February

The Laurel Comment
“China, for 18 of the past 20 centuries, has been the largest economy in the world and will be again this century”.
-Chris Patten (former Governor of Hong Kong)

Markets

January did not treat the world’s bourses very kindly and despite the continuous economic warnings of the last year, the downside momentum still came as quite a surprise to the unprepared and the “none so blind…”

Among the first 2007 warning shots was the February shakeout in China which transcended European and North American markets in quick succession. This potential for debacle however ended in an Asian minute as markets reversed course and soared to new highs, at least on the surface of things, for underneath the indexes the real story of what was to come had just begun to unfold.

The sub prime mess and the housing decline in the U.S. did not appear overnight, last Christmas or even last summer. They were both well known and well documented prior to both the August and November meltdowns, and were amply illustrated by the “financial” indexes which had peaked in the spring of 2007 dropping major bank stocks anywhere from 20 to 60 percent with Citigroup having led the way.

The Federal Reserve strongly intervened during the August crash awarding markets a three month respite, by January the Fed had exercised outright panic proving that their ability to follow far exceeded their talent for leadership.

So now it is February and many investors are wondering what is in store for 2008 and beyond. Will there be more panic, a deep recession, a global meltdown or will the world slog through its present difficulties and emerge solvent but chastened?

The answer to part one will be positive in this writer’s view as the actions of the Federal Reserve to liquefy the system in order to save it is always a short to medium term winning strategy. The answer to part two is even clearer, chastened capitalism is an oxymoron. There will always be excesses that lead to bubbles that end in troughs. This is a product of both a successful system and human nature.

As many readers are aware “The Comment” has been bearish on markets for many months now while it has remained bullish on gold and special energy situations for a somewhat longer period. This former position on markets has now changed. It is our belief that the financials lead markets both up and down and we now suggest that the bottom in this group was achieved in mid-January. In short the new market leadership will come from this sector, one best accessed through the purchase of specific exchange traded funds. The XLF in New York and either the HFU or XFN in Toronto will allow investors to buy the group rather than trying to choose a particular winner. Our position on gold remains not only unchanged but reinforced as our 1000 short term target fast approaches. We believe that $1500 in 2008 remains a distinct possibility as the massive financial infusions of the world’s central banks have further devalued most currencies. Buy precious metals, Japanese Yen and do the former through the aforementioned ETFs.

There will continue to be a great deal of talk during the coming year about the outcome a Democratic victory would have on stock markets. Don’t believe the talking heads on the business channels as they are, with few exceptions, reactionary Republicans whose idea of the common good rests with their own pay cheques. Markets have historically outperformed under Democratic administrations. The accompanying charts prove the point.

The most compelling argument in Democratic times is the one that small caps and tech stocks in general fare better than large caps and defence related companies. We wonder why.

Think too of the regulatory bodies which were put to sleep during the Bush and Reagan years enjoying a revival, a time to come when we hope that white collar crime has the same stigma as armed robbery. Try this metaphor on; think what would have happened on the streets of New York if all the policemen had been sent home for the past eight years.

Be bold in bad times and careful during the fourth, fifth and sixth boom years and you will likely do well.

Commentary

George Bush recently presented his government’s 2009 budget. The main points propose cuts for Medicaid, medicare and education while increasing the defense portion to its largest figure (adjusted for inflation) since World War II, a number that does not include the off budget spending on the Iraq/Afghanistan mess, another 200 billion.

The good news resides in the fact that this is the last Bush Budget, the bad news may be the continuation of his disastrous Middle East policy should Senator McCain win the Presidency now that the Super Tuesday primaries appear to have assured his nomination. This is not to say that any of the other Republican choices were or are better than McCain but more of the same is not what either America or the World needs at this juncture.

The momentum story of these 2008 primaries has obviously been that of Barrack Obama who despite his rather thin resumé is proving to be an inspirational public figure. This campaign has resonance for those of us who remember 1968 when an assassin stole the spirit of America and gave the world Richard Nixon in its place.

The Democrats in power are not like the Republicans because the people that surround and advise Democratic administrations are demonstrably more pragmatic and far less agendized. In short President Obama will not have a Vice president Cheney, he may instead have a team made up of the “best and the brightest”.

Remarkably

Writing a bullish market letter in the midst of a crash is not an easy task, particularly when one is aware of some very severe pitfalls in the underlying fiscal and monetary structure of the world’s largest economy. It is a time when faith, not in religion, but in history helps to restore the balance between what is and what is likely to be.

The banking systems of the world have been refinanced. The securitization of bank assets (conversion of existing assets into marketable securities) does not however necessarily solve the economic crisis that the bursting of the housing bubble has effected. The problem, as some more learned than I have begun to emphasize, is the slowing in the velocity of money from bullish multiples to deflationary negatives. This slowing of the economy may be attributable to a number of things many of which have ominous similarities to the mid to late 70s when money last moved en masse from consumers to the sovereign funds.

The OPEC led oil price rise at that time effectively moved circulating dollars that were better utilized buying fridges, stoves, cars and life’s necessities into the bank accounts of Arab Sheiks who bought planes, gold and collectibles in countries where trickle down economics was a literal experience.

This time around, the supply crisis for oil along with the political risk price due to Bush policies has added to the commodity price boom, thereby enriching the sovereign wealth funds who now seem to be more intent on buying existing assets than creating new ones. This and the Bush tax breaks to the already wealthy have combined to place money in the hands of those who don’t spend it, a phenomena that may also explain why the world market indexes stayed up over the last year while the underpinnings were crumbling.

In essence, it is possible to create enormous liquidity but if the banks don’t lend it and the people don’t spend it, the economy comes to a halt. To be crude, it is somewhat similar to someone with lots of Viagra but no partner.

Finally it is good to remember two things; the opening quote and the proven market adage “don’t fight the Federal Reserve”. After all during the 1920’s Germany under the Weimar Republic saw its stock market rise from 600 to 29,000; grant it they did print so much money that the entire Daimler Company was worth only 342 of its cars in then current US dollars. Daimler did survive.

Geoff Ryan
February 6, 2008
GeoffreyRyan@hotmail.com
514-795-8450
http://thelaurelcomment.blogspot.com/

January

The Laurel Comment
“ It was ordained at the very beginning that time would be the natural equalizer of all humankind and that it would be at once, both man’s mortal enemy and his greatest savior “ William Milton

If the major economic events of 2007 are to act as a harbinger of those things yet to come about, then it would appear that unlike Ebenezer, it is already too late for the world to change course. The impact of the sub prime mess that was brought about through cheap credit, lax regulation and blatant hucksterism may have been temporarily eased through the facility of the world’s central banks and their out of control printing presses but it is far from resolution.

As was the case during the Reagan-Bush Senior era when the Savings and Loan crisis was spawned, it is the perpetrators rather than the victims who are receiving the bailout. The ongoing actions of the aforementioned central banks to alleviate these short term difficulties are even seen as necessary and unavoidable by many of the issue’s most severe critics as their fear of imminent collapse has superceded their normal reticence toward monetary inflation. The question , it appears has reached beyond the pale, and that the only hope for present and future economic stability lies with “more of the same”. In essence, the easy credit , low rates and printed money that created the crisis in the first place are not being reversed, but enhanced.

Added to the actions of these all powerful government institutions are those of a relatively new and increasingly influential subset of national entities known as the “sovereign funds “. Dubai , ( known by some as the world’s money laundering capital ), China, Singapore, the OPEC nations and a still growing list of others have spent billions during the past few years buying U.S. based assets, including large positions in major financial institutions barely diminishing their ever mounting reserves of dollars. Hard assets , it would seem are better investments than currency based low yield treasuries, lending thought to the prospect that “ boxing day “ may have ended on December 26th but “ boxing year” in America has only just begun. The country is on sale , not necessarily to the highest bidder , but to any bidder at all.

It is difficult to believe that less than a decade ago America sat unchallenged as the world’s only superpower as it rode the rich technology wave to a budget surplus and record job creation। Remember too that oil in 1998 was at 10$ per barrel and only double that in the days of 9/11. Alas the surplus is no more and the deficit appears to have been permanently installed, while job growth even in the midst of the real estate boom barely matched labour market increases. Meanwhile the Iraq debacle , despite the surge fantasy, continues to waste both precious lives and precious funds as it destroys the last vestiges of America’s international moral and military credibility. This first decade of the new millennium has once again proven that a small group, or cabal if you will, of influential people can have an enormous impact upon history, unfortuneatly this impact is of a negative and destructive nature.

So where to now we might ask? Since the U.S. election is still eleven months away , there is little point in speculating upon what a new administration might do as the problem is about now. Furthermore, a recent poll voted George Bush as America’s most admired person, yes folks even a President Huckabee is possible . Betwixt here and there however lies the challenge for “sane “ Americans to fill the vacuum of intelligent political leadership with new hope for without such hard slogging...disaster looms.

Economy
The American consumer is responsible for 70 plus per cent of the U.S. economy, the savings rate in that country is effectively zero, credit card debt has reached epic proportions and the ATM machine that used to be a three bedroom house is broken. Meanwhile, energy and food prices have continued to escalate in the face of increased demand and market manipulation typified by the absurd subsidization of corn based ethanol. The potential for a return to the stagflation of the 1970's has fast become a topic for discussion among economists who either lived the experience and did not understand it and those who were conceived during its long nights and think they can avoid it.

Gold, energy and food appear to be the investments of choice should such a circumstance come about. It is true that emerging markets may one day replace the need for vast amounts of American consumption but that day has not arrived. China and the other sovereign funds will continue to support the “system” as long as they can and as long as it is in their interest to do so. Think 2008 Olympics.

Look for a strong market upsurge early in the year despite all the bad news as the mass of paper liquidity chases hard assets higher. Beware however that markets and economies are subject in the end to two important tenets, real growth and trust in the system. Such growth is fast fading and confidence in world currencies is eroding at a rapid rate. This is the recipe and the burners are on high.

Commentary
The recent events in Pakistan have underlined the nuclear threat we wrote of last month, they have also served to illustrate the failed policies that have abetted the breakdown. The government of Pakistan has received some 10 billion dollars of Bush largesse since 9/11, monies that were purportedly spent in support of the Bush “ war on terror” as well as to stabilize that country. This is not a joke, it is a tragedy of what may be epic proportion, one born of naivete at best or stupidity at worst. It is past time to change these insane neo con policies and for America and the West to abandon their interventionism as their efforts have not only proven to be wasteful, but counterproductive.

Leave, monitor and contain should be the freshly adopted stance of all serious Presidential candidates। Islamic terrorism is undoubtably a danger to the world but it is not an uncontainable one. North America , Europe including Russia, China , Japan, newly emerging India and Brazil represent a far more powerful potential economic and military alliance than all the bin Ladens of the world can ever dream. It is time to unite in the face of such tenth century foolishness and stop wasting precious resources in the pursuit of oil. Worries over global warming will quickly pale if a loose nuke finds its trigger.

Remarkably
The decade of the roaring twenties ended with a bang not a whimper as the crash of ‘29 brought a painful end to the excessive pursuit of pleasure and of things material that had typified the post Great War period. The depression that followed, it is said , did not have to be so severe, if the policies implemented by the Hoover administration had been more enlightened. Tight money and restrictive trade legislation have long been blamed for the length and depth of the economic decline that ended only with the buildup that preceded the Second World War.

As we look forward now to our present circumstance we note a different reaction to some of the same emerging problems. Instead of tight money, our cure has been greater monetary expansion as we have sought to innoculate the economy with the bacteria that caused the disease. As for trade and globalization , the real boom creators, we now hear rumblings of discontent from both the left and right as the scepter of protectionism and the xenophobia wrought from immigration and job loss move to front and center of the Presidential campaign.

In 1932 Franklin Delano Roosevelt , an aristocratic Democrat replaced the then unpopular Republican Herbert Hoover as President and quickly proceeded to rally the American public, morally if not practically with both his speeches and public policy decisions which appeared to be both inclusive and caring leading many observers of history to believe that his actions saved capitalism from itself and America from a revolution.

Social and regulatory policies implemented during FDR’s three plus terms some 70 plus years ago remain the basis for what is now America’s tattered social safety net. There have been additions over the years in the areas of civil rights and old age medicare of a sort but for the most part the nation has lagged far behind the rest of the industrialized world when it comes to citizen rights. A new agenda is long overdue and it is becoming ever more obvious and increasingly imperative that a vigorous and charismatic leader must emerge soon before the now developing social revolution becomes something else. If America is to move forward and regain the moral high ground it has most recently forsaken then it must elect a new FDR not another George Bush.

December

The Laurel Comment

“We are in a race between cooperation and catastrophe, and the threat is outrunning our response”.
Sam Nunn

Commentary

The global warming issue has once again moved to center stage this month as representatives of 190 nations along with a goodly number of NGO’s initiated a new round of subject discussions in Bali Indonesia, the framework of which, when decided shall replace the Kyoto Protocol which expires in 2012. Once again it is America that has so far chosen to avoid taking a leadership position in this global movement and with the signing on of Australia’s new Prime Minister Rudd, it becomes the only non-aligned nation.

Although Kyoto, and what will soon be known as the “Bali” something, are not, nor have they been a panacea to global warming they do encourage both a constructive effort and a forum for discussion of the views, both pro and con the growth of carbon emissions.

Even though there remains much to be learned in this area, the debate continues to rage over what is bogus science and what the real threat to climate change may be. The question to be begged here concerns the pursuit of knowledge and not the ideological rejection of ideas that don’t fit the anti-progressive mold. Yes there have been questionable claims and hyperbole on either side of the issue but the activation of international caring and commitment should never be diminished or counted out. It is also kind of nice to see some of the world’s youth inspired by something more substantial than i-pods and x-boxes, even if there is little they can contribute to the general solution other than enthusiasm.

The problem, there always is one, that I see with this exciting venture is its relative importance to what may be a greater environmental problem…the nuclear bomb.

For most of the last 60 years the nuclear club had five members; the United States, the former Soviet Union, China, Britain and France; and amazingly with all of the fear and fuss of the Cold War, humanity managed to survive.

However, since the fall of the Berlin Wall and the end of the Gorbachev era, the “peace bonus” as it was once called has been squandered and the age of proliferation has arrived as India, Pakistan and North Korea now boast such capability. The view that nations such as these latter three hold little international threat due to their inconsequential delivery systems and fear of massive reprisal is a questionable one if we take the role of fanaticism and loose nukes into account.

Difficult as it is to fathom, the question of “loose nukes” and unprotected plutonium first surfaced during the breakup of the Soviet Union when in the pre-Putin, pre-oil price surge days, everything was for sale. The answer to this incredibly dire threat was the 1992 passing of the Sam Nunn – Richard Lugar legislation known as the Cooperative Threat Reduction Program. This important and sensible program helped to deactivate or destroy some 7000 nuclear warheads and nearly 700 ICBM’s among other things. Similar to most such intelligent initiatives it was and remains under-funded having spent some 10 billion dollars during its long lifespan, or the equivalent of 3 weeks in Iraq.

According to Michael Crowley of the “New Republic” Sam Nunn the former Democrat Senator from Georgia and co-creator of the “loose nukes” program has since enlisted the support of Ted Turner and Warren Buffett to fund his Washington-based foundation the “Nuclear Threat Initiative” or N.T.I. circa 2001. Please Google.

Alright, now let’s go back to that first number of 6000 nuclear warheads destroyed and understand for a moment that 3 times that many remain, as well as the plutonium to potentially create yet another 40,000 new ones.

The Bush Administration has now spent over 600 billion dollars and incurred future costs of another trillion fighting a war of choice in Iraq that was ostensibly begun in the pursuit of nuclear weaponry. Furthermore, these actions have further empowered the non-Arab Shiite community of Iran and the Sunni Pakistanis. The former, it has recently been revealed, possess no nuclear program despite Bush bombast, while the latter has been an unstable nuclear state for a decade.

The bottom line here is that the world is now relying upon a privately funded (or underfunded) 250 million dollar organization to seek out and destroy real threats while the administration spends trillions chasing neo-con phantoms as it simultaneously courts the newly emerged and potentially combative powers of Pakistan and India.

Does this policy make any sense at all…to anyone?

Markets

Markets successfully tested their August lows in late November before staging a massive 2 day rally that served to place the entire precept of financial rationality in doubt.

We have often noted in this space that markets have a proven tendency to overshoot fair value at both tops and bottoms and that such volatility usually expends itself in the form of a burst bubble or a throw in the towel bottom. It is our view that neither condition has yet been reached.

In previous letters we have described the growth of sovereign funds and their increasing investment importance. China, Russia, India and even Brazil have joined OPEC nations as major players in this realm of super wealth. The amount of money controlled by these “sovereign” nations along with that of the private hedge funds has proven to be enough to not only move financial and commodity markets but to control them. Aided and abetted by the U.S. Federal Reserve, these behemoths have taken a world awash in paper currency created by loose credit and the world’s “out of control” super power and turned its economic system into “casino world”.

Super wealth, not immigration or free trade, is in the process of destroying middle class America and with it, the stability that both the nation and the world require for their survival. Western Europe and our beloved Canada appear to stand alone as bastions of sanity in this nether world of uncaring greed.

Buy gold, it will do well no matter what the market or economic outcome of the coming year.

Remarkably

As has been the case throughout history, booms end in busts and the world goes on to bigger and better cycles. The final result of this the greatest period of world growth is of course yet unknown, and only a reasonable prognostication based on previous performance can be made.

The foundations for a better world are laid through cooperation and diplomacy, functions that are most successfully realized through strong and informed leadership among the major powers and through the growth and improvement of international institutions. Let us hope that such leadership will become the norm rather than the exception in future years as we cannot dodge the bullet of stupidity forever.

Note: Will Stephane Dion’s next dog be named Bali Hai?

November

The Laurel Comment

“Time will run back and fetch the age of gold”.
-John Milton

Commentary

The world had great reason to celebrate on October 28th with the passing of the 45th anniversary of the Cuban Missile crisis. Although this date did not fall on a special number in 2007 its observance held particular importance in light of the recent drum banging by the Bush regime.

Our ability to look back four decades is predicated upon the actions taken, or lack thereof, at that crucial time in history. Similar to all things historic, we are now aware of greater detail than those who lived the experience. This is not hindsight; it is knowledge dispersed over time and now freely available to all through the magic of the Internet. For an interesting take go to the National Public Radio (NPR) site and listen to JFK’s premier speechwriter, Ted Sorenson, review the event.

The lessons of history are numerous and incredibly dangerous when ignored. One such instruction that appears increasingly relevant to our present circumstance is the understanding that permanence as it relates to both allies and enemies is a fleeting thing and an undisciplined measure, both of what has been and of what is likely to come about.

The Bush Administration’s recent campaign against Iran appears to ignore even the most basic lessons of diplomatic process as its penchant for grandstanding and unbridled hubris have now reached pre-Iraq invasion status. Worse still, their rhetoric belies the true effect of such bombast given the recognition by the rest of the world of its now diminished military and economic power. This perception, as it pertains to the Middle East, may prove to be highly dangerous because the true might of America now resides in only one area… its nuclear arsenal and its capacity to deliver weapons of mass destruction. What insanity we might wonder would provoke anyone to consider such a course of action, particularly given the minor nature of the threat? Welcome again to Bush world.

So in the name of perspective let us review once again the friends and foes list of the last century. Our enemies in World War II were Japan, Germany and Italy…okay? Our allies included the ex Soviet Union and China. Fast-forward to the Mao Tse Tung successes of 1949 and the outset of the “Cold War” and we then find that these are allies no more.

Bring on Vietnam, as boy George might opine, and America is soon faced with its greatest policy disaster. Concurrently let’s include the excursions into Latin America and the Middle East where Iran was then America’s best buddy, or at least the Shah was. How things change, by the 1980’s. Reagan at his Machiavellian best was arming both Iran and Iraq during their nine year war of attrition while another crazy in Libya topped their evil persons list.
Then along came Gorbachev and the fall of the wall, reform in China in the post Tiananmen Square era and a whole new look in the Muddled East.

Oh wait! I forgot to mention Osama, Al-Qaeda and America’s support of these gentlemen and the Mujadeen\Taliban during the Afghan-Soviet war. Silly of me, but it is as if this game of musical chairs, normally played by children now resounds to the harshness of rap as opposed to the gentler melodies of my youth; just as the war hawks’ mentality that had remained tethered during that other more serious confrontation of the 1960’s has now been freed to both proselytize upon and perpetuate the myth of nuclear weaponry as a military option.

This is indeed a troublesome time fraught with dangerous people but it is not the little Iranian who is the major problem.

Former enemies Japan, Germany and Italy are now America’s allies. Vietnam, Russia and the late Eastern Bloc have each become trading partners meanwhile China has over a trillion dollars in US currency, an amount that is growing faster than the US treasury can print the paper. Yes and even Muamar Qaddafi, remember him, well Al Qaeda’s number two man now calls him an enemy because he is too close to the United States.

Go figure, is the world going to watch George Bush and his neo con masters risk World War III against Iran, which left alone or properly courted might well prove to be America’s next best friend in that troubled and troubling part of the globe?

Markets

Every bull market ends in a credit\currency crisis and this one is a doozie. The problems this time around are not with the peso, the baht or even the ruble, well not just yet anyway because it is the US dollar that is in deep and dire straits and as Canadians we have carnal knowledge of the event as we have seen our newly minted petro\gold currency reach and surpass historic highs, while the new century’s Euro performs similar aerobatics.

Gold has now traded beyond $800 per ounce but is still priced at one-third of its inflation adjusted 1980 high. The prospects for this imperfect hedge are now almost limitless as paper rich holders around the world seek value for their fast diminishing greenbacks.

We will be hearing a good deal more about “sovereign wealth” over the coming years while excess liquidity in Petro dollars, Asian banks and Hedge funds may presently amount to as much as 20 trillion dollars, an amount that has driven markets higher this past year. But that was then and this now we have been warning of for many months includes the recognition that this mass of liquidity is made of paper and backed by less and less real value. The binge may not yet be over but as Robert Redford famously said…it’s close, it’s damn close.

Remarkably

As the fires raged in Southern California this past month it was interesting to watch the out pouring of sympathy for the many who had to leave their homes for their other homes. It brought to mind the greater tragedies of New Orleans and Iraq where 4 million of the displaced had neither a place to go nor an insurance policy to cover their losses.

And to finish with one more read on markets, someone recently pointed out that if you removed Google, Rim (Blackberry) and Apple from the NASDAQ, the index would be close to even on the year. So I guess that as in all things it’s not what you own but whom you own that counts most.

Buy gold, it has only begun to rise.

Addition

When Charles de Gaulle exited NATO in 1966 he demanded the removal of all U.S. troops to which Lyndon Johnson responded “Does that include the ones buried there?”

From de Gaulle to “freedom fries” to the Sarkozy-Bush wedding…plus ca change…

Geoff Ryan
Nov 6, 2007

GeoffreyRyan@hotmail.com
514-795-8450
http://thelaurelcomment.blogspot.com/

November

The Laurel Comment

“Time will run back and fetch the age of gold”.
-John Milton

Commentary

The world had great reason to celebrate on October 28th with the passing of the 45th anniversary of the Cuban Missile crisis. Although this date did not fall on a special number in 2007 its observance held particular importance in light of the recent drum banging by the Bush regime.

Our ability to look back four decades is predicated upon the actions taken, or lack thereof, at that crucial time in history. Similar to all things historic, we are now aware of greater detail than those who lived the experience. This is not hindsight; it is knowledge dispersed over time and now freely available to all through the magic of the Internet. For an interesting take go to the National Public Radio (NPR) site and listen to JFK’s premier speechwriter, Ted Sorenson, review the event.

The lessons of history are numerous and incredibly dangerous when ignored. One such instruction that appears increasingly relevant to our present circumstance is the understanding that permanence as it relates to both allies and enemies is a fleeting thing and an undisciplined measure, both of what has been and of what is likely to come about.

The Bush Administration’s recent campaign against Iran appears to ignore even the most basic lessons of diplomatic process as its penchant for grandstanding and unbridled hubris have now reached pre-Iraq invasion status. Worse still, their rhetoric belies the true effect of such bombast given the recognition by the rest of the world of its now diminished military and economic power. This perception, as it pertains to the Middle East, may prove to be highly dangerous because the true might of America now resides in only one area… its nuclear arsenal and its capacity to deliver weapons of mass destruction. What insanity we might wonder would provoke anyone to consider such a course of action, particularly given the minor nature of the threat? Welcome again to Bush world.

So in the name of perspective let us review once again the friends and foes list of the last century. Our enemies in World War II were Japan, Germany and Italy…okay? Our allies included the ex Soviet Union and China. Fast-forward to the Mao Tse Tung successes of 1949 and the outset of the “Cold War” and we then find that these are allies no more.

Bring on Vietnam, as boy George might opine, and America is soon faced with its greatest policy disaster. Concurrently let’s include the excursions into Latin America and the Middle East where Iran was then America’s best buddy, or at least the Shah was. How things change, by the 1980’s. Reagan at his Machiavellian best was arming both Iran and Iraq during their nine year war of attrition while another crazy in Libya topped their evil persons list.
Then along came Gorbachev and the fall of the wall, reform in China in the post Tiananmen Square era and a whole new look in the Muddled East.

Oh wait! I forgot to mention Osama, Al-Qaeda and America’s support of these gentlemen and the Mujadeen\Taliban during the Afghan-Soviet war. Silly of me, but it is as if this game of musical chairs, normally played by children now resounds to the harshness of rap as opposed to the gentler melodies of my youth; just as the war hawks’ mentality that had remained tethered during that other more serious confrontation of the 1960’s has now been freed to both proselytize upon and perpetuate the myth of nuclear weaponry as a military option.

This is indeed a troublesome time fraught with dangerous people but it is not the little Iranian who is the major problem.

Former enemies Japan, Germany and Italy are now America’s allies. Vietnam, Russia and the late Eastern Bloc have each become trading partners meanwhile China has over a trillion dollars in US currency, an amount that is growing faster than the US treasury can print the paper. Yes and even Muamar Qaddafi, remember him, well Al Qaeda’s number two man now calls him an enemy because he is too close to the United States.

Go figure, is the world going to watch George Bush and his neo con masters risk World War III against Iran, which left alone or properly courted might well prove to be America’s next best friend in that troubled and troubling part of the globe?

Markets

Every bull market ends in a credit\currency crisis and this one is a doozie. The problems this time around are not with the peso, the baht or even the ruble, well not just yet anyway because it is the US dollar that is in deep and dire straits and as Canadians we have carnal knowledge of the event as we have seen our newly minted petro\gold currency reach and surpass historic highs, while the new century’s Euro performs similar aerobatics.

Gold has now traded beyond $800 per ounce but is still priced at one-third of its inflation adjusted 1980 high. The prospects for this imperfect hedge are now almost limitless as paper rich holders around the world seek value for their fast diminishing greenbacks.

We will be hearing a good deal more about “sovereign wealth” over the coming years while excess liquidity in Petro dollars, Asian banks and Hedge funds may presently amount to as much as 20 trillion dollars, an amount that has driven markets higher this past year. But that was then and this now we have been warning of for many months includes the recognition that this mass of liquidity is made of paper and backed by less and less real value. The binge may not yet be over but as Robert Redford famously said…it’s close, it’s damn close.

Remarkably

As the fires raged in Southern California this past month it was interesting to watch the out pouring of sympathy for the many who had to leave their homes for their other homes. It brought to mind the greater tragedies of New Orleans and Iraq where 4 million of the displaced had neither a place to go nor an insurance policy to cover their losses.

And to finish with one more read on markets, someone recently pointed out that if you removed Google, Rim (Blackberry) and Apple from the NASDAQ, the index would be close to even on the year. So I guess that as in all things it’s not what you own but whom you own that counts most.

Buy gold, it has only begun to rise.

Addition

When Charles de Gaulle exited NATO in 1966 he demanded the removal of all U.S. troops to which Lyndon Johnson responded “Does that include the ones buried there?”

From de Gaulle to “freedom fries” to the Sarkozy-Bush wedding…plus ca change…

Geoff Ryan
October 1, 2007
GeoffreyRyan@hotmail.com
514-795-8450
http://thelaurelcomment.blogspot.com/

October 1

The Laurel Comment

“I think we agree, the past is over”
-George W. Bush
Markets

The August sub prime crisis that served to mortify bulls and please the “I told you so” bears largely subsided in September as the world’s central banks injected unseemly amounts of cash into the system, effectively solving a credit problem by expanding credit.

On the surface of things this unprecedented action brought both stability and strength to equity markets and some “funding” currencies such as the Euro and our own resource backed dollar. It also empowered US dollar based commodities, as both gold and oil rose to new (unadjusted for inflation) highs.

It is now, however, October and the beginning of the year’s final quarter, one that has begun trading with a continued upswing. As we write, Canadian markets have risen well above 14,000 and the dollar has exceeded par with its US neighbour. In America the weak currency has continued to help equity markets regain, and even surpass, their mid-July highs as foreigners convert their ever more worthless paper into the harder assets found within US companies.

The question before investors now is to decide whether the printing presses of the world’s banking system are solving the present problem or creating a far greater one. There are of course, differing opinions as to what the likely outcome may be, for as Mark Twain familiarly stated “that is what makes horse races”. The opinion of this writer for many months has been and continues to be guardedly pessimistic. It is possible that China may be capable of kiting America’s cheques through to the end of next summer’s Olympics, it may also be their wish to do so. But on balance we don’t believe that this can happen and that a severe market correction will soon occur.

There are any number of reasons both fundamental and technical for adopting either a bullish or bearish stance at this juncture, the most important of which resides in market momentum and the continuance of present trends. If you are determined to remain fully invested I extend my very best wishes but advise that you might do well to hedge your bank stocks with some gold positions. Try a Sprott fund or the Horizon ETF (symbol HGU). There is also a pure bullion play available through Central Gold Trust (symbol GTU.UN).

Special situations also exist among Oil and gas Royalty trusts as the merger and acquisition game continues. You might also wish to follow one of Canada’s more astute investors, Seymour Schulich, first by following him into Starfield (SRU) and Birchcliff (BIR) and secondly through reading his book “Get Smarter”.

You may also use this period to cover your gains with 100% or 150% national or Quebec based tax shelters.

Commentary

There are numbers and then there are numbers beneath the numbers, the ones that we can grasp.

The all time high for gold was reached in January of 1980 at $850 US dollars per ounce, a price this letter has projected for year’s end. But wait a minute folks, this is like comparing apples to oranges because the real price, you know the one you think your house is worth, would be better reflected in current dollars; and when adjusted for inflation that number would be in excess of $2000 dollars per ounce. Think of oil at 40 1980 dollars then apply the same 2.5 times multiple and think about how cheap gas actually is when that equivalent comes to one hundred bucks a barrel.

The flip side of these realities can be seen when you reduce the inflation factor to constant dollars and discover that the much followed S&P 500 has only appreciated from 139 at its 1982 August bottom to 270, not the inflated factor of 1555 which it reached this past July. As David Nichols points out in his Fractal Market Report this truer measure reflects a realistic growth factor of doubled wealth over 25 years.

So next time you are calculating your net worth think about that $60,000 cost home you own that is now selling for upwards of $400,000 and ask what it all means?...or on second thought maybe we shouldn’t bother.

Remarkably

A recent analysis of the Iraq War cost put the number at 720 million dollars per day, an amount that promises to continue to grow for some years into the future.

Last month we wrote of the need for an infrastructure rebuild in America that would dwarf the one required here in Canada, one that will take 5 years and a trillion dollars to begin to address. Strangely this is roughly the amount that has been frittered, no pissed away, in Iraq over that same period of time.

The question for the Democrats, should they be elected, is whether they will reverse this course by withdrawing from the former debacle and implementing the latter programs.

Long ago, Bill Copp, suggested that Iraq be divided into 3 federal or independent sectors whose transition would be temporarily guarded by United Nations forces made up of mostly Muslim nations, a position that has since been adopted by some Democrats. It is now later but it is not too late to begin the beginning. If you believe the foregoing then sell defence stocks and buy infrastructure for the coming 4 years.

Real numbers also tell a different story when the actual cost of oil is assessed. Details are available to anyone who wishes to do the research but suffice to say that 80 dollars per barrel does not include the 50 billion tax payers send to the Middle East each year nor does it include the subsidies given to the energy companies. Factor everything in and you come up with a number closer to $260 dollars a barrel. Don’t believe me? Then read it in a Senate report and discover what the true depth of lobbying can mean.

And finally, do the math once more on displaced Iraqis; 4 million of them are now refugees. That’s roughly 15% of the population, a number equivalent to greater Toronto.

What is there not to see? Maybe if New Yorkers had to pass through an Iraqi checkpoint as they travelled to and from work or day care, they might begin to understand what Bush’s America has wrought.


Geoff Ryan
October 1, 2007
GeoffreyRyan@hotmail.com
514-795-8450http://thelaurelcomment.blogspot.com/

September

The Laurel Comment

“The modern conservative is engaged in one of man’s oldest exercises in moral philosophy: this is to search for a superior moral justification for selfishness.”
John Kenneth Galbraith
Commentary

There seems to be little question that the opening decade of this, the third millennium has been frought with unforeseen difficulties. There is also little doubt that the present dearth of competent world leadership has served to magnify rather than to alleviate or resolve these growing negatives.

In our view however the major long term event that has overshadowed all others is not the absurd Iraq war but the China growth story and that of the other emerging economies in Russia, Brazil and India. These economic stories are the basis upon which our future world will develop and their potential will not be consumed but enhanced by Middle Eastern misadventures.

While America remains the world’s most powerful economy it is no longer the engine of international growth that it once was, as the diminishment of its national treasure and global reputation is now reaching unprecedented proportions. The arrogance of power, as Senator William Fulbright once called it, has truly been perfected by the Bush administration.

The final cost of the Iraq war is now being estimated at 1 to 2 trillion dollars while a recent paper on the need for an infrastructure rebuild in America calls for a 1.6 trillion expenditure over 5 years.

Although we Canadians have become acutely aware of our own such basic infrastructure failures in recent years, our needs pale when compared with the creaking underpinnings of major U.S. cities and the interstate highways that were constructed 50 years ago. The tragedies are multiplying monthly if not weekly and they are each so unnecessary.

Bombs, guns and the equipment of war are indeed stimulants to short term economic growth but aside from the obvious issues of morality and waste they are essentially, unless you are Halliburton, a non-productive use of public funds.

When a bridge, a sewer system, a hospital or a school is built the money spent is regenerated within the community and taxes are paid by both the companies contracted and the workers employed. Better still, at the end of construction society may have a useful facility or a safer environment instead of an exploded bomb, a flag draped coffin and an enriched defence contractor with an offshore account.

Put your two palms up and weigh these alternatives in the balance of life.




Markets

It has taken far longer then we ever expected for world markets to recognize the potential dangers inherent in the most recent policies of many of their central banks. Led by the once monetarist U.S. federal reserve, money supply growth has soared beyond any historical measure, save the Weimar Republic, while access to fast money and easy credit has abounded.

The surprise so far however, has not been the volatility of the market’s reaction but the facility with which it recovered from its August 16th flirtation with disaster, wherein the Fed, which had created the problem in the first place temporarily solved the liquidity crisis by creating more liquidity. This addendum policy was highly necessary as a short term solution and effectively added trading stability, but in the end we must ask…for how long?

We are now over 5 years into this present cyclical bull market and the time to pay heed to history has become imminent. The problem of a credit expansion and an inflated stock market can only be resolved by a contraction in both. The bigger the bubble grows, the greater the bursting will be, when not if it occurs.

The sub prime mortgage and “teaser” loan crisis has yet to work its way though the economy because the big jump up in U.S. mortgage rates will not take place until January. Markets however, will not wait until then to discount a possible recession in 2008.

September and October are the two worst market months of the year in normal times and these are not those. Please pay attention to the seasonality of what is happening and continue to take serious precautions as this summer’s action has a familiar 1987 look about it. For those of you who are either short of years or memory Google 1987 crash and look at a chart of the period, then move a large portion of your investments to cash or short ETF’s and sleep like a baby until all this passes; as it surely will.

Remarkably

Breaking news has Toyota taking over second place from Ford in U.S. car sales but the real economic and moral news is written beneath the headline number. BMW and Lexus sales have risen over 20% this past quarter while mid-sized cars, light trucks and compacts sales are all down. Get it, the rich are doing okay while everyone else is heading into the tank. Welcome to Bush world.

The ATM machine that closely resembled the average American’s house these past four or five years has stopped functioning and the aftermath wrought by tighter credit is about to begin…and no, cutting taxes to the already wealthy is not even on Bush’s agenda although it may be on Harper’s.

The Laurel comment may be wrong about all this but why take a chance.

Some months ago this letter noted a possible shift in Bush Administration policy towards Iraq. This transition of support from Shiite to Sunni now appears to have crystallized with the Bush Labour Day visit to Anbar province where a courtship of Saddamites appears to have been furthered. This situation bears watching.


Geoff Ryan
September 4, 2007
GeoffreyRyan@hotmail.com
514-795-8450
http://thelaurelcomment.blogspot.com/