Wednesday, April 30, 2008

Freedom of Speech in Canada

Today's article by Mark Steyn from Macleans Magazine examines the difficulties in the creation and enforcement of Human Rights legislation in Canada. (though it applies equally to most democratic states) This is part of a broader and disturbing trend in North America- the proliferation of "Communications" and "Public Relations" experts toiling over the wordings of statements for government officials and corporate entities that has led to a white-washing of meaning in public policy and accuracy of information.

Phrases and speeches are created to win over the audience under the assumption that as a whole we lack the intellect, desire or attention span to probe deeper behind the panoply of writer's tools. In his article, Mark Steyn discusses the faulty logic of Human Rights supporters in their zeal to create a society where no one is offended and no one dare have their sensibilites broached without legal recourse.

Canada stands as a fantastic example of how people of different cultures can work together to build a tolerant and humane society.
I enjoy the cultural traditions of different cultures including my own, but refuse to deify them as objects of worship. In stark contrast to the richenss of diversity is the notion that our right to speak freely should be contricted in various ways to prevent incting violence on others regardless of the validity and objectivity of the words in question. Form over substance is the order of the day for many, and its why some favour censorship of grotesque images on Television or the reporting of suicides in newspapers; exposure may breed replication, and only the state can protect us from copycat actions, not our own good judgement.

Lets be clear: there is a distinction between our rights as human beings, and the "human rights" legislations and policy decisions that emanate from them. The former is inherent in the equality of all human beings, while the latter is a human-construct with good intentions but has failed to prove its ability to protect anyone accpet those with glass jaws.


Please send more complaints

(Otherwise how will our taxpayer-funded hate police manage to keep their cozy sinecure?)

MARK STEYN April 23, 2008 MARK STEYN-->

Last week's letters page included a missive from Jennifer Lynch, Q.C., chief commissioner of the Canadian "Human Rights" Commission, defending her employees from the accusation of "improper investigative techniques" by yours truly. Steyn, she writes, "provides no substantiation for these claims," and then concludes:
"Why is this all important? Because words are important. Steyn would have us believe that words, however hateful, should be given free rein. History has shown us that hateful words sometimes lead to hurtful actions that undermine freedom and have led to unspeakable crimes.

That is why Canada and most other democracies have enacted legislation to place reasonable limits on the expression of hatred." "History has shown us that hateful words sometimes lead to hurtful actions that undermine freedom and have led to unspeakable crimes."

Commissar Lynch provides, as she would say, "no substantiation for these claims." But then she's a "hate speech" prosecutor and, as we know, Canada's "human rights" procedures aren't subject to tiresome requirements like evidence. Those of us who occupy less exalted positions in the realm might wish to ponder the evidence for her assertions.

It's true that "hurtful actions that undermine freedom" and lead to "unspeakable crimes" usually have some fig leaf of intellectual justification. For example, the ideology first articulated by Karl Marx has led to the deaths of millions of people around the planet on an unprecedented scale. Yet oddly enough, no matter how many folks are murdered in the name of Marxism-Leninism, you're still free to propound its principles at every college in Canada.

Ah, but that's the Good Totalitarianism. What about the Bad Totalitarianism? You know, the one everybody disapproves of: Nazism. Isn't it obvious that in the case of Adolf Hitler, "hateful words" led to "unspeakable crimes"? This argument is offered routinely: if only there'd been "reasonable limits on the expression of hatred" 70 years ago, the Holocaust might have been prevented.
There's just one teensy-weensy problem with it: pre-Nazi Germany had such "reasonable limits." Indeed, the Weimar Republic was a veritable proto-Trudeaupia

As Alan Borovoy, Canada's leading civil libertarian, put it:
"Remarkably, pre-Hitler Germany had laws very much like the Canadian anti-hate law. Moreover, those laws were enforced with some vigour. During the 15 years before Hitler came to power, there were more than 200 prosecutions based on anti-Semitic speech. And, in the opinion of the leading Jewish organization of that era, no more than 10 per cent of the cases were mishandled by the authorities. As subsequent history so painfully testifies, this type of legislation proved ineffectual on the one occasion when there was a real argument for it."

Inevitably, the Nazi party exploited the restrictions on "free speech" in order to boost its appeal. In 1925, the state of Bavaria issued an order banning Adolf Hitler from making any public speeches. The Nazis responded by distributing a drawing of their leader with his mouth gagged and the caption, "Of 2,000 million people in the world, one alone is forbidden to speak in Germany."

The idea that "hate speech" led to the Holocaust is seductive because it's easy: if only we ban hateful speech, then there will be no hateful acts. But, as professor Anuj C. Desai of the University of Wisconsin Law School points out, "Biased speech has been around since history began. As a logical matter, then, it is no more helpful to say that anti-Semitic speech caused the Holocaust than to say organized government caused it, or, for that matter, to say that oxygen caused it. All were necessary ingredients, but all have been present in every historical epoch in every country in the world."

Just so. Indeed, the principal ingredient unique to the pre-Hitler era was the introduction of Jennifer Lynch-type hate-speech laws that supposedly protect vulnerable minorities from "unspeakable acts." You might as well argue that Weimar's "reasonable limits" on free speech led to the Holocaust: after all, while anti-Semitism is "the oldest hatred," it didn't turn genocidal until the "reasonable limits" proponents of the day introduced group-defamation laws to Germany.

Between-wars Europe was awash in prototype hate-crimes legislation. For example, the Versailles Conference required the new postwar states to sign on to the 1919 Minorities Protection Treaty, with its solemn guarantees of non-discrimination. I'm sure Canada's many Jews of Mitteleuropean origin will be happy to testify to what a splendid job that far-sighted legislation did.

The problem the Jews found themselves up against in Germany and elsewhere was not the lack of hate-speech laws but the lack of protection of the common or garden laws — against vandalism and property appropriation and suchlike. One notes, by the way, that property rights are absent from Canada's modish Charter of Rights. The reductio ad Hitlerum is the laziest form of argument, so it's no surprise to find the defenders of the ever-more-intrusive "human rights" enforcers taking refuge in it. But it stands history on its head. Most of us have a vague understanding that Hitler used the burning of the Reichstag in February 1933 as a pretext to "seize" dictatorial powers. But, in fact, he didn't "seize" anything because he didn't need to. He merely invoked Article 48 of the Weimar Republic's constitution, allowing the state, in the interests of the greater good, to set — what's the phrase? — "reasonable limits" on freedom of the press, freedom of expression, freedom of association, freedom from unlawful search and seizure and surveillance of postal and electronic communications. The Nazis didn't invent a dictatorship out of whole cloth. They merely took advantage of the illiberal provisions of a supposedly liberal constitution.

Almost all those powers the Nazis "seized" the morning after the Reichstag fire, the "human rights" commissions already have. In the name of cracking down on "hate," Canada's "human rights" apparatchiks can enter your premises without a warrant and remove any relevant "document or thing" (as the relevant Ontario legislation puts it) for as long as they want it. And without anybody burning the House of Commons or even the Senate.

As for "freedom of the press," in her now celebrated decision to dismiss the Canadian Islamic Congress complaint against Maclean's, Barbara Hall of the Ontario "Human Rights" Commission acknowledged that she did not have jurisdiction over magazines. So she ruled that, while she didn't have the power to toss us in the clink, she'd certainly like to and we certainly deserve it. Commissar Hall suggested that if my words had appeared on a sign rather than in a magazine article, she would be free to haul my hatemongerin' ass into the dock. So I've now put the offending excerpt from my book on a placard and I'll be in Toronto in the first week of May to drop it off at her office. I look forward to the prosecution. Given that we've already been found guilty, I don't think I've got much to fear from the trial.

Happily, beginning on July 1, under Ontario's "human rights" reforms, Commissar Hall will have far greater powers to initiate prosecutions against all and sundry. Under the new proposals, " 'hate incident' means any act or omission, whether criminal or not, that expresses bias, prejudice, bigotry or contempt toward a vulnerable or disadvantaged community or its members." "Act or omission"? Of course. The act of not acting in an insufficiently non-hateful way can itself be hateful. Whether or not the incident is a non-incident is incidental.

I quote from "Concepts Of Race And Racism And Implications For OHRC Policy" as published on the OHRC website:

"The denial of racism used by so many whites in positions of authority ranging from the supervisor in a work place to the chief of Police and ministers of government must be understood for what it is: an example of White hegemonic power over those considered 'other.' "

Got that? Your denial of racism merely confirms your racism — because simply by being a "White hegemon" (like Barbara Hall or Jennifer Lynch) you wield racist power.

The author, Frances Henry, cites the thinking of "modern neo-Marxist theorists" as if these are serious views that persons of influence in Canada's "human rights" establishment ought to be taking into account, rather than just the latest variant of an ideology that's led to the deaths of millions in Russia, China and everywhere else it's been put into practice. Yet, underneath the blather about "omissions" and "denial" of racism is the bleak acknowledgement that, alas, Canadians just aren't hateful enough to justify the cozy sinecure of taxpayer-funded hate police.

Oh, and again, isn't that kind of a Nazi thing to do? Exaggerate the threat in order to justify government powers to deal with it?
Well, look, the defenders of the present "human rights" regime started this whole free-speech-leads-to-the-Holocaust line. I'm not saying that Canada's thought-crime enforcers are planning to murder millions of people, only that (as Jennifer Lynch might put it) history has shown us that extraordinary government powers in the name of "reasonable limits" often lead to hurtful actions that undermine freedom and have led to unspeakable crimes. Whether or not I'm the new ¼hrer and Maclean's is Mein Kampf, Commissars Lynch and Hall are either intentionally inverting the historical record or, to be charitable, simply ignorant. But, if it's the latter, why should they have extraordinary powers to regulate public discourse?

I don't have as low an opinion of Canadians as Barbara Hall and Jennifer Lynch do. I don't believe your liberty is the conditional discretionary gift of hack bureaucrats advised by Marxist theorists. You defeat bad ideas — whether Nazism, Marxism, jihadism, Steynism or Trudeaupian pseudo-"human rights" mumbo-jumbo — in the bracing air and light of day, in vigorous open debate, not in the fetid corridors of power policed by ahistorical nitwits.

It's not a left/right thing. It's not a gay/straight thing. It's not a Jew/Muslim thing. It's not a hateful/nice Canadian thing. It's a free/unfree thing. And the commissars are on the wrong side.

Tuesday, April 29, 2008

Inflation squeeze on Europe's middle class

An interesting article from regarding inflationary effects on Europe's middle class.

Tuesday, April 29, 2008

LES ULIS, France: When the local bakery increased the price of a baguette for the third time in six months last year, Anne-Laure Renard and Guy Talpot invested in a bread-baking machine. When gasoline became their single biggest monthly expense in January, they decided to sell one of their two cars.

Now, as everything from baby milk to chocolate desserts drives up their living costs, Renard, a teacher, and Talpot, a mailman, are planning their most radical lifestyle change yet: They are getting married to reduce their tax bill.

Across Europe, people in the middle layer of the labor force - from office workers, civil servants and skilled laborers to low-level managers - are coping with a growing sense that they are being pushed to the margins like never before, as a combination of rising costs and stagnant wages erodes their purchasing power.

Prices for basic goods from gas to milk are rising sharply, outpacing pay rises linked to official rates of inflation. Families that once maintained pleasant lifestyles afforded by two incomes find the rise in costs - which have accelerated worldwide in the past year - has pushed them to the tipping point. Many Europeans are pinching pennies on food and everyday items, while cutting back on a range of extras, from movie tickets to vacations abroad.

More worrisome, a generation of European workers is grappling with a rising sense of injustice as they face the reality that they may be becoming worse, not better, off than their parents. Even holding classic middle-class professions with a university degree has become less of a guarantee against economic hardship. That, in turn, is igniting concerns of an even more uncertain future for their own children.

To be sure, the middle class in Europe is still more prosperous than the disturbingly large group of citizens who are at risk of poverty. According to the European Commission, 16 percent of the population of Europe falls into this category. Policy makers are concerned that could worsen as the economy feels the sting of a U.S. slowdown, while inflation spirals around the globe.

Yet these same forces are also widening the pool of middle-class Europeans who see themselves on the edge of impoverishment. That concern boiled over to anger last week in Britain, when teachers closed the country's schools for the first time in two decades to protest pay deals that are not keeping up with the soaring cost of living. Especially for those who were not lifted by the latest financial market bubble before it started to collapse last summer, there is fear that proposed pay rises of about 2.5 percent are too meager to absorb food and oil costs that have surged in Britain by about 7 percent and 20 percent, respectively, from a year ago.

Their rallying cry is the latest to echo across Europe. German workers in several industries last month waged a series of strikes to demand a greater piece of the economic pie after years of being asked to make do with stagnant wages.

In France, a range of professions from teachers to factory workers have taken to the streets to urge politicians to counter a decline in purchasing power. This month, thousands of European workers protested on the same theme in Ljubljana, the capital of Slovenia, which currently holds the EU's rotating presidency.

Bowing to public concern, some European governments are promising relief, though their powers to curb inflation or raise pay are limited. In France, where the erosion of purchasing power has overtaken unemployment as the No. 1 public concern, the administration of President Nicolas Sarkozy is, among other things, looking into alleged "abuses" of pricing by food merchants. Neighboring Germany is mulling lower social insurance taxes to offset higher prices.

Capturing the squeeze felt by the European middle class in statistics and across national boundaries is tricky because this grouping has no universal definition. National authorities calculate purchasing power differently, making cross-border comparisons difficult.

Much of the story of declining purchasing power can be traced to policy decisions and economic developments that have taken place within the last decade, when the forces of globalization began to reshape the European and global landscapes.

Governments and employers, especially in industrial sectors, have kept pay rises modest, a trend that was manageable as long as inflation did not accelerate in a surprisingly sharp manner. In addition, more of each country's income has gone to the wealthiest individuals, underpinning the acute feelings of inequality across the broad middle class.

In Germany, the largest European economy, purchasing power had already been declining since 2000, when employers were able to wrest wage concessions or simply shift jobs away as Eastern Europe and China emerged as centers of low-cost labor. Inflation-adjusted incomes rose between 1 percent and 2 percent in the late 1990s, but in 2006 they rose only 0.5 percent and then declined by the same amount last year.

In France, the introduction of a shortened, 35-hour workweek in 2000 has kept average annual pay increases small. Spain, which generated thousands of new jobs for Spaniards and migrant workers by pumping up the housing market, has seen joblessness jump since the bubble burst, while wages are eaten by an inflation rate that is more than double the 2 percent level that most economists consider stable.

Stagnant pay and soaring food and energy prices have curbed consumption in Italy more than any of the other 14 countries that share the euro, sharpening fears that the country cannot escape decline. Since 1999, consumer prices in the EU's 27 member states have risen 22.5 percent, and are up 18.8 percent among the 15 countries that use the euro.

But some pushback is emerging, as the demonstrations in Britain suggest.

Employers and economists in Germany drummed into public discourse the point that labor costs had spun out of control, costing manufacturers much of their market share. But with purchasing power eroding, unions are trying to reverse the trend, drawing a tougher line in wage talks - with some success.

(Carter Dougherty reported from Frankfurt. Victoria Burnett contributed reporting from Madrid and Elisabetta Povoledo from Rome.)

Monday, April 28, 2008

After the Gold Rush

I came across this article while reading Its an interview with Richard Davis of BlackRock's natural resource team in the UK who run the Merrill Lynch Gold and General Fund, renamed today to the BlackRock Gold and General Fund.

After the Gold Rush, with Richard Davis

What are the factors that will result in a steady decline or rise in the price of gold, outside of dollar strength/weakness over the coming months?

RD: One of the key factors will be investment demand. This is important because investment demand is really the only factor that can drive a long-term bull market in gold. In fact, every bull market has been driven by investment demand.

There are many reasons why people today buy gold as an investment. Some people are worried about inflation, US dollar weakness or geopolitics for example. Buying gold as an investment is not something we tend to do in the UK, but it is common practice in many countries in Asia and the Middle East for example. Importantly, these countries are becoming wealthier, so investment demand could continue to grow strongly in these regions. ............................................................................................................................................

Do you think the current trend down is more of a short term correction or a long term trend as liquidity constraints are being resolved?

RD: The fall from US$1,030 per ounce to current levels is a short term correction in a long-term bull market. The factors that have been driving prices higher for the past 7-8 years remain very much intact. These factors include, amongst others, rising investment demand and shrinking mine production.


How serious are the likely effects of the potential electricity rationing in South Africa for gold supply? How will this affect gold stocks?

RD: South Africa is the world’s second largest producer, supplying 270 tonnes or roughly 11 per cent of global mine production. The power shortages in South Africa can only have a negative impact on supply. There is no quick fix to the problems, which stem from underinvestment in new generating capacity. It is estimated that it could take Eskom, the power utility, until 2011-12 to redress the problems.


In the long term and once we are over the current credit crisis, what are the prospects for physical demand for gold? As India and China become richer and global growth rates rise, will prices recapture recent highs?

RD:Physical demand for gold will grow in the long term. India is already a substantial buyer of gold, accounting for 555 tonnes, or 23 per cent, of total jewellery demand.

China is less important at 302 tonnes but has greater scope for growth. Per capita consumption of gold in China is extremely low – just 0.2g per capita per year compared with 2g per capita per year in Hong Kong, for example. As incomes grow, consumption should increase. This will be positive for gold prices.


Central banks around the world have been net sellers of gold for many years now. With investors driving the price of gold to new highs should central banks re-evaluate the role of gold in their reserves?

RD:European central banks have been net sellers of gold for many years. Arguably, they should re-evaluate the merits of selling. In recent years, gold has been the best performing currency – prices have risen in every major currency – so central bankers should ask themselves if it’s a good decision to keep selling their best performing asset.

Another interesting question is when they sell gold, what do they buy? Do they really want more US dollars? Outside Europe, central banks are now net buyers of gold for the first time in many years. My view is that any re-evaluation of gold will be made by central banks that don’t own enough and they could make a decision to buy some more.


What impact could further gold sales by central banks and the IMF have on physical supply of gold - as a high gold price, combined with growing budget problems worldwide, could increase their incentive to raise money from gold sales?

RD: European central banks are the main sellers of gold. Their sales are part of the Central Bank Gold Agreement (CBGA) which sets a limit of 500 tonnes per year. Any IMF sales will also be part of the CBGA. As the USA and Japan have stated they will adhere to the spirit of the CBGA, no other central bank owns enough gold to have much of an impact on the market.

China is the ninth largest holder, but with only 1-2 per cent of its reserves in gold, China is more likely to be a buyer. Going forward, we may see an increase in net buying by countries outside of the CBGA.


The US Federal Reserve has a dual goal: to fight recession and to fight inflation. If it is pumping dollars into banks and credit markets to fight recession, is there any evidence it has also been shorting gold to fight perceived inflation?

RD:There is no evidence to suggest that the Fed is shorting gold.


Has central bank intervention in the precious metals market actually been helpful to world economies?

RD: One example of intervention was the signing of the Central Bank Gold Agreement (CBGA) in the late 1990s. This limited the amount of gold that the European central banks could sell. This was a very positive step for gold prices because the market now had clarity on the volume of gold that would come onto the market.

Rising gold prices have been positive for gold exporting nations, many of which are emerging economies. In fact, many of these countries lobbied hard against IMF sales in the 1990s because of the potential adverse impact they would have had on their economies.


When the central banks sell, who are the primary buyers? I’ve read that there has been a major shift in the ownership of gold from the central banks and the governments they represent to the public, with the public now owning somewhere near 70 percent. Is this correct?

RD:When central banks sell, the main buyers are jewellers and investors. It is worth pointing out that jewellery demand alone is roughly equal to the amount of gold supplied by the mining industry.

The amount of gold that has ever been mined is 161,000 tonnes. The bulk of this - 83,000 tonnes - is in the form of jewellery. Only 29,000 tonnes, or 18 per cent of total stocks, is currently held by the world’s central banks.


Most of the recent gold investors never take possession of physical gold but instead invest in a claim to gold. Does this mean that gold rally of recent years is yet another asset price bubble?

RD:My view is that gold’s rally is not an asset price bubble, but is part of a long-term bullish trend driven by supply-demand fundamentals. A lot of demand for gold has made through exchange traded funds (ETFs), which is tantamount to buying the physical metal.


My purchase of gold mining stocks last year (Barrick and Kinross as well as Ishares) has not performed as well as the actual price of gold. What would you recommend as the best vehicle to take advantage of gold price movements?

RD: Gold shares have been disappointing given the movement in gold bullion.

Historically, gold equities have provided decent leverage to the gold price, but in last couple of years or so the benefits from rising bullion prices have been eroded by higher costs, so their margin expansion has been poor and this is reflected in their share price performance.

I think that the rate of increase in costs will taper off and that the producers will succeed in growing margins as gold prices rise. In fact, we saw this in the quarterly results of Newmont Mining released last week. So in answer to your question, I think you can make money by holding on to your gold equities

I’ve read that 75 per cent of the world’s gold has already been mined and the remainder is expensive and difficult to obtain... Will increasing wealth in the Brazil, India and China leave demand outstripping supply, or is there something that could cause a real gold crash sometime in the future, with prices dropping back to say half of today’s levels?

RD:Total demand for gold already significantly exceeds mine supply. The market needs central bank selling and scrap sales in order to fill the gap. Demand will continue to grow as emerging economies, especially Brazil, India and China become wealthier, while mine supply will struggle to grow – so this gap could rise, which would lift prices in the long term.

What could send prices sharply lower would be the dissolution of the Central Bank Gold Agreement and a return to unlimited gold sales by the European central banks. Any sales by the US would also be negative. These scenarios are unlikely in my view.


Would you agree that many of the mining majors are exhausting their reserve base, especially in light of high-grade production in recent years? And do you anticipate increased mergers and takeovers among junior miners & mid-tier producers with resource positions, in order for the majors to replenish their reserve bases?

RD: Gold reserves are being exhausted. Barrick Gold, one of the world’s biggest gold producers, estimates that around 15 million ounces of new discoveries were made last year by the gold mining industry. This compares to production of 80 million ounces.

According to Barrick’s analysis, global mine production will fall 10-15 per cent in the next 5 years. This poor success rate in exploration is not due to under funding. Indeed, budgets today are at record levels.

The key issue is that all the big, easy-to-find orebodies have already been found. There is no short term solution to the problem. The average time taken from discovery to production is around 10 years.

This is why M&A activity has been and will continue to be a feature of the equity market. The most efficient way to increase reserves and production is by buying another company. This gives instantaneous growth to reserves, production and sometimes earnings per share. The alternative is to grow organically through the drill bit which could take years and may even be completely fruitless.

Sunday, April 27, 2008

Religion as a legitimate target of debate and respect, not just the latter at the expense of the former.

Interesting book I recently came across from Walter Benn Michaels titled "The trouble with diversity"

"Religions are beliefs, not cultures, and that religions by their very nature are making truth claims. Truth claims by their very nature, in a democratic society, are to be debated and vetted publicly. We shouldnt exclude or preclude religious discourse from public dialogue, but rather it must be stricken from our notions of ‘respect’ and that it must be engaged as any other faulty truth claim in debate in the public sphere. "

Benn Michaels, The Trouble with Diversity

Canadian Gold Miners (XGD) TA update

Here is an updated 1 year chart for the XGD, Canadian Gold Miner's ETF. My chart from last Wednesday posed the question of a plunge in the making. The XGD is sitting at deeply oversold levels for the RSI, STO and MACD. A bounce next week could mark the start of a new upleg, or a fake out as the price of gold corrects towards its 200 MA at the low 800- high 700 level. The XGD is at a multi-year low relative to the price of gold. It seems the miners get hammered as more bad news develops for the POG yet other equities rise as news of write downs, losses and foreclosures mount. As oil breaks record highs the headlines claim costs of mining are rising too fast, hurting the sector, yet on pulls back in oil the same headlines claim the commodity bubble bursting and calls for gold/gold shares to fall in sympathy.

For investors in the gold mining shares its been over 2 years of under performance to the POG. At what point do mining shares become so cheap relative to gold that value investors begin to notice? There would be no point in ever investing in mining if the metal itself were a better investment, who would take the added risks of investing in mines?

Jim Sincliar has called for a resolution to the downdraft in gold and the shares by early May 2008. For now the TA is my guide.


I own shares in the XGD, this is not investment advice, and I am not an investment professional or advisor and have no affiliation with or have received remuneration from the custodian of the XGD ETF.

Saturday, April 26, 2008

Peter Schiff and Food Inflation

Peter Shciff's article this morning continues on the theme of inflation he has been concerned about for several years. Peter Schiff, dubbed "Doctor Doom" by the likes of CNBC and Fox News, has been incorrectly considered a perma-bear with the likes of Stephen Roach. I disagree with this assessment as Mr. Schiff has seen solid returns from investments in precious metals and equities outside North America which haven't eroded due to the currency devaluation occurring in The United States.

Food inflation is a page 1 story at the moment, but consider analysts like Peter Schiff, Don Coxe and Nouriel Roubini have been calling for this since wheat and rice prices were less than half of their current value only a few years ago.


Why Not Let the Market Set Prices?

Peter Schiff
Apr 25, 2008

Those unfamiliar with marketplace dynamics may not recognize how government activity has created price distortions across our economy. But when these chains fail to restrain the market, the underlying forces become easier to see.

Much as government mandated easy credit propelled home prices to bubble levels, similar forces pushed college tuition's up to the stratosphere. Both systems are currently breaking down along similar lines.

In light of the staggering cost of college education today, it may seem unbelievable that my father in the early 1950s was able to finance his own education with a summer job waiting tables. Like most in his generation, eight weeks of work per year allowed him to graduate debt free. In contrast, the debt burden now heaped on today's college graduates is so oppressive that the financial challenges are becoming a palpable psychological strain on an entire generation.

The irony is that without easy access to student loans, which have been touted as a means to ease college affordability, tuition's never could have risen so high in the first place. Sadly, it is not students who have benefited, but the educational establishment that receives the proceeds. Colleges collect huge sums of money up front while students get saddled with staggering balances.

Now that repaying loans has become increasingly difficult for home buyers and students (especially since the home equity well has run dry and the employment market has cooled), more debtors are defaulting. As a result, the market for securitized loans, which has completely dried up in the mortgage market, is now equally desolate for student loans. Here again, the government is being asked to pick up the slack by buying existing student loans and issuing new loans directly to students.

In so doing, the government is helping to sustain high tuition's just as similar actions are working to prop up real estate prices. If the government stayed out of the student loan market, students would not be denied educations. Colleges and universities would simply be forced to offer affordable tuition's or go out of business --just the way they used to back in my father's day. Similarly, if the government allowed real estate prices to collapse, Americans would not have to take on so much debt to buy houses.

To buy up all of these loans, the Fed is running the printing presses non-stop. As a result, prices of other goods, such as food and energy, are spiraling out of control.

Of course, mainstream Wall Street firms and the conventional financial media do not see this obvious connection. While CNBC searches the world for clues to this "mystery", no one sees the evidence "hiding" in plain sight. Higher prices simply result from all the money printing, both by the Fed and foreign central banks trying to maintain currency pegs to a sinking dollar.

It is amazing how those who were completely blindsided by the surge in food prices are now so quick to come up with ridiculous reasons to explain the phenomenon. However, for those of us who actually understand what inflation is, predicting the current surge in food prices was a no brainer. Read one of my commentaries from Oct. of 2006 and
see for yourself.

Similarly, analysts are blaming $120 oil on the hidden machinations of greedy speculators. They buttress these claims by noting that absent a bona fide oil shortage, current prices are not justified by fundamentals. This overlooks that while there is no shortage, there is also no surplus. The market is in perfect equilibrium at today's price, and recent spikes merely reflect the substantial increase in global money supply. If today's prices really were artificially high, like house prices, they would be a glut of oil in storage facilities while users, priced out of an inflated market, cut back on their consumption (This is precisely what is happening in the real estate market).

As consumers are getting wise to inflation, they are beginning to stock up on those products showing the most rapid price increases. This week, Cosco and Sam's Club began to limit bulk purchases of rice. After all, if you have the cash why not by the things you know you will need in the future now, before the prices go any higher. My guess is that if home storage were possible, consumers would be buying as much gasoline and home heating oil as they could currently afford...they might even load up their credit cards to do so. After airfares (which unfortunately cannot be stockpiled), apparel may be next major category of goods that will experience rapid price increases. Why not buy a few extra pairs of socks while they are still cheap?

As the government creates more inflation, and prices for all sorts of consumer goods spiral upward, the authorities, as they always have, will institute price controls and other forms of rationing of consumer staples. My advice is to stock up now, before you end up having to spend hours waiting in line.

Friday, April 25, 2008

J Global at Seeking Alpha

my first article for Seeking Alpha was published today,

you can find it here.


Thursday, April 24, 2008

Why the XAU is not a pure gold stock index any longer

Below you will find today's TA on the HUI gold bugs index. The HUI represents unhedged gold producers, while the XAU Philedalphia Gold and Silver Index represents a broader range of precious and now base metal producers. After reading the comments made by Frank Barbera I have stopped looking to the XAU as a measure of gold stock performance as its largest holding is more of a copper producer than gold.

The HUI chart below highlights the peak reached in the May 2006 run up which we are approaching at this point, along with various trend lines that may become more significant going forward. These multi-day plunges are painful for gold stock investors and there may be more to come in the upcoming weeks but this drop is still no where near exceptional.

Frank Barbera: $XAU: $HUI

The good folks at the Philadelphia Stock Exchange decided awhile back to include Freeport McMoran Copper and Gold (FCX) within the XAU. Their argument was that FCX is a major gold producer, --period. However, FCX also produces a lot more Copper then Gold, with up 85% of the companies revenues coming from sales of Copper. Thus, FCX is more a Base Metal stock, then it is a pure play Precious Metal stock. What’s more, FCX trades precisely along the same lines as other big name Base Metal stocks like BHP Billiton (BHP), RTZ Corp (RTP), Teck Cominco and Rio Dulce (RIO). It trades in a very different pattern then Gold Stocks and as a result, we would argue that it should not be included in the XAU or any other Gold Index.

Well, that argument has gotten us no where despite many calls to the PHLX. What is important, is to watch FCX as it presently accounts for 22.34% of the total index, by far and away the heaviest weighted component of the XAU with Barrick Gold currently at 18.29%, Newmont Mining at 9.95% and Goldcorp at 14.05%. Essentially, FCX is worth GG and NEM combined! Since April 1st, ABX is down from $41.92 to today’s close of $40.80, NEM is down from $44.80 to today’s close of $43.85, and GG is up slightlyfrom $37.46 to today’s close of $38.44.However, since April 1st, FCX is up 25.64 dollars per share, from $97.63 to a high today of $123.27, for a percentage gain of 26.26%. Since every one dollar in FCX stock kicks in 2.85 index points into the XAU, the 25.64 point gain in FCX has added 73.25 index points into the XAU since April 1st.

That is huge! And that is why the XAU is holding up much better then other Gold Indices, for the simple reason that since the beginning of April, FCX has skewed the XAU sharply to the upside causing the index not to reflect the real sideways action which has taken place in precious metals mining stocks. We can see all of this graphically on the charts below, with FCX moving to new all time highs and in the process skewing the XAU to the upside, with a super bullish bias.

If instead of the XAU, we use the HUI – Amex Gold Bugs Index, or the GDX ETF, which tracks the MarketVectors Gold Mining Index, we see that both of these other indices are now fully back to the March and April lows .

Outsourcing Debt Collection

Todays IHT is reporting on the proliferation of debt-collection outsourcing to India. Not the type of activity one would associate with outsourcing, but the irony of India's economy growing on the backs of American addiction to debt is just too much to pass up.


India's kinder, gentler debt collectors remind Americans to pay their bills

By Heather Timmons
Thursday, April 24, 2008

GURGAON, India: In a glass tower on the outskirts of New Delhi, dozens of young Indians are on the telephone, calling out-of-work, forgetful and debt-stricken Americans to ask for cash. "Are you sure that's all you can afford?" one operator in a row of cubicles inquires politely. "Well, how do you take care of your everyday expenses?" presses another.

Americans are used to receiving calls from India for insurance claims and credit card sales. But debt collection represents a growing business for outsourcing companies, especially as the U.S. economy slows and its consumers struggle to pay for their purchases. Debt collectors in India often cost about one-quarter the price of their American counterparts, and are often better at the job, debt collection company executives say.

"India will be the only place we grow this year," said J. Brandon Black, the chief executive of Encore Capital Group, a debt collection company based in San Diego. India is Encore's largest operating area, with about half the company's collection force of more than 300.

Companies like Encore buy bad loans from banks and credit card issuers for pennies on the dollar and pocket the cash they collect. The delinquent borrowers often owe at least a thousand dollars. So far just a tiny fraction, maybe 5 percent, of U.S. debt collection is done outside the country, industry executives estimate. But new business is in the pipeline. Financial services clients are saying, "We want you to collect my debt, to analyze it and change the way that we sell" the loans, said Tiger Tyagarajan, executive vice president at GenPact, the business processing company spun off from General Electric that has roots in India.

Telephone debt collection represents new, more aggressive territory for India. "This is really a sales job," Hughes said. "It is commission-intensive, and you're paid on your ability to collect." Like many sales teams, Encore's collectors in India gather for a daily pep talk before their shift. In one recent session, they were schooled on the intricacies of American tax policy.

Once the calls start flowing, the Encore office at Gurgaon resembles nothing less than the headquarters for an enthusiastic fund-raising telethon. Just minutes after collectors have put on their headsets, a supervisor yells out "Rajesh, for $35 a month for three months." All employees enthusiastically respond by clapping three times, and the name Rajesh is the first on the day's sales board.
Companies like Encore often schedule dozens of payments and make dozens of calls before a loan is paid off.

Mortgage loans, which involve complex state and national laws, are nearly always handled by collectors in the United States. But credit card, auto and other debt are prime candidates for collection overseas. Just over 4.5 percent of all bank credit card accounts were delinquent in the fourth quarter of 2007, according to the U.S. central bank, the Federal Reserve, up from 3.5 percent two years before. Businesses in the United States put $141 billion in delinquent consumer debt up for collection in 2005, according to a PricewaterhouseCoopers survey commissioned by an industry group, and debt collection agencies collected $51 billion that year. They kept nearly a quarter of that in profit.

Encore hires people with call center experience in India, and then trains them in unexpected skills like sympathy. Clients "get very abusive, very emotional, very sad," said Manu Rikhye, vice president at the Encore unit in Gurgaon. The collector's job is to "try to empathize with the consumer," he said, and try to figure out, if they are angry, why. "Maybe it's us, maybe it's someone else," he said. "You have to hear what they have to say."

Encore pays its collectors in India an average base salary of 17,000 rupees, or $425, a month, and they earn bonuses - sometimes more than $1,000 a month - for getting customers to pay. In contrast, collectors in the United States, make about $6,500 a month. Thanks to the income, a windfall in India, where the average monthly wage is $63, collectors are buying some of the status symbols that probably got their clients into trouble in the first place - new scooters, iPods, Swatch watches and exotic vacations.

Wednesday, April 23, 2008

Canadian Gold miner (XGD) updated chart

The XGD has plunged from its recent bounce with spot gold falling below $900 this morning. Just a theory that a possible patten may be developing:

Any thoughts or comments are appreciated.

Tuesday, April 22, 2008

XAU 1 year chart

Here is a 1 year chart of the XAU with notations. Within resistance and support lines lay an upward drift pattern in the making. With gold below $950, watch for a violation of the lower trendline in the drifting pattern.

Your comments and observations are always welcome.

Russia in talks with Georgia over Abkhazia Independence

The IHT is reporting on UN-backed talks between Russia and its former republic Georgia, over Abkhazia- a province of Georgia seeking full independence.

I posted an earlier story on Abkhazia here, it highlighted the complexities of multi-state autonomy. Recent developments in Kosovo, a state within Serbia, sought independence due to its ethnic Albanian majority, brought to light the legality of state recognition of independence movements and the potential domino effect Kosovo may have in an already volatile region.


UN Security Council set to discuss rift between Georgia and Russia
The Associated Press
Tuesday, April 22, 2008

UNITED NATIONS, New York: The Security Council scheduled a closed-door meeting Wednesday to discuss Georgia's call for the UN's most powerful body to address Russia's alleged "military aggression" against the breakaway region of Abkhazia.

Vitaly Churkin, the Russian ambassador to the UN, said after the council discussed Georgia's request for an emergency meeting on Monday afternoon that "we did not object to having a meeting," adding that "we'll have things to say at that meeting as well." David Bakradze, the Georgian foreign minister, is expected to attend the council meeting. Churkin said he reminded the council of the need to hear the views of the Abkhazian side as well, "and we will continue to work having them invited to speak to the council."

Tensions between the two countries have escalated over two breakaway regions in Georgia - Abkhazia and South Ossetia - which have close ties to Moscow and have been independently run since the early 1990s when fighting with Georgian troops ended.

Georgia said a Russian fighter jet shot down an unmanned Georgian spy plane Sunday as it flew over Abkhazia. Last week, President Vladimir Putin of Russia ordered his government to increase cooperation with the separatist authorities in Abkhazia and South Ossetia.

Moscow has granted Russian citizenship to the vast majority of the breakaway regions' residents and recently lifted 12-year-old trade sanctions against Abkhazia. Russian officials have warned that Georgia will have to abandon its claims on the regions if it joins NATO.

NATO declined to offer Georgia a road map for membership at a summit meeting earlier this month but assured the pro-Western president, Mikheil Saakashvili, that his nation would eventually join the alliance.

Georgia's ambassador to the United Nations, Irakli Alasania, said Putin's order on April 16 to open full-scale cooperation and formalizing its relations with Abkhazia motivates the separatists "to completely withdraw" from the negotiation process and "poses an open threat to Georgia's statehood and sovereignty."
"We witness a new dangerous reality," Alasania said. "The Russian Federation is legitimizing annexation of Abkhazia" and South Ossetia, "integral parts of the internationally recognized territory of Georgia."

He said the latest Russian actions and separatist threats forced Georgia to use unarmed capabilities to collect intelligence data "on our sovereign territory" - and on Sunday "Russian military aircraft intruded Georgian airspace above Abkhazia" and shot down an unarmed vehicle.

"We call upon the UN to address this direct military aggression against Georgia," Alasania said, urging the UN to fully exploit its "own means and capabilities in order to keep the situation from further escalation." He called on the UN military observer mission in Georgia to expand its monitoring capabilities "with emphasis on detection of any military activities on Abkhazian segment of Georgian-Russian border."

Although council members will discuss Georgia's complaint, no action is likely, because Russia has veto power.

Monday, April 21, 2008

A note of thanks

Its been only 2 months since I started this blog and Ive received some very encouraging emails from people who have checked out the site.

I just wanted to express my appreciation and please feel free to send me your thoughts or suggestions on how I can make this site better. I welcome your comments.



Gold Miners (XAU) vs. Gold Bullion

Here is a 1 year chart of the XAU/Gold ratio. A breakout may be in the works, but expect more base building in light of golds recent action below $950. The miners have tended to outperform gold on the upside the past while but the general trend has been down for some time.


Sunday, April 20, 2008

Canadian Gold Miners (XGD.TO) 1 year chart

Here is a 1 year chart of the Canadian Gold ETF (XGD.TO) which I use as my gold trading proxy. Its fairly liquid and its biggest component is Barrick Gold (ABX.TO).

Ive noted 2 separate trends, a longer term trend line since August 2007 and a shorter term sideways trend developing since early 2008. A critical element of this chart is that the 200 MA turned upwards in the early part of 2008 after a year of trending down or sideways. A larger trend upwards is still in the making as price action has remained above the 200 MA.

The volume of late has been weaker than prior upward thrusts, Im looking for a re-test of the 200 MA on the downside before adding to my position, or multiple closes above the longer term trend line on strong volume to add on strenght in anticipation of at least a $100 price target.

(I hold a position in the XGD, this is for informational purposes only, please do your own due diligence and contact your financial advisor before making any investment decisions.)

Saturday, April 19, 2008

Neptune Tech Bioresources (NTB.v) Update #2

My April 5th, 2008 chart of Neptune Tech and Bioresources (NTB.v) highlighted a potential breakout. Here is an updated chart with notes. Next week's action should give me a signal to either add to my position on a confirmation of a break-out or if this is just another fake-out.

Heres a link to what several Canadian analysts think about NTB.

I currently hold a position in this stock, this is not financial advice. Do your own DD!

Your thoughts and feedback are always welcome.


Friday, April 18, 2008

Captain Credit-Crunch

Look up in the sky
It’s a CDO!!
It’s an SIV!!
No It’s a bear market.

After sitting down to a nice hefty bowl of Captain Credit-Crunch cereal I thought Id take the time to discuss something other than the complexities of this bear market in the making. Just like a good Captain I have come to realize it was the tactical plans laid by those in command which sowed the seeds of the current crisis.

The tactics employed by various financial institutions are at best voodoo accounting practices; dropping doll-like charts and graphs before the audience, poking them with needles in hopes of eliciting a positive reaction from the market.

More subversive has been the shuffling of assets into "tiers" with varying explanations of what said tiers actually represent, while delaying at all costs reporting of asset rotation through various levels of accounting hari-kari.

Last March Alan Schwartz, Bear Sterns CEO uttered these now famous lines on CNBC “Bear Stearns' balance sheet, liquidity, and capital remain strong... Our liquidity position has not changed at all, our balance sheet has not changed at all” Bear Sterns would effectively declare bankruptcy by the end of that week. Such carefully crafted statements about an institution’s “strong” or "solid" balance sheet and healthy "capitalization" are dubious at best.

Ive looked these terms up in the dictionary and have no idea what constitutes a "solid" balance sheet. In high school my friends used to talk about the girls who were a “solid” 8 out of 10, good house parties were "solid" jams, and my favorite record had 15 tracks on it but 10 of them were "solid" tunes.20 years later, 20 pounds heavier and many hairs lighter, in the most sickening of rerun’s we are told by men in fine woolen suits that their bank’s balance sheets are "solid"?
I don’t know whether to buy more shares or chest-thump them over a cigarette along the butt-wall after gym class?

Granted I did look up "well capitalized" in the dictionary and it made perfect sense from a fiscal point of view. Certainly I never referred to girls or my mother's cooking as "well capitalized". Yet within this sound definition, I wondered why banks kept uttering this phrase. Why was being well capitalized so fantastic? Who needs sound capitalization if all is well? And why have banks grown gun-shy about lending to other “well capitalized” institutions with “sound” balance sheets?

Its sheer madness that black swan events are even being discussed, if one just happened 6 months ago, what are the odds of another so in 2008 right? Sorry was my mic on?

I would gladly surrender the prospect of double digit returns YOY just to hear a CEO of a major financial institution give this speech after the credit crisis:

"We believed a new paradigm of wealth was being created in which we earned double digit returns on triple A rated bond-like creatures that only MIT trained mathematicians understood.For years we enjoyed the upside but seemingly none of the risk, as blue-chip financial institutions, the vanguard of wealth creation in America, our stock was rising in double digits annually while still holding "conservative blue-chip" status. It was the very definition of a financial WIN-WIN.

Surprisingly our clients enjoyed the returns and blindly trusted us to keep risk parameters in check. In a sense we began drinking our own Kool-Aid when we spoke of safe returns, of "risk-adjusted" parameters, and sound money management.When the risk hit the fan we fired our "risk" analysts because they failed to do their job. In their place we hired the finest PR and consultants (our client’s money could buy) who could begin the delicate process of applying lipstick to the pig we placed on the market's stage.

For some time they made the pig dance, stocks resumed their upward rise, and our PR people averted a disaster, convincing the masses the worst was over. We lost upwards of %30-50 of our share price but the financial media still said our company was a buy. I mean, you can’t buy that kind of support, bless their hearts.

The lower prices went the more ways people came up with ways to keep the pig dancing, our stock became "cheap", a bargain. It was as if the credit-crisis was this external event that was hurt our share price, yet we maintained our stance of mere victims in this crisis that spread like cancer across the financial landscape. It was going on out there but in here we were fine, just fine, and we would weather the storm because of all these words that drummed up images of fortress like risk-aversion.

It was 2nd most popular definition of a financial WIN-WIN.We rehired our old risk-analysts to find out the odds of 2 WIN-WIN's happening to big banks in the same 12 month time-frame. they said the odds were so improbable, their mathematical models required 4 dimensional fractal combinatorics to express the exponential.

We slid down in our high-backed leather chairs sipping the most delicate of ancient single-malts, the saltiest of caviar's while cloaking our thievery in the softest of silken suits

The fiscal ship may have been sinking but the passengers were certainly not rushing for the life rafts. If anything the people were content with the first-mate's explanation that the ship was on a "well-charted" path.

I guess its true what they say about us….Captains of Industry."

Thursday, April 17, 2008

Today's post from my favourite financial blogger Mike "Mish" Shedlock is long as usual but required reading for anyone seeking a clearer understanding of the mountains of information being throwing out at the newswires.


Consumer Spending Mirage

Amidst the frequently heard drumbeat of bottom calls, this more realistic headline caught my eye:
The Consumer Spending Mirage.

Stocks riding high on illusions of consumers continuing to spend may be in for a nasty surprise. Forecasting the stock market is a fool's game—but there are grounds to believe there's another drop in the market yet to come. The reason: a broad decline in consumer spending, which so far has been masked by a quirk in the government's statistics.

Combine that with a rapidly unraveling job market, high energy prices, and the continuing credit crunch, and you have the recipe for a drop in consumer stocks. A big decline there could take the rest of the market down with it. A closer look at the numbers shows that the consumer spending boom may already have come to an end, without investors noticing.

The problem is this: What the government calls "personal consumption" is actually a grab bag of items, some of which don't really fit the usual notion of consumer spending. For example, the nation's current annual personal consumption of $10 trillion includes about $1.8 trillion in outlays by Medicare, Medicaid, and private health insurance providers. This is real money, but consumers don't control or even see most of it, since it usually goes right to the health-care provider.

The government's count of personal consumption also includes "imputed" categories, that is, entries that don't involve any money changing hands. Two of the biggest examples: $1.1 trillion for "rent" that homeowners theoretically pay to themselves to live in their own homes, and $240 billion for "services furnished without payment by financial intermediaries"—in other words, the value of services like no-fee checking accounts.

In fact, once medical outlays and those two imputed categories are set aside, it turns out that the rest of personal spending has actually fallen since November, adjusted for inflation. The decline is pretty much across the board: inflation-adjusted purchases of food, clothing, furniture, and motor vehicles are all down.

Some economists think the combination of economic stimulus checks soon to arrive from the federal government and lower interest rates should keep consumer spending from falling off a cliff. "We think consumers will narrowly skirt a downturn despite the recession in the overall economy," write Richard Berner and David Greenlaw of Morgan Stanley (MS) in a just-released report.

But if the decline in consumer spending continues, it's going to be hard for the market not to follow. Like personal consumption expenditures, GDP also includes the government imputed value of "free" checking accounts and the value homeowners receive from renting their own house. Calculation of the latter is based on a survey of homeowners asking them what they would pay to rent their own house if they did not own it. This is as preposterous as counting the value of free sex one gets from one's lover as opposed to what one might have to pay visiting the local red light district. And pretending those "free" checking accounts have unrecorded value that consumers should be paying for is equally absurd. Banks sweep money out of checking accounts nightly, lend it out, and collect interest on it.

Hedonics are yet another mirage that never occurs. Computers are the best example of hedonics. Prices go down every year while processing power, disk space, and other features increase. Let's say you buy a computer for $500. The government tries to figure out what that computer would have cost last year. For the sake of argument let's say that number is $1,000. So the government records the sale at $1,000. Multiply this by every computer sold and you have a massive fictional number.

Hedonics also come into play with autos. For example, if the government decides there are new features or safety improvements on this year's models vs. last year's model, sales numbers are upwardly adjusted.Subtract out all of this nonsense and the US was likely in recession quite some time ago.

BusinessWeek has this correct: Consumer spending minus hedonics and imputations is lower than reported. One thing BusinessWeek did not mention is the massive increases in gasoline expenditures. The three month running total of gasoline purchases is 22% higher than a year ago. Wages are falling, unemployment is rising, and rising oil prices are cutting spending elsewhere.

Consumer spending, especially discretionary spending, has only one way to go and that is down. Psychology of Deflation Consumer Sentiment has soured. Most place the blame on falling home prices. However, such thinking is incorrect. Consumer sentiment did not sour because home prices fell. Home prices fell because sentiment soured. If that sounds wrong then think about it this way: "The pool of greater fools ran out". Once the pool of greater fools ran out, then and only then did home prices fall.

Interestingly, the pool of greater fools includes lenders. Countrywide Financial (CFC), Citigroup (C), Washington Mutual (WM), Wachovia (WB), and others were so arrogant that they thought they were immune from any crisis. They did not care if they sold homes to people who could not afford them. They thought rising prices would cushion them from losses. They thought wrong.

So who was the greater fool, the lender or the borrower? Walk-aways are going to show that lenders were as much the greater fools as borrowers. For more on this theme, please see

Walking Away: The Next Mortgage Crisis. Psychology has reversed for both consumers and lenders. Consumers no longer think they can sink $20,000 into a new kitchen and get any of it back. Instead of buying a new kitchen or an SUV, consumers are worried about the price of gasoline, eggs, cereal, milk, and produce as discussed in Energy Affecting Food Prices.

Lending standards have now tightened and banks are less willing to lend. Even those qualified to buy a home are having a difficult time in many instances.

In this case, cautious (even fearful) bankers are tightening credit. Why? Because it all started with cautious consumers refusing to play the greater fool's game with home prices. The attitude change by consumers caused an attitude change by banks. The attitude change by banks will cause a souring attitude in those who were still in denial and still willing to party. And so the cycle feeds on itself, and will continue to do so until it reaches an extreme in caution and fear.

Attitudes are like pendulums. Momentum carries both pendulums and attitudes to extremes. The pendulum of consumer recklessness has now reversed, having recently reached a secular peak. It will not stop at equilibrium on the way down. Instead, momentum will progress to a point of complete exhaustion marked by cautious saving instead of reckless spending.That process is now underway.

This secular reversal has a long, long way to go.

Mike "Mish" Shedlock

Wednesday, April 16, 2008

Berlusconi returns to power in Italy- ECB shudders.

Ambrose Evans-Pritchard has been a staunch critic of the European Union (EU) since its inception. His most recent article regarding Italy's former PM Silvio Berlusconi of the Forza Italia Party examines the high levels of mistrust among states like Italy and France towards the ECB.


Berlusconi plans Paris-Rome axis to humble European Central Bank

Ambrose Evans-Pritchard

Silvio Berlusconi's return to power in Italy is a nightmare come true for the European Central Bank, opening the way for a Rome-Paris axis with the political muscle to force a change in monetary policy.
Read more by Ambrose Evans Pritchard

Silvio Berlusconi does not share the EU-loyalities of the outgoing government. The billionaire politician has pledged an alliance with France's Nicolas Sarkozy aimed at humbling the bank and asserting the primacy of elected leaders over interest rates and the currency. "A very strong euro is hurting Italy's economy. I will discuss intervening with the ECB with Sarkozy," he said.

The threat brought a sharp retort yesterday from the ECB's German governor and chief economist Jurgen Stark. "I would recommend to political leaders in Europe, newly elected and re-elected, to read the European law on the ECB," he said. Mr Berlusconi - who is setting up a temporary office in Naples to tackle the city's long-running rubbish crisis - inherits an economy trapped in near slump conditions.

The country has lost 40pc in unit labour cost competitiveness against Germany since 1995, largely due to anaemic productivity gains and an inflationary wage-bargaining culture. Yet it cannot use the old method of devaluation to claw back parity. The International Monetary Fund forecasts growth of just 0.3pc in both 2008 and 2009, levels that are certain to cause a renewed rise in the country's national debt. Italian car sales plunged 18.8pc in March, and the Alpine lender Credito Valtellinese has just become the first European bank in living memory to miss a redemption on a callable bond - raising concerns of deeper troubles brewing in Italy's financial system.

Mr Sarkozy has repeatedly attacked the ECB's tight money policies, blaming it for causing the euro to surge 27pc in two years to a record $1.59 against the dollar. He says the ECB risks bankrupting Airbus and driving much of Europe's industry off-shore. Until now he has lacked the allies needed to impose his will.

"Politics is everything in EMU, and the re-election of Berlusconi represents a big shift in the political balance of power," said Bernard Connolly, global strategist at Banque AIG. "Spain will probably join France and Italy before too long, so you will have three of the big four eurozone countries in the same camp. They can set 'broad guidelines' for the ECB. It is a total misperception that the ECB should not be subject to political influence."

Article 111 of the Nice Treaty gives politicians power to set a fixed exchange rate for the euro (by unanimous vote), or to shape the exchange rate (by qualified majority vote). This power gives EU ministers an indirect means to force the ECB to cut interest rates. The treaty article has never been invoked but it hovers in EU affairs like Banquo's Ghost.

Mr Berlusconi does not share the EU-loyalities of the outgoing government. Ex-premier Romano Prodi was once the president of the European Commission, the public face of the euro. His finance minster Tommaso Padoa-Schioppa was a founder of Europe's monetary union.

The last time Mr Berlusconi was in power, two ministers from his coalition partner 'La Lega Nord' called for a return to the lira to escape the constraints of the euro system. While he did not endorse the comments, he appeared to relish their effect on his enemies in Brussels and Frankfurt.