Spain's banking sector could be facing a death blow

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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Northern Rock: yet more of your cash down the drain

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…

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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

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.

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Why the credit crunch is good news for game birds

 

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…

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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

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

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

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!"