Dear CSA Reader,

How much longer can this rally go on? That’s the biggest question that keeps me up at night.

In the meantime, I think this latest swing higher is over with. So I want you to immediately sell your GLD December 92 call option (GLD LN) and lock-in a 46% gain.

I also want you to immediately sell your shares of Flotek Inc. (NYSE:FTK). We’re doing this to limit any further losses.

Flotek management found it appropriate to make a new share offering, doubling shares from 40 million to 80 million. I wouldn’t be shocked to see Flotek’s price collapse by 50% in the next few weeks, especially if the broader market is dropping.

To counter this expected market drop, let’s go long volatility by buying the VIX 24 December Call Option (VIX LA) for no more than 3.70 per contract (currently at 3.40). If the sell-off intensifies over the next few days, then we should easily make 100% gains on this.

Now that I’ve gotten that out of the way, let me explain why I think we’re in store for a short-term drop in the market.

As you can see, the buying is getting tired now that the Dow is overbought and at the top of its trend channel.

Something else I’ve paid attention to is the volume on the indexes. And right now volume is shouting “danger!” at the top of its nonexistent lungs.

The next chart comes courtesy of Afraid to Trade.com

Notice how volume has declined throughout the most recent rally. This is one of the biggest bear signals I’ve seen in some time.

Be aware, though, that this sell-off is in the short-term. I’d be shocked if the indexes sold off more than 5% over the next week or two. Over the longer-term, I’m still seeing higher-highs coupled with higher-lows.

Unless we see a significant break under the 50-day moving average on all three indexes, there is a strong possibility that the bull run continues into December or even January.

After all, we’re getting awfully close to that Christmas rally. And unlike last year, no one seems to be talking about it today (hopefully I didn’t open the floodgates). So perhaps we’ll actually get a solid Christmas rally this time around.

Until next week,

Charles Delvalle

Investment Director,
Crisis Strategy Alert

Imagine owning shares of Coca-Cola in 1970…

After splits and reinvesting dividends, a $500 investment in Coca-Cola back in 1970 would have yielded $45,315.20 cents today.

That’s 89 times your money in 39 years.

This is how real money is made. But you can’t think in days or months if you plan on making it. You have to think years… decades.

So what if I could introduce you to a company which Jim and I both know is a household staple of millions of people across the world?

Really, the opportunity is bigger than Coca Cola was back in 1970. You don’t have to drink Coke. But you DO have to eat.

In Brazil, 187 million people (98% of the population) are exposed to this company’s products just by walking into the grocery store. And over 1 in 4 people there have its products stuffed inside their refrigerator.

This company also sells its products to another 110 countries across the world. That’s where 45% of its revenues come from. But again, I’m not talking about America. This company is big in the Middle East and in Europe.

It doesn’t matter if Brazilians are buying milk… chicken… pork… beef… or frozen pizza. This company is exposed to all aspects of Brazilian food production. In fact it’s the biggest.

Baron’s even said that this company offered “a tantalizing investment opportunity”

What I have for you today is a company that Brazilian consumers already love and know, and that will expand drastically as the Brazilian middle class explodes.

Upcoming Plays: Brasil Foods (NYSE:PDA)

Brasil Foods is one of the largest meat processing companies in the world, with 42 factories and 120,000 workers. It’s also Brazil’s largest food producer.

When American’s think of food they think of brands like Dole, General Mills, and Hershey’s.

In Brazil though, people think of Perdigao, Cotoches, and Batavo, three of Brasil Foods five different brands.

The fact that this company doesn’t rely on American consumers is one of its biggest strengths. In America the unemployment rate should keep rising until next year. At the same time, more people will lose their homes, cars, and see their credit lines slashed.

The only way supermarkets can compete is by slashing prices and promoting their own brands. It would be the worst possible environment for Brasil foods.

Instead, PDA has to worry about increasing demand and increasing profits for the products they sell. The big trends are on their side, especially in Brazil. Brazilians went through 14 years of hyperinflation and are just now getting used to steady prices.

Not only that, but Brazilians are now being exposed to credit. Will Landers, who manages $8 billion of Latin American stocks at BlackRock Inc said “People never before thought they had access to credit. Now they’re talking about, ‘I have a credit card, a payroll loan, a car loan.’

In September alone, sales of new cars rose 20%. And according to the Banco Central Do Brazil in 2007 there were 118 million credit cards, up from 44 million in 2003.

Just take a look at how well PDA’s business has done thanks to the expansion of credit in Brazil…

Brasil Foods’ Sales are Exploding

Source: Brasil Foods 2008 Annual Presentation

To be sure, business has slowed down since the start of the global downturn. You see, PDA was already shipping less pork and beef in 2007, but higher prices more than made up for that.

But 2008 was a little different. Prices plunged alongside demand, meaning PDA had to cut more production and lower margins.

Thankfully, it appears that the worst is behind PDA. Net margins have increased from 0.7% in the first half of the year to 4.8% today. And as prices move higher, margins should approach 7-8%. That means more profits and more growth.

You see, this isn’t GM or some bloated bureaucratic company that moves slow. This is a lean, mean, production machine that’s main purpose is to grow and make more profits. PDA doesn’t have to worry about an invasive union getting in the way of cost cutting. It just has to recognize the risks out there and respond to them. And that’s exactly what it did in spades.

More importantly, as consumers in Brazil - 55% of PDA’s revenues - make more money, they’ll demand more food. Just take a look at the growth PDA has seen in dairy products like powdered milk…

Source: Brasil Foods Q2 2009 Presentation

Reuters also estimates that the Food and Drink sector in Brazil will grow from $161.54bn in 2008 to $253.66bn by 2013.

Growth like that is sure to supercharge Brazil’s largest food producer, don’t you think?

That’s why I recommend buying shares of Brasil Foods (NYSE:PDA) today.

Portfolio Update

Our GLD December 92 call (GLD LN) has performed admirably as gold hits new record highs. We’re up 37% so far.  At this moment we’d like to thank India for helping to make us all a little wealthier.

If you were also into some of the gold stocks James recommended in Strategic Investment (which you also receive) then you’d also be up 27% on the Market Vectors Gold Miners ETF (NYSE:GDX) and a whopping 108% on Witwatersrand Consol Gold (Toronto: WGR).

Jim and I both believe that there is more upside to gold left in the near term. So we’re going to hold onto the options and target 50% gains.

One position that hasn’t done so well is our bet on natural gas with Flotek Inc. (NYSE:FTK) . As of this writing, we’re down 17%.

Flotek has proved to be quite the roller coaster. But our original reason for getting into this company has not changed. Jim and I still believe that a colder than expected winter will help demand for natural gas and boost prices.

The fact that Flotek has such a high short-interest ratio (18% of float) means that it would take 9.6 days of buying in order for everyone who is short to close out their position

So really, what we want is for rising natural gas prices to trigger a short squeeze on FTK. We’ll know it’s happening once we see prices spiking higher alongside higher than normal volume.

As always, i’ll keep my eyes on it and let you know what’s happening.

Until next week,

Charles Delvalle

Co-editor

Crisis Strategy Alert

You Have Been Deceived
About Global Warming

Time to Implement
The Strategic
“Little Ice Age Portfolio”

The chill is on: Unseasonably cold air will envelop much of the eastern half of the nation both Saturday and Sunday, with temperatures averaging anywhere from 10 to 30 degrees below normal. High temperatures will reach only the 40s and 50s across the upper Midwest, Great Lakes, Northeast, and Mid-Atlantic states each day.

-Doyle Rice, USA TODAY

“Congress has been badly misinformed about the so-called science that supports the claim that increasing CO2 levels will bring about catastrophic climate change…The idea that Congress can stop climate change would be just hilarious if the actions they propose were not so damaging to the American people and even more [damaging] to the poorer people of the world,”

- Dr. William Happer,
Cyrus Fogg Bracket Professor of Physics
Princeton University

Not since Chicken Little warned that the sky is falling has there been more baseless geophysical hysteria than the current furor over “Global Warming.”

If you remember that cautionary childhood tale, you’ll recall that its moral comes in two parts. Firstly, it is a warning not to believe everything you hear. The secondary moral is even more critical in current circumstances. When you have an atmosphere of hysteria, you need to be particularly alert, lest some clever fellow like Foxy Loxy turn the hysteria surrounding the imagined crisis to his own ends.

In case you’ve forgotten the gory details, Foxy Loxy cashed in “the sky is falling” hysteria, by eating its infatuated supporters, Henny Penny, Cocky Lockey and Goosey Loosey.

While you are not about to be eaten, you are vulnerable to one of history’s great power and money grabs now being orchestrated in the name of fighting “Global Warming.”

In a matter of weeks, Foxy Loxy will open the Copenhagen Conference with the objective of ramming through a “Climate Change Treaty” that will drastically reduce your standard of living while handing hundreds of millions or even billions of dollars to Al Gore.

Nah. Don’t believe it?

I realize that I just warned you not to believe everything you hear. So I expect you to be skeptical when I tell you that Al Gore is poised to make a fortune out of the global warming hysteria that makes AIG bonus payments seem like pocket change.

Believe me, however. Gore’s propaganda for Global Warming is more than just hot air. It involves a grab for billions, even trillions of cold cash.

Here is a brief outline of the facts:

“Blood and Gore”

Al Gore and David Blood at a GIM Press Conference

As a U.S. Senator, then as Vice President of the United States, Al Gore helped funnel billions of tax dollars into research supporting his pet project for combating “global warming.“

After he left office, in 2004, Al Gore co-founded Generation Investment Management (GIM), a hedge fund devoted to “green” investments.

Former Goldman Sachs golden boy David Blood joined Al at GIM.

Together, “Blood and Gore,” as they like to call themselves, called on all their wealthy friends in Washington, Wall Street and Hollywood and raised $5 billion.

With $5 billion of private capital in hand, and billions more in taxpayer funds being dispensed to support Climate Change “alarmism” every year, the groundwork was in place for what will one day be seen as the biggest ‘rip off” in history.

An Inconvenient Truth

Once the money was raised, Al went to Hollywood with an idea for a movie.

In the lavish hotels of Beverly Hills, he pitched his idea for a documentary about global warming to his liberal friends.

Al Gore’s Oscar Nominated Movie
An Inconvenient Truth

By December 2004, the film started shooting. An Inconvenient Truth was finally released in 2006.

Al then traveled the world promoting the movie with the best-financed promotion of intellectual hysteria in history.

He pushed hard the idea that an “end of the world/the sky is falling” type scenario will occur if governments didn’t act immediately to drastically curtail carbon emissions.

Gore booked pricey speaking engagements to show off his charts and graphs… quoted “experts”… and he asked philosophers and religious leaders to save the planet from global warming.

But he said nothing about how he and his business partners were set to profit handsomely off his global warming scam.

Al was greeted with huge crowds the world over.

His film won two Oscars. And he was given the Nobel Prize for his scare tactics.

The Media Falls
Hook, Line and Sinker

Don’t Let Al Brain Wash You

Rather than debate global warming, the mainstream media parroted every word out of Al’s mouth and completely ignored his conflicts of interest. And that wasn’t all they ignored.

They totally dismissed the arguments of scientists and other critics who disputed the contention that higher concentrations of atmospheric carbon were necessarily the cause of marginally warmer temperatures experienced in the last quarter of the 20th century.

Think about it. The underlying proposition of the Global Warming hysteria is that scientists can forecast global temperatures a century or more from now to an accuracy of 1/10th of a degree Celsius. How can they do that when they can’t forecast temperatures to within an accuracy of 5 degrees five days from now?

How Al Gore made $100 million from a

Flawed Differential Equation, And other

Adventures in Global Warming . . .

The obvious mathematical implausibility of long-term climate forecasts from tiny atmospheric changes should have invited a lot of rigorous investigation of “the sky is falling” themes of the warm-mongers. But apparently, it didn’t. Until recently.

You’ve heard the old adage, “he who pays the piper calls the tune.” By and large, the government was paying the piper, and it was made clear early on that the basis for receiving large grants, (now running at about $5 billion a year), was to underscore alarms about a climate calamity.

H.L. Mencken explained the dynamic reasons for this before Al Gore was born. “The whole aim of practical politics is to keep the populace alarmed — and hence clamorous to be led to safety — by menacing it with an endless series of hobgoblins, all of them imaginary.”

Gore himself has admitted that he thinks it is justified to lie in the service of convincing people that there is a Global Warming crisis. Of course, he stated his confession more diplomatically or perhaps in a more mealy mouthed way, as support for “an over-representation of factual presentation on how dangerous it is.” Gore stated, (Grist, May 9, 2006)…

“Nobody is interested in solutions if they don’t think there’s a problem. Given that starting point, I believe it is appropriate to have an over-representation of factual presentations on how dangerous it is, as a predicate for opening up the audience to listen to what the solutions are… “

Of course, it is easy for Gore to be enthusiastic about his solutions. They mean billions for him.

If you’re like most people, you probably don’t spend much time parsing differential equations. Truth be told, not even the Rev. Al Gore, Nobel Prize-winner that he is, can follow their intricacies. But as detailed below, that hasn’t stopped him from pocketing a cool $100 million from a flawed differential equation worked out in 1922 by the “step father of global warming,” physicist Arthur Milne.

Athur Milne, the step father of global warming

In a better world, it would not matter to you whether a physicist who has been dead for almost 70 years incorporated a blatantly unrealistic assumption into a differential equation about the atmosphere. In this case, it does matter because climatologists are still using Milne’s flawed equation purportedly to prove that carbon dioxide emissions, along with other “greenhouse” gases will turn the earth into a furnace.

Milne’s calculations of the behavior of atmospheric gases included the assumption that atmospheres are infinitely dense. Even as a simplification that is more than a little over the top.

In fairness to Milne, he was by no means a “warm-monger” like Gore. Milne’s research into radiative equilibrium and the structure of atmospheres was part of a larger argument he had with Einstein over the General Theory of Relativity. Milne was not much interested in terrestrial atmospheres. His equations were focused on stellar atmospheres.

Hungarian scientist, Ferenc Miskolczi, an atmospheric physicist and former researcher with NASA’s Langley Research Center, who was forced out because NASA did not like his objections to the Al Gore thesis of Global Warming, has a lot to say about the defects of Milne’s equations.

“Runaway greenhouse theories contradict energy balance equations,” Miskolczi states.

So Miskolczi re-derived the solution, this time using the proper boundary conditions for an atmosphere that is not infinite.

NASA refused to release his results. Miskolczi believes their motivation is simple. “Money,” he says. Research that contradicts the view of an impending crisis jeopardizes funding, not only for atmosphere-monitoring projects, but all climate-change research. Currently, government funding for climate research tops $5 billion per year.

Miskolczi resigned in protest, stating in his resignation letter, “Unfortunately my working relationship with my NASA supervisors eroded to a level that I am not able to tolerate. My idea of the freedom of science cannot coexist with the recent NASA practice of handling new climate change related scientific results.”

Dr. Richard Lindzen, Alfred P. Sloan Professor of Meteorology at MIT, agrees with Miskolczi’s view that Earth’s climate does not amplify “global warming” because of “greenhouse gases.” To the contrary. Lindzen declares, “Warming as may arise from increasing greenhouse gases will be indistinguishable from the fluctuations in climate that occur naturally from processes internal to the climate system itself.”

These conclusions are supported by research published in the Journal of Geophysical Research last year from Steven Schwartz of Brookhaven National Labs, who gave statistical evidence that the Earth’s response to carbon dioxide was grossly overstated. It also helps to explain why current global climate models continually predict more warming than has actually been measured.

The equations also answer thorny problems raised by current theory, which doesn’t explain why “runaway” greenhouse warming hasn’t happened in the Earth’s past.

Of course, you can’t expect any of these qualifications to impinge on the enthusiasm of global warming cultists for imposing draconian limits on carbon emissions. Witness this nonsense:

350: The most important number in your life?

According to the environmentalist website, www.treehugger.com,”The most recent science tells us that unless we can reduce the amount of carbon dioxide in the atmosphere to 350 parts per million, we will cause huge and irreversible damage to the earth. (See http://www.treehugger.com/files/2008/04/350-most-important-number-lifetime-planet.php)

CO2 levels were 20 times higher than todays

I don’t suppose that anyone at www.treehugger.com could begin to explain why holding carbon dioxide at 350 parts per million, (a bare chemical trace) is crucial to preventing “huge and irreversible damage to the earth,” in light of the fact that scientific studies have shown that atmospheric Carbon Dioxide in past eras reached concentrations that were 20 times higher than the current concentration. If that did not cause “huge and irreversible damage to the earth” why would 95% lower concentrations pose any danger now?

That, of course, is merely a rhetorical question.

Your role in this scam is not to think too closely, but listen to what the media tell you.

Another of their recurring themes is the suggestion that the polar ice caps are melting. They say this over and over. Even when the evidence doesn’t support their conclusion.

Arctic Ice Cap Grows by 370,000 square miles

In fact, the government’s own surveys of Arctic Sea ice compiled by the National Snow and Ice Data Center, (NSIDC) show that it has grown by 370,000 square miles since 2007. That’s an area 1½ times the size of Texas.

The Ice Cap is growing in Eastern Antarctica

The Ice Cap is growing in Eastern Antarctica

The recovery of Arctic Ice in the last year alone was 220,000 sq miles yet the NSIDC claims that the scientists don’t consider this a recovery because they say the growing ice cover is thinner than it was at some points in the past. Right.

While the politicized U.S. agency pretends that Arctic Ice is getting thinner a team of Canadian and German scientists flying over the ice, measuring its thickness with the latest electromagnetic equipment, found exactly the opposite, that the ice was “thicker than expected”, as you would infer from the fact that the summer melt stopped 370,000 sq miles short of its 2007 low.

It turns out that ice is melting… in Western Antarctica. But at the same time, parts of Eastern Antarctica, four times the size of Western Antarctica, is cooling and gaining ice.

Note that forecasts and alarms about melting snow and disappearing glaciers in Antarctica have been equally distorted by the mass media.

Years ago, when NASA scientist Marco Tedesco found evidence of increased summer snow melt in Antarctica, NASA put out loud press releases highlighting this information, which seemed to buttress alarms of global warming.

But NASA has remained totally mum about more recent evidence reported by Tedesco and his co-author, Andrew Monaghan in the journal Geophysical Research Letters, reporting a record low snowmelt during the past austral summer.

According to space borne microwave observations for 1980–2009, the most recent Antarctic snowmelt during austral summer 2008–2009 is the lowest ever recorded. The Antarctic Ice cover is now 30% greater than its average over the past 30 years.

Compared to the remorseless dishonesty of claims about the melting of the polar Ice caps, the hyping of “green investment” by the major media is almost measured and responsible.

Major print media mentioned green investing 3,485 times in 2006 — a 70% increase from the previous two years.

And going green became a cultural movement…

Paris dimmed the lights on the Eiffel Tower… Solar investments became hot – even for oil companies… Evangelicals preached the gospel of “creation care.”

Princeton Physicist
Dr. William Happer

And scientists who disputed Al’s claims risked losing their jobs and having their reputations smeared. For example, Princeton physicist Dr. William Happer was fired by Al Gore as director of Energy Research for the US Department of Energy, after he testified before Congress in 1993 that the scientific data did not support widespread fears about the dangers of the ozone hole and global warming.

Then-Vice President Gore sent a message to other scientists by firing Happer.

Happer said, “I was told that science was not going to intrude on public policy.” When Happer was not prepared to alter his scientific conclusions to please Gore, “I had the privilege of being fired by Al Gore, since I refused to go along with his alarmism. I did not need the job that badly.”

Unhappily some other scientists feel they do “need the job,” and depend upon government grants to fund their research. Unlike them however, Happer was not muzzled by strong hints that government wants scientists to support concerns about carbon dioxide in the atmosphere. To the contrary, Happer continues to sharply criticize global warming hysteria.

“I have spent a long research career studying physics that is closely related to the greenhouse effect,” said Happer. “Fears about man-made global warming are unwarranted and are not based on good science.”

Dr. Happer views climate change as a predominately natural process. “The earth’s climate is changing now, as it always has. There is no evidence that the changes differ in any qualitative way from those of the past.”

“Computer models used to generate frightening scenarios from increasing levels of carbon dioxide have scant credibility,” Happer concluded.

For more details on how scientists have been bribed and/or intimidated to support global warming hysteria, check this link for an analysis by Richard Lindzen, the Alfred P. Sloan Professor of Meteorology at M. I. T.

Professor Lindzen explains how Al Gore and company have manipulated scientists with a combination of money and intimidation to create the impression of authority for ill-founded global warming claims. (This analysis was presented as a keynote address on March 8, 2009 at the second International Conference on Climate Change.)

In candid moments, even some of the government scientists who conjured up the scare stories admit that they were playing fast and loose with the facts in the service of political goals. Witness this comment from Stephen Schneider of the National Center for Atmospheric Research:

On the one hand, as scientists, we are ethically bound to the scientific method, in effect promising to tell the truth, the whole truth, and nothing but-which means that we must include all the doubts, the caveats, the ifs, ands, and buts. On the other hand, we are not just scientists but; human beings as well. And like most people we’d like to see the world a better place, which in this context translates into our working to reduce the risk of potentially disastrous climatic change. To do that we need to get some broadbased support, to capture the public’s imagination. That, of course, entails getting loads of media coverage. So we have to offer up scary scenarios, make simplified, dramatic statements, and make little mention of any doubts we might have.

- DISCOVER October, 1989, Page 47.

If you believed scare stories about global warming, you have been deceived.

Al has almost everyone scammed. Even conservative giant Newt Gingrich wrote a book demanding action on global warming.

Everyone was buying the hype.

Al’s plan was working perfectly….

Cap and Trade

Once Democrats seized control of the House, the Senate and the presidency, there seemed to be no stopping Al’s last act.

You see, while he’s been touring the world, promoting his movie and scaring everyone about the world heating up, his banker friends back in New York and London have been very busy…

… Busy buying up shares in green energy companies all over the world. And laying the groundwork to profit handsomely from carbon taxes.

And they‘ve already made a heap of money in the process.

Bloomberg reports that Al’s net worth jumped from $2 million to $100 million since he left office.

And According to Morningstar, GIM beat the global stock market return by 12.6%.

GIM’s “global sustainability fund” trounced the benchmark and most of its peers through 2008.

But Al biggest profits are still to come…

Al has been calling for a laundry list of heavy-handed regulations and carbon taxes since the Democrats came to power last year…

He wants a freeze on greenhouse gas emissions… a ban on new coal-fired power plants, tough new fuel efficiency standards for vehicles… carbon taxes… and timetables for reducing greenhouse gases.

But his favorite policy idea is cap and trade. And I’ll show you why in just a moment.

Cap and trade means Washington will place a “cap” on the amount of carbon dioxide emissions that the economy can create.

If companies go over their allocated limit, they must buy a carbon credit from a company that emits less carbon than its allocated limit… or pay a hefty fine.

As I explain below, “Cap and Trade” will make Al Gore a billionaire.

The Problem is cap and trade is going to cost you and every other American wads of money.

According to the Heritage Foundation, the version of the “Cap and Trade” bill that passed the House of Representatives will reduce U.S. GDP by $161 billion dollars.

That is roughly $1,870 for every family of four in America.

In my view, however, this estimate is laughably conservative, as it more or less supposes that Al is right and the world will get warmer.

The costs of repressing carbon dioxide emissions will be much higher if climate takes a turn in the direction I expect and the earth gets colder. More on that below.

Remember also that Cap and Trade imposes an arbitrary and unnecessary burden of “carbon accounting” on every business in America. Not only will every business have to purchase “carbon offsets” through Al Gore’s carbon exchange, it will have to audit its carbon emissions to prove that panting employees have not discharged more carbon dioxide into the atmosphere than they have paid for.

Another ghastly cost for the economy that is bound to be imposed along with Cap and Trade would be validation of the effort by scavenging plaintiffs’ attorneys to sue every industrial company and utility in the United States for damages associated with bad weather. Consider this from the Wall Street Journal’s Law Blog:

For years, leading plaintiffs’ lawyers have promised a legal assault on industrial America for contributing to global warming.

So far, the trial bar has had limited success. The hurdles to such suits are pretty obvious: How do you apportion fault and link particular plaintiffs’ injuries to the pollution emitted by a particular group of defendants?

Today, though, plaintiffs’ lawyers may be gloating a bit after a favorable ruling Friday from the Fifth Circuit in New Orleans, which is regarded as one of the more conservative circuit courts in the country. Here’s a link to the ruling.

The suit was brought by landowners in Mississippi, who claim that oil and coal companies emitted greenhouse gasses that contributed to global warming that, in turn, caused a rise in sea levels, adding to Hurricane Katrina’s ferocity.

Bay St. Louis, Miss after Hurricane Katrina
Source: Source: NASA

For a nice overview of the ruling, and its significance in the climate change battle, check out this blog post by J. Russell Jackson, a Skadden Arps partner who specializes in mass tort litigation. The post likens the Katrina plaintiffs’ claims, which set out a chain of causation, to the litigation equivalent of “Six Degrees of Kevin Bacon.”

The central question before the Fifth Circuit was whether the plaintiffs had standing, or whether they could demonstrate that their injuries were “fairly traceable” to the defendant’s actions. The defendants predictably assert that the link is “too attenuated.”

You can be sure that a lot more “attenuated” links will be asserted if Congress dignifies the far-fetched connection between carbon emissions and bad weather by passing Cap and Trade.

Cap and Trade will also increase your electricity bills by up to 90%. Maybe more, if utilities lose jury trials and have to pay Katrina damages to Mississippi farmers and every street vendor from New Orleans.

It could even cost you your job!

“The government is going to be directly responsible for the destruction of millions of jobs if the bill passed by the House becomes law – anywhere from a net loss of 0.5% of total jobs over the first 10 years, according to the liberal Brookings Institution, to 3 million by the year 2030, according to the industry-backed Coalition for Affordable American Energy.”

- U.S. News and World Report, July 6 2009

That may be bad for you, but it’s going to make Al Gore very wealthy indeed. It could turn him into the world’s first green energy billionaire.

Al Gore’s Trillion-Dollar Monopoly

So why has Al been such a huge promoter of Cap and Trade?

It’s simple.

He owns 10% of the exchange that will handle every single carbon credit traded. That’s why the “Cap and Trade” bill and the Copenhagen Conference are so important to culminate Gore’s scheme.

If laws and international treaties with the effect of law bind the whole world to trade carbon credits, Gore’s carbon exchange will be worth untold billions.

This market is going to be big.

Bigger than the New York Mercantile Exchange. Maybe even bigger than the NASDAQ.

According to the New York Times, carbon “will be the world’s biggest commodity market, and it could become the world’s biggest market overall.”

A report by New Energy Finance puts the value of the carbon market at $1 trillion a year by 2020.

But this market barely even exists today!

All the banking big boys want to get their greedy little fingers in this pie.

See, until a few years ago exchanges were private companies. But that’s all changed. Now they’re publically traded cash cows that get a small slice of money each time a trade is made.

And early investors in these exchanges can cash in big.

Take a look at the following chart of the CME group, the largest futures and options exchange in the world. Early investors could have bought shares for $41 dollars back in 2003.

Over the next five years, the exchange surged in price, giving investors 15 times their money.

I bet you wish you could have gotten in on these profits back then…

Who wouldn’t?

A $5,000 investment turned into $85,000, just like that.

But Al Gore’s “Money Machine” provides him an opportunity with even more upside potential.

Why?

Because right now membership of this new exchange is still voluntary. And today, only 470 companies currently participate.

But once cap and trade is signed into law, and re-enforced by a global treaty, every single company in the United States will have to join.

That means 470 companies will balloon to hundreds of thousands overnight…

It’s the law.

Since 2005, Al’s exchange has seen 2,825% growth in trading fees.

But that’s just the beginning. You can bet this number will jump by magnitudes more once the law is signed.

And Al Gore will laugh all the way to the bank as he sees his 10% stake soar 500%… 1,000%… maybe much more….

You see, this one exchange has cornered 99% of the carbon trading market. Competition is already virtually non-existent. And once the law is signed, it will have a government-sponsored monopoly. Perhaps even a monopoly enforced by international treaty.

Incredibly, hardly anyone in America has even heard of this exchange… yet.

In fact, like much else in the “Global Warming” hysteria, the mainstream media has barely covered it.

But that’s going to change soon.

You see, the cap-and-trade bill passed the House on July 24.

Now it’s up to the Senate to sign off on this bill. Will they?

Probably. My guess is that even if the Capitol were covered by glaciers that the Senators would find a way to burrow in and cast their vote against “global warming” as a show of obeisance to environmental lobby.

And, of course, we have our two Nobel Prize-winning campaigners against global warming leading the charge. Obama, because he wants to raise taxes, and Gore, because he would like to make billions out of this scam that he has so patiently orchestrated.

If they get their way, Al Gore will become a Green Economy billionaire, while you and other investors are carried away on a tide of red ink.

More on this in just a moment…

First, I want to tell you about something called the Maunder Minimum. It proves that carbon emissions have little to do with Global Warming.

You see, for all the hype, “Global warming” is hardly proven science.

Yes, the climate is changing. Climate is always changing. It has changed a lot over the past 10,000 years. It is a lot warmer now than it was at the end of the last Ice Age.

But it is also colder than it was 1,000 years ago. When the Vikings first went to Greenland, it actually was green. Believe it or not, they grew grain there. As late as 1300 AD, 3,000 farmers lived on 300 farms there. But then the climate got colder and eventually it became too cold for crops, starving the Nordic farming settlements out. By the end, the few remaining farmers were all dwarfs due to malnutrion.

Based on historic records and the indisputable evidence that the earth has been both much hotter and much colder in the past, there is no logical basis for the supposition that solar output is stable and constant from year-to-year.

To the contrary, there is evidence of considerable cyclical variability in the sun’s warmth. This explains much more about climate than do fluctuations in minute concentrations of so-called “greenhouse gases.”

If you ask yourself why the Ice Ages ended and why the Medieval Warm Period petered out in generations of cold, wet summers… you are on the path to understanding the dynamic of climate today. Not surprisingly, it‘s closely linked with variations in the energy output of the sun itself.

By the second quarter of the 17tth century astronomers were carefully observing the heavens. Among the key measurements they recorded were daily records of sunspots — the visible manifestations of magnetic storms on the sun. It turns out that sunspot activity is closely correlated with the sun’s total energy output.

When there are lots of sunspots, the sun produces more energy and temperatures on earth rise. When sunspots recede, the earth gets colder.

In the 17th century, the sun plunged into a 70-year period of almost total spotlessness known as the Maunder Minimum. The sunspot drought began in 1645 and lasted until 1715.

During that time, also known as the “Little Ice Age,” temperatures plunged. It was the coldest period in the last millennium. Some of the best astronomers in history (for example, Haley, who discovered the famous comet) monitored the sun and failed to count more than a few dozen sunspots per year, compared to the usual thousands.

The summer of 1693 was so cold that millions of people in France and surrounding countries died of starvation. Equally, there were crop failures in Scotland in eight of the last nine years of the 17th century. That’s one of the reasons that Scotland joined England in the Treaty of Union to form the United Kingdom in 1707. The English growing season also shrank by five weeks in the late 17th century, but some grain could still be grown at lower altitudes whereas food production in Scotland was almost totally frozen out.

In Norway, total grain harvests late in the 17th century were only about 2/3rds of what they had been in the year 1300. The failure of Norwegian crops from 1680 into the 18th century was a prime reason for the great growth of merchant shipping there. Coastal farmers whose crops failed turned to selling their timber and to constructing ships in order to transport these timbers themselves.

If you’ve ever been on a cruise, chances are you sailed with a Norwegian crew who were sent to sea by the Maunder Minimum.

Meanwhile, Al Gore’s late 20th century crisis of “global warming” just so happened to coincide with an historic high in sunspot activity. What a coincidence.

But not to worry. It’s all over now. Sunspot activity has plunged. And Global warming seems to have vanished with it, except as a political cause.

We’ve just seen the largest temperature drop in recorded history

The period from January 2007-through September 2009, showed the sharpest drop in worldwide temperatures in recorded history. (Note that this flatly contradicts the forecasts of the CO2 warm-mongers. According to the “Global Warming” alarms, average global temperatures should have increased by 0.2 degrees Celsius.)

Temperatures are now back to what they were in the 1980’s, the Arctic icepack grew by 370,000 sq. miles in the past two years, and the Antarctic icepack continued to increase, as it has steadily done for the last several years. The average global temperature has been declining since 1998.

The moral of the story is that there is no need for you to fret about warming in your future. Even if you live on the coast, you won’t have to swim to work.

But you may need some thicker blankets.

Global warming is a hoax. Only the money that will be made out of this scam is real.

In all probability the world will continue getting colder in the immediate future. Finnish astrophysicist, Timo Niroma, a leading expert on sunspots, flatly declares that the era of “global warming” is over. He projects that the period between now and 2300 will be another “Little Ice Age” with a repeat of the MAUNDER MINIMUM. Brrr.

Niroma has closely studied sunspot cycle lengths since the 17th century, cycles that he correlates to the Jovian year. As the largest planet in the solar system, it would stand to reason that Jupiter’s orbit could create perturbations in the sun.

However Niroma doesn’t base his forecast of a colder climate solely on cyclical patterns. Among the reasons he emphasizes for his forecast of deepening cold — there is a clear trend towards diminishing solar output:

Bill Livingston and Matt Penn of the National Solar Observatory (NSO) in Tucson, Arizona report that the magnetic strength of the sunspots irrespective of their amount has linearly declined since at least 1990, suggesting that the spots could vanish in 2014 or 2015 if the trend continues.

Equally, Niroma points out that the brightness of the sun has dropped a whopping 6% at extreme UV wavelengths since the solar minimum of 1996. Current sunspot activity has plunged below the Dalton minimum associated with bitterly cold temperatures in the early years of the 19th century.

Already, this decline in solar output has been manifested in dramatically colder weather around the globe. In mid-October, 20 per cent of the entire United States was covered in snow, the greatest October snow cover the country had known for years. Note also, the snow cover unambiguously accelerates cooling by reflecting sunlight back into space.

Colder weather reports have not been confined to North America. Unseasonable snowfalls blanketed central Europe and the Alps.

Freak October snows caused traffic chaos in the North Island of New Zealand.

Up to 100 inches of snow hit Patagonia in a freak austral spring blizzard. Meteorologists recorded the lowest October temperatures ever in Germany, as the mercury dipped to a chilly -24.3 degrees Celsius in Bavaria’s Berchtesgaden national park.

And hundreds of Tibetan herdsmen had to be rescued when blizzards swept their summer pastures weeks early.

The furor over “Global Warming” is misplaced. As part of the research I did into the hidden factors that drive history for the books I wrote with Lord Rees-Mogg, I found evidence that climate fluctuations have destabilized civilizations throughout history. By far the most destabilizing climate changes are those that involve cooling of the earth.

A major reason for the collapse of the Roman Empire was colder weather that drove the barbarian German tribes south looking for food and warmth. “Global Warming” is just another name for good weather.

The Biggest Contrarian Play Ever—
Invest Now to Profit from the Coming Ice Age

If you want to invest alongside Al Gore and make a killing off of Cap and Trade, the best way to do that is by getting into the Climate Exchange (CLE.L) trading on the London Stock Exchange.

Not only does this exchange take care of the European carbon market, but it also has a huge interest in the Chicago Climate exchange.

What you really have to worry about is not Global Warming, but Global Cooling. The danger is when the weather gets colder, as it did in the 17th century, during the Maunder Minimum.

I have followed Dr. Timo Niroma’s work with interest. Obviously, I cannot independently confirm his forecast that we are now headed into either a “Little Ice Age” or even worse, a Big Ice Age. Unlike Al Gore, I do not pretend to be an expert on climate. But I do tend to recognize a contrarian investment opportunity when I see one.

With the whole world focused on a “global warming” treaty in Copenhagen in December, there has probably never been a more wide open field for spectacular returns on a contrarian play. That’s why I am recommending an “Ice Age Portfolio” now.

You might also want to pick up a pair of warm mittens.

Sincerely,

James Davidson

The Little Ice Age Portfolio:
How to Profit from the
Biggest Lie in History

No matter if the science is all phony, there are collateral environmental benefits…. Climate change [provides] the greatest chance to bring about justice and equality in the world.

- Christine Stewart,
Minister of the Environment of Canada,
1997-1999

Even if the theory of global warming is wrong, we will be doing the right thing — in terms of economic policy and environmental policy.

- Tim Wirth ,
while U.S. Senator, Colorado.

Oh I takes de gospel whenever it’s pos’ble. But wid a grain of salt.

- Porgy and Bess

If you think the U.S. and Canadian economies have trouble now, wait until much of North America is buried again under glaciers a mile or two deep as it was in the last Ice Age.

Or better yet, don’t wait. If you want to stake out a claim to preserve prosperity for yourself and your family, act now to implement the biggest contrarian play ever, “The Little Ice Age Portfolio.”

I must preface my recommendations by underscoring the fact that I hope my forecast of a “Little Ice Age,” much less a full-blown Ice Age, proves to be wrong. If it comes to pass, it will not only surprise lots of gullible people, it will kill more people than World War II. Valid estimates suggest that one sixth of the world’s population lives at the threshold of starvation. A Little Ice Age could drastically reduce food supplies and put their survival in jeopardy.

If we do enter even a semblance of an Ice Age it will trigger the greatest social crisis in history, as even an apparently minor fall in average global temperatures could have a devastating effect on growing seasons in temperate latitudes. Millions and millions of people would die.

Experts believe that average global temperatures fell by 2 degrees Celsius or less in the “Little Ice Ages” associated with the Sporer minimum of 1400-1510 and the Maunder minimum of 1645-1715. This does not sound dramatic, but it was associated with a sharp drop in summer warmth in higher latitudes in the Northern hemisphere. A decline in global temperatures of a couple of degrees Celsius can precipitate an increase in food prices of 800%. A bankrupt world could not afford to feed itself if growing seasons dramatically contracted at higher elevations and higher latitudes.

Note that according to the Canadian Wheat Board, the growing season in Canada’s prairie has already fallen by 10 days in the past two years as “Global Warming” has petered out. But with all the “hot air” coming from Al Gore and company, you probably haven’t even noticed colder temperatures in recent years.

Even changes that fall well short of the advent of an Ice Age can have devastating economic consequences in a world accustomed to “temperature inflation.” The end of the medieval warming period (warmer than the present) was a matter of dire consequences in mainland Europe where crops failed year-after-year and millions of undernourished people perished through starvation and epidemics, culminating in the Black Death.

Note also that cold spells tend to have persistent cultural effects. The fact that Little Ice Age conditions eliminated the cultivation of grapes in Northern Europe precipitated an apparently permanent shift to beer-drinking.

The Domesday Book census of England in 1085-6 reported 42 vineyards, mostly owned by nobles to provide wine for their dining tables. By the end of the 14th century, a three degree Celsius decline in global temperatures was enough to wipe out wine production in England. Beer and ale became predominate for reasons of climate. In cold, wet weather, stored grain spoiled too readily to be kept in unprocessed form, so beer brewing gained vogue as a technologically efficient way of storing vulnerable grain for later consumption. And beer had another advantage. It could be brewed from barley, a short season crop.

The preference for wine in the everyday diet was preserved among the wealthy who could afford to import wine and among the population in general in Southern Europe, where climate did not become too cold for grape cultivation.

You see, contrary to what the “warm-mongers” suggest, life has mostly gotten better when temperatures have risen. Happily, it did get warmer after the Black Death. With a few instructive exceptions, it has mostly been warmer since 1500 than it was in the late Middle Ages, but not as warm as the Medieval Warm Period.

Though Al Gore and his pals have figured out how to profit spectacularly from his pet theories that burning hydro-carbon fuels releases too much atmospheric carbon, humans unfortunately have little or no capacity to regulate the earth’s thermostat by manipulating atmospheric carbon. This is important to bear in mind when you consider the investment consequences of another Little Ice Age.

Approximately 99.72% of the so-called “greenhouse effect” is due to natural causes — mostly water vapor and traces of other gases, which are not caused by human activity. Total human contributions to greenhouse gases account for only about 0.28% of the “greenhouse effect,” just a little more than a quarter of 1%. Man-made carbon dioxide (CO2) comprises only about 0.117% and other man-made sources, including methane, nitrous oxide, carbon monoxide and other miscellaneous gases contribute another 0.163%.”

In other words, eliminating human activity altogether would have little impact on carbon levels in the atmosphere, and even less on climate change. Even if we wanted to, we could not up-regulate temperatures in the face of a deep solar chill by emitting more CO2. Of the 186 billion tons of CO2 that enter earth’s atmosphere each year from all sources, only a little more than 3%, about 6 billion tons, are from human activity. Approximately 90 billion tons come from biologic activity in the earth’s oceans and another 90 billion tons from such sources as volcanoes and decaying land plants.

Further to that, at 368 parts per million, CO2 is only a trace element of earth’s atmosphere. It comprises less than 4/100ths of one percent of the total gasses present. Compared to former geologic times, earth’s current atmosphere has only a bare trace of CO2. In the Paleozoic Era, atmospheric CO2 was present in concentrations up to 20 times higher than current readings of 386 parts per million.

Unfortunately, if we needed to raise the earth’s temperature in order to save millions from starvation, we would have no idea how to do so. The only route forward would be to attempt to adjust to the celestial forces that govern the sun’s dynamo.

If you’ll permit me to rant and rave for a moment, the prospect of a coming Ice Age underscores the folly and the evil involved in Al Gore’s program of phony research into “Global Warming.” In recent decades, the U.S. government has wasted untold tens of billions on bogus climate research which amounted to little more than bribing scientists to add credibility to Al Gore’s semi-religious conviction that human activity is imperiling the planet. In a real climate crisis, almost all of the U.S. government’s “research” would be utterly useless, as we have been paying experts to come to bogus conclusions.

Unfortunately, it is all too plausible that our climate could rapidly revert to Ice Age conditions. For one thing, the earth has been in an Ice Age for most of the past 750,000 years. This suggests that more frequently than not, the sun fails to provide enough radiative energy to keep the earth from freezing.

Notwithstanding all the bellyaching about “Global Warming,” we are technically in an Ice Age now, as there are extensive glaciers covering most of Greenland and Antarctica, as well as other smaller glacial formations in Patagonia, on the South Island of New Zealand and at high elevations and high latitudes in the Northern Hemisphere. We have enjoyed an intermission from advancing glaciers, known as an “Interglacial period” during all of recorded history, but that is a short interlude in geological time.

The past temperate Interglacial periods like the current one, known as the “Holocene” interglacial, have tended to last for relatively short periods, of about 11,500 years. Our current Interglacial has persisted for about 11,400 years, which means it is due to end relatively soon. Unfortunately, based on the evidence that an Ice Age is the baseline climate of the earth, it is more probable than not that any major climate change would involve the world getting colder.

Furthermore, the evidence of cyclical patterns in the waxing and waning of Ice Ages also points to the possibility that we could rapidly revert to a period of glaciation. Dr. George Kukla, of Columbia University argues that variations in the earth’s orbit around the sun largely inform Ice Age cycles. He states: “I feel we’re on pretty solid ground in interpreting orbit around the sun as the primary driving force behind ice-age glaciation. The relationship is just too clear and consistent to allow reasonable doubt.” Dr. Kukla said. “It’s either that, or climate drives orbit, and that just doesn’t make sense.”

Some evidence suggests that the return to glaciation can happen as rapidly as one year. In 2008, German scientists reported that the last Ice Age 13,000 years ago took hold in just one year, more than ten times quicker than previously believed. Rather than a gradual cooling over a decade, the Ice Age rapidly plunged Europe into the deep freeze, the German Research Centre for Geosciences at Potsdam has said.

An abrupt shift to cold, stormy conditions plunged Europe almost instantly into an Ice Age during the Younger Dryas less than 13,000 years ago – a very recent period on a geological scale. Dr Achim Brauer, of the GFZ (GeoForschungs Zentrum) German Research Centre for Geosciences at Potsdam, and colleagues analyzed annual layers of sediments, called “varves”, from a German crater lake. Each varve records a single year, allowing annual climate records from the region to be reconstructed. From one year to the next, an Ice Age began.

Evidence of a dramatic fall off in sunspot activity suggests a serious risk of this happening again.

I know that politicians assure you that there is no such danger – because carbon dioxide emissions from human activity are purportedly poised to turn the earth into a hot house.

Unfortunately, this is a blatant lie, upon which you cannot depend to stay warm in winter. For that, you will need fuel. That is why one of the core contrarian plays in The Little Ice Portfolio is to purchase natural gas through the -First Trust ISE/Revere Natural Gas Index Fund (FCG). This ETF buys individual natural gas producers, so it should give you broad coverage for an uptick in the demand for gas for heating, both directly and through greater demand for electricity.

Equally, we think that unequivocal evidence of a deep freeze will eventually sink in with even so benighted a group as the U.S. Congress, with the result that “greenhouse” limits on the use of coal are likely to be eased. Hence our recommendation of two Coal ETF’s: Van Eck Market Vectors Coal ETF (NYSE: KOL) and PowerShares Global Coal Portfolio (NasdaqGM:PKOL). Note that the PowerShares is more diverse across countries, while the Market Vectors is more focused in the US.

As evidence accumulates that global warming has not transpired as predicted, Gore and his minions have shamelessly recast their campaign as one to combat “CLIMATE CHANGE.” Al doesn’t want to risk the billions he has at stake on the chance that people will look past all his “hot air” to focus on the thermostat and realize that we are already entering a “Little Ice Age.”

Global Warming? Ice Age? What’s the difference?

In case you missed it, Obama’s White House science czar, John Holdren, has predicted that 1 billion people will die in “carbon-dioxide induced famines” in a coming new Ice Age by 2020…

Talk about brazen “Double Think.” Holdren published two books in the 1970s in which he set out completely contradictory theories on the impact of CO2 on global cooling. Holdren and Ehrlich argued in their 1973 book “Human Ecology: Problems and Solutions” on page 198 that the main effect of carbon-dioxide-induced global warming “might be to speed up circulation patterns and to bring arctic cold farther south and Antarctic cold farther north.” Just how and why mixing hot and cold air under warming conditions could lead to an Ice Age is a matter that they cannot explain.

In “Ecoscience: Population, Resources and Environment”, last revised in 1977, Holdren together with co-authors Paul and Anne Ehrlich stated on page 687 that “a man-made warming trend might cancel out a natural cooling trend.”

Equivocating, contradicting himself, and making plainly ridiculous leaps without scientific basis, Holdren forecasts disaster, no matter what. He based his prediction on a theory that human emissions of carbon dioxide would produce a climate catastrophe in which global warming would cause global cooling with a consequent reduction in agricultural production resulting in widespread disaster. Got that?

It is key to answering the most important IQ test in history. It will determine whether the great majority of Americans is stupid enough to sign away what remains of the superior living standard we have enjoyed in the service of a global power grab designed to make Al Gore and his Wall Street buddies richer while millions are reduced to poverty under the weight of draconian carbon taxes.

Holdren is right about one thing, however. A return to Ice Age conditions, or even a marginal, “Little Ice Age” cooling would devastate food production. If the current plunge in solar activity as measured by sunspots and other indicia of solar radiation, leads to the same drop in global temperatures experienced in the 17th century, when growing seasons in Europe plunged, the world will have a serious challenge to feed itself.

Human population is now ten times higher than it was in 1700. Feeding all these mouths under “Little Ice Age” conditions difficulties no easy task. Food prices would soar, as food output in Europe, Canada and the United States plunges.

Note that the temperature gradient between winter and summer in the American grain belt averages about 59 degrees Fahrenheit. If winter temperatures persist erratically into spring, or return early before the harvest, the result could be a collapse of the growing season.

This is what happened during the last Dalton Minimum, in 1816, “the year without a summer,” when diminished sunspot activity, combined with volcanic pollution from the eruption of Mount Tambora to produce a sudden onset of Little Ice Age conditions.

The greatest effect of the cold was felt on the Northeastern U.S., New England, the

Canadian Maritimes, Newfoundland, and Northern Europe. In times of “normal” solar radiation, late spring and summer temperatures in the northeastern U.S. and southeastern Canada average (day and night) about 68–77 °F and rarely fall below 41 °F. Although there are occasionally May flurries, summer snow is an extreme rarity.

In May 1816, frost killed off most of the crops that had been planted, and two major June snowstorms devastated crops in eastern Canada and New England, causing many human deaths (and precipitating a mass migration out of New England. If you own property in the Northern part of the U.S. or in Canada that you intend to sell within the next few years, you might want to take a lesson from the past and try to sell it before all the potential buyers realize that the climate has taken a long-term turn for the worse).

While, obviously some crops were brought in at lower latitudes in 1816, grain prices skyrocketed eight-fold. The result was the last major subsistence crisis in the Western world, with malnutrition, starvation, epidemic, and famine.

Europe, still recuperating from the Napoleonic Wars, suffered from acute food shortages. Food riots broke out in both the U.K. and France. Grain warehouses in many locations were looted. The violence was worst in Switzerland, where the government declared a national emergency to combat unrest precipitated by famine. A BBC documentary using figures compiled in Switzerland estimated that fatality rates in 1816 were twice those of average years.

The evidence that widespread unrest accompanied Little Ice Age conditions in the past in countries as well mannered as England, France and Switzerland is a strong hint of what you can expect in North America when temperatures plunge. Social unrest and the declaration of “states of emergency” would probably make it complicated to move to warmer locales. The government might even impose a “windfall profits taxes” on oil and natural gas companies.

You can be sure that politicians will seek to deflect public anger over a climate reversal.

They will pretend that the cause of the crisis lies in human activity, rather than in the dynamo of the sun, and the complicated patterns of changing orbits of the earth around the sun.

Another hint from “the year without a summer” comes from China, where the cold weather killed trees, rice crops and even water buffalo, especially in northern China. Unusually low temperatures in summer and fall devastated rice production in Yunnan province in the southwest, resulting in widespread famine. Fort Shuangcheng, now in Heilongjian province, reported fields disrupted by frost and conscripts deserting as a result. Summer snowfall was reported in various locations in Jiangxi and Anhui provinces, in the south.

On this evidence, it is suggestive that China would probably be a big buyer in food markets at the outset of Little Ice Age conditions.

All this implies dramatic price escalation for basic food stuffs. For that reason, three food ETFs are included in the core contrarian Little Ice Age Portfolio: PowerShares DB Agriculture (NYSE:DBA);Market Vectors Global Agribusiness (NYSE:MOO) and Elements Grain Total Return (NYSE:GRU).

If grain production in Canada, Europe and the U.S. fell short, what other countries could take up the slack? Answer: Not many.

Just about the only major agricultural producer that would not likely be devastated by “Little Ice Age” conditions is Brazil. According to the U.S. Department of Agriculture, Brazil is already the world’s leading agricultural economy as measured by profitability. U.S. farmers currently grow more crops. But because of our crazy-quilt of farm subsidies, much of the U.S. farm output is unprofitable. In Little Ice Age conditions, Brazil could literally be the world’s breadbasket.

As you probably realize, the equator passes through Northern Brazil. The temperature gradient between winter and summer in Brazil is, on average, less than the difference between day-time and night-time temperatures.

In other words, if winter temperatures lasted into spring or arrived early in the autumn, there would be serious crop failures throughout the Midwestern United States and in other temperate latitudes. But late or early winters in equatorial Brazil would have little or no effect on growing seasons. Hence, my conclusion that Brazil is just about the only leading agro power where growing seasons would not be adversely effected by the return of a “Little Ice Age.” That being the case, the comparative attractiveness of Brazilian government debt and investment in Brazil in general would likely jump sharply as crops in North America, Europe and China failed.

Note, by the way, that we are up 47.53% for the year on the Brazilian government bonds recommended in January.

Equally, our spread, long the Brazilian stock market and short the Chinese market has been a big winner. In just a few months, we’re up 28% on Brazil and down just 11% on China.

Both these positions are excellent core holdings in the Little Ice Age portfolio.

Other than Brazil, Eastern Bolivia, Paraguay and parts of Argentina would probably become more attractive in comparative terms because the growing seasons there would not be wiped out by erratic cold. Some African countries could also pick up some slack in food production. Kenya lies close to the Equator. Zimbabwe was formerly a food-producing country. In a starving world, I would expect some drastic action to improve the productivity of Zimbabwean agriculture. Someone would make it worthwhile for Mrs. Mugabe to divest the stolen farms she has been mismanaging.

You could also expect to see the business of “hot house” farming get a boost. If food could no longer be grown outdoors in North America, there would be efforts, no doubt subsidized and screwed up by government, to bring farming indoors. Some of the empty factories and abandoned strip malls in Detroit and in the Northeast of the U.S. and southern Canada would no doubt be fitted out with artificial lighting and heated to a degree required to grow food. While there are a few firms piddling around in this area, I know of none that has developed sufficiently to be an attractive receptacle for your investment.

Note that we are just scratching the surface, brushing away a few ice cubes in establishing the contrarian Little Ice Portfolio. An adverse climatic shift implies a drastic drop in living standards, a climatic deflation, including a plunge in the sale of air conditioners, and a general fall in discretionary income.

The current depression has already wiped away a full decade of progress in industrial production. The “recovery” in production, such as it has been, has leveled off at a low-level plateau of activity that has wiped out the last 10 years of growth. As John Williams of “Shadow Government Statistics” notes, “Despite the near-term gains (as will tend to become evident as inventories are worked off in the months ahead), the series generally still is bottom-bouncing.”)

A Little Ice Age would mean a multi-decade plunge in real living standards, perhaps wiping out most of the progress since World War II. It would mean the final end of U.S. economic predominance, already long frayed, probably the death of the dollar, a big surge in gold, and a fall in demand for other non-essential commodities.

Another side effect might be to restore the reputation of genuine science, in preference to the Al Gore version of “political science” which seems in many respects to be a throw-back to the pre-Copernican medieval superstition that insisted upon making humans and the earth the center of the universe. But to my knowledge, while the Ptolemic astronomers insisted that the earth was the center of the universe, none of them ever insisted that human action could arbitrarily change the climate. In those days, that was the province of God.

And yes, Climate Change, in the form of a Little Ice Age, would grant Ms. Stewart’s (Christine Stewart, Minister of the Environment of Canada, 1997-1999) wish by bringing about “equality in the world.” There will be a lot of equality in subsistence poverty.

Best,

James Davidson

Portfolio Update

It’s been a tumultuous month.

Not only has the market showed signs of hitting a top, but now it’s beginning to turn south. We’re already beginning to see a little bit of the red hit our very own portfolio.

The biggest hits have been to our gold holdings. The MarketVectors Gold Miners ETF (GDX), for example, dropped from $49 to $41 per share. We are still up 14%.

Witswatersrand gold (WGR.TO) also took a hit, now we are up 87% instead of 100%.

Our Brazil holdings have all gone down a little with one exception: CCR Rodoviarias (CCRO3.SA). CCR pushed up from $31 to $35 a share. We are now up 14% on CCR. Honestly, I’m not sure why it pushed higher. CCR is selling new shares into the market and priced them at $19.12. This would typically push some investors away as shares become diluted. But it appears that didn’t happen with CCR – a bullish signal indeed.

Our short China and long Brazil spread has worked out quite admirably. We are down 5% on the China ETF (FXI) and up 15% on our Brazil ETF (EWZ). Looking forward, as the market gets beat down we expect to see our short position in China shine.

I want to take the time and remind you that the Strategic Investment portfolio is a long-term one. The market looks ripe for a fall at these levels. But the companies that I’ve highlighted for you over the past year are ones that will survive and thrive in any meltdown.

These are companies that are riding very strong trends that show no signs of slowing.

And so instead of looking at this sell-off as a painful exercise in money management, I want you to look at it as your final chance to get into fundamentally strong companies at dirt cheap valuations.

I’ll be with you every step of the way. And when the time is right to buy more, I’ll let you know.

Until then,

James Davidson

We meant to send this update this morning, but when we got up the price of gold had hit a new all-time high. So we have decided to put a trade in to allow you to capitalize on gold’s steady march higher.

Action to take: Immediately buy the GLD 92 December Call option (GLDLN) for no more than $11.50 per contract (currently at $11.10). We expect gold prices to hit $1,100 or higher an ounce. If gold prices collapse under $1,000, we will exit our position.

Dear CSA Reader,

Did you know that the latest stock market rally started nearly at the exact same time that the Fed began Quantitative Easing?

The rally started on March 9th. The Fed started buying $300 billion in treasuries and $1.25 trillion in mortgage backed securities a week later. The rally has continued… and so has the Fed’s QE program.

All you have to do is leverage $300 billion by ten times… and you have liquidity of $3 trillion entering the market. That’d be enough to push up stock prices, wouldn’t you say?

How about if we leverage $1.25 trillion by ten times? Then we see an additional $12.5 trillion entering the market. That’d be enough to boost lending enough to level out home prices, right? You betcha.

This suits the banks because higher stock prices can help prop up a bank’s asset prices – making its situation look less dire on paper.  And it suits the Administration because higher stock prices provide the illusion of recovery. And this illusion is far easier to achieve by “monetizing” the market than it is to repair all the broken balance sheets that stand in the way of a genuine recovery.

This suits the Fed, too, because it increases confidence and makes it less likely that the Fed will inject more capital into banks. More importantly, it buys time.

But 12 days ago that all started to change.

The Fed finished buying $300 billion worth of treasuries at the end of last month. All that’s left now is to finish buying the mortgage backed securities and then the QE program will end. And fed members have shown no indication that they want to expand it.

Recently, Fed Governor Kevin Warsh said…

If the economy were to turn up smartly and durably, policy might need to be unwound with the resolve equal to that in the accommodation phase. That is, the speed and force of the action ahead may bear some corresponding symmetry to the path that preceded it.

If our theory of QE pumping up the stock market is right, then as QE ends, the stock market should lose its “pump”. Sure enough, from Sept 23 to just two days ago, the S&P had lost 5.1%.

It’s not just James and I who feel this way. Maybe you do too. After all, everybody knows the government is blatantly trying to “fix” the stock market.

In a recent article from ZeroHedge, they wrote…

The “monetization liquidity” fueling the rally comes from the $300B in long-dates Treasuries announced back in March as part of the Fed’s QE. The POMOs executing the injection have been covered extensively, and the end result is primary dealers end up sitting on the cash. Only about $7B (about 2.3%) of the original $300B remain to be injected. Without this liquidity (which correlates very well with the S&P’s performance since spring), the rally loses its legs and momentum switches to the downside.

Their conclusion is that we’re about to see another big market drop. But this isn’t set in stone. Remember, the Fed is also pumping in $1.25 trillion via mortgage bond buybacks. And these buybacks will continue until early next year.

So while the market may have less cash moving forward, liquidity is by no means exhausted. We could see this rally continue at a slower rate.

In the News…

Every week James sends me ten to twenty different articles (from his iPhone, of course). Most of these articles come from Bloomberg. And they always relate to our open positions and thoughts on the market.

So, I thought it would be great if I started covering these articles here for you every week. That way you’re looking at what we look at… and understanding why we feel the way we do about the markets.

The first article is very telling. It covers how bad loan portfolios really are at the nation’s banks. From Bloomberg…

Units of Frontier Financial Corp.,Towne Bancorp Inc. and Steel Partners Holdings LP are among 26 firms with more than one-fifth of their loans 90 days overdue or not accruing interest as of June 30 — a level of distress almost five times the national average — according to Federal Deposit Insurance Corp. data compiled for Bloomberg News by SNL Financial, a bank research firm. Three reported almost half of their loans weren’t being paid.

While regulators may not force firms on the list to close, requiring them to raise capital and curb loans may impede recovery in Florida, Illinois and seven other states. The banks are among the most vulnerable of a larger group of lenders whose failures the FDIC said could cost $100 billion by 2013.

This article actually shows you why we’ll have a choppy economic recovery. Because the only way to fix the banks is to do things that would “impede” recovery. Sometimes a bank can’t make any more loans until it deleverages or acquires more assets. Other times a bank must fail outright, causing a deflationary chain of events to happen (like a collapse in available credit).

These things won’t happen all at once though. It will happen in dribs and drabs. And so the effects will be spread out over time and region.

And don’t forget that we have a credit-based economy. When banks fail and mortgages go into foreclosure, credit is extinguished and the money supply falls.

This segues nicely into our second article, which is about how Bernanke may have to keep interest rates low to fight off deflation.

From Bloomberg…

The U.S. faces the possibility of deflation for the first time since the Eisenhower administration, a threat that may prompt the Federal Reserve to keep interest rates near zero through next year.

Executives at Kroger Co., the largest U.S. supermarket chain, blamed deflation for a 7 percent drop in earnings in the second quarter, while falling prices for food, gasoline, and electronics left August sales unchanged at Costco Wholesale Corp. A sustained price drop might set off a chain reaction in which lower profits force employers to pare wages and payrolls. That would erode consumer demand, exacerbating wage cuts and firings.

Such a spiral led to Japan’s “lost decade” of slow economic growth in the 1990s. A more vicious version in the U.S. helped create the Great Depression six decades earlier. Bond investors are forecasting retreating consumer prices, as shown by the yield they demand to hold a one-year bond versus a similar inflation-protected bond.

“Deflation is definitely a threat right now,” Nobel laureate Joseph Stiglitz, 66, a professor at Columbia University in New York, said in a Sept. 22 interview. “The combination of the deflation threat and the sluggish recovery should keep the Fed on hold for quite a while.”

Consumer prices are experiencing deflation, with the consumer price index sliding for six straight months from year- earlier levels, the longest stretch of declines since a 12-month drop from September 1954 to August 1955, according to the Labor Department.

So far, the core consumer-price index, which excludes food and energy, is facing disinflation, a slowing in the pace of increase. The core index rose 1.4 percent in August from a year earlier, down from 2.5 percent in September 2008.

I suggest you read the whole article here .

It will show you how regardless of the Feds unprecedented action, wages, credit lines, and home prices are still falling.

The reality is that Deflation is harder to fight off then Ben imagined. He once wrote about how the Fed could defeat deflation by dropping cash from helicopters.

As Ben sleeps at night, we can only imagine that he dreams of dropping thick $100 bills from helicopters in order to stop deflation. Because right now, we’re seeing the strongest deflationary forces since the Great Depression.

The third article covers how job losses are 824,000 WORSE than expected over the last year. From Bloomberg…

Payrolls were forecast to drop 175,000 in September after a 216,000 decline initially reported for August, according to the median of 84 economists surveyed by Bloomberg News. Estimates ranged from decreases of 260,000 to 100,000. Job losses peaked at 741,000 in January, the most since 1949.

The jobless rate was projected to rise to 9.8 percent. Forecasts ranged from 9.6 percent to 9.9 percent.

The Labor Department today also published its preliminary estimate for the annual benchmark revisions to payrolls that will be issued in February. They showed the economy may have lost an additional 824,000 jobs in the 12 months ended March 2009. The data currently show a 4.8 million drop in employment during that time.

The projected decrease was three times larger than the historical average, the Labor Department said. Most of the drop occurred in the first quarter of this year, probably due to an increase in business closings, the government said.

That’s the biggest decline in jobs since the Great Depression. Though, not in percentage terms (we have a lot more workers today than we did back then).  When the full revisions are tallied and brought forward, the additional 824,000 jobs lost since January will probably equate to 2,000,000 additional job losses now.

Still, U-6 unemployment (which counts discouraged and some part-time workers) came in at 17% for September. That’s worse than the double-dip recessions of the 1980’s. And if unemployment continues to climb until late next year, as even Ben Bernanke imagines it will, than we could see U-6 hit Great Depression levels of 25% + unemployment.

Don’t be fooled; things aren’t getting better. They’re just getting worse more slowly.

Upcoming Plays…

Over the past few weeks I’ve made a few passing mentions about how we would like to play gold. Since then, Gold has done real well at holding the $1,000 price level.

In fact, this weekly alert was going to go out earlier this morning. But then gold hit a new record price. Last I checked, it was at $1,040.20 an ounce.

And there’s a litany of reasons why it’s moving higher.

From seasonality thanks to Indian wedding demand… to a shrinking buck… and even good old fashioned “catastrophe insurance”.

Not only has the price of gold held the $1,000 mark pretty decently, but it never dropped under the blue support line on the chart below.

Now that gold has hit a record price, we are in a prime position to ride the breakout higher.

What I’ve done is chosen an option with a December expiration. That way we have time to let gold move higher. I also chose an option that was pretty deep in the money. Reason being, gold can be volatile. The deeper in the money the option is, the better our downside protection becomes.

If gold breaches past $1,100 an ounce over the next few weeks, we could see the price on this sucker double.

Action to take: Immediately buy the GLD 92 December Call option (GLDLN) for no more than $11.50 per contract (currently at $11.10). Our stop-loss will be the $1,000 mark for gold. If gold prices collapse under $1,000 we will exit our position.

Portfolio Update

Flotek (FTK) has recovered some of its losses. We were down 6% last week and this week we are down 3%.

But let me tell you, it’s starting to get cold where I’m at in Oregon. We’ve already started to use our gas heater to keep things cozy. And most people I talk too up here are also turning up the gas heater.

This is going to be one of the colder winters we’ve had here in this part of Oregon. And we can thank the 0.74 degree of cooling the earth has experienced in the last few years.

Right now, natural gas prices are still at remarkable lows. If you haven’t gotten into this position yet, you should. Gas is going to be used more and that increased demand can only push prices higher than where they are today.

We’ve also made a few changes to the Strategic Incomeportfolio which I wanted to point out to you today.

All of these changes had to do with the “Buy up to” prices which we list.

Money4Gold (MFGD) we lowered the “buy up to” price to 0.25 from 0.60. Reason being, these shares are extremely cheap right now and you should take advantage of them immediately.

MFGD announced preliminary earnings this morning. For the third quarter, they have realized revenues of $6 million. Compare this to the second quarter, which saw revenues of $1.49 million and you’ll notice there’s been tremendous growth.

The CEO Douglas Feirstein recently said “Following the successful integration of Money4Gold and My Gold Envelope, we have accelerated our ad buying efforts strategically focusing on our most profitable media channels. The result has been a tremendous success for our Company as gross gold collected per week is now consistently exceeding $1 million. As we enter the fourth quarter, we will continue to strategically increase our marketing expenses, enter new international markets and leverage our growing advertising budget to attain greater purchasing power positively impacting margins.”

If you haven’t gotten into MFGD yet, than you have the perfect shot to take advantage of these low prices.

Banco Itau (ITUB) has shown nothing but strength over the past two months. Shares have steadily climbed 28% since our initial purchase in May. We think the prospects for this bank are better than ever. So we’ve increased our “buy up to” price to $23 from $20 a share.

Prospect Capital Corp (PSEC) has also given us great returns over the short-term. We’ve gone ahead and raised our “buy up to” price to $13 a share, from $11.

Our short China and buy Brazil play has done quite nicely over the past month. We are down 2% on our China short (FXI) and up 15% on our Brazil long play (EWZ). We’ve added price targets to both of them. You can keep shorting the FXI down to $38 per share. And you can keep buying EWZ up to $70 per share.

That’s it for now. But stay tuned to your inbox for a potential gold or dollar play which could come as soon as this week.

Take care,

Charles Delvalle

Co-editor,
Crisis Strategy Alert

]]> http://www.crisisstrategyalert.com/articles/october-6-2009-csa-update-2/1058/feed http://www.crisisstrategyalert.com/articles/monthly-portfolio-9-28-09/1054 http://www.crisisstrategyalert.com/articles/monthly-portfolio-9-28-09/1054#comments Tue, 06 Oct 2009 15:39:23 +0000 admin http://www.crisisstrategyalert.com/?p=1054

The concept of contracts being enforced ended in this country in the fall of 2008 and early in the term of the radical socialist ninny in the White House. They screwed bond holders in the GM and Chrysler deals – broke contracts all over the place. This by our own gobmint. We are now indeed a third world country, where negotiating never ends.

– Rob Wilson, September 3 2009

The only element of a classical emerging market crisis that is missing from the US and UK experiences since August 2007 is the “sudden stop” – the cessation of capital inflows to both the private and public sectors. There has been a partial sudden stop of financial flows, both domestic and external, to the banking sector and the rest of the private sector, but the external capital accounts are still functioning for the sovereigns and for the remaining creditworthy borrowers. But that should not be taken for granted, even for the US with its extra protection layer from the status of the US dollar as the world’s leading reserve currency. A large fiscal stimulus from a government without fiscal credibility could be the trigger for a “sudden stop.”

– William Buiter, Financial Times
“Fiscal expansions in submerging markets;
the case of the USA and the UK”

There is perhaps no better place on earth to contemplate economic decline than in this cosmopolitan city of Buenos Aires, with its somewhat slummy, discount version of European cafe life that seems to have been distilled from an old post card of Paris or Rome as they might have been on the eve of the Great War.

Buenos Aires is full of Parisian-style patisseries, known here as confiterias, and Roman-style emporias de las pastas frescas artesanales. The city also has Michelin-caliber kitchens, such as La Bourgogne, El Sud, Casa Cruz and Nectarine, where you can eat splendidly for a fraction of what you’d pay in Europe.

But economic decline is not just a matter of living well at a discount for those who have managed to retain a smidgen of solvency through eight decades of misgovernment. Decline has a darker side.

In the ultimate expression of recycling, a multitude cartoneros (literally, “cardboard collectors”) prowl the sidewalks of Buenos Aires, pushing unwieldy gray carts made of baling bags on wheels as they deconstruct the city’s garbage. This from a Christian Science Monitor report:

Nearly 30,000 “cartoneros” invade the city’s neon-laced streets every night pushing handmade canvas carts, overturning garbage cans, strewing trash along the streets and collecting materials that they sell to recycling centers – each on average earning 10 to 15 pesos, about the cost of a large pizza.

As befits a thoroughly politicized economy, the cartoneros have become an officially recognized profession, subsidized by the government to dump trash all over the street and rummage through it for recyclables. The cartoneros hold some of those exciting “green” jobs you keep hearing about.

They also stand as a living refutation of the demagoguery that played so destructive a role in Argentina’s past.

Then as now, demagogues claimed that maintaining an open market economy was unacceptable; they had worked up a lusty appetite for “change” during the Belle Époque prosperity. But in those days, demagoguery was not a paying sport. The masses to which demagogues appealed were not permitted to vote in Argentina until high property requirements for the ballot were waived on the eve of World War I. Before the election of 1916, only the richest 10% of Argentine men voted.

When the distribution of ballots is equal but the distribution of economic assets is unequal it is elemental, if seldom acknowledged, that voting will tend toward the equalization of economic assets.

Lake Woebegone Arithmetic

Back when universal male suffrage was introduced, the Argentine elite identified closely with the British upper class. They reasoned that since Britain had experienced more or less universal male suffrage since 1885, that Argentine prosperity could survive adopting it. They reckoned without the world crises that soon disrupted Argentina’s economy; Argentina’s terms of trade fell about 50% from 1910 to 1921.

Then as now, one of the issues that most inflamed demagogues was wide income disparities. The old Argentine arguments make an interesting twist on current complaints against globalization. In those days, critics alleged that only the rich benefitted from free trade because they could sell primary products at a high profit that enabled them to afford expensive imported manufactured goods that were beyond the means of the ordinary worker.

Today, after the collapse of the Bubble Epoch, we hear griping about globalization that is the inverse of those old arguments. Anti-globalization critics fret that free trade hurts the poor because it permits consumers to buy cheaper manufactured goods, which thereby undercuts the high wages of the ordinary worker while “the rich get richer.”

The moral of the story may be that at any point where the dynamics of the free economy lead to disproportionate gains market critics will agitate for change that involves a lot of political intervention in the economy.

As a “local lady” told Flora Lewis of The New York Times in 1990, “All our grandparents were rich.” This smacks of the arithmetic of Lake Woebegone, where “all the children are above normal.” But for Argentines of a certain class it would have been true. On the eve of the Great War, Argentina had about one-tenth the population of the United States – but among them were probably more who were wealthy by world standards than were Americans at that time.

Although precise figures on income distribution in Argentina date only to the 1930s, there is good reason to believe that the top 1% of Argentines earned a third or more of national income before export markets collapsed in 1929.

After years of redistribution, quantitative easing and forced industrialization to achieve “national independence,” the sudden spur to exports of grain and beef caused by World War II raised the percentage of income earned by the top 1% of Argentines to 26% in 1943. It would have been considerably higher before the Great War.

The lucky minority of super-rich Argentines were the proprietors of vast tracks of the Pampas – arguably the most fertile agricultural region in the world. In many places, the top soil was ten feet deep.

The Argentine pampas make up more than a quarter of a million square miles – an area larger than France – of which 8.2% of the land titles accounted for 80% of the productive area. As weather conditions in the pampas permitted two harvests a year, that area was twice as productive as the wheat growing regions of Canada. This is part of the reason that Argentina vied with Canada and Australia as the leading destination for British capital before the Great War.

Like the US today, Argentina was a rich country dependent on foreign capital. In those days, the main source of international capital was the City of London. The staggering cost of the Great War crippled Britain’s ability to export capital. Net property income from abroad plunged from 8% of British GNP in 1910 to just 4.5% by 1920. Argentina suffered along with the British capitalists.

During the 1920s, London was still prepared to lend a trickle to Argentina at only 90 basis points above the interest rates on British government Gilts. In New York it was another story: Argentine loans found few takers. The loans that were made were of short duration and at high interest rates of 7%.

As a result of the lack of foreign capital inflows, investments in Argentina declined sharply. And the rapid GDP growth achieved by high levels of capital accumulation earlier in the century receded. Between 1890 and 1913 the Argentine capital stock had grown by 4.8% annually; from 1913 to 29 it grew by only 2.2%. The opportunities for continued expansion of the Argentine economy dwindled correspondingly.

For a Spanish-speaking country, Argentina was thoroughly Anglicized in 1929. In that year, Sir Malcolm Robertson, the British Ambassador to Argentina, said, “Without saying so in so many words, which would be tactless, what I really mean is that Argentina must be regarded as an essential part of the British Empire.” He was certainly not wrong. Though as he was widely quoted, it is difficult to parse how “tact” came into his comments.

In any event, no country suffered more from the decline of the British Empire than Argentina, the only country in Latin America to drive on the left. Wealthy Argentines congregated at the sumptuous Jockey Club in Buenos Aires, conceived as an extravagant version of a London gentlemen’s club, with a portrait of the Duke of Wellington positioned at a point of pride over the mantel. Wealthy Argentines, like the Martinez de Hoz family, sent their sons to Eton. And Argentines enthusiastically took up English sports, such as cricket, rugby and polo. There was even a rare Eton Fives court in Buenos Aires. (Eton Fives is the form of the handball played at Eton.)

When de-globalization gathered steam as British capital receded after the Great War, Argentina applied for membership in the British Commonwealth to avoid having its exports punished by steep tariffs. The application was vetoed by Canada. Argentina later signed a Commonwealth-like trade treaty with Britain – the Roca-Runciman Pact that gave British goods preferential tariff rates in Argentina. This required Argentines to deposit payment for their export goods with Bank of England, to be offset against the $2.14 billion of loans Argentina still owed to British creditors.

That treaty notwithstanding, Britain was much more open to free trade with Argentina than was the emerging power of the United States. No doubt, part of the reason was that, unlike Britain, the US economy was competitive rather than complementary to the Argentine. Instead of welcoming Argentine meat, as Britain did, the US imposed import barriers after briefly running a trade deficit with Argentina.

The high tariff policy of the Republicans worsened the situation as the 1921 and 1922 tariff hikes hit Argentina hard, laying prohibitive rates on wheat, corn, meat, wool, hides, flax and sugar. Many Argentine exports had been on the free list; now only two were. Argentina protested. But it got little relief.

When the Great Depression began in 1929, Argentina was the world’s leading exporter of wheat, corn, beef, wool, hides, and several other primary products. The Argentine economy was still quite prosperous.

USA: The Next “Submerging Market”?

Argentines consumed more imported goods per capita than Americans. Argentines also owned more cars per capita than Americans, or indeed, than any other country except Britain. But rather than building on its economic progress to that point, Argentina pioneered the dynamics of the “submerging market,” the process through which a once rich economy devolves into poverty and economic retardation.

Like it or not, this is a process destined to engage the attention of Americans, as the United States under Barrack Obama rapidly adopts the very policies that brought ruin to Argentina.

After 1929, Argentina responded to the Great Depression with a “tremendous growth of statism” – the use of the state to own or guide economic institutions. As result, the number of government enterprises grew rapidly, as did bureaucracy. What did not grow rapidly was the Argentine economy.

Argentina’s example shows how a surge of statism could result in dramatic economic retardation.

Buenos Aires is home to a new
economic underclass
- the cartoneros

Hence the fact that Argentina’s politicized economy today has subsidized jobs for cartoneros who live on garbage. It is hard to credit that they enjoy more income, more dignity, a greater chance of advancement or more of anything other than bad odor than even unemployed workers did in the pre-1929 free economy.

Lidia Quinteros, a shoemaker-turned-cartonero and activist, ominously advises Americans, “When a crisis happens in your country, you’ll have to do the same thing.”

That’s what I am afraid of. The crisis has happened, and I fear it is leading the United States in the same direction that Argentina took after the onset of the Great Depression in 1929. At that time, Argentina moved away from an open, free economy that was one of the world’s most prosperous, to become a closed, politicized economy, where government rather than the market determined investment priorities.

Of course, all these years later, one could say there is good news and bad news. Decay seems to have had some attractive results. For one thing, it seems to have mobilized the desire of women to look alluring. This is something I noticed decades ago as a (temporary) economic advisor in the former Soviet Union.

Before the fall of Communism, the women you saw on the streets there looked as though their deepest desire was to be mistaken for Mrs Breshnev. Afterward, they all dressed like expensive French whores. As Governor Mark Sanford of South Carolina could attest, there are some smoking hot women in Buenos Aires.

Steep economic decline, that included a multi-billion-percent inflation and decades of negative compound growth, hit Buenos Aires like an economic neutron bomb, wiping out families but sparing many handsome structures left over from a century ago when Buenos Aires was one of the world’s wealthiest cities.

Choosing the Wrong Path

Wherever you turn, there is a lot of faded elegance to be seen. That said, I am not insensible to the fact that one cannot merely stroll the streets of Buenos Aires and look around. That would be a recipe for a breaking a few bones or at least twisting your ankle. You have to be careful not to fall on the broken sidewalks, or tumble over destitute persons lying about, especially sprawled near the doorways to any sort of food establishment.

At night when the confiterias close, the adjacent sidewalks are blocked by crowds of homeless begging for scraps of day-old bread and pastries that would otherwise be thrown out.

From the vantage of my bathroom window, I can see the courtyard of a crumbling four-storey mansion built a century ago by a minor “lord of the Pampas.” No homeless here. But the rotting remains of the pergola and the classical 60-degree architectural trellis have been stacked along with dead limbs from a rubber tree and fallen palm fronds to form an incendiary hazard. It looks like the makings of a perfect “bonfire of the vanities.”

The derelict mansion next door, like the Belle Époque apartment from which I write, was built when the phrase, “rich as an Argentine” was a self-evident cliché, not an historical curiosity.

In 1929, Argentina was rich. By some accounts it was the fourth richest country per capita – richer than Germany, richer than France and much richer than Japan on a per capita basis. That was a lifetime ago. Today, after eight decades as the pioneer “submerging economy,” Argentina has fallen far behind Europe North America and Japan.

I suspect that the example of Argentina’s steep decline holds lessons for the United States. Like the US today, Argentina entered the Great Depression in 1929 heavily dependent on foreign capital, with highly unequal income dispersion, wide political resentments and lots of what would become bad debts in the banking system.

The path Argentina took out of depression led from bank bailouts to runaway budget deficits, hyperinflation and decades of negative compound growth.

An open, free economy was replaced by a closed system, hobbled by intervention and inward looking strategies after the Great Depression.

Many of these changes were set in motion by a charismatic demagogue, Juan Perón.

The Rise of a Demagogue

Perón burst into the national scene in September 1930, less than a year into the Great Depression, when he was one of only a few soldiers to organize a military coup that overthrew Argentina’s elected government.

Peron and his wife, Eva: The beginning
of the end of the Argentine middle class

A junior officer at the time, he negotiated to become the secretary to the minister of war as his reward for helping plot the successful coup. In that capacity, he had himself assigned to Italy as military attaché, where he took a tutorial in fascism at the feet of Mussolini.

Eventually, Perón returned to Argentina to apply the leadership methods of Mussolini to implement similar fascist economic policies. Perón was driven by his interest in power. He cared little for economics per se, except to use economic grievances to increase his own power, which he did adeptly.

Like Barack Obama, Juan Perón advanced rapidly up the power ladder. He was first under secretary of war, then secretary of war, then head of the labor department, moving on to become vice president. (He was part of the military group that ousted Ramírez with General Edelmiro Farrell.)

Perón recognized that labor was susceptible to his organization and control. By giving them goodies, he gained their devoted support. Perón used the term descamisados (shirtless ones) to convey his sympathy for the urban and rural working classes and the lower middle class. At political rallies, he would remove his suit jacket and rail against the rich.

Thanks largely to Perón, monetary depredations and predatory taxation wiped out once wealthy families, as the economy of a once-rich country submerged to a lower level of development.

Perón is still a controversial figure in Argentina 35 years after his death. Although he grievously harmed Argentina’s economy, he created many make-work jobs for his supporters in bureaucracy and government-run enterprises.

The current president of Argentina is a Peronist who has continued his legacy of predatory policies.

Harvard economic historian Alan Taylor argues that “much of Argentina’s precipitous decline in relative economic performance can be attributed to deleterious conditions for capital accumulation.” In other words, after 1929 it was hard to make money and keep it.

Partly this was because, as Taylor puts it, statist “price disincentives channeled funds away from, rather than toward, those investment activities which are the precursor of growth.”

The Perils of Statism

There is no more emphatic example of how government intervention retarded the Argentine economy than the tale of the telephone business, which began auspiciously in 1881.

Until 1929, Argentine telephones were operated profitably by a British-owned company, Unión Telefónica del Río de la Plata Ltd. In 1946, Perón’s government bought Unión Telefónica and renamed it Empresa Nacional de Telecomunicaciones (ENTel). ENTel rapidly became a deficit-ridden, poorly administered behemoth. By 1990, prior to being privatized again, ENTel’s bloated workforce of 47,000 had been mismanaged under 28 chief executives in the previous 30 years.

The service was then arguably the worst in the world, even worse than the poorest African countries. Argentines had to wait as long as 15 years to obtain a phone line, and then installation cost as much as $1,500.

Unbelievable? Don’t laugh.

You can expect similar dysfunctional outcomes in the energy sector in the United States, as the federal government under Obama retreats into an inward-looking import-substitution policy – just as Argentina did under its charismatic demagogue, Juan Perón.

Note that like Obama, Perón had a fascination with cutting edge and doubtful energy projects. In 1951, Perón announced the Huemul Project that he claimed would produce nuclear fusion before any other country.

The project was led by an Austrian scientist Ronald Richter. Perón proclaimed that energy produced by the fusion process would be delivered in milk-bottle sized containers, which could be used in airplanes and other vehicles. Success was proclaimed; but no proof was given.

When independent scientists investigated Perón’s Huemul Project to provide nuclear fusion in milk bottles. They revealed the project was a fraud.

When Perón took office, Argentina had the world’s second largest gold reserves. But these were soon squandered nationalizing industries and funding politicized investments, like the Huemal Project, to provide energy through nuclear fusion.

I fear Obama will do for the all-important energy sector in America what Perón did for telephones in Argentina. In the years to come, I predict that you will look back nostalgically on the days when you could flip the switch and turn on the lights. Obama’s energy program, which entails an array of subsidies for extracting sunbeams from cucumbers, could change all that.

Obama’s insistence on forcing conversion of US energy production to costly, unproven and unreliable alternative sources, plus his punitive cap-and-trade carbon taxes, will make Al Gore richer; it will certainly make you poorer.

Obama will put you in the business of forecasting rolling blackouts. In the years to come, you won’t be able to put aside a freezer full of meat – or even a freezer full of tofu burgers. Your electricity is going to flicker off in erratic blackouts, like it does in Nigeria, Angola, Bangladesh and other Third World hell holes.

Furthermore, the outages will involve constant fears for public health because pumps supplying running water and sewage treatment will be halted. Imagine how your wellbeing will be affected under Obama’s new nationalized health care, when power supplies to hospitals fluctuate erratically.

Also, you’re not going to enjoy shopping in the America of the future because you’ll find that the charming high-school grad who is used to scanning bar codes at the checkout line will take a long time to tally your purchases with pen and paper when the computer system is down.

The American economy will be crippled. Airlines will avoid night travel. And the only source of dependable power will be expensive diesel generators (but we won’t want to use them to avoid “global warming.”)

How Obama Will Destroy Prosperity

As the US follows the same policy path as Argentina, it will obtain similar results. Perverse policies will destroy prosperity and inspire thinking people to get out, and/or get their money out. This is already happening.

In 2008, more than two million Americans emigrated, marking the first time that net legal and illegal migration will have reduced the population of the US.

This is an important inflexion point that will enable Obama to brag that he was the president who solved illegal immigration – by making it unattractive for immigrants and natives alike to live in the United States.

In the future, the government will be more focused on prohibiting people from leaving. As part of this sensitivity, the US government will impose exchange controls to prohibit individuals from escaping.

Soon after, the government will demand that people who had the foresight to take their money out bring it back. Portfolio investments will be the most vulnerable to forced repatriation.

Based on the assumption that governments do the same predatory things over and over again in similar circumstances, it is probably safer to put your money to use buying property abroad rather than to acquire only portfolio holdings.

Although the U.S. government will resort to draconian measures to tax the “rich” (and you may be less than delighted to discover that you are “rich” by the elastic definitions they will use), destructive economic policies will diminish tax revenues even as government spending runs amok.

Then you will be destined to see another result pioneered in Argentina.

As economist Mauricio Rojas put it, “The government couldn’t pay its bills, so it tried to inflate them away. The rise in prices between 1976 and April 1991 was an incomprehensible 2.1 billion times. During approximately the same period, per capita income sank by over 25% and the poverty rate among Argentine households soared from 5% to 27%.”

Standing in Long Lines

An astonishing result of the inflation was that a billion dollars worth of Argentine pesos was reduced in value to only 47 cents over 15 years.

Argentina’s annual deficits amounted to an average of 14% of GDP – on a similar scale as Obama’s budget deficits. This year’s deficit is tracking at $1.8 trillion this year alone. And $9 trillion more is projected in the next few years. The federal government under Obama is now spending nearly 200% of taxes taken in.

Among other consequences of runaway budget deficits and hyperinflation was the virtual disappearance of the income tax in Argentina. It shrank to just 1% of GDP as the value of the previous year’s income became pocket change by the time taxes were due.

During hyperinflation, the biggest contributor to the Argentine budget was energy tax. Not coincidentally, these stand to be a major factor in America’s future under Obama.

Another predictable consequence as Obama reduces the United States to Third World economic status will be wage and price controls to suppress the evidence of inflation caused by printing money to finance deficits. As implied above, only about 50% of the current US budget is supported by tax revenue. The rest is being spent out of an empty pocket. It will get worse as we follow Obama down the road to fascism.

Gas lines during the 70’s oil shortage

Runaway deficits eventually lead to runaway inflation. Runaway inflation in a politicized economy leads to price controls, which inevitably lead to shortages… and then to rationing.

Your future in America will involve standing in long lines. Get ready for it.

Argentine-style nostalgia for the “good old days” will predominate in the American imagination as the US follows Argentina into economic retardation.

Of course, the Argentines, like Americans today, were by no means aware that the policies of successive governments were destined to lead to decades of hyperinflation and negative, compound growth. No country ever set out to bring ruin upon itself.

“Smiley-Smiley”

The Argentine leaders who adopted destructive policies in the wake of the last depression thought they were responding with creative solutions in a difficult situation.

They were constrained by the fact that Argentina was heavily dependent on borrowing foreign capital. Lacking fiscal resources, they adopted policies remarkably similar to those championed by Obama in the United States today – beginning with a bank rescue plan that set the stage for hyperinflation.

As Morten Roed Sørensen, of Denmark’s national bank, observes:

The recession (the Great Depression) also had political consequences. Government intervention replaced laissez-faire in the field of economic policy . . .

Monetary policy also changed. Like many other countries at the time, Argentina used the gold standard, although the exchangeability of banknotes for gold was suspended for long periods (1914-1927 and again, finally, from 1929). In 1931 a decisive step away from the gold standard was taken, as the money supply was from then on increased independently of movements in the central bank’s gold reserves.

From a present-day point of view this was a sensible step, as the recession required an easing of monetary policy. The monetary-policy measures taken by the government and the central bank in 1935 were somewhat more doubtful, although presumably inevitable.

At this point, the government took over all “bad debts” accumulated by the unregulated banking sector during the 1920s and 1930s. In reality, this step was financed via monetary financing and totaled approximately 4 per cent of GDP (della Paolera et al. 1999). This paved the way for the extreme, inflationary monetary policy seen in later periods.

Ominously, the bank bailouts that sent Argentina hurtling toward ruin amounted to a much smaller percentage of GDP than Obama’s bank bailouts. As we have previously reported, according to the Inspector General of the TARP program, these bailouts are nearly 100% of US GDP.

But that is by no means the worst of it.

The most distressing parallel between Argentina after 1929 and the United States today is not the specific policy similarities arising from path dependence of governments undergoing similar solvency crises at the onset of depression.

The more worrisome issue is that Obama seems to be precisely the same type of charismatic demagogue as Perón, who imprinted Argentina so negatively with perverse economic policies and fascist dictatorship. He left Argentina in a mess that Obama seems entirely capable of duplicating. As one Argentine critic quipped, ”We socialized the losses and exported the profits.”

Like Perón, Obama’s views are a curious amalgam of radical leftwing notions in a fascist framework. As Jonah Goldberg, bestselling author of Liberal Fascism: The Secret History of the American Left, From Mussolini to the Politics of Meaning, arguesthe big government wing of the Democratic Party is the intellectual heir of Mussolini.

Godlberg suggests that the differences between Mussolini-style fascism and the brand practised by Obama are stylistic rather than substantive. As George Carlin said recently on HBO’s “Real Time with Bill Maher” when he said that “when fascism comes to America, it will not be in brown and black shirts. It will not be with jackboots. It will be Nike sneakers and smiley shirts. Smiley-smiley.”

The Narcissus Principle

Of course, a fascist demagogue can be as troubling in Nike sneakers as in jackboots.

I was first alerted to the potential dangers of Obama by prominent Israeli psychologist Dr Sam Vaknin, who suggests that Obama is a narcissist with much the same personality profile as many dictators.

Dr Vaknin is a world authority who has written extensively on narcissism. He observes:

I must confess I was impressed by Sen Barack Obama from the first time I saw him.

At first I was excited to see a black candidate. He looked youthful, spoke well, appeared to be confident – a wholesome presidential package.

I was put off soon not just because of his shallowness but also because there was an air of haughtiness in his demeanor that was unsettling. His posture and his body language were louder than his empty words.

Obama’s speeches are unlike any political speech we have heard in American history. Never a politician in this land had such quasi “religious” impact on so many people.

The fact that Obama is a total incognito with zero accomplishment makes this inexplicable infatuation alarming. Obama is not an ordinary man. He is not a genius. In fact he is quite ignorant on most important subjects. Barack Obama is a narcissist.

Although I am suspicious of psychobabble, Vaknin is an acknowledged world authority on narcissism. When he talks about the subject everyone listens.

Vaknin says Obama’s language, posture and demeanor – and the testimonies of his closest, dearest and nearest – suggest the president is either a narcissist or he may have narcissistic personality disorder.

Narcissists project a grandiose but false image of themselves. Among those to whom he compares Obama are David Koresh, Charles Manson, Mao Zedong, Joseph Stalin, Kim Jong-il and Adolph Hitler.

All these men had a tremendous influence over their fanciers. They created a personality cult around themselves and with their blazing speeches elevated their admirers, filled their hearts with enthusiasm and instilled in their minds a new zest for life. They gave them hope. They promised them the moon, but alas, invariably they brought them to their doom.

Charmed by the charisma of the pathological narcissist, people cheerfully do his bidding and delight to be at his service. He creates a cult of personality – focused on one thing alone and that is power.

I was particularly struck by Dr Vaknin’s reading of Obama’s autobiography.

Obama’s election as the first black president of the Harvard Law Review led to a contract and advance to write a book about race relations.

The University of Chicago Law School provided him a lot longer than expected and at the end it evolved into, guess what? His own autobiography. Instead of writing a scholarly paper focusing on race relations, for which he had been paid, Obama could not resist writing about his most sublime self. He entitled the book Dreams from My Father. Not surprisingly, Adolph Hitler also wrote his own autobiography when he was still nobody. So did Stalin.

For a pathological narcissist no subject is as important as his own self. Why would he waste his precious time and genius writing about insignificant things when he can write about such an august being as himself?

Narcissists are often callous and even ruthless as the norm, they lack conscience. This is evident from Obama’s lack of interest in his own brother who lives on only one dollar per month.

A man who lives in luxury, who takes a private jet to vacation in Hawaii, and who has raised nearly half a billion dollars for his campaign (something unprecedented in history) has no interest in the plight of his own brother. Why? Because, his brother cannot be used to increase his power.

A narcissist cares for no one but himself. […] What can be more dangerous than having a man bereft of conscience, a serial liar, holding an office of great power?

Many politicians are narcissists. They pose the usual threats to others. […] They are simply self serving and selfish and are prone to passing ill-advised laws.

Obama evidences symptoms of pathological narcissism, which is different from the run-of-the-mill narcissism of a Richard Nixon or a Bill Clinton for example. History shows plenty of evidence that pathological narcissists can be dangerous.

The downside of this is that if Obama’s policies turn out to be the disaster I predict, he could prove to be a dangerous demagogue.

All Praise Obama

I predict that by the end of Obama’s presidency, Obama will have begun to behave more like Juan Perón at his worst – repressing dissent, nullifying rights and employing bully boys to physically intimidate his critics.

I suspect his behavior will become more dictatorial as it becomes increasingly evident that his extravagant ‘stimulus’ and ‘bail out’ policies have failed to ignite a genuine recovery, and his popularity suffers accordingly.

As former Merrill Lynch economist David Rosenberg points out:

It is so evident, with fiscal stimulus accounting for 100% of global economic activity this year and an estimated 80% government contribution to world GDP growth in 2010, that this entire recovery is as illusory and artificial as it was in the treacherous 1930s.

When President Hoover’s well intended efforts to turn back the tide of depression failed 80 years ago, he became a widely reviled figure. Luckily, Hoover was a man of wide accomplishment who was not suffering from anything resembling pathological narcissism.

Unlike Hitler, Mussolini, Stalin, Perón, (and dare I say, Obama,) Hoover did not fancy standing on balconies delivering stirring harangues to multitudes of his enchanted followers. I can’t say that I have the same confidence about Obama.

We already know that Obama’s administration has undertaken efforts to create “a cult of personality” around Obama that are reminiscent of Juan Perón’s efforts to use state power to encourage popular adulation.

I hinted above that I think Obama could prove to be the Juan Perón of the United States. Now couple Dr Vaknin’s warnings about Obama’s power hungry personality with the Obama administration’s Education Department mandate to U.S. schools.

They were told by the federal government to assign a project to all children to praise Obama. Those in grades K-6 were to define what Obama has done for them and how they can help Obama. Grades 7-12 were to write how Obama has inspired them, all with posters of Obama and his pronouncements in the classroom.

I don’t know how you feel. But I see this as a creepy lesson in fascism that is the equal of anything Juan Perón picked up in his tutorial from Mussolini in the 1930s.

You may think I am joking. But the Education Department mandate to which I refer is real.

Among the activities the government initially suggested for prekindergarten to sixth-grade students: that they “write letters to themselves about what they can do to help the president.” Another task recommended for students immediately after listening to an Obama speech: to engage in a discussion about what “the president wants us to do.”

The “help Obama” curriculum plan brought sharp criticism from many citizens, including some who complained that classrooms were being used to spread political propaganda. In response, the White House announced it was revising the lesson plan that was distributed by the Department of Education.

This is not the only example of the Obama administration using government power and money in outrageous ways to underwrite the Obama program.

Note that a White House official was caught on tape advising hand-picked artists and writers that they could be guaranteed federal grant money if they dedicated themselves to celebrate Obama and his policies. A writer was encouraged to compose a poem celebrating Obama’s election as president. And other creative artists were encouraged to create plays, films and music celebrating Obama’s health care, energy and environmental policies. See Obama voter Patrick Courieiche’s account of this attempted manipulation here. He says:

I’m not a “right-wing nut job.” It just goes against my core beliefs to sit quietly while the art community is used by the NEA and the administration to push an agenda other than the one for which it was created. It is not within the National Endowment for the Arts’ original charter to initiate, organize, and tap into the art community to help bring awareness to health care, or energy & environmental issues for that matter; and especially not at a time when it is being vehemently debated.

Artists shouldn’t be used as tools of the state to help create a climate amenable to their positions, which is what appears to be happening in this instance. If the art community wants to tackle those issues on its own then fine. But tackling them shouldn’t come as an encouragement from the NEA to those they potentially fund at this coincidental time.

And if you think that my fear regarding the arts becoming a tool of the state is still unfounded, I leave you with a few statements made by the NEA to the art community participants on the conference call.

“This is just the beginning. This is the first telephone call of a brand new conversation. We are just now learning how to really bring this community together to speak with the government. What that looks like legally? […] Bare with us as we learn the language so that we can speak to each other safely…”

Is the hair on your arms standing up yet?

A Disturbing Discovery

In the future, as Obama’s depression policies become about as unpopular as Hoover’s were in the Great Depression, you can expect Obama to strike back at his critics, much as Perón did, when he got his thugs to burn down the Jockey Club, repressed newspapers, and enacted the desacato laws (the laws of disrespect) that made it a crime to criticize him.

Obama will be somewhat constrained by the American tradition of respecting civil liberties. But only somewhat. The accumulation of powers in the imperial presidency over many years will give Obama and his true-believing minions’ ample scope to punish those who withhold support from Obama in the ongoing “emergency.”

For one thing, the imposition of wage and price controls will give government bureaucrats life and death power over almost every business. By withholding critical supplies from Obama critics they can impose serious economic harm. Don’t forget that the Gestapo not only rounded up Jews and dissidents, it also enforced wage and price controls.

Further to that, as clever as Obama is, I would not be surprised if he used health laws under his new system to force people who cause him trouble into involuntary quarantine. News reports already indicate that the government is preparing plans to forcibly impress large numbers of Americans into quarantine under the guise of preventing a flu pandemic.

Here I quote the website Zero Hedge:

Zero Hedge obtained some interesting documents from the CDC web site. They contain blank ‘forced quarantine’ orders from Iowa and Florida regarding novel H1N1 – including quarantine to a ‘secure detention center’ – which appear to be recent – dated April 2009. Some may be aware the NIH and CDC just held an H1N1 conference in DC – August 19-21 2009 – that focused on ‘mass fatality management.’

For many, this should be cause for concern. As is becoming clear, our government is quite corrupt. The idea that this same government is now preparing for forced quarantine and mass vaccination should make anyone who has been following recent events shudder.

There is something going on here, but governments have not come clean with the public. Why ‘secure detention centers’ in the US and ‘secure vaccination centers’ in France if there is nothing to be concerned about?

It is becoming increasingly clear that a global mass vaccination campaign is planned – likely to become mandatory in the 193 WHO member countries, despite serious safety concerns regarding these untested novel H1N1 vaccines, some of which are now known to contain high levels of the deadly adjuvant squalene.

Others may be aware that it was only last week that the Massachusetts State Senate passed a law making it a relatively serious crime to refuse a mandatory vaccination or to break a quarantine order. This law also includes rather astounding violations of the 4th Amendment, including warrantless searches and seizures of property if deemed necessary in an ‘emergency.’

This new Massachusetts law also included authorizations for illegal arrest without a warrant and of forced vaccination of the public. But the political activity is not limited to the states. Yesterday Obama held meetings with senior cabinet officials regarding H1N1 ‘pandemic prepardness’ including HHS Secretary Sebelius. So this is not idle speculation. There is something going on here. Either the government knows something we do not, or this is the biggest hype since the dot com bubble.

On to this sobering conclusion:

Here at Zero Hedge, we are expecting a flock of economic black swans soon, and a pandemic – whether real or hyped – may be part of this flock. An economic collapse will be no doubt be triggered soon, and it will be convenient for the political elites to blame the collapse on an external factor, such as a pandemic or a war.

Furthermore, the fall H1N1 pandemic may be a convenient pretext by which dangerous levels of expanding social control can be established by elites which have proven themselves utterly corrupt and morally bankrupt.

That’s the bad news. The good news is that Obama has given a speech advising Americans to better prepare for the future that awaits them by saving more. Specifically, the Treasury Series I bonds recommended by Obama to help Americans to increase their savings now earn 0.00%.

That will give you some cushion to fall back on when Obama turns the United States into a not-so-original copy of the original “submerging economy,” Argentina.

Sincerely,

James Davidson

Surviving the Death
of the American Dream

History repeats itself, first as tragedy, second as farce.

– Karl Marx

“Don’t cry for me, Argentina,” was a fetching refrain from Andrew Lloyd Weber’s operetta Evita, about fascist dictator Juan Perón and his charismatic wife, Eva. With apologies to Weber, for neglecting the music, and to his lyricist, Tim Rice, I give you the Reader’s Digest condensed version of their account of the tragedy of Argentina.

As you have probably heard, Reader’s Digest, like much else in the United States, has recently gone bankrupt. So I hope I don’t owe the bankruptcy trustee a royalty for that reference.

In any event, the more closely you review the parallels between Argentina under Juan Perón and the United States under Barrack Obama, the more they resonate.

We will take the riches from the oligarchs

Only for you, for all of you

And one day, you too will inherit these treasures.

In Obama’s America, like Perón’s Argentina, the rich are going to pay for all the goodies lavished on the people by “a government able to give us the things we deserve.”

The news is currently crammed with details of Obama’s initiative to spend trillions of dollars on a remake of the U.S. health-care system to give the uninsured the health-care coverage “they deserve.”

Not incidentally, Perón shared Obama’s fascination for malinvesting national resources in half-baked energy projects. Perón promised to deliver Argentina from the rigors of world oil markets through the magic of nuclear fusion in a milk bottle.

We know how that turned out.

I expect little better from Obama’s even more expensive dedication to state-directed investment in alternative energy.

The Road to Economic Retardation

If Marx was right in his observation about history repeating itself as a farce, it will be no laughing matter when Obama leads the US down the road to ruin along which Perón took Argentina.

Of course, it is not clear how even a talented duo like Weber and Rice could reprise their triumph with Evita as a farce relocated to the United States telling the tale of Americans enthralled by their new president.

If the National Endowment for the Arts gets its way and lots of creative people are induced to write subsidized poems, plays and films celebrating Obama as “everything” (as Perón was once celebrated) I can’t see this turning out to be much more than a farce.

Still, the implications for your life will be many if Obama insists on acting as if he is“The One: The hope and the reality of the American people, with his own source of light.” Here, we are not talking about alternative energy, but megalomania.

As George Will put it recently on efforts by the Obama White House to harness the arts community to support his recovery agenda, the effort also “was the beginning of a small scandal that illuminates something gargantuan – the Obama administration’s incontinent lust to politicize everything.”

There is not really much of a mystery about where this leads. In time, the US will become economically retarded like Argentina. In time, runaway spending will lead to runaway inflation, the collapse of the dollar and probably social collapse as well.

As Voltaire warned centuries ago, “Paper money eventually returns to its intrinsic value: zero.”

My Favorite Carry Trade

If all this happened instantly, you could minimize the damage to your family fortune by simply going short the dollar. Thanks to Obama’s “recovery agenda,” the US currently sports invisibly low interest rates, which open the door to leveraged profits from betting against the dollar in the “carry trade.”

There will be more details on this in Crisis Strategy Alert. But the basics are straightforward. The bursting of the Japanese credit bubble in 1990 opened the door to a “carry trade” that facilitated trillions of dollars in leveraged profits by big traders. They borrowed yen at low interest rates and invested the funds in areas of high return like dot-com stocks, commodities and US real estate.

Now Obama is setting up one of the greatest carry trade opportunities in history by effectively promising to destroy the dollar while the Fed holds interest rates low.

There is, of course, an inherent risk in diving headlong into a carry trade against the dollar: the likelihood of another abrupt deflationary crisis over the next 12 months. A return to an acute stage of the solvency crisis will rally the dollar.

Ideally, the time to establish a carry trade is during such a crisis. But this may be impractical, as credit may not be available during such an acute stage of distress. This is why it’s best to carefully select your carry trade during a time of optimism about a coming recovery.

My favorite option for the carry trade now (and probably for the foreseeable future) is to borrow dollars to acquire Brazilian government bonds, like those we hold in our portfolio with a greater than 40% gain this year.

You can still get 12% interest on the longer dated Brazilian government bonds. Brazil is one of the world’s most dynamic economies. And it is now a major lender to the US. I expect Brazil to grow much faster than the US in the next half century. I also expect the Brazilian currency, the real, to trade to a premium over the dollar when production from the 70 billion barrels of new Brazilian oil reserves comes on line.
Among other options for carry trade investment are high yield stocks, gold stocks and instruments. We will address these in detail as time passes in Crisis Strategy Alert, because they may entail the need for more nimble trading than our Strategic Investment portfolio.

On Becoming “Invisible”

As I indicated elsewhere in this issue, the likely consequences of Obama’s presidency will be dire for future American economic growth. Realistically, this means that protecting yourself solely through portfolio investing may not be practical.

When Perón put Argentina on the road to ruin, those who fared best in protecting themselves were not necessarily the nimblest traders on the Bolsa de Comercio de Buenos Aires – but those who left the country and placed their investments outside the reach of Argentine laws.

With that in mind, one of the shrewder things you could do might be to either move abroad or get your money out while you still can. To that end, we are scheduling a conference in Buenos Aires this November 7th. Click here for all the details.

The setting of Buenos Aires is important. It underscores a useful point about economic retardation. It shows that some fraction of the population will find a way to live well, even under the most counter-productive laws. Egalitarian compression may devastate fortunes and lead to decades of negative compound growth. But life goes on.

People still fall in love. Marry. Have children. And guide them through even the snares and hazards imposed by charismatic demagogues.

It provides a useful perspective to see that, although Perón devastated Argentina’s economy by imposing a lasting legacy of statism, there is still scope to live well in Argentina.

Will the same thing be true in the United States during and after hyperinflation?

Perhaps. But perhaps not immediately.

Even if the story of America’s imitation of Argentina ultimately proves to be a farce, many tears will be shed over the death of the American Dream. Many fortunes will be wiped out.

I can’t pretend it is farfetched to suppose that policies that squandered wealth and brought on economic retardation in other countries could have similar effects in North America. To the contrary, that is the result to be expected.

There are two solutions.

One is to try to outsmart the demagogue and his minions… to try to stay one step ahead and get out while you can.

The other is hunker down with your family, friends and loved ones and try to live in the spirit of Bob Dylan’s song: “When you got nothing, you got nothing to lose / You’re invisible now, you got no secrets to conceal.”

The Pulse of the Economy

We can’t deny that the economy is getting better. More than $11.6 trillion will buy you something. Nearly every report that has come out in the last six months has proven that.

I want you to look at a few important economic charts. Most of these charts are courtesey of John Mauldin and Calculated Risk. These guys are great at creating charts from the official data.

The first chart is of the US unemployment rate.

Unemployment has risen sharply and is close to the levels of the double-dip recession in the 1980’s. Honestly though, this chart is misleading. For one thing, we no longer calculate unemployment as we did in 1983, much less in 1933. I explain everything in a note I e-mailed to a friend where I talk about the U-6 Unemployment number …

… the U-6 number counts “discouraged workers” and people who are looking for full-time work but can only find part-time.

Today the U-6 rate stands at 16.8%. This tells you that right now unemployment is worse than during the double-dip recession of the 1980’s.

For comparison, the Great Depression had unemployment of 25%. Most people (even Obama and Bernanke) believe that unemployment will keep climbing until late 2010. In essence, the U-6 number could hit 25% by the end of next year.

So really unemployment – at least how it feels to people on the street – is at nearly 17%.

This second chart does unemployment a little more justice. It shows you how many people are unemployed.

Unemployment is not only bad, but it’s getting worse. And credit card defaults, mortgage defaults, and all sorts of bad things follow the unemployment rate when it goes up.

That means you can expect more banks to fail in the years ahead as borrowers go broke. This is certainly not the stuff bullish recoveries are built on. But for our analysis today, it’s one of the only big weaknesses we could find.

You see, much of the fall we saw after Lehman collapsed was the result of a massive reduction in outstanding credit. Credit collapsed and became harder for most people to get. This led consumers into spending less and saving more.

As you can see, the savings rate climbed to 4.8% this year. One analyst from PIMCO, Richard Clarida, is calling for the savings rate to climb to 8% over the next few years.

This is bad news for anything that relies on US consumer spending over the next few years. It’s not good for Macy’s or mall stores like Abercombie and Fitch. The fact is the consumer won’t be in America, the consumer will be in Brazil and eventually even China.

But credit won’t remain tight forever. We’ve already seen many signs that credit is getting much easier to access… well at least for those who can truly afford it.

The London Interbank Offer Rate (LIBOR) has shrunk to levels unseen since before the crisis went full blast in September.

The A2P2 spread which tells us how commercial paper is doing has also declined to normal levels…

The TED Spread – which is the spread between the three month loans interbank rate loans and the three month Treasury – dropped to the low range of its normal spread.

As you can see, according to the TED Spread everything is back to normal.

Even the CBOE Volatility Index (VIX) is showing improvement…

Today the VIX finds itself around the 25 range. This is high, but a far cry from nearly 80. Clearly, things aren’t nearly as volatile as they were in the panic stricken day’s post-Lehman.

But are things really getting better? By these measures, the credit markets seem to think so. But you know very well that James and I both think that there’s something on the horizon. Something that will take the market down one more time.

A hint of trouble to come is incorporated in some rather sluggish measures of bank lending and money supply. Tim Congdon from International Monetary Research says that US bank loans have been falling at an annual pace of almost 14% since early summer: Ambrose Evans Pritichard quotes Congdon, “There has been nothing like this in the USA since the 1930s.”

Along the same lines, M3 money has been falling at a 5% rate; M2 fell by 12% in August; the Commercial Paper market has shrunk from $1.6 trillion to $1.2 trillion since late May; the Monetary Multiplier at the St Louis Fed is below zero (0.925). In Europe, M3 money has been contracting at the less drastic rate of 1% rate since April. This may be setting the stage for a deeper episode of the solvency crisis.

Whether it’s that, a blowup in Chinese growth… or US hyperinflation… or, what I personally think will happen next, a mucked up attempt by the Fed to withdraw itself from the markets… things are seeming a little too cushy right now.

Investors are willing to take on too much risk in stocks even though the rewards aren’t clearly there. Really, the stock market is expensive, with the P/E of the S&P 500 eclipsing over 140.

It’s just insane. But that doesn’t mean it could not keep going on for months.

Portfolio Update

So don’t kid yourself; going against the trend is a recipe for pain. It’s one of the reasons we’ve refrained from entering into many short positions.

In fact, we’ve only got one short position right now, outside of China. That position is a synthetic short through the PowerShares DB Crude Oil Short Fund ETF (NYSE:SZO). We’re up about 8.2% on that position. And the sole reason we entered into it was due to seasonality. James and I discussed about how oil use drops during after summer driving season. This tends to affect prices by pushing them down. So far, that’s exactly what’s happened.

Other than that one position, we are long commodities via Petrobras Brasiliero (NYSE:PBR) [up 47%], the MarketVectors Gold Miners ETF (NYSE:GDX) [up 17.47%], and Witwatersrand gold (WGR.TO)[up 91.67%].

We’re also holding onto Money4Gold Holdings Inc. (MFGD.OB) but are currently down about 45% in this position. However, we’re expecting the company to post strong results for the current quarter.

I also wanted to clarify a little something about our positions in the PIMCO California muni fund (NYSE:PCK) and the Van Kampen California fund (NYSE:VCV).

About four days ago we had a new reader chime in and threaten to cancel. Reason? Well, they saw one of our recent promotions pitching these California funds, but when they went to our track record it showed that we had already sold the position.

I completely apologize for the confusion.

We did sell the position… but we bought back in August. The only reason we sold was because we wanted to avoid the nasty risk that a California bankruptcy would push every investor out of these funds. Thankfully, bankruptcy never came to pass. And we got back into both companies.

Right now both companies are listed as buys in our portfolio. So if you haven’t had a chance to take advantage of these babies… and enjoy the monthly dividend payments they provide… then you should buy into them soon.

Until next month,

Charles Delvalle

Dear CSA Reader,

I’ve been getting into a funny routine over the past week.

Honestly, it makes me feel like I’m a kid again. But it really makes a difference in how I perceive the market.

It takes about five minutes of my time an hour after the market close. Reason I wait so long is because I like to digest the day’s events.

What I do is write down my end of day thoughts in a journal.

Every day at the end of the day I go over a few charts, digest the day’s news, and then write a small summary of what I thought was important and what I think will happen over the next few days or weeks.

Here’s what I wrote on Friday…

Just as I start hoping for another down day, the market pops higher.

The trend is definitely up.

Initially I found myself trying to defend why I was wrong. I said to myself that it was mainly event driven – mergers. Plus, it was on low-volume. But, the market really popped higher today. Enough to pretty much wipe out two of the down days it had last week. Which makes me think, is this a 61.8% Fibonacci retracement from the total fall?

Indeed it is, pretty much perfectly.

This signals that we could see a resumption of selling happen tomorrow. But that bounce on the 20-day moving average that happened to the S&P also makes me think that this rally has legs.

So tomorrow I’ll look for follow through.

Either the rally has legs and the market moves higher. Or we see the market move lower as the 66% Fibonacci retracement pans out.

Some days I write more. Others I write less. But what really makes this valuable is looking back on it.

Journals like this give you a way to visualize your thought process in the markets. If, for instance, you kept a journal of every investment or trade you made, I can guarantee that you’d become a better investor because of it.

That’s because you can’t hide behind your mistakes. If you’re keeping a decent investment journal, then you can’t help but see your mistakes right in front of you. In fact, you think about them deeply when you document them.

That makes it more painful to repeat that mistake again.

There’s nothing worse than doing something you knew you shouldn’t have done… like hold on to a stock that just blew past your stop-loss… or jumping the gun and buying before your trigger went off… or even getting greedy and not selling when you know things are overpriced.

I want to know what you do to become a better investor.

Do you keep trading journals? Attend seminars everywhere? Let me know by shooting over an e-mail toinfo@crisisstrategyalert.com and I’ll discuss them next week.

In the News…

Every week James sends me ten to twenty different articles (from his iPhone, of course). Most of these articles come from Bloomberg. And they always relate to our open positions and thoughts on the market.

So, I thought it would be great if I started covering some of these articles here for you every week. That way you’re looking at what we look at… and understanding why we feel the way we do about the markets.

The first article comes from Bloomberg. And it covers the unexpected decline in Durable Goods orders in the US. From the article…

Demand for U.S. durable goods unexpectedly fell in August, signaling companies are planning to curb spending on concern gains in sales will not be sustained.

Orders for goods meant to least several years dropped 2.4 percent, the worst performance since January, the Commerce Department said today in Washington. Excluding transportation equipment, orders were little changed.

Restrained consumer spending and near-record excess capacity mean companies will probably not boost investment in new plants or equipment in coming months. The report indicates the jump in auto sales from the Obama administration’s $3 billion trade-in program may not give other industries a jolt, raising concern any factory rebound will be uneven.

The reason why James found this so important is very simple. It’s one of the only news reports that’s recently come out showing the economy getting worse.

Think about it, everything is moving higher. Consumer confidence, the stock market, real estate prices are even bottoming. But this one report shows that things aren’t as good as they same.

The reality is that the US economy is far from healthy. It’s stable, not out of critical condition yet.

Another article James sent depicts just how lucrative the market is in Brazil. From Bloomberg…

Brazilian companies are returning to equity markets after the global financial crisis last year dried up liquidity and boosted investors’ aversion to risk, forcing some companies to sell debt or be taken over to finance operations. Cia Brasileira de Meios de Pagamento, the payment-processing company known as VisaNet, in June raised a record 8.4 billion reais in Sao Paulo’s first initial public offering since June 2008.

…

In addition to IPOs, at least 10 Brazilian companies have filed in the last five weeks to sell shares in secondary offerings, including real estate developers Cyrela Brazil Realty SA Empreendimentos & Participacoes and Rossi Residencial SA, and toll-road operator Cia. de Concessoes Rodoviarias.

“You have some companies doing follow-ons that are well- known by the market and have been accompanied for some time,” Amaral said in a phone interview before details of the Tivit IPO were released. “The construction industry is at a very favorable moment right now because of government stimulus.”

I don’t have to tell you how strongly we feel about Brazil. All you have to do is go over a few past issues to get the gist. Brazil is going to be a huge source of growth for you over the next few years.

That’s a big reason why our portfolio is so Brazil heavy. Brazil, unlike China, has consumers that are willing to spend lots of cash. And these consumers are just now starting to become acquainted with credit.

More credit means more buying. And more buying means more money for you.

Another thing James and I have been paying attention to is the climb in power that emerging nations have had. Just this past week, the G-8 ceded power to the G-20 on the international scene.

From Bloomberg…

With China poised to surpass Japan as the second-largest economy, the decision by world leaders to make the Group of 20 nations the main forum for global economic coordination instead of the G-8 reflects the increasing power of emerging markets.

The G-8 oversees about two thirds of global GDP. The G-20 accounts for about 85 percent of global economic output and was created after currency devaluations plagued emerging markets from Russia to Thailand in the 1990s.

The G-20’s ascendancy reflects how the recent slump was led by housing and financial-market busts in major economies and the recovery is being driven by countries such as China. That’s a reversal from previous crises when the G-8 pushed the recovery effort.

The G-20 members are Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, South Korea, Mexico, Russia, Saudi Arabia, South Africa, Turkey, the U.S., the U.K. and the European Union.

This is huge. And I have no idea why the market didn’t make a bigger deal of it before. You see, a lot of those emerging nations are all for creating a new reserve currency. And one of those nations, China, is hell-bent on making their own currency a form of reserve currency.

But an interesting thing happened when they met last. They came out with a communiqué saying that they wanted to fix the imbalances that helped cause this crisis.

Those imbalances, of course, is the US consumption rate and the Chinese savings rate. These two things have helped create a surge of exports from China and a surge of unsustainable buying from US consumers.

So, if the G-20 wants to fix those things, they have to somehow prod the US into consuming less and China into consuming more. This would eventually flatten out the trade deficit the US runs as well as bring some manufacturing jobs back.

Sounds easy. But it’s not. Something of this magnitude would require something just as big. After all, we are talking about changing the patterns of billions of people in the world on the drop of a dime.

The easiest way to encourage China to stop exporting so much is by pushing up the value of their currency on the open market. At the same time, the value of the dollar should drop.

Is the G-20 hinting at another Plaza Accord… except with US and China the main actors, not the US and Japan? It seems to make sense. And it would fit nicely into the plot of China pushing their currency to be a new reserve currency (since its value would climb).

Of the Portfolio…

I hope you were able to get into the natural gas position inFlotek (NYSE:FTK) I recommended last week. As of today, we are down about 4% on the position. But not to worry, we’re riding a seasonal pattern that will play out over the next few months.

In an e-mail sent earlier today, James said this…

Charles, the natural gas play will benefit from the collapse of global warming. It is going to be a cold winter unless sun spot activity jumps uncharacteristically (given that it has been receding and solar output declining).

It’s true. Global temperatures have fallen .74 degrees Fahrenheit since ‘An Inconvenient Truth’ hit theatres. Most of that cooling occurring in the past two years.

It’s already starting to get cold where I’m at in Oregon. Hell, it snowed last year – it never snows here.

I think the desire to stay warm this winter will surprise many analysts that think that natural gas is too expensive.

If you haven’t gotten into Flotek yet, then I suggest you take advantage of the low prices.

There is another position that I recommend you sell immediately. That is the USO October Put Option (USOVG). We’re down about 46% on this position. While oil prices have fallen since the recommendation, they haven’t fallen enough.

Remember, when we got into this position we priced in oil falling by half, which could have netted us a nice 500% gain. Our risk/reward ratio on this particular trade was 10 to 1. So James and I aren’t too worried about once off 46% loss.

So let’s dump the position and wait for something else.

As you read in my trading journal entry above, today was an important day for the markets.

As it turns out, the Fibonacci retracement I saw yesterday actually triggered resistance today. The result being the three US indexes closing at the lows of the day.

This signals that we might see a few more days of selling. But if the selling is as weak as it has been for the past two weeks, than we shouldn’t move too much lower.

I’m thinking 9,500 on the Dow Jones and 1,025 on the S&P 500.

James and I will send you some good positions to take advantage of any potential upswings.

Take care,

Charles Delvalle

Co-Editor
Crisis Strategy Alert

“China’s growth is getting back on track after being pulled down by the global export slump. It’s leading the turnaround in the global economy.”

– David Cohen, Action Economics

“There is only one vital time to wake up: and that is now.”

– Buddha

Consult a dictionary for the meaning of the word “recovery,” and you will find this definition: “recovery n 1. Return to an original state: ‘the recovery of the forest after the fire was surprisingly rapid.’ 2. The act of regaining or saving something lost (or in danger of becoming lost).”

So if you have normal fluency in English, you are likely to be misled by the much vaunted economic recovery the mainstream media heralds.

“Recovery” in economics is a term of art. It doesn’t mean what most people think it means. For example, if you’re whispering to yourself, “The recovery of the economy after the credit collapse was surprisingly rapid,” you’re imagining something much more vibrant than a technical recovery actually entails.

You see, in economist speak the word “recovery” does not mean “returning to an original state” (as you would intend if you said that the patient enjoyed a “rapid recovery” from his stroke). Far from it…

Economic Recovery and the Falling Man

According to modern economists, what recovery actually means is “hitting bottom” (or one of many bottoms in a series of collapses). Technically, a recovery begins when the economy ceases falling. In that sense, it has nothing to do with actually rising again… or regaining what was lost.

Imagine a man plunging from the upper stories of a sky scrapper. When he hits something, it halts his plunge; temporarily or permanently that marks a “recovery.”

If he hits a ledge on a lower floor, he may be “recovering” while he just lies there in a vegetative state.

Of course, he really hasn’t hit bottom until he reaches the pavement. This would mark another phase of his “recovery” – even if he is critically injured and cannot move.

When you think of recovery you may have something in mind more akin to the stunts of a superhero bounding off the pavement in acrobatic fashion.

In my youth, I watched “Adventures of Superman” on TV. Superman, as you may remember, could leap tall buildings in a “single bound.” You think of him jumping off a skyscraper, dusting himself off and then moving on unharmed, rather than lying in heap – a broken body awaiting a medivac helicopter for a trip to the critical care unit.

That is the kind of recovery we are really getting.

Why a Decade-Long Recovery Awaits

U.S. retail sales, for example – although stimulated by “cash for clunkers,” checks to Social Security recipients and a massive inflation of the Fed’s balance sheet – have shown little sign of recovery. Except in the sense that they have stopped becoming considerably worse.

Remember, the U.S. government has launched an unprecedented bailout and stimulus program. And it has resulted in a budget deficit that, according to Goldman Sachs, will require $3.25 trillion in borrowing before the end of this fiscal year.

The U.S. government has also taken over both GM and Chrysler – seriously disrupting the seasonal patterns of industrial production and auto layoffs.

The combination of these factors has caused the seasonal adjustments of economic statistics to artificially spike employment data and industrial production numbers.

Of course, as the warped seasonal adjustments reverse, you can expect “surprisingly bad” numbers in the months ahead. This will bewilder those who naively assume the economy has “recovered” to the state that existed prior to the bankruptcy of Lehman Brothers and the Great Wipeout of last autumn.

Those of us who have studied market reactions after past credit collapses, however, will not be surprised that the economy cannot plunge 40 stories to the pavement, then hit the ground running like Superman and sprint away as though nothing had happened.

It normally takes a decade or more to unwind the consequences of a credit collapse. That will certainly be the case this time. After all, we have witnessed the greatest credit bubble in history go wrong.

Consumer Spending Is Dead and Buried

If you smooth out the “noise” of warped seasonal adjustments and other statistical quirks, on a three-month moving average basis U.S. retail sales have been holding at a year-over-year decline of about -9% since December 2008. (For more details, see John Williams’ Shadow Government Statistics here.) This is a record low for the post-World War II era.

This decline in consumer spending has far reaching implications for U.S. GDP growth, the personal savings rate, the trade (current account) deficit and the world economy.

As recently as the early 1990s, consumer spending amounted to just about 65% of U.S. GDP. By last year it had soared to almost 72%.

This became possible because the savings rate in the U.S. plunged from about 8% to almost nothing. From the end of 2004 through last year, the U.S. savings rate has either been hovering at about 1%. or it has even gone negative.

A big part of the decline in aggregate savings in the past two decades is attributable to the fact that credit became readily available to the bottom 40% of the population, people with little or no net worth. The recent stiffening of credit standards following the subprime collapse, along with the contraction of leverage, have made it impossible for these zero net worth families to resume spending as they previously did.

To buy a home now, for example, you must make a sizeable down payment. This is unlike the situation a few years ago. Then, buyers without income or assets could buy homes for zero percent down. In some cases they could actually withdraw cash at settlement.

Equally, the disappearance of home equity for many millions of American homeowners has taken home equity loans with it. This means cash-strapped households no longer have the option of reverting to the home equity ATM to finance consumption.

Each dollar that Americans save is a dollar that will no longer be immediately spent. Although higher savings for the long run are essential – the savings rate will probably double from the 5.2% recorded in the second quarter – a higher saving rate means less economic activity in the U.S. and in countries that produce goods for American consumption.

This takes on a special significance when you consider that, according to the McKinsey Global Institute, consumer spending decreases by more than $100 billion for each percentage point the savings rate goes up.

Although Warren Buffett argues that it has never been profitable to bet against the appetites of the American consumer, the extraction of leverage from the credit system has imposed a slowdown in consumption that is unlikely to be reversed any time soon.

You see, the rise in savings to this point is not just a matter of chastened consumers realizing the folly of profligate living. It is also a matter of structural limitations on credit expansion to uncreditworthy borrowers.

And as unemployment rises due to the continued slowdown in consumer spending the savings rate will rise further as credit is withdrawn from more and more consumers.

The “green shoots” of recovery everyone is so excited about are, at best, plastic flowers the government has sprinkled about the economic landscape in order to mobilize greater consumer confidence than can be justified on the facts.

And the “recovery” you are getting is more mirage than reality – an artifact of stimulus/bailout efforts magnified in the light of unrealistic projections.

China: A Danger to Your Wealth

This crisis is not just confined within the borders of the U.S. It is global. Thus the search for “green shoots” in far flung corners of the world.

A lot of recent enthusiasm over the prospects of Chinese recovery, for instance, can be explained by the dark hunch that something more than the “shop till you drop” disposition of American consumers is needed to sustain a real recovery.

David Cohen’s comments quoted at the top of this article epitomize the common misconception that China is “leading the turnaround in the global economy.” This is a misreading that could be dangerous to your wealth.

First, it is arguable whether or not there is any “turnaround in the global economy”. Second, far from contributing a solution, China’s stimulus program is aggravating the underlying problem. It is adding supply to a world plagued by excess capacity and collapsing demand.

As China expert Michael Pettis has convincingly argued, China’s massive stimulus program is stimulating the wrong things. And it’s making the ultimate adjustment required for world prosperity more difficult by setting the stage for another credit collapse and a greater contraction of global GDP.

This from a recent article by Pettis titled “Will China’s Trade Surplus Soar?”

I know this all sounds drastic, but the imbalances have to be worked out one way or the other. Rising savings in one part of the world, even assuming no change in global investment, requires declining savings somewhere else, and although it may be unrealistic to expect no change in global investment, the plausible prediction is that global investment will actually decline, which increases the pressure. This is just another way of saying that changes in trade deficits in one part of the world require equal changes in trade surpluses elsewhere. This is also just the obverse of saying that declining consumption in one part of the world requires rising consumption elsewhere (or sharply rising investment, which since it represents future production only postpones the need for consumption growth) or else global GDP must contract.

Pettis’s important argument needs to be read closely to be understood. What he is saying is that the fall in U.S. consumption means there must be a contraction in global GDP – unless consumption picks up somewhere outside the U.S. to replace U.S. spending.

He doesn’t think Chinese consumption can expand fast enough to supplant lost consumption from Americans who never could afford the standard of living they were enjoying and can now no longer borrow to keep it afloat.

An Orgy of Lending

Pettis doubts that the Chinese can sustain the 7.1% growth rate they enjoyed in the first half of 2009. For reasons I explore below, growth cannot be sustained for long by ever increasing amounts of government-financed investment.

To the contrary, flushing trillions of dollars worth of investment into an economy at low rates of return for many years is a recipe for creating a credit bubble that is bound to collapse eventually – with dire consequences, as we have seen in Japan since 1990.

The U.S. stimulus package is overwhelmingly biased towards increasing U.S. consumption and creating/maintaining employment to sustain that consumption. The Chinese stimulus package, although it is definitely oriented towards maintaining employment, is heavily geared towards subsidized investment.

Consider the following facts…

In the first half of 2009, China’s GDP rose at a 7.1% yearly rate. Fully 88% of that growth was attributable to investment. The money to fund this surge of investment was provided through an orgy of lending by Chinese banks – mostly to state-owned enterprises.

The political point of the lending, which the Chinese government pressured banks to make, was to forestall unemployment – especially at inefficient state-run enterprises.

But there is general agreement among Chinese experts that most of the investment funded through this stimulus bubble is in projects with very low or even negative returns.

The People’s Bank of China keeps interest rates artificially low to subsidize production at the expense of Chinese consumers, who must settle for nugatory interest rates on bank deposits. That means if a non-subsidized interest rate were applied, the return could well be negative on almost all of the trillions of yuan invested in the Chinese stimulus binge.

A Growing Oversupply Problem

You see, Beijing has flushed trillions of yuan into expanding capacity in sectors already suffering from collapsing demand and an overhang of capacity.

To cite one example, which has been highlighted by Chinese officials themselves, Li Yizhong, chief of the Chinese Ministry of Industry and Information Technology, has proclaimed that China will withhold approvals of new steel projects for at least the next three years.

Li told a press conference on August 13 that oversupply has become a serious problem because China’s annual production capacity of 660 million tons exceeds estimated demand by an astonishing 190 million tons.

One of Li’s spokesmen put it this way: “The industry must produce according to market needs and avoid adding to the excess capacity. They should avoid reckless investments. The government must also take action to curtail additional investments by companies that are already in excess.”

The particular case of malinvestments in steel – a sector suffering from vast excess capacity – probably came to be a focus of official comment at least in part because the stimulus had unintended consequences: it frustrated Chinese attempts to stockpile iron ore at low prices.

This has been a particular focus of attention for the Chinese. You may recall that the general manager of Rio Tinto’s Shanghai office, along with three other RTZ employees, have been under arrest in China since the July 4 weekend on charges they “stole state secrets.”

Not incidentally, at the time of the arrests the Rio Tinto employees were engaged in contentious negotiations over iron ore prices with Chinese steel mills.

I know nothing about the specific charges of spying. But I would judge that the frustration of China’s ambition to take advantage of the global depression to stockpile iron ore at low prices is due more to the scramble for iron by China’s subsidized steel mills than the clandestine maneuvers of a the Shanghai office of Rio Tinto.

Currency Devaluation – No Way Out

Quite apart from the melodrama over stealing state secrets, what is not a secret is that China’s program to expand capacity through indiscriminate lending will compound the difficulties of world recovery.

Justin Lin, chief economist of the World Bank, suggested in a speech last month that there was a danger of economies being trapped in a vicious cycle of deflation. According to Lin, “Significant excess capacity has been built up, and unless this issue is addressed we will face a deflationary spiral and the crisis will become protracted.”

Lin said capacity utilization had tumbled to 72% in Germany; 69% in the U.S.; 65% in Japan; and as low as 50% in some developing countries, “touching lows not seen in modern times.”

And he went on to suggest that the conventional remedy for countries caught in slumps is to devalue their currencies. This would improve the terms of trade and allow them to gradually recover their health through export earnings.

But currency depreciation to stimulate exports as a remedy for recession will not work today because the crisis is global.

“No country can count on currency depreciation and exports as a way out of recession,” says Lin. “Unless we deal with excess capacity, it will wreak havoc on all.”

Will Stimulus Trigger a Deflationary Spiral?

So you can see that far from leading a turnaround in the global economy, China’s stimulus program may have compounded the risk of a deflationary spiral.

This is true for three important reasons.

1. An investment driven program to increase capacity can only exacerbate the problems of global excess capacity in the face of insufficient demand.

2. The massive program of subsidized lending to increase capacity in China has negative feedback effects on world trade that could contribute to growth-stifling protectionism.

Another consequence of China’s stimulus has been that the country’s share of the U.S. trade deficit has grown enormously. From 2000 through 2008 China’s share of the non-oil U.S. trade deficit ballooned from 26% to 69% – a compound annual growth rate of about 13%.

According the Economic Policy Institute, so far this year China’s share of the non-oil trade deficit has leaped to 83%– a jump of more than 20% in an environment in which the U.S. trade deficit has been dwindling. This means exporters from countries other than China are “being killed,” as Pettis describes it.

When you consider that world trade in the first half of 2009 took the deepest plunge in 80 years (U.S. imports dropped by 30% this year), there was very little prospect that countries whose tradable goods exports to the U.S. were squeezed out by the Chinese goods could readily find other markets in which to make up for the loss of sales.

This implies a growing threat of protectionist measures. It is not hard to predict that protectionism will grow – with negative consequences for total world trade. Other things being equal, more barriers to trade mean a greater deflationary impulse. That’s because the total demand for goods across the globe will fall as trade barriers rise.

3. Perhaps the greatest risk of further financial stress (with ultimately deflationary consequences) arising from the Chinese stimulus package is the likelihood that the Chinese will follow in the footsteps of Japan.

Is China the New Japan?

As you know, in the 1980s the Japanese experienced a massive asset bubble that was set in motion by policies similar to those China is now pursuing.

Charter subscribers to the original Strategic Investment will recall that we were disappointed in September 1985 to have made only a few thousand dollars from accurately anticipating the Plaza Accords (which led to dramatic increases in the values of the Japanese yen and the German mark.)

Unfortunately, the agreement was announced on September 22 1985, a few days after expiry of the September Japanese yen futures contract that Strategic was holding long. Had the accord been struck a few days earlier, we would have profited by many tens of thousands of dollars.

We made up for the money we left on the table, however, when we profited for a second time from the misguided efforts of the U.S. government to staunch the U.S. trade deficit via currency manipulation. We made a fortune shorting the Japanese stock market when it collapsed.

There is no more vivid testimony to the enduring stupidity of the U.S. Congress than that its distinguished members are today agitating for an increase in the exchange value of the yuan, just as they agitated 25 years ago for an increase in the value of the yen in the misguided notion that a lower exchange value for the dollar would extinguish the trade deficit.

It won’t.

If their simpleminded view of the world was correct, you could have expected the U.S. trade deficit to have disappeared long ago. The value of the yen rose from an average of ¥239 per $1.00 in 1985 to ¥94.18 as I write.

Japanese Yen vs the U.S. Dollar

Déjà Vu All Over Again

You may wonder how my editorializing bears on the question of the moment: How will China’s stimulus program informs economic developments to come?

I believe it does. Bear with me.

You see, we are in a situation of the sort that Yogi Berra described in his classic phrase: “This is like déjà vu all over again.”

China is doing more or less what Japan did between 1985 and 1990 when it created one of the greatest asset bubbles to that date – a bubble that went on to collapse in a deflationary crisis the country has yet to escape.

As you may recall, land valuations during the Japanese bubble reached preposterous extremes. The Tokyo Imperial Palace was said to be worth more than all of California at the height of the bubble!

Such fantastic valuations came about because Japanese authorities understood one thing better than the U.S. Congress. They knew that even a 55% appreciation of the value of the yen that followed the Plaza Accord would not necessarily lead to a decline in the Japanese trade surplus with the U.S., as many Congress folk and other fools contended at the time.

Japanese leaders were content to see their currency double against the dollar, while their trade surplus with the U.S. actually surged. They understood that a country’s trade surplus or deficit is an expression of the gap between what it produces and what it consumes.

See, absent a huge surge in the U.S. savings rate (which began a secular decline in about 1985), the U.S. trade deficit was destined to explode. It did.

An October, 2007 study by the Federal Reserve Bank of St. Louis noted the following:

This consumption boom and the associated decline in the savings rate coincided with a large increase in revolving credit outstanding, which consists primarily of household credit card debt.… It increased from about $54.8 billion (2.7% of personal income) in 1980 to about $854.6 billion today (8.9% of personal income).

It is striking to see how closely these numbers match: the increase in the trade deficit ($762 billion), the increase in consumption due to a rise in consumption’s share of personal income ($802 billion), and the increase in revolving credit outstanding (about $800 billion).

Unfortunately for the Japanese and the world, they played along with U.S. political posturing to push the value of the dollar down because doing so staunched the agitation for protectionism in the U.S.

How Free Money Killed Japan

Although the Japanese may have seen beyond the simpleton’s view that currency depreciation would quickly bring the U.S. trade account into surplus, they were much less perceptive in foreseeing the catastrophic consequences of the “work-around” that the Japanese Ministry of Finance and the Bank of Japan devised in response to the currency accord.

What the Chinese are doing today is much like what the Japanese did in the mid-1980s. Fearing a fall-off in the earnings of Japanese business from trade, Japan’s Ministry of Finance directed a torrent of low-interest bank loans into the manufacturing sector that were backed by a “nod and a wink” from the Bank of Japan.

The big banks knew they could lend profitably to manufacturers because the government implicitly guaranteed the loans. The manufacturers took the money at low nominal interest rates. It was, after all, almost free money.

Naturally, Japanese manufacturers found themselves awash in liquidity. And they looked to deploy this cash in asset speculation, rather than spending on capital goods or other aspects of the real economy.

It became obvious to us here at the time at Strategic Investment that the Japanese assets bubble was destined to burst.

After a trip to Tokyo in the summer of 1987, my co-editor, Lord William Rees-Mogg, wrote a lead article titled “Japanese Bubble to Burst.”

It informed readers that in 1986 “no less than half of the major companies of Japan made part of their reported profit from speculative trading on the Tokyo stock market. In some cases, their trading profits were larger than their profits from normal business.”

The profits were often very large. Toyota was by far the most successful investor with financial profits of 159 billion yen, or more than $1 billion. But such well-known businesses as Sony, $275 million and Sanyo, $130 million, were also among those for whom these financial profits came to more than their ordinary business profit. […]

In Tokyo this month I have been left in no doubt that both the stock market and real estate values are dangerously high. […] The market value of Japanese real estate, small geographically as Japan is, has now overtaken that of the U.S. A two-bedroom apartment in central Tokyo can cost $8 million to $10 million. Houses go for up to $50 million. Hardly any business in Tokyo would trade at a profit if it paid full market rent.

Lord Rees-Mogg went on to forecast that “Tokyo markets could be in catastrophe when the bubble burst”… as it did only a few years later.

A New Bubble Is Born

Flash forward to today, and we find another Asian economic superpower has replaced Japan as the world’s largest trade-surplus country. And it is now making the same mistake that Japan made in the 1980s.

China’s leaders have instructed Chinese banks to lend trillions of yuan (CNY7.4 trillion so far) to Chinese manufacturers. These are mostly old-line state-owned enterprises that are in the least productive sectors of the Chinese economy. As a result, Chinese M2 money supply has increased by 28.5%. And yuan based lending has soared by 34.4%.

You can be absolutely sure that the lending is implicitly guaranteed by the Chinese government.

Consider the following hint… Chinese bank stocks plunged in early July on rumors that the extravagant and unsustainable growth of banks loans would be curtailed. Obviously, if the banks were acting on their own in such a potentially ruinous lending spree, prudent shareholders would welcome the news that it might be brought to an end. But the fact that bank stocks sold off on rumors of restraint says that the market understands the lending is a “no risk” win for the banks because the government is backstopping the losses.

The new money has been used to refinance bad loans previously on the books. And it has underwritten a surge of capacity in a number of sectors. It has also leached into the stock market and real estate, just as it did in Japan.

A number of highly placed Chinese leaders are acutely aware of this danger. Wu Xiaoling, former vice governor of the People’s Bank of China, has stated, “Under conditions of overcapacity, excess money supply will not lead to rises in price indexes, but it could generate asset bubbles.”

There actually is no need to wonder whether asset bubbles will result from all this funny money. According to Wei Jianing, a deputy director of the Development and Research Center of China’s State Council, “Chinese new bank loans worth an estimated 1.16 trillion yuan ($170 billion) were invested in the stock market in the first five months of this year.”

It’s little wonder that the Shanghai Composite Index has soared by 100% off its November lows. And that Chinese real estate has skyrocketed in nominal value.

Make no mistake. We have a situation very similar to Japan in the mid-1980s.

“Speculation, Overexpansion, Wasteful Expenditures”

In China now, as in Japan then, the early stages of the bubble are being mistaken for a grand success. ‘Experts’ applaud China for “leading the turnaround in the global economy.”

But closer examination reveals that China has simply inflated another potentially disastrous credit bubble – one that will aggravate the imbalances in the global economy and increase the danger that the rest of the world will be sucked into an intensified financial crisis and a deflationary spiral.

No less an authority than President Herbert Hoover warned, early in the 1920s, while he was serving as secretary of commerce, that:

Booms are times of speculation, overexpansion, wasteful expenditures in industry and commerce, with consequent destruction of capital. […] It is the wastes, the miscalculations and maladjustments, grown rampant during the booms that make unavoidable the painful process of liquidation. The obvious way to lessen the losses and miseries of depression is first to check the destructive extremes of booms.

Hoover was talking about the U.S. during the Roaring Twenties. But he might as well have been describing the gigantic bubble the Chinese authorities are unwittingly inflating now by force feeding of credit into the country’s flagging economy.

I think it unlikely that the Chinese will prove more adept at finessing the collapse of their bubble than the Japanese were.

It’s obvious to the discerning eye that the rosy reports of “recovery” in China describe something far less encouraging. China is attempting to replace its export-led prosperity with investment-bubble ‘prosperity.’

This bubble will collapse, causing an even greater crisis than that which sank Japan into its “lost decade” almost 20 years ago.

James Davidson

Editor,

Strategic Investment

An Unusual Way to Profit
from the China Collapse

“We can’t develop like this any longer. It’s a dead end. And the crisis has placed us in a situation where we will have to make decisions on changing the structure of the economy.”

– President Dmitry Medvedev on the double-digit decline of Russia’s energy dependent economy in the Q2.

The “fantastic” growth of the Chinese economy this year is exactly that – fantastic in the sense that it departs from reality.

The Chinese are inflating a real, not an imaginary, bubble. But the impression of growth given by the government’s claim of a 7.1% GDP increase in the first half relies on anachronistic GDP accounting left over from the days of Stalinist central planning.

Perhaps President Obama’s statisticians will drill in and learn something about levitation from the Chinese. If U.S. politicians could claim GDP growth by simply allocating spending in a stimulus program, U.S. GDP would be half a trillion dollars higher this year because of stimulus spending Washington has announced but not yet spent.

Obama signed the $787 billion stimulus law on February 17. But through July the government has only disbursed $60 billion. Under Chinese accounting, the whole $787 billion could have been counted in the GDP accounts in the first quarter. (Or rather $499 billion could have been counted; the other $288 billion consisted of tax cuts.)

Equally, if we could claim production in state-run companies at full retail value, Obama’s car czar could instruct GM and Chrysler to run their assembly lines around the clock. Every vehicle that rolled off the assembly line could be counted in the GDP statistics at full price – even if none of them were sold. (Production counts in U.S. GDP at wholesale value.)

That would do more to goose the statistics than all the shuffles and gags introduced to GDP accounting within the last quarter century.

You get the point.

China’s boom, upon which a lot of global optimism has been capitalized, is not what it seems. The apparently robust first-half GDP growth of 7.1% is a strange amalgam of statistical illusion and a genuine, but unsustainable, investment bubble.

Can We Predict Bubbles with Math?

UCLA geophysicist Didier
Sornette believes he
can predict when
bubbles will burst

Didier Sornette, a professor of geophysics at UCLA, has developed a model he and his team claim can identify an economic bubble and provide guidance on the likely time that it will burst.

Sornette and his team have stated, “By the very nature of the model, this result gives two conclusions: Firstly, there exists a bubble in the Shanghai Stock Exchange Composite Index. Secondly, it will reach a critical level around July 17-27, 2009. This will lead to a change in regime which may be a crash or a more gentle bubble deflation.”

Among other things outside the normal realm of geophysicists, Sornette has been fascinated by “super-exponential growth” of human population and economic output over the past centuries.

He has published a paper titled “The End of the Growth Era?” that suggests world economic growth is destined to be snuffed out by “a drastic and unavoidable change of regime around 2050.”

According to Sornette, “A spontaneous singularity has been created by the increasing growth rate! This process is quite general and applies as soon as the growth rate possesses the property of being multiplied by some factor larger than 1 when the population is multiplied by some constant larger than 1.”

He goes on to say that, “Singularities and infinities were anathema for a long time. […] They are not fully present in reality, only the precursory acceleration is there and foreshadows an important transition. In the present context, they must be interpreted as a kind of ‘critical point’ signaling a fundamental change of regime.”

Sornette is Malthus with a computer. He’s projecting a long-term Japanese “lost decade”-style collapse of growth for the global economy. (From 1996 through 2002 Japan’s per capita income increased by a bare 0.2%)

In future issues, we’ll look more carefully at Sornette’s gloomy “secular stagnation” forecast, which corresponds to Sir Isaac Newton’s projection that the world would end sometime around 2060.

The good news is that even if Sornette and Newton are correct, we have a few decades to think about it.

A Shanghai Market in Lalaland

I have no specific explanation of how Sornette and his team teased out the notion that the Shanghai Stock bubble was destined to burst, or at least begin a slow leak, sometime between July 17 and July 27. (He is an expert in complex systems, so I doubt any mathematical algorithms he employs could easily be translated into English.)

But we already know why the Shanghai market is in Lalaland…

China has roughly twice the industrial capacity needed to supply all the consumer goods that U.S. consumers demanded before the credit bubble popped year. And despite the disappearance of demand from their best customers, the Chinese have responded with an investment-led boom to create still more capacity.

This could be an extraordinary statement of faith in Say’s Law – that supply constitutes demand. Alternatively, it suggests that the Chinese are just blundering along like the rest of us on the momentum of past success.

In terms of our current crisis, it is hard to credit that the Chinese are rejecting Keynes, who included an attack on Say’s Law in his General Theory of Employment, Interest and Money.

How to Profit on the Short Side of China’s ‘Boom’

Be that as it may, the Chinese market is ripe for a correction. The communist regime there has too many problems and contradictions in its economic policy for this stimulus bubble to end happily.

There are several ways to short China.

An indirect play on China weakness is to sell short commodities such as copper and oil. That’s because Chinese stocks and commodities tend to trade along with each other.

But I don’t recommend this approach at the moment. We already have a short position in oil. And it has not been working because of investor enthusiasm about the “recovery” theme.

Although oil has rallied, natural gas – a commodity that reflects many of the same fundamentals as oil – has fallen to multi-year lows. My conclusion is that oil has risen on speculative enthusiasm rather than on fundamentals.

Probably the purest play on the supposition that China’s boom cannot be sustained would be to short or buy longer-term put options on the big Chinese ETF, the iShares FTSE/Xinhua China 25 Index (NYSE:FXI), which tracks the FTSE/Xinhua China 25 Index.

Or you could buy an inverse fund that profits when Chinese stocks fall. For instance, the ProShares UltraShort FTSE/Xinhua China 25 (NYSE:FXP) is an “ultra-short ETF on the FTSE/Xinhua China 25 Index.

Be aware though that you should only use the UltraShort ETF’s for shorter-term moves. That’s because over the long-term it loses its leverage advantage.

Another way to play the move is to short The Greater China Fund, Inc. (NYSE:GCH), a proxy for the Shanghai Stock Exchange. The Greater China Fund recently suspended dividend payments; making it less costly to short then before.

My analysis of China reveals that the country’s investment driven ‘growth’ cannot last. It does not prove that Chinese policy will change this month or that market forces will presently deflate the bubble. Remember, the Japanese continued to inflate their bubble for five years before their collapse.

On the other hand, Shanghai may already have started to gently pop – more or less in the time frame projected by professor Sornette.

The third week of August was the worst week for Chinese equity funds since early in the first quarter of 2008. A 4.7% drop in the Shanghai Composite Index – its third straight weekly decline – made it the world’s worst performer this month.

Shanghai Index

Based on this recent market movement, now may be a good time to take a short position in China.

An Unconventional Spread…

Another bold strategic play also occurs to me in a world desperately seeking for signs of growth. That is to buy Brazil and short China.

As far as I know, Strategic Investment is the only advisory service in the world recommending this spread. That is to say it is not conventional thinking.

There may “safety in numbers” if you’re storming the Bastille. But when you’re entering a trade, the ultimate returns are better if you’re implementing fresh thinking – provided, of course, the underlying idea makes sense.

In this case, it does. Here’s why…

We know that the “BRIC” economies (Brazil, Russia, India and China) are the most vital and developed of the so-called “developing countries.” We also know that China, the largest of the BRIC economies, is following in the footsteps of Japan in inflating a massive stock and property bubble that seems destined to end in tears

We know all the BRIC countries followed the U.S. into recessionary bear markets – peaking after the S&P 500 and recovering before it.

And we know that there is a lot of hot money flowing around the globe to back the thesis of “decoupling.”

The international editor of Newsweek, Fareed Zakaria, has been a strong advocate of this theme. He argued in a June 8 Newsweek column, “Boom Times Are Back – Just Not Here in the United States,” that the global economy is dividing into a tale of “two worlds.”

In one camp, he places the rapidly emerging economies such as China, India, and Brazil. In the other, he puts the fading “bastions of wealth and power” – the U.S., Europe and Japan.

Zakaria’s basic contentions are correct. China, Brazil and India are certainly in better fiscal shape than the U.S., Europe and Japan. Of these countries I think Brazil has the most innate strengths.

Therefore, I think that the eventual downturn in China will leave Brazil as the strongest emerging economy.

The Best of the BRICs

On a superficial basis, this may seem unlikely. China is Brazil’s leading trade partner. And Brazil mainly sells China commodities and passenger jets. A first order consequence of China’s growth slowing down would therefore be a fall in commodity prices and, presumably, a fall in Brazilian exports to China.

That may be true. But the question is: What happens next?

Brazil is far better situated to recover in a world where export surpluses of the kind that the Asian economies have cultivated with the U.S. dry up. Brazil has fewer structural obstacles than China to developing its own vibrant domestic consumption.

I suspect that hot money flowing out of China will be more prone to go to Brazil than India or Russia.

This was signaled recently by record outflows from emerging-market equity funds. Funds investing in developing nation stocks lost $946 million globally in the week ended August 19. Asia (excluding Japan) funds lost $810 million – the most in 24 weeks – while Latin America, Europe, and Middle East and Africa funds saw “modest inflows.”

An “Unmistakable” Recovery

Just as China’s troubles with bad loans and runaway stimulus of industrial capacity have come into focus, the growing strength of the Brazilian economy has been more vividly in evidence.

Unemployment in Brazil unexpectedly fell again in July to 8%. “The recovery of the Brazilian economy is unmistakable,” said Alexandre de Azara, chief economist at BRZ Investimentos SA in Sao Paulo. “The unemployment number in July was much better than expected.”

Brazil’s July unemployment rate was the lowest this year and down from 8.0% in July. The drop surprised 23 of 25 analysts surveyed by Bloomberg.

Source:ibge.gov

Unlike the U.S – where the unemployment rate of 9.4% excludes lots of people who believe they are unemployed – the Brazilian unemployment rate is more comprehensive. It includes economically active persons over the age of 10; if U.S. unemployment were calculated according to Brazilian methods, it would be at least double the Brazilian rate.

Consider the following analysis from John Williams’ Shadow Government Statistics.

During the Clinton Administration, “discouraged workers” — those who had given up looking for a job because there were no jobs to be had — were redefined so as to be counted only if they had been “discouraged” for less than a year. This time qualification defined away the long-term discouraged workers. Adding them back into the total unemployed, unemployment in line with common experience — as estimated by the SGS-Alternate Unemployment Measure — held at about 20.6% in July.

[See the Alternate Data tab at www.shadowstats.com for a graph and more detail.]

I previously indicated a prejudice: I am married to a Brazilian. This has given me both a better vantage for understanding Brazil and an incentive to look more closely.

I have detailed in recent issues some of the considerable strengths of Brazil’s economy. Among other points, Brazil is a vast continental economy with a large young population and an active entrepreneurial class. India looks big on the map. But there is a single state of Brazil that is larger than India.

Brazil also has a totally solvent banking sector. Its consumers and businesses are almost completely unleveraged – the majority of Brazilian home sales are made without a mortgage. And although Brazil has run a significant trade surplus, it is not greatly dependent on exports. Exports make up only about 10% of Brazil’s GDP, as compared to 35% of Chinese GDP.

I see Brazil as the country most likely to achieve balanced domestic growth – just as the U.S. did in the late nineteenth century.

We have already analyzed why China’s growth prospects are dependent upon U.S. recovery. Brazil’s trade is much more evenly distributed. About 26% is with the E.U; Latin America accounts for 25%; Asia counts for 16%; and U.S. accounts for just 14.3% of trade with Brazil.

Brazil also has more arable land and fresh water resources than any other country on the planet. This will be increasingly important as the twenty-first century unfolds.

Put simply, Brazil is the world’s largest dealer in protein, selling more beef and poultry than any other country. And although Brazil lags the U.S. in the total volume of all agricultural exports, its agricultural sector is more dynamic and by far the most profitable in the world. U.S. farmers grow more of certain crops – but Brazilians make more money doing it.

For these reasons, I expect Brazil to continue to grow based on the capacity of the Brazilian consumer to increase demand as credit becomes available in housing and other consumer sectors.

Brazil is already one of the largest markets in the world. Unlike China, it is capable of growing internally. China is funding a bubble to ramp up GDP by building more capacity for export. And for this reason alone I think Brazil’s economy will outperform China’s over the next few years.

This Month’s Recommendation

I recommend spreading the iShares MSCI Brazil Index ETF (NYSE:EWZ) long against either a short position in the iShares FTSE/Xinhua China 25 Index (NYSE:FXI) or a long position in the ProShares UltraShort FTSE/Xinhua China 25 (NYSE:FXP)

EWZ does not directly track the Bovespa Index on the Sao Paulo Stock Exchange. It is tied to Morgan Stanley’s proprietary MSCI Brazil Index. However, it should work to capture the divergence I expect.

If you are an international investor, there is a French ETF on the Bovespa, the Lyxor ETF Brazil (LON:LBRZ), which is traded in Europe.

You may need to call up your broker in order to buy those shares.

As the Chinese bubble shows more conclusive signs of bursting, we’ll be back with additional recommendations for profiting from this situation, including some currency spreads.

James Davidson

Editor,

Strategic Investment

Pulse of the Global Economy

Sometimes a picture is worth 1,000 words.

It is no different when it comes to the state of our economy – a few good charts can relay more valuable information then an entire page of words.

In a day and age when talk of ‘green shoots’ dominates the mainstream media, I find it important to show you the true state of the domestic and global economy.

The first thing I’m going to show you is a chart of credit conditions here in the states

This shows you the sharp increase in credit cards and residential and commercial real estate delinquencies since the credit crisis started.

We’re seeing a slight flattening in consumer credit card delinquencies. But with the unemployment rate at nearly 10%, delinquencies have nowhere to go but up.

These delinquencies will undoubtedly lead to more bank failures.

We’ve had 81 bank failures this year, costing the FDIC about $20 billion. We’re on pace to see 150 bank failures, nearly doubling the cost to the FDIC to $40 billion.

One prominent mainstream analyst, Dick Bove from Rochdale Securities recently speculated that “perhaps another 150-200 banks will fail” this year.

As of August 27, there were about 416 banks with assets totaling $299.8 billion that were on the FDIC’s Problem Bank list. These are banks that are either receiving cease & desist lending orders, or under a written, formal, or supervisory agreement with the FDIC.

While not all of those 416 will fail, we could reasonably expect half of them to fail.

The Problem with Bank Failures

Anytime a bank fails, it causes the amount of credit in circulation to drop. That means credit to businesses and the consumer is cut, stifling demand for purchases and upgrades that might actually add something to GDP growth.

We’ve already seen the amount of consumer credit – the stuff that fuels the buying of stuff at your neighborhood Best Buy –drop by the most in 50 years.

The drop isn’t over yet.

You see, banks don’t plan on increasing lending yet.

According to Dave Rosenberg from Gluskin Sheff “We just received the monthly data on commercial bank lending in July and it showed a record contraction of $64.0 billion, which is the equivalent of a 12.0% annualized decline. This was the third month in a row of declining bank credit to households and businesses during which the contraction has totaled $149.0 billion (again, an unprecedented 9.0% decline at an annual rate). We are not sure if a recovery can be sustained without credit creation — we haven’t seen it happen in the past, but maybe there is a new paradigm of a credit-less recovery awaiting us.”

Indeed, in a credit-based fiat economy, a contraction in credit is a contraction in money supply.

That’s because people use credit like they use cash. They buy TV’s and space-cushioned beds with their plastic.

If credit is cut… or if they lose their job… they are less likely to spend money or pay back the debts that they owe.

This kills exporters that sent their electronics and t-shirts to the US.

Across the globe the contraction of available credit has caused a 25% drop in trade.

Of course, ‘green shoots’ economists will point to that small increase in 2009 and tell you that a bottom has been reached.

This begs the question, where does trade recover to? Will it stay at this level for the next ten years? If it does, we’re not likely to see the earnings growth we witnessed just a few short years ago.

We’re in a Secular Bear Market

One chart courtesy of Michael Shedlock explains it all.

For the past ten years we’ve been in a cyclical bear market, at least according to the Nasdaq.

If you look at a chart of the S&P 500, you’ll see it’s near the levels it traded at in 1996.

Worst of all, this market was driven by excess credit – a condition we won’t see for some time. Remember, consumers have to repair their balance sheet. Those that choose not to will see their credit score suffer… and get cut off from credit altogether.

The savings rate already moved to 5.1% from negative numbers as a result of what’s happening. This rate should move higher over the next few years.

And as the savings rate moves north, I just don’t see how the economy can expand.

This is one of the reasons why James Davidson and I believe in an eventual collapse of the Chinese investment bubble.

The Chinese are investing to boost capacity at a time when demand for their goods continues to drop.

This will push prices for its goods down as it floods the market with its products. At the very least, it’s adding bad debt onto the balance sheet of Chinese national banks.

We are seeing the makings of the next big banking crisis. Except this time it will take place in China. And the repercussions will be extraordinary.

Staying prepared is the most important thing to do right now. That’s why James has recommended you position yourself for a drop off in the Chinese economy.

Until next month,

Charles Delvalle

Associate Editor,

Strategic Investment

Yesterday, I had an awkward moment.

I got the following note from my publisher, Will Bonner: “I don’t know if you got it from him or not, but Doug Casey wants a hat tip for the “Greater Depression” term…”

This was awkward, in part, because I don’t wear a hat.

It also made me feel bad because Doug was obviously reading my work, but I couldn’t recall seeing anything that he’s written for quite a long while.

I used to get his newsletter when Agora published it. Then it stopped coming, and I fell out of the loop. I had no idea that Doug Casey originated the catchy phrase “the Greater Depression.”

Well done he. If I had a hat, I’d tip it. Since I don’t, I’ll scratch my head in homage.

When I used the phrase it occurred to me as a kind of obvious escalation. According some economic thought, “great depressions” are declines of 25% or more in GDP; mere “depressions” are declines of 10% or more. Presumably, a “greater depression” would represent an even deeper collapse of output, say 40% or more.

Most of us hope to come no closer to a “Greater Depression” than to encounter it as a turn of phrase. But the Baltic states of Europe are flirting with a greater depression right now. Lithuania’s GDP fell by 22.4% in the last quarter alone. If that keeps up for a moment longer, they are in a “Greater Depression.”

Nearby Latvia is also headed for one of the deepest depressions in history. Analysts expect Latvia’s GDP to plunge by 18% this year and still more next year. Lithuania and Latvia pegged their currencies to the euro at a high rate. Latvia’s currency is the more overvalued of the two. One lat is worth euro 1.40.

The trade of the moment is to sell the lat forward against the euro. This can be done early in the week at an implied interest rate of 20%. But the rate tends to expand as the weekend nears, because devaluations are normally orchestrated on Sundays.

The margin for the trade is rather high. You should expect to put up about $0.50 for each lat you sell forward (for three months). I think three months should be sufficient to make a handsome profit from the coming crisis.

As Nouriel Roubini wrote recently in the Financial Times , “At this point, a currency and financial crisis is pretty much unavoidable.” A poll released today showed that more than 60% of Latvians expect the lat to be devalued soon.

To take advantage of the coming crisis, by selling short the overvalued lat, contact Scott Lines at Lines Overseas Management, one of the largest offshore investment services in the world.

You can reach Scott in Bermuda on 441-292-5000. The toll free line is 1-800-840-6340.

If Scott is out when you call, speak with his able assistant, Devi Johal.

James Dale Davidson

Editor, Crisis Strategy Alert