute terms, then I am happy to report that
he went on to say, "Congress congratulates itself for raising the minimum
wage by mandate, but in reality it has lowered the minimum wage by allowing
the Fed to devalue the dollar." This is exactly the mechanism at work!
I understand that as a possible presidential contender, he wisely doesn't
want to appear too alarmist. But, unfortunately for him, he is standing next
to a guy
(me) who is all too happy to proclaim, loudly, the ugly fact that "Everyone
suffers from price inflation, and it is evil!"

And those who will suffer first, and suffer the most, from price inflation
are those who do not (or cannot) increase their incomes to match the
increase in prices, and they will suffer piteously because their fixed
incomes will not buy as much stuff as it did yesterday, and tomorrow will be
worse, and every day for the rest of their lives that they do not, somehow,
miraculously, get an increase in their income, it will be worse than the day
before, and they will grow angry that they must always buy less and less,
and pretty soon people are getting desperate, which turbo-charges "angry."
Of course, one can argue whether technology has made the guillotine passé as
the weapon of choice of rioting mobs of angry people made destitute by price
inflation, or whether the Uzi and the shoulder-fired rocket-
propelled grenade are an advancement or not, but
there it is.

Dr. Paul, judging by the horrified look on his face, is obviously not "into"
how this discussion has degenerated, but, again proving his intellectual
mettle, makes note of the fact that I am not just another raving paranoid
lunatic, but an ARMED raving paranoid lunatic. Big difference! Wisely, he
attempts a sort of compromise, and says, "We must consider how the growing
inequalities created by our monetary system will lead to social discord."

The new official merchandise trade deficit came in
at negative $68 billion for the month. Sixty-eight billion bucks left the
country in one month!
Unfortunately, there are fewer people with jobs to make enough money to buy
all this imported stuff, as from AP we learn "Jobless claims rose to 357,000
last week, the highest level since late November. The increase of 44,000
claims from the previous week was the biggest one-week increase since Sept.
10, 2005, when claims soared in the aftermath of Hurricane Katrina hitting
the Gulf Coast."

Even worse, "The four-week moving average for claims rose to 326,250 last
week, the highest level in nine weeks and an indication that conditions in
the job market have softened."

One of the downsides of inflation in the money supply, leading to an
increase in prices, is that the prices of commodities will go up, to which
you should be particularly attuned, as commodities are what you Earthlings
(meaning "we", since I'm stuck here, too) call "food". And by "food", I of
course mean the delicious, often gravy or chocolate-coated stuff that we
shovel into our gaping, slobbering maws with both hands, gobbling it down
like the ravenous, messy, slurping, feral hogs we are. And we don't care who
knows it, including whose hypercritical, picky wife is crying and wailing
out, "Oh, Jesus! Can't we ever go anywhere nice without you embarrassing us
like this, you Stupid Mogambo Pig (SMP)?"

But your wife's prayers for heavenly release from the torment of
embarrassment may be at hand, as your gluttony will soon be attenuated by
"lack of affordability", because commodities will go up in price not only
because of the fall in the purchasing power of the dollar, but also because
of scarcity of food itself, as implied by an article in Newsweek that read,
"There are ominous signs that the Earth's weather patterns have begun to
change dramatically and that these changes may portend a drastic decline in
food production - with serious political implications for just about every
nation on Earth. The drop in food output could begin quite soon, perhaps
only 10 years from now. The regions destined to feel its impact are the
great wheat-producing lands of Canada and the U.S.S.R. in the North, along
with a number of marginally self-sufficient tropical areas - parts of India,
Pakistan, Bangladesh, Indochina and Indonesia - where the growing season is
dependent upon the rains brought by the monsoon."

The article says that this is nothing new, but now, "The evidence in support
of these predictions has now begun to accumulate so massively that
meteorologists are hard-pressed to keep up with it."

At first I think that the food has disappeared because so many people are so
damned fat, and that they just ate it all! Hahaha! Apparently, nobody is
interested in my humorous and glib explanation, and with a sniff of
condescension they go on to say, "The central fact is that after three
quarters of a century of extraordinarily mild conditions, the earth's
climate seems to be cooling down. Meteorologists disagree about the cause
and extent of the cooling trend, as well as over its specific impact on
local weather conditions.
But they are almost unanimous in the view that the trend will reduce
agricultural productivity for the rest of the century."

Of course, this flies in the face of the huge, and hugely popular, "global
warming" argument. But, either way, the common denominator is that both
camps agree that the weather is changing dramatically, and this bodes ill
for those that eat food that they have to pay for, as a Big Double-Chubby
Cheeseburger Super Deluxe is more than just a couple of seeds, a few pounds
of fertiliser and a cow.

And already there are reports of the increase in the prices of food. For
example, onions, reportedly a staple in the diet in India, have tripled in
price in the last year, and of course, we just had the Tortilla Crisis in
Mexico, as corn meal has soared in price. And I am Very, Very Sure (VVS)
that this is just the tip of the inflationary iceberg, if you like your
metaphors in a Titanic vein.

All of this economic stupidity will end in tears (as it always has) as
inflation in prices destroys economies by destroying a lot of people's
lives. That is the problem with creating money: It shows up in prices,
higher and higher. And after awhile you get really sick and tired of hearing
the whining and complaining of your family about how they can't afford to
buy anything, and how it is all your fault just because you are lazy and
stupid, and how you are the worst parent and worst husband in the whole
world. Then one day you find yourself thinking of murder-suicide scenarios
and what the newspaper headline would say, until you say to yourself,
"Whoa!"

Better that you start thinking about robbery, or better yet, getting money
that does not depreciate in the first place - gold. And if you also want a
little capital gain with that buying-power-security, then Nick Barisheff at
Bullion Marketing Services Ibbotson Associates has some news that will be of
interest to you. It concerns the Eternal Mogambo Truth About Gold (EMTAG).

He claims that he has never heard of the EMTAG, but notice that he does not
explain how he stated it exactly when he said, "It takes fewer ounces of
gold to buy a house, a car, the Dow, or almost any other good or service
than it did in 1971." And even more damning, he admits that he said, "Gold
will continue to increase in purchasing power as long as its inflation rate
(mine supply) is lower than the increase in the money supply."

In case you were wondering, like me, he added, "Mine supply increases by
about 1.5% annually."

So (and this is so exciting!) as the money supply has been expanding by
almost 12%, you would certainly expect gold to rise in price? Well, that is
exactly what has happened, QED (picking my own entry and exit points to skew
the data the way I want)!

And, since the money supply is still expanding exponentially, you can also
certainly expect the price of gold to continue to go up, too! Whee!

Michael Nystrom at BullNotBull.com hears me chortling and giggling like a
little girl in my childish glee about the coming rise in gold, and notes
that Robert Prechter has pointed out that "the nominal Dow peaked at 381 in
September 1929, and today it is hovering somewhere around 11,500, a 30X
increase over 77 years.
Not bad, right? But amazingly, measured in gold, the recent Dow highs are
actually right about where they were at their 1929 peak!"

For those interested in the actual details, he says, "It took 18.5 ounces of
gold to buy the Dow on September 3, 1929. On May 10, 2006, it took 16.5
ounces of gold, so it is actually cheaper."

So gold made slightly more gains! Hahaha! He adds, "As Dr. Gold would put
it: One dollar won't buy what it did in 1929, but one ounce of gold (about
$20 at the time) sure will (about $650 today)!"

I see the audience getting up to leave, obviously taking the lesson to
heart, and are going out to get some gold immediately. I am suddenly in a
panic, as I need them to come back for the next part of the presentation,
where I hopefully sell them a sizable interest in my exciting, new Mogambo
Time-Sharing Investment (MTSI)! So I leap up, seize the microphone, and
order them all to come back and sit down - right now! - or I will hunt them
down, one by one, and shoot them through the head. But, as usual, nobody
listens.
They continue to stream out, only now making rude hand gestures at me.

And I could hardly blame them for their disinterest. I am as full of empty
bluster as I am full of crap about most things - as long as you don't keep
pestering me, like that stupid credit card reader at the damned grocery
store that kept pestering me, pestering me, pestering me to "Enter PIN
number", and I keep telling it that I don't HAVE a PIN number. It's a credit
card, you stupid machine, and it keeps beeping, beeping, beeping for me to
"Enter PIN number", and I am yelling that I don't have a damned PIN number,
dammit. And it is still beeping, and we're all yelling and beeping, and
after awhile I grab a can of stewed tomatoes and shout, "You want my PIN
number? Is that what you want?
Okay, here's my PIN number, you damned beeping machine from bleeping hell!"
I was winding up to really smash that hateful little device to little tiny
pieces when the ashen cashier said, "I'll enter your credit card number from
here, sir! Just don't kill me or break the
machine!" which I figured was a fair compromise. So
I said, "Okay."

But nobody was pestering me, in fact they were doing the opposite by
leaving. But I could not blame them for leaving to buy more gold, either, as
this is the everlasting beauty of gold: It has preserved buying power over
the last century, and over the millennia, while I laugh the Haunting Yet
Scornful Laugh Of The Mogambo (HYSLOTM) at the dollar, the greenback dollar,
the bigshot dollar, the Almighty Dollar, which as lost about 97% of its
buying power in just 94 years, which it will never get back! And it had a
30% decline in buying power in just the last few years!

So if you have not had a net-of-tax, net-of-expenses, net-of-fees,
net-of-everything profit of 43%, measured in nominal dollars, in the last
four years, then you lost buying power, chump! Hahaha! So much for the
promises of "investing for the long haul!" Hahaha! You invested a $20,000
car and netted a $25,000 bicycle!

Well, my laughter rang hollow in the now-empty room, as none of the audience
came back, and now I am still stuck in my own crappy, dilapidated house,
instead of being able to unload that eyesore on a bunch of suckers in the
Mogambo Time-Sharing Investment Scam (MTSIS).
Thinking quickly, I deduce one other good idea to make a lot of money,
enabling me to get out of this dump and say "goodbye" to family, friends and
angry creditors:
Maximise some profits from the guaranteed rise in gold, that can supposedly
be estimated by (for one thing) the percentage change of the fall in the
dollar.

It's a lot, I know that, but now much is all over my head, of course, and
it's all academic anyway. That is why we turn to Puru Saxena, in his Money
Matters newsletter. He reports that the shares of gold mining companies go
up when gold goes up, like you would expect, but (even better!), they go up
as a multiple of the rise in the gold itself! He reports, "So far in this
bull-market, mining stocks of precious metals have on average outperformed
physical bullion by 300%. In other words, investors who bought the mining
shares made three times more money than those who bought the physical
bullion."

I seem to remember that this is also what happened after the stock market
crash in the '30s, and everywhere else before and since then, too, when the
government acted stupidly.

Like in Argentina now, where President Kirchner just had a government
statistician fired when, as the Wall Street Journal put it, "she refused to
alter the 'methodology' used to calculate inflation in January.
Armed guards then escorted a political appointee to replace her." Hahaha!

Mogambo Memo (MM) to Argentinians: Buy gold now, while your money still has
some buying power, because you will soon be screwed otherwise!

Speaking of actual money, Bob C. was wondering about the acronym "FIAT" when
used to describe our "money".
He says, "I believe it is short for Financial Instrument Administering
Theft, but I am not sure.
Could you please confirm? Thanks!"

I can, and will, answer that question in genuine Inscrutable Mogambo
Gibberish (IMG)! With a phony- baloney gravitas, my voice resonates, "No, it
isn't, but at the same time, yes it is. Thank you for coming.
Please leave a donation on your way out. A big one!
Now scram!"

Part of the money to pay for a bigger budget is revealed by Mark Nestmann,
president of The Nestmann Group, who writes to his A-Letter readers that the
Small Business and Work Opportunity Act, "could include a little-known
provision, which demands that expatriates pay a tax on all unrealised gains
of their worldwide estate. The gains will be assessed based on the fair
market value of the expatriate's assets and the tax due within 90 days of
expatriation. Presumably, the phantom gain would be taxed as ordinary income
(at rates as high as 35%) or capital gains (at either a 15% or 25% rate), as
provided under current law." Yow!

Paying a tax on unrealised (paper) gains! You ain't sold nothing, and you
ain't made no profit, and yet you are paying the tax on the paper gain, just
because you don't live in America for one reason or another? Wow!
Things are much worse than I thought if they are starting to pull this kind
of crap!

Suddenly, I am galvanised into arming myself in preparation for the armed
resistance I figure will result from this outrage, because, if this is true,
there are no "paper profits" anywhere that are safe!
Talk about a stampede to get out of U.S. stocks and bonds and houses! And
exchanging the money into gold!

Giddy with excitement and trembling with fear at the same time at the
prospect of people rushing into gold, I am dropping handguns and spare ammo
all over the floor. Mr. Nestmann tries to get me to remain calm and put the
hand grenades down nice and easy by explaining that this could work out
well, as "When the assets are actually sold, no further U.S. tax will be due
(although the gain might be taxed again by the country in which the
expatriate resides, leading to double taxation on the same income)."

I figure that this scheme is almost certainly true, as it neatly solves the
tax problem inherent in investment losses; they are deductible against
future capital gains, and against another $3,000 of income, per year, until
completely recouped! So how much income tax will you pay, over the rest of
your life, if you make $50,000 a year, pay a total of $15,000 a year in
various taxes, but you have losses totaling $200,000?
Hahaha! You'll never pay any tax on gains (if any) for the rest of your
freaking life, and you will pay less income tax, too, by not paying any on
that $3,000 of ordinary income!

Now, if you were a government with its back against the wall, in desperate
need of money, right now, you can see the attraction of this unprecedented
tax policy.
Scary stuff!

But it's not like they need the money right now, as Doug Noland in his
Credit Bubble Bulletin reports, "With one-third of the fiscal year now
completed, y-t-d federal receipts are running 9.7% ahead of comparable 2006.
Corporate tax receipts are running 21.8% ahead and individual income tax
12.6% ahead of last year's level. Indicative of the ongoing systemic credit
boom, y-t-d receipts are running 21% above comparable 2005."
Of course, "Fiscal 2007 y-t-d spending is 2.1% ahead of 2006's level (up
9.7% from 2005)."

He also reported the news from Bloomberg's Shannon D.
Harrington, from whose report today's Mogambo Pop Quiz
(MPQ) is derived. "The credit-derivative product companies, or CDPC, are
seeking to tap into a market where outstanding contracts surged to more
than":

a) $26 billion last year
b) $260 billion last year
c) $2.6 trillion last year
d) $26 trillion last year
e) More money than the human mind can comprehend.

The correct answer is either d or e, which are both completely equivalent in
every respect.

The part where you keep reading and re-reading the same sentence over and
over as your brain refuses to believe your eyes is, "The new entities are
driven partly by the ability to secure top AAA ratings, which allow them to
sell protection without having to post collateral."
And, somehow this, "gives investors on the other side of the trade
counterparties with the highest ratings."
Hahaha! This is insane!

I mean, hell, let me in on this deal! It is so eye- poppingly unbelievable
that I am actually slavering (which is not as charming as it sounds) down
the front of my shirt at the prospect of being able to, "secure top AAA
ratings", for zillions of dollar's worth of instant assets, "without having
to post collateral" or probably even any money! Hahaha! This is insane!

Robert G. called and wanted to know what I thought about a proposal to have
totally electronic money, and to get rid of cash altogether. To this idea I
laugh uproariously, as only cash allows criminal activity, payoffs,
rake-offs, bribes, corruption, political graft, prostitution, drugs, CIA
activity and
everything else that is the least bit frowned upon
or outright illegal.

So, total electronic money? Hahaha! Can you imagine
a world where every expense, by everyone, is traceable all the way back to
the original bank loan that created the money in the first place? Do you
really think that the American government would do what it does, if the
money could be traced that easily?

Hahaha! Actually, "Ugh".

**** Mogambo sez: Gold, silver and oil have suddenly declined in price a
little bit, and that can only mean one thing: It's getting to be time to buy
more, and you would buy some, too, if you had some money, which you don't
anymore. Welcome to the hell of inflation!

Until next week,

The Mogambo Guru

"U.S. mortgage crisis goes into meltdown," screams a headline in the London
Telegraph.

"Panic has begun to sweep the sub-prime mortgage sector in the United States
after the bankruptcy of 22 lenders over the past two months, setting off
mass liquidation of housing loans packaged as securities. The rapid
deterioration could not come at a worse time for British bank HSBC, which
has set aside $10.5bn (£5.4bn) to cover bad loans in the U.S. The cost of
insuring against default on these loans has rocketed in recent weeks, from
50 basis points over Libor to 1,200, raising fears that a credit crunch
could spread to the rest of the property market."

Quoting our friend Peter Schiff, head of Euro Pacific Capital, the Telegraph
described the U.S. mortgage industry as in an "unstoppable meltdown."

"It's a self-perpetuating spiral: as sub-prime companies tighten lending
they create even more defaults", he said.

And from Ohio comes news of an "epidemic"
of foreclosures.

So far, 20 companies in the sub-prime lending business have melted down.
ResMae, for example, turned into a blob last week. It filed for bankruptcy
less than a year after management cut the ribbon on its new headquarters.
The company was making so much money, and expecting to make so much more,
that it built a lavish building, fit for a staff twice or thrice as large as
the 497 employees it had.

Those were flush times for the lending business.
There seemed to be no credit risk not worth taking.
But what happened?

Our Law of Stupidity tells us that useful information declines by the square
of the distance from the source.
As the lending business became more and more "sophisticated," lenders and
borrowers took leave of each other. Finally, they forgot they'd ever met.
The Economist explains:

"Banks are traditionally supposed to know a bit about the borrowers on their
books. But in many cases, their loans did not stay on their books long
enough for them to care. Mortgages were written for a fee, sold to
investment banks for a fee, then packaged and floated for another fee. At
each link in the chain, the fees mattered more than the quality of the
loans, which could always be passed on.

For now, though, the Federal Reserve believes the damage can be contained,
so not to worry, dear reader.

"We don't expect any large impact on prime mortgages from the sub-prime
market," said Fed governor Susan Schmidt Bies.

But, she did admit that there was a "hidden" problem - sellers were pulling
their property off the market, leaving behind a lot of empty houses...and
very soft property prices for a very long time.

Meanwhile, Nouriel Roubini, thinks all this softness will push the whole
nation into recession. As many as 600,000 jobs are being lost...as former
real estate agents and ex nail-bangers look for work. But what are they
going to do? Get a job in Detroit? Go down to Nicaragua? Well,
actually...but, more on that later...

First, the news...

Adrian Ash, watching the 'Crash Warning' flag flap in the wind:

- Is the crash here at last? "Anything that challenges the abundance of
global liquidity is a matter of concern," said an Italian fund manager to
Bloomberg earlier today.

- She was commenting on the news just in from Shanghai... the news that
Chinese stocks dumped 9.2% of their value today.

- The Shanghai & Shenzhen 300 Index had more than doubled in the 12 months
to Monday. Today it lost
$107.8 billion of its value amid the the biggest one- day points drop in 10
years.

- Emerging markets to the west have begun tumbling too as the sun peeked
over the horizon. Russian commodity stocks have sold off...the Polish market
has dropped hard...the JSE in South Africa's lost nearly 2% so far...and the
Czech market in Prague has dropped 1.4%.

- "I wouldn't buy [emerging markets]," says Marc Faber, the Hong Kong-based
voice of doom. "Something has changed in the financial market: It's the time
to sell rallies rather than buy dips."

- By 11am in London today, the MSCI Emerging Markets index stood 1.3% lower
from last night. It had touched a record high last Thursday, rising by
nearly a fifth in 12 months. But that's nothing. The Chinese stock market
had jumped by one fifth during the last nine weeks alone!

- Why the plunging Shanghai & Shenzen? Regular sufferers of The Daily
Reckoning will recall what happened to Thai stocks in December last year.
The country's military junta imposed a 10% charge on foreign investors. So
foreign investors got out, and Bangkok shares lost $23 billion in one day,
retreating to levels last seen 16 years earlier!

- Now it's the bureaucrats in Beijing that are coming the heavy with
finance. "China's highest ruling body, the State Council, has approved a
special task force to clamp down on illegal share offerings and other banned
activities in the market", reports Bloomberg. "The group will provide advice
on regulations and policy explanations of the securities market."

- Hmmm...a ban on illegal share offerings, eh? If that sounds familiar,
you've been reading The Reckoning for too long, gentle reader. For it was
this same provision in The Bubble Act of 1720 that brought about the
collapse of the South Sea Bubble. New share issues were made illegal in the
vain hope that all fresh investment cash would pour into the government's
favourite pyramid scheme.

- But alas! Trying to control the mania created by the South Sea Bubble
simply caused the Bubble to burst instead. Fast forward to 27 February 2007,
and now the Chinese policy wonks are having to relearn the lessons taught to
Westminster's idiots in 1720.

- "In the West, one of the warning signs of a possible crash is a period of
intense activity in the Initial Public Offerings market," writes William
Rees-Mogg on The Daily Reckoning's website, www.dailyreckoning.co.uk "The
Chinese authorities have encouraged the development of the I.P.O. market in
order to transfer some of the financing of business from the banks to the
stock market."

- "Chinese investors only receive a 2% yield on their bank deposits," Lord
Rees-Mogg explains, "and are not allowed to send their money abroad, so
I.P.O.s are attractive to them. "These new Chinese stock issues have been
rationed in the past, but the rationing [had] been eased. So this year, the
big Hong Kong companies are looking to China for more favourable issue
terms. As a result China may overtake Hong Kong in the total I.P.O. market."

- The sheer size of China's run-up says the crash – whether it started today
or was simply announced – will be big enough to scare investors for years to
come yet.
In 2006 prices rose 130% after 5 years lagging the world. The price-earnings
ratio hit 33, up from 16 in late 2005.

- "Now the Chinese authorities want to bring the Shanghai market under
control," William Rees-Mogg continues. "There is talk of a forthcoming
editorial in the People's Daily warning readers against putting more money
in the stock market. I am not sure this will work."

- William Rees-Mogg: "Markets do not much like being talked up or talked
down, either by bankers or by journalists. J.P.Morgan managed to steer Wall
Street through the market panic of 1907, but, after his death, his bank
could not prevent the 1929-33 crash."

- If you've got money in emerging markets then beware, gentle reader. And if
you've got money in the stock markets themselves, you might want to recall
which stocks sink quickest when the air escapes from a bubble.

- Stock in the NYSE Group has already dropped 1.4% in the futures market
today. The namesakes of J.P.Morgan just cut their recommendation on the New
York Stock Exchange shares from "neutral" to "underweight" – meaning "sell"
in plain English – citing the fresh issue of new stock to Euronext
shareholders. All told some 110 million shares are being printed to help pay
for the NYSE's purchase of the Paris, Lisbon, Brussels and Amsterdam
bourses.

- Here in London, meantime, the LSE's stock has more than tripled in the
last 24 months. Thanks to repeated bid rumours and takeover offers, the
London Stock Exchange now trades on a p/e ratio of 46 times.

- But the stock's dropped 1.5% this morning. More to come? Watch this
space...

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

Now, more opinions...

*** Oil is over $60. Gold jumped up too. Are these signs of 'inflation' of
the world's money supply? No, says the financial press. They are merely
signs that investors are worried about Iran, say reporters.

We would look at it in a slightly broader way. There are always potential
problems. Economic. Financial.
Political. Natural. An earthquake could hit California.
Or, the Chinese stock market could crash.

Let us stop a minute and consider China's situation.
The Chinese market is in a clear bubble pattern. Its national economy is
directed by aging communists. Its banking sector is said to have $1 trillion
in bad loans. And its cash flow depends on buying from customers who don't
have any money.

Could China "blow up?" We don't know...could the next head of the Bank of
China be Chinese? Could the next
Pope be Catholic?

Typically, when trouble comes, investors try to figure out how they can get
through the crisis without losing their lives or their money. But to do this
they have to guess what sort of crisis awaits them. Protecting yourself from
an earthquake is very different from protecting yourself from a market crash
or a war.

Right now, investors with their wits about them have a generous smorgasbord
of worries they can sample. A wider war in the Mid East is only one of them.
A meltdown in the dollar is another. A crash in the Chinese stock market is
still another.

We do not mention natural disasters, because they are probably impossible to
foresee ....and very difficult to protect yourself from. Should you sell
your home in California because the place might be hit by a tremor?
We have no opinion. But the threats investors face today come from one
source – super-low lending rates that boost speculation and excess
consumption. That makes them much easier to predict. And much easier to
protect yourself against, too. Bubbly asset inflation is bound to be
followed by bubble-popping asset deflation. The best protection is to hold
cash...
preferably in different currencies, and gold.

*** "You know, nowadays, the economy here in Nicaragua depends on tourism.
And people coming down to buy lots and second houses."

Our friend was explaining what was going on in the property development
business in Nicaragua, where we are still vacationing at our beach shack.

""We had a little setback" he went on "when Danny Ortega was elected. But I
don't think Ortega is a real threat. He doesn't control the army or the
parliament.
And it looks like he doesn't even control himself. His wife has the real
power, according to the rumours.

"No right now, we have more trouble with the North Americans than with the
Sandinistas. They get down here...they buy a place...and then they want
everything to stop. They don't want anyone else building anything.
What they don't seem to realise is that if the local people don't get jobs
or can't start businesses, there's going to be trouble. You can't just stop
the clock, not with so many poor people. Nicaragua needs more development,
not less. The government realises that. The local people realise it, too.
But some of the gringos want to preserve things the way they are now.
And in a way, I understand. The beaches here are almost deserted...not many
houses or people which is very nice, especially if you come from a city in
the U.S.
But it can't stay that way. The locals need their jobs and the visitors need
places to stay and things to do.
There's no stopping development now. All we can do is guide it and direct
it, so we don't regret it later."

*** A vacation is as tiring as work. Maybe more tiring.

Without the unconscious routines of everyday work life, we are forced to
think...and improvise. After a while, it becomes a little tedious... even
exhausting.

Yesterday, for example, we had to decide whether to take a long walk on the
beach before breakfast...or a short walk followed by a swim....decisions...
decisions... Then, what to do at mid-day is always a big question. The sun
is too hot for Northern Europeans between 10am and 4pm.

"Just use sunscreen," says our better half, insouciantly. But we don't trust
it. Only mad dogs, Englishmen, and surfers go out onto the beach at midday,
in our opinion... Which leaves us six hours to spend somewhere else.

Should we spend it with Caesar, on his history of the Civil War in Rome...or
should we study our Spanish?
Should we have a beer or a lemonade? Take a nap or chat with the boys?
Decisions...decisions...decisions. We're not used to so much deciding. We
can't handle it. Then, after 4 pm...we have to decide whether to go for a
swim in the ocean...or lie on the beach with a book...or try to learn to
surf. And when we get off the sand, should we stay in our beach shack for
dinner...or go over to the clubhouse restaurant?

All this leisure is making us nervous, restless...
exhausted. Not that we are eager for it to come to an end yet. Still, we
look forward to a break from it....back at our office.
The Daily Reckoning PRESENTS: The Mogambo rages at the latest on the money
flows cascading through the world's financial taps...and the inevitable
consequence that will spring from it...inflation...

London congestion

MARKET REVIEW: London's congestion charge...Japan's rate rise

- There's no denying it. We're squashed. In fact we must be some of the most
squashed people on earth.

- My wife likes to make the point that she comes from a place a good deal
less squashed... Canada. In fact, it's positively unsquashed for the most
part. Her province alone is the size of western Europe she reminds me. To
which I counter sarcastically (for it is not a new observation in our
house), yes but how many of us want to add to the burdens of our daily round
by relocating to the Arctic Circle? Then there's the rejoinder - if I'm
really striving to quell the insurrection - that why do most Canucks choose
to live within 100 miles of the US border.

- Not that I wish to bring you, dear reader, our ongoing domestic dialogue
as to optimum lifestyle options. It's more about traffic. Everyone in the UK
moans about it but everyone's got a car...at least one. Each year the
traffic gets worse...each year people want a new car...or another one...a
bigger one...a faster one. But what's the point we're near enough gridlocked
as it is?
Your super duper 'S' type model may charge from 0-60 in 5 seconds flat but
its less than useless if your average urban crawl is slower than in the days
of the horse and carriage. So we throw our hands up at the congealed mess of
snarling earth warming fumes and frayed tempers.

It can't go on...do something...someone!

- Well in this town, someone did...the mayor of London.
Four years ago political pariah "Red Ken" Livingstone – so called for his
left wing political views - introduced a vehicle congestion charge to an
area encompassing the core of London with the City financial district at its
heart. Originally £5 per day (approx.
$10) when introduced in 2003 it was increased to £8
($15) two years later with more draconian threats in the offing for carbon
toting 4x4 drivers, so-called "Chelsea tractors".

- The director of congestion charging in London, Malcolm Murray-Clark, says
70,000 fewer vehicles a day now come into the zone. This amounts to a 20%
cut in traffic and consequently sweeter air. As another tax, it's a nice
little earner too generating £122m last year which is recycled into public
transport, additional cycle lanes etc. As such public transport is on the
increase as are bicycles. Indeed, there has been a 72% increase in the
number of cyclists on London's major roads since 2000. Extrapolate the trend
and London could one day rival Beijing for cyclists and maybe Beijing, with
its new found love of the motor car, rival London for clogged roads and
seething traffic jams.

- This week the zone got bigger. It more than doubled by extending to cover
the West End too. It now includes the reluctant boroughs of Westminster and
Kensington & Chelsea – home to some of the most expensive real estate in the
UK.

- Traffic problems are little better on a national level as our crowded
island looks at road pricing to help ease congestion. Satellite technology
is proposed to monitor driving from a little black box placed in the car.
Journey prices to start from 2p a mile says a BBC report. An estimated 1.5m
respondents petitioned Tony Blair in protest.

*** At some point people are going to start noticing oil's over $60 again
and gold's leapt to $685. What's going on? Iran, primarily. Iran's nuclear
ambitions defying the UN. US aircraft carriers duly steamed into the Gulf
this week amidst talk of a "surgical strike".

Also, new data showed falling US petrol inventories as heating fuel demand
remains strong in the face of cold weather. The FT reports today too, a
three year delay in the development of a giant new oilfield in Kazakhstan.
A big deal given its the largest discovery in more than 30 years.

Not that this news has disturbed the buoyant mood prevailing in global stock
markets. The S&P 500 is within "a few percentage points of recapturing its
all time highs", reports Richard Beales in the FT. Though there's plenty of
room for pessimism "the price-to-earnings ratio of the S&P 500 has been
hovering below 18 times. That is hardly excessive by historical standards,
and means price gains so far mostly reflect rising profits, not inflated
optimism about the future."

*** The Japanese Central bank doubled interest rates this week when it
raised from 0.25% to 0.5%. Nothing much to write home about yet as the Yen
slide to another record low against the Euro but warning shot for the
countless billions plying the Yen carry trade – borrowing in Yen and buying
higher yielding assets in other countries. After five years of zero interest
rates though, the deflation period is now over and its flipside, inflation,
is makign a reappearance. The Japanese stock market responded positively to
the news and closed the week at 18,188, a seven year high.

*** Finally, a job that seems to rival football managers for rapid turnover,
the role of Italian Prime Minister.
We can't seem to get rid of ours in Britain, the Italians can't seem to hold
on to theirs. Romano Prodi is quitting after just nine months in the job
leaving the problem of tackling one of the highest debts in the western
world,
108% of GDP, to another.

Have a great week-end.

Robin Mackrill
The Daily Reckoning

THE SUNDAY RECKONING: Sermon Lent I 2007 with the Rev'd Dr Peter Mullen,
Chaplain to the stock exchange

So again we are at the start of Lent. How should we keep this season? What
should we do? Well, don't be seduced by the newspapers and magazines which,
if they refer to Lent at all, make it the opportunity for going on a diet.
So that you'll look nice and trim for your holiday – on some godforsaken
celebrity sand dunes. Do not confuse dieting with fasting. The diet is just
another aspect of the generalised self-obsession, and pampering me-ism that
now passes for spirituality almost everywhere. Fasting is different. It's
not that chocolates or beer or sticky puddings are bad things.
But fasting is a demonstration of the truth that even good things, even the
best things, should be set aside for a while to help us concentrate on God.

This is the whole point of Lent. It is to be used to help us draw nearer to
God. Traditionally, this is the season of Give up and take up. Give up a
pleasure and take up a devotion. There's lots you can do easily.
Come to one of the weekday Masses on Wednesday or Friday. Come to the Monday
evening Devotions session.
Look in your Prayer Book at the Psalms and you will see that at the top of
every page it tells you which Psalms are set for which days. Say them
morning and evening and in a month you've read the whole of them – some of
the most powerful and helpful poetry ever written. It needn't even take up
much extra time – you can read them in the bath or on the loo.

But Lent asks some basic questions. What do we mean by drawing closer to
God? And why should we want to do this? Because being near God is all
delight. It is what we are here on earth for. God is our origin and our
destiny. In his beautiful prayer St Augustine said, O Lord, thou hast made
us for thyself; and our hearts are restless till they rest in thee.

And the thing about giving yourself to God is that you don't lose anything:
you get yourself back – yourself clarified and enlarged. Once you start to
give yourself away – to give yourself to God – you become who you really
are. In God's wacky spiritual economy, the more you give yourself to him the
more you you become. It is a shift in perspective. We are used to going
round with self-consciousness. What we need to develop instead is
God-consciousness.

Put your mind on to God and give your heart to him, and that way you will
avoid being strangled by introspection. We all have this little person in
our head. We all talk to it a lot of the time. It's talking to yourself.
It's putting self-awareness at the centre of life. Wrong from the start. The
aim is to shift this psychological-spiritual orientation so that we feel the
reality of God at our centre.

But we quite like ourselves, don't we? Why should we want to get rid of
self-consciousness – that constant awareness of sweet little me? Because in
fact it's not that sweet. Self-consciousness easily generates into
self-obsession. At its best self-consciousness is a jabbering in the head;
it's a worry; it's an endless self-assessment. Mankind is always tempted to
put himself at the centre. And for the last century – since Sigmund Freud
and psychoanalysis – we have been taught that this perpetual inward gaze is
what we should be doing. It isn't. That man ought to be known as Sigmund
Fraud.

Think about something else. Look outwards. Why do you think creativity is so
admired and desired? Because it is a high grade way of taking yourself out
of yourself and putting yourself into something else. The escape into
creativity. Only it's not an escape – it's making a gift of yourself. It's
what God did when he made the world. And creativity should not be understood
only as the business of high art. Any movement outwards, away from the
soliloquising self, is an act of creativity.
Not just The B-minor Mass but Who sweeps a room as for thy laws makes that
and the action fine.

This thing about drawing nearer to God. It's because God is lovely. He's not
the schoolmaster or the VAT man. He's not sitting up there judging you,
adding up your vices and virtues. The language about judgment and hell is
simply a description of life without God at the centre. God doesn't send us
to hell. But unless we are centred in him, we are in hell already. God
doesn't want that.

What does God want? He wants to show us his love. He wants to fill our
hearts and minds with his love. He is full of love, overflowing. You know
from human relationships that unsurpassable joy – even if it is fleeting –
of being in love, of loving and knowing you are loved in turn. This is how
it should be between us and God. And not fleeting, but forever. God is in
love with us and he invites us into a love affair with him.

There is nothing Schmaltzy about this. It's not sentimental. For the way we
love God is through our will. We love God by obeying him and serving him.
And not, as William Blake thought, because God is the Great Nobodaddy aloft
farting and belching and coughing. Not because God sternly demands our
obedience. But because obedience to God is the whole meaning and purpose of
our existence and all our happiness. That's what blessed means in The Sermon
on the Mount. Your blessedness, your happiness, your good – that's what God
wants.

As I said, it's not sentimental. It's personal. And it's more than personal.
For just as a man can destroy himself through sin, so a whole society and
nation can be destroyed if it turns away from God. Our society faces
destruction – I'd better say that again, you might think it was a slip of
the tongue – our society faces destruction from two directions: our own
internal decadence and the ambitions of a rival culture which is
aggressively confident and committed to promoting its way of life. I'm not
talking only about so called terrorism. The ordinary devout Muslim despises
us for the way we have turned from our faith and followed a decadent and
trivial way of life.

It is not too late. Just as each individual man can be saved from his sins
by the Lord Jesus Christ, so a people and nation can be restored if it
returns to God.
But we have to wonder if the corporate will exists. We shall not be saved by
the hedonistic consumer culture of celebs. We shall not be saved by
sentimentality and chestnuts roasting by the open fire. We shall not be
saved by the Last Night of the Proms – or even by Harrison Birtwistle and
Damien Hirst.

We shall not be saved by high art and by the supposed cultural treasures of
our heritage. Man does not live by museums and art galleries alone but by
every word that proceedeth out of the mouth of God. For our intellectual and
artistic achievements are at bottom the product of Christian civilisation.
If we let Christianity go, the lot goes and us with it. Or as T.S. Eliot put
it more eloquently: Such achievements as you can boast of in the way of
polite society will hardly survive the faith to which they owe their
significance.

So what's the answer? It's simple and plain. We must actually believe the
Christian Creeds. We must pray. We must receive the Blessed Sacrament. We
must centre ourselves on the truths of God. In a word we must return to him.
We must do this here in our church of St Michael. In our homes, our places
of work. And we must let the whole nation know what is at stake – not in
some apocalyptic future, but here and now. Tell them all what the score is.

Turn ye then, and ye shall live. Although we have sinned, we have an
Advocate with the father, Jesus Christ the righteous and he is the
propitiation for our sins.

For Better or For Worse

For Better or For Worse
By Bill Bonner

"I've got to admit it's getting better...a little better all the time."
The Beatles

Waking up in the tropics is a pleasure. At 5am, we open up the double doors
to our bedroom and look out at the sea. Already, the sky is lightening. A
soft, pink hue surrounds the hills to the east; the beach is still in
shadow. The sea remains a dark grey; all we really see is the lines of white
foam made by the waves crashing on the shore and advancing up onto the
beach. We imagined ourselves watching an attack of foot-soldiers from a
lookout post, like Robert E. Lee watching the attack on Cemetery Ridge. The
white line moved ahead in a jagged formation, some troops making more
progress against the enemy than others...but all of them are then driven
back as the beach counterattacks and the wave recedes.

Below the crest of the hill and above the line of furthest advance of the
white foam is not the quaint village of Gettysburg, but a group of
condominia built in the last couple of years. Walking past in the evening,
we found the condos full of Norte Americanos – soft, white people sitting on
their soft, white plastic chairs enjoying the last soft light of day.

They seemed to be having a good time, too. The area must be a paradise to
them, as it is to us. The beach is empty. The sun is warm. The beer is cold.
What more could they ask for? The most remarkable thing is that they are
here at all. This life is now affordable even to a mid-level manager at the
Gap or even a union factory worker in Milwaukee; they can live in a way that
used to be reserved for the rich.

Since we are on vacation ourselves, we don't feel the need to have a
particular object to our ruminations.
But as we looked out our door this morning, we had an insight. A trivial
one. But one worth passing on.

In the 1920s, the tycoons and stock jobbers took the train from New York all
the way to Palm Beach, where they built their mansions and enjoyed their
repose.
They were followed by the well-to-do middle classes...and then the
not-so-well-to-do lower middle classes. The Venetian-style great houses on
Palm Beach were followed by the bungalows two blocks back...and then by the
trailers in Central Florida. But all of them found a new way of life in the
Sunshine State, a life of leisure and luxury and warmth ...a life that they
never could have had in the North.

The whole phenomenon was new. It was only in the 20th century that the idea
of leisure came into being in a major way. Before that, everyone expected to
work from childhood until the end of his days. Then, thanks to the internal
combustion engine, assembly lines and electricity, fairly large numbers of
people accumulated enough capital so they could live without working at all.
And then, later, after the imposition of the Social Security system in the
1930s, everyone came to believe that he deserved a period of rest and
'retirement' after the age of 65. Of course, relatively few people reached
65 back then.

Now the dream is ubiquitous. Everyone takes for granted that he can have
'vacations' during his working years, and that when his work is finished he
can enjoy many more years of retirement – preferably in a warm place.
In Europe, this dream is even more elaborate than in America. And among
government workers, in both places, it is more extravagant than in the
private sector. A government employee in France can count on six weeks of
vacation each year...and, depending on his particular career, he may retire
as early as 55 or even 50.
Thereafter, he lives entirely at the expense of the rest of the society.

Americans are more niggardly with their vacations...and more long suffering
about their work. The typical American worker earns more take home pay, but
he has to work a lot more hours to get it. And when he has finally earned
his reward – he is likely to head for the sun. Until recently, he aimed for
Florida or Arizona. Now, he is more adventuresome. He may get out the map
and find Mexico, Puerto Rico...or even Nicaragua. Coming in large numbers,
they are changing
the places they come to.

"How do we know when we actually make things better?", we asked Elizabeth.

It was a leading question. We already had our answer.
But conversation and cross examination often work better when questions are
put to the witness.

"I guess you just have to look at the results," was the answer. It was not
the answer we were looking for.
We've found that Elizabeth rarely gives us the answer we want. Which is what
makes her an ideal wife; she helps us maintain our humility.

"But how do you know if the results are beneficial...if they are good...if
they actually make the world a better place?" we wanted to know.

"You have no choice but to apply your own standards...your own aesthetic and
moral sense.
What else is there?"

"Well, that's just the problem....

"I was thinking about what we've done here," she went on. We came here to
Nicaragua before anyone else. Now, there are roads, houses, condos....the
local people have work. Money is coming in. And the gringos seem to be
having a good time, too.

"But suppose we had decided that what we wanted was simply to buy up land on
the coast and keep it for ourselves. We could have had a big house and
employed guards to keep others out. That might have been 'better' from our
point of view...but would it have been better for others? Would it have been
better for the world?"

We had our answer ready at hand: "I don't know, but I think it might. This
was such a lovely place when it was virgin tropical woodlands. It's not
necessarily better because it has condos on the beach. And this idea
'better' is a rather loaded term, don't you think?
It depends on what you mean by it. Better for whom?
Better how?"

Elizabeth is used to our arguments, so she explained patiently, "Well, of
course, it's freighted with our prejudices, and tastes, and desires. But,
suppose we
had done nothing. It would have been better for the
people who like virgin tropical woodland...yes...but we, and the local
fishermen, would have been the only ones to appreciate it."

We were not done, however.

"But, suppose we had decided that we wanted to build a community where
everyone had to live in green houses?
What about that? Would that have been better?
Maybe...but only if you like green houses...

"What I'm getting at is that the only way to tell if you've really made
things better or not is by following the money. If you had made more money
building green houses than pink houses, it would have told you that more
people liked green then pink. And the only measure of what is good...or what
makes things better...is what people are willing to pay for, isn't it? If
you disagree with that, aren't you merely substituting your judgment for the
judgment of others? That's what communists, neoconservatives and central
planners do.
If they decide that the world would be a better place if everyone lived in
pink houses, they force everyone to live in a pink house – whether they want
to or not.
When you take away the freedom of choice, and the free movement of prices,
you no longer know what people really want...and so you don't know how to
make things better."

"Surely, not everything is reducible to money,"
Elizabeth replied. "Paris Hilton might make a fortune producing a sex video.
Is that really making the world a better place? You can pander to people's
weaknesses...to their flaws and foibles. You can make money. But it doesn't
necessarily make the world a better place, does it? I guess I would say that
the world is always a worse place when you force people to live in pink
houses when they don't want to. But it's not necessarily a better place when
you sell them pink houses either."

The dove of peace...or at least agreement... hovered a moment over the
Bonner ménage.

"Yes, that's it, isn't it? You can try to make the world a better place by
holding a gun to people's heads...or by stealing their money...or killing
them.
But it rarely goes well. Because if they are not free to express their own
private wishes – even if they are depraved or tacky – you have no way of
knowing whether you're really doing good or not. People express what they
want...and what they regard as making their lives better...by how they spend
their money. If you over- ride them, by forcing them to do things they
wouldn't otherwise do, you are bound to make a mess of things.
Of course, even if you proceed without violence, you can still make a mess
of things. But that's just life.
You do your best. Sometimes you succeed and sometimes you don't."

We both looked out the door again. There, on the Pacific Coast of
Nicaragua...a country that was once a banana republic...then an experiment
in mass delusion...and lately, a tourist destination...plumbers and dentists
from North America are enjoying a few days in the sun. They have the ocean
in front of them...air- conditioning behind them...and ice-cold drinks
inside of them. They bought their condos and their vacations of their own
free will. And now, with the sun peaking over the hills, they rise and
stretch...and look out their own doors too...

..and who can doubt that they have found a better world?

Bill Bonner in Nicaragua:

"Bubbles Brewing in Shanghai, Tokyo, and London."

Thus Gary Dorsch, editor of the Global Money Trends newsletter:

We will hear the evidence later, dear reader. First, we will render our
judgment: Too much liquidity.

"There is a bubble growing. Investors should be concerned about the risks,"
said Cheng Siwei, vice- chairman of China's National People's Congress in a
January 31 interview with the Financial Times. "But in a bull market, people
will invest relatively irrationally. Every investor thinks they can win. But
many will end up losing. But that is their risk and their choice," Cheng
warned.

The Shanghai Composite "A" share Index has gone up over 200% in the last 16
months. The market is limited to Chinese nationals, which just goes to show
that the Chinese can be as silly as Americans.

"On the smaller Shenzhen market," Dorsh continues, "three new IPO's soared
into orbit, suggesting that the Chinese stampede into stocks hasn't run its
course.
Non-ferrous metals maker Yunnan Luoping Zinc soared to
30.94 yuan, triple its IPO price of 10.08 yuan.
Zhejiang Sunwave Communications jumped to 19.65 yuan, double its IPO price
of 9.15 yuan. And China Haisun Engineering 002116.SZ surged 178% to 19.16
yuan.

"Investors opened 50,000 retail brokerage accounts a day in December and
mutual funds raised a record 389 billion yuan ($50 billion) last year,
quadruple the
2005 amount. January turnover was five times early 2006 levels. Beijing is
now ordering banks to prevent retail borrowing for stock investments."

What is the source of this bubbly activity? Is it the same 'tide of
liquidity' that is washing over the rest of the world? As the Chinese sell
more and more goods to US consumers, Chinese firms end up with more and more
dollars. These are turned in to the Chinese central bank, which now has
foreign currency reserves of more than $1 trillion - the biggest pile ever
built up – most of it in US dollars. In return, the bank of China gives out
local currency, the yuan. What are the gambling-mad Chinese to do with all
that money? Play the stock market!

Meanwhile, in neighbouring Japan, the Topix stock market index is at a 15
year high. The much-despised yen has been driven down to such low levels
that it has made Japanese exports cheap. Japanese exporters – notably Toyota
Motor Company – are having a great time of it.

Dorsch: "Since the BoJ dropped its overnight loan rate to zero percent in
March 2001, the Euro has advanced from around 105-yen to as high as
158.70-yen today.
Aided by the Euro's strength against the yen, Japanese exports to the
European Union nearly doubled to 1.06- trillion yen in December. But on the
flip side, European exports to Japan have waffled between stagnation and
deterioration.

"Last year, Japan racked up a 18.6 trillion yen ($160
billion) current account surplus, while the Euro zone suffered a 16.8
billion Euro ($21.5 billion) deficit.
Yet the power of the "yen carry" trade was able to swim against the tide of
these trade imbalances, by pushing the Euro 12% higher against the yen last
year."

Just last week, Japan began to 'normalise' its interest rates. But it did so
in such a weak and waffly way that it merely served to convince speculators
that the 'yen carry trade' would last a long time.

Dorsh again... "Japan's interest rates remain abnormally low and far out of
alignment with the rest of the world, and the "yen carry" trade lives on."

Finally, Dorsch looks to another island nation:

"The Bank of England (BoE) delivered a nasty New Year surprise on January
11th, its third quarter-point rise in interest rates in six months.... But
London's FTSE- 100 all but shrugged off the rate hike. It suffered a
30-point fall to as low as 6,140 just after the announcement, but then
closed the day 70 points higher.
After stabilising above the 6,200 level, the Footsie- 100 tacked on another
5% gain to 6,450 last week."

While the Bank of England raises rates, it keeps the money flowing. Money
supply figures show available liquidity increasing as much as four times
faster than the economy last year. As a consequence, house prices in Britain
went up more than 10% in 2006 and the stock market reached its highest level
in 6 years.

On Tuesday, the Bank of England not only read the past,
but predicted the future:

"Investors are likely to take advantage of this ample liquidity and the
associated easy credit to purchase other assets, driving risk premiums down
and asset prices up... In due course, those higher asset prices may be
expected to feed through into higher demand for goods and prices, putting
upward pressure on the general price level."

Yes...and then what?

We've giving up guessing. This liquidity bubble should have blown up a long
time ago. That it has not yet doesn't mean it won't. It just means that
when it does, many more people in many more places will hear the loud
crashing noise...and feel the walls shake.

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

More news:

Adrian Ash, chewing on a sausage roll from Greggs the bakers:

- "It may not be surprising that in these times of excess and extreme
wealth, 'Let them eat cake' has become 'Let them eat gold'," sniggered an
article in the Boston Globe back in November 1999.

- On the Nasdaq, Enron was about to go from $40 to $70 to $90 (and then
zero). Amazon's stock was trading above $75 (it's now $41). And in New York,
"select restaurants [were] sprinkling gold – real 22-carat gold flakes –
atop their sashimi salad, roast lamb, and other pricey dishes..."

- Ten years before, Tokyo financiers were also eating gold flake atop their
sashimi – as well as drinking gold-laced sake to wash down their gold-foil
rice crackers and gold-wrapped sweets. Drunken "sarari-men"
in Roppongi sushi bars struggled to eat golden food with golden chopsticks.

- But just as the DotCom Bubble found its pin, the sheen came off Tokyo's
financial mania, too. The crash starting in 1990 took gold-flaked noodles
off the menu all across Japan – for the bigger the bubble, the bigger the
bust, to paraphrase Ludwig von Mises. And so far in post-war history, the
collapse of Japan's credit bubble has been unmatched.

- The Nikkei dropped 75% of its value by 2001. Japanese industry suffered
three recessions to leave its total production unchanged after 12 years.
Prices of residential land relative to consumption fell by nearly
two-thirds, according to a study by the Dallas Fed. And the male suicide
rate went from 20 per 100,000 to 37 per 100,000 – only just behind the rate
of growth in male unemployment.

- Fast forward to London 2007, and gold's on the menu once again – this time
as a drink at the Baglioni Hotel in Kensington. It serves a rum-peach
cocktail (basically a Peachy Keen) with gold dust floating on top. Jeremy
Paxman guzzled one for BBC Newsnight viewers on Wednesday. Paxo also gasped
at the hotel's suites costing £1,900 per night plus VAT...the staff dressed
entirely in black (Ermenegildo Zegna, no doubt)...and the courtesy car, a
Maserati Quattroporte.

- Could London's gold-lipped fund managers be sipping their last glass of
bubbly soon, too?

- "It was the monetary equivalent of 'shock and awe',"
writes Gary Dorsch at SirChartsaLot.com. "The Bank of England (BoE)
delivered a nasty New Year surprise on January 11th, its third quarter-point
rise in interest rates in six months...But London's FTSE-100 all but
shrugged off the rate hike. It closed the day 70 points higher [because] few
traders take the Bank o England seriously. Bringing the UK economy back into
balance will unfortunately require a lot more discomfort than the slap
delivered by Mervyn King and his chums last month."

- For now, the stock market just doesn't care.
Interest-rate futures now put base rates up at 5.75% by June. That signals
another pair of rate-hikes ahead!
But the FTSE continues to knock around 6-year highs regardless. Global
inflation, after all, always sounds like good news to London equities. Just
yesterday the FTSE 100 closed up 24 points at 6,381. Mining stocks accounted
for six of the top 10 rising shares.
Commodity stocks all told made up nearly one quarter of the index's advance.

- But the sharp spike in your cost of living has little to do, we think,
with rising oil prices and stronger copper. Instead, "years of monetary
abuse by the Bank of England are finally coming home to roost," as Dorsch
puts it. You can't have the supply of money rising by 10% and more for two
years running without expecting the value of money to fall – and domestic
prices to start rising. And lo!

- Dig into the latest official inflation data – as your editor did this
morning – and you'll find the mischief of cheap money lurking down the back
of the sofa like an old piece of chewing gum covered in fluff and stuck to
the cushions. Housing costs last month stood nearly 8% higher from one year
before. Services in general – the haircuts, plumbing, legal advice and
nights in the pub that we can't outsource to China – became 6.1% more
expensive. Seasonal food, meaning what's grown in Britain, rose 7.5% in the
year to January, as vegetables became 10% more pricey, while fresh fruit –
more likely to be imported at New Year, of course – rose only 3.5%.

- Home-killed lamb rose 6.9% against 2.2% for imported lamb, while rail
fares rose 5% - as did the cost of holidaying in Britain. Foreign holidays,
which you'd expect to use up more fuel, rose only 3.1% from a year earlier.

- You get the picture, gentle reader, even if the Old Ladies would rather
you didn't. Compare the price of domestic with imported items like this, and
it's clear that Sterling's strength on the forex markets has "saved" the Old
Lady from runaway rises in the headline inflation rate.

- Now, as Gary Dorsch says, "in order to get a handle on the explosive M4
money supply, the Bank of England would probably have to hike its base rate
by at least
75 basis points to 6%."

- If you're out sipping gold-sprinkled cocktails tonight, make sure you
enjoy it...

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

And more views from Bill:

*** Did you notice what happened to gold on Wednesday.
Up $23. Then, yesterday, it gave up just one of those dollars. Gold is
watching this liquidity bubble. It is wondering too...when will it end? And
it is getting in position. All this excess liquidity has to go somewhere.
Asset prices now. Consumer prices later? Or collapsing asset prices?
Anywhere it goes it is bound to raise the price of gold, because gold is
more durable in value. Historically, it is the thing to which investors'
turn when they smell something fishy in all that liquidity. The bull market
in gold probably has a lot further to run.

*** Writes Robert Samuelson:

"The concerns about "excess liquidity" stem mainly from the
low-interest-rate policies adopted by the United States, Europe and Japan
after 2000. The aim was to avert a deep recession. The Federal Reserve cut
its overnight rate to 1 percent; the European Central Bank got down to 2
percent, and the Bank of Japan actually went to zero. With low short-term
rates, investors have poured money into longer-term securities with higher
interest rates - government bonds, mortgages, "junk"
corporate debt, bonds from emerging market countries - and into stocks.
Often, these investments are financed by short-term loans at low interest
rates."

What happens when there is 'excess liquidity'? "The danger is that a sharp
shift in exchange rates (either the borrowing or lending currency), or
higher interest rates in the lending country, could make these appealing
trades unprofitable. A panic might ensue as investors seek to escape.
Historically, "excess liquidity" often evaporates through losses."

Yes, it evaporates dear reader. It does not change hands. It simply
disappears. If a company issues a billion dollars' worth of bonds, for
example, those bonds are held as assets by their purchasers. The company has
the money...the bondholders have the paper.

Then, if the company spends the money and goes broke...then what? The money
has changed hands. But the bondholders have nothing. The $1 billion they
thought they had has disappeared. They will never see it again.
If a work of art suddenly declines from $1 million in price to only
$500,000...a half a million dollars has disappeared too. No one has it. It
is gone. And if the financial industry cuts its bonuses in half...that money
too, just no longer exists.

That is how excess liquidity goes...up in vapour.
Then, there is no more excess. In fact, there may
be a shortage. Something else to look forward to,
dear reader.

*** Lent began yesterday. We would have forgotten about it, but we ran into
Padre Walter on Tuesday, who reminded us that good Catholics have to observe
the Lenten season. Of course, we had forgotten that we were good Catholics
too. Since we are in the New World, we thought we might get away with going
back to our New World ways. In the old world, we were always Catholics –
both before we immigrated to America and after we went back. But in the New
World, we've always been Episcopalians. Besides, we're on vacation with a
young family headed by an atheist.

"Our children go to the local Presbyterian church in New York. But I told
the preacher that I was a practicing atheist," said our friend. "Religion is
a hot subject in our area. Our son came back from school and they had told
him evolution was 'just a theory.' He also learned about 'Intelligent
Design.'"

The discussion began with the pancakes. It grew with the papaya and
melon...and finally matured with the coffee. All through breakfast, we
discussed the limits of science and the reach of religion.

What surprised us was not evolution...about which people seemed not to care
particularly...but global warming. Here, the younger generation was of one
mind:
global warming threatens the planet.

We confessed that we knew nothing about it; but what makes us so irritating
to kin and company is that we suspect that others know not much more.

"Are temperatures really rising? Is it unusual? It is caused by man? Is it a
bad thing? Can it be controlled?
Would it be worth controlling? There are a lot of question marks between
here and having a firm view of this issue," we offered modestly.

"You can't just stick your head in the sand. You can't just say, 'I can't
know everything...therefore I won't try to know anything.' You can't just
deny responsibility for what goes on in the world and how future generations
are affected by it," said Henry.

"Oh, I don't know," we replied gamely. "Has any major disaster in history
been caused by people who hesitated...by people who wanted to think
twice...or even three times? Or by people who decided they should mind
their own business...and stick to their own knitting? Wars, pogroms, forced
starvation, mass murder, revolutions, murders – they're always sins of
commission, not sins of omission."

"Yes, but here we're faced with an unnatural disaster – as if the tsunami in
Asia had been caused by a man-made nuclear test underwater in the Pacific.
If something like that had been caused by man...or even if it hadn't
been...shouldn't you still try to warn people...tell them to get off the
beach....try to do something to reduce the number of people who will die?"

"Well, yes...but that doesn't reduce the number of question marks here. We
don't know if there is a tsunami. We don't know what caused it or how to
stop it...or even if there is any reason for trying. If you think the sea
level is going to rise, you should definitely move to higher ground. But
maybe you don't want to force people to stop using air-conditioning or stop
keeping their milk cold just because you have a theory of how it will affect
the world climate 50 years in the future."

The argument ended badly. There were no victors, only losers. Everyone felt
bad about arguing so aggressively about something that none really knew
anything about.