3SOF

Quote from nullzero:

QuoteYou dont think sediment can change very fast over the next 3 weeks going into January 1st? From what I hear from many other traders and analyst is we should see the market get some sense knocked into it after the holiday season. Heh just bought some QID the about 10 mins ago and im up .50% so far. I think the time is coming for the market to pullback at least a little.

EDIT

On another note the vix index is up over 6% today and just passed over the 50dma recently. The techincals of the vix index look like its positioned to break out. I will post under stock market talking with the chart and maybe we can have dicussion about the market over there.

My quote:

QuoteGood luck nullzero :)

I'm trying to stop betting on small fluctuations and stay with the big swing. Because betting on fluctuations will never make me rich. I've tried that for too long.

Man, if I can make 50% a year I'll be the richest man on earth 30 years from now. I don't need 50% a month. Trying to get, say, 20 or 30% a month was what made me make much less money than I ought to, given how right I was in the market.

I won't have 30 years in front of me forever, so I better start doing the right thing ... You know what I mean :)

Nullzero quote:

QuoteYeah I know what you mean. I am just worried holding many things long these day because of the problems we face ahead; Weak dollar, housing bubble burst, losing the war in iraq and iraq turning into a proxy iranian state (which would lead to an oil crisis.) I can go on maybe its just me and im to negative but I feel that the perfect storm is brewing for a major recession and stock market pullback in the next year.

QuoteWeak dollar

A weaker dollar is the best thing that can happen to the US economy. The dollar has been weak since 2003 and that was a major help to bring some balance to the world economy, because you were consuming too much and not exporting enough. A weaker dollar will make import prices go up and export prices go down.

Since GDP = Consumption + Investment + Exports - Imports, the weaker dollar is having and will continue to have a positive effect on the US economy. Moreover, multinational profits will also be higher due to the weaker dollar.

Quotehousing bubble burst

I think that concern is overdone. It's behind us. Look at the international picture. For example, Portugal had an even bigger property bubble than the US (I mean bigger, housing prices are 5 fold higher now than 15 years ago, on average) and when the bubble burst, nothing serious happened. The market didn't collapse, it just stopped rising, maybe down 2 or 3% a year since 2002.

Quotelosing the war in iraq and iraq turning into a proxy iranian state (which would lead to an oil crisis.)

Iraq is non existent in the world economy. I see a lot of capacity in the pipeline for oil, mainly in Africa and Russia. I don't think Iraq will have any major impact on the world or the US, but it's a risk, you have a point.

My biggest concern is debt. But the market knows the issue for long, and it still a bull market. I prefer to concentrate on the benefits of globalization.

Since I read an extraordinary book on the economic history of the world, which is called "The wealth and poverty of nations" I know globalization will have an astounding impact on the world economy. We're not only exchanging goods and services anymore. We're exchanging knowledge, and that is the most powerful trend going on in the world now.

I know a weak dollar is good for manufacturing and less consumption... however the U.S. federal deficit is at records levels and the world economy is sick of financing our excessive debt. I also was worried of the looming problems with the USD as the major world currency for trading and oil. Recently China and many other countries have been trying to get rid of there massive dollar reserves this could effect trigger a intense dollar selloff causing foriegn investors and the wealthest americans to flee holding dollars and sit their buying power in safe heavens.

I know this hasnt been talked about a lot but people dont realise that the dollar is unoffical backed by oil since we have been taken off the gold standard in the 70s with the last crisis. Not many people doubt that the war in iraq was done to secure future oil reserves... What happens if Iran turns iraq into a proxy state and in effect making Iran in control of the worlds largest proven oil reserves? (adding iraq and iran oil reserves I believe would come to this outcome.) Since the Iranians are planning to strictly trade their oil in Euros and other currency this can hit the dollar hard in the long run and cause a oil crisis back here in the U.S. Since we would lose are leverage of cheap foriegn oil and the declining value of the dollar would mean more dollars for a gallon of gas.  I know im rambling on at this point heh.. just stuff on the top of my head.

Here is some facts about oil in Iraq and Iran.

"Iraq's Oil Reserves: Untapped Potential
While its proven oil reserves of 112 billion barrels ranks Iraq second in the work behind Saudi Arabia, EIA estimates that up to 90-percent of the county remains unexplored due to years of wars and sanctions. Unexplored regions of Iraq could yield an additional 100 billion barrels. Iraq's oil production costs are among the lowest in the world. However, only about 2,000 wells have been drilled in Iraq, compared to about 1 million wells in Texas alone."

http://usgovinfo.about.com/library/weekly/aairaqioil.htm

Here is some info on Iran and its oil reserves
"As of late 2002, Iran held 90 billion barrels of proven oil reserves, or roughly 9% of the world's total."
http://www.globalsecurity.org/military/world/iran/oil.htm

So thats about 200 billion barrels of proven oil reserves together, if we assume in the distant future that Iraq turned out for the worse and turned into a proxy state for Iran.
I was wrong it comes slightly behind Saudi Arabias proven oil reserves of 262.7 billion barrels but very close http://saudinf.com/main/z002.htm.


So together Iran and Iraq make up about 20% of the total oil reserves which can effect the market greatly regarding oil prices.

Oil represents much less for the world economy now than it did 30 years ago, but those are good bullish arguments on oil, thank you.

And what about the 3 billion new consumers and investors showing up in the world with the fantastic growth of countries like China, India, Russia and Brazil? This is 10 times more population than in the US.

Those markets were incipient 20 years ago, but now they're big markets for America's products. And they can only get bigger (of course, there will be recessions along the way, but longer term). Why? Because they're opening their minds and learning from you guys in America how to do things right ;)

Got to go have dinner, but I'll be back, perhaps you're right over the short term, I need to look at some indicators ... that VIX is a short term concern.

yeah the vix is showing one big green candle today and is up over 8% today so far.

Quote from: David Randolph on December 07, 2006, 03:17:03 PM
Oil represents much less for the world economy now than it did 30 years ago, but those are good bullish arguments on oil, thank you.

And what about the 3 billion new consumers and investors showing up in the world with the fantastic growth of countries like China, India, Russia and Brazil? This is 10 times more population than in the US.

Those markets were incipient 20 years ago, but now they're big markets for America's products. And they can only get bigger (of course, there will be recessions along the way, but longer term). Why? Because they're opening their minds and learning from you guys in America how to do things right ;)

Got to go have dinner, but I'll be back, perhaps you're right over the short term, I need to look at some indicators ... that VIX is a short term concern.

I disagree to a degree on oil not being as important on world economy as it once was. The demand is higher then ever for oil because of high and rapidly growing demand in China and India. Until we start using a widespread alternative to oil it will have major impact on the markets (Brazil has its act together.) The oil spike just a couple months ago put a dent into the U.S. economy and could be blamed for the slowing economy. When gas prices go higher Americans drive less and shop less.

Weakning U.S. dollar may help out defense and aerospace companies like Boeing, Lockheed, General Dynamics, General Electric, Northrop, etc. Other then that I can't see any strong industrial manufacturing companies that still having major operations in the U.S. everything seemed to be packed up and moved to foriegn countries. When it comes to made in USA consumers here and abroad have been shunning the auto industry and other parts of manfacturing. The only made in USA the foreign countries would rather have is oil drilling equipment, aircrafts, weapons, and infrastructure parts from companies like GE etc. I have seen a lot of activity with the exports in the defense industry and loosing restrictions in the aerospace and weapons category. Most recently I remember we sold some F-16s to India, Pakistan, and Taiwan.

What a great idea to have an to have a discussion about the big picture. When that is said I really don't share David's optimisme. To be honest David's track record is a lot better than mine but I am very proud of having been wrong about the US stock market for the last 7 months. The only other person I know of who has been wrong for such an extented period of time is Warren Buffett  ;D

When I look at US today the only bullish thing I see is that the stock market goes from strength to strength. I kind of understand why because US stocks are not expensive based on historical earnings and there are a lot of liquidity in the market.

When I look at the US economy I am extremely pessimistic and as most US companies are depending on US demand that makes me wonder when this house of cards will crash.

I am convinced that we will have a major correction before June next year and most likely earlier.

Energy prices are at historical high, The trade balance deficit is astronomical but most important: the housing market is breaking down and compared to Portugal the US spending spree have to a large extent been funded by the consumers perceived wealth based on the value of their real estate.

The pillars of the US economy is consumer spending so when that start to crumple....

The latest PMI and ISM data disappointed and even the upward revision of GDP was based on Government spending, inventory build up and increased import. Exports and consumptions were revised down.

It is correct that a weak dollar helps US export but please remember that most US companies are depending on the US economy and a weak dollar is basically a vote against the US economy. A strong economy have a strong currency a weak eco.....

Basically US has lost it competitiveness in my opinion. Look at economies like China and India. These countries are growing at a rate 3 to 4 times faster than US. They are taking over the back-bone of US economy - the industrial production capacity.

When the goods are manufactured in these countries you will start to see research and development pick up as well. I like design houses for electronics goods and Biotech's in China and India. The cost of developing drugs and new electronics is a fraction of the cost in US.

My biggest question is to what extent a US recession will drag down the rest of the world. Initially I think that will happen but I am looking towards Asia for a new leadership.

Quote from: nullzero on December 07, 2006, 03:06:54 PM
I know im rambling on at this point heh.. just stuff on the top of my head.

Well Nullzero you are not alone.........

Im glad to see others share this view. I am pretty worried about a trigger happening soon that will lead to this. The perfect storm in my eyes is brewing.

Fully agree with you guys and thats why I invested part of my portfolio in QID
and DXD.  There is also a very particular ETF that could be in your radar =  EWO 

GLTA

jorgegr

Interesting article to add to the discussion
http://www.bullnotbull.com/archive/stocks-11.html

Also a useful site to read daily on news articles related to a bad economy (updated daily).
http://www.dollarcollapse.com/

Yes I know the the title sounds bearish and negative haha. This site is simply a colletion of news articles showing the bear case. I know its one sided on the bear cause but its always useful to identify and focus on the news that could effect the markets in a big way.

1. Introduction

nullzero started this discussion on the general market and I see many people interested, which is great :). I want to study some of the bearish and bullish arguments outthere and see if I can get to a conclusion of my own. Let's start by the bear's arguments.

2. Bear arguments
2.1. Oil

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=29822;image)

Many people have been bearish on the world economy and the stock market due to oil's bull market. This has been a theme ever since the war in Iraq started, in March 2003 (the bottom of the stock market).

As I see it, oil's bull market only happened because there was strong demand, not because of supply disruptions. The high oil price is attracting new investments to add to production. For example, Ramsburg's father is a major director at Atlas Copco and he says there's very high demand coming from new oil exploration and production companies for its industrial compressors. I've also been hearing OPEC oil ministers say that "at $60 a barrel I don't see many people willing to cut production".

Oil is down 22.5% from its top. I see it between $50 and $70 for years to come. The world economy can handle this, and it will continue to adapt and search for new energy alternatives.

2.2. Interest Rates

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=29823;image)

The FED rose interest rates for 17 times since June 30, 2004, from 1% to the current 5.25%.  It has paused since June 29, 2006. The 10 year treasury bond yield, currently standing at 4.48%, says the next FED move will be down, not up.

Moreover, the bull market from 1982 to 2000 was developed on a much higher interest rate environment. Interest rates are still historically low and they are bound to go lower, or at least, stay around current levels.

Bernanke saved the world economy from deflation back in 2003. You got to give the man credit.

2.3. Housing market

I think this concern is completely overdone. Housing prices went down, but didn't collapse. I used to have this bearish argument myself, but I don't have it anymore. In fact, home construction stocks (http://bigcharts.marketwatch.com/industry/bigcharts-com/) were one of the best performers over the last 3 months, as their valuation is too cheap.

Also, interest rates are coming down over the last 6 months or so, and that will at least put a floor on the housing market. I don't see much new supply and demand will stabilize at current levels. That's my opinion.

2.4. Weak US Dollar

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=29824;image)

Come on, the weak US dollar was what got the US out of the recession in the first place. It is a major global re-balancing tool. The weak dollar makes US exports more competitive and imports less competitive. Everybody knows a weak currency spurs economic growth, because:

GDP = C + I + Ex - Im, that is, Gross Domestic Product is Consumption (private and public) + Investment (private and public) + Exports - Imports.

Of course, these are major macro changes that take years to develop, but I see US exports picking up and imports slowing down. The rest of the world which saves too much and doesn't have the same consumption habits as the Americans, is adapting and internal demand is growing in countries like China, India, Russia, Brazil and even Europe.

The weak dollar is one of the strongest bullish arguments for the US and world economy. The market agrees with this view, since the USD is near its lows, and the S&P 500 is near its highs !

(of course, you or anybody can hedge your US Dollar exposure using Forex or currency futures)

2.5. US consumer debt

I share this concern with the bears. As I searched for information about consumer debt, I found this article on a mainstream media website: Spending our way to disaster (http://money.cnn.com/2003/10/02/markets/consumerbubble/)

Now look at the date of the article. October, 2003. Yesterday there were some news on the subject: Consumer credit falls at fastest rate in 14 years (http://www.marketwatch.com/News/Story/Story.aspx?guid=%7BB95F6D10%2D58AB%2D4535%2DA2A0%2DC8807B939F2F%7D&siteid=mktw&dist=bnb)

Everyday, I receive e-mails telling me to get out of debt. Every week, I see Oprah talking about the "America's Debt Diet". I think the trend is changing for lower debt, not higher and higher debt. Also, as we've seen, interest rates are going lower.

There are solid reasons to be worried about the US consumer debt load, but the argument is getting weaker as time passes, not stronger.

2.6. Inflation

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=29825;image)

The CPI came off sharply over the last several months. Core CPI is still a bit high, at 2.9% YoY.

10 year treasury note yield six months trend is down, so the bond market isn't all that much worried about inflation, why should you?

2.7. Terrorism/Iraq/War

You have to shut down your ears and eyes to the media (they need bad news to survive - because good news aren't news) to understand what's going on in the world right now, using a very, very long term perspective.

Since World War II we were afraid of the USSR and a possible World War III. That didn't prevent major bull markets in the stock market, in fact, the two biggest of the US history.

Now those fears are gone, because USSR was dismantled and Russia is as friendly as it has ever been. The European Union is a political process that is bringing long term peace to Europeans.

All big wars were fought for one thing: money. With the world economy opened as never before, let me rephrase this, as never before, no state needs wars to get rich anymore. The more world trade the less likelihood of wars.

Yes, Iraq may go into a civil war, I don't know, but it won't be able to develop anything dangerous for decades to come. Do you think Russia would let them? They're so near ...

Anyway, my point on this is: compared with World War II and the cold war period, the fear of terrorism is peanuts. Terrorism, especially religion related terrorism, gains strength on people's ignorance. With the advent of the internet, people in Iraq, Iran and other's of the "axis of evil" will see how the Americans and Europeans live and will want that too. Nobody wants to be poor and sad. The trend is for those people to open their minds, not to close them even more.

Short term there's a lot of resistance (as in any ideological confront), but longer term the positives win. That has been the world's history for millenniums.

3. Bull arguments
3.1. Long term chart

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=29826;image)

This long term trend chart tells me the S&P 500 had its bear market between 2000 and 2003. It is clearly in a bull market now. Of course, many people won't recognize it until the S&P500 makes a new all time high, above 1,553 points. But remember, the Dow Jones and the Russel 2000 are at all time highs. 

3.2. Medium term chart

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=29827;image)

Nobody can say the trend isn't bullish. You can say it is overbought, but you can't call it bearish. Unless you're trying to pick a top.

If you're doing that you need to learn not to do it. Trying to pick tops and bottoms in the general market is a futile exercise. Many people simply can't go with the flow, respect the trend, because it isn't natural for a human being to chase prices higher or keep selling them lower. To be a successful stock investor you need to behave contrary to your basic instincts, and respect the trend, because the voice of experience tells you that's the right thing to do, the only way to survive.

3.3. Short term chart

(http://www.3stocksonfire.org/trading/index.php?action=dlattach;attach=29828;image)

It doesn't get much more bullish than this. Of course, it may come down to test the 50 days SMA, because it is overbought (I never consider overbought/oversold indicators, they're useless), but the trend is bullish. It may continue for several months more. It may continue until the S&P 500 makes a new all time high, in mid 2007. It's just 10% away from that.

If you respect technical analysis, and I do, you have to be a bull.

3.4. Globalization

The internet and global trade is changing the world as it has never happened before. Never, ever, the world has been so close together. It has never been so BIG. Now we have these guys, the Chinese, the Indians, the Russians and others with buying power. Also we have eastern Europe and even Africa growing like never before. You can't ignore these major global trends.

Look at 3 Stocks on Fire, for example. I'm a Portuguese fellow, writing stock market analysis not only for Americans, but for people of every part of the world (check our member map (http://www.3stocksonfire.org/trading/index.php?action=mm))

Those dots in Asia, South America and Africa will grow more and more over the years. This is a global market place now. Investors from all parts of the world can buy stocks anywhere they want. The available pool of money to invest is bigger than ever.

The US is the best prepared country to benefit from globalization trends. It's not by chance that Google, Ipod, Amazon and many other global trademarks were born in America. You're more used to think globally than other countries.

I'm not saying that China won't be a larger economy than the US. I think it will. But that only helps the US. This isn't a race. You don't have to be the first to win.

Everybody benefits when another country grows. That country will be able to import more of your goods. It's good when others are getting richer, it's good for you. They will be able to pay you higher wages, or buy anything you want to sell them.

3.5. Market Sentiment

I used to rely on market sentiment indicators, like the VIX, the Investors Intelligence Survey, the Commitment of Traders Report, but not anymore. I think market sentiment is only important at major market tops and bottoms.

I've lived through two bull markets and two bears markets (not in the US market). I know how people feel when we're close to a top (although I would always wait for a technical confirmation to start selling) and close to a bottom.

At the top everybody is bullish and it is extremely hard to think of bearish arguments. Nobody or almost nobody wants to sell stocks. People got tired of trying to sell to buy on reactions, they've decided "this time I will buy and hold".

I see the media bombarding bearish news. I see people going short or selling all their shares. I see them worried about oil, interest rates, housing market, weak US dollar, consumer debt, inflation and terrorism/war in Iraq.

I don't see the crowd sharing my bullish arguments. And yet, the market has been saying, and I expect it to keep that way "you're right David, hold on to those shares".

4. General overview

Of course, I expect corrections and retractions, and perhaps one is unfolding now, I don't have a clue. But we're in a bull market. And all a man has to do in a bull market is to buy and hold fundamentally attractive stocks to make an above average return.

I won't try to sell stocks to catch them lower. I did that in past bull markets. It didn't work, that is, I could have made much more money if I just sit tight.

Don't misunderstand me, I've been a short term trader and a day trader for years. I'm not, what do you call them, Mom and Pop investors, am I right? I don't mean buy and hold forever, I mean buy and hold for as long as it is a bull market. Not every company, but the good ones.

Because if you make 50% a year you'll be a very, very rich man/woman. If 50% a year isn't enough for you, you should get a job.

I know my English isn't good, especially when I get out of specific stock's talk. But this is what my 11 years of experience in trading the markets, of reading everything I could about them, of talking to thousands of traders and investors over the years has taught me.

I've been wrong in the past and I know I'll be wrong again in the future. But I'm humble to change my opinion if I have to. For now, I'm a long term bull in the S&P 500.

Good luck for all :)

Nice overview, thanks Dave. The debate that I found most interesting regarding the US was between Alan Greenspan and Warren Buffet. Buffet accused the US of being a Sheercroper country (having sold off all their assets and being left with nothing) and Alan Greenspans belief that America's investments (Assets) outside the US are what will give the US its future strength. The verdict is still not out, but I sort of side with Greenspan.  Great thread, thanks again.

uc.

Great market debate guys, i loved reading this whole thread just now :) I still have a lot to learn on the fundamental side ;)

Im about 90% technical, 10% fundamental so i dont look into the economy too much. As a short term trader all everything starts and ends with the chart. I may like a stock fundamentally, but im not gonna continue holding it if the chart falls apart.

the only thing i need to know about a company is if there is bullish news recently, and earnings and revenue are expected to increase. Match that with a hot chart and im set to go. I find that if pay too much attention to fundamentals i may persuade myself not to enter a stock because i find something thats kinda shady when really its irrelevant to the 1-3 weeks i plan on holding. Or i may hold for too long because i have faith in the fundamental value of the stock and i watch it tank ending me in a losing position, I've taught myself to avoid these factors and stick to my game plan. Anyways i digressed somehow into my trading theory lol. Keep this discussion goin i enjoy reading and learning about the bigger picture. Cuz like you David i don't plan on being a short term trader forever ;)

Ive got a long road of learning ahead of me. Ive only been trading since when, May of last year?? lol

-fous

"I think this concern is completely overdone. Housing prices went down, but didn't collapse. I used to have this bearish argument myself, but I don't have it anymore. In fact, home construction stocks were one of the best performers over the last 3 months, as their valuation is too cheap."

I live in Orange County in California. From the ground perspective the housing slow down has killed the economy down here. The higher end resturants are dead which use to be booming when the housing market was doing well. Down here in Orange County the housing industry is the biggest industry. The mortgage lending capital of the United States is based down here, and from my point of view on the ground its not looking to well. My parents have many friends down here that have been fired from there jobs at country wide mortgage and ditech. They are firing people down here and its hurting the economy. The realtors are like stray dogs trying to find food down here every day I get new flyers or new realtors knocking on my door seeing if I want to sell the house I living in which is rented   ::). I have also seen many new forclosures down here and every weekend I can see hundreds of for sale signs when I pass by the local streets near me.  This is the best video I have seen on the internet relating to the housing bubble and its potential effects on the economy. http://video.google.com/videoplay?docid=-2640239019877885520&q=housing+bubble&hl=en

Few people realise this but the housing industry has been the leading economy in California since 2003. I know several people that have bought new cards or upgraded their cars payed off debt etc by refinancing there house which boomed so much. Everyone has been using their house as a big ATM. If the housing boom dropped more it would send a ripple effect through the California economy that would eventually effect the whole nation. I also have been out to Riverside and San Bernardino county and have seen the vast tracts of new homes made by Plute, Centex, etc not moving at all. The Centex townhouse units scattered through out los angeles county and orange county are not moving at all and every weekend they have paid day hires waving big signs like a store closeout store lol. I guess im more bearish then most on the housing situations because I have more of a in person feel for the effects of it.

Speaking of oil, Iraq, Iran, Saudi Arabia & all that crap.... here is the source of energy of the future & beyond -- "Water" ..... Without water no fossil fuels ;)


Quoted:
With global modernization in the 20th and 21st centuries, the thirst for energy from fossil fuels, especially gasoline derived from oil, is one of the causes of major regional and global conflicts. A global movement toward the generation of renewable energy is therefore underway to help meet the increased global energy needs.

The burning of fossil fuels by humans is the largest source of emissions of carbon dioxide, which is one of the greenhouse gases that allows radiative forcing and contributes to global warming. The atmospheric concentration of CO2, a greenhouse gas, is increasing, raising concerns that solar heat will be trapped and the average surface temperature of the Earth will rise in response. A small portion of hydrocarbon-based fuels are biofuels derived from atmospheric carbon dioxide, and thus do not increase the net amount of carbon dioxide in the atmosphere.

An increase in global temperatures can in turn cause other changes, including a rising sea level and changes in the amount and pattern of precipitation. These changes may increase the frequency and intensity of extreme weather events, such as floods, droughts, heat waves, hurricanes, and tornados. Other consequences include higher or lower agricultural yields, glacial retreat, reduced summer stream flows, species extinctions and increases in the ranges of disease vectors.



Global warming could even create another major world war, famine you name it.....It's very very sad just to think of it :(  :(  :(


http://www.metacafe.com/fplayer/335674/water_fueled_torch.swf

Hey China should stop being like China and be more like the US. Brilliant Ben has a great idea!. Does he not understand that China is a Communist country and that repression of the masses is at the heart of its culture. The world is a funny place these days. Way to go Ben, you tell um.

uc.



Bernanke urges action on yuan reforms

By JOE McDONALD, AP Business Writer Fri Dec 15, 4:16 AM ET

BEIJING - U.S.
Federal Reserve Chairman Ben Bernanke recommended Friday that China allow a more flexible currency, saying a stronger yuan would improve the lives of ordinary Chinese and help to ease global trade imbalances.
ADVERTISEMENT

Bernanke was in Beijing with a delegation led by U.S. Treasury Secretary Henry Paulson, who said Chinese officials pledged to allow more currency flexibility — a move long sought by Washington — though he gave no timetable.

A stronger yuan would raise living standards and make China's economy more stable, boosting domestic consumption to balance booming exports, Bernanke said in a speech at a government think tank.

He said a more flexible exchange rate also would give Beijing more effective more control over inflation.

"More flexibility in the RMB would have important advantages for China," the Fed chairman said, referring to the Chinese currency by one of its names, the renminbi, or people's money.

Washington has been pressing Beijing to raise the value of the yuan, arguing that it is undervalued and gives Chinese exporters an unfair price advantage, hurting U.S. companies. Some American lawmakers have threatened to impose tariffs on Chinese goods to compel Beijing to move faster in easing currency controls.

Bernanke noted those criticisms in passing, but avoided joining the debate. While a written text of his remarks called a weak yuan as an "effective subsidy" to exporters — potential ammunition for Beijing's critics in Washington — when he delivered them, Bernanke said only that a stronger yuan would reduce "the incentive for Chinese firms to focus on exporting."

"It's better to have a better balance between domestic and foreign demand," he said in the comments at the Chinese Academy of Social Sciences.

The change might have reflected Bernanke's decision to temper his remarks following Paulson's announcement.

Chinese leaders say they want to encourage domestic consumption in order to reduce the country's dependence on export-driven manufacturing industries and investment.

But retail sales and other measures of consumer spending are growing much more slowly than exports.

China says its global trade surplus this year should be at least $168 billion, while the U.S. trade deficit with China is expected to top last year's record of $202 billion. Beijing's overall surplus is smaller than its gap with the United States because China runs deficits with other countries.

Economists say such imbalances cannot continue and that they threaten the stability of the world economy.

Bernanke said more balanced Chinese growth would help to contribute to global stability, though he acknowledged that the United States also had a role to play.

"In order to get more balance in the world economy, the United States and other deficit countries need to save more and China and other surplus countries need to save less," he said

I have turned "bearish" so I bought QID at 53.10 yesterday. Too high as usual.  ;)

I'll start a new subject on this (QID or QLD) in stockpicking.

I'd be very glad if you would comment there as well.

Thanks.

Hi,
as I told you before I have sold my HAUP shares because I have also general concerns regarding a positive 2007 outlook.
Basis of my concern are some discussions in some yahoo boards (esp. quickmovers).
Let me quote some text and links from this discussion for the 3SoF Members ( I haven´t created the text or chart but after some discussions I am not able to find much arguments against the concerns  ??? )

Text:
We are due for a correction.  Nobody on this earth knows how much.  Most S&P500 corrections are <8%.  The S&P500 is historically tied to the 4-Year Presidential Cycle.  Unfortunately, we are on borrowed time for a correction that is >8% since we are over 1500 days since the last one.  On the past nine occasions when this has occurred the minimum correction has been 9.73% and the average since 1950 is 23%. 
.....
Over the past 56 years of history of the S&P 500 there is a 75% probability that the Index will correct 8% or less.  (Note that the last S&P 500 correction in May to July this year was 8.2%.) So the potential for such a correction is in your favor. When Indexes catch a cold, stocks usually catch flu, so I would offer that even VPHM with all its rosy prospects will be susceptible to up to a 25% haircut.  Any bigger correction by the Indexes and you can rest assured the correction for most stocks will be in excess of 30%.  You have only to look back to the timeframe of May 11 to July 14 this year to see that many stocks took sizable cuts, and even VPHM took a 20% cut in PPS during that period, depressed though it already was at that time, for all the reasons we have chewed the fat on before.

The next question you need to evaluate is "what are the odds that the S&P will correct only 8% or less?" I will tell you that when the S&P 500 has exceeded over 1000 trading days without a 10% correction, the lowest correction was 9.73% and the average of the nine occasions that has happened over these 56 years was 23%.

We are currently over 1520 days since the S&P 500 corrected more than 10% since the 10/10/2002 low, so we are on borrowed time.

Links:
a)
Dow Industrial Link:
http://stockcharts.com/h-sc/ui?s=$INDU&p=D&yr=1&mn=0&dy=0&id=p04948191114
b)
Nasdaq / VIX relationship:
http://stockcharts.com/h-sc/ui?s=$COMPQ&p=D&yr=2&mn=6&dy=0&id=p87689842275
c)
May correction comparison part 1:
http://stockcharts.com/h-sc/ui?s=$COMPQ&p=D&yr=0&mn=10&dy=0&id=p93380591263
d)
May correction comparison part 2:
http://stockcharts.com/h-sc/ui?s=$COMPQ&p=D&st=2004-08-27&en=2005-06-14&id=p65524724952&a=93480185&listNum=1
e)
NYSE Bullish Percent Index (BPI):
http://stockcharts.com/h-sc/ui?s=$BPNYA&p=D&b=3&g=0&id=p54846761430

Defintion about BPI:
Bullish Percent Index (BPI)

The Bullish Percent Index (BPI) is a popular market breadth indicator that is calculated by dividing the number of stocks in a given group (an exchange, an industry, etc.) that are currently trading with Point and Figure buy signals, by the total number of stocks in that group. Bullish Percent levels that are above 70% are considered overbought, whereas levels below 30% are considered oversold. Strong buy signals occur when the Bullish Percent Index falls below 30% and then reverses up by at least 6%. Conversely, promising sell signals occur when it goes above 70%, and then reverses down by at least 6%.

It is important to note that the Bullish Percent Index is not something that can be applied to a single stock but rather an index that is calculated for a group of stocks.

The most popular version of this chart is the NYSE Bullish Percent ($BPNYA) which is mentioned prominently in Thomas Dorsey's book, Point & Figure Charting however it is important to remember that the Bullish Percent index can be calculated for any grouping of stocks.
Because the NYSE's Bullish Percent Index is so closely followed, each day we also publish the list of NYSE stocks with P&F buy signals as well as the list of all stocks in the current NYSE "universe". Those lists can be found on our NYSE BPI Components page.
Traditionally, the Bullish Percent indicator is charted on a Point and Figure chart using a 2 point box size. However, the indicator can also be charted and studied using standard charts as well.


I would like to start a discussion about this topic and I am also thinking to invest into QID (as cumuliina)

I am looking forward to your answers/feedback  ;)

cheers
Oliver

I was sitting looking at a real-time 1 minute chart of QID today, wondering where I should put a bid to re-enter.

Then - ahem - something the fan, and all I could do was to watch in awe.  :o

I'll post the intraday chart, and you can pretty much figure out when it was... i almost dropped my dentures!  ;D

I didn't re-enter today....  :P

some more facts:
Nasdaq100 support broken:
http://www.stockta.com/cgi-bin/analysis.pl?symb=$NDX&num1=13&cobrand=windchart&mode=stock

Nasdaq support tested but holding:
http://stockcharts.com/charts/gallery.html?$COMPQ

next two days will be very interesting IMO

updated & quoted links:
a)
http://stockcharts.com/h-sc/ui?s=$INDU&p=D&yr=1&mn=0&dy=0&id=p04948191114&a=67591016&listNum=1
b)
http://stockcharts.com/h-sc/ui?s=$SPX&p=D&yr=0&mn=6&dy=15&id=p82382744610&a=84629589&listNum=1



Seems to be nobody is interesting to discuss this topic  ???
I am prepared to short/ buy QID.

cheers
O.

I think that it'll come, la-onda.

Now that both David and Melf Elf are keeping an eye on it, we can hopefully get some more of their expert analysis on them both. (QID and QLD, I mean. Not Melf and David... ;D ;D ;D)

Today was a good day for me (QID) so I'll include a chart.

Hey Guys
Here's another free newsletter I try to make time to read (ignore the sponsor ads).
It's from Investment U (Mark Skousen). I am just finishing up a subscription with one of his team's paid newsletters (too conservative for me). Anyway, I have a lot of confidence in his views and breathed a sigh of relief when I read this article.

Even John Mauldin seems to be coming around to view the 07' market as moving in a positive direction (my What's going on in the World post).

January 5, 2007
How to Save the Economy
by Dr. Mark Skousen


"What's Christmas time to you but a time for paying bills without money."

~ Ebenezer Scrooge, A Christmas Carol


Dear Investment U Reader,

The day after Christmas, I said hello to a postal worker and asked him how his Christmas went.  He surprised me: "Not well, thank you."

"Why not?" I asked.

"We've lost the true spirit of Christmas," he implored. "Now it's all about spending money we don't have on gifts we don't want."

I could see I encountered a modern-day Ebenezer Scrooge.

The newspapers are full of stories these days about the absolute necessity of retail spending to keep the economy booming. But it's just not true...



Christmas Spending Costs Us $10 billion a year?

Retail sales jumped 15% in the last two months of the year, and according to the National Retail Federation, U.S. consumers will have spent $457 billion this holiday season, or approximately $4,000 per household.

Millions of books, ties, jewelry, picture frames and appliances are given away every year to friends and relatives who don't want them. This social "deadweight loss" can amount to $10 billion a year, based on surveys, even after re-gifting.

There's a famous paper by Wharton economist Joel Waldfogel (American Economic Review, December 1993), which argues that the frenzied gift-giving during December is a highly inefficient way to connect consumers with goods. He and other economists argue that we would be better off if spending were spread out more evenly throughout the year.

So what really drives the economy?

It's Business, Not Consumer, Spending!

The idea that consumer spending is the lifeblood of the economy is an old wives' tale. The national media and Wall Street have been brainwashed by this conventional Keynesian wisdom. "Oh, if only Christmas were to last year around," say the spending advocates. Never mind that in January, when the bills come due, consumers have to spend less in order to pay for their spendthrift habits.

What would happen if people stopped giving on Christmas? Horror of horrors, consumption might decline and savings increase. How terrible!

It reminds me of the comments made by the media after Bush's tax rebates went into effect. I well remember one commentator saying, "If people save those tax rebates, it will do nothing to help the economy recover."  What nonsense.

Here are some common misconceptions about what keeps the economy moving, followed by the facts:

1. Consumption represents 70% of the economy.

Consumption does NOT represent 70% of the economy. It represents 70% of GDP, and GDP is the value of final goods and services only. If you measure spending at all stages of production, consumption represents only about 30% of aggregate spending in the economy. Meanwhile, business spending, including capital goods and gross spending at pre-retail stages of production, represents over 50% of the economy.

2. Consumer spending and retail sales are leading indicators.

Not true. The vast majority of leading indicators are on the supply side: manufacturers' new orders and hours, building permits, real money supply and the stock market.

3. Consumer spending is the cause of economic growth.

Consumer spending is actually the effect of economic growth. New growth comes from the supply side: saving, investment, productivity and technological advances. Here's an example to prove my point: Seattle's consumers became big spenders only after Bill Gates and Microsoft created Windows, a technological breakthrough.

4.  A decline in consumption and an increase in savings would cause an economic slowdown or slump.

Again, not true. Increased savings would cause interest rates to fall, which in turn would encourage businesses to borrow more to upgrade their tools, equipment, and productive processes, increase training of its workers, and encourage the buying of new capital goods. Increased business spending and hiring offset declines in consumer spending.

Wall Street had a good year in 2006 because of increased business spending, global productivity, and technological advances. Consumers increased their shopping this Christmas because of good business conditions and the prospects of lower interest rates, not the other way around.

CNBC commentator Larry Kudlow said it best: "Though not one in a thousand recognizes it, it is business, not consumers, that is the heart of the economy. When businesses produce profitably, they create income-paying jobs, and thus consumers spend."

Now you are one of those "one in a thousand" who understands how the economy really works.

This is going to be a good year for stocks, not because of a good Christmas retail market, but because of lower interest rates, a booming export market, and increased global productivity.

Start investing now.


Good trading, AEIOU,


Mark

Anyone notice the Nasdaq broke above the 2 year channel today. :o

Hi All
This popped up as a by-product of one of my Google Alerts.
It's long winded but covers a lot of bases and is well written.
Food for thought on housing, gold, silver PGM's oil and the US Dollar.
Looks like the charts didn't make it.....here's the link.

http://news.goldseek.com/Grandich/1168917000.php

Best
GMan

2007: Buckle Up, Boys and Girls. Danger Lies Ahead

By: Peter Grandich
The Grandich Letter, Grandich Publications, LLC




-- Posted Monday, 15 January 2007 | Digg This Article



For me, it's hard to imagine but this will be my 24th year in and around the financial services arena. So much has changed in the industry and especially on the information flow side. I can recall writing the very first Grandich Letter in October of 1984. We literally typed it up, went over to a printer and ran the issue on blue paper. Just a year later, while working at my second brokerage firm, the owner offered to "upgrade" it by having it done by a professional commercial printer. We would have to have it typeset, printed, folded and then first stuffed in envelopes before mailing it, which some readers didn't receive until days later. Now, I pen my thoughts, my assistant formulates it in just minutes or an hour or two and presto- it's distributed to readers around the world in a matter of seconds via the Internet. While I very much appreciate the timeliness and less cost overall, I wonder if the information age has caused an overload in our minds and the thought that we must act so quickly?



It's also been my firm belief of the existence of a "Don't Worry, Be Happy" crowd within the financial arena. These folks always, without exception, paint the most optimistic outlook--not because it's their whole-hearted belief, but because it sells. And certain parts of the financial media are willing conduits. I'm not trying to be sarcastic when I call CNBC-TV "TOUT-TV".  Once a "fair and balance" news channel that gave both bear and bull equal footing, CNBC has now become virtually one-sided in its reporting. You would sooner find a needle in a haystack than see and hear a bearish stock market/economic forecaster on their broadcast. And, if you do find one, hosts like Mark Haines or Joe Kernen will try to eat his/her lunch before long. These anchormen have openly cheered when the market rose and frown when it was down. If you agree, I encourage you to watch Bloomberg television and better yet, Canada's financial channel, "Report on Business" Television (ROB-TV). There, you will see and hear fair and balance reporting without any egos. CNBC's last fair and balance guy was Neal Cavuto (now with FOX News, ironically). ROB-TV has many distinguish reporters and the single best TV financial journalist in North America today, Mr. Jim O'Connell. Not only is Mr. O'Connell brilliant yet humble, but he always asks the questions you would in his position. Sadly, yours truly can't stomach TOUT-TV for more than a minute or two but thankfully is able to watch ROB-TV live on his computer for a minuscule yearly cost (see home page of www.robtv.com for information.)



One more comment on certain aspects of the financial media from a personal experience that I believe clearly shows the biases against anything that may not fit into the bullish category: This past fall, I was asked to pen an article about gold for a "very" well-known nationally-circulated business magazine. After completing the article, the "Features Editor", sent me back the edited version. I wrote back and said in part "... I'm sorry but I can't in good faith put my name to this article. You took virtually all I said in the interview with the reporter and discarded it for a gold story mostly about just one element of the gold outlook-China. Unlike your version, I don't believe it's the driving force for gold and the article has nothing about all the other factors I had previously offered. Anyone familiar with my work would question this article knowing it's not the key reason for my bullishness."



In the original interview, I spoke mostly about a coming U.S. Dollar crisis and how it would be the key factor for gold in 2007. Here's what the editor wrote back:



"It is possible to change the part about China, but we would feel irresponsible building the case around the dollar decline where there are also numerous reasons to believe that global geo-political forces will not let the dollar hit rock bottom. So all things considered, we will not run the piece."



YOU NEED TO APPRECIATE THIS! Because my commentary forecasted a dollar crisis despite my argument being supported by hard facts and solid assumptions, this nationally-read, so-called financial magazine would not allow my comments because they already concluded that certain forces would never allow such a thing to occur. As far as I'm concerned, not only is this unfair and unbalanced reporting, it's irresponsible...but not surprising. Ironically, the U.S. dollar had its hardest fall of the year just one day after I received the above comments from that magazine that rhymes with "birth."  ...oops!





2007 – It's Time to Be a Live Chicken Versus Dead Duck



Since 1984, I made two "dire" forecasts. In August 1987, while Head of Investment Policy for New York Stock Exchange Member firm Philips, Appel & Walden, I issued a stock market crash forecast. By October 19, 1987, the day known as "Black Friday," markets around the world took a big tumble. Ironically, I would state on October 20th that the worst was over and new highs would be seen within a year. And they were.



There's an old saying that you're only as good as your last call and you can live off it for quite awhile. I think I did, as I was more wrong than right for more than a decade until January 2000. It was then that I penned a commentary that said the market was about to have another tumble, making this my second "dire forecast" (1987 was the first). The NASDAQ basically crashed and losses in the stock market were widespread.



I now believe the U.S. stock market is again poised for a major fall, only this time it can be more of an ongoing erosion versus sharp declines. I believe this erosion can be over a multiple of years. My targets are DJIA 7,500 and NASDAQ 1,100. The best scenario is for one more big rally on the back of a change in Fed policy to easing, which the "Don't Worry, Be Happy" crowd will sell as a sure fire, can't miss bullish signal. Don't ask me what date or at what stock market level this will begin because at this time I don't know. But, I believe it is time to greatly lower one's exposure to general U.S. equities. Selling rallies versus buying corrections is the new marching order, as far as I'm concerned.



The Three Biggest Lies:



1 – The check is in the mail.

2 – I'll love you in the morning.

3 – A "Goldilocks' economy" and "soft landings".



As noted earlier, the always-bullish forecasters dominate the financial media. Do a Google search on "goldilocks economy" and you will find over 63 thousand sites (not including news or vides searches) – most of which predict such a scenario for the U.S. economy. Yet, history will show that such a scenario has actually happened only once in the modern era. I would sooner forecast a Vancouver Canucks Stanley Cup Championship before a US economic soft landing (Canuck fans have to be the most optimistic sports fans in the world). The chart "Beware the Bears" is a four-week moving average of how many times the words "goldilocks economy" appeared in the financial media. This is one new high that I believe doesn't bode well for the users.







Where you get most hurt in investing is when consensus is overwhelmingly one-sided and unprepared for any scenario other than the one they all believe in. The "soft landing" scenario is a universal belief. It is endorsed by the US Federal Reserve, numerous central banks around the world and the vast majority of private and public sector forecasters. Such an overwhelming belief was seen in the oil and copper market less than six months ago. Now look at them.



While the Internet bubble caused the last fall, I believe a series of economic, political and social factors will combine to lead the US stock market sharply lower for the balance of this decade. Below are just some of the factors that make me so bearish:



Love may make the world go around, but there's no denying enormous amounts of liquidity has driven financial markets worldwide. A measure I like to use for the US economy is corporate net cash flow plus the money US households have on deposit. It's been growing about 9 percent – far faster than nominal gross domestic product. I can't recall when liquidity growth became so disconnected from the economy. Even more amazing is that this has occurred while the US Federal Reserve raised the Fed funds rate 17 times.


My concern here is that this dramatic increase in extra liquidity has led to speculative excess. Nowhere is that more evident than in the hedgefund industry. Yes, one should be concerned about their deep foray into commodities and the likes of "carry trades" (borrowing in a low-yielding currency like the Japanese yen and investing in a high-yielding one such as the Australian dollar). However, what most concerns me is their stampede into the credit derivatives. These "products" were supposedly created to make markets more efficient by allowing banks and traders to package default risks and swap them. One of their side benefits has been record low spreads payable for corporate credit risks over low-risk government debt. This, in turn, makes it easier to finance corporate acquisitions. While this has been a big boom to the stock market, I believe this is nearing its end of positives and a whole bunch of negatives await us.



History as shown us that man eventually mis-prices risks, especially in newer markets. The Bank for International Settlements recently reported that the amount of over-the-counter derivatives contracts grew by 25% and the newer credit-related markets saw a nearly 50% increase. History has shown us when a bank's loan book expands by more than 20% a year, chances are management has taken too much risk and the bank blows up. About half a dozen of the world's leading banks are on one side – and often both sides – of the majority of these derivatives. A concern of mine is the leverage gain by a small down payment that gives big exposure to price movements. These underwriting banks are doubly leveraged. Corporate defaults and market volatility has been exceptionally low and complacency about systemic risk is real.



Uncle Sam, Go Home. Once the world's favorite uncle, Sam has become the estranged uncle no one wants to talk about or be seen with. While I will discuss some of the world geopolitical problems later, it's been my contention that the 21st century edition of the Hatfields vs. McCoys is underway here on our shore – the Democrats versus Republicans. I believe the political infighting will create a mud bowl in Washington, D.C. Since we, as a nation, depend on foreigners to support our daily lives (thanks to our continuing deficit spending), the question arises as to how all this bickering and inability to fix numerous economic and social problems of ours will be viewed on the world stage? It's already gotten off to a bad start as House Democrats prevented Republicans from participating in deliberations as promised in their victory on November 7th. While the infighting will be bad enough, I believe an even worse scenario is going to become reality. The Democrats are going to bring forth a raft of congressional investigations into the White House's conduct of policy and its assertions of executive power. Mark my words: we will be reading and seeing this on the front pages in the not-too-distant future. Its been reported that President Bush is already seeking a new chief lawyer with credentials as a proven combatant. It's coming – trust me!


U.S. housing market and employment. Once again, the "Don't Worry, Be Happy" crowd is out in full force, proclaiming the housing slump is already over and taking the latest government farce known as payroll data as a sign to "party on, dudes!" The National Association of Home Builders index of US housing market confidence plunged in 2006 (see chart).





A dead cat bounce is both warranted and likely. The first reflex rally after all bubbles burst is hailed as the worst is over. Go look at the comments made when the NASDAQ hit 4000, then 3000. The housing market is still a long way from the bottom. The "Don't Worry, Be Happy" crowd would like you to think that all the property values that were inflated by bogus appraisals, borrowers who were allowed to qualify for mortgages far beyond their financial means, income and assets that were rarely verified (especially in the sub-prime lending markets), and all the "shoe-horn financing" tools used to get people in a home on highly creative mortgages are now behind us. The problem is, these factors haven't even begun to implode. Why? Many who are hanging on by their fingertips are being lulled away from panic that the reported strong job market will make all things well again.



You want a sure-bet (no, not betting against the Canucks)? Put what ever you can on the fact that the December U.S. payroll numbers will be revised – DOWN! Just about every private and independent economic research group was signaling a sharp slowdown in the US job market and then came the latest government report. Who had more reasons to fudge numbers? If you answered the private and independent group, stop reading now and go down and open an account at your local brokerage firm that has a bull or a rock on their front door. They're waiting for you!



Graying. I continue to believe the ultimate crisis for America is the aging crisis (no longer coming aging crisis, as the first of the baby boomers have begun to hit the retirement age). In the last six months, former Federal Reserve Chairman Greenspan, the U.S. Comptroller of the Currency and some of the best independent economic minds in the world today, have all made a great effort to warn of the pending disaster America faces on entitlements and matters related to our aging population. The fact that the average financial advisors at those firms with bulls and rocks on their front door are not offering the same warnings, should make the concerns even more alarming because when they finally do, it will be too late (as usual).

The aging crisis is not limited to the United States, although it should be most acute here due to our high levels of debt and little or no real savings.







Our friends to the North face it as well as Asia and Europe. Mr. Joaquin Almunia, the European Union (EU) monetary affairs commissioner, recently stated that the public finances in six EU countries are at "high risk" because of the continent's aging society. He predicts without policy changes, the average debt to gross domestic product ratio of all EU members will rise from about 60% to almost 200% in 2050.



Bottomline –

There are numerous other bearish factors, some to be discussed shortly. I take no comfort in sounding alarmist and trust me, based on my 1987 and 2000 experiences, it's a net negative for me. If I'm right (like before), the vast majority of people will not act properly and will not be in a position to become more bullish when the situation presents itself. Also, of the handful that do act, half or more of them will also likely be too afraid to go to the other side as the bad times that took hold will appear to be here for a long time. (That's what many on Wall Street predicted after the 1987 crash. I will never forget how brokers in my office went from selling stocks to selling zero coupon bonds – those old enough to remember will likely chuckle when remembering this).



North of The Border –


How good was 2006 economically for Canada? Based on an annual index complied by BMO Nesbitt Burns Inc., Canada outpaced the performance of all other G7 countries.  In fact, the report points out that its "Canadian Economic Performance Indicator was recently at one of its highest levels since the early 1960s – only the high-tech boom years of 1999 and 2000 were better."



While looking in the rear view mirror may help looking back, the look forward via the old crystal ball is still suggesting Canada is in far better shape than its largest trading partner to the south. Like in the U.S., Canada had some surprisingly strong labor reports that showed a 30-year low unemployment rate. The Bank of Canada's own business outlook survey suggested the economy is still running close to full speed and businesses are confident about the year ahead.



Given the fact that oil prices have peaked for the cycle, one can still expect Alberta and British Columbia to be the leading provinces for growth in 2007. The oil sands are not going away and the sharp sell-off in oil has (and/or should) removed much of the froth on the oil sands stocks. All in all, I suspect economic growth to slow, but not anything like I expect in the U.S.



Gold –
Every once in a while, I have to pinch myself after hearing and reading so much concern about the price of gold. One would think it was $310 versus $618 based on all concerns and outright bearishness. Personally, I'm delighted to see bullish sentiment low yet no important technical indicators violated to the downside. Outside of last spring when seemingly everybody suddenly liked gold and drove it to $735 (the lead reason why I turned bearish back then), the overall bullish sentiment for gold versus financial assets remains quite low despite a 150% increase in the gold price. People always ask me when I see a top? I've often answered that a clear signal that the last leg up (as it proved for oil) would be when TOUT-TV moves their girl from the oil pit to the gold pit.



I believe three factors should drive the gold price in 2007 to at least last year's highs of $735 and possibly an all-time high above $875 if certain conditions worsen. The three factors in order of importance IMHO are:



Geopolitical Concerns – At the end of the day, gold is not an asset class as so many touted during the commodities craze in 2006, but it's an alternative to paper money, especially the world's "current" reserve currency, the U.S. Dollar. The single biggest reason to seek it as an alternative currency is not inflation, as Wall Street likes to tout, but in times of perceived trouble. The world has plenty of trouble these days, none bigger than the mushrooming turmoil in the Middle East.


First let me discuss what most are willing to talk about regarding the Middle East. To begin, let's fully appreciate what someone who ought to know said recently about the Middle East. Jordan's King Abdullah, a true American ally among many known and disguised enemies in the region, said the Middle East is on the verge of three civil wars – in Iraq, Lebanon and the Palestinian territories. He said the U.S. must see the "big picture" and pursue a regional solution, indicating his support for American engagement with Iran and Syria in pursuit of an end to worsening violence. He told CNN recently, "They need to do it now, because, obviously, as we are seeing, things are beginning to spiral out of control. We're juggling with the strong potential of three civil wars in the region."



Knowing hindsight is always 20-20, the cost to witness Saddam's Hussein death appears to have been more than we bargained for. It's hard to imagine (as crazy as it sounds, given that the man was such a horrific criminal to his own people) but some suggest we may have been better off with him alive. More and more people are realizing we opened a can of worms and getting all the worms rounded up will be difficult at best.  I'm not writing this for debate but instead trying to have a realistic analogy and to see how it can play a role in the investment scheme of things.



I like to be proven wrong, but I don't see Iraq staying one sovereign country as it stands now. In the end, Iraq is all but certain to be split up. The problem is how to share the oil revenue among the different groups? Trust me, if it was just sand there, the U.S. would be long gone.



Then there's Iran. Its President Mahmoud Ahmadinejad mustn't be taken lightly (Israel isn't doing so). I think most of us realize where he's coming from and its no place most of us want to be or see realized. You can virtually be assured Israel will not live with a nuclear power Iran. That's why I believe the most recent reports of Israel having drawn up secret plans to destroy Iran uranium enrichment facilities with tactical nuclear weapons is, sadly, real.



This scenario is real and while mind-boggling to even consider, is likely to at least become points of discussion soon and influence financial markets going forward. A growing number of Israelis believe they face a second Holocaust unless somebody – preferably the Americans, but if not, then Israel itself – pre-emptivly bombs into rubble Iran's nuclear facilities. A kill or be killed attitude is now, or will be, prevalent as reports show Iran closer and closer to a nuclear bomb. In addition (and not discussed on the airwaves), much of Israel has lost hope that it can have a manageable peace with its neighbors. It looks like a question of "when?" not "if?" the fragile Democracy in Lebanon will cave. And Palestine? Well, I don't think anyone really knows.



A side note to this nuclear issue is the spectre of a nuclear race in the Middle East. The International Atomic Energy Agency says Algeria, Egypt, Morocco, Saudi Arabia, Tunisia and the UAE all say they want to build civilian nuclear energy programs. Do we try to deny them on the pretense they would have hidden agendas?



America has never faced an enemy like the one it has now – Islamic terrorists. While Hitler, Stalin, Castro and the like wanted to rule the world, they didn't want to die doing it. America's 21st century enemy is not only willing to blow everyone up including themselves, but think there's a great reward waiting for them when they die. Personally, I never understood the thinking of a suicide bomber. If there are indeed 14 virgins waiting for him as soon as he blows himself up, why doesn't he ask the guy strapping the belt on to him why he, too, isn't blowing himself up? Makes you wonder, no?



While I expect the Middle East to be the primary geopolitical hotspot, let's not forget North Korea and Venezuela. I've advocated not owning anything in Venezuela. That suggestion has never looked more appropriate.



U.S. Dollar – Listen up! It's rare to find an historical factor that proves to work more than 50% of the time, let alone 80%-85%, and that's about how often the inverse relationship between gold and the U.S. Dollar has worked (they move in opposite directions). That's why it's critical for those interested in gold to realize the path of the U.S. Dollar is the single most important factor for determining the path of gold. Despite what the Don't Worry, Be Happy" crowd is touting of late, the U.S. Dollar has only one long term direction – DOWN!


I have used the phrase "America has been robbing Peter to pay Paul but Peter is broke" to describe where we stand fiscally both on the governmental and consumer level. In order to get through each day, America must take in $2 billion in capital flow from foreigners. Once considered a bastion of stability, offering the most lucrative returns and the highest growth rates, America has now caused foreigners to grow skeptical and have begun limiting or withdrawing their capital. They have come to realize we're a mess fiscally and heading towards an economic crisis unprecedented in our history.



I'm convinced that Paulson and Company have seen the handwriting on the wall and used their recent trip to China as the first of many actions in hopes of stemming a dollar collapse. I wholeheartedly believe they are resigned to the fact that the dollar is terminally ill, but it's their hope to engineer an orderly decline versus a collapse. Since this is in the best interest of most Central Banks around the world, I suspect a lot of behind the scenes coordination is going on (including massaging the gold price from time to time). But be warned, the Forex markets can overwhelm intervention and such intervention could end up escalating the decline versus slowing it.



Richard Nixon's Treasure Secretary, John Connolly, famously remarked that, "the dollar is our currency, but your problem." The world always wanted a strong U.S. Dollar only now they have concluded the country that once made up that currency is just a shell of its former self. They know we face enormous economic, social and political problems at a time when there's now no love lost between us and most of them.







How the happy go lucky crowd on Wall Street can be bullish on the long-term aspects of the U.S. Dollar Index is beyond me. After free falling from a double top around 120 in 2001-2002, the dollar could only manage a puny technical rebound to the 92.5 area in 2005. This, despite a major one-year U.S. government amnesty repatriation offer in 2005 that saw U.S. multi-nationals bring back to our shores oodles of dollars that they had overseas and 17 straight interest rate hikes by the Federal Reserve. Knowing that with all this going for it we still find the U.S. Dollar around 85, one should ask these Pied Pipers of Wall Street, "exactly what happens to the dollar if your merry forecasts for a change in Fed policy to easier monetary conditions actually happens?"



The 80-area basis the U.S. Dollar Index is the line in the sand for the whole world. If and when that breaks (yours truly believes it's only a question of "when?" not "if?"), the world should get a sell signal on the dollar and that can only greatly enhance an already bullish environment for gold. Conversely, we would need to re-think our stance if the U.S. Dollar Index rose above 93.



Supply versus Demand – While the U.S. Dollar and geopolitical concerns demand our attention, we mustn't lose sight of one of the purest factors - supply versus demand. To say that the mining industry has made a 180-degree turn since the start of the new millennium would be an understatement. The industry's very survival was in doubt as those left in the business were thinking "last one out turn out the lights." Now, while the industry is liquid and making money again, the world landscape where it explores, develops and mines has dramatically changed. Once able to do its thing virtually anywhere in the world, the industry finds itself struggling on several fronts. If social and/or political issues are not preventing and/or making it difficult to operate in many parts of the world now, operational difficulties like skilled labor shortages, parts, drills, drillers and the like are all impacting operations. This, and the fact that enough new deposits are not being found to replace reserves is also paramount. (Also unspoken is how mid- to upper- mining and exploration management is being greatly impacted by the aging population, as well as how few young people have gone into mining and exploration as a career in the last decade or so).


We must also take into account jewelry demand, which is still over 75% of the yearly physical off-take. But keep in mind, part of it is simply for show while others buy it as an investment. A slowing world economy can and will impact jewelry demand but I fully anticipate the other two key factors previously discussed to more than make up for it on the demand side.



Other Important Factors –


Money Supply - It was no coincidence that our government decided to stop reporting M-3 money supply figures. People in the know have still been able to make a good guess based on what is being reported and they say money supply is growing rapidly despite the many interest rate hikes. We're also seeing global money supply rising sharply.


Negative real U.S. interest rates have also been an historical bullish factor for gold. I see little chance of this abating anytime soon.


Manipulation – While I don't see the daily manipulation my good friend Bill Murphy of www.gata.org does, I firmly believe the main argument of GATA that past and current manipulation has and is occurring. It's frustrating at times but in the end, history shows all forms of artificial interference is eventually overcome. One important side note to the manipulation argument of late has been a dispute between Bill Murphy and www.kitco.com analyst Jon Nadler. While I respectively disagree with Jon's assessment that there has been no manipulation, I've found his overall metals assessments quite informative. I hope these two minds can come together and agree to disagree – it will be net beneficial to the gold community.


Central Bank selling is my wildcard. Forgetting for a moment what they may or may not have done regarding conspiring to suppress the gold price, I think what was once only a major negative overhang, has become net neutral and may be becoming a surprising positive. Central Bank sales, and/or the threat of them, used to crater the gold market for months if not years. Now, the impact is just days or weeks. The pleasant surprise by this time next year could be how much their sales have fallen, plus how some of them were net buyers.


Gold ETFs – While some goldbugs were (or still are) not in favor of the ETFs, it has been my contention that they were, and are, one of the best things that happened for gold in the modern era. For a very long time, private investors and institutions avoided gold's lure simply because there was no easy and cost-effected way for them to gain exposure to it – until the birth of ETFs. Just wait until the U.S. stock market peters out and TOUT-TV is reporting for more than an hour a day about new highs in gold. The rush by the American investment community into gold via ETFs should be fun to watch.
Hedging - Thanks to the combination of lower interest rates (which make contangos unattractive) and the unpopularity of it, hedging has become gold's "seven" letter word. I don't anticipate most management teams wanting to be the first kid on the block using it again to any great extent.
Economic growth is always good for gold. Where it's occurring now in the world coincides to lands where gold historically has been widely accepted as the best form of money. China's gold consumption continues to rise, along with India's. While their economies can be expected to slow at times, I believe their people will look at gold ownership as a means to better their lives like Americans have thought debt is the way. Bet on the Americans ending up with the short end of the stick.


Bottomline –
The next $100 in gold is up. Because the commodity bubble is bursting as we speak (more in a moment), gold has been kept in a trading range and can even dip below $600 but risk appears no worse than $550 while ultimate upside is still a new, all-time high above $875.



Silver –
Mainly because I believe it's the "kissing cousin" to gold and I remain staunchly bullish on gold, I believe silver should track gold. On occasion it can lead, as it tends to be more volatile than gold.



Platinum and Palladium (PGMs) –
Watching paint dry can at times be more interesting than the trading of PGMs. However, of all the metals other than uranium, they appear to have the least downside risk. Recently, platinum spiked to $1,400. The combination of talk about a new platinum ETF, a belief some market participants had a big position in some now expired options, and a tight physical market that saw one-month lease rates paid by those who borrow the metal top 100%, were all likely reasons for the spike.



I, for one, don't want to see a platinum ETF. Yes, prices would likely rise sharply, but because this is an overall thin market to begin with, and the fact that valid substitutions like palladium are readily available, any gains would over time evaporate. While new and increased usages of platinum give strong support that any price pullbacks should be moderate, there are also reasons to be concerned that price increases should be limited in the foreseeable future as well. Because platinum is so much more highly priced than gold and palladium, we've witnessed a significant decrease in its off-take in the jewelry sector, most notably in China. There, not only have consumers resisted platinum jewelry, but fabrication margins have been pared to the bone.



I continue to like palladium the closer it is to $300 or under and especially if the spread between it and platinum widens by more than 10% from the current levels.



Copper and Oil –
There were two markets I was screaming bearish on in 2006. Taking such a position not only flew in the face of my bullish stance for precious metals and uranium, but it created an awful amount of emails and phone calls, some of which came from the darker side of the human race. Thankfully (because I can only imagine how that dark side would have reacted if I was proven wrong), my extreme bearishness towards copper and oil paid off.



In the May 24, 2006 edition of the Grandich Letter, I wrote of copper:

"Gold Correction Nearing its End -

Copper a Disaster Waiting to Happen



A sentiment indicator of mine has just turned positive for gold after reaching its most bearish level ever just two weeks ago. It is likely going to have to go to very bullish before we get "the" bottom, but it suggests the correction is all but near its end (hours, days or few weeks away at most).



I'm also pleased to see even some of the most vocal bulls turn cautious in their published commentaries this morning. We need gold off the front page, as it was for most of the rise until the New Year.



I continue to "love" the precious metals (gold, silver, platinum and palladium) and especially uranium, but I'm extremely bearish on copper. The International Copper Study Group report yesterday said the global refined copper market is expected to show a modest surplus in 2006 after ending 2005 with an essentially balanced supply versus demand. The copper market has witnessed the biggest short squeeze (combined with speculators running wild) ever! It's ending is all but certain to be the ugliest. I'm extremely tempted to short copper but my wife already has my bags packed thanks to my Anooraq Resources position."



In the November 6, 2006 edition of the Grandich Letter, I wrote of copper:

"As the U.S. heads toward recession (second largest user of copper), an overall slowdown worldwide in 2007 is likely. I believe that's why despite the euphoria for copper, inventories of copper are beginning to rise. Technically, copper has formed an extremely bearish chart formation.



As you can see, copper has been making a series of lower highs since June with the $3.20 area major support. A break below $3.20 on a weekly basis could lead to a rather fast drop back to $2.40, as there's little support until that level."



In the June 7, 2006 edition of the Grandich Letter, I wrote of oil:

"I remain convinced that oil has seen its cyclical high above $75 barring severe hurricanes in the gulf (since everyone is predicting them, I suspect they won't happen) and Iran being foolish and not now taking advantage of the U.S. cave in announced this week. Yes, I'm virtually alone in this belief, but what else is new?"



In the July 1, 2006 edition of the Grandich Letter, I wrote of oil:

"I think Iran has moved front and center again as it appears not to be prepared to respond in the timeframe the U.N. and key world powers have given it regarding stopping its enrichment of uranium. Refusal to do so or the appearance can only help underpin oil for now. I suspect if we get a hurricane in the Gulf again, we can see oil spike up and test or make new highs. But if this happens, I would want to be a seller into this as I think come Fall, we can begin to see one of the sharpest falls in oil prices in several years back under $60 by Spring of 2007 (okay send those emails)."





In the July 21, 2006 edition of the Grandich Letter, I wrote of oil:

"I remain convinced that oil is topping out for this cycle. The fact that it failed to make much of a new high despite enormous geopolitical events that most would have bet the ranch it should have made, suggests that once hurricane season passes without another Katrina-type event and the Middle East events don't blow up, we are likely to see oil back in the low's 60s to high 50s in 2007-2008."



In the August 15, 2006 edition of the Grandich Letter, I wrote of oil:

"It's been my contention that the $75 area is likely the top for oil prices in this economic cycle. Despite the occurrence of numerous factors (that, had they know in advance, most people would've bet the ranch would have take oil higher), oil has gone nowhere. While it's still hard to go short in face of all this, I do believe oil's next $15 move is down, not up."





In the September 12, 2006 edition of the Grandich Letter, I wrote of oil:

"Has Oil Peaked?

Much has been written the last couple of years about what is commonly known as the "Peak Oil" theory. Simply put, it suggests that oil production has peaked and will decline going forward at a time when demand would remain very strong. This belief allowed for many predictions of $100 oil. My response since oil traded over $75 was that the theory had validity, but it would be one more economic cycle before the theory turns into reality. When oil was hitting new highs just a month or so ago, I said the next $15 move would be down. I never held myself out as an oil expert. The very fact that I seemed among an extremely small group of prognosticators who were bearish gave me media attention ... just so the numerous bullish forecasters could have even a little balance in the media reports.



Barring a major Katrina-like hurricane or a severe, sharp increase in Middle East hostilities that causes actual oil fields to be attacked, I believe the cycle top has been put in. The difference now is traders should look to sell rallies versus buying dips."





Okay, first, lets all give yours truly a pat on the back. Ah, that felt good. Hey Anooraq holders, was that a pat or a push? Okay, let's grab my crystal ball but keep in mind, those who live by the crystal ball end up learning how to eat a lot of broken glass.



Copper –
During my bearish drum beating, I noted that a "fair value for copper was three times its cash cost, which is somewhere between $.65 and $.85 a pound." I noted this and suggested a downside target of $1.95 to $2.55. We hit the $2.55 and while under $2 is still a reasonable target, I suspect we can minimally see a sideways consolidation and/or a countertrend rally to as high as $3. Since such rallies are strictly selling opportunities, the hot air in the copper bubble is all but gone.



Oil –
Don't throw away those peak oil arguments, although they may get a little dust on them before they are popular reads again. Since I believe the bulk of the retreat is behind us, I think we should start to plan on how to play the long side again. The best scenario is for oil to break below $50 and down toward $45. That would be a no-brainer buy. However, it's more likely at the moment we hold $50 and even see a few dollars added to the upside. The wildcard in this is if we continue to go down below $50 from here. I would think there would be one or more hedgefund blow-ups and that could get ugly. The good news is by seeing $75 as the top we have a lot of lead way towards our next move. Stay Tuned.



Uranium –
$100 remains a question of "when?" not "if?" to me. However, as noted on my ROB-TV appearance on January 5th, uranium stocks were showing early signs of froth and a correction would be a good thing. We had a sharp pullback shortly thereafter and I would sooner see more sideways before going back up sharply. The key is always volume. I don't mind declines, especially in stocks that had parabolic-like rises, providing volume is quite high.



Mining and Exploration Shares –
Like gold itself, the degree of caution and outright pessimism in mining related shares given where their underlying metal prices are now compared to where they were a few years ago, suggests to me that we aren't close to any long term top. The American investing public is still virtually out of these types of equities. You can see this at the American-based gold shows. Attendance is very low compared to shows in Canada and the age of the average attended is quite old – suggesting they are leftovers from the 1980 craze and not new, young blood.

Interesting study on market effect of Israel blowing out Iran's nuclear facilities.
Best
GMan

http://www.jsmineset.com/cwsimages/Miscfiles/4034_iran.pdf

Hi All
Though this was a good interview.

Q: If the NASDAQ is going down, should we be worried about any of our stocks?

All the Best
GMan

"Dear Investment U Reader,

Last week, I had the opportunity of a rare interview with one of the world's most ingenious financial economists, Arthur B. Laffer, at his new office in Nashville. 

A former professor at the famed University of Chicago, Art Laffer is the inventor of the "Laffer Curve," found in all economics textbooks; it demonstrates that cutting taxes can stimulate productivity so that government revenues can actually increase. The Laffer Curve has been proven right, especially when it comes to cutting capital gains taxes...

Every year after a capital gains tax cut, such as 1978, 1986, 1997, and 2001, revenues from capital gains have increased substantially.

Laffer is a sought-after expert. His offices are crowded with letters and photos of famous people – Alan Greenspan, Ronald Reagan, Jane Fonda, et al.  While I was in his office, he got a phone call from former governor Mitt Romney, who is running for president, and Steve Moore from The Wall Street Journal. 

But he's also known as a brilliant money manager and economic forecaster, and since 2000, his Macro 100 stock portfolio is 48 percentage points ahead of the S&P 500 Index. Below is our interview, where we'll take a look at his unique top-down approach to investing.

Is the Laffer Curve a Free Lunch in Economics?


Mark Skousen: I see your Laffer Curve is still in all the textbooks. How does it feel to be famous?

Art Laffer: I love it. It's great. I was blessed with a name that is very entertaining [laughter]. 

MS: Is the Laffer Curve alive and well?

AL: I brought it back in the 1980s under Reagan, but it's been around for time immemorial in economics. And it's true. How can you ever be worse off if you lower tax rates and you get more money?

MS: So there is a free lunch in economics?

AL: Of course, there's a free lunch!

MS: Is there a free lunch in finance? Do investors get a free lunch taking advantage of Warren Buffett's expertise in Berkshire Hathaway?

AL: Sure. When Buffett acquires a very large asset and gets it at a discount, because he sees things we don't get to see as retail investors, it's hard not to win. It's a huge advantage over other investors.

MS: Do you manage money?

AL: We have two firms: Laffer Associates is our research firm and boutique broker/dealer.  We have close to 350 institutional clients. And we have a money management firm, co-owned by General Electric, again for institutional investors.

We advise the Huntington Funds on the Macro 100 stocks, so individual investors can take advantage of our services through the Huntington funds. We've been in business for six years. 

Laffer's Top-Down Investing Style

MS: Do you have a unique strategy?

AL: Our angle is unique. We look at the world from macroeconomics. For example, if oil goes from $10 to $70, you will do well no matter what oil companies you buy. So the key is to invest in sectors that are benefiting from changing macroeconomic policies. We look at trade, income and fiscal policies.

MS: What's your favorite sector right now?

AL: Growth stocks, both small- and large-cap. We think we're in a "neutral interest rate" environment – we don't think they are going up or down by much right now. We also invest in companies in individual states that are lowering taxes, and avoiding companies in states that are raising taxes.

MS: Are there states that are lowering taxes?

AL: Oh, my, yes, over 40 right now. State governments are cutting taxes like mad, and adopting pro-growth strategies. It's very exciting. This is one of the most overlooked pluses in the economy right now.

MS: But aren't most companies national or global these days?

AL: That's true for McDonald's and IBM, but many companies are concentrated in just one state, such as auto suppliers.  We also do our stock analysis country by country. 

MS: Are you still bullish on China and India like most analysts?

AL: Yes, but not as much as I used to be. I was bullish on Japan a year ago, but not so much now. We look at every country's monetary policy, tax policy, etc. 

MS: You're not investing in Venezuela?

AL: No. I'd be out of Venezuela for a lot of reasons. Oil is going to come way down in price.

MS: Oh, really? You sound like Steve Forbes, who predicted $35 a year ago in one of my IU interviews.

AL: Oh, yes, and easily lower than that, over the next two years.

MS: Many of my gold bug friends, including Jim Rogers, see a 20-year bull market in commodities. What do you think?

AL: They are wrong, wrong, wrong!  Oil, copper, gold... they're all coming down and will continue to fall in price. We've seen a huge bull market in commodities, and at the same time, we are now seeing the dollar at its lowest level in terms of its trading partners. 

MS: Do you envision the dollar crashing?

AL: No!  It's going to rise. When oil prices decline, the trade deficit – what I call the capital surplus – is going to come way down. These are all cases of a reversal to the mean. 

Positive Outlook for U.S. Stocks

MS: What about the U.S. stock market?

AL: I've never seen the U.S. stock market so well positioned as it is now. They're really cheap right now. According to my own method of valuing stocks – taking into account profits in relation to interest rates and tax rates, which I call "capitalized economic profits," the stock market has never been lower in relative terms. I don't see a recession coming, I don't see interest rates going up. Tell me, what tax increases do you see coming down the road?

MS: Well, the Democrats are now in charge of Congress, and they could raise taxes. 

AL: I was more worried about the Republicans raising taxes! I love gridlock on Capitol Hill. I don't see a big tax increase right now. Have you noticed that the Federal deficit has fallen dramatically? The Laffer Curve works!

MS: What's your opinion of the new Fed chairman?

AL: Ben Bernanke, an orthodox Jew from South Carolina, is terrific. He may be boring, but he's sound. The Fed has been leaning against inflation, and the monetary base is hardly growing at all, just what you want. The price of gold is going to come down, and the dollar is going to strengthen in 2007. 

This isn't the 1970s. Compared to those days, today we have wonderful fiscal policy, and wonderful monetary policy. Who would have thought that since the 1970s, the highest Federal income tax rate and capital gains rate have fallen from 70%, to 35%? We don't have 21% interest rates, we have 4% rates today. 

MS: Aren't you worried by the regulatory stranglehold of Sarbanes Oxley?

AL: I think Sarbanes Oxley is great! Yeah, it's added a layer of regulation that has hurt small business, but I'm on a lot of company boards, and a lot of companies have found Sarbox to be highly beneficial because they've learned a lot more about their companies, the good and the bad.

MS: Isn't it true that you are always optimistic about the stock market and the economy?

AL: No, not at all. In the 1960s and 1970s, I was a big pessimist. 

MS: Did you anticipate the Nasdaq collapse in the early 2000s? 

AL: Yes, sir! I warned investors to "take warning" in late 1999, and in 2000, when inflation and interest rates were rising sharply, I told investors to go to the basement and hide and wait until its over. [Laffer showed me copies of papers he had written confirming his bearish views in the early 2000s.]

The War on Terror

MS: Are you concerned at all about worldwide terrorism and the war in the Middle East?

AL: I really don't see much of a problem. I think the Middle East is terrible, but it's always been terrible. Iran and Iraq need the oil money badly, but when the oil price drops sharply, as it will, it will be the best foreign policy we ever had, and we'll get rid of those tyrants in Iran and Venezuela. Sure, terrorism is a problem, but I lived through an era in the 1950s and 1960s under the fear of Soviet attack, and that was much more scary.

Most Important Lesson in Life

MS: Final question that I ask all my experts: You've lived a long life, you've met a lot of famous people. What's the most important lesson in life?

AL: Never lose sight of the fact that you are part of a family.

You know, Mark, that I have six children and ten grandchildren. When I saw my first child, I knew that I was living for eternity. My dad was my best friend. I was married twice; my dad was my best man at my first wedding, my son at my second. There's nothing – nothing – nothing that comes close to working as a team with my family. Many of my family members work here. It's beautiful. I loved going to Washington, being an advisor to Reagan, being a professor, creating the Laffer Curve, but none of that comes close to the pleasure knowing that I have the greatest family in the world.

MS: Thank you, Dr. Laffer.


·           The Laffer-curve was reportedly coined by a Wall Street Journal writer in 1974. Jude Wanniski was meeting with Laffer and Dick Cheney when Laffer sketched the curve on a napkin to illustrate the concept – that there is an optimal tax rate for maximizing government revenues; a tax rate too low will clearly decrease revenues, but a tax rate too high will have the same effect.



·           Crude oil prices have now hit a fresh 20-month low... Saudi Arabia recently said that OPEC output cuts are working, and that an "emergency meeting" of the oil producer group's members was no longer needed. Oil is trading close to $50 per barrel, and has dropped 18% this month.

Another really good article.
Best
GMan


Rhetoric and Reality: The View from Iran
By George Friedman 


The Iraq war has turned into a duel between the United States and Iran. For the United States, the goal has been the creation of a generally pro-American coalition government in Baghdad -- representing Iraq's three major ethnic communities. For Iran, the goal has been the creation of either a pro-Iranian government in Baghdad or, alternatively, the division of Iraq into three regions, with Iran dominating the Shiite south.

The United States has encountered serious problems in creating the coalition government. The Iranians have been primarily responsible for that. With the death of Abu Musab al-Zarqawi in June, when it appeared that the Sunnis would enter the political process fully, the Iranians used their influence with various Iraqi Shiite factions to disrupt that process by launching attacks on Sunnis and generally destabilizing the situation. Certainly, Sunnis contributed to this, but for much of the past year, it has been the Shia, supported by Iran, that have been the primary destabilizing force.

So long as the Iranians continue to follow this policy, the U.S. strategy cannot succeed. The difficulty of the American plan is that it requires the political participation of three main ethnic groups that are themselves politically fragmented. Virtually any substantial group can block the success of the strategy by undermining the political process. The Iranians, however, appear to be in a more powerful position than the Americans. So long as they continue to support Shiite groups within Iraq, they will be able to block the U.S. plan. Over time, the theory goes, the Americans will recognize the hopelessness of the undertaking and withdraw, leaving Iran to pick up the pieces. In the meantime, the Iranians will increasingly be able to dominate the Shiite community and consolidate their hold over southern Iraq. The game appears to go to Iran.

Americans are extremely sensitive to the difficulties the United States faces in Iraq. Every nation-state has a defining characteristic, and that of the United States is manic-depression, cycling between insanely optimistic plans and total despair. This national characteristic tends to blind Americans to the situation on the other side of the hill. Certainly, the Bush administration vastly underestimated the difficulties of occupying Iraq -- that was the manic phase. But at this point, it could be argued that the administration again is not looking over the other side of the hill at the difficulties the Iranians might be having. And it is useful to consider the world from the Iranian point of view.

The Foundation of Foreign Policy

It is important to distinguish between the rhetoric and the reality of Iranian foreign policy. As a general principle, this should be done with all countries. As in business, rhetoric is used to shape perceptions and attempt to control the behavior of others. It does not necessarily reveal one's true intentions or, more important, one's capabilities. In the classic case of U.S. foreign policy, Franklin Roosevelt publicly insisted that the United States did not intend to get into World War II while U.S. and British officials were planning to do just that. On the other side of the equation, the United States, during the 1950s, kept asserting that its goal was to liberate Eastern Europe from the Soviet Union, when in fact it had no plans, capabilities or expectations of doing so. This does not mean the claims were made frivolously -- both Roosevelt and John Foster Dulles had good reasons for posturing as they did -- but it does mean that rhetoric is not a reliable indicator of actions. Thus, the purple prose of the Iranian leadership cannot be taken at face value.

To get past the rhetoric, let's begin by considering Iran's objective geopolitical position.

Historically, Iran has faced three enemies. Its oldest enemy was to the west: the Arab/Sunni threat, against which it has struggled for millennia. Russia, to the north, emerged as a threat in the late 19th century, occupying northern Iran during and after World War II. The third enemy has worn different faces but has been a recurring threat since the time of Alexander the Great: a distant power that has intruded into Persian affairs. This distant foreign power -- which has at times been embodied by both the British and the Americans -- has posed the greatest threat to Iran. And when the element of a distant power is combined with one of the other two traditional enemies, the result is a great global or regional power whose orbit or influence Iran cannot escape. To put that into real terms, Iran can manage, for example, the chaos called Afghanistan, but it cannot manage a global power that is active in Iraq and Afghanistan simultaneously.

For the moment, Russia is contained. There is a buffer zone of states between Iran and Russia that, at present, prevents Russian probes. But what Iran fears is a united Iraq under the influence or control of a global power like the United States. In 1980, the long western border of Iran was attacked by Iraq, with only marginal support from other states, and the effect on Iran was devastating. Iran harbors a rational fear of attack from that direction, which -- if coupled with American power -- could threaten Iranian survival.

Therefore, Iran sees the American plan to create a pro-U.S. government in Baghdad as a direct threat to its national interests. Now, the Iranians supported the U.S. invasion of Iraq in 2003; they wanted to see their archenemy, former President Saddam Hussein, deposed. But they did not want to see him replaced by a pro-American regime. Rather, the Iranians wanted one of two outcomes: the creation of a pro-Iranian government dominated by Iraqi Shia (under Iran's control), or the fragmentation of Iraq. A fragmented Iraq would have two virtues. It would prove no danger to Iran, and Iran likely would control or heavily influence southern Iraq, thus projecting its power from there throughout the Persian Gulf.

Viewed this way, Iran's behavior in Iraq is understandable. A stable Iraq under U.S. influence represents a direct threat to Iran, while a fragmented or pro-Iranian Iraq does not. Therefore, the Iranians will do whatever they can to undermine U.S. attempts to create a government in Baghdad. Tehran can use its influence to block a government, but it cannot -- on its own -- create a pro-Iranian one. Therefore, Iran's strategy is to play spoiler and wait for the United States to tire of the unending conflict. Once the Americans leave, the Iranians can pick up the chips on the table. Whether it takes 10 years or 30, the Iranians assume that, in the end, they will win. None of the Arab countries in the region has the power to withstand Iran, and the Turks are unlikely to get into the game.

The Unknown Variables

Logic would seem to favor the Iranians. But in the past, the Iranians have tried to be clever with great powers and, rather than trapping them, have wound up being trapped themselves. Sometimes they have simply missed other dimensions of the situation. For example, when the revolutionaries overthrew the Shah and created the Islamic Republic, the Iranians focused on the threat from the Americans, and another threat from the Soviets and their covert allies in Iran. But they took their eyes off Iraq -- and that miscalculation not only cost them huge casualties and a decade of economic decay, but broke the self-confidence of the Iranian regime.

The Iranians also have miscalculated on the United States. When the Islamic Revolution occurred, the governing assumption -- not only in Iran but also in many parts of the world, including the United States -- was that the United States was a declining power. It had, after all, been defeated in Vietnam and was experiencing declining U.S. military power and severe economic problems. But the Iranians massively miscalculated with regard to the U.S. position: In the end, the United States surged and it was the Soviets who collapsed.

The Iranians do not have a sterling record in managing great powers, and especially in predicting the behavior of the United States. In large and small ways, they have miscalculated on what the United States would do and how it would do it. Therefore, like the Americans, the Iranians are deeply divided. There are those who regard the United States as a bumbling fool, all set to fail in Iraq. There are others who remember equally confident forecasts about other American disasters, and who see the United States as ruthless, cunning and utterly dangerous.

These sentiments, then, divide into two policy factions. On the one side, there are those who see Bush's surge strategy as an empty bluff. They point out that there is no surge, only a gradual buildup of troops, and that the number of troops being added is insignificant. They point to political divisions in Washington and argue that the time is ripe for Iran to go for it all. They want to force a civil war in Iraq, to at least dominate the southern region and take advantage of American weakness to project power in the Persian Gulf.

The other side wonders whether the Americans are as weak as they appear, and also argues that exploiting a success in Iraq would be more dangerous and difficult than it appears. The United States has substantial forces in Iraq, and the response to Shiite uprisings along the western shore of the Persian Gulf would be difficult to predict. The response to any probe into Saudi Arabia certainly would be violent.

We are not referring here to ideological factions, nor to radicals and moderates. Rather, these are two competing visions of the United States. One side wants to exploit American weakness; the other side argues that experience shows that American weakness can reverse itself unexpectedly and trap Iran in a difficult and painful position. It is not a debate about ends or internal dissatisfaction with the regime. Rather, it is a contest between audacity and caution.

The Historical View

Over time -- and this is not apparent from Iranian rhetoric -- caution has tended to prevail. Except during the 1980s, when they supported an aggressive Hezbollah, the Iranians have been quite measured in their international actions. Following the war with Iraq, they avoided overt moves -- and they even were circumspect after the fall of the Soviet Union, when opportunities presented themselves to Iran's north. After 9/11, the Iranians were careful not to provoke the United States: They offered landing rights for damaged U.S. aircraft and helped recruit Shiite tribes for the American effort against the Taliban. The rhetoric alternated between intense and vitriolic; the actions were more cautious. Even with the Iranian nuclear project, the rhetoric has been far more intense than the level of development seems to warrant.

Rhetoric influences perceptions, and perceptions can drive responses. Therefore, the rhetoric should not be discounted as a driving factor in the geopolitical system. But the real debate in Iran is over what to do about Iraq. No one in Iran wants a pro-U.S. government in Baghdad, and blocking the emergence of such a government has a general consensus. But how far to go in trying to divide Iraq, creating a pro-Iranian government in Baghdad and projecting power in the region is a matter of intense debate. In fact, cautious behavior combined with extreme rhetoric still appears to be the default position in Tehran, with more adventurous arguments struggling to gain acceptance.

The United States, for its part, is divided between the desire to try one more turn at the table to win it all and the fear that it is becoming hopelessly trapped. Iran is divided between a belief that the time to strike is now and a fear that counting the United States out is always premature. This is an engine that can, in due course, drive negotiations. Iran might be "evil" and the United States might be "Satan," but at the end of the day, international affairs involving major powers are governed not by rhetoric but by national interest. The common ground between the United States and Iran is that neither is certain it can achieve its real strategic interests. The Americans doubt they can create a pro-U.S. government in Baghdad, and Iran is not certain the United States is as weak as it appears to be.

Fear and uncertainty are the foundations of international agreement, while hope and confidence fuel war. In the end, a fractured Iraq -- an entity incapable of harming Iran, but still providing an effective buffer between Iran and the Arabian Peninsula -- is emerging as the most viable available option.