Investment risks and opportunities

Bubble About to Pop - Crash on the way

2011-06-15T11:06:00.001-07:00

Bubble About to Pop - Crash: The bubble is just about to pop now. On 1June – all US stock markets went down between 2.2% to 2.4%. This was just a minor correction, a mere wobble compared to what is just about to happen.

Printed Money: We have a very simple message. The $2 Trillion of printed US money has created a bubble – inflated things well beyond their real value. This has swollen US debt and a recession is now beginning.

Indices Down: All key indices this week pointed down. In our opinion the USA should already be in recession – it’s just that the quarterly numbers are not out yet. We wont bore you with all the details – suffice it to say we did not see any positive indices this week – they all stayed the same or worsened. The UK is also very close to a recession. In a few months, the markets will realise the extent of the growth problem and investors will dump shares because of fears of large drops in earnings. Meanwhile a few key negative things out there:

1 US administration has yet to agree to increase the $14.3 Trillion debt ceiling – time is ticking by and default would start in August if no agreement is reached

2 Greece needs to make its Euro 12 Billion debt payment in June – it cannot afford this – and a further bail-out is still to be agreed

3 The US stops QE2 on 30 June – there are no plans for QE3 and in any case, the USA cannot afford this – interest rates are due to skyrocket because people will demand a greater risk premium to hold dollars with declining value due to the inflationary bubble created

4 The summer slow-down is on us – economies always slow in the summer

5 Public sector spending cuts will start to kick-in

6 Inflation is now out of control – normally if inflation is 5%, interest rates should be 8%. Interest rates are only 0.5% - ridiculously and dangerously low. One can only assume Central Banks expect a recession later this year.

7 Food and energy inflation is running at 10-25% with taxes rising – if this does not lead to a recession, we don’t know what will

8 Oil prices are averaging $100/bbl on an 6 monthly basis, far higher than in 2008 – it led to a recession last time – why does anyone think it will be different this time, especially as western economies are now less robust?

9 Go away in May – the old adage is worth taking very seriously – this time millions of retiring baby-boomers will be getting their money off the table and heading for the hills for the very last time – expect to notice more retirement announcements early this summer as these people liquidate and head for the sun

10 Despite the Fed pumping $2 Trillion of fiat money into the US economy, it has barely created any jobs. US tax revenues is $1.3 Trillion a year with government deficit $1.3 Trillion – the US deficit is >10% of GDP - totally unsustainable. Even if the US government double tax rates, they would still be in deficit. And that's before interest rates go up - worried - you should be! Any other country would be bankrupt with such finances and the USA’s ability to keep printing money will soon be curtailed after the dollar crashes, and as foreign investors shift away from viewing the dollar as a safe haven. They must be sick and tired of the dollar being devalued on purpose.

Peak Oil: This was 2005 (crude oil) or 2008 (all oil liquids) – for seven years we’ve been on a bumpy plateau and oil production is declining after massive supply disruptions to light sweet oil supplies from Libya (1.6 million bbls/day) and Yemen (0.4 million bbls/day). OPEC is not capable of making up for this light oil off the market – and high oil prices have now killed the western economic recovery. It always does, it always has and it always will. News this week broke via Gazprom that Russia’s oil production is now in decline – they have also reached Peak Oil – production will be down 3% this year. It's highly likely Saudi Arabia cannot increase production significantly – and in any case will not do so even if they could. If oil prices rise, demand will be destroyed as a recession takes hold so they will use this as an excuse for not exporting more oil. In any case, with their massively increasing population and oil demand internally, the Saudi’s need all the oil they can get to fuel their own economy - electric power for air conditioning and gasoline for cars – expect Saudi oil exports to drop (not increase). As global oil prices rise, there is an incentive for Saudi to hold oil back and get higher prices in future years – yes, expect OPEC exports to decline not increase. This is not a normal market.

Alternatives: The world is so reliant on fossil fuels that any immediate transition to renewable alternatives is wishful thinking. Not only are these energy forms far more expensive, the infra-structure has not been developed to make the switch possible in a 10-15 year time frame. In any case, such gigantic investment would be required - it would bankrupt most developed nations. Most renewable energy already relies on large subsidies - as Peak Oil affects hit and government have less money to spend, these subsidies will dry up even though at these times they will most be required. We're pretty much locked into fossil fuels. Nuclear power was about to see a gigantic growth period because this was moderately low cost, very low in emissions and considered safe - however, the Japanese nuclear disaster has made many countries think again. In Germany, they announced last week they would shut all their nuclear power plants by 2022. That means they will have to find 22% extra capacity from somewhere - a gigantic new investment and likely to drive energy prices far higher. It will also probably lead to more CO2 emissions because we frankly find it unbelievable they will be able to replace this capacity with renewable sources. Especially as new overhead pylons would need building and the locals will undoubtedly complain that this is polluting. Hydro-electric plants are no longer being built because of environmental complaints. Nuclear ditto. Shale gas has just been outlawed in France - because fraccing is now illegal. It all points to rapidly increasing energy prices, slower economic growth and energy crises in various countries. Shale Gas was the great hope a few years ago, particularly in the USA - the energy business has been hydraulically fraccing wells for 30 years, but now it seems many governments want to ban this practice - just when we most need this relatively cheap clean energy. What alternatives are there that are not killed off by various different vested interest groups? None. Expect power cuts -affecting hospitals, schools and homes - particularly in developing nations. As energy prices rise, overall GDP growth will drop in oil importing developed nations.

GDP Growth: To be quite explicit, we have modelled the effects of oil price based on economic costs (import-export deficits), historical trends and forward projections - the table below gives our view on the likely GDP growth at sustained oil prices levels. As you can see, anything over $100/bbl leads to stagnation in developed oil importing nations. Anything over $130/bbl will lead to recession. We are there or thereabouts at the moment - and we see a recession recommencing before oil prices drop back thus re-stimulating the economy. Just to re-iterate the direct relationship between oil prices and economic wellbeing. Ignore this at your peril - since all other output prices are either directly or indirectly linked to oil prices. The age of cheap energy driving consumerism and debt is over. This will change henceforth and western oil importing nations will battle to stay out of recession because of high oil prices.

Oil Price $/bbl	US GDP % growth rate	UK GDP % growth rate	India GDP % growth rate	China GDP % growth rate	Saudi GDP % growth rate
50	3.0	2.5	9.0	11.0	-4.0
75	2.0	1.8	8.0	10.0	-1.0
100	1.2	1.0	7.0	9.0	4.0
125	0.6	0.6	5.2	8.0	6.0
150	-1.2	-1.2	4.5	7.0	8.0

UK Trips Up Big Time: As for the UK, Chancellor Osbourne’s £2 Billion tax grab has stalled North Sea oil and gas investments to the tune of £10-20 Billion and this will increase declines in UK oil and gas production. Just when the UK needs more oil and gas, this ridiculous tax on "supply" will do the opposite. Meanwhile tax on "consumption" was dropped at the petrol pump – does that make sense? – we must be missing something! Expect worsening balance of payments deficits as more projects are cancelled – we saw the first evidence of this last month as North Sea oil production crashed the most in ten years. Many jobs will be lost, particularly in Scotland. This tax was stupid. The UK has the most unstable oil tax regime in Europe – possibly the world. UK governments seem to want to destroy the goose that lays the golden eggs. And this tax is at the same 82% level on gas – and UK gas imports are now gigantic compared to ten years ago all leading to increased balance of payments deficits. When will they learn?

Crash: We expect the US stock market to crash by at least 30% by year end. The Dow should eventually drop from 12600 to 8000 - this is our central projection. Ditto the UK stock market - dropping from 6000 to about 4200. We urge all serious investors with stock market investments to sell up into cash now – before it’s too late. Then you can get back into the stock market after a crash. Don’t hang around in this market – you’ll be the sucker that gets caught. Be the first to leave the party, not the last.

Safe: And if you have a lot of cash, spread it around different banks in case one or two go under during or after the next financial crash. Or store it in a safe bank vault – forget the interest – it’s not worth anything anyway. Better still – put the money into a Swiss Bank account is Swiss Francs. Or in Canadian Dollars in Canada - a country well protected from Peak Oil.

Chinese Property Bubble: People have been talking about the Chinese property bubble for the last five years. Normally, if people say a bubble has formed, it's normally the case. Euphoria takes hold, and people see a fast rising market, speculators jump and board then try and find the top. Then everyone bails out - the canny investors first with the suckers last. Up until now, we thought this market was well supported by fundamentals, but since early 2011 we have changed our tune. The think there is 80% chance its a bubble and it will go pop. If and when it does, it could have a global repercussion because so much money, energy, resources, employment and speculation has gone into this mighty building boom. If it goes pop, other assets like oil commodities, coal, banking and resources companies would likely be affected. Particularly steel, iron ore, copper and cement -plus oil and gas that is needed for building. We also see the first signs of a property crash in China, not for sure, but it certainly looks spooky. So, this is another reason to get your money off the table for a while - if the Chinese property bubble goes pop, it could stimulate stock market declines globally - and trigger a wider recession in countries exporting to China.

Chinese Invest in London: An interesting article describes evidence the Chinese are starting to invest heavily in London property - because prices are lower than Beijing. The Chinese are canny investors - this is certainly a sign that all might not be well as indicated in the mainstream in China at the moment. Undoubtedly China is a fast growing country with massive upside, but property prices have probably got too far ahead at this time, and there could be a rapid correct in some of the major industrial cities.

Property Investing: Some of the biggest smartest investors have liquidated stocks and shares and got into London prime property – not a bad strategy considering what is likely to happen. The buy-to-let market is also resurgent in the UK because so few first-time buyers can afford to buy their own properties now. They cannot get financing. Deposits are too high. Student loans drag them down. Weddings cost a bomb. Credit cards have too much debt on them. "Mum and Dad" cannot afford to help anymore. Banks prefer to lend to established buy-to-let investors. And of course rents have been rising fast because of a shortage of rental accommodation, shortage of private landlords and social housing. There is almost no building and the population is expanding rapidly - 1% a year in London for instance. So it does not take a rocket scientist to realise that the housing crisis – will and is causing rents to sky-rocket. Being a landlord is a rather unpopular profession and highly stressful – with problem tenants, high taxes, problems with regulation and councils, and a good deal of criticism mainly from either envious, jealous people, or people that believe buy-to-let investors are responsible for driving up house prices – because of this, there is not much competition any more. Few landlords around. Hence rents go up. This is the un-intended consequence of all the regulations and tenant rights that have been put in place in the last 15 years. So yields are reasonably attractive. As you can understand, they have to be attractive because being a landlord is not exactly a pleasant or easy experience. So indeed, there are some good high yielding rental opportunities out there and very little competition. We don’t think this will change any time soon because 15 years of governments have failed to improve the attractiveness of private letting for landlords. And capital gains tax also took another slice out of profits last year. If landlords pay for energy and council tax – these costs have also sky-rocketted.

Inflation: Also consider, property is generally thought to be one of the best hedges against inflation. If you believe governments will try and inflate their debts away, then as inflation kicks in, its likely property prices will follow suit. It does not take many years of 4% inflation to reduce debt burdens - for instance, after 10 years at 4%, debts in compounded real terms halve. If property prices rise with inflation, then equity levels shift markedly higher quite quickly, as the real terms debt level reduces - even if property prices do not out-pace inflation. That's one reason why so many wealthy people invest in property, and London property is the most popular place. London gets more visitors a year than any other city in the world - 20.5 million visitors. More than Paris, double that of Madrid. London attracts wealthy international families with its culture, transport, history, education and language - along with a cosmopolitan open environment. Expect international inflows of property investment cash to continue to stream into London - as a safe haven during problematic times.

Land: As the population rises from 7 Billion to 9 Billion in the next few decades and Peak Oil continues to affect the economic landscape, land prices will likely rise sharply. Anything growing production activity on land like forestry, water, mining or agriculture will prosper as food prices rise and food shortages become noticeable. Land is something tangible, physical that can be used to grow and sustain life – so fiat money and debt lose value, land prices will more than likely rise far above inflation. The very most wealth people normally invest in land – during hard times, land will always come in handy and be coveted. To have land in your portfolio seems sensible. In our view, we prefer land to gold. We like land like oil, gas and coking coal. Land can be used to generate energy. Land can be used to grow food and fuel. Peak Oil leads to higher land prices, especially good value farmland close to cities.

Key criteria point to recession and crash

2011-05-15T04:32:00.001-07:00

Crash On The Cards: The US government came out 27 April as expected and advised they would end quantitative easing 30 June and continue with low interest rates in the medium term. They said inflationary pressures were under control and the US economy was improving. All sound okay on the face of it. It’s very important you read ahead now – for our objective assessment - we describe our view on why and when we think a market crash will occur.

Recession on the Horizon: All the indications we can see point to a stock market crash and another recession – it’s just around the corner. This is our opinion based on detailed analysis. We give a 70% chance of some sort of stock market crash in the next six months and will now outline the reasons why:

1. Fiat Money: Firstly - $2 Trillion of printed money has been pumped into the US economy which has hardly got the US economy moving. Unemployment is still rising. Real Estate prices are dropping, even though interest rates remain at 0.5%. One of the key reasons for this is that the private sector – now making gigantic profits – is not re-investing the proceeds because they are scared about what is just around the corner. They lack confidence to put large amounts of money on the table and are worried about interest rates rising. These companies are hoarded the cash, give some away as dividends to shareholders, and mainly invested overseas. Furthermore, a lot of this money has gone into speculation of commodities - further deteriorating the US economy by driving up energy input prices.

2. Pumped Up Stock Prices: Because profits are high, this has fed through to stock market prices (price/earnings multiples) - the stock market has sky-rocketed to very dangerous levels since the early 2009 low point. The Dow has risen from 6600 to 12800 end April - up over 100%.

3. Increasing Deficit: But the US deficit has increased – not decreased. The USA is now running with a $1.4 Trillion annual deficit. It's spending is £3.0 Trillion but it's income from taxes despite these massive short-term profits is only $1.6 Trillion. This is about 10% of GDP – the same levels that Greece is currently running with – also the UK. Dangerous levels - not worthy of an AAA rating. The reduced April 2011 deficit to $45 Billion compared with a year earlier at $86 Billion we believe is large related to companies making big profits because of low interest rates. Once borrowing costs rise, the tax receipts will reduce and deficit sky-rocket.

3. No Plan To Reduce: But the USA has no concrete plans to reduce the deficit – instead the deficit has been revised up on a six monthly basis since the 2008 financial shock. Medicare, military and oil import expenditure is totally unsustainable and in our view will lead to a dollar crash and ultimately a financial crash. No wander Standard & Poors put the US on credit watch for a downgrade from their AAA rating. The US based Weiss Rating's end April advised that the US rating should be CCC in their objective view, just above junk status.

3. Dollar Standard: Remember that gold used to be the global currency standard. Then this was decoupled – after a brief period of UK Sterling being the standard - then the Dollar has continued to be the global currency standard since. It was initially backed by oil reserves, coal, gold, high-tech and a booming economy. This has changed since the 1980s beyond recognition - oil reserves have depleted, the high-tech boom has played itself out, and debt has sky-rocketted. Manufacturing has moved to China. But let’s just look at a couple of scenarios:

1 The Chinese currency decouples from the dollar – the dollar would crash as people bought the Chinese currency

2 Oil is priced by OPEC in a basket of currencies – the dollar would crash as people switched away from the dollar

3 The US gets a downgrade from its AAA rating – the dollar would crash

Risks: All three of these scenarios are not exactly likely in the next few years, but let’s just say in three years time if oil prices stay high, one could imagine one of these scenarios playing out – if not two - if contagion took hold. No other country can just print more money to get itself out of trouble and get away with it. It’s only because of the previous US reputation that the current Administration has managed to get away with this. But as the US declines as a super power and military power, it’s likely the dollar will continue a long decline and currencies like the Swiss Franc, Norwegian Kroner, Australian Dollar and Canadian Dollar will increase in value against the US Dollar – because these currencies are backed by hard assets and resources and run with healthy budget surpluses (oil reserves, gas reserves, coal reserves, metals or gold).

Printing Pressed Stop: You see, the immediate problem is – when the Fed stops printing money 30 June and stops buying it's own debt – the interest rates will have to sky-rocket to attract investors against risky dollar debt, particularly as no deficit reduction plan is agreed. When interest rates rise, profits drop, businesses get into trouble and the stock market should therefore crash.

Fiat Money: We believe the only key reason why the US stock market has doubled in two years is because fiat money has been printed and used by speculators on risky assets to make a fast buck. In a way, this was the Fed’s plan to stimulate investment into risk – to create some inflation. But it’s actually created a huge bubble that is very likely to pop very shortly. Why should the value of US companies double in two years - let's be honest and just admit it - it makes no sense.

Dow Jones At Record: Every time we see the Dow Jones rise further above 12000 – we just think “bubble” and “when will it pop”. May be we are too simplistic or too honest – but it’s an accident waiting to happen and many normal small investors and pensioners are going to get severely burnt unless they get their money off the table quickly.

Getting Out: The first people to get out will be the big investment banks and wealthiest big investors. Anyone with pensions, unit trusts or small equity amounts will get burnt just like they always do. By the time the average punter realises a crash is on – it will be too late. It might happen in a few minutes or a few hours. Not enough time to react. When it starts, people in the know will talk it up as a buying opportunity, but it will only drop further. You have to get out now – now – yes – now – before the crash.

Printed Money Being Used In The Wrong Place: Another reason why we think the US is due for a hard fall is because printing money and increasing the public sector is a recipe for disaster. On top of this, the current administration seems intent on banker bashing and oil company bashing. After ten years of steady oil investment, US oil production actually started to increase in 2009 – but this has all been massively set back by the current energy policy which is frankly a mess. Plus the offshore ban on drilling. Oil import bills will keep rising and the Administration is very unlikely to survive through to the end of 2012 if gas prices are over $4/gallon. The average American uses ten times more oil than a Chinese person – and it affects their consumption patterns so much, it will likely lead to a US recession – especially if US based oil prices rise above $120/bbl. As employment drops, oil demand drops. Unemployed do not drive around and spend heavily at shops. They also don’t use energy at work. There is a very close correlation between employment and oil usage. Yes – look no further than the Fed if you want to know who pumped up the oil price and stock market prices – the fiat money – having an unintended consequence. Far from creating jobs, it’s developed a bubble, raised oil prices and created no jobs – surely someone in the Fed could have predicted this?

UK Recession: As for the UK – it’s laughable how people looked at the meagre 0.5% GDP growth in the last quarter and say the country is growing. No – the snow in Q4 2010 had a massive economic impact keeping people at home and slowing business – then in Q1 people had to make large purchases and go about their normal business again. We believe, that’s the only reason why the UK grew 0.5%, it was just a rebound from a recessionary quarter. Everyone expected a bit of a rebound. In the last three quarters, there has been zero growth. Any hiccup in the next few months equals a recession. We already know there is a massive hiccup – namely high oil prices and all the security problems in North Africa and the Middle East. As the summer approaches – a slower growth period normally starts. Meanwhile the tax shock of increasing North Sea oil taxes will lead to many cancelled oil projects and a slowdown in oil production - we expect GDP to drop in Q2 and Q3. Then by end 2011 everyone will need to acknowledge that there is another recession. Despite Sterling massively declining in value in the last few years, exports have not really risen significantly and the service lead growth is likely to be temporary stimulated by the fiat $2 Trillion that the Fed has printed in the last three years along with a spike in commodities prices. It only needs a stock market correction to wipe out the UK service lead economic recovery. As oil prices and stock market prices drop - it will kill any service growth in the UK - this is our base prediction.

Oil Prices Again: The other reason why we think there will be a stock market crash and recession is that oil prices rose over $120/bbl (Brent) in April – well over danger levels. It's been too high for too long. Goldman Sachs are right and Barclays are wrong in our view – it’s time to get out of oil and commodities now that prices have stayed well above $100/bbl for four months. It’s only a question of a few more months before inflation takes hold, prices start blowing off, import costs swell debt levels and a stock market crash triggers another financial meltdown. Every time oil prices spike – a recession happens – period. There is no example of when oil prices spiked and a recession did not start in western oil importing nations in the last 60 years. The simple fact is – our lifestyles and massive consumption use far too much oil for the value we create in western oil importing nations – too many people burning around in cars but not adding value – just burning expensive oil that is running short. Inefficient non value creating consumption we call it. Lots of people "swanning around" - delivering zero and eroding value.

Peak Oil – Bumpy Plateau: As far as Peak Oil is concerned, some of the Peak Oil doubters point to an interesting statistic that oil production in March was higher than at any time in the world’s history. We’d like to explain our view on this – because we are of course Peak Oil advocates. What we have always said is that – since mid 2005, oil production has been on a bumpy plateau. The first peak was for crude oil in 2005. The second peak was July 2008 for all oil liquids (including biofuels and natural gas liquids that rose in production levels whilst crude declined somewhat). The third peak is about now – because oil prices have skyrocketed to $125/bbl (Brent) and everyone is producing at maximum rate – except Saudi Arabia. This is the bumpy plateau we have been describing for the past five years and this oil production spike will be temporary, probably only a month. It will drop back by year end. We are on a plateau – and the downside risk of a sudden big drop in overall global oil production is far higher than a rapid expansion of oil production. Time will prove us correct on this one – we maintain our view – based on our unique world oil production model (of every oil producing and consuming country) that total oil production will stay within a +/-10% bracket from 2005 levels through 2011 – that’s a plateau in our opinion – not an increase.

Diesel Shortages: The other aspect of oil worthy of particular note is that there is a shortage of light low sulphur crude oil – the feedstock that is ideal for refining into diesel. There is consequently a shortage of diesel globally. Diesel usage has sky-rocketted in the last ten years – for trucks, cars, tractors and power generation (temporary and semi-permanent). We see light high quality oil prices continuing to increase as diesel shortages intensify – until the recession begins again in western developed nations. Russia is suffering diesel shortages, as are India and China – a serious situation that is little publicised. This will lead to lower productivity, higher prices and be another factor helping tip the west into recession.

Greece: The trigger for the crash could very well be Greece. There interest rates have sky-rocketted recently to 25% because everyone is half expecting default – or debt re-structuring. If there are problems re-structuring this debt – it could trigger another bout of Euro-contagion and a financial meltdown – not just in mainland Europe but also into the USA and UK. The underlying reason why Greece has not been able to get its deficit below 10% of GDP despite massive austerity measures – is because of it’s huge oil, gas, electricity and coal import bills compared to its output production. Greece does not produce much, but consumes masses of commodities – a consumer economy built on very shaky foundations. But they are not the only ones. Further afield are Portugal, Ireland and possible Spain and even Italy - other examples. These countries had economic booms when they joined the Euro off the back of low interest rates, a high value currency, business reputation of Germany/France and tourism plus a fiat property boom. Now it’s all ended. Oil prices have risen. Tourism is declining. Public sector cuts are dragging the economies into recession. Aging populations with big pensions contributing little to the country will drag these economies down even further. Ultimately if France and Germany dump these peripheral countries from the Eurozone as the Euro experiment fails – their currencies will halve in value, with it their property prices - then inflation will start as import bills rise. But at least the economy will be re-balancing and tourism will rise as the cost to visit drops for British, French and Germans visitors. Frankly – we cannot see a pretty end to the Greek debt issues if oil prices stay above $100/bbl.

Peak Oil: Again, it’s another sign of Peak Oil – the underlying cause of the Euro-contagion is actually Peak Oil. The Europeans import $1 Trillion of oil a year – that’s massive. As much as the US annual deficit. And they simply cannot afford this oil – especially if they do not manufacture anything worthwhile like Greece. Sorry to be so harsh, but if you have any property in Greece, sell it quickly in Euros and get your money out – before not only the property crash happens in earnest but also the currency crashes as well - as Greece is booted out of the Euro. The same is also true of Portugal – where property prices are unsurprisingly now in free-fall - again, if they get dumped from the Euro, they will halve in value again – and yes, we are being serious. The smart property investors got out of Portugal a long time ago. And don’t be tempted either by Spain and Italy at the moment – there is a significant chance these far larger economies could go a similar way as well if severe contagion takes hold. The remaining Euro block could be Germany, France, Austria, Holland, Finland and Denmark.

Ireland: As for Ireland, it's a complete basket case. A deficit reported this week of -25% is horrendous and expect property prices to drop in all parts of Ireland. Irish property prices would also drop in Euro or Sterling terms far further if Ireland left the Euro of course. In some ways, Ireland looks in the worst shape – a massive property boom with bubble that popped with a government that dear not increase corporate taxes and does not want to seriously reduce the public sector deficit. Regrettably the economic hardship is likely to spill over into Northern Ireland and one might expect security to deteriorate regrettably – it often happens in a recession. The correlation between economic wellbeing (employment) and security is high and the many years of hard won peace are being risked now from this economic hardship and a disparity in wealth between different groups. Of course, any increase in security risks will send house prices tumbling in Northern Ireland – it already started back in 2008 and does not look likely to stop at least in the medium term especially after recent security set-backs.

Baltic Dry Dock Index: We checked this index end April. It’s looking dangerous. As you might know, the Baltic Dry Dock Index is often used as a leading indicator of future recessions. It worked very well in predicting the 2008 recession - it crashed 12 months before Lehman Brothers in August 2008. In the last few months, the index has steeply dropped 40% and is languishing close to 5 yearly lows. It points to a recession just around the corner or at a minimum a severe slowdown.

Dow: The Dow Jones rose steadily into the 12800 range end April – and it all looks stable on the face of it. But from our intuition and experience – this is just when one needs to bail out and head for the hills. We think the Fed is propping the whole lot up – buying on the dips. Giving it support. We don’t know this for a fact – it’s just a bit of intuition. It all looks suspiciously stable if you know what we mean.

Sell In May And Go Away: As they say, sell in May and go away. We expect a massive sell-off in May. The period up until end of May is a very risky period. If the stock market can survive without a crash through into June, then it could just hang in there for a while longer. But our logic would suggest that people will bail out in May – for the summer. All those retiring baby-boomers will want to pull their money off the table one last time – before the printing presses stop end June. Then relax on their boats in the Med and Florida. So get out while you still can!

We hope this guidance has been helpful. We also hope we are wrong. No-one likes to see a crash. Just make sure you reduce your exposure to it as much as you reasonably can. We just cannot see things rising much further – and we really think things are due for a big drop.

2. Young Go East For High Growth Excitement

Now we switch tact. Look at opportunities, particularly for young people in the East.

The World Is My Oyster: The world is now a truly global economy. For educated people with financial acumen, the world is your oyster. A conventional view of the world would suggest staying in your home country being norm and one would normally start business, employment and/or wealth creation in one’s base country. But if you have only loose family and friendship ties to your base country – let’s say – a Western European country – you would normally stay put in the country. But the future of high growth business is almost certainly in the developing expanding countries. High growth countries in the last century were for example the USA in the 1940s or the UK in the 1980s and Spain/Portugal in the 1990s

Looking forwards in this century, the high growth countries are likely to be:

China 2000 to 2020

India 2005 to 2040

Vietnam 2005 to 2040

Mongolia 2005 t0 2040

Brazil 2000 – 2020

Growth: If you can join these rapidly expanding economies – integrate and speak the language – and use you educated financial acumen to develop a business, it’s likely you could be rich beyond your wildest dreams if you jumped into these economic hotspots now.

Serious Money: It was easy to make serious money in the UK from 1980 to 2007 through accumulation of property and stocks and shares. Ditto for the USA. But these countries now face years of slow growth or even recession. They are already wealthy, developed, high cost and low growth – using massive quantities of imported high cost oil. Opportunities are lower and competition is fierce from highly educated individuals – with huge numbers of educated people trying to do the same thing. Western developed oil importing nations will suffer from Peak Oil and slow growth, aging populations and in some cases, declining populations – this will all lead to economic stagnation.

High Growth Streams: Countries like Mongolia – rich in natural resources and bordering on massively growing China – would expect to see annual growth rates of 5-12%. China up until 2020 a growth rate of 8-12%. India up until 2030 a growth rate of 7-12%. Any reasonably run business should expect to see rapid expansion – catching the growth wave moving forwards. It’s partly to do with low wage costs and partly to do with low oil input costs compared to a unit of GDP growth. If you join a high growth country, you would be inserted into a growing arena of opportunity – so even if your business was not best in class – it would likely still grow strongly, also because the population is growing and overall country GDP is growing so strongly – catching up with western developed nations that are likely to stagnate.

Developed Cities - High Standard of Living: If you preferred to be in a more developed city– Hong Kong, Shanghai, Mumbai or Singapore could be good bases. In Australia, Sydney, Perth and Melbourne are all booming off the back of resources require for China and the Far East.

Young Entrepreneurs: The bottom lines is – if you are an entrepreneur who likes adventure and can learn another language, there are amazing opportunities in countries like India, China, Mongolia, Vietnam and Brazil. You would have to watch out you were not taken advantage of – being a non local. You would have to develop a network of business contacts. But it could be incredibly lucrative living in such a country and starting a business. Particularly if you can identify a gap in the market and organise a good business. Or just invest in the best companies in that country that churn out healthy 5+% dividends on a consistent basis – and look like they will growth for many years to come.

Relocate: We’re not about to relocate abroad. But we’re not 20 years old and unattached either! If you are 35+ years old, it might be too late because you have a partner, family, friends and become set in your ways. You are already thinking about retirement when you are in your late 40s. You could be married at 33. But if you are smart, young, adventurous and entrepreneurial – it’s certainly worth considering joining a high growth country and either starting a business or investing in the very best – honest - businesses in these wealth creating nations.

Where Will The Growth Be? Is there anyone out there that thinks the UK will grow faster than China, India, Vietnam or Brazil in the next 20 years? It’s almost certain that the latter countries will grow far stronger and faster than the UK. |So if you are 21 year old, out of college, smart and entrepreneurial – why wouldn’t you consider joining the high growth stream? So many of these countries like Vietnam, Thailand and Brazil – almost all of the people are just lovely. A great place to live. If you are not wedded to the UK or USA – it’s certainly worth considering.

Businesses that are likely to be particularly successful in these developing countries are:

1 Property – residential and commercial

2 Tourism

3 Internet – high tech

4 Renewable energy

5 Oil, gas, coal, metals, commodities

6 Construction

7 Power generation

8 Organised food and agriculture

9 Water

10 Shipping and transportation

11 Storage and infra-structure

12 Retail – for the new middle classes

13 Investment and business services

Western Europe Stagnates: These countries will have construction and properties booms just like the USA had in the 1960s, Spain in the 1980s and peripheral Eurozone countries between 1995 and 2005. As Peak Oil prices western oil importing developed nations out of the global economy – these new developing countries will use the remaining resources to catch up with the west. It’s not rocket science.

Resources and Far East: Mongolia has a massive mining and resources boom – not surprising being on the doorstep of China. To get a piece of the action in this country could be very lucrative. In the 1970s – people used to laugh at Mongolia. Now – they are a real developing powerhouse. China will make sure they succeed. Getting into mining and power either as an investor, business owner (or even consultant on rate and commission) could put you on the path of stellar returns – rather than battling against stiff competition and slow growth back home.

Insights: The short article is really meant to stimulate some insights and thoughts – particularly for the younger people. The question might be “why wouldn’t I want to join a high growth exciting developing county” rather than “why would I...”. To follow the high growth - think "resources-energy and the Far East". Start young in a high growth arena, and by the time you are 35 years old, you should be made.

Healthlinx Limited (HTX.AX) key developments

2011-01-01T06:09:00.001-08:00

Latest Key Developments

Healthlinx Ltd Announces Issue Of Shares
Thursday, 30 Dec 2010 12:49am EST

Healthlinx Ltd announced that it issued 1,347,709 ordinary shares for a total consideration of AUD100,00 and 202,156 unquoted options at an exercise price of AUD0.1018. Ordinary shares and unlisted options issued pursuant to a Convertible Note Agreement for up to $7.23 million between the Company and SpringTree Special Opportunities Fund, LP, a New York based investment fund, and originally approved by shareholders on November 26, 2009 and further approved on October 11, 2010.

Healthlinx Ltd Announces Part 1 Of Second Study Confirms Superior Efficacy Of OvPlex Ovarian Cancer Diagnostic
Tuesday, 14 Dec 2010 05:23pm EST

Healthlinx Ltd announced that reports initial analysis of part 1 of its multinational ovarian cancer biomarker study confirms a statistically significant increase in diagnostic performance of OvPlex over CA125 alone. Enhanced performance of OvPlex was also established specifically for early stage (Stage I-II) disease. These data represent preliminary statistical comparisons of area under the curve (AUC) of receiver operator curves (ROC) generated from Part 1 of the second larger multi-national, multi-centre biomarker study. Biomarker measurements in over 500 samples have been completed to date, which represents a subset of the full OvPlex study that will include a total of 1150 samples which will be collected in Australia, Singapore and the United Kingdom. Measurement of all OvPlex biomarkers was performed in over 500 samples as part 1 of the current biomarker study and the epithelial ovarian cancer patients and normal subjects (case / control) have undergone independent preliminary analysis (Emphron Informatics Pty Ltd) in order to draw comparisons with our previous OvPlex trial. The primary end point for the study is to undertake a ROC analysis of control subjects versus all epithelial ovarian cancer patients. Part 1 of the study demonstrated that OvPlex significantly outperformed the diagnostic capability of CA125 alone.

Healthlinx Ltd Announces Early Results In OvPlex Ovarian Cancer Biomarker Study
Thursday, 11 Nov 2010 05:23pm EST

Healthlinx Ltd announced that stage 1 of the multi-centre, multi-site second study for OvPlex has returned excellent initial data for the two new biomarkers AGR2 and HTX010 being evaluated for accuracy in diagnosing ovarian cancer. To date, AGR2 and HTX010 data have been analysed in over 400 case and control samples. Both AGR2 and HTX010 demonstrated statistically significant elevations in circulating plasma concentrations in both early stage (Stages I-II) and late stage (Stages III-IV) ovarian cancer patients. These data are significant as they confirm and reinforce previous findings from several smaller pilot studies and now pave the way for HealthLinx to use these markers in its OvPlex multimarker panel. Previous modelling with these biomarkers demonstrated improved diagnostic efficiency of the OvPlex panel. In combination with the other OvPlex biomarkers the Company expects a marked. Based on these data, HealthLinx will now move forward with plans to further develop and partner the AGR2 immunoassay as a clinical diagnostic tool with a range of potential applications related to cancer diagnosis and monitoring.

Healthlinx Ltd Executes Commercial Agreement With Millipore
Tuesday, 28 Sep 2010 07:06pm EDT

Healthlinx Ltd announced that it has signed a commercial agreement with Millipore Corporation, one of the research reagent companies to license HealthLinx’s AGR2 monoclonal antibody. The worldwide non-exclusive licence agreement allows Millipore to market and sell the monoclonal antibody for research purposes only, with upfront fees and royalties to flow back to HealthLinx.

Healthlinx Ltd Signs Exclusive OvPlex License Agreement With Medison Pharma Limited
Monday, 6 Sep 2010 07:51pm EDT

Healthlinx Ltd announced that it has signed an exclusive OvPlex license agreement with Medison Pharma Limited, an Israeli marketing company. Under the terms of the agreement Medison Pharma will endeavour to register and commercialise OvPlex in Israel. Israel is now the fourth jurisdiction to secure an OvPlex licence following Australia, United Kingdom and Singapore. Under the agreement Medison is granted exclusive rights for 10 years to market, distribute and sell the OvPlex panel in Israel.

Healthlinx Ltd Announces Issue Of Shares Pursuant To Conversion Of Convertible Note
Wednesday, 1 Sep 2010 06:32pm EDT

Healthlinx Ltd announced the issue of 1,584,786 fully paid ordinary shares. The total consideration for the issue is $100,000. The shares on conversion of Tranche 11 of $100,000 made in accordance with the Convertible Note Agreement between the Company and SpringTree Special Opportunities Fund, LP as announced on October 5, 2009 and approved by shareholders on November 26, 2009.

Healthlinx Ltd Commences South Korea OvPlex Study For KFDA Regulatory Approvals
Tuesday, 31 Aug 2010 07:47pm EDT

Healthlinx Ltd announced that it has finalised research agreements with its collaborators in South Korea to begin the 220 patient study required for South Korea Food and Drug Administration (KFDA) approval for the distribution of OvPlex. The trial will be conducted by Principal Investigator Professor Byoung-Gie Kim of Samsung Medical Center and Sungkyunkwan (SKK) University School of Medicine. Professor Kim assisted HealthLinx in securing further key institutions to participate in the trial including the highly reputable Asan Medical Centre and Seoul National University Hospital. Collectively the three hospitals have over 12,000 beds and support the three gynaecological cancer research centres in the country. It is anticipated that the study will take approximately 12–14 months to complete and then submissions to the KFDA will commence. The company is also in final negotiations with one of the largest privately owned, centralised laboratories in South Korea to partner the technology for commercial distribution. When the terms sheets are finalised, the market will be informed accordingly.

Healthlinx Ltd Progress On Prostate Cancer Diagnostic
Monday, 21 Jun 2010 08:23pm EDT

Healthlinx Ltd announced new data that may be the basis for the Company’s development of a new and more accurate prostate cancer diagnostic compared to what is currently used. PSA is the most commonly used biomarker for diagnosis of prostate cancer and is the most widespread form of prostate cancer screening tool with a specificity of 63.1 per cent and low sensitivity of 34.9 per cent. This poor performance highlights the need for a statistically improved more effective method to detect prostate cancer. Prostate cancer is the ninth most common cancer and is often associated with over-diagnosis and unnecessary surgery. The market opportunity for a diagnostic for prostate cancer is greater than USD350 million per annum based on the PSA test. Globally there were 679,000 new cases of prostate cancer identified in 2002 with 221,000 men losing their lives. Although some data suggest modest survival benefit from PSA screening, there is a strong un-met clinical and market need for a product that can increase specificity. Early data suggest that one of HealthLinx’s biomarkers shows significant potential for fulfilling this un-met market need and justifies priority development.

Healthlinx Ltd Announces Launch Of International Study On OvPlex Cancer Test
Monday, 14 Jun 2010 06:30pm EDT

Healthlinx Ltd announced that it will launch a major international trial on the OvPlex test, that will see 1150 samples screened using the current five biomarker panel and an additional two biomarkers including the recently described biomarker AGR2. The multi-site, multi-centre trial that is partially funded with $750,000 from the Victorian Government Victoria’s Science Agenda Investment Fund, aims to test whether the two new biomarkers can increase the sensitivity and specificity of OvPlex to greater than 97 per cent. The study has been powered to allow direct determination of sensitivity and specificity and will include collaborators from Australia, Singapore and the United Kingdom. The current OvPlex test relies on measurement of five biomarkers found in human blood and delivers 92% sensitivity and 94% specificity for the diagnosis of early stage (stage I & II) ovarian cancer. The trial will involve 1150 women and begins on June 15, 2010. The first stage of the study will use 450 samples secured through collaborators that include the Victorian Cancer Bio Bank, West Australian Research Tissue Network/SJOG Pathology and University Hospital Singapore.

StoneBridge Securities Completes Private Placement Of $0.750 Million In Healthlinx Ltd
Monday, 7 Jun 2010 06:41pm EDT

Healthlinx Ltd announced that Stonebridge Securities Limited has successfully completed the placement of 7,500,000 ordinary fully paid shares at 10 cents each plus free attaching options, as announced on June 1, 2010. The placement includes 300,000 new shares. The purpose of the issue is to further support the commercial roll out of the OvPlex cancer test over the next 12 months.

Positive Criteria for Property Prices in 2011

2011-01-01T05:24:00.001-08:00

For 2011, there will be a number of criteria that will pull property prices one way or the other, which we outline below:

Positive Criteria for Property Prices in 2011

1. More competitive and more abundant mortgages after credit squeeze affects die away

2. UK coming out of recession

3. Increased employment by mid 2010

4. Increase in private sector bonuses

5. Lack of house building

6. Increasing population

7. Pent up demand from three years of low market activity – please needing to move

8. Likely change of government

9. 2012 Olympics London

10. Javelin trains and East London Rail service-orbital London

Negative Criteria for Property Prices in 2010

1. Higher VAT, national insurance, petrol duty and tax on bonuses

2. Increase in inflation feeding through to higher interest rates and higher costs

3. Increase in unemployment likely peaking around March 2011

4. High oil prices and energy prices - feeding through to inflation and higher interest rates

5. Public sector jobs losses continuing through 2011 and lower or freezes on public sector wages

6. Possibility the UK Coalition may break-up

7. High levels of deposit required

8. Low lending to salary multiples

9. Heat oil, petrol, diesel adversely affects rural areas and house prices in remoter parts

Overall, we believe the positive factor more or less cancel out the negative factors and prices will remain fairly subdued and fluctuating around current levels through 2010 on an overall UK national level. However, we predict property prices in the more wealthy southern and London areas will be stronger than in northern areas that are more exposed to public sector and manufacturing sector jobs losses and spending cuts.

Property Price Predictions

1 London +2%

2 SE England +1.5%

3 East Anglia +1%

4 Scotland +1%

5 SW England 0%

6 NW England -1.5%

7 Midlands -2%

8 Wales -3%

9 NE England -3.5%

10 Northern Ireland -5%

Other criteria

US Dollar to the UK£ $1.65 / £1

UK£ to the Euro £1 / 1.17 Euro

Oil price $93/bbl early 2011 rising to $112 by June 2010 then dropping back to $90

UK Gas price 45p/therm

UK Interest Rates – rising from 0.5% in Mar 2011 to 1.75% by end 2011

FT rising to 6050 by early May 2011 then dropping in June to 5000 then closing same end 2011

UK Inflation CPI staying at 3.2% or thereabouts all year

UK GDP staying at 2% through 2011 (on quarterly annualized basis)

Security outlook – Iran and North Korea key hot-spots (Pakistan remains a concern).

Euro interest rate – staying at 2% through 2011

US Interest rates rising from 0.25% early 2010 to 1% end 2011

UK unemployment – rising slightly through 2011

Wage inflation – staying at ~2.3% through 2011

GDP growth London 2.7%, North 1.2%, Midland 0.8%, Scotland 1.3%. Wales 0%

GDP China 9%, GDP India 7%, GDP Africa 3.5%, Global GDP 3.0%, UK 2%, USA 2%, Euroland 2% - as a whole over 2010

Iran and North Korea developing nuclear weapons capability will be a key issue – lack of global leadership not helping resolve. Terrorism threats reduce as oil prices rise and economic situation in most of the Middle East improves. Security situation in Iraq improves considerably as government representation and political will wins over as expanding oil exports improve economic picture for the population as a whole.

USA debt situation is likely to deteriorate further. Dollar declines as the Obama administration continues to print money devalues the currency and causes bond rates to rise sharply. Chinese and other international investor become increasingly frustrated with declining dollar value. Further talk of valuing oil in a basket of global currencies causes dollar to drop further and forces US loan interest rates to rise.

Inflation starts to become a serious issue by March 2011 and interest rates in western nations rise. All commodities prices rise. Oil, gas, copper, sugar, wood prices all rise. Oil production continues on a bumpy plateau – oil shortages start showing by mid 2011.

Greece, Portugal, Ireland, Spain and Italy continue economic stagnation exacerbated by high oil prices (oil import costs). Further Euro debt contagion and potential bail-outs for Italy, Portugal and Spain if oil prices rise >$120/bbl. These countries need to leave the Euro to devalue their currencies and regain competitiveness. France and Germany continue to drive the European economies through manufacturing and commerce expertise – peripheral Euro-zone countries suffer as the Euro stays strong. Norway and Sweden will continue to excel. Norway with its huge budget surplus, high performing sovereign wealth fund and high transparency and environmental standards.

As oil prices continue to rise, Dubai/UAE and Middle Eastern economies continue to grow strongly. China continues it’s boom with GDP 9%. Brazil and India also boom with GDP at 7% and 9% respectively.

Property Commentary

Prime West London will see the largest UK price increases of about 4% driven by higher city bonuses, foreign investors taking advantage of the low sterling values and relative cost in Euro, Middle East and Far East currency terms.

The Tory–Lib/Dem Coalition will be further strained by a concerted effort by some newspapers to target Lib-Dem politicians in an attempt to destabilize the Coalition and cause a snap election. As the Tories gains political momentum, the following general policies are enacted:

1. Higher rate taxes are lowered after a few years

2. Private sector and financial services are encouraged

3. Public sector cuts through pay freezes, jobs cuts, efficiency improvements and project cancellations

4. Manufacturing and remaining heavy industry will not necessarily benefit

5. Market economy stronger, competition more intense

6. Social and housing benefits costs reduced

7. Large infra-structure projects rationalized

Such measures tend to benefit London and SE England and increase the north-south divide. Rural areas will be particularly badly affected by public sector jobs cuts along with northern and western areas. Manufacturing will continue its long term stagnation – with a decline in Sterling in value in 2009-2010 not having the desired positive export impact. Massive global wealth will continue to feed into London – boosting financial services and positively impacting West End prime property demand and prices along with property in surrounding central areas.

We expect the property market to pick up by mid January until end May then rapidly cool and stagnate for the rest of the year. Any increase in property prices in the first five months of the year in most areas will be wiped out by a slide in the second half of 2011 as interest rates rise, inflation takes hold and oil prices continue to escalate.

If oil prices rise above $120/bbl then a recession in western developed nations six months later is highly likely in view of debt levels and fragile banking systems. Hence if oil increases to $120/bbl by mid 2011, a “western developed nation” recession will occur by Dec 2011.

London will start to feel the positive impact of the upcoming Olympics in 2012 in 2011. 800,000 additional people swelling London’s population in the next ten years and lack of building will support prices. The positive impact of the East London Rail, Javelin High Speed Rail links from Kent and other rail/tube upgrades will benefit the city and property prices close to new stations (e.g. New Cross Gate, Brockley, Gravesend) will continue to rise.

________________________________________________________

Look-back on 2010 Predictions

For good order we now look-back on our predictions for 2010. Overall we were close on most of the predictions.

Property prices in 2010 (in order of decrease):

1 London +3%

2 East Anglia +3%

3 SE England +1.5%

4 SW England +1%

5 Scotland +1%

6 Midlands -2%

7 NW England -1%

8 Wales -1%

9 Northern Ireland -3%

10 NE England -3%

Very close - general regional trend correct – London saw prices rise about 5% year-on-year whilst the north saw a slight drop (as close as one can realistically get looking at all indexes)

Other criteria

US Dollar to the UK£ $1.5 / £1 Very close, ended year at $1.55 / £1

UK£ to the Euro £1 / 0.88 Euro Not close – ended year at 1.173 (Euro was far stronger – debt contagion was averted or deferred for some months )

Oil price $75 early 2010 rising to $102 by end 2010 Rose to $94/bbl by end 2010 - close

UK Gas price 48p/therm Very accurate – averaged about 48p/therm

UK Interest Rates – rising from 0.5% in Feb 2010 to 3.25% by end 2010 Stayed at 0.25% - missed by a long margin – despite inflation rising to 3.2% the BoE kept rates at record lows!

FT rising from 5350 Jan 2010 to 5550 by end 2010 FT closed 2010 at 5850 - higher than expected

UK Inflation CPI rising from 1.6% early 2010 to 2.9% end 2010 Very close, inflation rose to 3.2% by end 2010

UK GDP rising from 0% early 2010 to 2.2% by end 2010 (on quarterly annualized basis) Accurate –more or less spot on

Security outlook – worsening – far more tensions in Middle East and increase in tensions South Asia - with Iran in key role. Indeed, Iran was a key security concern though North Korea also joined the list

Euro interest rate – 2% rising to 2.75% by end 2010 Rates stayed at 2%

US Interest rates rising from 0.25% early 2010 to 1.25% end 2010 Rates remained at 0.25%

UK unemployment – dropping from March 2010 slowly - Unemployment actually rose slightly through 2010

Wage inflation – rising from 2.8% end 2009 to 3.7% end 2010 Wages inflation was somewhat more subdued at ~2.8% throughout 2010

GDP growth London 2.2%, North 1%, Midland 1%, Scotland 1.5% Yes, London had higher growth than Midlands and Scotland

GDP China 10%, GDP India 6.5%, GDP Africa 2%, Global GDP 2.5%, UK 1.7%, USA 2%, Euroland 2% - as a whole over 2009 – Very accurate, almost spot on

Continued economic hardship in Middle East and South Asia along with lack of global leadership will lead to increased tensions and further degradation of security in the Middle East and South Asia – disenfranchised radical groups. Iraq security and economic well-being will improve further. Overall global terrorism will increase. The Iran nuclear issue will be the key security point in 2010 – with significant risk of being a trigger event. Iran was a key issue but overall security levels did not deteriorate significantly.

USA and UK will both come out of recession, but debt overhang will stifle any strong recovery because of increasing tax and massive public spending programmes making these economies less competitive and efficient. Interest rates will rise sharply mid 2010 as inflation starts to get out of control. All commodities prices will rise. Oil, gas, copper, sugar, wood prices will all rise. Oil production is on a bumpy plateau – oil shortages may start showing end 2010. Generally fairly accurate.

Greece, Portugal, Ireland, Spain and Italy will suffer long recessionary or periods of stagnation – there will be national calls for some of these countries to leave the Euro – so as to de-value their currencies and gain competitively. France and Germany will continue to drive the European economies through manufacturing and commerce expertise – peripheral Euro-zone countries will suffer as the Euro stays strong. Norway and Sweden will continue to excel. Norway with its huge budget surplus.

As oil prices rise, stability of Dubai will improve – growth will resume end 2010 and by end 2011 the current financial turmoil will be a distant memory. China will continue to boom at GDP 10%+. Brazil and India will also boom.

___________________________________________________

For Reference Commentary made end 2009 – for Property Prediction 2010

Prime West London will see the largest price increases of about 5% driven by higher city bonuses, foreign investors taking advantage of the low sterling value and relative cost in Euro, Middle East and Far East currency terms.

One point to consider is the expectation that there will be a new government of Tories by mid 2010. We’d give this a 50% chance of a Tory majority, 25% change of a hung parliament and 25% Labour stay in power. Based on a Tory victory, what normally happens when Tories get into power is:

1. Higher rate taxes are lowered after a few years

2. Private sector and financial services are encouraged

3. Public sector will be cut through pay freeze, jobs cuts, efficiency improvements and project cancellations

4. Manufacturing and remaining heavy industry will not necessarily benefit

5. Market economy stronger, competition more intense

6. Social costs reduced

7. Large infra-structure projects rationalized

If such measures did not benefit London and SE England we would be surprised – these are also the traditional Tory strongholds. So we would expect to see mid to upper end southern property perform rather better than they would under Labour. Meanwhile lower end northern property – with proximity to public sector jobs and manufacturing jobs would expect to perform worse under Tory than Labour. So the period of stimulating northern prices by public sector jobs growth has likely come to an end. But the positive affects on prime London property could be significant. Okay, these are only trends – but they are based on previous actions implemented over many decades by both parties.

We expect the property market at the start of the year to be fairly active from mid January to early May with first time buyers re-entering the market after many years of very low activity. Interest rates will start rising likely March in response to increasing inflation – this will be the big story of 2010 – inflation. Record low interest rates and billions of printed money will feed through – if oil prices rise to $100/bbl as we expect – then inflation will start loosing control. And interest rates will need to be jacked up very quickly. This would then stall out any housing recovery fairly rapidly by end 2010. We see this scenario as about 50% chance by end 2010. If oil prices stay between $50/bbl and $80/bbl – then inflationary pressures will be far more subdued. And we would be far more confident that house prices in London and southern England would continue to rise in a sustainable manner.

London: There are some areas of the UK that look particularly attractive at present. London is of course one of these – with the Olympics in 2012, financial services industry that should stablize and then prosper after the Tories get into power mid 2010 and the 800,000 extra people expected in the next ten years, with very low levels of building. Crossrail, new High Speed Rail links, East London Rail Line and large redevelopments in various suburbs all point to higher prices. Talk of a mass movement of banking staff to overseas areas is, we believe, a little premature – if you were the head of a big bank, would you not first of all wait five months to see if the Tories get into power? Remember most banking staff have kids in public schools – it takes a year to properly implement an overseas move. Plans may be being formulated, but we believe the trigger would be a Labour victory – and this is unlikely.

Cornwall: This county is an interesting study. One tends to think of such counties as full of local agricultural workers and fishermen – with a few rich Londoner buying holiday homes. But the demographic make-up is far more varied. Many Midlanders, northerners and London-southern people migrate to Cornwall to start small businesses, retire, telecommute, or start work in the public sector. The population has the largest growth of any county in the last 35 years – about 25%. This is forecast to continue to rise – it’s hardly surprising because:

1. It’s a very beautiful place

2. Five hours by car or direct train to London – not so far

3. Improved airport links (Newquay)

4. Continuous stream of wealthy Londoners buying holiday homes

5. IT improvements – more consultants living in Cornwall and working in London

6. Lots of interesting people, arts, culture, scenery, beaches, sand, seas, sun, surf

7. Warmest UK place by far in the winter – longest winter days in UK with brightest sun

Add to this that there is almost zero building in Cornwall because of strict planning and you have a recipe for increasing property prices. Yes, despite property prices being about 10 times the average indigenous worker wage, we believe prices will continue to rise above trend to the average UK prices. For inland hotspots, Truro ranks highest with the best schools in the county, a Cathedral city, Cornwall’s capital and beautiful shops. Good rail and road links help. For coast destinations, the riches areas will probably rise as fast as the poorer areas. So the very most select areas are Manaccan, Mylor, Rock, Padstow, Mousehole, St Ives, Helford, Mawman Smith, Fowey, Helford, Looe. For more down-at-heal value, Newlyn, Newquay, Perranporth, Portreath, Penzance, Bude are good examples. Be careful with Newquay though – keep an eye to make sure there is no threat to flights being cancelled since this would adversely affect property prices in the immediate area. The same is true of direct trains to London – it’s a low chance these will be stopped, but always possible – this would be rather catastrophic for property prices through Cornwall. One would hope rail times would instead improve – but higher oil prices are not good news since long distance travel by car becomes far more expensive. Hence Cornwall is fairly exposed to the effects of Peak Oil.

Is this the death of capitalism

2008-09-22T03:04:00.000-07:00

We all knew where this was going to end up. It was just a matter of how long it took.

You let a bubble get too big, and suddenly it's no longer the problem of the participants alone - it's everybody's problem. And so, when it comes to paying for the global property bubble, it won't just be those who over-extended themselves to buy over-priced houses who suffer. And it won't just be the bankers who sold them the loans.

It'll be you, me, and every other mug who ever paid a penny in taxes to governments who blatantly ramped the idea of property ownership as a right. Our own government might not do anything as obvious as creating a $700bn "bad bank" like the one being proposed in the US.

But rest assured, we'll be paying for the fall-out from this for years to come...

Who's really to blame for this crisis

It's been a hectic couple of weeks, and amid all the chaos, it's easy to lose sight of what this is all about. So let's go back to the basics.

This crisis has its roots in the actions of central banks. I think it's important to make this point very clear right now. George Bush might say there'll be plenty of time for "blame-storming" later. But funnily enough, once 'later' comes around, no one can quite remember who really was to blame, and the government ends up getting to point the finger at whoever it likes - usually the media.

Meanwhile, we're hearing about the 'death of capitalism', and even sensible people are warning that we need more regulation, over everything from City remuneration to short-selling. Now, I have no quarrel with bankers getting bonuses that actually reflect some sort of ability to manage money rather than their luck at being hired at the right stage of the economic cycle. And I'm not shedding a tear for any of the City wives who suddenly seem to have columns in all our broadsheets, bewailing the sheer hell of life without a bevy of domestic servants and carping about how charities will go short of money this year.

But regardless of how irritating all this poor-mouthing from former bankers becomes, we have to remember that their Caligula-esque pay and conditions were a symptom of the credit boom, not the cause.

Whatever is done now to bail out the system, we should remember that this credit bubble has its roots in government interference, in the form of central banking. And when we come to sort the system out, that's where we need to start, rather than with lots of tinkering around the edges.

The central bankers should have popped the property bubble

There was a rampant property bubble. The world's central bankers should have popped it before it grew too big. They didn't (although Mervyn King clearly thought that it would have been a good idea), mainly because Alan Greenspan put his hands over his eyes and said he couldn't see any bubble. He also added that, even if there was one, it would be better to clear up the mess after it had popped. It was obviously nonsense at the time, and by now hopefully everyone realises that.

Because instead of pricking it at a time when the fallout was manageable, we let it grow until harsh reality finally had to step in. Things grew so crazy that the long-term unemployed in the US were being given hundreds of thousands of dollars to buy homes on which they didn't make a single payment. This bubble stopped growing simply because it ran out of room. It just couldn't get any bigger.

Some of you might think it's too simplistic to blame central banks. But think about it for a minute. The first instinctive call of every columnist, estate agent, and business leader in the land, as they realised recession was coming, was to scream for a rate cut. That's a dramatic display of faith in the idea that whatever the problem, a quick wave of the Bank of England's magic wand would make it go away. Even now, some are still labouring under this misapprehension, even though the Fed has amply demonstrated that even slashing rates by more than half has done nothing to ease this crisis.

Because everyone thought that central banks would always be willing and able to save the economy - and the financial services industry - lenders thought they could get away with murder. All the risk ultimately lay with the government, after all. And if you take away the risk, people then do whatever they like without fear of consequences - particularly if regulators have adopted an otherwise hands-off approach.

Why we should let the market set interest rates

What's the solution? Ideally, I'd say just ditch central banks and let the market set interest rates. Central banks, regardless of how ostensibly independent they are, are instruments of the government. The government wants happy voters, and free money makes people happy. So there's always the temptation to keep the money flowing freely.

The market on the other hand, couldn't care less what voters think. One feature of the credit boom is that most people in the City and on Wall Street knew it couldn't last forever, and they had a hunch it would blow up in a very unpleasant way. But they couldn't stop playing along, because they had to compete with their peers. However, if markets set interest rates rather than governments, then arguably this mood of rising concern among the participants, would be reflected in the price of money long before things got out of hand. Anyone who had overplayed their hands would run into trouble long before they became "too big to fail".

The alternative is that we decide that banking is such a vital part of our infrastructure, that it cannot be left to the market. And if it really is the case that "banking is too important to be left to the bankers," as Roger Bootle argues in today's Telegraph, then there's no choice. We have to turn it into a utility. And just like with the water and power regulators, we need a big domineering regulator, who tells them how much profit they can make and how much they can charge us, and in return we get a government-backed banking system.

I know which option I prefer. But I suspect that by the end of this crisis, we'll be left with some half-hearted mish-mash which will simply sew the seeds for the next boom and bust.

Short-sellers aren't to blame for the banking sector's problems

2008-09-19T06:14:00.000-07:00

Short-sellers aren't to blame for the banking sector's problems

It's time to "clean up" the City, says Gordon Brown. He's going to rush forward better rules to protect whistleblowers, apparently and crack down on "irresponsible behaviour" in the financial markets. After all, he says, "we don't want these problems occurring in the future."

The FT reports how his noble words have roused the party's left-wing. Labour MP John Cruddas said: "In the wake of casino capitalism and with the onset of recession, the state is the only means society has of protecting itself from the destructive forces of global capitalism."

It would be hilarious if it didn't make you want to weep. Bankers may well have acted as if they've been sitting in the casino during the boom years. But it was a state-owned casino, with governments as the croupiers, and central bankers behind the bar giving out free booze.

This Government built its reputation for economic "stability" on soaring house prices and nothing else. It was happy enough to point to this growth in "wealth" (not "debt") as evidence of its competence all through the boom. And the reason that banks were able to lend as freely and as stupidly as they did, was because central bankers pushed interest rates so low. And who were central bankers working for? The Government, who set the inflation target too high, at a time when prices were being pushed lower - a healthy development - across the world by globalisation.

But of course, it can't be the Government's fault. So now we have a witch-hunt against the nearest available target - short-sellers. Yet, if you really want to protect whistleblowers, you should embrace short-sellers. Here's why.

Short-selling's a risky business. When it goes right, you can make a lot of profit. But when it goes wrong (as it clearly has today, given the rapid surge in the FTSE 100 and elsewhere), you can end up owing far more than your initial stake. So it's not something to be done lightly. Unlike many 'active' fund managers, who just buy what everyone else is buying, a short-seller has to pick their targets carefully.

So when a short-seller takes an interest in a company, you can bet it's got problems, or that it's about to run into problems. It's no coincidence that the most shorted stocks in the run-up to the UK recession have included retailers, newspapers, and of course, banks.

The point is that the shorts are just taking advantage of the underlying problem. The banks made wildly irresponsible loans all through the property boom, and now that the bubble has popped, they are in serious trouble. In a perfect world without politicians, there'd be no problem with short-sellers taking advantage of that - in fact, the banks are only getting their just desserts.

The real 'spivs' behind the financial crisis

If Alex Salmond and the like want to attack 'spivs', how about the spivs who were cheerily selling young couples interest-only mortgages at six times their joint income? "Don't worry about interest rates, love, you'll be able to remortgage to a better deal in a couple of years' time. And don't worry about the capital - you can always start paying that back once you can afford it. Besides, the house'll be worth a lot more by then."

Those unlucky homeowners are now staring negative equity and rising mortgage payments square in the face, and the truth is it doesn't matter a damn to them who owns their debt, because they can't pay it anyway. Banning short-selling won't help them.

But then, all that dodgy dealing was going on back in the good times. And when times are good, no one wants to hear the warnings, or to let anyone spoil the party. And unfortunately for short-sellers, when times turn bad, most people would rather throw the smart-alecs off a cliff, than admit that maybe they got it wrong.

What the failure of Fannie and Freddie means for capitalism

2008-09-12T00:51:00.000-07:00

I read a very pithy letter to The Telegraph the other day that made me chuckle. Referring to a story about Fannie and Freddie's nationalization, the correspondent asked: "Why didn't your headline 'World's biggest mortgage bail-out' read 'Capitalism fails'?"

Like many of the best headlines, it's witty and to the point. That almost makes it a pity that it's also completely wrong. It's also worrying that far too many other people also have this perception.

Because of course, the reality is that Fannie and Freddie were invented by the government in the first place. The reason they were able to dominate the market to the extent they did was because everyone knew they were government organisations, even when there was still some vague charade that they weren't.

In fact, all this miserable little episode in economic history tells us is this - the market will get you in the end, even if it takes 60-odd years to do so...

What the failure of Fannie and Freddie means for capitalism

As Simon Nixon points out in this week's edition of MoneyWeek (out on Friday), it was in part, the birth of Fannie and Freddie after the Great Depression in the 1930s (Freddie came later, but its roots were in that crisis) that has led directly to the current upheaval in the financial markets.

Fannie and Freddie had the implicit backing of the US government. That meant they could borrow money almost as cheaply as the government. That meant they could buy up more loans than anyone else. That's why they now dominate the US mortgage market. And that's why the government - which first created them - has now had to bring the prodigals back onto its balance sheet.

In other words, the biggest player in America's mortgage market has always been the public sector, complete with unaccountable, overpaid bosses, and dodgy book-keeping. It's only now that the majority of the population realises it.

So the 'failure' of Fannie and Freddie - or rather, the fact that the US government has finally had to admit it always owned these things - says nothing about capitalism. What it does show is that attempts by the government to buck the market are doomed to eventual failure.

It's the exact same story with attempts by central banks to set interest rates. There's a massive gap between what central banks generally say the cost of money should be, and what it actually is just now. And that's because the market has finally reasserted itself and said - this can't go on.

Why the credit crunch is 'the start of the solution', not the problem

As Leigh Skene of Lombard Street Research puts it (and I'm going to give the full quote here, because it's an unusually perceptive summary of what's going on): "The credit crunch is the start of the solution, not part of the problem. The problem is too much household debt, and it took the credit crunch to halt the hysterical borrowing / lending spiral. The crunch will be over when people understand that they should be looking to repay debt, not borrow."

That hits the nail right on the head. What needs to happen now is that people start rebuilding their savings, and companies rebuild their balance sheets. That's the way the market is pointing too. But what's the one big thing attempting to stand in the way of this vital process? That's right - the governments of the world.

Governments hate downturns. That's because voters tend to prefer good times to hard times, unsurprisingly. A government that presides over house price growth and full employment comes in for plaudits, regardless of how that growth was achieved.

The basic ideas behind how to run an economy for a long time now, have been rooted in Keynesian economics. The idea is that governments can take an active role in managing the economy through various tools, including setting the interest rate. You try to make sure the economy doesn't overheat during the good times, and in the hard times, you make money a bit more available, and maybe increase public spending too, to compensate for the downturn in the private sector and "stimulate" the economy.

There is very little the government can do to stop this downturn

Does it work? Who knows? Because while it sounds good in theory, what you actually get is a government that keeps pressing the "stimulate" button for as long as it can get away with it. The British economy has been flooded with cheap money and public spending even when times were good. It's over-inflated the economy, and left us with nothing to fall back on during the hard times.

With the coffers empty, there really is very little any government can now do to stand in the way of this downturn. But that won't stop them from trying. They won't make things any better. But as a long and grim history of price controls, currency market interventions, protectionist laws, and good old Fannie and Freddie demonstrate, they might just make things worse.

Turning to the wider markets...

The FTSE 100 closed at 5,366, down 49 points after a poor showing by banks - affected by their American counterparts' troubles - and miners. Among the risers were ITV, up 6.55% and BAE Systems, up 4.29%. For the latest stock market news and charts, click here.

In Europe, the Paris CAC closed at 4,283, down just 0.2%, and the German Xetra Dax finished down 0.4% at 6,210.

Over in the US, energy stocks were boosted by Opec's decision to restrict output, while financial shares were hit by worries about the future of Lehman. The Dow Jones closed up 38 points at 11,268; the wider S&P500 was up 0.6% to end at 1,232; and the Nasdaq Composite rose 0.9% to 2,228.

And in Asia, the Nikkei-225 was also hit by fears about Lehman, with Nomura holdings down 5.9%. The index closed at 12,102, down 2%.

Brent spot was trading at $96.17 a barrel this morning, with crude oil in New York at $101.76 a barrel. Gold spot was at around $740 an ounce; silver at $10.62 an ounce; and platinum $1,118.00 an ounce.

In the forex markets this morning, sterling was trading against the US dollar at 1.7498 and against the euro at 1.2569. The dollar was trading at 0.7191 against the euro and 107.06 against the Japanese yen.

This morning, owner of Argos and Homebase, Home Retail Group, revealed how badly it has been hit by the consumer slowdown. Second quarter same-store sales fell 5.8% at Argos, and 8.3% at Homebase in the three months to August 30th. Earlier this week, the British Retail Consortium said wider High Street sales were down 1% in August.

The US bail-out is a great opportunity to sell

2008-09-10T03:11:00.000-07:00

Yesterday's breakdown in the London Stock Exchange was a fitting metaphor for the state of the entire financial system. As one problem is apparently solved so another rears its ugly head.

The Federal Reserve flew in to 'save the planet' by nationalising Fannie and Freddie, but UK investors couldn't even get in to sell their rebounding banking shares, because the LSE computers imploded at the vital moment.

As trading finally restarted, London joined markets around the world in the relief rally. But anyone who genuinely believes that Hank Paulson's move to guarantee the US housing market is the end of our woes is kidding themselves...

The stock market party looks a little premature

"Today's meltdown from the LSE couldn't have come at a worse time," said Sejal Patel, a London-based trader at CMC Markets. It's all a bit of a disaster for the idea of the all-singing, dancing, 24-hour trading, etc, second-biggest market in the world that on one of those days it really needed to work properly... well, er, it didn't. "Pretty poor", said Simon Denham of Capital Spreads.

Exactly. But sadly, also typical of today's financial systems. Look at the US mess. The American property market seemed to be solid enough when everyone was making loads of money. But there was a huge fault line running right through the house.

Emboldened by Fed chief Alan Greenspan and his never-ending supply of cheap money, lenders and borrowers threw common sense out of the window, dishing out vast sums to people who had no hope of repaying. As a result, the works have been completely gummed up by a near-$550bn subprime write-off, said S&P last Friday - and the end total could prove even higher still.

So the US authorities jumped to the rescue of Freddie and Fannie with taxpayers' cash. While the first-up 'expert' view is that nationalisation is good because it'll re-establish some stability, the fact that this has happened pre-election (as my colleague John Stepek pointed out yesterday (see: The Fannie and Freddie bail-out: bad news for us all)) shows just how bad things are. And now that the risks have been dumped on the public, it will be much harder to hide the losses.

The move isn't likely to help US house prices, because it won't make life easier for millions of Americans struggling to repay mortgages. It won't reduce the massive stock of unsold American houses - 4.7m at the last count and the equivalent of over 11 months supply, roughly twice a 'stable' market level, according to the National Association of Realtors. It won't cut unemployment, which has now climbed to a five-year high of 6.1%, nor stem foreclosures, which at 2.75% of all home loans are at their highest since records began 29 years ago.

So the stock market party looks a little premature. And what's more, European traders shouldn't be cheering either - eurozone companies are facing a whole other set of problems.

Europe's companies have been spending more than they earn

One of the best barometers, eurozone consumer confidence, has nosedived within recent months. That suggests that the downturn in annual output, which shrank in the second quarter for the first time since the single currency started life 10 years ago, is the start of a lengthy trend.

And now lots of corporate concerns are building up, too. "European companies may be living on borrowed time", says Simon Kennedy at Bloomberg. "A decade of investing more than they've earned in profits has loaded corporations in the 15-nation euro area with debt, leaving them a thinner cushion than their US and Japanese counterparts as the world economy slumps".

In other words, eurozone companies have been living beyond their means. The shortfall between profits and investment for Europe's non-financial corporations rose to 4.5% of annual output last year, reckons Citigroup, compared with 3.6% for their counterparts in the US. Take out companies in Germany, where earnings still outstrip investment, and the gap swells to 6.6%.

It all means that Europe's non-financial companies are burdened with 5.3 trillion euros ($7.6 trillion) of debt, equal to about 57% of the euro-zone economy, up from 48% before the 2001 slowdown and compared with 46% in the US, according to the Federal Reserve and the European Central Bank.
Enough figures. You get the picture. As Europe's companies feel the debt pinch, so will we all. "The size of the debt imbalances makes it very difficult to envisage a strong euro-zone economy over the next year or so," says Dresdner Kleinwort's London chief economist, David Owen. "It increases the risk of recession." Deutsche Bank analysts agree, predicting that investment will shrink in 2009 for the first time in seven years, so that the eurozone's economy will grow just 0.1%.

And the cause? Too much cheap credit, of course, says Deutsche Bank. European companies are now "under attack from both sides''. Profit margins are being squeezed by slowing demand, high fuel costs and rising wages, while at the same time banks - once so keen to lend - are now trying to rebuild their own balance sheets by tightening loan standards and demanding higher interest rates.

It's no surprise that eurozone manufacturers' confidence dropped in August to its lowest level since May 2005, and that production expectations were the weakest in almost seven years.

This is a great opportunity to sell

It all adds up to a shedload more pain, with less investment and fewer jobs across Europe. As for share prices round the world, yes, they might rally for a day or two as some 'short' traders - i.e. those who had sold shares with the intention of buying back lower down - have had to close out their positions, prompting a temporary rally. That's a good opportunity to dump any retailers, property stocks or banking shares you're still holding on to.

But don't be fooled. That short-term fix across the Atlantic won't help Europe in the slightest. Nothing has changed, apart from US taxpayers being loaded up with a long-term potential mega-bill.

After recovering from a breakdown which halted trading for more than six hours, UK shares ended Monday sharply higher, with the FTSE 100 index climbing 3.9%, 205 points, to 5,446. Banks were among the top gainers after the Fannie and Freddie takeover, while oil stocks were also higher on fears that Hurricane Ike will shut down production in the Gulf of Mexico.

In Europe, shares were also higher, with the German Xetra Dax up 2.2% to 6,263 and the French CAC 40 gaining 3.4% to 4,340.

US markets also ended higher, with the Dow Jones Industrial Average rising 290 points to 11,510 and the wider S&P 500 gaining 25 points to 1,267. The tech-heavy Nasdaq Composite gained 13 points to 2,269.

But overnight the Japanese market gave back some of yesterday's gains as traders rapidly realised that the bail-out isn't going to cure the slowing global economy. The Nikkei 225 fell 1.5% to 12,439, and in Hong Kong the Hang Seng slipped 2.2% to 20,328.

This morning Brent spot was trading at $101 a barrel, spot gold was at $799, silver at $11.97 and platinum at $1,305.

In the forex markets this morning, sterling was trading against the dollar at 1.7571 and against the euro at 1.2441. The dollar was trading at 0.7084 against the euro and 107.75 against the Japanese yen.

And this morning, the Royal Institution of Chartered Surveyors reported that house prices continued to fall in August. The number of surveyors and estate agents reporting falls exceeded those reporting rises by 81 percentage points, compared to 83 in July. Average sales per agent were down to 12.7 in the past three months, the lowest since the survey began in 1978.

The reasons behind the Fannie and Freddie bail-out

2008-09-08T08:01:00.000-07:00

As the old saying goes, they do everything bigger in America.

Here in the UK, the government nationalised Northern Rock, a regional banking minnow whose failure wouldn't really have been very important on the scale of global finance, despite the hefty political fall-out.

Over in the US, they'll happily let their regional banks fail. Northern Rock wouldn't have stood a chance. But while the free market ethos might be applied in some instances, the US is more than happy to invoke the "too big to fail" clause when it wants to. Yesterday, the US government took over what are probably the most important financial institutions in the world at the moment, mortgage groups Fannie Mae and Freddie Mac.

The move will drag these two monsters kicking and screaming onto the government's balance sheet. According to The Telegraph, it represents a potential liability of £2,900bn. That's about £10,000 a piece for every man, woman and child in America.

Better start saving now, guys...

The reasons behind the Fannie and Freddie bail-out

Fannie Mae and Freddie Mac don't write mortgages themselves, but they own or guarantee almost half of America's $12 trillion mortgage debt. With the housing market in freefall, that's inevitably lead to a crisis of confidence in the companies' balance sheets. Their shares have been hammered - and after this latest move, shareholders seem likely to be wiped out altogether.

But it's not the shareholders who were the problem - it was bond holders. Fannie and Freddie are still responsible for almost 70% of new mortgage loans in the States. They raised cheap money by issuing bonds, and were thus able to fund cheap mortgages for US home buyers.

Now Fannie and Freddie have always inhabited a kind of "nudge, nudge, wink, wink" financial hinterland. The US government didn't exactly say it was responsible for the two mortgage providers. But everyone knew it was. So that meant that the two companies were able to borrow money at the same rate as the US government.

That's ended recently as fears for Fannie and Freddie's future grew. All those foreign governments buying up Fannie and Freddie debt suddenly started to worry - wait a minute, maybe these guys aren't bluffing. Maybe they really won't pay back any of the loans that we've got here. And that sent them rushing for the hills. That increased the cost of borrowing for Fannie and Freddie, which in turn made US mortgages more expensive.

How much is this going to cost?

So now the US government has been forced to turn around and explicitly back Fannie and Freddie. How much is this going to cost? Well, just like Northern Rock, the answer is that nobody really knows. The US Government is crossing its fingers and hoping that things go well enough so that it might even turn a profit at a later date as it gradually runs the two behemoths down. But as Hank Paulson admits, "the ultimate cost to the taxpayer will depend on the business results... going forward."

The general consensus is that this will make things better. Ruth Lea of Arbuthnot Banking Group tells The Telegraph: "this is good news for the global economy. The Fed has clearly taken a view that to allow these two to go under would have been horrendous."

But as Paul Kedrosky points out on his Infectious Greed blog, the fact that this has happened at all shows how bad things are. The Bush administration would far rather have put this off until after the election, making it the next president's problem. The fact that they couldn't "tells you how fast and out-of-control this apple cart is."

This is turning into a dirty great game of "pass the parcel" where nobody wants to be left holding the package. The bail-outs just keep getting bigger and bigger. And every time it happens, the idea of moral hazard is dismissed as being noble, but inapplicable in this case, because the consequences of collapse are just too great.

Let's track this back. We've gone from a situation where we bailed out a single hedge fund - Long Term Capital Management (LTCM) - in 1998. That fund, which had fewer than 200 employees, was deemed too big to fail at the time. Then the tech bubble burst, and Alan Greenspan slashed interest rates to bail out Wall Street. And now the housing bubble has burst, and slashing interest rates isn't enough. So the mortgage industry is being bailed out directly.

Meanwhile, every other industry is putting the begging bowl round for subsidies. The car makers want money from the government too. How long before the retailers start asking for a hand-out (though you could argue that they've already had theirs, in the form of the tax rebate earlier this year)?

Rising interest rates, a weaker dollar - stick with gold

America's stock of bad debt has now gone as far up the tree as it can. It's all with the government and the taxpayer now. I don't know what that means for the dollar today, but it can't be good in the long run. The government's aim has to be to inflate that debt away, and forget about the consequences.

As Roben Farzad points out in BusinessWeek this week, US savers must feel absolutely sick. Their reward for resisting "the siren call" of debt is "injurious savings yields, inflationary rot, and election-season neglect, all served up with a dollop of institutional insecurity." David Gitlitz of investment adviser TrendMacrolytics tells Farzad that with the Federal Reserve rate cuts, "rates haven't been this negative" since the 1970s.

The trouble is, the world has changed, but nobody seems to get it yet. Our past decade of care-free debt accumulation has been built on the US consumer spending money borrowed from Asia, on goods made in Asia. But now the US consumer is spent out, so that cycle can't carry on.

Asian governments might still be keen to prop up the dollar, but once they realise that their exporters aren't selling anything, regardless of how weak their currencies are, they'll stop. Why lend money to these people if they're not keeping their side of the bargain and spending it in your factories? And so, to keep borrowing money and rolling over its massive debts, the US will have to pay more interest, which means higher interest rates in the long run.

We'll see what happens. But in the meantime, this bail-out gives you another good reason to be holding onto gold. Think of it as insurance: if we face inflation, it'll preserve its value. If we end up facing deflation and financial instability, it'll lose out less than other assets. I'd stick with it.

Turning to the wider markets...

UK shares sold off sharply, with the FTSE 100 index eventually closing 2.3% down, 121 points, at 5,241. Over the week, the index dropped 7% to just 90 points above the 2 ½-year low hit in July, while the FTSE 350 mining index plunged 18% in its biggest monthly fall since 1987. Also over the week, the FTSE oil and gas index slid almost 10%. Amongst the worst hit stocks was car catalyst maker Johnson Matthey, which slipped 8.5%. Resource stocks suffered generally, with Kazakhyms and ENRC both tumbling 8% and Lonmin down 4%. In financials, Friends Provident slipped 4.4%. But Cadbury gained 2% on disposal talk.

In Europe, shares also dropped back sharply, with the German Xetra Dax easing 2.4% to 6,127 and the French CAC 40 sliding 2.5% to 4,197.

US markets were mixed, with the Dow Jones Industrial Average nudging up 33 points to 11,221 and the wider S&P 500 gaining 0.4% to 1,242, though the tech-heavy Nasdaq Composite eased 0.1% 2,256. News that unemployment had risen to 6.1%, a 5-year high, was offset by a rally in financials.

Overnight the Japanese market rallied 412 points, 3.4%, to 12,624, and in Hong Kong the Hang Seng gained 739 points, 3.7%, to 20,673.

This morning Brent spot was trading at $104, spot gold was at $815, silver at $12.57 and platinum at $1,374.

In the forex markets this morning, sterling was trading against the dollar at 1.7786 and against the euro at 1.2408. The dollar was trading at 0.6977 against the euro and 108.92 against the Japanese yen.

And in London this morning, Associated British Foods, food producer and owner of Primark, said profits will rise in the second half. The group has managed to pass through higher commodity prices to customers, while profit is also up at Primark as consumers trade down to discount shops.

How house prices could fall by 75% from here - in gold terms

2008-09-03T03:23:00.000-07:00

What I'm confident about is that we will get through it," said Alistair Darling yesterday about the current economic crisis.

Well, of course, we'll get through it. What I want to know is will we get through it with a currency?

It is a government's duty to provide its people with opportunity. So we must thank Alistair Darling for giving us with his wise words on Saturday what has to be the easiest money-making opportunity of the year: to sell the pound as soon as the markets opened on Monday. Not since Northern Rock a year earlier has such an obvious trade presented itself.

I said in MoneyWeek's New Year predictions for 2008 that I wouldn't rule out a sterling crisis later in the year. That moment is looking more and more likely. If it is the government's intention to devalue sterling as quickly as possible, it's hard to see how they could improve on the job they're doing.

Then again they may just be incompetent.

The story behind the pound's devaluation

Let's start with some charts of sterling. Two pictures that each tell a thousand ugly words. The pound against the euro:

And against the dollar:

The downturn accelerated in October-November 2007, shortly after Gordon Brown announced that he would not be holding a November election. The horrid realisation must have dawned on forex traders that we had three more years of the bloke and they began hitting the sell button. But it was an orderly decline. 'He can't last three years, surely?' they thought.

Then as August began, the grim reality hit home that not only was he coming back from his holiday, but that he had no intention of resigning, despite dire Scottish election results. We had what is known as a mad rush for the exit, punctuated by a brief moment of respite as somebody won another gold medal, then downwards into the abyss.

Just as you thought you could take a breather last Saturday - perhaps watch a bit of footy or take a stroll by the river - Darling has his Road-To-Damascus-Meets-Trisha moment and onwards and downwards went the pound.

Anything that you, me or my Aunt Joan own which is denominated in sterling has lost 15% of its value in a year in currency alone.

Devaluing sterling effectively devalues the Government's debt, so you might think for a second it's deliberate. But you know deep down it isn't. It's that old Labour favourite: incompetence.

The Government can't hope to save the housing market

Do they honestly think they can save the housing market? With this new £175k stamp duty threshold, I feel sorry for anyone who is struggling to sell a property currently valued at £250k. Before you can say party political broadcast, they're going to be getting a whole load of offers at £175k, plus some cash for curtains and white goods.

Interest-free loans to help low earners to get on the housing ladder! If they're low earners, why are you trying to get them into debt? That is highly irresponsible, is it not? How will they pay that debt back? They might go on to become high earners, yes, but then they might not - and with this lot in charge of the economy the latter is more likely - and what then? This is imprudent lending - the very cause of the problem.

The cure for the property crisis

It's so simple. Why not just let prices fall to a level which people can afford? The excesses of the previous 14 years are purged and trade will begin again. That is the cure for all this: lower prices. Why do they feel the need to interfere all the time?

Interest-free loans are highly inflationary. Labour is attempting to save the housing market at the expense of the currency. It is attempting to bail out debtors, when it is their very excesses that created this mess. Why not bail out those who saved instead? Why should the prudent have had their savings value eroded by 15% in one year because of their leaders' incompetence?

Here is an update of a chart I like to show from time to time. It shows how many ounces of gold it takes to purchase the average UK house since 1930. My thanks to Tom Fischer of Herriot-Watt University for putting together. It is a wonderful chart and well worth studying.

You can see the price rises during periods of credit expansion and declines during periods of contraction. Nothing Darling does can change the inevitability of further falls. He has two choices: to simply let prices fall to the point where houses have become affordable again; or, the option he appears to have taken, which is to devalue sterling, so the falls don't seem so bad. But the net result - the real value of houses - will be the same.

If the UK really is in the worst state it's been for 60 years, as Darling says, then look at the lows set during in the 1930s and the late 1970s. One hundred or less of gold ounces to buy the average UK home. That would mean another 75% fall from here, measured in gold. Impossible? Well...

Let's just say, for the sake of argument, that sterling falls by another 20% against the dollar (I think it will be more). That will take us to $1.40. (It's been there before). Let's also say housing falls by another 25%, which would more or less mirror the falls of previous downturns. We would have an average price of £123,490. And let's say gold reaches its inflation-adjusted all-time high of around $2,000. Then you see an average UK house price of just over 85 ounces of gold. It's not so impossible.

Gold may be all over the place in dollar terms, but such is the dire state of sterling, anyone who has been buying gold with their pounds will have been doing very well. The last twelve months have seen gold go from about £330 an ounce to £460. That's a nice 40% gain in a year.

Thank you very much, Mr Darling.

Things must be bad - politicians are telling the truth

2008-09-02T02:16:00.000-07:00

Things must be getting bad. Politicians are resorting to telling the truth.

Chancellor Alistair Darling caused something of a stir at the weekend by admitting that economic conditions are "arguably the worst they've been in 60 years." The financial crisis will be "more profound and long-lasting than people thought," he said in an interview with The Guardian.

Of course, Mr Darling does have to make the rather embarrassing admission that his earlier forecast for 2-2.5% economic growth this year, was so off-the-scale wrong as to be in the realms of surreal fantasy. So it's best if he tries to look as if he knows what he's talking about now.

And it's hardly breaking news. House prices have already fallen faster and harder than at any time since records began. Anyone who's still trying to compare this favourably to the 1990s recession is way behind the times.

But credit where credit's due. Mr Darling may finally be facing up to reality. Shame his colleagues aren't quite there yet…

Darling is finally facing up to the harsh reality

I'm no great fan of Alistair Darling, but I have to say he came across well in his "controversial" Guardian interview at the weekend. Granted, the paper was never going to give him a hard time. But to hear a member of the Cabinet dispense with the Orwellian New Labour-speak and just admit things were awful was refreshing.

That said, I'm not daft. I suspect Mr Darling's attempts to tell it "straight" and play up the image of the hard-working but slightly naïve politician, who doesn't quite understand the world of spin, is all part of some devious Gordon Brown election strategy. You know the kind of thing I mean. "Who do you want running the country? I, prudent Gordon Brown, with my straight-talking down-to-earth team, who tell it like it is? Or smarmy professional politicians like Miliband and Cameron?" Call me cynical, but you don't survive in the Cabinet as long as Mr Darling has without knowing how to play the game.

But still, compare Mr Darling's blunt appraisal of the British economy with the defensive gibberish spouted by Hazel Blears, the communities secretary. Ms Blears told The Times that "we know things are tough and understand that people are worried. But Britain's economy is fundamentally strong."

This is just patronising rubbish, and voters are rightly irritated by it. She may not realise it, but she's effectively saying: "you're all panicking over nothing. The economy's basically fine and you're just stupid people who are taken in by all these nasty newspaper headlines."

And what does "fundamentally strong" mean? Our houses are overpriced, and our economy is dependent on people spending money they don't have on non-productive goods imported from other countries. Our banks are short of money, our government is up to its eyeballs in debt, and unemployment is rising rapidly. Where's the strength in any of that?

And Home Office minister Jacqui Smith clearly doesn't agree with Ms Blears's cheery little assessment. According to the front page of today's Telegraph, Ms Smith's department reckons that a recession will also bring with it rising crime, increased budget pressures on the police and border controls as tax revenues fall, and worsening racial tensions.

It all adds up to a grim picture for UK plc.

2 tips to help you survive the recession

But let's take a step back a minute. Yes, recessions are painful, and all the more so when you've been using borrowed money to put one off for as long as we have. But a recession doesn't have to mean complete social collapse. Believe it or not, it's a natural part of the business cycle. And just as recessions clear out a lot of the bad, unproductive investments that should never have been made, it can also be a chance to perform a similar clean-up on the household balance sheet.

Because the reality is that for most people, recession won't be a life-changing experience. Many people will lose their jobs, but many more won't. Lots of people will lose their homes, but an awful lot more won't. For the majority of people, recession will be about saving more money, and paying down debt. They won't have to worry about keeping up with the Joneses anymore, because the Joneses will be too busy trying to stay ahead of the bailiffs.

The main thing to do is to make sure you have a savings cushion for if you end up being made redundant. So you need to save up three to six months' salary as an easily accessible emergency cash pile. You should always have one of these, but needless to say they tend to get frittered away in the good times. The basic aim is to be able to meet all your living costs for long enough to find another job, if necessary.

The other big issue many people may face is finding that when they come to renew their mortgage deal, it's got a lot more expensive. The best way to avoid this – particularly if you are coming to the end of a fixed deal soon - is to have as much equity in your house as possible. Many lenders are now looking for at least 25% before they'll give you their best deals. It may well be worth diverting investment money into paying down your mortgage if this is the case. For more on this topic, see Does a small mortgage beat a big pension?

Turning to the wider markets…

UK shares closed the week with the FTSE 100 index advancing another 35 points, 0.6%, to 5,637, its highest level for more than two months. For the month as a whole, the index rose 4.2%, its best August since 2000. London Stock Exchange fared well with a 4% climb. Energy stocks were boosted by firmer oil prices as BP and Shell both added 1% and BG gained 3%. Banks were led higher by HBOS, up 3.4% on disposal rumours. But Enterprise Inns was the biggest blue chip faller, losing 4% on bearish broker comment.

In Europe the German Xetra Dax was flat at 6,422 and the French CAC 40 advanced 0.5% to 4,483.

US stocks closed down, with the Dow Jones Industrial Average shedding 172 points, or 1.5%, to end at 11,544 and the wider S&P 500 slid 1.4% to 1,283. The tech-heavy Nasdaq Composite added 1.8% to 2,368.

Overnight the Japanese market lost 239 points, 1.8%, to 12,834 and in Hong Kong the Hang Seng eased 321 points, 1.7% to 20,911.

This morning Brent spot was trading at $113, spot gold was at $835, silver at $13.76 and platinum at $1,459.

In the forex markets this morning, sterling was again weak, trading against the dollar at 1.8073 and against the euro at 1.2335. The dollar was trading at 0.6825 against the euro and 107.71 against the Japanese yen.

And in Europe this morning, Commerzbank has agreed to buy Dresdner bank from insurer Allianz for €9.8bn. It's Europe's biggest financial services takeover this year, reports Bloomberg, and means Commerzbank will overtake Deutsche Bank as Germany's number two banking group

UK market news 1st September 2008

2008-09-01T00:21:00.001-07:00

HBOS Plc's Bank West Retail unit in Australia has been approached by Commonwealth Bank of Australia and National Australia Bank (Times).

Associated British Foods Plc is in talks to purchase Azucarera Ebro in Spain (Mail).

WPP Group Plc could consider moving its head office out of the UK (Times).

Petrofac Ltd and Mubadala Petroleum Services Company LLC to establish a joint venture, Petrofac Emirates LLC in Abu Dhabi.

Travel & Leisure: Stagecoach Group (+5.88% to 319.75p) reached a new 3-month relative high against the FTSE 100.

British Airways Plc may consider a partnership with Alitalia (WSJ).

Industrial Goods & Services: G4S Plc (+2.98% to 233.5p), Charter Plc (+2.64% to 952p) and Bunzl (+2.07% to 715p) reached a new 3-month relative high against the FTSE 100.

BP bought back last Friday for cancellation 1,500,000 ordinary shares at prices between 520.75 pence and 530.50 pence per share.

National Grid bought back last Friday 1,184,117 ordinary shares at a price of 717.53 pence per share. The purchased shares will be held as Treasury shares.

Latest broker recommendations

Henderson price target was raised to 130p vs 110p at Citigroup.

Bodycote was cut to "underperform" from "neutral" at Merrill Lynch.

Imperial Energy price target was cut to 1250p vs 1500p at UBS.

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The stories, data, and stocks that may have the greatest impact during the coming trading week.

Today’s Corporate Events (FTSE 350 universe)

No major earnings expected.

Director Dealings

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techMARK (15min)

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European Markets

Germany / Austria

Commerzbank to buy Dresdner Bank from Allianz for appx. E9.8bln in a two steps transaction to be completed no later that the end of 2009. The transaction has potential synergies of E5bln. Allianz will have a stake of nearly 30% in the new entity. The insurance company agreed to buy Cominvest from Commerzbank, to commit up to E975m into a trust solution for specific ABS assets of Dresdner Bank. Oldenburgische Landesbank will remain with Allianz Group. The Co will cut 9,000 jobs out of about 67,000.

Technology: United Internet (-1.09% to E9.96) closed at a 3-month relative low against the Dax.

Retail: Arcandor (-1.64% to E5.41) reached a new 3-month relative low against the Dax.

Continental was cut to "underweight" from "neutral" at Merrill Lynch.

Volkswagen's commercial-vehicle unit to meet its 2H targets (WirtschaftsWoche).

Daimler: Tesla Motors may be the batteries supplier for the Co's electric Smart cars (FT Deutschland).

Deutsche Telekom price target was raised to E13.25 from E13 at Morgan Stanley.

France

Vivendi delivered 2Q adjusted net income of E757m compared to E728m consensus, EBIT of E1.24bln vs E1.23bln a year ago. Revenue reached appx. E6bln, an increase of 15.1% and of 17.4% at constant currency when compared to 2Q07. Furthermore, the Co expects to deliver 2008 profit growth similar to 2007, at constant perimeter.

GDF Suez announced 1H net profit up 14% to E3.38bln compared to E2.96bln a year earlier, beating the E3.16bln consensus. The group to pay an interim dividend of E0.8 a share.

Vinci reported 1H net income up to E731m (E678m consensus) compared to E614m a year ago, operating income of E1.46bln (E1.45bln expected), up 12% YoY on revenue up 15% to E15.7bln. Besides, the Co decided to pay an interim dividend of E0.52, up 11%.

Altarea posted 1H net income down to E67m compared to E147.5m a year earlier.

Thales and Cadbury Plc may sell their appx. 20% shares in Camelot Group Plc (Telegraph).

Industrial Goods & Services: Nexans (+1.27% to E86.25) closed at a 3-month relative high against the Cac 40.

Accor was cut to "sell" from "neutral" at UBS.

Michelin was raised to "buy" from "neutral" at Merrill Lynch.

PPR price target was raised to E86 from E84 at Lehman Brothers.

Spain / Portugal / Greece

Inmobiliaria Colonial posted 1H net loss of E2.4bln compared to a profit of E316m a year ago.

Cintra CIT 1H net loss seen at E42.7m compared to a loss of E29m a year ago.

Grupo Ferrovial could report 1H net income down to E192m compared to E756m a year ago on revenue of E6.8bln vs E7.1bln.

Banks: Banco Pastor (-0.45% to E6.62) closed at a 3-month relative low against the Ibex.

Construction & Materials: Sacyr Vallehermoso (-2.97% to E12.41) closed at a 3-month relative low against the Ibex.

Sacyr Vallehermoso and Faes Farma 1H results expected

Grupo Catalana Occidente price target was cut to E21.4 vs E27.6 at UBS.

Today’s economic events (CE time)

FR 09:50: Aug F PMI Manufacturing, exp.: 45.1
GE 09:55: Aug F PMI Manufacturing, exp.: 49.9
EC 10:00: Aug F PMI Manufacturing, exp.: 47.5
UK 10:30: Jul F M4 Money Supply (MoM)
UK 10:30: Jul F M4 Sterling Lending (BP)
UK 10:30: Jul Net Consumer Credit, exp.: 0.8B
UK 10:30: Jul Net Lending Sec. on Dwellings, exp.: 3.0B
UK 10:30: Jul Mortgage Approvals, exp.: 36K
UK 10:30: Aug PMI Manufacturing, exp.: 44

Indices

	Last	Daily Change	% YTD
FTSE 100	5,637	35.40	-12.70
FTSE 250	9,382	110.10	-11.97
FTSE techMARK 100	1,614	14.64	-1.68
Dow Jones	11,544	-171.63	-12.98
Nasdaq 100	1,873	-42.58	-10.19
S&P 500	1,283	-17.85	-12.64
DJ Euro STOXX 50	3,366	6.21	-23.50
Dax	6,422	1.76	-20.39
Cac 40	4,483	21.11	-20.15
SMI	7,239	48.34	-14.68
Nikkei 225	12,853	-219.87	-16.04
Hang Seng	20,879	-382.75	-24.93
ASX	5,099	-36.90	-19.58

Bonds

	Last %		Last %
10Y Gilt	4.48	US 10Y T-Note	3.81
10Y Bund	4.15	US 30Y T-Bond	4.42

EUR / USD (15min)

USD / JPY (15min)

Dax 30 (15min)

Cac 40 (15min)

Euro Stoxx 50 (15min)

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Spain's banking sector could be facing a death blow

2008-08-31T23:28:00.001-07:00

Sometimes it's the most innocuous-looking headlines that spell the most trouble.

With most papers leading on "here comes the recession"-type stories, it would be very easy to overlook the report on page five of yesterday's FT that the "ECB is to tackle abuse of liquidity aid". And no wonder. The story sounds either a) very technical or b) something about the financial equivalent of binge drinking.

But there's a bombshell being delivered here - the European Central Bank is about to stop bailing out eurozone commercial banks. And that could mean another big lender going 'bust'. Time to reach for your tin hat again…

The ECB is about to stop bailing out eurozone commercial banks

The European Central Bank has said nothing official as yet about its plans to take a closer look at its support for European banks. In true eurozone style, the ECB's thoughts are being carefully leaked in a dull bureaucrat-ese that's easily ignored and designed not to prompt a panic.

ECB policymakers have agreed a "certain amount" of refinement to the central bank's rules," said the governor of Luxembourg's central bank, Yves Mersch, at the weekend. The changes under consideration weren't "a broad-based revolution", he added. However, as markets evolved, "we have to adjust our framework regularly to market practices" which would "concern some instruments".

Hardly a "stop the press!" moment. But fortunately, Not Wellink, the Dutch central bank chief and a major figure on the ECB council, has been a bit more specific. He said that banks were becoming addicted to the Frankfurt 'liquidity window'. That's where the ECB has been providing cheap funding for eurozone banks by lending against the collateral of a whole range of so-called asset-backed securities (ABS).

Let me explain. A number of European banks weren't able to borrow enough cash to keep their balance sheets balanced because other investors weren't prepared to lend them the money. The only way they've managed to keep their heads above water recently has been to shovel the dodgy loans they have made onto the ECB – a sort of financial pass-the-parcel. Without it, those banks would have gone bust, a la Northern Rock.

But the bad news for these lenders is that it looks like the party's over. "If we see banks dependent on central banks, then we must push them to tap other sources of funding", Mr Wellink told Dutch financial daily Het Finacieele Dagblad. "There's a limit how long you can do this. There is a point where you take over the market".

Exactly. I can't think why it's taken the ECB so long to work out that it's storing up problems for the future. After all, it was prepared to hike interest rates two months ago when worried about too much inflation. Perhaps it was because the Bank of England and the US Federal Reserve had to put in place their own panic measures – sorry, emergency funding arrangements - while the ECB already had something suitable in place.

But this is where the second part of the problem arises. Though its policy buys time, the ECB ends up with a shed-load of assets whose value is highly debatable at best. That's bad enough in itself, but there could be much more fallout. The Maastricht Treaty – one of the EU foundation stones - formally prohibits long-term taxpayer support of this kind for the EMU banking system.

"The ECB is in an unenviable situation", says Paul McCulley of Pacific Investment Management. "The lender of last resort should be just that, not a permanent provider of funds."

Spanish banking sector could be facing collapse

So it's starting to look like the game could be up for a large chunk of the Spanish banking system. We've written before about the parlous state of the Spanish property market and, as a result, the hole into which the country's banks have dug themselves. The latest Bank of Spain data shows that the country's banks have increased their ECB borrowing to a record €49.6bn (£39bn). "A number have been issuing mortgage securities for the sole purpose of drawing funds from Frankfurt", says Ambrose Evans-Pritchard in The Telegraph. "These banks are heavily reliant on short-term and medium funding from the capital markets. This spigot of credit is now almost entirely closed".

But the ECB will have to end this bailing-out soon. Now it's possible - just – that the central bank can deal its way out of this mess, and somehow avoid the carnage that a Spanish bank bust would cause. But as the world's banking glitterati gather in Jackson Hole, they've got plenty of hard thinking to do. After all, if Spain's banking sector collapses, it would result in even tighter credit, less lending and less spending.

One – admittedly unorthodox solution – could be for the ECB to simply pretend that Spain doesn't exist. If that sounds silly, that's because it is. Yet, that hasn't prevented British buy-to-let lender Paragon from trying to disown an entire sector of amateur landlords who have fallen on hard times.

According to The Guardian, Paragon now says that investors in the kind of overpriced city-centre apartments which are now virtually unlettable and unsellable should not be classed as buy-to-let investors. "These properties were targeted by speculative purchasers who thought they could make a quick buck by flipping them. That is not the buy-to-let market. Buy-to-let investors do not own a property unless they can demonstrate that there is tenant demand".

It's an interesting solution to the housing bubble implosion – just stick your fingers in your ears and pretend it's not happening. But somehow we don't think it'll catch on.

Turning to the wider markets…

UK shares rallied strongly on Friday, as the FTSE 100 index climbed 135 points, 2.5%, to 5,506. Property stocks soared, with Liberty International - surrounded by bid rumours – jumping 8%, while British Land added 6% and Hammerson 5%. Banks also fared well with Royal Bank of Scotland and Barclays both gaining 5% while Lloyds TSB put on 7%. BT climbed 3.4% on vague bid talk. But Michael Page lost 4.4% having rejected Adecco's advances. The London market was closed yesterday for the August bank holiday.

Shares in Europe dropped yesterday, with the German Xetra Dax losing 0.7% to 6,297 and the French CAC 40 shedding 1% to 4,356.

US stocks fell sharply last night, with the Dow Jones Industrial Average dropping 242 points, or 2.1%, to end at 11,386 and the wider S&P 500 and the tech-heavy Nasdaq Composite both shedding 2% to 1,267 and 2,366 respectively.

Overnight the Japanese market shed 100 points, 0.8%, to 12,779, while in Hong Kong, the Hang Seng was almost flat, down 0.1% to 21,088.

This morning Brent spot was trading at $113, spot gold was at $821, silver at $13.52 and platinum at $1,443.

In the forex markets this morning, sterling was trading against the dollar at 1.8441 and against the euro at 1.2547. The dollar was trading at 0.6803 against the euro and 109.72 against the Japanese yen.

Also this morning, Bovis Homes said first-half profit plunged 83% after banks granted fewer mortgages. Sales dropped 43%.
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Diversionary tactics or simple coincidence?
- The world's markets have remained calm in the face of fluctuations in global currencies, spasms in world commodity prices, the Beijing Olympics and war in South Ossetia. But could all these events be linked in some way? To read the article, click here: Diversionary tactics or simple coincidence?

Northern Rock: yet more of your cash down the drain

2008-08-31T23:26:00.001-07:00

Turns out – would you believe – that the Newcastle-based lender, a pioneer of 125% mortgages and one of the most dominant lenders right at the peak of the market in early 2007, is getting clobbered by much higher-than-average default rates. Surprise, surprise!

Sarcasm aside, the Rock is just the tip of the iceberg, if you'll forgive the slightly mangled metaphor. The rest of the UK banking system, or certainly the bit that isn't effectively bust already, is getting set to slam down the loan window shutters as it runs shorter and shorter of money.

It all promises to be a very unhappy 2009 for borrowers…

Northern Rock is suffering much higher-than-average default rates

There've been probably more column inches within the last year devoted to the sorry Northern Rock nationalization saga than to any other company in the country, so I'm not going to add to them by talking about the right and wrongs of what the financial authorities did or didn't do.

We're stuck with it. But if anyone's looking for any further evidence that offering 125% mortgages is a completely brainless idea, particularly if the lenders responsible proceed to scatter their cash around like confetti, the latest news serves that up on a plate.

It turns out that from what The Telegraph calls "previously unseen documents" that Granite, the £40bn so-called 'off-balance sheet securitisation vehicle' which holds many of the mortgages issued by the Crock, is anything but rock-solid.

Payment arrears of 90 days or more on mortgages on Granite's books rocketed by two-thirds between this year's first and second quarters, according to the credit monitors at Standard & Poor's. That adds up to £508m-worth of dodgy home loans, even though rival banks saw relatively small increases in delinquencies. What's more, repossessions soared by 163% between the first and second quarters, again much worse than virtually every other lender.

The loan-to-value (LTV) ratio is another potential disaster. Average LTVs were 77% for Granite compared with 60% typically elsewhere, with almost 30% of Granite's loans at LTVs of 90%. That means a large chunk of borrowers will soon be dropping into negative equity territory as the housing market gets worse.

Today's Nationwide survey said that UK home values have already plunged 10.5% over the last year after a further 1.9% fall in August, while the Bank of England's governor Mervyn King this month forecast "a significant adjustment" downwards in house prices.

How much will this cost British taxpayers?

Here's the bad news for the public coffers: any financial pain of a major blowout in defaults would be shared between Granite bondholders and the Rock. Andrew South, S&P's senior structured finance director, tells The Times that "the deteriorating book increases the chances that taxpayers, ultimately, might have to shoulder some of the cost". And if that's not enough, you'll be less than glad to hear that on top of the £40bn Granite loan book, the Rock holds £37bn worth – on paper at least - of mortgages on its own balance sheet, which it says are of similar quality. Thanks, guys!

The cost to the taxpayer? "At the time of the nationalization, the Government was advised by Goldman Sachs that the loss could be between £450m and £1.28bn", says Patrick Hosking in The Times. And now? I dread to think. But I bet it'll be a long way north of even that higher figure, particularly as the economy gets worse. It doesn't take Einstein to work out why high-risk home loans have virtually disappeared off the radar screen. What's happening to over-indebted mortgage borrowers is, in a rather painful way, a microcosm of what's happening in the wider world.

Britain is heading for a major slump

The recent bank reporting season has already showed us that the balance sheets of UK lenders are looking fragile as both personal and corporate bad debts have started to stack up. In other words, demand for credit is dropping as bank customers' ability to make interest payments on their loans is getting worse by the day. And the other side of the coin is that the banks are toughening up their loan criteria.

"When lending standards go up, corporate defaults rise. And that's only just started", says James Fairweather, chief investment officer at fund manager Martin Currie. "This is the sharpest-ever rise in lending standards we have ever seen and it has continued to sky rocket."

But now, says Capital Economics, it's even looking unlikely that banks will be able to raise all the capital they need to keep expanding their balance sheets as fast as they have been. So they'll have to ration the supply of credit even more.

Lending growth won't just slow, it could actually fall outright: "if banks fail to raise any more capital than the £20bn raised so far, lending could contract by 7% - and reducing lending to UK households and firms could have dire implications".

It's all pretty desperate news for the UK economy, which "may already be in recession and is now expected to contract in 2009 as a whole", says Capital Economic's Vicki Redwood. She concludes: "A full-blown slump is a growing possibility".

There's not a lot more to add to that.

UK shares closed strongly, with the FTSE 100 index advancing 57 points, 1.16%, to 5,528, though the FTSE 250 was flat. Housebuilder Taylor Wimpey reversed much of the previous day's gain, shedding 7% after reporting a £1.54bn loss. Other stocks in the sector also suffered, with Persimmon and Barratt Developments both 2% down and Bovis losing 3%. In contrast, miners generally did well, with Antofagasta and Vedanta both up 4% and Kazakhyms adding 2%. BSkyB rose 1% on a bullish Goldman Sachs note but Johnston Press slid 7% after announcing an 18% pre-tax profit drop and a scrapped interim dividend.

Shares in Europe were mixed yesterday, with the German Xetra Dax easing 0.3% to 6,321 but the French CAC 40 nudging up 0.1% to 4,373.

US stocks were firmer, with the Dow Jones Industrial Average adding 90 points, or 0.8%, to end at 11,503 and the wider S&P 500 gaining a similar percentage to 1,282. The tech-heavy Nasdaq Composite added 0.9% to 2,382.

Overnight the Japanese market was again almost flat, adding 15 points, 0.1%, to 12,768, though in Hong Kong the Hang Seng slid 551 points, 2.6% to 20,914.

This morning Brent spot was trading at $115, spot gold was at $834, silver at $13.74 and platinum at $1,443.

In the forex markets this morning, sterling was again weak, trading against the dollar at 1.8370 and against the euro at 1.2447. The dollar was trading at 0.6776 against the euro and 109.03 against the Japanese yen.

And in London, French bank Credit Agricole reported that second quarter profit had slid by 94% to €76m, after writedowns related to troubled US bond insurers. However, its Tier 1 capital ratio remained steady, reports Bloomberg.

The second-most expensive four words in the English language

2008-08-31T23:24:00.001-07:00

The late great Sir John Templeton warned that the four most expensive words in the English language are “it’s different this time.”

He was absolutely right. You usually hear those words at the frenzy stage of an investment bubble, when there’s no conceivable sensible reason for prices to go any higher, and vested interests have to clutch at straws to promote their arguments. Just ask anyone who bought property stocks a year ago, or tech stocks in 2000.

But in the wake of a bubble popping, you often hear another phrase, which may well qualify as the second-most expensive four words in the English language. And we’re hearing it more and more from the property pundits, politicians and City hotshots who stand to lose most from the looming recession.

It’s that whiney little mantra, “something must be done!”

Property pundits are calling for government intervention

We have to do something to save the property market. Or so everyone who makes money from the property market is saying.

David Ritchie, chief executive of house builder Bovis, was among the latest to call for government intervention this week. “People need to be able to access finance to buy property and anything we can do to assist people getting on the housing ladder must be good.”

The Government agrees it seems, even if it can’t quite work out a plan yet. After all, nothing screams “get rid of this bunch of incompetents!” to a British voter louder than collapsing house prices. There’s the vague rumours about stamp duty, which no one has stamped on yet, so they must be getting ready to announce something. And The Times reports this morning that the Government is also considering helping councils to buy “repossessed and unsold properties.”

It seems that “something is being done.”

But let’s rewind a moment. Let’s just examine that statement from the Bovis boss, particularly the second half. “Anything we can do to assist people getting on the housing ladder must be good.”

Here’s an idea. Why don’t you give away your homes for free, Mr Ritchie? They’re not selling anyway. That would get people onto the housing ladder. And that must be good, right?

Oh, wait, I forgot – that would cost you money. In fact, it would bankrupt you. Why should you be expected to subsidise housing for the rest of the nation at your own expense?

Taxpayers shouldn't have to prop up the housing market

It’s a ridiculous notion, of course. And yet, when it’s taxpayers’ money that’s meant to fund other people’s property purchases, it’s apparently just fine.

Well, I’m a taxpayer, and I don't think it’s fine at all.

Let me explain why. The Government takes money from your pocket and mine in the form of tax. The justification for this is that it spends that money on public goods, things that can’t be provided more efficiently by the private sector. You can argue the point on what these things are, but we generally accept (in this country at least) that this includes the army, the police, universal health care, and some form of welfare safety net.

I don’t see anything on that list about propping up the housing market. A cut in stamp duty is simply taking money from people who don’t intend to buy a house, and giving it to those who do. That’s completely unfair. If the Government can afford to cut taxes at all, then it should be giving us all some of our money back.

How to make the recession less painful – cut taxes

And this takes us to the bigger point. If we want to get out of this recession in one piece, what really needs to be done?

Interest rate cuts won’t work. They haven’t worked in the US, they didn’t work in Japan. That’s because as a nation, we’re up to our eyeballs in debt. Banks can’t afford to lend money; we can’t afford to borrow it. All of us need to pay off our debts and build up our savings. So it doesn’t matter how cheap money gets, we’ve snapped out of spending mode and strapped on our tin hats.

So the quickest route out of recession is to help people pay down debt and build up their savings. Inflation is one way to reduce the value of debt, but it generally comes with a hefty price tag – currency collapse and economic meltdown. Higher interest rates might help build up savings, but they’d also make debt more expensive to service.

How can we help people save more without fuelling inflation or making our debt burden even worse? Simple. Cut taxes.

If you cut taxes, you almost automatically increase productivity, because you take money from a wasteful, inefficient organisation – the government – and reallocate it to someone who actually gives a damn about how effectively it’s spent – the individual. And rather than squander the money on property (as the Government is proposing), individuals would use it sensibly, saving it, or using it to pay down debt.

This isn’t a magic bullet. It won’t stop the recession – nothing can. The looming bust is nature’s way of telling us that we spent too much money on unproductive garbage during the good times.

Look at it this way. If we’d taken all the money we spent as a nation on property in the past ten years, and had pumped it into – let’s say – our energy infrastructure, then maybe we’d have lower gas bills, and a nice, productive industry providing highly paid, specialist jobs that would be tough to outsource. Instead, all we’ve got is big debts, an unwanted pile of jerry-built buy-to-let flats which are already turning into slums, thousands of unemployed estate agents, and a national energy crisis.

It’s depressing, yes. But what we can do now is put an end to the rot and the waste. The quicker those savings build up, the faster balance sheets are repaired and the quicker we can get out of this downturn.

Will this happen? I doubt it. The Government still believes the great lie, that you can spend yourself rich. It still believes that “something must be done.”

Better get ready for a long, drawn-out, painful recession.

Turning to the wider markets…

UK shares had another good day as takeover speculation helped the prices of several rumoured targets. The FTSE 100 index advanced 73 points, 1.3%, to 5,601. J Sainsbury flipped up 8% on hopes that former suitor the Qatar Investment Authority might be prepared to re-open bid negotiations, while insurer RSA climbed 5.5% on talk that several rivals could be considering acquiring it. Legal & General put on 4%. Banks also did well, with Barclays up 6%, and HBOS and Royal Bank of Scotland both 4% higher. Wolseley recovered 6% on better US economic numbers.

Shares in Europe were also stronger yesterday, with the German Xetra Dax gaining 1.6% to 6,421 and the French CAC 40 advancing 2% to 4,461.

US stocks were again firmer, with the Dow Jones Industrial Average adding 213 points, or 1.85%, to end at 11,715 and the wider S&P 500 gaining 1.5% to 1,301. The tech-heavy Nasdaq Composite added 1.2% to 2,412.

Overnight the Japanese market joined in, adding 305 points, 2.4%, to 13,073 and in Hong Kong the Hang Seng improved 321 points, 1.5% to 21,293.

This morning Brent spot was trading at $113, spot gold was at $837, silver at $13.85 and platinum at $1,473.

In the forex markets this morning, sterling was again weak, trading against the dollar at 1.8291 and against the euro at 1.2400. The dollar was trading at 0.6780 against the euro and 108.58 against the Japanese yen.

This morning also brought news that London luxury house prices have posted their first annual drop (-1.6%) since 2003, according to Knight Frank, after a 1.3% monthly fall, while UK consumer confidence remains around its record lows, said GfK.

Our recommended articles for today...

Why Citi shows that big isn't always best
- Citigroup is America's biggest bank. But with over 380,000 employees, it became too big to manage. In the last year, it wrote down over $55bn in bad debts. So what could the future hold for this banking behemoth? To find out, read: Why Citi shows that big isn't always best

Why you should keep a cool head on commodities
- Commodity prices are slipping back from the highs of earlier this year. It is likely to be a short-term correction, but there could be some great buys out there. Just be careful and don't bite off more than you can chew. To read the article, click here: Why you should keep a cool head on commodities

Why the credit crunch is good news for game birds

2008-08-15T10:39:00.000-07:00

The grouse shooting business is feeling the crunch

Grouse shooting is big business. The industry is worth £1.6bn to the UK economy. It generates the equivalent of 70,000 full-time jobs, while ensuring the management of two-thirds of the UK's rural land.

But like almost every other British business, it’s under pressure. Costs are rising. Both fuel and ammunition are getting more expensive. What’s more, the weakness of the US dollar – even allowing for the recent bounce - has pushed the cost of a day's grouse shooting in Scotland to around $13,300. That’s enough to make even high-rolling American hunters think twice about whether they can afford another trans-Atlantic trip.

However, the real concerns in the grouse shooting world run rather deeper. Much of the demand for shooting comes from the City and corporate business. So if the Square Mile’s hot shots aren’t gunning for a day on the moors, that could be bad news for shoot organisers.

This year’s season will probably be OK, says Christopher Graffius, director of communications for the British Association for Shooting and Conservation. Most bookings were paid for at the beginning of the year, “before the credit crunch really hit.”

Yet a study by specialists Fox Harris has found “some signs of softness in the market”, says Martin Waller in The Times. One unnamed banker told him that “in today's climate, taking large numbers of clients to shoots costing as much as £30,000, was probably a non-starter on PR grounds”. Another agent spoke of a dearth of corporate customers, and warned that some who’ve paid deposits may walk away. “We're aware of shoots normally full and difficult to get into that are now offering days. There will be some days coming back on the market discounted.”

“It’s not going to make any difference for the guys that come in their own private jets, but certainly at the lower end of the market there seems to be a bit of a slow-down”, says Russell Hird, who runs grouse-shooting expeditions on the Isle of Lewis.

Other birds may find they have fewer bullets to dodge this season. John Bingham in The Telegraph reports that “pheasant shooting - which gets under way in October – [is] thought to be particularly vulnerable to the downturn,” with “the number of birds expected to outstrip the number of shooters”. Even clay pigeon shooting has become more expensive due to the rising cost of metals.

Now, you may not care that much about the troubles of the City’s amateur hunters. But what this all demonstrates is that the view that the ‘crunch’ won’t affect the ‘top end’ is complete nonsense. When economies turn down sharply very few people escape unscathed.

And investors in premium brands are starting to realise that.

Why now's the time to sell luxury goods stocks

The FT revealed last month that inflation in the luxury goods market has halved in the last year, “indicating that the wealthy are watching the pennies as much as anyone else”.

Even down in Saint-Tropez, retailers are reporting a “dramatic drop in takings as the number of yachts dropping anchor is down 50%”, reports AFP.

The rich are having trouble paying their debts too. “The wide-ranging effects of the US housing downturn are highlighted by the worsening of credit quality in American Express’ affluent card member base,” wrote Oppenheimer analyst Meredith Whitney in a recent client note.

It all spells bad news for the luxury sector. In the year to July, the sector and luxury-brand dedicated funds fell between 15-20%, reports Funds Europe. Luxury goods makers are pinning their hopes on the newly wealthy in emerging markets. But decoupling has already been shown to be a myth, as China’s economy slows alongside America’s. Eastern millionaires will be no more inclined to keep spending than their counterparts in the West.

It’s yet another sector for investors to avoid – and if you do hold any luxury goods stocks, now would be a good time to sell them.

With the economic downturn picking up steam, prospects don’t look great for many sectors, in fact. But MoneyWeek contributor Stephen Bland reckons investors should take a longer-term view of things. To read his take on why you shouldn’t be worrying too much about the current volatility, see: Don't panic: the world isn't ending.

Turning to the wider markets…

UK shares recovered, with the FTSE 100 index closing 49 points higher, or 0.9%, at 5,497. Miners led the rally, with Antofagasta, Anglo American and Kazakhyms all up 5%. But banks generally continued to suffer, with Barclays down 1.5% on fears that more credit write-downs will be needed, though Royal Bank of Scotland managed to hold its price level after a Goldman Sachs recommendation. Housebuilders dropped after Bellway’s downbeat trading update, which hit Taylor Wimpey 11%, Barratt Developments 8% and Persimmon 4%.

Shares in Europe also picked up as the German Xetra Dax nudged up 0.3% to 6,442 and the French CAC 40 improved 0.4% to 4,421.

US stocks bounced off early-session lows, with the Dow Jones Industrial Average adding 83 points, or 0.7%, to 11,616. The wider S&P 500 gained 0.6% to 1,293 and the tech-heavy Nasdaq Composite advanced 1% to 2,454.

Overnight the Japanese market recouped 66 points, 0.5%, to 13,019, though in Hong Kong the Hang Seng eased 321 points, 1.5%, to 21,072.

This morning Brent spot was trading at $112, spot gold at $788, silver at $13.10 and platinum at $1440.

In the forex markets this morning, sterling was still weak against the US dollar - falling for its eleventh successive day, its longest losing streak for 37 years, according to Bloomberg - trading at 1.8555 and against the euro at 1.2599. The dollar was trading at 0.6789 against the euro and 110.41 against the Japanese yen.

And this morning, recruitment company Michael Page has rejected a 400p-a-share (£1.3bn) bid from rival Adecco, saying it “materially undervalued” the company.

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How the cheap money era led to the war in Georgia

2008-08-12T05:29:00.001-07:00

From John Stepek, across the river from the City

The end of the easy money era and the war in Georgia don’t, at first glance, seem to have an obvious connection. But they are linked. Bear with me, and I’ll explain why.

Cheap money gave us many things, including a global property bubble, and a £1.4 trillion debt mountain for UK consumers. Another noticeable trend was a taste for exotic new investment classes, from Iraqi government bonds to obscure derivatives.

All of these trends were the result of falling risk aversion. Investors believed that central bankers, lead by Alan Greenspan, now had complete control of the global economy. Globalisation would ensure economic growth went on forever. And if it didn’t, a soft landing could be engineered by judicious use of the emergency interest-rate cut button on Greenspan’s miraculous economic control panel.

As investors became bolder, and focused entirely on returns, rather than risks, one brave new investment class, invented entirely by a man working at Goldman Sachs, benefited more than most.

It was called the Brics…

The Brics were a great investment, when risk didn’t matter

The Brics – as you probably know by now - was a catchy acronym for Brazil, Russia, India and China. Jim O’Neill at Goldman Sachs coined the term in 2003, and predicted great things for these four countries.

And he was right. They’ve all benefited from booming commodity prices (in the case of Brazil and Russia), or booming US consumption (China), or the outsourcing boom (India). But another point has also worked in their favour.

Low interest rates pushed returns down too. As more and more money chased each new investment opportunity, yields fell on all major asset classes. That drove investors, particularly adventurous new players like hedge funds, into ever-more outlandish investment areas.

Risk took a back seat – political risk in particular. No one batted an eyelid at putting money into once-frontier markets. “China? Sure, it’s a totalitarian regime. And yes, communists have never quite got to grips with the idea of privately-owned property. But this is a globalised economy now. The government won’t want to upset investors. Especially not ahead of the Olympics.”

Why China and Russia have now become very risky for investors

But free and easy money has vanished now. Now some of the best returns you can get are in good old-fashioned hard cash. And when your best returns come from risk-free assets, suddenly things like political risk matter again.

That’s bad news for most emerging markets. And it’s a worry for the Brics too, all of which have seen their stock markets take a hit this year.

But it’s worse for China and Russia. Brazil and India have their problems, and plenty of them. India in particular has a fractious democracy, terrible infrastructure and chronic corruption. But at their core, they believe in democracy as a model for society, so the chances of dangerous social upheaval are comparatively low.

In China, the chances of a civil breakdown are higher. Economic problems tend to lead to unrest. The uprising in Tiananmen Square occurred at a time of high inflation, for example. We’ve more on China and the troubles it faces in the current issue of MoneyWeek.
But Russia’s probably the most risky for investors. The country is a basket-case in many ways. It has appalling social problems including high levels of alcoholism, HIV infection and suicide. And while surveys suggest that the Chinese population seems largely comfortable with the idea of capitalism, ordinary Russians seem to pine for the good old days.

Above all, Russia’s recovery from bankruptcy in the 1990s has been built on the soaring oil price. China makes things for US consumers; Brazil has a broad range of commodities for sale; and India has a bright, cheap white-collar workforce. All of those are under threat from the global slowdown, but none quite as much as the price of oil.

All those petro-roubles pouring into the coffers have given Russia back its swagger. But as the deflating credit bubble leads to global economic downturn, the oil price is already falling. That’s why if Russia wants to press home its advantage, it needs to do it now.

Hence the stepping up in state rhetoric and confiscation of assets, and its action in Georgia. What’s the US going to do after all? America doesn’t have any money – and all the funds it could borrow are being spent in Iraq. Who’s going to risk distracting the army’s attention from that over a minor satellite state?

It’s time to take profits on Russia

As for investors – well, Russia’s got what it needed from them. It doesn’t have to indulge them anymore. And that means that investors can no longer ignore political risk in the country. If I was you, I’d take any Russian profits you’ve made off the table. The time will come to get back in, but it’s not now.

“We didn’t need this,” one Russian fund manager reportedly said at the weekend. “It’s not going to break the Russian economy, but war is bad for investor sentiment.”

No kidding.

UK shares picked up a further 1% with the FTSE 100 index gaining 53 points to 5,542. House builders were in demand, with Barratt Developments jumping 24% after Polaris Capital increased its stake to 6.2%, Bellway climbing 7%, Bovis 10%, Persimmon 11% and Taylor Wimpey 14%. But miners dropped again, with ENRC losing 6% despite Kazakhyms (down 1%), raising its stake to 25%. Rio Tinto shed 2% and Ferrexpo 6%. In contrast, ITV gained 6% on bid hopes while Wolseley rallied another 13% on disposal hopes. For a full market report, see:
Shares in Europe were better again, as the German Xetra Dax advanced 0.7% to 6,610 and the French CAC 40 added 1% to 4,538.

US stocks continued to improve, with the Dow Jones Industrial Average gaining 48 points, or 0.4%, to 11,782, while the wider S&P 500 added 0.7% to 1,305, its first close above 1,300 since late June. The tech-heavy Nasdaq Composite gained 1.1% to 2,440.

Overnight, the Japanese market slid 127 points, 1%, to 13,304. But in Hong Kong, the Hang Seng tacked on 39 points, 0.2%, to 21,899.

This morning, commodity prices were weaker with Brent spot trading at $111, spot gold at $808, silver at $14.24 and platinum at $1,488.

In the forex markets this morning, sterling was trading against the US dollar at 1.9015 and against the euro at 1.2776. The dollar was trading at 0.6720 against the euro and 109.86 against the Japanese yen.

This morning the latest RICS report showed UK house prices falling again in July as the credit squeeze brought the property market to a “virtual standstill, with first time buyers rapidly becoming an endangered species”.

Knowledge: The New Power in Retail

2007-05-02T06:49:00.000-07:00

Knowledge: The New Power in Retail
by Glynn Davis

Everybody knows that knowledge is power so it seems strange that many
retailers seem to have little insight into their customers. But their
interest is growing as they increasingly recognise customer intelligence is
now a key factor in differentiating winners from the losers in the retail
sector. An example of how important it has become (in all parts of the
business world) is the recent Business Week 'Best Performers 2007' survey.
This concluded that the key distinguishing factor of many companies in the
top 50 was a deep understanding of their customers.

This gave them the competitive advantage to sell more goods and services
than their rivals. And nobody would argue that the likes of Google, Goldman
Sachs and Amazon, which finished high in the list, are exemplars in using
customer knowledge to drive sales.

Nowhere is the increased desire for customer insight more evident than in
the ultra-competitive food retailing sector. So much so in fact that even
the mighty Wal-Mart is in the midst of jumping onboard.

As the creator of the long-standing Every Day Low Prices
(EDLP) strategy (that was pretty much adopted by all retailers around the
globe in recent years) it believed that all it needed to attract customers
was low prices.
But it now realises this view was wrong and that its myopic focus has
limited its business development. For a company not keen on showing any
signs of weakness it was pretty open in admitting that it had to become more
customer-focused: "Broad stroke 'Always Low Prices' has not allowed us to
develop some of the businesses to their full potential, because that doesn't
resonate with the customers."

Nowhere has Wal-Mart seen greater proof of how customer intelligence can add
significant value to a retail business than with Tesco. For some years the
Wal-Mart owned Asda has been losing ground to Tesco in the UK as it
increasingly capitalises on its extensive customer knowledge to drive sales
harder and move into new categories.

It's fair to say that Tesco's insight into its customers is regarded as
second to none in the retail world. And what makes this possible is
marketing data specialist Dunnhumby (of which Tesco owns 83%). So successful
is it that the company has also sold its services to Kroger a US-based
supermarket and general store business that operates over 2,500 outlets that
trade under a variety of fascias including Fred Meyer, Kroger and Dillons
and also to leading French supermarket operator Groupe Casino.

It has helped Kroger to stage a recovery against Wal-Mart after a long
period of losing ground. Unsurprisingly, its smaller scale meant it was
unable to fight on an equal footing with Wal-Mart using an EDLP strategy. It
has been using Dunnhumby's expertise with customer data to segment
- or tailor - its stores to their specific local markets.

The Kroger chairman and chief executive David Dillon has described the data
company as his secret weapon in fighting Wal-Mart: "Dunnhumby has helped me
reset my understanding of what the customer is after, and it helps replace
intuition with actual data and actual facts. And it's those facts that are
driving our decision making."

Dunnhumby analyses the sales data from stores to enable it to construct
complex marketing strategies and promotional campaigns. This essential
information on actual buying behaviour has guided most of the key decisions
taken by the management team at Tesco in recent years (such as the launches
of both Tesco.com and its financial services arm, and its entry into
non-food categories such as clothing). It will increasingly have the same
effect on Kroger and will likely do the same for Casino in the future (the
link-up was only announced in October 2006).

What makes is possible to enjoy such customer insight from the data analysis
at these retailers are their loyalty schemes through which they are able to
collect personal details on their customers and to link this with the
purchases that they make in-store. Such loyalty schemes have not been
regarded as particularly good ideas to date and Tesco has received much
criticism about its loyalty programme since its launch in 1995. They were
just seen as a cost on a business since they would reduce margin as
customers collected points to redeem against goods or money off their
shopping bills. David Sainsbury infamously dismissed it as "no better than
electronic Green Shield stamps".

But he was to eat his words many times over because since the first customer
signed up to the scheme it has provided much of the fuel that has powered
Tesco to the top of the UK retailing tree. It is no coincidence that since
Tesco launched the scheme it has overtaken Sainsbury's to become, by a long
way, the UK's largest retailer.

Within only a few months its impact was obvious. Research showed that
customers spent 28% more at Tesco while cutting their spending at
Sainsbury's by 16%. This had a major effect on the market shares of the two
companies with Sainsbury's having a 19.4% share in January 1995 compared
with Tesco on 18.1% but by May of that year the former's share had slipped
to 18.8% while the latter had grabbed a 19.4% share. This trend has
continued to this day and Tesco now commands a 31.3% share against the 16.5%
of Sainsbury's.

From day one Tesco knew that the scheme would provide a whole lot more than
simply allowing people to collect loyalty points to reduce their shopping
bill. In fact this was never the point of the exercise because the
point-accrual mechanism was simply the carrot to customers that would get
them to dig out their loyalty cards whenever they visited a Tesco store,
thereby enabling Tesco to collect data on them.

But as other retailers launched their own loyalty programmes they soon
recognised that collecting data is one thing but making sense of it and
transforming it into customer intelligence is a completely different matter.

It was an inability to overcome this problem that prompted Sainsbury's (yes
it did ultimately launch a loyalty card despite David Sainsbury), Safeway,
Somerfield, Asda and Waitrose to abandon their schemes one-by-one.

Just consider that even when Clubcard had a mere five million cardholders,
during a three-month trial of the scheme, Tesco had to deal with 50 million
shopping trips that comprised 50 billion purchased items. What made the
analysis of this data mountain possible was the decision by Dunnhumby to
only analyse 10% of the data and then apply the findings back to the other
90%. It realised that even a 10% sample could give 90% accuracy whereas the
massively more complex and expensive task of analysing a much larger
percentage of data might only deliver 95% certainty so it came to the
conclusion that crunching any more than 10% of the numbers was simply not
worth the cost or effort.

So powerful were the findings from this trial period that the then Tesco
boss Ian MacLaurin said: "You know more about my customers in three months
than I know in 30 years." The belief at Tesco was that if Dunnhumby could
replicate the success from the trial across the whole business then there
was a chance that it could propel the company to become the UK's number one
food retailer - displacing Sainsbury's. Since this has come to pass
Dunnhumby has played a serious part in customer intelligence creeping up the
agenda of an increasing number of retailers. They have come to realise that
without sufficient knowledge of their customers'
behaviour and buying habits then they are doomed to failure.

A number of years ago I spoke with a former chief executive of Wal-Mart and
asked him whether the company - and its UK arm Asda - would be likely to
introduce a loyalty scheme to learn more about its customers and he gave a
categorical 'no'. Although he was right and neither company has launched
such a scheme this is not to say that they won't in the future. Especially
as Wal-Mart will soon find itself competing directly with Tesco on US soil
as the UK supermarket will shortly be opening a chain of 'Fresh & Easy'
shops on the West Coast.

Ominously for Wal-Mart, the Tesco boss Sir Terry Leahy recently stated that
the company intended to roll out its Clubcard scheme to each of the
countries in which it operates thereby throwing up the scenario where
Wal-Mart could be facing the might of Tesco's customer insight on its own
doorstep.

But even if Wal-Mart resists committing to a scheme there is little doubt
that it is increasingly looking to learn more about its customers having
recognised that price in no longer the be-all-and-end-all for consumers.

To this end last year it appointed a new head of marketing who had
previously spent 19 years at Target - which is recognised as very proficient
in targeting segments of customers through focused marketing made possible
by customer insight. Target has proved itself particularly adept at
extracting more money out of its customers by targeting them more
effectively through knowledge of their behaviour, thereby achieving higher
profits out of its existing stores. Target's business is regarded as the
'upmarket discounter' in the US.

Wal-Mart is now attempting to follow the same path. Its new marketing man
has set up a market research and consumer insights competency that is
intended to help the company adopt a marketing approach that focuses on
specific categories. This will help it to introduce new categories and
better tailor the mix of goods in each of its stores so they are better
suited to their location and customer bases.

There is evidence that retailers are using various methods to boost their
customer knowledge without necessarily running their own loyalty scheme. The
multi- retailer loyalty programme Nectar is one example of how retailers
have been able to increase their customer knowledge without running their
own scheme. In the UK Nectar has signed up some serious retail names
including Sainsbury's, Debenhams and Dollond & Aitchison but although it
provides the mechanism for cardholders to collect and redeem points it is
nowhere near as effective at providing customer insight as Dunnhumby is for
Tesco and Kroger.

To address the increasing demand for such insight Nectar is now working on
creating a data analytics division (a la Dunnhumby) that will enable it to
make much better sense of the mass of data that it collects each day on
behalf of its retail clients. Tesco has successfully used market
intelligence to steal a march on its competitors who are now belatedly
waking up to its potential.

Regards,

Glynn Davis
For the Daily Reckoning

We open the papers this morning and find the same two- headed schizophrenia
we have been watching for so many, many months.

One head proudly announces that not only is everything doing well - it is
doing better than ever in history. The Dow hit a new record yesterday. The
funds are flush with cash. Takeovers...Mergers and Acquisitions...new
IPOs...are all headline news. Rupert Murdoch is bidding for Dow Jones,
Microsoft is working on a major purchase.
Money...money...money! Deals...deals...deals..!

It is glorious to get rich...as Deng Tsaio Ping put it.
And many people, all over the world, think they are bound for glory.

Meanwhile, the other head hangs down in despair. "Actual underlying
conditions of the world economy continue to deteriorate," it mumbles.

Larry Fink, CEO of Black Rock, a trillion-dollar fund management company,
spoke out last week and said that all these mergers and acquisitions were
going to cause "tomorrow's problems." Why? Because they are all funded with
debt. And lending standards for big, commercial deals have gone the same
way as the lending standards for people buying trailers.

"Standards have deteriorated to a level that we never even dreamed we would
see," said Fink.

Almost on the very same day, the Bank of England said almost the same thing.
Loose credit standards have "increased the vulnerability of the [global
financial] system."

The Boston Globe helpfully provides
more detail:

"Private equity firms are raising gigantic new funds, which in turn are
buying companies on an unprecedented scale. The targets are bigger than
ever, and the deals are gushing at fire-hose volume. But that isn't just a
function of all the billions raised from limited partner investors. Borrowed
money is the real fuel driving an overheated market.

"I think of this as a debt bubble, not a private equity bubble," says Kevin
Landry, chief executive of the Boston private equity firm, TA Associates.

"Debt markets that finance private equity transactions have changed in three
important ways. They are charging lower interest rates, reducing the premium
normally charged for greater risk. They are lending more money for the
purchase of an operating company, exceeding normal caps based on the cash
generated by the acquired business. Finally, debt markets are reducing or
virtually eliminating covenants and other rules that now make it almost
impossible for private equity investors to default on loans used to buy
companies.

"Got that? Low rates, more leverage, practically no conditions. How do you
think that story is going to end?
"The reality is the markets are willing to provide extraordinary amounts of
debt, almost indiscriminately,"
says Scott Sperling, co-president of Thomas H. Lee Partners, the big Boston
private equity firm. "It's hard to put these companies into default. I can't
think of the last time we had a real covenant in one of our deals."
In the financial deal business, it is still like the middle of the property
boom, when householders practically couldn't default, because lenders
wouldn't let them. As soon as they got into trouble, the lenders would give
them more money.

Landry explained that in a deal his company made recently, he didn't even
have to make the scheduled payments. If he ran into trouble he could make a
"toggle payment," or "payment in kind," essentially borrowing more to make
the regularly scheduled loan payment.
"How do you default?" asks Landry. "You used to say,
'Can I pay down enough of this debt so if a recession
hits I can get through it?' Now it doesn't matter even if a recession hits
next week."

"Investors stretching for yield are making all kinds of markets do strange
things. Look at the sub-prime mortgage market to see how that practice can
end badly. Private equity's debt bubble could become another story with a
very ugly ending."

The bubble in sub-prime lending ended when the value of its collateral -
housing - stopped rising in price. The bubble in Private Equity financing
will pop too when its collateral - ultimately, the stock market - ceases to
go up.

Then, over-stretched lenders will go broke. A few high- profile hustlers,
prosecuted for financial hanky-panky, will go to jail. And, like soldiers
tripping over the bodies of their dead comrades, the survivors will have to
find some other route to glory.

More news:

*************************

Rob Mackrill pondering some very big numbers:

Accountability. Integrity. Reliability.

- These three words grace the web pages at the US Government Accountability
Office (GAO), formerly the General Accounting Office. They might strike some
of a cynical disposition as a tad ironic, not for the organisation itself,
but for the charges over which they must cast their analytic eye.

- The GAO changed its name almost three years ago. It wanted to clarify
things for the benefit of dim job hunters and journalists, that they weren't
just a bunch of nerdy bean counters poring over the government's books.

- These days they do so much more they say. But when all's said and done, it
remains by its own admission the lead auditor to the US government's
consolidated financial statements.

- If you feel your eyes glazing over at this point, you're not alone but
bear with me. The GAO is not the sex and violence of government. It's the
chronicler of the consequences of sex and violence...or as an old saying
would have it 'an auditor is someone who goes onto the battlefield after the
battle has been fought and shoots the survivors'. Whatever your definition
its recent report makes for some eye-popping reading.

- In February bean-counter in chief, Comptroller General David M. Walker,
amongst other representations, wrote a letter to Congress. We've got a
problem he tells them and we need to change our ways was the general
gist...oh, and by the way, I have prepared a little report that's easy to
read - even for those not good with numbers - and is near enough guaranteed
to ruin your day.

- The title of his report gives us a clue as to its nature:
Fiscal Stewardship: A Critical Challenge Facing Our Nation.

- Here we offer up a few choice excerpts from Mr Walker's assessment:

"We are failing to properly discharge one of our biggest stewardship
responsibilities to our children, grandchildren, and generations of unborn
Americans: fiscal responsibility.

"The federal government's financial condition and fiscal outlook are worse
than many may understand...in fiscal 2006...its costs exceeded its revenues
by $450bn...

"As at 30 September 2006, the US government reported that it owed more than
it owned by almost $9trn.

"In addition, the present value of the federal government's major reported
long-term 'fiscal exposures'
- liabilities (eg debt)... contingencies (eg insurance), and social
insurance and other commitments and promises (eg Social Security, Medicare)
- rose from $20trn to about $50trn in the last six years.

"GAO is responsible for auditing the financial statements included in the
Financial Report [prepared by the US Treasury], but we have been unable to
express an opinion on them for the 10th year in a row because the federal
government could not demonstrate the reliability of significant portions of
the financial statements...

- Not signed off for 10 years on the trot. Wow! Sounds bad, like the US is
just some giant Ponzi scheme waiting to tumble, but then the EU accounts top
that achievement.
They have not been signed off for 11 years. Reasons for which is now
engaging the attentions of a House of Lords Sub-Committee on Economic
Affairs.

- Maybe a nation's, or block of nations', accounts are just too complicated,
convoluted and twisted for even the boldest to dare putting a signature to?
We don't know, but certainly wouldn't relish the task.

- But wait there's more, how about those Social Security and Medicare
promises?

"...one would need approximately $39trn invested today to deliver on the
currently promised benefits for the next
75 years."

- Okay so Uncle Sam is rich. At $13trn it accounts for over a quarter of
global GDP, but even this vast wealth looks pretty puny against the job in
hand. Living beyond your means is ruinous whatever the scale. Time to wheel
out Dickens's timeless advice courtesy of Mr Micawber:

"Annual income twenty pounds, annual expenditure nineteen pounds, nineteen
shillings and sixpence, result happiness. Annual income twenty pounds,
annual expenditure twenty pounds and sixpence, result misery."

- So if the US is looking at misery what's the GAO got in mind? Well its
bitter medicine. To sort out the mess would require either spending cuts or
tax increases equal to 8% of the entire economy for the next 75 years.

- Try selling that to an electorate Messrs Guiliani, McCain, Clinton, Obama!
A critical challenge indeed...

For interested readers the full report can be found via this link:

http://www.gao.gov/fiscalstewardship.html

*** There may be considerable anxiety about the rise of China in many parts
of the world, not least the US, but a note from a reader tells us
Nostradamus - as ever - was on the case and provided a forecast long ago as
to who should be most worried.

'The Complete Prophecies of Nostradamus' by Henry C.
Roberts reportedly predicts that by the year 2025, by ritual, China, having
completed her industrial and economic expansions, will absorb almost the
whole of Northern Russia and Scandinavia.

So now you know...in advance.

*************************

And more views from Bill:

*** How time flies! It is already May...the 5th month of the 7th year of the
21st century. Who'd have thought?

We remember back in the 1950s...we wondered what it would be like in the
year 2,000. Flying cars...regular commutes to the moon...we imagined all
sorts of things that turned out to be farther in the future than we had
thought.

What really changed in the last half century?

Cars...airplanes...skyscrapers...golf...hamburgers...
TV...air-conditioning...antibiotics...nuclear bombs - all the big things
that shaped our lives had already been invented. What has been invented
since then?
Hmmm...the Internet?

We can't think of anything else.

Of course, the Internet is changing the world. It is part of the reason real
estate prices are going up faster in desirable resort locations than
elsewhere - so many more people can live in these places and still continue
working. It is also changing the way we get information and ideas...never
before have so many people had such ready access to so many bad ideas.

In today's headline news is a report from New York, where Rupert Murdoch has
just offered to buy Dow Jones. He's offered a 65% premium over yesterday's
share price. Major shareholders are said to be considering it.

Elsewhere is news that the New York Times has sold its flagship building in
Manhattan to a diamond merchant.

And everywhere traditional news media, in which the lies are printed on the
pulp of trees, is giving way to the new news media, in which the drivel
comes to you electronically.

Through no fault of our own, we have occasionally been the victim of news
stories, in which the 'news' differed dramatically from what we knew to be
true - often to such a degree that the reader would come away with the exact
opposite of the truth. But what would you expect? The fourth estate is no
less self-interested than the other three. And it is dominated by a class of
people who are particularly dull-witted and lazy. Generally, they have 'the
story-line' already in mind - because it has been written hundreds of times
already - before they ever take a single note or look at a single fact.

"But it's really gotten a lot worse in the last few years," explained a
journalist friend. "The newspapers used to spend a lot of money on
investigative journalism...to come up with facts that would keep readers
interested. But now, they don't want to spend any money on research or
investigating. They don't even want the facts, because they might interfere
with the story- line. They spend all their money hiring pundits..."

*** Our old friend Ron Paul is running for President.
Poor Ron. He is much too honest and thoughtful for a career in politics. We
are sure the press will trip over itself in its rush to ignore him. He will
get in the way of their story line.

*** Meanwhile, in London, global warming seems to having a delightful
effect. The trees are green. The wisteria is blooming a month early. The sun
is out all day long. It
is not spring at all; it more like midsummer.

The ocean is so warm, icebergs are melting faster than ever. Dry areas seem
to be getting drier.

Is Global Warming real? We don't know... all we know is that it seems
unusually warm and pleasant here in Europe.

"Winters have been milder than they used to be," said a couple from Nova
Scotia, with whom we lunched on Monday.
We were in Paris. The flowers were out. The smell of blooming things was in
the air. The sidewalks were crowded with tables. People were out...
walking...
sitting... sunning themselves in the parks.

*** And last night, we almost had a chance to sample urban poverty for
ourselves, when we had a brief brush with the life of the homeless.
Economists and investors should always remember to eat at regular intervals.

Otherwise, their blood sugar level is likely to drop to such dangerous
levels that they will do something stupid.
So it was, that upon entering our hotel, we got into an argument with the
desk clerk and at midnight proudly marched out of the hotel in 'high
dudgeon,' as they say...only to find ourselves with nowhere to stay.

We wandered the streets of South London for a while, wondering about the
life of the homeless. How did they support themselves? Where did they eat?
What did they do all day? They were beginning to bed down. A group of young
bums spread out filthy sleeping bags under a bridge An old man lay down on a
piece of cardboard in a doorway, covering himself with newspaper. A mental
defective sat in a dark corner, asleep, but still holding a cup and a
sign: Please Help.

We considered the choices. We could lie down with the young whelps under the
bridge. Or we could grab a piece of cardboard from a dumpster and join the
old dog in the doorway. Or, we could just sit in a corner until daybreak...
perhaps muttering to ourselves in order to look like we belonged there.

Instead, we checked into the Hilton...
The Daily Reckoning PRESENTS: Glynn Davis identifies the secret edge that
helped transform the British supermarket group Tesco, from high street dog
to retail superstar...

Tasty Morsels of Deficit Spending

2007-04-11T09:24:00.000-07:00

Behavioural finance and investment decisions

By Bill Bonner

"The bulk of the money in this world is managed in a cover-your-ass
fashion."

Thus speaks a modern day Zarathustra; a prophet of the school of
'behavioural finance,' Mr Whitney Tilson, fund manager, founder of T2
Partners, and Financial Times columnist.

As an investment theory, behavioural finance turns out to be a full-dress
version of the familiar truism about the fool-and-his-money. What worries
the behaviourists is the way investors make mistakes by following their
impulses...with nary a sign of rational profit- maximizing. If only the poor
suckers would stick with sober investment analysis, complain the
behaviourists, drumming their fingers in a nervous, academic sort of way.

Think about it. Here, an investor holds a stock too long. There, another
buys a fund simply because everyone else is buying it. A third bumbler
investigates so much he gets 'married' to his picks, having put so much time
and effort into them.

We might feel sorry for the poor fools for we realize that we make all those
'mistakes' ourselves...only, we wonder if they really are mistakes.

You see, the problem with the behavioural finance chaps is that they don't
go far enough. They pretend to analyze what people do, and then compare it
to what some fictional, non-existent investor 'ought' to do. So, today, we
ask the question, why should he?

If we investors do not really invest the way a theory says we should, where
is the fault? Where is the error?
In ourselves or in the theory? Why, after all, should investors behave in
any other way than the one they are accustomed to?

The behaviourist professors assume that man is essentially a rational,
profit-maximizing creature who simply makes 'mistakes.' But these 'mistakes'
are no mistakes. If an investor does not invest the way the professors think
he should, it is because he is not the animal they think he is. In other
words, we investors do not invest merely to make money.

If our only goal were to make money, we would go into pornography, illegal
drugs or even worse, hedge funds!
Yes, if men were only money-makers, we would go door-to- door in trailer
parks, offering zero-down, no-interest, negative amortization loans on new
houses. And we'd give a discount for buying two of them. Where we met
resistance, we'd throw in a subscription to one of those nifty Internet porn
sites for free with every purchase.
And maybe some crack cocaine too, just to ease the settlement.

But the 'lumpeninvestor' does not have only money-making as his goal. Making
money is merely a part of a whole complex of desires and prejudices that
drives him to his much-deserved fate. The lump wants not only to make money,
you see, but also to feel both wise and hip, both daring and cautious. He is
certainly willing to try contrarian investments, only so long as everyone
else is too!

And that is why in the hard world of investing, the lumps are losers. For,
in investing, what tends to go up are just those things that have gone down.
But, buying down-and-out investments is not what the average investor wants
to do. Why? Because it makes him feel marginalized, odd, in danger. It makes
him feel like an outsider when he wants to feel anything but, and would as
soon forego his profits to pay for that privilege. In fact, the lump tosses
and turns at night, unless he is firmly and squarely bedded down in the
middle of the vast herd of other slumbering fools.

The lumps may not maximize their investment returns...but they judge being
able to sleep well worth the cost.

Other investors don't care so much about making the right decision as they
do about avoiding the wrong one.
Such men fear losses less than laughter. They dread most of all being in a
position where anyone - especially their wives - might point a finger and
call them a jackass. To tell the truth, they would rather actually be a
jackass, financially speaking, than be accused of being one by an ignoramus.
And, what do you do to avoid your wife's criticism? Why, you do exactly what
Citibank or Lehman Bros does. Or what the Federal Reserve Bank tells you to
- even if it means taking out an adjustable rate housing payment.

Yet another lot of investors exhibit a loyalty we can only admire. They
stick with an investment sector - or even an individual company - through
thick or thin, rich or poor, success or failure...until death do them part.
And death often does. Others tend more to be bad boyfriends, dropping their
poor girls as soon as another bit of skirt wiggles in front of them.

But, of course, if you believe the behaviourist geeks, the cads are only
being rational, profit-maximizers. Not a whisper of spring fever in the
blood at all.

But if investment decisions really were such cold- blooded, binary choices -
one clearly right, the other clearly wrong - computer programs might make
them for us just as well. Only, computers don't get to read tomorrow's
headlines any sooner than we do and even a silicon chip can't tell which
investments intend to go up or down.

Which means that the whole idea of a rational profit- maximizer - a perfect
investor who doesn't make mistakes
- is so lacking in any connection to reality, we can safely classify it as a
bloodless intellectual fraud.

That is why our ingenuous and irrational investor is right, after all.
Knowing that the success or failure of his investments - money-wise - is
mostly beyond him, he goes for the non-monetary rewards - bragging rights,
sound sleep, social cache, derriere-covering, wife-
pleasing...skirt-chasing.

He may be a fool to finance professors. But, in the real world, he is a man.

Bill Bonner, August 23rd 2006

The Daily Reckoning Brings you: Tasty Morsels of Deficit Spending

by The Mogambo Guru

"And this pathetic performance occurs despite the fact that the government
has been buying huge, huge, HUGE amounts of war materiel from the 'defense
industry' and running up enormous, enormous, ENORMOUS deficits to pay for
it!"

Money must be getting tight, as Total Fed Credit is up only $1 billion from
last week, foreign central banks are cutting back on their gluttony (adding
only $4 billion to their holdings at the Fed), and now I am forced to make
the painful choice between paying for the kids' damned dental problems or
getting that expensive new driver that is GUARANTEED to give me another 15
yards off the tee, curing my accursed fade-away slice problems forever. And
this will (in the final analysis) make me a whole lot happier, and will last
a hell of a lot longer than anything that stupid dentist does, too.
("See you again in six months, suckers!")

But it is neither golf nor dentistry that disturbs my already restless
slumber; it is inflation that makes me wake up screaming in the night, with
a spasmatic trigger-finger, and my loud, irritating voice issuing both wails
of fear and sulfurous curses to add to the incessant Mogambo Inflation Alert
System (MIAS) buzzer - which indicates that monetary inflation is raging,
raging, raging around the globe, as all the central banks are busily,
busily, busily creating money and credit at monstrously high rates of
issuance, averaging (as I understand it) about 14% a year. That means that
inflation in prices will continue to get worse and worse
- as will my aforementioned sleeping and trigger-finger problems.

And surely things are going to get heated up pretty soon thanks to inflation
- especially when the middle class starts whining; Congress really comes
alive then. And speaking of that, we have Ty Andross of TraderView.com
newsletter reporting that "the broad middle class has not shared in the
wealth of this expansion except for the bubblicious appreciation of their
home values."

He adds, picturesquely, that they were "robbed at night while their money
was sitting in the bank and the Treasury's printing presses churned out
dollars and credit by the trillions", which made every dollar of that
appreciation in the house worth less! And then the homeowner had to pay
higher property taxes and insurance premiums on the now-expensive house!
Hahaha! I'll bet THAT is not in the stupid little econometric models the
stupid Federal Reserve uses! Hahahaha! What dorks!

And all that price inflation was spawned by the Federal Reserve, since it
created the money and credit to finance a stock market boom, and a bond
market boom, and a derivatives boom, and a financial-services industry boom,
and then a housing boom. All now busted, to one degree or another.

And while the inflation "problems" of the stock and bond markets is one
thing to be officially ignored, the inflation in the effective prices of
houses (taxes, mortgage and insurance) and the subprime mortgages that
spawned it, now has the idiotic Congress frantically looking into it (at
long last), now that the bust is here and it's too late to prevent the boom
that caused the ensuing bust that they are so bent out of shape about.

And why will the government try and bail out these homeowners and investors
who are looking at huge losses in a housing bust? Taxes, I figure! Same as
always!
Congress is surely aghast at the prospect of trillions of dollars of losses
being deducted on tax returns next year, and for years to come, too.

I mean, next year the federal budget balloons to a whopping $2.9 trillion,
up from $2.7 trillion this year, and so the LAST thing they need is less tax
revenue coming in!

But feigned ignorance and subsequently being aghast at the results also
comes naturally to the Federal Reserve, which has an annoying habit of
ignoring (and lying
about) inflation in prices, especially the kind of willful ignorance about
the results of creating inflation in money and credit, as perfectly
illustrated by the essay "Inflation and the Ironic Productivity Tax"
by Richard Benson of Benson's Economic & Market Trends newsletter.

He writes, "It dawned on me that the one thing the government never reports
on is that the dollar in my pocket will buy me more next year. Indeed, my
dollar should buy more because of the relentless increases in productivity,
and I should in reality be better off if I saved money, rather than spend
it."

I leap to my feet and shout, "Bravo! Well said! An increasing standard of
living is the whole promise of productivity!"

Ignoring me completely, he goes on to say, "But, in my lifetime, my world
has only known inflation, so buying goods today that I will need tomorrow,
and stashing them away, has proved to be a better investment than saving
cash in the bank. As a consumer, when I think about the escalating cost of
food today, I realize I really didn't benefit at all from all those
productivity gains!"

So where did the benefits of productivity increases go?
He explains, "With inflation, the government has basically stolen/taxed my
share of productivity away."

He dryly and sarcastically notes, "It's ironic that the best and brightest
at the BLS are employed to figure out how to use fancy statistics to rob
their grandparents of their social security increases". After which, he goes
on to calculate, "If money and credit growth were restrained, I estimate the
dollar could purchase about two percent more each year, and we would be
living in a saver's paradise." And a spender's paradise too, as prices would
go down each year!

He calculates that productivity, as measured by the Consumer Price Index,
deliberately understates inflation, and "Taking productivity out of the
Price Index means that when the CPI shows three percent, in reality it's
more like five percent." 5% inflation! Yow!

We glean a little macroeconomic forecasting lesson when he says, "So, when
looking forward, it is important to remember that whenever productivity
slows down, inflation will suddenly pick up", which I take to mean that if
productivity drops, you should immediately short bonds! Hahaha! This
investing stuff is so easy!

"Now that I clearly understand how this productivity tax works," Mr. Benson
goes on to say, "I am less inclined to buy inflation-indexed bonds and more
inclined to buy gold and silver. I believe precious metals are more likely
to track the real inflation numbers."

"And why is this?" you ask with that cute little innocent, quizzical look on
your adorable, trusting face. Instantly I am on my feet to deliver a
stirring and powerful condemnation of the Federal Reserve for creating all
that money and credit, gradually working the crowd into an absolute
blood-frenzy, see, ending with me being declared King Mogambo by cheering
throngs of adoring people ready to obey my every command, and given
unlimited powers of retribution and vengeance! I cruelly sneer as I laugh
the hollow laugh of the damned, "Hahaha! Let the games begin!"

However, I was not prepared for Mr. Benson apparently being so appalled at
the prospect of a King Mogambo, and he quickly preempted my plan for a
speech leading to world domination by pithily summing it up by saying, "The
U.S. is inflating like crazy, and it's only going to get worse."

Already angry at being thwarted in my attempt to deliver the Speech Of A
Lifetime (SOAL) that would have lead to my being crowned King, the news that
inflation is "only going to get worse" makes me angrier and angrier, until I
race home to fire off flaming emails and faxes to my Congresspersons ("Dear
Butthead, I hate you for allowing the Federal Reserve to create all that
money and
credit!") and the Federal Reserve ("Dear Buttheads, I hate you, too!").

But while stocks, bonds and houses may not be going up in price (and may be
going down in price!), the kinds of things you and I have to buy to satisfy
our insatiable wants and needs for tasty morsels and various kinds of fun,
ARE going up in price...every one of them! That is the horror of it all!

And speaking of raging price inflation, Doug Noland of the Credit Bubble
Bulletin says that last week "M2
(narrow) 'money' rose $9.1bn to a record $7.164 tn (week of 3/19). Copper
gained 2.5%. May crude surged $3.59 to $65.87. May Gasoline jumped 5.7% and
May Natural Gas 4.4%. For the week, the CRB index gained 1.9% (up 3.1%
y-t-d), and the Goldman Sachs Commodities Index (GSCI) surged 4.2% (up 7.9%
y-t-d)."

And now Bloomberg.com reports that we have entered a portal to what I think
may be characterized as the Worst Of All Worlds (WOAW): The economy is going
down and prices are going up. More specifically, "Manufacturing growth in
the U.S. slowed more than forecast last month"
as "The Institute for Supply Management said its factory index fell to 50.9,
from 52.3 in February."

And what's worse, "raw-materials costs jumped, reinforcing concerns that a
cooling economy isn't reducing inflation" as "A sub-index of prices rose the
most in seven months."

But worst of all, "measures of employment and new orders declined."

All of this is provided as more proof of the eerie accuracy of the economic
indicators, like the leading indicator has been right in forecasting future
economic activity, in that it has been going nowhere for quite a while and
thus has been predicting today's lower economic activity.

Specifically, we now find that in February, durable goods orders fell by
0.1% when you exclude aircraft orders - which was huge - but including
aircraft, durable goods orders, it would have risen by 2.5%!
Making an economy out of airplanes! Hahaha!

And this pathetic performance occurs despite the fact that the government
has been buying huge, huge, HUGE amounts of war materiel from the "defense
industry" and running up enormous, enormous, ENORMOUS deficits to pay for
it!

How much defense industry spending? Well, Mark Skousen of Forecasts and
Strategies newsletter says, "the U.S.
government's share of GDP spent on defense has gone from 3% to 3.7% since
September 11, 2001", adding, "while other nations collectively have declined
from 2% to 1%."

Well, as uncannily correct as the leading economic indicator has been in
forecasting this slowdown, the lagging economic indicator (which can be
characterized as measuring burdens and future inflation) has been on a
relative tear, and has been absolutely prescient in predicting the inflation
that we are seeing.

And the coincident indicator has always been right about current conditions
all along, too. It looks like three out of three!

On the site bbj.hu, which apparently got the news from somebody else, there
was the headline "Central Bank gold holdings fall to lowest since 1948" and,
"Gold holdings by central banks and other government organizations declined
for the eighth straight year in 2006, to the lowest in almost 60 years,
figures from the International Monetary Fund show. Bullion holdings were
867.6 million ounces last year, down 1.2% from 2005."

So where is all of this gold? Well, it turns out, "Of the 4.98 billion
ounces of gold in inventories at the end of 2005, 52% was in the form of
jewelry, 18% was in central bank vaults and 16% was investor owned."

As to why this may be important, we turn to the famous and handsome John
Embry of Sprott Asset Management, writing in the March 30 issue of
Investor's Digest under the title "The Time For Gold 'To Go Ballistic'
Approaches". He starts off by explaining, "In reality, it isn't the price of
gold that changes, but the value of the paper currency in which it is
denominated. I have made the case many times that paper money is being
seriously debased, and I think my position is strongly supported by the
recent spate of money-supply growth numbers that have emerged from around
the world."

He then ticks off the annualized growth of some broad money supplies, namely
Eurozone M3 up 9.0%, UK M4 up 13%, China M2 up 15.9%, South Korea up 10.6%,
Australia
M3 up 13%, United States M3 up 10%, Russia M2 up a staggering 48%.

And if you are wondering how the dollar is faring right now, after this kind
of debasement, Yahoo.Reuters.com reports, "The dollar fell around 3 percent
against a basket of major currencies in the final quarter of 2006." This is
a huge move! Huge!

I know what you are thinking: "That Mogambo Idiot (TMI) has gotten off the
subject again, which was supposed to be about the world's gold. And so why
in the hell is he is yammering about money supplies? Who needs this crap?
Screw this! What's on TV? We got any beer left?"

If you were not so rude, impatient or thirsty, you would have soon learned
that Mr. Embry feels, "we are very, very close to that key moment when there
could be insufficient central-bank gold to meet mounting demand.
As I have said before, that is when the gold is price is going to go
ballistic."

This assessment agrees perfectly with that of Richard Russell, of the Dow
Theory Letter, who says that he thinks "the dollar will die a slow, probably
a very slow death. It will be death by inflation. In other words, the dollar
will, over the years, lose an increasing amount of its purchasing power."

And as for gold, he says, "Another irony is this - essentially, holding gold
is a rich man's escape. The reason is that gold doesn't pay interest, and it
doesn't pay dividends. The rich man can hold a large amount of gold, and it
doesn't affect his life style. The poor man, the middle class man, can't
afford to hold a significant portion of his assets in gold. No, the average
American remains at the mercy of his government and the Fed. He's doomed to
see his savings (assuming he has any savings) taxed away or inflated away",
as will his increasingly meager earnings, I might add.

To tell you the truth, I disagree with the idea that only the rich can buy
gold. When I see the enormous amounts of money the middleclass and the poor
spend on pure trash every year, I say, "And you want me to believe that out
of all that money, they can't manage to buy a stinking half-ounce of gold a
year? Or some silver? Hahaha! Don't hand me that crap!"

I think that the important point is that gold is a "rich man's escape",
which, by definition, means that rich people will be buying gold to effect
their escape! And given the staggeringly huge amounts of money now in the
world (mostly owned by the rich!), versus the pitifully small amount of gold
in the world, this could be Really Big Time Stuff (RBTS) indeed, because 1.)
History has shown that rich people always take their money and rush to the
safety of gold at the inflationary ends of booms (like this one), 2.) Gold
is essentially (like all
markets) an auction market, and 3.) Rich people bidding against other rich
people for a finite supply of gold, with unimaginable amounts of money, is
the stuff of which auction history, and newspaper headlines, is made!

And the good news, the better news, the best possible news, is that gold is
still selling at only about $660 a lousy ounce! What a screaming bargain
when viewed against what is surely coming, just like it has always come!
Unbelievable! But, "Whee!"

To a suspicious little creep like me, I naturally connect Mr. Embry's point
that there may not be enough central-bank gold to satisfy demand, to Bill
Murphy of Le Metropole Café citing a Dow Jones report that "The
International Monetary Fund has proposed to increase transparency in the
gold market by publishing statistics that reveal the amount of gold loaned
and swapped into the market by central banks."

What? This surprises the hell out of me! Then I remember (and make some
rude, disparaging noises) that the IMF has mismanaged itself, which comes
mostly from the fact that no country needs to borrow any money from the IMF
these days, as the entire world has long since gone completely freaking
insane with creating all this excess money and credit in which the world is
currently sloshing greedily around.

Now, with the slowdown in the "bail-out-and-meddle-in-
your-sovereign-affairs" business, the IMF desperately needs more money with
which to overpay themselves and maintain their expensive little lifestyles,
empires and power, to which end they recently actually proposed to sell the
gold (their capital) that the United States loaned them to fund the damned
IMF in the first place!
What thieving arrogance!

Rebuffed, I guess, this proposed new disclosure rule by the IMF to reveal
the actual gold holdings of central banks is, I figure, just the usual slimy
blackmail.
"Give us more money, or we will tell what you did!"
(Which is sort of how I ended up getting married, but that's another ugly
story, which I don't want to get into because I will cry like a baby and get
all embarrassed. And then angry. Very angry. And nobody wants that!)

Exactly what the central banks did (but not how much) is hinted at by the
news that "Although they provide regular reports of their gold purchases and
sales, central banks don't currently reveal how much gold is loaned and
swapped."

But there are just too many tremors, and tremors in central bankers
everywhere, not to think about predicting earthquakes in the gold market,
and getting long gold.

And speaking of central bankers, from Bloomberg we read, "Federal Reserve
Chairman Ben S. Bernanke said monetary policy is still aimed at combating
inflation even though risks to economic growth are multiplying. 'Our policy
is still oriented towards control of inflation, which we consider to be at
this time to be the greater risk,' he told the Joint Economic Committee of
Congress in Washington."

Bernanke is reported to have said, with no hint of embarrassment,
"uncertainties have risen, and therefore a little more flexibility might be
desirable." The Mogambo is also reported to have said "Hahaha!" in snarling
disdain, and if you didn't read or hear about it, it obviously means that
this highly-illuminating Mogambo Editorial Comment (MEC) was censored by
government goons, which that proves they're all out to get me. And it also
proves that snooping government agents and spies are prowling around in my
bushes, probably right now, and thus I am fully justified in ruthlessly
hosing down the shrubbery with withering machinegun fire until I feel safe
again (or until I run out of bullets, whichever comes first).

Okay, well, maybe it doesn't actually mean all that, but it DOES mean that
the Fed wants to ignore inflation, although preventing inflation and
attendant boom/bust cycles is the reason that power over America's money was
given to the Fed in the first damned place! They obviously haven't done
their damned jobs - I mean, look at the record! They've failed miserably!
And now, they still don't want to do their damned job; they want "more
flexibility" to give us more of the same! This is insane! And yet Congress
does nothing! Nothing! I am incensed!

But wait! I may be too hasty! With a sudden, powerful insight, I realize
that I could use this unusual stalling technique to my own advantage: Since
my Annual Employee Evaluation is coming up soon, I evilly twirl my mustache
as I scheme to myself, "This 'more flexibility'
thing could come in very, very handy indeed!"

Goals not met? I cry out "I need more flexibility!"
Losses mounting? I wail, "I need more flexibility!"
Employees and customers in open revolt at my arrogance and incompetence?
With a tone of voice that speaks volumes about what I am going to do to my
boss's car if this Evaluation thing doesn't work out for me the way I want,
I say, through clenched teeth, "I need more flexibility!"

Another way of looking at it was provided by Bloomberg:
"Bernanke said the central bank last week dropped its stated tilt toward
higher borrowing costs because policy makers wanted more room to maneuver."
Thanks! Now I realize I need more room to maneuver, too! I need room to
maneuver! For God's sake, give me room to maneuver!

The message is clear; my boss now hates and fears me more than ever, and the
Fed is clearly signaling that lots of inflation is in our future, as it is
the price we must pay to bail out the blinding, incandescent incompetence of
the Federal Reserve under Alan Greenspan, who created the housing bubble,
which was created to bail out the busted stock market bubble, and the bond
market bubble, and the size-of-government bubble that he also created.
Grrrr!

And how bad is inflation in consumer prices? Bloomberg itself provides an
answer with "The Fed's preferred inflation benchmark, the personal
consumption expenditures price index, minus food and energy, has been at or
above the two percent comfort zone of at least six Fed officials for 34
months. The price measure rose 2.3 percent for the twelve months ending
January."

Three years! Three long, long years of inflation above zero, which is de
facto evidence of their incompetence, and even more so when you realize
that, in reality, even that unacceptable recent 2.3% measure of inflation
actually understates inflation by about four to seven huge percentage points
or so! Gaaaaah! We're freaking doomed!

Even worse, "An index of 18 industrial materials tracked by the JOC-ECRI
Index is up 2.5 percent year-to-date, and 12 percent over the past year. Oil
prices are climbing."

John Stepek, of MoneyMorning at Money Week.com, must have overheard us
talking about oil prices climbing, and says that in Britain, "The rising oil
price was one of the major factors driving official inflation figures higher
across the globe in the past few years. It's also served as a convenient
excuse for politicians to point to - 'rising inflation isn't our fault, we
can't do anything about the oil price' - as Tony Blair effectively said last
year."

He says that he was reading an interesting report from Donald Coxe of BMO
Financial Group, who says, "he's also not expecting the Fed to cut interest
rates. And the reason is that the world is very short on food, at a time
when demand has never been stronger."

As to what this means, he correctly notes that I am an American, I am
stupid, and thus, carefully tailors his answer with, "This means that U.S.
consumers are about to find that their burgers, their buns, their daily pint
of milk, and everything else they eat are going to tick up in price over the
coming year."

By this time I am actually gagging on Mogambo Vomit Of Fear (MVOF), and
since I was so preoccupied with making the crucial decision of whose lap I
was gonna barf in, I almost missed him saying, "The latest U.S. producer
price index data from February showed that food prices rose 6.8% on the
previous year. It's little wonder - data from the U.S. Department of
Agriculture suggests that the amount of coarse grains left over this year to
carry over to the next 'could be the lowest - in relation to consumption -
in decades.'" Gaaaaah! MVOF!

And this is at a time when there have been, "16 straight years of favourable
growing conditions in the Midwest - the world's leading producing region.
This is an historic winning streak."

So, to recap, we ended up with nothing in savings, at the end of remarkably
long booms in stock markets, bond markets, houses, size of governments, and
now even in commodities, too? Hahaha! I laugh in derision because, I mean,
isn't this supposedly an overwhelmingly Christian nation, and thus shouldn't
we, as a people, overwhelmingly know about the Biblical admonition to save
during the fat years in preparation for the cyclically-inevitable lean
years? Hahaha! We're religious idiots, too!

As further evidence of that, I point to the Economist magazine article about
Lynn Westmoreland, "a Republican from Georgia", who appeared on the Comedy
Channel's hit show, the Colbert Report, and who "co-sponsored a bill to have
the Ten Commandments displayed in the Capitol."
Mr. Colbert reportedly asked him to name the Ten Commandments. He could
name, in all, seven.

It is not just The Mogambo and a few of you other gold- bug, whack-job,
paranoid lunatics out there ("Hi, Lucy!"
"Go to hell, Mogambo!"), who are buying gold, as MoneyandMarkets.com
breathlessly reports, "Dubai's Gold Souk, an open-air market that contains
some 500 gold shops, is the largest retail gold market in the world.
An estimated 500 metric tonnes of gold, or nearly 18 million ounces, are
bought and sold each year. In the gold souks of Dubai, both the ultra-rich
and regular citizens are buying gold. I watched wealthy businessmen,
construction workers, and imams all snatching up the yellow metal."

And speaking of prices and gold, Junior Mogambo Ranger
(JMR) Richard D writes "I got this from Sinclair newsletter. 1941 prices.

Gallon of Milk $0.34

Loaf of Bread $0.08

New Auto $925.00

Gallon of Gas $0.15

New Home $6,954.00

Average Income $1,231.00 pa

Dow Jones 110

Gold $34.60"

I note with a certain satisfaction that, since 1941, gold has pretty much
held its own against the rest of the items on the list, which are all up
about 20 times (except milk - which is government-subsidized, so who knows -
and the Dow Jones, which is up by over 100 times
- which is now also government-subsidized by the Plunge Protection Team, so,
again, who knows.

So, is the stock market overpriced in relative comparison to everything
else, or is everything else under-priced in relation to stock prices? A lot
will depend on your answer, but it is bad news either way.
Ugh.

**** Mogambo sez: If GATA is right, and the gold market is being manipulated
with the collusion of the central banks (and I have absolutely no doubt that
it is, and would be stunned, absolutely stunned, to learn that it wasn't), I
again think of John Embry and his phrase, "the gold price is going to go
ballistic" when central banks can't meet demand.

My Mogambo Profit-Sensing Gland (MPSG) recognizes the screamingly obvious
profit that will come when this kind of manipulation ends (as it must), and
it squirts a jolt of "greed hormone" into my bloodstream. In response, I
look at my pitiful stash of gold and silver, and I compare that to how
freaking much wealth I want to have when the inevitable explosion in gold
finally happens, and I wonder "Do I have enough?" which is Polite And
Genteel Mogambo-Speak (PAGMS) for "Has my embarrassing, gluttonous greed and
unspeakable depths of avarice been satisfied with this pathetic little pile
of gold and silver?" Upon reflection, I find the answer is, of course, "no".

Then I wonder, "Should I get a job, to earn some money with which to buy
more gold and silver?" Again, upon reflection, the answer is, of course,
"no".

Then I wonder, "Should I make the wife and kids drop out of school, get
second jobs so that they can buy their own food and clothes (saving me a
bundle!), and maybe pay a little room and board around here (the little
worthless, parasite freeloaders!), and then use the money to buy more gold
and silver?" At last, I arrive at a solution I can live with. Even optimal,
in its own way!

So while I don't know how it works out for you, and you'll do what you do,
but whatever you do, you'll find that you are usually better off if you do
what you know you should do, as this gold and silver thing is "do it or it's
doo-doo!"

The End Of The World As We Know It

2007-03-29T22:41:00.001-07:00

"IT'S THE END OF THE WORLD AS WE KNOW IT"
by Doug Casey

.."And I feel fine."

That's not just the title of an R.E.M. song. It's how today's gold and
silver investors feel every time they get a reminder from a newspaper or
news program.

They see what you see, and anyone paying even a little attention can't help
but notice the stunning array of problems that are menacing the global
economy and threatening traditional investments. In fact, I can't say I've
experienced the like of it before. And that's saying something, considering
I've made crisis (and how to profit from it) the focus of my life's work.

This time around, the unfolding crisis carries several especially dangerous
features - and a locked-in profit
opportunity available to anyone even moderately fleet
of foot.

First, the intractability of the situation. That's the word Paul Volcker,
former Chairman of the Fed, used to describe things, and it's a perfectly
good word meaning, simply, that the underlying problems can't be fixed.
In the Middle East, for example, even if we pull all our troops out today,
the situation won't settle down for years... or maybe even decades. And each
day of turmoil will cost the U.S. more tens of millions in direct and
indirect costs - and keep the global economy in a state of chronic worry
over energy supplies. Then there's the collapsing housing bubble. For years
a galloping real estate market was the primary driver of our economy. Now
real estate is hobbling on three legs and has become the primary driver of
personal and corporate bankruptcies.

Even more serious is the 6 trillion or so U.S. dollars in increasingly
twitchy foreign hands. Hardly a day goes by without some government or
another announcing plans to diversify out of the dollar. And no wonder,
given the record levels of personal and government debt in the U.S.
And even more debt is baked in the cake. We have a freshly-elected slate of
Democrat law makers looking to "do something"... from universal health care,
to global warming, to confronting the "unfair" trade practices of China and
Japan (the very people who own much of the above mentioned $6 trillion).
Those projects are just for starters, of course. Congress's "must-do" list
goes on and on, and for politicians, "do something" never means "do
something cheaply."

So far, so bad.

But it gets worse. Much worse. Over 20% of the U.S.
population - the baby boomers - are now beginning to retire, and most of
them have nowhere near enough savings to enjoy their senior years. So
they'll be absolutely dependent on the Social Security and Medicare promises
they've been hearing all their lives. Politically, those promises are
impossible to renege on. Financially, they're impossible to pay. And along
with the government's other unfunded entitlement programs, they add up to
$50 trillion of off-the-books debt.
Mr.Volker spoke well. Intractable is the word.

There's more, but that's enough. We're in a box canyon with a floor of
quicksand, and the only exit is blocked by a landslide. Investors who take a
business-as-usual attitude are not going to have a nice day.

In case that litany of problems isn't enough to get the sweat beading on
your forehead, ponder derivatives. While these hybrids have been around for
decades, the rocket- shot rise of hedge funds and the advances in financial
modeling techniques have spawned something of a competition among the
so-called best and brightest to find ever-more-complex ways of skimming
pennies from very large piles of money.

The collective result is that our financial system has been wired up to $370
trillion dollars of privately negotiated investment contracts. They're
usually written to shift risk from one bank, pension fund, insurance company
or brokerage firm to another. And many are linked together in long chains,
with each contract providing collateral for the next.

It's all very clever, but layering the enormous size- $370 trillion dollars,
far more than the net worth of all the financial institutions in the world -
on top of all that complexity is downright scary. In simpler times, a home
loan going bad would affect only the particular lender. Enough defaults
would put the lender out of business. And that would be the end of it. But
today a wave of defaults can send a shock through the portfolios of
financial institutions around the globe, including hedge funds, banks and
pension funds far removed from the troubled borrowers.

Imagine an electrical circuit with thousands of connections. No one designed
it. No one tested it. No one has a diagram for it. It just grew. Now,
because of its size and power and pervasiveness, everything depends upon it.
So what happens when one of those thousands of connections burns out? No one
really knows, but I say it's a circuit you should disconnect from before the
world learns the answer.

If you are relying on traditional investments to pad your nest for the
future, the problems stalking the world economy should be a matter of
serious concern.
Especially given that as bad as we think things are about to get, there
remains the potential for things to spin entirely and un-recoverably out of
control. That's because so many wildcards are now in play. A war in Iran?
New York hit by a freelance nuke? A worldwide panic exodus out of the
dollar? Traditional investments would be the first casualty.

The $2 trillion or so loss in stock market valuations during the recent
correction is a precursor of what's to
come... in a best case. The worse case is... much,
much worse.

Working apart from the investment multitudes, a very small minority of
investors over the past few years have been building portfolios of precious
metals and Canadian precious metals stocks. It's a minority I'm happy to be
a part of, as it allows me peace of mind and the
considerable advantage of viewing these crises
somewhat dispassionately.

That doesn't mean I'll enjoy standing on the sidelines and watching the
impact of a monetary crisis on the lives of the unprepared. Of course not.
Yet I would be a fool, having recognised a crisis shaping up, not to take
the fairly obvious steps to profit.

Which brings me to the opportunity that the crisis is carrying on its back.

For any number of reasons, but first and foremost its use as money in all
the world's cultures, throughout all recorded history, gold has begun to
find renewed favour with in-the-know investors as the currency of last
resort.

Make no mistake, despite gold's rise from its $255 low in April of 2001 to
over $650 as I write, so far, only the thinnest of trickles, a minor
fraction of global capital, has made it into gold. When the flight to safety
really heats up, the real fun will begin, and the price of gold won't just
add dollars, it will add digits.

If that sounds like hyperbole, remember that, unlike the U.S. dollar, which
can be created at the speed of light, the available supply of gold is finite
and is painfully slow to change.

You can't print gold the way you print paper money. And you can't just build
a gold mine the same way you might build a Starbucks almost anywhere and on
short notice.
Instead, you first have to find a promising ore body - which is, without
exaggeration, like finding a needle in a haystack... a haystack buried
"somewhere" in the earth's crust.

Then you need to go through the immensely complex and expensive exercise of
confirming that the ore body is economically viable. Then, years after you
started exploring, you can start the even more time consuming and expensive
process of actually building your mine. That entails finding a labour force,
bringing in power, roads, mills, etc., etc... with every step hindered by
environmentalists waving court injunctions.

The long and short is that there are hardly any gold mines of size scheduled
to come on stream... and we are not talking about just over the next year or
two, but ever. Most people in the know see annual gold production falling
from here on.

For proof, there was news recently out of South Africa,
the most world's prolific gold producer. Despite the
loud incentive of higher gold prices, South African
gold production in 2006 dropped to the lowest level
since 1922.

And, above ground, there just isn't much gold to go around either. The U.S.
government, for example, possesses the world's largest gold reserves...and
those reserves amount to only about $170 billion at today's prices...not
even a rounding error on the trillions of dollars in debt the government has
guaranteed.

Put simply, the amount of gold available to investors and central banks is
like the number of beachfront home sites at Malibu - it's not going to
change much. As a result, when the rush for the lifeboats begins in earnest,
the upward pressure on gold will be unimaginable. As will be the profits for
anyone who acts now, ahead of the crowd.
If you haven't yet started accumulating precious metals, you still have
time. Start by picking up some bullion coins from a reputable dealer (silver
should do as well as gold).

Then build a portfolio of the better small companies exploring for new
deposits - the ones with the best management teams, working on the best
projects, in the best geology. These stocks are the true profit gems - in
part because of an accident of recent history.

During the long bear market that ended in 2001, the large mining companies
all but eliminated their exploration departments. Now they urgently need new
deposits to restock their declining ore reserves. But rather then scouring
the world themselves, the majors let the more agile and entrepreneurial
junior explorers - often Canadian firms, due to the resource orientation of
that country's economy - invest the capital and sweat needed to find a new
deposit. Then, when a junior company's project seems ripe, the majors
compete to buy the deposit or to acquire the junior explorer itself - and
they pay up in a most serious way.

Pick your companies right, and you can pay pennies today for shares in a
junior exploration company that history has shown again and again will sell,
with a little success, for $10, $20 or more when the market gets rocking and
investors at large rush into all things gold.
While there's no such thing as a sure thing, there are times - like now -
when the deck is heavily, massively, stacked in your favour.

You are, therefore, left with a relatively simple choice.
Do nothing and hope that all the world's troubles just drift away-and risk
personal financial disaster if they don't. Or take action, if even with a
modest share of your portfolio, and position yourself for extreme profits.

Regards,

Doug Casey

Prime slips...and slides into sub-prime.

Problems in sub-prime mortgage loans could be spreading into sub-prime
auto-loans...and sub-prime commercial loans...

As to the sub-prime auto and truck loans alone, there are some $34 billion
outstanding. As to the rest of the loans that were made to shaky borrowers,
without proper credit standards, the total may reach into the hundreds of
billions...

And what about politics? Isn't the US government operating at sub-prime
levels? And aren't the candidates for next year's presidential election also
less than prime?

Oh where...oh where...dear reader...shall we begin?

No big breaks in the financial markets yesterday. But the millwheels keep
grinding...turning the pretensions of the smart...the conceits of the
powerful...the assets of the rich – all to dust.

When standards go out the window, they just don't go out of windows in
trailer parks and ghettos. They go out of windows in gated communities in
Florida...and in Washington...and they would go out of windows of
skyscrapers in Manhattan and London, if you could only open the windows.

Even in education and art...standards slip...

We were looking at Henry's report card last night. Ai yi yi...

"Needs to work harder..." said his science teacher.

"Performing below his capacity..." said his math teacher.

"Work okay...but could be much better..." said his Latin teacher.

The half-empty part of that glass was obvious. But there was a half full
part too.

Henry does his homework until midnight every night...and works on it at
least 8 hours each weekend. And still, his teachers aren't satisfied.

We checked his grades and class ranking (in France, every student knows
exactly where he stands) and found that Henry is above the average in what
must be one of the toughest schools in France. Ah ha! A school with
STANDARDS...

From what we've heard, in most of the schools in France – and America -
students get passing grades, even without really knowing anything.

Meanwhile, yesterday, Elizabeth came back from an exhibit of Greek
statues...attributed to Praxiteles or his imitators.

"It was unbelievable," she remarked. "The sculptures had such dignity. It
is incredible that they were done more than 2,000 years ago..."

A thought crossed our mind. How many of today's artists could create a
beautiful statue out of a block of marble?

But blocks of marble are not our beat, here at the Daily Reckoning, so let
us get back to money.

What is endangering America's money is the same thing that is undermining
its position in the world – slipping standards.

And slipping standards is what had brought about the fifth of our Big E's.

We began to review our Five Big E trends yesterday:
Energy, Experimental Money (the faith-backed dollar), and the Exodus of
power and wealth from West to East. Today, we look at our fifth – the
Empire.

When we say that America is an Empire, it is neither a matter of desire or
reproach. It is simply an observation.

Some readers think it is unpatriotic or un-American to notice. But while a
good husband doesn't notice when his wife gets fat, perhaps, a citizen with
his wits about him might do well to keep a close eye on his government. And
if he looks carefully at America circa 2007 he will see it resembles an
empire more than a modest republic. Its troops...its culture...its
commerce... impose themselves over almost the entire planet.

Empires must be empires and follow the imperial path...from humbug, to
farce, to disaster. They must believe what isn't true (that they have some
intrinsic, inalienable advantage)...and they must relax their standards...as
they stretch...and then overstretch...until they have stretched too far.

Nine trillion in federal debt...a 'fiscal gap' 50 trillion dollars wide...
an $800 billion trade deficit...an everlasting War on Terror...

And in today's news comes word that the US is "no longer technology king."

The BBC reports:

"The US has lost its position as the world's primary engine of technology
innovation, according to a report by the World Economic Forum.
"The US is now ranked seventh in the body's league table measuring the
impact of technology on the development of nations.
"A deterioration of the political and regulatory environment in the US
prompted the fall, the report said.

NETWORKED READINESS
INDEX RANKINGS 2006
(2005)
1: Denmark (3)
2: Sweden (8)
3: Singapore (2)
4: Finland (5)
5: Switzerland (9)
6: Netherlands (12)
7: US (1)
8: Iceland (4)
9: UK (10)
10: Norway (13)
Source: WEF

And more bad news. Alan Blinder writes in the Wall Street Journal that
globalised competition could cost the US as many as 40 million jobs over the
next two decades. Fifty years ago, America was the world's most competitive
economy. Now, Asians have an edge when it comes to low cost production. And
Europeans have an edge when it comes to innovation and high quality
production. The Empire is peaking out...

What will it do when it can't pay its bills? We're going to find out...

More news...

*** "What did the economic boom ever do for us?"

The world is booming...the economy's growing...and yet.
And yet somehow we feel poorer. Somehow we are poorer too, according to a
report in today's FT. Disposable household income fell by 1.7% in the last
quarter of 2006 and managed a miserable 1.3% for the year as a whole.
With inflation nearer 3% than 2%, this for happy campers does not make.

And that doesn't help Britain's Chancellor Gordon Brown either regardless of
the quality of his recent dental work. In the run up to the push (or is it a
shoo-in?) for No 10 a disgruntled swathe of Middle England totters a step
nearer the financial edge as higher taxes, rising interest rates and rising
inflation put a squeeze on take home pay.

And what happens when standards of living are under siege? Pull in our belts
and save a little harder in case things get worse? Sounds a sensible idea
but that's not the way it works in practice explains Jonathan Loynes of
Capital Economics.

People do what they want rather than what they need.
Given the choice between foregoing the annual cash ISA allowance and the
holiday in Florida, it's the ISA that gets the bullet. To keep up the
spending, something's got to give and what's giving is the rate of saving.
At 3.7%, the UK household savings rate is at its lowest level since 2004.

So as the queen bee of globalisation coins it in the average drone is
getting squeezed...and these are the good times.

And as money gets tighter the risks considered to get more of it become
wilder and hopes more delusional. A gambler's mentality can develop...

Looking at a chart published in The Times this has already happened in the
virtual world of the internet. It publishes a chart plotting the growth in
UK online gambling revenues since 2000. Were this a stock chart and had I
bet the house on it, I would not be straining away at my keyboard today. UK
revenues have ballooned from around £300m in 2000 to £2,750m in 2005. And
that was 2005! Then there's other temptations for a 'flutter'...spread
betting, the National Lottery, gaming machines, super casinos... Oh there
are many ways for the financially squeezed to throw the dice one last time.

And while Middle England struggles to keep up appearances we hear a
confession from a senior civil servant:

'I'm an alcoholic and do very little for my £737,000 a year'.

Bob Kiley, formerly London mayor Ken Livingstone's transport czar charged
amongst other things with making the London Underground less of a hell hole,
has gone public with his personal problems. We can admire the candour but
despair at the waste. More taxes, more wasted spending - twas ever thus.

Finally, good news. Bao Xishun, at 7ft 9 inches the world's tallest man has,
after a global search for a partner, found a wife says The Times. He's
managed to stumble on a bride living in his home town of Chifeng, 5ft 6 inch
Xia Shujuan. Given the lousy demographic odds of finding a wife in China,
achievement indeed.

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

And more views:

*** Et tu, Dear Reader?

The Daily Reckoning is too long. That's what readers tell us. We're sorry.
But we don't have time to write something short.

*** And we promised to explain our Theory of Modern Politics...

The question before is how come all governments – including the supposedly
freedom-loving U.S. of A – have edged towards collectivism?

We begin with a conversation we had with our bus driver.
The last two days were spent at the Chateau de Courtomer, where we were
attending a conference with Addison and Eric and many others on the Daily
Reckoning team. The days were bright and sunny. The conversation quick and
agreeable. The wine soft and smooth.

Coming back, we sat up next to the bus driver, where we could get a good
view of the rolling Normandy hills.

"I worry about what will happen to our kids and grandchildren...about what
kind of world they're going to live in," he said.

He was a very-French looking man of about 50, with a full head of dark hair
with gray streaks in it, and an ironic smile. He wore a tie and might have
passed for a waiter in a good restaurant.

"I started my career as a chauffeur 30 years ago," he went on. "Back then,
you had no trouble getting a job.
And they didn't ask you a million questions or tell you what to do. You just
had to drive the bus.

"But now, everything is regulated. Everything. I can't drive more than 4
hours without stopping for a 45 minute break. That's why I couldn't move the
bus out of the parking lot when we got to the chateau. I had to stay there
and do nothing for 45 minutes. The 45-minute break is supposed to be a
safety measure. But, the effect of it was that I was driving at night...and
I was tired.

"Back when I started, I could decide for myself But now everything is
decided for us."

He is onto something. Just look at the current issue of Fortune Magazine for
proof. It is supposedly the voice of conservative, capitalistic freedom
lovers – people who treasure the liberty of the individual to decide for
himself when to drive his bus...or how organize his work...or how to spend
his money.

"Fix the health care system: Raise taxes," says the headline. "Sometimes
raising taxes makes sense, even to conservatives."

The writer, Matt Miller, goes on to explain that there is an "opening of the
capitalist mind," going on, allowing the old robber barons to appreciate the
benefits of taxation.

We almost fell out of our chair when we realised what he was proposing; we
were laughing so hard.

The story is this: employers are finding it hard to keep up with the cost of
health care benefits. For example, another article explains that a
65-year-old couple, not covered by a private health care plan, should plan
on spending $215,000 on health care through the end of their lives – an
amount up 7% from the year before.

But far as we have observed, there is no direct relationship between
spending money and enjoying good health. Many of the most expensive health
problems are simply a result of bad habits. We suspect that 90% of
heath-care expenditures is unnecessary or inefficient, or both. But if
people want to spend their money on health care, well...it's their money.

Already, company-sponsored health care is collectivised.
But it is collectivised privately...and honestly. For the most part,
employers and employees can decide for themselves what they want to do about
their health and how much they want to spend on it. But employees want
health care benefits...and many employers have health care plans with
crushing legacy costs. So what do they want to do? Own up to the fact that
they their costs are out of control? Raise the standards...and cut the
costs?
Figure out how to fix their own health care system problems? No, they want
to shove the costs of their health care obligations onto the general
taxpayer!
They want a program of forced collectivisation – where their employees spend
someone else's money on their health...and where the government will be
ultimately responsible for the health care of everyone in the country.

Most likely, the pseudo-conservatives at FORTUNE will get their wish.
George W. Bush went a long way towards forced collectivisation of health
care costs with his big drug bill. The next president is likely to go even
further.

And so...the whole world goes in Marx's direction...in Bismarck's
direction...away from Liberte and towards Egalite...away from the Theory of
the Individual and towards the Theory of the Collective.

Private equity is the hottest thing on Wall Street

2007-03-28T10:56:00.001-07:00

Private equity is the hottest thing on Wall Street.

Here's why. Profits in 2006 reached $2.27 billion, more than double that of
the previous year.

"That means," says the FT, "each of its 770 workers produced an average of
$2.95 million in net income. By comparison, employees at Goldman Sachs Group
Inc. - the largest U.S. investment bank - each averaged about $360,000 for
the company in 2006."

And now, more news of a fabulous offer by the same Blackstone Group. We say
'fabulous' because it is the stuff of fable…a morality tale telling itself.

Blackstone, this fabulously sucessful firm of private equity investors, now
will offer 10% of its shares to the public for $4 billion. We asked 'Why?'
earlier in the week.

We will endeavour to answer today.

The facts: The Blackstone Group is the largest private
equity firm in the world. According to the report in the
Financial Times, Blackstone's assets have grown from $14 billion to $78
billion in less than 6 years. That is, it has multiplied its assets under
management more than 5 times in 6 years.

Even more remarkable has been the incredible profitability of the firm. Its
annual rate of return is better than Warren Buffett's. Since 1987 it has
averaged 23% a year, while Buffett's rate of return has been 22% -- though
over a much longer time. Blackstone's real estate holdings have done even
better – up 29% per year since 1991.

But now cometh these uber money shufflers with an offer to shuffle some
money to the public.

Or from it?

How does it make so much money? We turned for an explanation to our
colleague, Eric Fry, who is sitting next to us:

"Private equity can mean a number of things. But what a company like
Blackstone does, typically, is to buy a company from the public, reorganize
it and sell it back to the public. Or, sometimes it will buy a private
company and sell it to the public. The paper almost always ends up with the
public."

Today, we stop to marvel at the chutzpah of it.

Associated Press describes the deal:

"Consider this: Blackstone is a great firm. Going public will bring even
greater riches to those at the top. That said, great riches have already
been captured by those up and down the management hierarchy. This is not the
case of a go-go high-technology firm that generates little free cash flow
and requires an IPO or a sale to crystallise value for its shareholders.
Blackstone has been and will continue to be a cash machine that can
distribute substantial sums to its minions every year. Therefore, either an
IPO or a leveraging of the balance sheet is simply a means of extracting
even more cash from the business. Given the friendly nature of today's
equity markets, going public offers the best risk/reward decision for
Blackstone's existing shareholders. This is an opportunistic step driven by
the state of today's equity markets and other considerations such as the
state of the private equity market."

Yes, but what does that mean?

The Financial Times comments:

"These self-motivated, intelligent individuals are trying to tell us
something important. The question is: do we have the ability to look beyond
their words and actions and intuit motivation? Greed, uncertainty and fear.
What are the implications? That the equity markets are in trouble?
That the credit markets are on the verge of a sharp sell- off? That we are
at the dangerous stage of a private equity bubble?"

There is no magic to the Blackstone Group or other private equity firms.
The genius of private equity prime capital is no different from the genius
of subprime credit. When liquidity rises…both ride high.

But money and credit are no different from bananas or lovers; the more you
have, the more will go bad on you.
This is what economists call the Law of Marginal Utility.
Each additional increment, of whatever it is, is less
valuable than the one that came before.

We find in the Fed statistics that the total credit market debt has been
increasing five times as fast as GDP for the entire 21st century, or at
least, what we have seen of it so far. Subprime lenders had so much money
to lend that they gave it away to people who couldn't possibly pay it back.
There are only so many good borrowers. And there are only so many good
private equity deals. And a credit bubble lasts only so long.

AP again:

"What will happen when the debt markets grow less friendly and additional
equity is required to get deals done?
Returns will fall. What will happen to those who have invested in private
equity funds? They will not be happy.
And those who have invested in common shares of the private equity
management company? Unhappier still.

More news:
--------------------------------

Adrian Ash, just trying to make the repayments in Tunbridge Wells:

- Hands up for a housing crash! What's not to love about falling property
prices?

- Bill Gross at Pimco, for instance. He forecasts "an ongoing bond bull
market of still undefined proportions"
to follow the subprime collapse in the US.

- Manager of the world's biggest bond fund, Gross thinks lower house prices
will force the Fed to cut Dollar interest rates. His model puts US interest
rates back at 4%, down from the current 5.25%, if the Fed's going to keep
home prices stable.

- And if the Fed doesn't cut? Average home prices may fall by one fifth,
says Gross.

- "Investigate the Fed's own study," he advises, "written in September of
2005 [and] covering housing cycles in aggregate and individually for 18
countries over the past
35 years. This study's important conclusion...is that if home prices in the
US have peaked, and are expected to stay below that peak on a real price
basis for the next three years, then the Fed will cut rates and cut them
significantly over the next few years in order to revigorate an anemic US
economy."

- Here in the UK, cheaper housing would save the Bank of England from having
to raise Sterling interest rates, too. Which explains why the Old Ladies
keep wishing away their own property bubble, too. Mervyn King told a
Treasury Committee on Tuesday "there are now some signs that the housing
market is beginning to slow."

- Ha! You should be so lucky, Dr. 'Blin' King! Perhaps the chief pooh-bah is
reading different data from everyone else. Because average national asking
prices have risen 12% from this time last year, according to Rightmove. That
estate agency website covers half of all properties for sale. In March
alone, it shows, average asking prices rose £3,381 ($6,626).

- You call that beginning to slow?

- And while Mervyn King shuts his eyes, sticks his fingers in his ears and
cries "I can't see you! I can't hear you!", would-be buyers are starting to
demand home- ownership as part of their human rights. No, really.

- "Everyone has the right to own property alone as well as in association
with others," says Article 17 of the UN human rights declaration. It's
quoted by a regular blogger at PricedOut.org, the website where first-time
home buyers yet to enjoy their first time gather to bewail their lack of
mortgage debt.

- "No one shall be arbitrarily deprived of his property,"
the UN goes on. "Everyone has the right to a standard of living adequate for
the health and well-being of himself and of his family, including food,
clothing [and] housing..."

- The UN doesn't mention mortgage indemnity insurance or stripped pine
flooring from Ikea. But never mind. That lower house prices will soon prove
obligatory, we have no doubt. The first-time buyers will get what they want,
just in time to dive into negative equity.

- "Legislation must be bought into place to control the market," says Carron
Miller, a young mother and teacher.
She's now threatening a BBC chatroom that she'll emigrate if she can't buy a
house soon. "People need to be put before profit."

- Over in Tokyo, meantime, it's the Bank of Japan praying for slower
real-estate inflation. Incredibly, after 17 years of depression, land prices
in Tokyo finally turned higher in 2006 according to official data last week.

Trouble is, rather than just picking up, land prices in some parts of Tokyo
leapt 46% higher. How the gods must be howling with laughter!

- "We aren't yet in a situation in which land-price gains warrant concern of
excessiveness," said Toshihiko Fukui, governor of the BoJ to the Japanese
parliament Tuesday.
"But we'd like to keep a close watch on them."

- Commercial land prices in Japan's three biggest cities rose 8.9% in 2006.
With interest rates still next to zero, why not? The fastest property gains
came in the Omotesando Hills of central Tokyo, a retail and residential
development that opened in Feb. last year.
Amid the developers' scramble, the city's tallest building is now due to
open on Friday. A 42-storey skyscraper will open in front of Tokyo Station
next month.

- Still, there's a long way to go before Tokyo, Osaka and Yokohama catch up
with Glasgow, Baltimore, Derry, San Diego, Pula, Beijing, Buenos Aires,
Reykjavik, Jo'berg, Auckland and the rest of the planet. Japanese land
values for commercial and residential property now trade for half the price
of their 1989 peak.

- But what a peak! And what a mess Japan's had to endure trying to unwind it
ever since. Gearing up to speculate on the wasting asset called real estate
cost Japan more than a decade of recession, depression, banking defaults and
deflation.

- "The buy to let market," says the young British teacher who can't get a
mortgage, "is responsible for a lot of misery." We don't doubt she's right.
But it's not created half as much misery yet as it will when house prices
really do start slowing down.

- Beware what you wish for, Dr. King...
--------------------------------

And more views?

*** Well, at least we know the fire alarm works.
We were sleeping soundly last night. Then, all of a sudden, at about 3AM, we
became a victim of modern technology. A fire alarm interrupted our dreams.
Was the place on fire?
It didn't seem likely. But we couldn't sleep with the screeching alarm
going off…so we dressed and went downstairs.

It is one thing to turn on an alarm. It is another to turn it off.

Pierre was already at the control panel when we got downstairs. He was
pushing buttons. But the noise continued for another 10 minutes – until
everyone was wide awake.

What could we do, but open another bottle of wine?

*** We know we left you on the edge of your chair, last week, with our
theory of modern politics.

Why has collectivism triumphed everywhere, we asked.
But for today, we have to cease with our views. We're attending a conference
and we need to pay attention; maybe we'll learn something. More tomorrow,
dear reader…

FOLLOW THE SILICON TRAIL TO GLIMPSE THE FUTURE OF MEDICINE

Michael Orme

Set your sights on medical diagnostics as the next big thing. The bloated
$3-$4 trillion global healthcare industry shows itself overripe for radical
disruption and the alchemists of Silicon Valley have set their sights firmly
on it.

When they home in on an industry, the game changes and wealth creation
amounting to hundreds of billions or even trillions of dollar can result.
And sometimes be destroyed, it should be added, when a bubble bursts, like
the Internet 1.0 bubble in 2000, only to bubble up again as Web 2.0.

Here, though, we're in at the creation. So let me give you a sense of what's
being spawned. Today, doctors are overwhelmed by administration and
forceably moved far beyond their main function of old of the laying on of
hands and offering a comforting bedside manner. In prospect, is a medical
world where they will be superseded by medical knowledge and expertise
captured in silicon, software and algorithms and delivered cheaper every
year.

It's been called 'rebooting your doctor.'

In prospect are diagnostic tools that will detect early signs of plaque in
arteries or tiny clusters of cancer cells to enable preventive therapies—all
without the need for hospitals, prima donna specialists or blockbuster drug
treatments. We don't have to speculate about weird nanobots cruising through
our gizzards and blitzing incipient cancer cells en route to get the picture
and see that radical change is afoot.

If you want to glimpse where medicine's going, best to talk to those silicon
alchemists rather than medicos, biotech scientists or government policy
makers. Better still, perhaps, to a truly switched on venture capitalist
with a technology background. I sat next to Don Valentine, the doyen of
Silicon Valley venture capitalists a few years ago at a dinner in Menlo
Park, California.

Formerly, a top executive at National Semiconductor, he is worth over a
billion dollars and put seed corn into CISCO and Google when each was little
more than a couple of bright sparks from Stanford with a business plan. I
asked Valentine his secret. "Follow the silicon'' was his brusque reply as
he turned to his other neighbour.

The one thing I learned in 20 years tracking the technology business, first
as a journalist and then as a consultant, is that once silicon focuses on
something you only have to wait for the big markets to be created from
almost nothing - witness PCs, mobile phones, digital cameras and iPODs.

The master mantra is 'better, faster, cheaper, smaller.' Silicon gets
cheaper by 30% every two years and halves in price roughly every two years.
If you find something that works today, more or less, but is too expensive,
then wait a bit and the fireworks start. Look at PCs, routers, mobile
phones, iPODs, search engines, GPS systems for cars, digital cameras. Under
the lash of this relentless mantra, silicon integrated circuits get better,
faster, cheaper, and smaller with every shortening product cycle.

The same cycle of innovation is about to hit medicine, which contrary to
everything in information technology, gets more expensive, more muscle bound
and less satisfying to its customers every year. This is why medicine meets
the criteria laid out by Professor Clay Christensen of the Harvard Business
School, author of best seller, The Innovator's Dilemma, and the chief
theorist of disruptive forces in business, for being 'ripe for disruption'
from the bottom-up.

This is why Andy Grove, the legendary ex-chief honcho at microprocessor
giant Intel, talks of the need for medicine to move "from the mainframe to
the PC era''.
He is talking metaphorically. He means that technology must now be deployed
to undermine the current medical establishments and their ways of doing
things, not least to evaporate the crippling fiscal burden of healthcare on
governments across the world.

In his recent book, End of Medicine, a sprightly but profound study of the
scene, Wall Street veteran and ex-hedge fund manager Andy Kessler points to
what he calls "the cholesterol cancer conspiracy'' as the main culprit. He
argues that hospitals, specialists, and insurance and drug companies have
combined to put the medical focus on costly 'cut and drug' treatments for
chronic conditions, mostly around 'the Big Three', heart disease, stroke and
cancer. But this 'conspiracy' and this focus on costly late stage treatments
is on the point of being subverted by new breeds of diagnostic tools - real
time 3D scanners, biomarker chips to scan for cancer cells, neural networks
to read mammograms, portable ultrasound kits and expert system GPs etc - all
built around silicon.

Rather as the mainframe and minicomputer cultures were subverted by silicon
dominated and defined PCs, and by employees smuggling them into their places
of work twenty years ago, so these diagnostic tools will surround, squeeze
and suffocate medicine's old ways of operating. And they will keep on
improving in lockstep, just like mobile phones or digital cameras do now,
with the remorseless power of siliconomics.
Let's quickly look at what's happening with CT Scanners (Computerised
tomography scanners: a diagnostic medical imaging technology) to round all
this out and make it tangible.

You're a baby boomer and you may have a heart attack, but then again you may
not.
How about having a look in your arteries to see if there's a blockage?
The test is doable with the current generation of 64 slice CT scanners but
is still too expensive and perhaps still not a good enough test.
Coming next is the new generation of 256 slice scanner making its way to
market. They can scan your heart in 4/10ths of a second or less and create a
colour 3D image of it of sufficient quality that you and a medical
professional, not necessarily a heart specialist, can look at to identify
any clogged arteries. Following that, in two to three years time, will come
new and improved volume produced scanners costing less than $200. They will
become a mainstream product and heart attacks will be a lot less common.

Same for strokes.

With cancer, the development of 'molecular imaging' will be able to detect
tumours 3-5 years earlier when they are easier to treat. Antibody chips
costing 10 cents or less will scan your blood or urine for unique proteins
of circulating cancer cells. The current medical establishments hold on late
stage treatment will be increasingly undermined by technology driving
medical practice to the front end, to early detection and preventive
therapy.

As Grove, looking back on over 40 years in the tech business, remarks:
"technology always wins''. Nobody is forecasting root and branch change
overnight in medicine.
But as Kessler puts it: "even if the things budge slightly from chronic to
early detection, waves of change like a Cat 5 hurricane will rip through
medicine.'' And they will.

Regards

Michael Orme

for The Daily Reckoning

Michael Orme is a financial journalist and former stockbroker.

Editor's Note: A Cambridge philosophy graduate, Michael Orme has worked in
the UK Treasury and in stockbroking, the latter under the legendary fund
manager Nils Taube. He was Mr Bearbull on the Investors Chronicle in the
1970s, then a tech journalist covering Silicon Valley for various journals
in the 1980s, including Management Today, Computing and the Mail on Sunday.
He is currently an Associate at Westhall Capital, a investment house
specialising in Asia.

FW: Why British prosperity is no illusion

2007-03-28T03:48:00.001-07:00

WHY BRITISH PROSPERITY IS NO ILLUSION
by Brian Durrant

Many people in Britain are perplexed by UK's apparent prosperity. How can we
enjoy such a rising standard of living while at the same time we do not seem
to produce anything? City and town centres, even in the formerly depressed
industrial regions of the north, are buzzing with busy shopping complexes
and restaurants. Out-of-town supermarkets and D-I-Y superstores are
springing up everywhere as are new private housing estates. People dress
well, eat out more often and drive bigger cars.

When whole swathes of manufacturing industry closed down in the early 1980's
and the coalmines were shut down in the second half of the decade, a bleak
future of economic decline beckoned with mass unemployment, boarded up shops
and crumbling amenities. Somehow Britain has, in most parts, escaped this
outcome of economic hardship. But people still harbour nagging doubts that
their apparent prosperity is built on sand. This Easter there will be a
credit-fuelled spending spree on D-I-Y goods made in China, Swedish
furniture and Australian wine, while our wealth is somehow based on
homeowners bidding up the value of each other's property. It is
understandable that people who measure their own wealth in terms of material
possessions tend to see prosperity based on services like entertainment as
some kind of statistical trickery.

Scepticism about our economic prosperity is deep rooted particularly among
those endured the trials and tribulations of the 1970's. This miserable
decade included a three-day week, power cuts, a near 70% fall in share
prices in the 1973-75 bear market, inflation at 26%, an IMF loan and the
winter of discontent. Sir Nicholas Henderson, the British Ambassador to
Paris, sent a telegram to the new British Prime Minister Margaret Thatcher
in June 1979 saying "our economic decline in relation to our European
partners has been so marked that today we are not in the first rank even as
a European one". He supported the message with a table which showed how
Britain's GDP per head had fallen to 46% below the German level and 41%
below that of France. Britain's economic success particularly in relation to
Europe over the last 15 years bucks a century old trend, which is still
embedded in the psyche of those who suffered in the 1970's. It is indeed
difficult to believe that in 2005 British per capita income was over 8%
higher than France and 6% above a united Germany, despite the fact that
Britain no longer makes anything that one can lay one's hands on.

While it is true that almost everything we buy today has a "made in China"
label, this does not mean that the all money we spend on these goods ends up
in China and drains jobs and resources from our economy. Here is an example
that may seem trivial but it makes a point.

Later this month the shelves of toy shops will be flooded with Spider-man
merchandise ahead of the launch of Sony Pictures third block buster movie
"Spider-man 3" in May. A simple action figure toy will have "made in China"
embossed on it. Say for example it retails at £10.00, roughly half the
retail price will go to the UK retailer and distributor, with another 20% or
so paid to Hasbro, a US toy company which will spend much of this on
advertising, promotion and distribution in the UK. A further 10% or so will
go Sony Pictures Limited, which owns the Spider-man film rights and
additional royalties will be paid to Marvel Enterprises Inc. Furthermore
£1.49 will go to the UK Treasury in VAT, and there's the cost of shipping
and insurance too, leaving a small remnant of the purchase price going to
the toy manufacturer in China, who has to buy materials and plastic moulding
machines, probably imported from Korea or Japan. In the end less than 5% of
the £10 you paid for the Spider-man toy will end up as wages for Chinese
workers or profits for Chinese manufacturers. Meanwhile the retail and
wholesale margins, advertising and promotion will probably contribute around
£7 to Britain's GDP.

In the 1960's and 1970's the economic success stories were West Germany and
Japan. These countries enjoyed strong growth led by manufactured exports.
The nature of the world economy has been turned upside down since then.
Manufactured goods, whose production can be readily transferred to the
lowest labour cost economies like China, are falling relentlessly in price.
This process of outsourcing has created a new type of business, called a
"platform company" which sell everywhere but do not own factories. Examples
include Dell, Nokia, L'Oreal, Ikea, GSK and Apple. These companies
subcontract almost all their manufacturing to other businesses, mostly in
developing companies. A generation ago production and manufacture was the
key to business success. Today design and marketing add the most value,
because manufacturing is in the hands of subcontractors in developing
countries that compete intensely to drive down costs.

Moreover if there are changes in demand for goods, it is the manufacturing
part of the business that bears the brunt of the adjustment, so the
volatility of the business cycle is outsourced to developing countries while
mature economies enjoy greater economic stability. This new found stability
has in turn made higher levels of borrowing safer and more attractive for
businesses and consumers in advanced economies. And it is the countries
which are financially the most deregulated like the UK that have benefited
most from the processes of globalisation and outsourcing. The new world
order has played into the hands of Britain, which throughout the last
century always struggled to compete in manufacturing goods, but has always
enjoyed a comparative advantage in finance and other knowledge based
services. The prices of manufactured goods have collapsed in the last 15
years, while the prices of knowledge based services like finance, law and
entertainment have risen in price. In economics jargon Britain has enjoyed
an improvement in the "terms of trade".

To illustrate this point, an international lawyer earning £250,000 a year
today probably works no harder than his counterpart in 1990 when he probably
earned less than half this amount. Although the lawyer's productivity has
not doubled, his contribution to the British economy from his foreign
income, his taxes and his consumer spending has.

However for Britain to be in a position to benefit from this new world
order, it had to lick itself into shape domestically. Two events are crucial
to the story: the election of Mrs Thatcher in 1979 and the ERM debacle of
September 1992. The trade union reforms, deregulation and privatisation of
the Thatcher era created a truly competitive market economy in Britain for
the first time since before the First World War. Cast your mind back to the
world of the 1970's when you had to "queue" for a mortgage, have
restrictions on how much money you took out of the country and the
nationalised telecoms industry lacked funds for investment because the
government was too busy backing losers like British Leyland.

But Thatcherism alone was not enough, the government was still making a mess
of the economy by using interest rates to target the exchange rate. This
resulted in the Lawson boom and bust of 1988-90 and the unnecessarily long
recession that followed. It took the climactic events of 16th September
1992, which I like to call "White Wednesday"
to bring economic policy makers to their senses. Thereafter interest rates
were set according to the domestic needs of the British economy and our
decision to stay out of the euro has ensured that this framework that has
delivered economic stability has remained in place.

The market reforms of the Thatcher era, the sane monetary policy framework
after White Wednesday and fall in the prices of manufactured goods relative
to knowledge based services have helped transform Britain's economic
performance and reverse a 100 years of relative decline.
How long Britain's economic renaissance lasts depends on the wisdom of
policy makers and the evolution of the world economy. But for now, Britain's
prosperity is no illusion.

Regards,

Brian Durrant

What's it all about, Alpha?

Alpha (above market returns) is what hedge funds are supposed to bring
investors. Alpha is why they get away with charging outrageous fees (usually
2% of capital and 20% of performance).

Alpha is why, developing a case of 'mission creep,' the funds then began
speculating rather than hedging.

But after that came news of another extraordinary
development: hedge funds started going public. The lay public, it seems is
willing to pay for alpha and pay more for alpha than alpha is making for the
funds. What gives?

Take a look at the amazing sale of shares in the Blackstone Group.
Blackstone is one of the multi-billion dollar groups of 'Private Equity'
money that prove to us that Wall Street is no place for an honest man.

Think about it a minute and it almost makes you stop breathing. The idea of
the hedge fund was, primarily, that it could protect investors by hedging
risk. It did so by being able to go both long and short. Mutual funds, by
contrast, are always long. You buy a fund that invests in China, for
example, because you want a little sliver of the China pie. If Chinese
shares go up, you want to go up with them. And you know you're not
competent to select shares in China yourself. So, you don't mind paying a
mutual fund manager for helping you. It wouldn't make any sense for the
manager to hold cash…you could do that yourself without paying a commission
or fee.

Along comes the hedge fund with a different mandate -- to make money even
if shares go down. The idea was to protect the investor on the downside.
All very well to own shares in China and the US, but what if the shares went
down? The hedge fund manager hedged an investor's bets, by shorting
(selling shares he didn't own) or by using put options (giving him the right
to buy shares at a lower price) or other strategies designed to make money
when most investors lose it.

Then came the curious news that a few hedge funds were selling shares to the
public. That too took our breath away. The only justification for the high
fees was the 'alpha' performance. But if a hedge fund manager could get
'alpha,' why would he want to sell shares to perfect strangers? Hedge fund
managers can do math. They wouldn't sell shares of their own fund unless
someone else thought they were worth more than they did. You could infer
from that that either the public was paying more for alpha than alpha was
worth. Or, that there really wasn't any alpha at all.

And now, before us is Private Equity, the hottest thing on Wall Street,
because it delivers alpha. In theory, you can't really beat the public
market – because it has so much more information than any individual
investor or group of investors. But along came the Private Equity money…and
phyzzzt went the theory. In fact and in practice…the smart, well-informed,
well-funded private investors were letting us know that they were the ones
making money, not the rubes in the public marketplace.

But Private Equity is going one step further now…a step too far, in our
opinion. The Blackstone Group is going public to raise billions of dollars.
"Look," it says to the rubes, yahoos, and lumpencapitalists, "We can get you
alpha; buy our shares."

But the Blackstone Group is not a religious or charitable order. They are
not going to give away alpha. Nor are they innumerate; they can do the
math. The only circumstance in which they would possibly sell their shares
to the public was if they felt their alpha was over- estimated by the
share-buying public...or, they didn't have any alpha.

What is happening to Private Equity is what has happened to hedge
funds...and happens to everything else in the markets...and indeed, to the
rest of life. Alpha – the extraordinary, the special, the above-market -- is
in short supply. And the more people chase after it, the harder it is to
get.

As more capital sought out more above-market returns, the returns fell.
That's why hedge funds are already yesterday's news.

Now Private Equity too is running into the Law of Diminishing Returns. Or,
the Law of the Declining Marginal Utility of capital chasing alpha.

Private Equity is probably selling to the public for the same reason hedge
funds did: they've lost alpha.

Meanwhile a look at the headlines tells us immediately what 'gives' in the
market these days:

"Subprime Bust Forces Families From Homes," says the AP.

"American dream becomes nightmare as millions face foreclosure," trumpets
the AFP.

Is the problem containable, as Treasury Secretary Paulson says?

We don't know...but we wonder if he does either.

And more news:

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

Adrian Ash, reporting from BullionVault in Hammersmith:

- So the US housing market picked up in February, or so said the National
Association of Realtors in Washington on Friday. Sales of previously owned
homes in the US, said the real estate shills, rose 3.9%.

- Phew! That was close. And there we were thinking the biggest housing
bubble in US history might take more than a few months to unwind.

- Forty-four lenders in the subprime market have now gone kaput since late
2006, reports ML-implode.com. "It is clear that some subprime lenders have
engaged in abusive practices," barked Emory Rushton, senior deputy
comptroller, at a senate hearing in Washington last week.

- In the wider economy, "the US housing recession has contributed to pushing
overall GDP growth down to a 2% annual rate over the past three quarters
ending 1Q07," says Stephen Roach, chief economist at Morgan Stanley – "well
below the 3.7% average gains over the previous three years."

- But c'mon! What's to fear as the world's biggest economy, driven by
consumer debt, moves from those super-low "teaser" rates onto full-fat Fed
funds rates nearer 5.25% and above?

- "The headlines in the financial press proclaim (for the umpteenth time)
that the worst of the housing slump is behind us," notes our friend John
Mauldin in his latest missive. "Home prices are down a mere 1.3% from a year
ago, although the number of homes for sale rose slightly to a supply of 6.7
months, meaning homes are staying on the market longer, as sellers are still
reluctant to sell at lower prices."

- "But the problems for new and existing home sales are in the future," says
John. "Last year there were 400,000 foreclosures. Moody's estimates that
that number will double in 2007. That means that there will be an additional
800,000 homes added to the supply of existing homes this year, which is at a
seasonally adjusted 6.69 million homes."

- Outside the real estate offices, "jobs are supposedly plentiful," adds
Mike Shedlock for Whiskey & Gunpowder.
"Yet 2.1 million Americans with a home loan missed at least one payment at
the end of 2006. That seems pretty hard to me. And it's going to get a lot
harder paying that mortgage when ARM interest rates reset and unemployment
starts to rise. Both are going to happen."

- And still there's nothing to fear. "Most of the housing adjustment is
completed," reckons one Californian economist interviewed by Bloomberg. Put
another way, "House prices to recover next year," as the Times of London
announced in November 1989...just before the UK real estate market lost
one-third of its value over the next 7 years.

- Regular readers won't need reminding, but that's never stopped us before.
"Recovery [was] forecast for house prices in market awash with loan funds,"
reported the Times in Jan. 1990. Not even broad money supply growing by 18%
year-on-year could stop the rot, however.

- By July 1990, "the bottom of the current house price cycle may have
passed," the paper went on. Come the autumn of that year, however, The Times
had to repeat itself again.

- "House prices bottom out...the long slide in house prices could be nearing
its end," it said. National prices continued to slide regardless.

- By Sept. '91, real house prices - adjusted for inflation
- stood 25% down from the peak. "House-price surge is on the way," said The
Times, "but wait for it."

- No fooling! The following month, Oct. 1991, The Times finally admitted
that "Fall in house prices dashes market hopes."

- Why so glum? Well, mortgages more than 6 months in arrears accounted for
3.5% of all loans outstanding at the start of 1992. Cue The Times to report
that "record repossessions are keeping down house prices" - even though the
mortgage lenders themselves had long since stopped repossessing when they
could possibly help it.

- Ahead of the United Kingdom's last house-price crash, nine out of every 10
late-paying mortgages more than 12 months in arrears were taken into
repossession. By the bottom of the slump, however, the mortgage lenders
slashed that kill rate beneath one-in-5. America's mortgage lenders may well
try the same remedy in 2007.

- US foreclosures rose 42% in 2006 according to RealtyTrac.com, up from
855,000 in 2005 to 1.2 million nationally. But throwing young families out
on the street rarely makes for good PR. And during a genuine real-estate
slump, it only adds to the downward pressure on home prices.

- For now, reports Bloomberg, many US lenders are urging their late-paying
borrowers to sell their homes themselves...and redeem whatever they can of
their outstanding debts. Better that, the lenders are thinking, than collect
ever-more default properties on their books.

- But leaving late-payers where they are could soon become the subprime
strategy of choice. What that decision will do to America Inc's credit
rating – and the implied value of its paper promise, the Dollar – we'll just
have to wait and see...

And more thoughts…

*** Remember Harry Dent?

He's the one who forecast the Dow at 40,000, based upon his reading of
demographic trends. All those aging baby boomers had to save for their
retirement, he said. And the logical place for them to put their money was
in the stock-market.

Well, as the years have passed…it now becomes clearer that the boomers
aren't all that interested in saving money – not when credit is easily
available and when their houses are rising in price. So, this past November,
Dent felt it was time for a little backtracking. Now he says the new bubble
will reach its maximum in late 2009, with the Dow near 20,000 and the Nasdaq
at 5,000.

Could he be right? Anything is possible. We suspect that the boomers will
start saving again. They've been on a spending binge for the last 10 years.
They're probably about ready to go on a saving binge. Not only will they
need the money, we've noticed signs that saving money is becoming avant
garde. There may be a backlash against conspicuous consumption coming.
We'll have to explain more tomorrow – when we take up our new theory of
modern politics. But there are times when spending is hip, stylish and
trendy. There are other times when spending is regarded as vulgar, crass
and foolish. The times could be changin' now.

*** If boomers begin saving…what will they do with their money? Will they
put it in stocks? Or real estate?

We noticed, recently, how much of a drag owning real estate is. You're not
bothered by it when prices are rising sharply. But when they begin to
flatten out…and when sales sag…you begin to resent having to fix the roof or
the dishwasher.

This came home to us when we looked at what it costs us to hold onto our
farm in Maryland. There are a couple of houses on the farm, which are
rented out. It should be making money for us. Instead, we get this message
from our property manager:

"Last year there was around an $8,500 loss. The main house was rented for
$2,500 a month for six months. We had to replace an HVAC in the dairy
apartment, a water heater in the tenant house, a heating stove in the barn,
carpet in the dairy apartment.
Last year we spent the following for maintenance and repairs (parts & labor)
on each of the buildings:

Barn-$1,665
Dairy $3,667
Main House $17,250
Tenant house $890
Grounds $9,659 ($2,547 for labor, the rest for mulch, gravel, etc.)
Management $2,770.00"

We doubt boomers will want to deal with these problems.
And we wouldn't be surprised to see attitudes to real estate revert back to
what they were 30 years ago – when people regarded property as an expensive
burden, not as an investment.

*** Want to buy property where property is still going up.
Buy in Japan. For the first time in 16 years, Japanese real estate prices
are going up nationwide.

The biggest gains came in Tokyo commercial property – where prices were up
by 9.4% in 2006.

ores why and how Britain has become so prosperous...

Investment risks and opportunities

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Healthlinx Ltd Announces Issue Of Shares
Thursday, 30 Dec 2010 12:49am EST

Healthlinx Ltd Announces Part 1 Of Second Study Confirms Superior Efficacy Of OvPlex Ovarian Cancer Diagnostic
Tuesday, 14 Dec 2010 05:23pm EST

Healthlinx Ltd Announces Early Results In OvPlex Ovarian Cancer Biomarker Study
Thursday, 11 Nov 2010 05:23pm EST

Healthlinx Ltd Executes Commercial Agreement With Millipore
Tuesday, 28 Sep 2010 07:06pm EDT

Healthlinx Ltd Signs Exclusive OvPlex License Agreement With Medison Pharma Limited
Monday, 6 Sep 2010 07:51pm EDT

Healthlinx Ltd Announces Issue Of Shares Pursuant To Conversion Of Convertible Note
Wednesday, 1 Sep 2010 06:32pm EDT

Healthlinx Ltd Commences South Korea OvPlex Study For KFDA Regulatory Approvals
Tuesday, 31 Aug 2010 07:47pm EDT

Healthlinx Ltd Progress On Prostate Cancer Diagnostic
Monday, 21 Jun 2010 08:23pm EDT

Healthlinx Ltd Announces Launch Of International Study On OvPlex Cancer Test
Monday, 14 Jun 2010 06:30pm EDT

StoneBridge Securities Completes Private Placement Of $0.750 Million In Healthlinx Ltd
Monday, 7 Jun 2010 06:41pm EDT