Daily Reckoning: Only Dead Fish Swim With the Stream by Christopher Mayer

Only Dead Fish Swim With the Stream
Christopher Mayer

for the Daily Reckoning

Most people want to buy strong companies with growing sales and expanding markets and a bright future. No one wants to buy a company that has problems to work through, that has been hit with one setback or another and where the near-term outlook is murky and uninviting.

Yet it is in these latter opportunities where the greatest investors have plied their trade and milled their fortunes. Warren Buffett bought The Washington Post in the throes of the 1973 - 74 bear market, when it was struggling. He bought 10% of the company for about $10 million. At the time, the company had revenues of over $200 million. Ten years later, his stake was worth a quarter of a billion dollars.

He bought GEICO when, in his words, "It wasn't essentially bankrupt, but it was heading there." It was one his greatest acquisitions.

Not just Buffett, but scores of wealthy investors have enjoyed incredible returns by buying when other investors were fearful, by seeing through the temporary setbacks.

The greatest investors did not fear to go against the consensus. As writer Malcolm Muggeridge used to say, "Only dead fish swim with the stream."

I've recently completed a book, which brought to mind many of these thoughts on the paradoxical nature of market returns. The book is titled Capital Account: A Money Manager's Reports on a Turbulent Decade 1993 - 2002, and it is edited with an introduction by Edward Chancellor (author of the acclaimed Devil Take the Hindmost). The book collects financial reports written by Marathon Asset Management's partners and delivered to its clients over the boom years. Marathon is an investment advisory firm based in London that manages over $24 billion in assets for institutional investors.

The book was interesting because it illustrates Marathon's unconventional investment style and provides a number of useful ideas and examples of investments that succeeded by bucking consensus opinion.

Consider General Dynamics, a company that Marathon backed in the early 1990s. General Dynamics was in bad shape at the time, suffering from a declining backlog of business in the wake of the Soviet Union's demise.

New management took the company in a different direction in 1991 – by closing or selling unprofitable businesses and buying back its own depressed shares.

The stock of General Dynamics increased six fold between 1990 and 1993, even though its sales were reduced by half.

Yes, sales declined by 50% and the stock rose six fold!

Marathon used the example to highlight a couple of key points regarding their "capital cycle approach" (which we'll get to in a minute). First, investment returns can have less to do with sales and growing markets than they have to do with the efficient allocation of resources.

In this case, the management of General Dynamics took the existing resources of the company and dramatically changed the way those resources were deployed. Instead of frittering them away on unprofitable business lines, management focused on its core business. Even though this involved effectively making the business smaller, investors were rewarded with an outsized gain in the stock price during a relatively short amount of time.

Secondly, Marathon pointed out that General Dynamics benefited from a decline in competition, as money was withdrawn from the defense sector or diverted to other areas and the existing businesses consolidated. As Chancellor writes, "It is better to invest in a mature industry where competition is declining than in a growing industry where competition is expanding."

Marathon has named its approach the "capital cycle approach." The approach is based on a simple yet compelling idea. High returns on capital, or the prospect of high returns on capital in one area of the market, will attract additional investment. This additional investment will put downward pressure on returns in that market.

Think about the Internet bubble. When the Internet was still new, the first few firms in the space commanded large market caps relative to the amount of capital invested in the business or the amount of money required to start the business. As a result, more money kept pouring into dot-com businesses.

Let me give you Chancellor's distillation of this idea, and you will never forget it.

He wrote, "When a hole in the ground costs $1 to dig but is priced in the stock market at $10, the temptation to reach for a shovel becomes irresistible."

Using the capital cycle approach, you would become suspicious when shares are priced on the assumption that existing returns are going to be maintained or improved in light of rapidly expanding new investment and growing capacity in a business or industry. In other words, the approach helps guard against the error of simply extrapolating prior returns into future years. Capital cycle forces you to think about competitive pressures.

The process works in reverse as well. As share prices decline, investment capital moves off to find greener pastures and competition declines. As excess capacity is sweated off, though, returns are likely to improve. Here is where there is opportunity, as share prices in these situations are often priced assuming the pessimistic present conditions are permanent. But as things improve, as the market naturally adjusts, these companies may provide outsized returns for far-seeing investors. General Dynamics did exactly that. Target may be able to do that with Hudson's Bay.

InvestmentRarities: BEST OF KURT RICHEBACHER February 20, 2004

BEST OF KURT RICHEBACHER
February 20, 2004

Our differences of opinion with the bullish consensus about the economic and financial situation in the United States have many reasons. One of them is a radically different apprehension of wealth and wealth creation. America’s policymakers and economists view asset inflation as wealth creation as if this were a self-evident fact. What this asset inflation truly generates is phony collateral for runaway consumer indebtedness, luring the consumer into unprecedented debt excesses. It is phony wealth creation because unlike the real wealth creation through capital investment, both its creation and its use involve no income creation.

This perception of wealth creation, actually, runs completely counter to traditional thinking in economics. It has always been apodictic in economics that there is but one way to create genuine wealth for an economy as a whole, and that is to consume less than current production or income. Wealth creation from the macroeconomic perspective essentially occurs through saving and investment in tangible, income-creating plant, equipment, and commercial and residential buildings.

Guided by the Greenspan Fed, America is practicing a radically different pattern of "wealth" creation. An extremely loose monetary policy forces up asset prices, providing both the impetus and collateral for higher borrowing. Being offered almost limitless credit at rock-bottom interest rates, the consumer responds with a frenzied borrowing and spending binge.

The crucial thing about this new American way of wealth creation is that it takes places entirely outside the national product. Its gist is to inflate asset prices by inflating credit. But what gives it such great dynamics is the conventional practice to value the vast mass of existing shares and houses in line with movement of the price of the last, marginal trade.

It is really like printing wealth.

The crucial concern is the inherent effects of this so-called wealth creation to the economy. Asset inflation by itself has no effects at all. Its economic effects arise only from the associated increase in consumer borrowing and spending. But that has two highly malign effects. An endless escalation of unproductive debt is one. The other is that consumption takes an ever-greater share of GDP. Overconsumption is, really, America’s deep-seated, structural disease, and asset inflation is worsening it.

Grossly distorted economic growth at the expense of saving and investment is one dangerous legacy of America’s asset inflation. The exponential rise in the consumer’s indebtedness in relation to his badly lagging income growth is the other. A savage debt deflation is the inevitable outcome. But this kind of deflation does not lower interest rates. It boosts them. Basically, the Fed has lost control.

CONCLUSIONS:

U.S. economic growth is no longer based on saving and investment. Its essence is that credit excess provides soaring collateral for still more credit excess creating still more asset inflation for still more borrowing and spending excess. It seems like a perpetual motion machine that just goes on cranking out wealth and spending. It is important to see that the true name of this game is bubble-driven growth, and all bubbles end by bursting. America is the next Japan.

August 25 The Philippine Stock Market Review: Dead Cat Bounce?

August 25 The Philippine Stock Market Review: Dead Cat Bounce?

After being spooked by the ‘Crisis’ talk, local investors regained some sensibilities and bargain hunted on the domestic equity market, as officials moved to assuage concerns of the investing public on the country’s ability to meet its debt payments. The Phisix climbed a measly 6.07 points or .39% after yesterday’s brutal thrashing. While your analyst is disinclined to oversimplify the recent events to the market’s short-term movements, the shocking admission by no less than the Philippine President on the gravity of the country’s chronic economic conditions cast a pall on the attractiveness of investments in the country, hence in the short-term the ‘risk’ issue becomes the primordial wall of worry from which the bulls has to climb.

Today’s market activities reflected such skepticism. As we earlier mentioned first to ever react would be foreign investors as lugubrious prospects would increase risk considerations of their portfolio relative to benefits hence any shocking revelations could spur a sudden exodus from the market. While yesterday’s activities manifested a tempered reaction from the foreigners, today we noticed significant volume increase of these liquidations, which amounted to P 71.648 million, or almost equivalent to 11.9% of aggregate volume. Foreign trades constituted 61% of today’s output while selling two times more issue than it bought.

SIX of the eight heavyweights scored a net outflow from foreign capital with the most notable outflow seen in Ayala Corp (unchanged), almost 45% of its output and represents about 50% of the net outflow, joined by moderate selloffs in SM Primeholdings (+1.75%), PLDT (-.39%), and Ayala Land (-1.88%) while Bank of the Philippine Islands (+1.25%) and Metrobank (+2.0%) posted negligible selling. Only Globe Telecoms (unchanged) recorded positive flows from overseas money while San Miguel B (unchanged) had no foreign trades.

Other noteworthy foreign activities are the continuing intensive selling on Filinvest Land (-1.07%) accounting for 75% of its trades, and the modest accumulations in ABS-CBN Preferred shares (unchanged) representing about 17% of its output and First Philippine holdings (+2.06%) about 27.58% of the firms trades.

Sentiment was biased towards the bulls with advancing issues ahead of declining issues by 35 to 20 and the major industry indices were higher led by the rebound of the mining sector while Oil and the property index posted losses.

Yesterday’s major trendline breach was a cause of concern, while today’s rally hardly made a significant headway to regain lost grounds, meaning that today’s run up could be construed as temporary or a dead cat bounce. As gauge, the former support level is now its resistance level and has to be credibly taken out backed by sizable volume. However, with the past two day’s performance of having foreign money taking on the selling side of the trade equation, it would need a lot of firepower from the locals to repulse the seemingly strengthening bears, and to hold or buoy the index from its current levels.

August 24 The Philippine Stock Market Review: A Reign of Fear?

August 24 The Philippine Stock Market Review: A Reign of Fear?

Well with the dirty little word out as officially promulgated by no less than the highest authority of the land…what do you expect? Massacre, Bloodbath carnage…yes, the PHISIX was clobbered by 34.17 points or 2.17% as foreign and local investors stampeded out of the Philippine equity assets to register its biggest loss since the post election May 11 and is the largest decliner among the Asian bourses, as of this writing.

It was a sea of blood out there today as declining issues routed advancing issues by 8 to 1, ALL major subindices hemorrhaged led again by the mining index which fell by 2.82% and foreign money saw an outflow of P 21.847 million. Aside, foreign investors sold slightly more issues than they bought.

Of the nine heavy cap mainstays of the Phisix, 6 issues contributed to the steep decline of the Phisix mostly due to foreign led sell-offs, namely Ayala Corp (-5.46%) Globe Telecoms (-3.46%), Bank of the Philippine Islands (-2.44%), Metrobank (-1.96%), PLDT (-1.56%) and San Miguel B (-1.43%) while the remaining three, Ayala Land, SM Primeholdings and San Miguel A were unchanged.

Aside from the tormented heavyweights foreign money also saw heavy liquidations in Pilipino Telephone (-8.46%) and Union Cement (unchanged), while unassumingly providing support to First Philippine Holdings (-3.0%), ABS-CBN Preferred Shares (-2.43%) and DM Consunji Inc (-7.69%).

Today’s market action calls for us to raise our alert levels to orange, meaning that the Phisix based on its chart has manifested a strong warning reversal signal after having successfully breached its major trendline. Put differently, we have yet to confirm the negative signals emitted today, if it is simply a knee jerk reaction or the onset of the market’s reversal to a declining phase in the immediate term. The sustainability of the critical 1,518-support level should give us a clearer picture where the market is headed for.

Will investors flee the market on thoughts of an Argentina-like upheaval or will they construe that such official acknowledgement of the existing problem, instead of a denial, as government’s resolve to confront the dilemma and stave off a full blown crisis? Today’s market action points toward the former however it remains to be seen how investors would react in the coming days. Will the market's psychology now be enveloped by a reign of fear?

Kitco.com: Gold - the Instinctive Protection of Wealth By Barry Downs and Bill Matlack

Gold - the Instinctive Protection of Wealth

By Barry Downs and Bill Matlack

August 18, 2004

Kitco.com

Nowhere in the mainstream conventional-wisdom discussion of economics is there any concern shown for the cumulative negative impact on society of the past many decades of inflation. In fact, Federal Reserve inflation has become institutionalized to the point where, if inflation prospects lessen or deflation threatens, the Fed becomes quite aggressive to bring back inflation. We have seen this happen over the past three years. Aside from the minute group of economists and investment managers concerned with the unsound nature of the money credit system, the masses at this time remain blissfully ignorant, complacent, and unprotected; and still see gold as only relevant for baubles and bangles.

Dollar inflation (i.e., the loss of purchasing power) has grown in intensity since the establishment of the Federal Reserve in 1913. By year-end 2003, based on CPI inflation, the dollar had lost 96% of its purchasing power. In the period from the early 1940s to 2003, 91% of that loss occurred. Since President Nixon closed the gold window to foreigners in 1971, ending any tie to gold, the dollar by year-end 2003 had lost 78% of its purchasing power.

One has to ask how long the inflating can go on before a serious breakdown in the money credit system occurs, perhaps sending the dollar shuffling off to the dust bin of money history or, as some would say, to money heaven. History has shown that, in the world of defunct currencies, past French inflations, as an example, have lasted around six decades or until the currency had lost 99 1/2 % of its value. On that timetable, the US dollar's day of reckoning may be fast approaching. Fed governor Ben Bernanke minced no words over a year ago when he stated that when threatened with falling costs and prices, money printing could reach the point where there could be helicopter dollar distributions. A panicky Fed is quite capable of anything!

The French provide a very good example of a society with an inborn instinct when it comes to surviving monetary turmoil. It's standing French folklore that every French peasant has some savings in gold coins under the mattress or in the floorboards, and that in past generations gold has enabled survival amongst a succession of great disasters under various forms of government. In a little over two centuries the French had to survive a profligate king and John Law's Mississippi bubble, which ended in a worthless currency; a few decades later, it was the guillotine for a tyrannical government and again worthless paper; Napoleon's war and nation building brought hardship and monetary turmoil to the country; the French were defeated twice in the 1800s; there was a succession of weak and vacillating governments including a monarchy and several republics; and finally, two destructive world wars were both won, but the aftermath still produced economic disaster.

Throughout European history, there have been similar instances where a gold hoard has been the difference between financial survival and ruination. The reichsmark at the end of WWI was exchanged for the dollar at the rate of one hundred to one, but by the fall of 1923 it went to one trillion to one, wiping out the savings of Germans or any other holders of the currency.

There has never been a fiat paper money system which has survived. The US dollar, through its circulated Federal Reserve notes, represents a fiat paper money cut loose from the discipline of gold money over 30 years ago. The reserve currency concept was sold to the rest of the world on the presumption that a paper money, issued by a country as successful as the US, must be sound. Confidence has been built around the full faith and credit of the US, but as America has lived beyond its means and leveraged itself to the hilt, confidence in America's eventual solvency is eroding.

Unfortunately, US finances have been so mismanaged by the Keynesian and Monetarist micro managers that the country sits with record trade and budget deficits, beholden to foreigners for financing with a total credit market debt pyramid of over 300% of GDP and coming off a period of unprecedented debt stimulus where $4 is being spent to get a miserly $1 of growth. Added to US financial woes is the $45 trillion of unfounded liabilities looming in the period not far ahead, and the war against America and its way of life being waged by the Islamic Fundamentalist world. The cost of a prolonged terrorist war could alone bankrupt the country.

The cumulative dollar inflation since WW II has wiped out 90% of the dollar's purchasing power and trillions of dollars of savings of Americans, but few Americans so far seem to realize what has happened to their store-of-value money, and even fewer have contemplated how the inflation eventually ends.

Americans had a brief encounter with gold in the late 1970s, which took the dollar price per ounce to $600 for a short time in 1980. But for more than 20 years, the flood of paper by the Federal Reserve and the focus on paper assets have mesmerized the general public, causing them to forget about the importance for a sound money credit system. The 8,000% plus increase in NYSE average volume since the 1970s and the 18,000% increase in NASDAQ volume over the same period illuminate the interest in paper assets in roughly 30 years. A very small percentage of Americans from time to time will speculate in gold via the futures market or in paper gold, or will speculate in a limited way in gold stocks. But as far as holding physical gold for monetary reasons as the rest of the world holds gold, there is virtually no interest, at least at this time.

The belief that the dollar and the debt-based paper wealth surrounding it are somehow blessed with some special spiritual permanent protection is residing in a fool's paradise. The world has always been a crime and punishment place, and the Federal Reserve has created the ultimate financial crime, which has been the orchestrated destruction of wealth through inflation. The punishment ultimately will be dished out by the market place to the dollar and its holders. Market forces in the final analysis will also likely dictate the return of paper money tied to gold, but not until bitter lessons have been learned.

Human instinct to seek protection in gold seems likely to explode when the time comes, probably first among Europeans and Asians where gold to this day has its tradition. If history has taught us anything, interest in gold and indirect investments in gold will eventually spread to the US as well, adding to the demand for something in very limited supply and sending gold prices soaring.

The gathering economic storm and approaching money/credit inflection point is providing holders of wealth, dominated in the dollar or any other fiat paper money, a chance to secure protection in the gold arena at historically low price levels. Whether it be a position in the physical metal (the ultimate) or gold in the ground via a well-chosen portfolio of gold mining stocks, or both, some significant diversification away from a world of pure paper fiat money has never been more appropriate.

Those with wealth centered only in paper assets, including real estate, should perhaps begin to ask themselves if they will end up having been as smart as a French peasant.

Mineweb.com: Philippines wants Chinese mining investment

Philippines wants Chinese mining investment
By: Dorothy Kosich
Posted: '23-AUG-04 05:00' GMT
© Mineweb 1997-2004

RENO--(Mineweb.com) For the second time this month, a top economic development official of the Philippine government has publicly declared the nation's intention to attract Chinese investment in mining in the Philippines.

Philippine Socio-Economic Planning Secretary Romulo Neri said that his nation considers China "a potential huge investor" in domestic mining. However, under the Filipino Constitution, mining and exploration are limited to local investors. Nevertheless, Neri believes that the mining sector could become the main engine of the nation's economic growth in the nation if foreign investors are permitted to invest. Neri is also director general of the National Economic Development Authority, which is the social and economic development planning and policy coordinating body for the Executive Branch in the Philippines.

Last January, President Gloria Macapagal Arroyo issued Executive Order 270, a National Policy Agenda on Revitalizing Mining in the Philippines, aimed at reviving the mining industry and developing the mineral potential of the country. The government, through the Mines and Geoscience Bureau, is now promoting mining investment.

"If the Philippines promulgates proper policies, it has a great opportunity of attracting China, which has exchange reserves of more than 400 billion U.S. dollars," Neri declared. He said that foreign investors are badly needed since the development of a single large-scale mining operation would require between $850 million to $1.2 billion in investment, well beyond the reach of Filipino investors.

Neri said the mining industry is critical in stabilizing the nation's macoeconomy and that the sector is expected to increase tax collection, reduce risk perception, and improve the country's credit rating. He also insisted that reform of the Filipino mining sector would also generated a substantial increase in exports and boost the country's precarious foreign exchange reserves, as well as strengthen and stabilize the peso.

Meanwhile, many foreign mining and exploration companies tend to believe that the Philippines does not have exceptional geology. The country also suffers from business policies viewed as unfavorable to foreign investors, a perception of being corrupt and politically unstable, and of being a haven for terrorists.

"The growth of the mining industry is critical in inducing greater economic growth, attracting more investments, creating more jobs and reducing poverty," Neri declared, predicting that mining could create 10,000 jobs. The former director of the Philippines Congressional Planning and Budget Office, Neri said mining had a six-time multiplier effect on the economy, which would generate up to 36% of GDP. He estimated the Philippines' potential mining wealth at $840 billion, which is ten times the country's GDP.

Among the foreign mining and exploration companies doing business in the Philippines are TVI Pacific and Crew Gold of Vancouver, Mindoro Resources of Edmonton, and Oxiana and Climax Mining of Australia. ,p aling="justify"

UNFAVORABLE LEGAL RULING

Despite Neri's overtures to foreign mining investment and the Chinese, the Philippine government still must prove successful in its challenge of a Supreme Court ruling that threatens millions of dollars in foreign investment in the mining industry. The Supreme Court of the Philippines last February overturned portions of a law, originally aimed at opening up country's mining industry to foreign investment. The Natural Resources Department, the President and the mining industry have submitted a motion asking the Supreme Court to reconsider its ruling.

The Supreme Court ruled that portions of 1995 Mining Act, which allowed 100-percent foreign ownership in the exploitation of the country's mineral resources, were unconstitutional. The law had been challenged in court by an anti-mining environmental group, backed by the Roman Catholic church. The ruling may impact as many as 13 foreign companies involved in 15 mining projects, the majority in exploration. Business leaders claim that the Supreme Court order has further harmed the nation's image as a country that welcomes foreign investment and will scare off foreign capital from the mining sector and other key industries.

August 23 The Philippine Stock Market Review: Stock market drivels

August 23 The Philippine Stock Market Review: Stock market drivels

Surely today’s decline will be attributed by so-called ‘stock market analysts’ to the forecast prepared by a group of illustrious economist from UP presaging an Argentina and Turkey like crisis brewing in our midst. Well of course, while your analyst do respect the outlook of these pundits, and agree with them on economic risk the country is facing (What more under the FPJ stewardship?), although today’s activities in the stockmarket does not confirm the anxieties impressed upon by the UP study.

First thing in order is to know who would react to such dour outlook, foreigners or locals? Naturally the foreign investors. Since this is an alien land to them learning of such dicey prospects would probably compel them to adversely react on their portfolio holdings in the country. However, given that most of the foreign money invested in the Philippines comes from money institutions, the risk variables to the country, such as political, economic, cultural and others, have already been imputed to their investment decisions as part of the risk premiums. Yet given the still accommodative monetary environment the world is into, such institutions would probably still have the optimal tolerance for risk appetites in the quest for higher yields.

Second, the plight of the Philippines is not an isolated case, even the largest and the most influential economy of the world is almost embroiled in the same quagmire. But of course, one would argue that they are privileged and less affected being that they hold the backbone to the world’s monetary system, the US dollar.

But going back to today’s trading activities, while the locals probably cringed at the “wake up call” (for me) or gloom and doom (for the ‘rationalizing’ analysts) prospects of the Philippine economy, foreign investors infused P 53.882 million ($962 million) to the Philippine Stock Exchange and bought the broader market (bought more issues than it sold by almost 2 to 1). These hard data flies in the face of those who would dare call on today’s decline due to probability of an economic Armageddon which is simply a call to action to those concerned (authorities) that the Philippines has long been walking on a tightrope and is tilted towards losing control.

The Phisix closed lower by 6.66 (bad sign?) points or .42% on lean volume of P 441.395 million or $7.823 million and is one of the minority decliners in the Asian region, whose bourses are mostly higher following the Friday’s rally in Wall Street.

Market sentiment was inclined towards the bears, with declining issues ahead of advancing issues by a tight 35 to 27 and major industry indices are all in the red except for the Oil issues which jumped 6.06% even as crude oil prices corrected from its Friday’s record high of $49.40 per barrel. The Mining sector was the biggest loser even as Gold and Silver rose to their April high levels. What irony! Well, extractive issues are supposedly no brainer investments given that the underlying prices of the commodity/ies should actually determine the economic value of the company that owns or produces them. Unfortunately our market is so puerile that it thrives on gossips and rumors instead of valuations. So much for no brainer investments.

With PLDT (+.39%) the only gainer among the heavyweights, there are three decliners responsible for the drop of the Phisix, namely SM Primeholdings (-1.72%), San Miguel A (-1.72%) and Globe Telecoms (-.59%). Bank of the Philippine Islands, Metrobank, San Miguel B, Ayala Land and Ayala Corp closed neutral.

In sum, foreign capital supported today’s index despite a lower close primarily by locals who sold on some index issues and partially the broader market. As to what compelled the locals to sell is probably out of profit taking or sheer lethargy. So much for the stock market drivels.

Chris Temple: Bonds or gold - which market is wrong?

Bonds or gold - which market is wrong?

August 20, 2004

The Prudentbear.com

by Chris Temple

As we all know, financial markets now and then send mixed signals on what the future might hold. Especially these days, with investors on edge over soaring oil prices, terrorism fears, uncertainty over the upcoming election and a growing belief that the U.S. economy’s surge since early 2003 might be flaming out, it’s hard to know whether to “zig” or “zag.”

One of the most curious anomalies of the last few weeks has been the fact that both U.S. Treasury securities and gold have been rallying. While not unprecedented, this is a situation that is inherently contradictory, and is unlikely to last. To be sure, some are arguing that the rallies in each are due, in part, to terrorism fears and the inevitable flight of some capital to traditional safe havens; on this score, both bonds and gold qualify. At the end of the day, however, both markets will be supported or shunned based on their underlying fundamentals.

Let’s start with the bond market. Virtually everyone at the beginning of the year believed that long-term interest rates had nowhere to go but up from their lowest levels in half a century. The economy and corporate earnings were strong, and it appeared inevitable that the Federal Reserve would finally have to respond at least somewhat to the extraordinary inflationary pressures it has fostered in the recent past by taking some of them away via, at last, raising short-term interest rates. Topping off an environment which was already pointing to higher rates and lower bond prices has been the inexorable rise in the price of crude oil to fresh all-time nominal highs. No matter how the Bureau of Labor Statistics tries to gloss over its implications, higher oil prices still—Fed Chairman Greenspan’s “new economy” notwithstanding—have inflationary implications. In fact, through 2004’s first half, even the substantially understated numbers from the BLS showed U.S. consumer prices rising by a 5% annualized rate during the first half.

After topping out twice around the 4.9% area, though, the yield on the government’s current bellwether 10-year note has plunged lately; it now stand at around 4.25%. Ignoring much of the above, bond traders seemingly are voting now that a weakening economy and the apparent peak in corporate earnings growth demonstrate that interest rates can’t go up much more. They ignore the inflationary pressures of rising oil prices to instead reinforce their belief that this additional “tax” on the economy means that the Fed will neither have the ability or the nerve to raise rates much farther. Combined, this suggests to them that we have already seen what rise we’re going to in long-term market rates; and that, before much longer, we’ll be fretting over recession/deflation anew.

Longer-term, that is certainly where we’re heading to some extent (though whether everything goes down in price or, in the alternative, at least some items such as commodities buck the coming unwinding is yet to be determined.) For the time being, however, gold is begging to differ with some of this hypothesis. Gold traders also see soaring energy costs; they realize to some extent, however, that such an event has always meant higher eventual inflation.

In addition, those tiptoeing back into the yellow metal with increasing conviction seem to recognize something stock traders and the cheerleaders on financial television incredibly continue to dismiss; and that is—terrorist premium or not—high (and rising) energy costs are here to stay. Now, there’s no question that at least some of the rise in oil’s price (and today was a good example, as a barrel of black gold closed at $48.75, up $1.48 on the day) does indeed owe itself to speculators. And I’ll even concede here that, if peace suddenly broke out in the world, oil’s price would likely plunge, as some speculators exit their recent bets.

However, listening to the shills for Greenspan and the Bush Administration, you’d think that under this scenario oil would go back to $25 per barrel and stay there. This is nothing but fantasy. There is nothing “transitory,” to use one of Greenspan’s favorite words, about countries like China and India having embarked on major growth trends not unlike that of the United States at the beginning of our own Industrial Revolution. If and when oil does settle down for a while, it will later be looked back on as nothing but an interlude in what is otherwise a long trend to substantially higher U.S. dollar prices for crude.

I stress U.S. dollar prices because that’s another thing seemingly understood by those re-entering gold that is utterly lost on those again willing to loan money to Uncle Sam for 10 years at 4.22%, as of today’s close. Though the greenback has spent most of 2004 successfully holding its own against most other currencies, it’s inevitable that its secular bear market will soon resume (if it in fact has not done so already.) Our nation’s external debts continue to mount. Eventually, a trade deficit now running in excess of $600 billion annually and a combined current account deficit of even more means that the currency with which that “nut” must be serviced has to go down in value.

The disconnect between bonds and gold was especially stark when it was announced a few days ago, in fact, that the U.S. trade deficit for June had surged to a new record of $55.8 billion, smashing the old mark. The dollar sank, gold rose—and bonds yawned.

Smug bond traders, out in front of their belief that, like they did in Japan, long-term interest rates have to decline ultimately to even new lows as the U.S. economy weakens further, are taking a heck of a gamble on two fronts. First, they’re betting we’re headed straight to that outcome; and that, in between here and there, nothing will cause long-term rates to, at the least, challenge their old highs (on yields) first. I respectfully disagree.

Secondly, they fail to realize that there is at least one clear, HUGE difference between the U.S. today and the Japan of the 1990’s; namely, that they cut interest rates to the bone from a position of having current account and foreign exchange surpluses. In short, nobody from the outside had to “ratify” their policy of massively inflating their monetary base and taking rates down to virtually nothing, in order to cushion their long unwinding. America is not in such a position, but instead has the largest external debts of any country in recorded history. In spite of what remains a large appetite for U.S. paper around the world, at some point our creditors will decide that their excess savings might better (and more safely) be put elsewhere. The long-term implications for interest rates, therefore, is much less sanguine than bond traders seem to grasp; and could hit us sooner rather than later, depending (among other things) on how quickly China moves to revalue its currency.

For our present purposes, in addition to betting that bond traders are wrong in the near term, I’m increasingly willing to bet that gold traders are correct. Gold has managed to move above $400.00 per ounce again and, in the last couple days, has additionally moved above a down trending resistance line in place since its peak around April 1. The most leveraged basket of gold stocks, as measured by the HUI Index of the American Stock Exchange, has today managed to close sufficiently above overhead resistance in the 200-202 area to mark an important breakout point as well.

Unlike the false starts of late May and late June/early July, this last few days has seen volume increase smartly as well. In fact, even in the last week, it was typical to see volumes for most gold stocks traded on the major exchanges remain below their 30-day averages even on days they were rising. Today, as this apparent breakout was occurring, those I follow were not only up strongly, but traded on average DOUBLE their recent normal volume.

At the least, we are on a course to shortly challenge the April high in the gold price, and last December’s high in the HUI. In the end, I have to take sides with either the bond bulls or the gold bugs; and for the time being, I’m choosing the latter.

Chris Temple is editor of The National Investor newsletter and founder of The Foundation for American Renewal.

Guardian Unlimited: World faces population explosion in poor countries

World faces population explosion in poor countries

Rich nations will downsize, but Britain will grow at the fastest rate in Europe

John Vidal, environment editor
Wednesday August 18, 2004

The world is heading for wildly uneven population swings in the next 45 years, with many rich countries "downsizing" during a period in which almost all developing nations will grow at breakneck speed, according to a comprehensive report by leading US demographers released yesterday.

They predict that at least an extra 1,000 million will be living in the world's poorest African countries by 2050. There will be an extra 120 million more Americans, and India will leapfrog China to become the world's most populous country. One in six people in western Europe will be over the age of 65 by 2050.

But the populations of some countries will shrink. Based on a number of factors, including analysis of birth and death rates, Bulgaria is expected to lose almost 40 per cent of its population.

Britain is expected to grow faster than any other major European country. Within 20 years, the authors expect it to have four million more people, at which point its growth is expected to tail off, adding only a further 1.5 million in the next 25 years to eventually reach 65 million. By then it will have overtaken France as Europe's second or third largest country, depending whether Russia is classed to be in Europe or partly in Asia.

The changes, considered inevitable given present trends, will transform geo-politics and fundamentally affect the world's economies, people's lifestyles and global resources, suggest demographers with the Washington-based Population Reference Bureau.

Countries such as Nigeria and Japan, which today have similar sized populations of about 130 million people, could be unrecognisable by 2050, say the authors. By then, Nigeria is expected to have more than doubled its numbers to more than 300 million people. But Japan, which has only 14% of its current population under 15, may have shrunk to roughly 100 million people.

Among the major industrialised nations, only the US will experience what the authors call "significant" growth. It is expected to have reached a population of 420 million by 2050, an increase of 43%. But Europe is expected to have 60 million fewer people than today and some countries could lose more than a third of their populations.

Eastern Europe is leading the world's down shifters. Bulgaria is expected to return to pre-1914 population levels, losing 38% of its people, while Romania could have 27% fewer and Russia 25 million fewer people. Germany and Italy are expected to shrink by about 10%.

The projections are based on detailed analysis of infant mortality rates, age structure, population growth, life expectancy, incomes, and fertility rates. They also take into account the numbers of women using contraception and Aids/HIV rates, but do not allow for environmental factors.

Climate change and ongoing land degradation are widely expected to encourage further widespread movements of people and pressure for migration away from rural areas towards cities and richer countries.

The population changes are causing growing alarm among experts, who believe sustained growth in developing countries can only be managed with economic help from rich countries. "World population is going to grow massively in some of the most vulnerable countries in the world. We have to ask how rich countries are going to help", said Kirstyen Sherk, of the Planned Parenthood Federation of America.

The former World Bank economist Herman Daly believes globalisation and the uncontrolled migration of cheap labour could put potentially catastrophic pressures on local communities and national economies. "The sheer number of people on Earth is now much larger than ever before in history. Some experts question whether Earth can even carry today's population at a 'moderately comfortable' standard for the long term, let alone 3 billion more".

The report, based on countries' own statistics, confirms trends identified earlier by the UN, and more recently by the US Population census report. While the world's few developed countries are expected to grow about 4% to over 1.2 billion, population in developing countries could surge by 55% to more than 8 billion.

Africa and Asia will inevitably be transformed. Western Asian nations are expected to gain about 186 million people by 2050 and sub-Saharan African countries more than one billion people. By 2050, India will be the largest country in the world, having long passed China.

How some countries will cope with the changes is debatable. Bangladesh, one of the poorest, most crowded and disaster-prone countries, may have doubled numbers to more than 280 million.

Overall, says the report, world population is growing by about 70 million people a year, and will likely reach 9.3 billion by mid-century from 6.3 billion today.

However, a separate report, to be published soon by the Washington-based Worldwatch Institute, will argue that fertility rates in poor countries could drop if there is a world fuel crisis. The thinktank says people usually have as many children as they think they can afford, and the motivation to have fewer comes from anticipating hard times ahead.

Increases in food production per hectare, it will say, have not kept pace with increases in population, and the planet has virtually no more arable land or fresh water to spare. As a result, per-capita cropland has shrunk by more than half since 1960, and per capita production of grains, the basic food, has been falling worldwide for 20 years.

Losers in a numbers game
Five countries are likely to lose a substantial proportion of their population by 2050. These are:

· Bulgaria -38% (7.8 to 4.8 million)
· Moldova -28% (4.2 to 3 million)
· Romania -27% (21.7 to 15.7 million)
· Russia -17% (144 to 119 million)
· Latvia -24% (2.3 to 1.8 million)

A dozen countries are forecast to more than double in numbers. They are all politically, socially or environmentally volatile.

Yemen (255%) Palestine (211%) Afghanistan (187%) and Kuwait (182%) have all been involved in armed conflicts. Bhutan (113%) and Nepal (105%) are undergoing great changes.

Kiribati (133%), the Solomon islands (112%) Tuvalu (122%) and Vanuatu (124%) are all expected to be devastated by climate change and rising sea levels.

NYT: Financial Firms Hasten Their Move to Outsourcing

Financial Firms Hasten Their Move to Outsourcing
By SARITHA RAI

New York Times

BANGALORE, India, Aug. 16 - Last February, when the online lending company E-Loan wanted to provide its customers faster and more affordable loans, it began a program in India. Since then, 87 percent of E-Loan's customers have chosen to have their loans financed two days faster by having their applications processed in India.

"Offshoring is not just a fad, but the reality of doing business today," said Chris Larsen, chairman and chief executive of E-Loan, "and this is really just the beginning."

Indeed, seemingly a myriad of financial institutions including banks, mutual funds, insurance companies, investment firms and credit-card companies are sending work to overseas locations, at a scorching speed.

From 2003 to 2004, Deloitte Research found in a survey of 43 financial institutions in 7 countries, including 13 of the top 25 by market capitalization, financial institutions in North America and Europe increased jobs offshore to an average of 1,500 each from an average of 300. The Deloitte study said that about 80 percent of this went to India.

Deloitte said the unexpectedly rapid growth rate for offshore outsourcing showed no signs of abating, despite negative publicity about job losses. Although information technology remains the dominant service, financial firms are expanding into other areas like insurance claims processing, mortgage applications, equity research and accounting.

"Offshoring has created a truly global operating model for financial services, unleashing a new and potent competitive dynamic that is changing the rules of the game for the entire industry," the report said.

Michael Haney, a senior analyst at research firm, Celent Communications, said: "With its vast English-speaking, technically well-trained labor pool and its low-cost advantages, India is one of the few countries that can handle the level of offshoring that U.S. financial companies want to scale to." .

In a recent report "Offshoring, A Detour Along the Automation Highway," Mr. Haney estimated that potentially 2.3 million American jobs in the banking and securities industries could be lost to outsourcing abroad.

Girish S. Paranjpe, president for financial solutions at Wipro, a large outsourcing company in India, said, "Pent-up demand, recent regulatory changes and technology upgrade requirements are all making global financial institutions increase their outsourcing budgets." His company's customers include J. P. Morgan Chase, for which it is building systems for measuring operational risk, and Aviva and Prudential, the British insurers.

Several recent studies concur that there has been an unexpected and large shift of work since the outsourcing pioneer Citigroup set up a company in India two decades ago. They cite cost advantages as the primary reason. According to Celent, in 2003 the average M.B.A. working in the financial services industry in India, where the cost of living is about 30 percent less than in the United States, earned 14 percent of his American counterpart's wages. Information technology professionals earned 13 percent, while call center workers who provide customer support and telemarketing services earned 7 percent of their American counterparts' salaries.

Experts say that with China, India, the former Soviet Union and other nations embracing free trade and capitalism, there is a population 10 times that of the United States with average wage advantages of 85 percent to 95 percent.

"There has never been an economic discontinuity of this magnitude in the history of the world," said Mark Gottfredson, co-head of the consulting firm Bain & Company's global capability sourcing practice. "These powerful forces are allowing companies to rethink their sourcing strategies across the entire value chain."

A study by India's software industry trade body, the National Association of Software and Services Companies, or Nasscom, estimated that United States banks, financial services and insurance companies have saved $6 billion in the last four years by offshoring to India.

But cheap labor is not the only reason for outsourcing. Global financial institutions are moving work overseas to spread risks and to offer their customers service 24 hours a day.

"Financial institutions are achieving accelerated speed to market, and quality and productivity gains in outsourcing to India," said Anil Kumar, senior vice president for banking and financial services at Satyam Computer Services, a software and services firm. Satyam works with 10 of the top global capital markets firms on Wall Street.

Mastek, an outsourcing company based in Mumbai, is another example. Two years ago, Mastek turned from doing diverse types of offshore work to specializing in financial services. The results are already showing. In the year ended in June, 42 percent of Mastek's revenues, $89.28 million, came from offering software and back-office services to financial services firms, up from 22 percent last June.

Fidelity Investments, the world's largest mutual fund manager, started outsourcing to Mastek 18 months ago and is now among the top five clients in its roster.

Sudhakar Ram, chief executive of Mastek, said, "It is rare that within a year a new customer turns a top customer; this illustrates the momentum in the market."

Another Mastek customer, the CUNA Mutual Group, which is based in Madison, Wis., and is part of the Credit Union National Association, started a project billed at less than $100,000 two years ago. Now the applications that Mastek is building for CUNA, to handle disability claims, amount to a multimillion-dollar deal.

In the transaction-intensive financial services industry, offshoring of high-labor back-office tasks is becoming the norm.

ICICI OneSource, based in Mumbai, has added 2,100 employees in six months and signed on four new financial services clients, including the London-based bank Lloyd's TSB, for which it provides customer service.

In one year from March 2003 to March 2004, ICICI OneSource grew to $42 million in revenues from $17 million. Today, more than 70 percent of its revenues come from the financial services industry, up from 40 percent two years ago.

For India's outsourcing firms, growth has not been without hiccups. Earlier this year, Capital One canceled a telemarketing contract with India's biggest call center company, Spectramind, owned by Wipro, after some workers were charged with enticing the credit-card company's customers with unauthorized free gifts. Weeks earlier, the investment bank Lehman Brothers canceled a contract with Wipro saying it was dissatisfied with its workers' training.

In response, outsourcing companies are improving their offerings. Leading companies are investing in privacy and security due diligence as they handle sensitive customer data, doing reference checks on employees, providing secure physical environments with cameras, and banning employees from using cellphones and other gadgetry on the work floor.

Deloitte forecasts that by the year 2010, the 100 largest global financial institutions will move $400 billion of their work offshore for $150 billion in annual savings. Its survey forecasts that more than 20 percent of the financial industry's global cost base will have gone offshore in that period.

With competence levels rising, Indian companies are tackling more complex tasks. DSL Software, a joint venture of Deutsche Bank and HCL Technologies, a software company, is handling intricate jobs for the securities processing industry. "Indian firms are taking offshoring to the next level; in the banking industry for instance, they are getting into wholesale banking, trade finance and larger loan processing type tasks," said Mr. Haney, the analyst from Celent.

But the relentless demand for skilled workers is putting pressure on wage rates, narrowing the wage gap with the United States and other Western economies. Simultaneously, companies are plagued by higher attrition rates that may lead to quality and deadline pressures.

For the moment, however, there is no indication the industry cannot cope with the unflagging demand to send work offshore. "If India can continuously pull less paid, less educated people into the labor pool," Mr. Haney said, "a substantial wage gap will continue to exist."

BBC: "Expert slams wave threat inertia"-the coming of the mega tsunami?

Expert slams wave threat inertia

A scientist has attacked the inaction over a threat from a dangerous volcano in the Canary Islands which could send a tidal wave crashing against the US.

Bill McGuire of the Benfield Grieg Hazard Research Centre said no one was keeping a proper watch on the mountain.

If Cumbre Vieja volcano erupts, it may send a rock slab the size of a small island crashing into the sea, creating a huge tidal wave, or tsunami.

Walls of water 300 feet high would travel to the US at the speed of a jet.

Within three hours, the wave would swamp the east coast of Africa, within five hours it would reach southern England and within 12 it could hit America's east coast.

The rock is in the process of slipping into the sea, but the trigger that sends it into the Atlantic is likely to be an eruption of Cumbre Vieja. According to Professor McGuire, Cumbre Vieja could blow "any time".

New York, Washington DC, Boston and Miami would be almost wiped out by the tsunami generated by the insecure rock falling into the Atlantic.

"Eventually, the whole rock will collapse into the water, and the collapse will devastate the Atlantic margin," said Professor McGuire, of the Benfield Grieg Hazard Research Centre.

"We need to be out there now looking at when an eruption is likely to happen...otherwise there will be no time to evacuate major cities."

The two or three seismographs designed to pick up signs of movement in the rock could not detect a volcanic eruption weeks in advance, McGuire said.

He urged the governments of Spain and the US to fund monitoring of the volcanically active La Palma - a project he said could be achieved relatively cheaply.

Global strategy

Professor McGuire and other experts speaking at a news conference on natural disasters on Monday said the global community needs to monitor and develop strategies to cope in the face of a catastrophe such as the one that Cumbre Vieja could cause.

Global Geophysical Events, or "Gee Gees", as they are nick-named, are not being taken seriously enough, they say.

However, good progress is being made in reducing the threat of asteroid impacts, researchers said.

Since 9/11 we have become acutely aware of the threat of terrorism. Governments worldwide are battening down the hatches and ratcheting up the security.

But some scientists believe we are ignoring threats with similar, or greater, potential to devastate human populations.

Giant walls of water that can devastate coastal cities, volcanoes so big that their ash crushes houses 1,500km (932 miles) away, giant earthquakes and asteroid impacts. These are very rare events and, if we are lucky, nothing like them will happen in our lifetimes.

But in the longer term, Gee Gees may be our undoing if we do not take action, say researchers. Careful preparation could potentially save thousands of lives, they say.

Super eruption

Volcanoes and earthquakes are relatively common occurrences, but Gee Gees are on an altogether different scale.

The last "super volcanic eruption" was back in April 1815, when Tambora in Indonesia exploded violently in what was the largest eruption in historic time.

The eruption column reached a height of about 44 km (28 miles), ash fell as far as 1,300 km (800 miles) from the volcano - and an estimated 92,000 people were killed.

Global governments are not entirely ignoring the threat of Gee Gees, however.

Some think the greatest danger to humanity comes from asteroids, but steps are underway to tackle the threat.

The European Space Agency (Esa) and Nasa are planning missions to test how the course of asteroids and comets can be altered by an impact.

Esa's mission Don Quijote will send a spacecraft crashing into the surface of a space rock to measure the effects. In 2005, Nasa's Deep Impact will monitor the outcome of blowing a hole in comet Tempel 1.

Scientists hope this will help them learn how to destroy or deflect an asteroid on a collision course with Earth.

According to Benny Peiser, of Liverpool John Moores University, UK, the threat of cosmic mega disasters will be essentially "abolished within 30 years".

"A quiet and largely unnoticed technological revolution is dramatically accelerating the rate at which near-Earth asteroids (NEAs) are discovered," he said.

In 1995 we knew about 300 NEAs, today we know about 3,000 - and within 20 years we could be aware of 90% of all nearby space rocks, he says.

"For the first time in the history of evolution we are closing this window of vulnerability."

August 19 Daily Philippine Stock Market Review: Locals Dictate Tempo

August 19 Daily Philippine Stock Market Review: Locals Dictate Tempo

Local buying spurred the Phisix higher by 1.09% or 16.9 points on a lean volume of P 412.311 million (US$ 7.363 million).

Even as foreign net capital flows registered a net inflow of P 24.730 million the nub of today’s buying interest was directed at Ayala Corp (+3.7%) which comprised two-thirds of the firm’s output and about a third of the cumulative net buying. Among the Phisix heavyweights and the broader market, foreign money was mostly bearish, as more issues posted outflows against inflows (6-3 for the heavyweights, 18-8 on the broad market). Aside foreign money constituted only 43.96% of today’s turnover.

Market breadth was obviously bullish despite the thin volume, gainers beat losers by 38 to 27 while industry subindices were all positive led by oil and property issues. Index heavyweights were mostly up led by foreign propelled Ayala Corp., Ayala Land (+3.8%), SM Primeholdings (+1.79%), Bank of the Philippine Islands (+1.23%), San Miguel A (+.86%), PLDT (+.8%) and Globe Telecoms (+.56%) while San Miguel B and Metrobank were unchanged.

Compared to the previous sessions, today’s rally was practically in line with the positive outlook seen in the rest of the Asian region where, as of this writing, 12 of the 15 bourses are up, reflecting yesterday’s robust gains in Wall Street. However, the locals being today’s market driver generated a less than convincing upside performance given the scanty volume. Foreign investors, on the other hand, had reversed their positive stance during the past two days leading to the steep fall of the Phisix while today’s activities still mirrors the cautious and selective posture in terms of accumulations, at the same time reducing their portfolio positions in the broader market. In other words, the locals are bullish and providing the cushion to the market while the foreigners are still slightly bearish. Unless we see a tandem of bullishness from both local and domestic investors, the Phisix is likely to trade in a tight range.

In technical terms, the Phisix bounced off its major support trend line, which was tested yesterday, and thus far had been a healthy manifestation of its year long uptrend.

August 18 The Philippine Stock Market Review: The Exodus Continues

August 18 The Philippine Stock Market Review: The Exodus Continues

Foreign money once again continued to dump local equity assets as the Phisix fell for the second day by a hefty .67% or 10.46 points, as foreign equity portfolio outflows recorded P 132.747 million (US$2.307 million) or equivalent to 28.67% of accrued output. PLDT (-2.35%) posted the largest outflow accompanied by equally intensive outflows in the Property heavyweights SM Primeholdings (-3.44%) and Ayala Land (-1.88%) and in food conglomerate San Miguel B (-1.42%). Of the eight heavyweights only two scored gains, namely Bank of the Philippine Islands (+1.25%) and San Miguel A (+.87%) while the rest posted losses. Metrobank was unchanged.

In technical lingo yesterday’s downside triangle formation break fortified the correction mode of the market. Today, the 50-day moving average support level was taken out with an attempt to breach the major trendline support at 1,553. The current market moves are manifesting ominous sign of market exhaustion. Any further downside pressures that would break the major trend line support level would spell a possible near-term trend reversal. Again, all eyes on PLDT whom has led the market for over a year and a half.

Market’s mood was relatively somber with declining issues slightly ahead of the advancing issues by 34 to 26, although in a much improved state compared to yesterday. Industry indices were mixed with 3 decliners (Commercial-Industrial, Oil and the Property) against 3 advancers (Mining, Financials and ALL index). Foreign money sold more than they bought while today’s trading activities was slanted towards local support of the general market as well as the Phisix components.

Today’s darling has been the International Container Terminals who braved the tide of foreign selling and was the sole major acquisition by foreign interest amounting to about a third of its output. ICT broke out of its long symmetrical triangle consolidation yesterday and was up 9.45%

Asian markets are currently mixed with the Phisix registering the largest decline in the region. We see no fundamental impetus for the sudden turnaround of foreign investors on the domestic market, except for the aspects of correlation to Wall Street. New York’s key benchmarks are currently showing severe oversold positions and are likely to post substantial rallies in the coming sessions, although this may be limited. Hence, if correlation is the subject of the recent declines we may expect the Phisix to ease further from its current levels, unless of course the locals would be able to match the volume of foreign capital and be aggressive enough to stave off the bearish sentiment.

MarketingProfs.com: Six Ways to Increase Marketing ROI

Six Ways to Increase Marketing ROI

by Marcia Jedd

August 17, 2004

Growing companies need to concentrate on what they do best—which, often, isn't marketing.

Worse yet, paid advertising, direct mail, publicity and event sponsorships are only a few of the channels vying for your marketing dollar. Today's information explosion and proliferation of media outlets add to the squeeze on marketing budgets.

Taking cues from consumer marketing and tested marketing strategies, consider these six ways to increasing your marketing return on investment (ROI):

1. Planning. To reap marketing ROI, the cost of entry is a good marketing plan. The plan needs to incorporate your company's mission and sales and marketing objectives. It profiles your markets and target audiences and identifies your marketing tactics.

Marketing tactics are the individual marketing channels and types of advertising, as well as publicity and marketing initiatives, that will best convey your messages to your markets, achieve sales goals and maintain brand awareness.

Remember, the dog wags the tail: affirm marketing and sales objectives, plan strategy, then select marketing tactics. It's an ongoing cycle.

2. Making a market. What new markets can you create for your brand, product or service? Sometimes new products or services happen spontaneously.

In the 1999 movie Office Space, Milton, a harassed office worker, is bothered by coworkers who pilfer his bright red stapler. Swingline turned down a movie tie-in offer by the film's producers because it didn't make such a stapler and wasn't convinced of the demand. Three years later, out of sheer demand, Swingline put its Rio Red Stapler on the market.

There are few rules in making markets. Leading-edge market makers are tomorrow's cash cows.

3. Snooping. Are you missing market openings and marketing opportunities by failing to snoop on your competitors or fish for trends? Use of competitive intelligence (CI) is on the rise, according to CI firm Fuld & Co.

Consider the minimal time investment it takes to monitor your markets and scour databases and industry news sources for trends that influence your markets. The key is trolling for CI regularly and acting appropriately on the information.

Learn from large companies such as Kraft Foods, which recently announced its plan to reduce portion sizes and pull back on marketing to kids in reaction to studies finding rising obesity rates.

Study the competition by investigating the personalities and background of its management. You can then be prepared for and anticipate its next move.

4. Tooting your own horn. Ten years ago, who would have thought that bathroom stalls gas pumps or the sides of trucks would be hot advertising spaces? What traditional and non-traditional media outlets can you leverage to reach your audiences?

Smart use of PR and alternative marketing methods—no longer just paid advertising—maximize your marketing budget to build your brand and market your product or service. A growing range of consumer products are marketed via word-of-mouth marketing, viral marketing or what's known as “buzz” marketing.

You will increase your chances of placement in print and broadcast media when you grease its wheels: provide broad industry information or statistics that the media can use.

5. Web marketing. How robust is your Web site and Web marketing plan? Opt-in email newsletters, blogging and other Web marketing initiatives can overtly or covertly sell your product or service on the Web.

The good news is that the cost of Web development has come down. Dynamic Web sites with predictive features, or an e-commerce Web site with data-capture capability, aren't only for large companies with big budgets. Web-based marketing techniques such as embedded HTML tracking in emails and newsletters show what happens to your messages.

You are only as good as today's Google search, where holders of the top non-paid keyword placement can change by the minute. Make sure to feature content on your site that accurately reflects your business.

6. Measuring. Are you measuring your marketing programs? Can you determine the percentage increase of sales from a direct-mail campaign or the number of leads generated by a specific marketing program?

The ability to track and measure your results matters to your bottom line and the success of your marketing efforts. This counts for failures, too.

If you marketed to 5,000 and you only received one sale, why? Low-quality lists, poorly developed Web sites and other haphazard marketing communications efforts achieve great results only for the lucky. Top marketing vehicles for measurement include Web sites, lead generation programs, events/tradeshows/seminars and print advertising.

What's in your marketing game plan? When you use these six strategies, you stand to maximize marketing return on investment

Marcia Jedd is president of MJ & Associates (www.marciajedd.com).

The Economist: Consuming passions

Consuming passions
Aug 16th 2004 From The Economist Global Agenda
As the American consumer tires, can shoppers in Europe, Japan and China take up the burden?

CAPITALISM is all about getting and spending. In America, where household debts amount to about 115% of disposable income, capitalism is often about spending rather more than you are getting. In recent months, however, American consumers have appeared uncharacteristically hesitant: their spending fell by 0.7% in June and their confidence ebbed last month, according to the University of Michigan's latest survey.

But as Americans acquire new inhibitions about spending, the French are shedding some of theirs. Their spending on manufactured goods surged by 4.2% in June (the biggest leap since the mid-1990s) and their saving rate dropped from 15.8% for the whole of last year to just 15.2% in the first quarter of this year. The French state, famous for intervening on behalf of its favoured companies, has recently stepped in on the side of shoppers. Nicolas Sarkozy, France’s finance minister, has arm-twisted supermarkets into cutting their prices, and part of the interest on consumer loans is now tax-deductible. In the French republic, thrift is now a vice, borrowing a virtue.

Partly as a result, French capitalism, for one brief moment, looks sprightlier than the American variety. According to figures released on Thursday August 12th, French GDP grew by an annual rate of about 3.2% in the second quarter. America grew by just 3% over the same period. France’s performance was not matched by other members of the euro area, however. In Germany, which grew by an annual 2% last quarter, household spending has been flat for a year or more; Italy is slowing; Dutch output actually shrank. The euro area as a whole grew by 2%, slower than in the first quarter. The long-awaited European recovery may have peaked before anyone really noticed it had arrived.

Japan’s recovery, of course, has been much more noteworthy. But it too may have peaked. According to figures released on Friday, the world’s second-largest economy grew at an annual rate of just 1.7% in the second quarter, after posting growth of 6.6% in the first. The yen value of Japan’s output actually fell, thanks to falling prices.

Again, Japan’s consumers may be partly to blame. Their spending, which grew by 4.2% (at an annualised pace) in the first quarter, slowed to 2.5% in the second. But the numbers are apt to mislead, says Richard Jerram of Macquarie Bank. The Japanese authorities have great difficulty stripping out the effect of deflation on their measures of output. As a result, official GDP figures probably overstate growth in the first quarter and understate it in the second. Other indicators are not much better. The household spending report, which expects households to track how much they spend on each of 21 varieties of fish, is simply too onerous and intrusive to be accurate, Mr Jerram says.

However unreliable, the numbers cannot obscure the most important question hanging over Japan’s recovery: can it survive China’s slowdown? Last year, China accounted for almost 80% of Japan’s export growth. But China is overheating—not only in economic terms but quite literally too. The China Meteorological Administration last week warned that temperatures could reach 40ºC in the southern coastal areas. Fans, air conditioners and industrial coolers are putting an intolerable burden on China’s power generators, inflicting blackouts on homes and stoppages on factories. Volkswagen has shut down plants in Shanghai twice in the past month.

Meanwhile, the inflationary dragon has returned. China’s consumer prices, which fell for much of 2002, rose by 5.3% in the year to July. The figures, released last Thursday, will revive troubling memories of a decade ago, when an unsustainable investment boom pushed inflation past 20%. In the spring, the People’s Bank of China said it would raise interest rates if inflation exceeded 5%. That limit has now been breached for two months in a row, and real interest rates, taking into account rising prices, are near zero. Nonetheless, the central bank has stayed its hand. It seems resigned to inflation rising through the third quarter, hoping it will ebb thereafter.

Should the government do more to slay inflation? Perhaps not. Higher food prices, the result of poor harvests, account for much of the inflationary pressure. According to Capital Economics, a consultancy, the best remedy for inflation may be more effective use of agricultural land, not higher interest rates.

For most of its short life, Chinese capitalism has been all about getting and investing. The Chinese invested over $660 billion in fixed assets last year, dotting the country with industrial parks, steel mills and office towers. Qu Hongbin, an economist at HSBC, reckons that about $200 billion-worth of this investment is surplus to requirements. Thus the task for the Chinese authorities is not to restrain the economy so much as to rebalance it, away from investment towards consumption.

To a certain extent, this shift is already taking place. Investment in fixed assets is slowing, while retail sales have been strong. As J.P. Morgan reports, the disposable income of city-dwellers is accelerating, and income per head in rural China is growing at its fastest pace for seven years.

Still, the authorities may be asking rather a lot of the Chinese consumer. Investment accounted for well over 40% of GDP last year. If such an important yet volatile component of Chinese demand were to collapse, could consumption ever compensate? Even if it could, Mr Qu argues, this would be cold comfort for Japan or for any other economy dependent on exports to the Middle Kingdom. What China buys from the rest of the world, after all, are commodities and machinery, not consumer trifles. If its growth were to shift from investment to consumption, its demand for the rest of the world’s products would slump, even if its growth did not slow that much.

The Chinese invest too much, Americans save too little and the Europeans, especially the Germans, could stand to spend more. The fate of the world economy in the year to come depends a lot on how these imbalances are resolved.

August 17 Philippine Stock Market Review: What do they know which we don’t?

August 17 Philippine Stock Market Review: What do they know which we don’t?

A 180-degree turnaround from yesterday, foreign investors stampeded out of the market to afflict heavy losses on the Phisix which closed lower by 28 points or 1.76%. Foreign investors sold P 60.592 million (US $1.08 million) of equity assets a reversal from yesterday’s positive inflow of P 100.161 million (US $1.789 million) selling on all the blue chips except for Ayala Corp (unchanged).

In technical jargon, the Phisix has broken on the downside of the triangle formation (bearish reversal) and currently rests on the 50-day moving average support level, which means that either we see a bounce from the important support levels or we could see the market move lower in the coming sessions as indicated by the breakdown of triangle formation. I think that the balance is tilted towards the latter.

The mostly vibrant Asian bourses are reflecting the spectacular overnight gains in Wall Street with only four bourses (Korea, Taiwan and Jakarta) out of 15 in the Red. The Philippines is the largest decliner thus far.

Again except for Ayala Corp and SM Prime whom were unchanged for the session, the major market cap heavyweights Bank of the Philippine Islands (-2.43%), and Ayala Land (-1.85%) were the largest issues sold by foreign capital, followed by Globe Telecoms (-4.37%), PLDT (-1.92%), Metrobank (1.92%), and San Miguel B (-.71%). Foreign trades accounted for a significant majority of 60.76% of total output.

Today’s bloodbath was actually an extension of yesterday’s bearish market breadth. Declining issues routed advancing issues by 5 to 1 or 69 to 13, all industry indices were in the red with the Mining sector suffering the largest loss (-4.79%), foreigners sold more issues than they bought aside from the outstanding net foreign selling.

Since the Phisix has behaved divergently against Wall Street in the past weeks, could it be that foreign money sold issues locally to shift their investments to regional issues with heavier correlation to the US as the latter has been oversold? There are no adverse domestic developments to pinpoint for today’s carnage. Neither does oil seem to be the factor since crude oil prices have eased from its recent record highs leading to the surge in bourses around the world. One could only speculate on why foreign money suddenly decided to exit from the local market. What do they know which we don’t?

Floyd Norris of New York Times: The Lesson of Iraq High Oil Prices May Not Be Temporary

Lesson of Iraq: High Oil Prices May Not Be Temporary
By FLOYD NORRIS

DID George W. Bush rely too much on diplomacy when he planned the war in Iraq?

The diplomacy in question was not the effort to line up allies for the war, which ended with much of Europe on the sidelines and angry. Instead, it involved what initially appeared to be a diplomatic victory: the quiet promise obtained from Saudi Arabia to step up oil production if necessary to offset a temporary decline in Iraqi oil exports.

That strategy was a good one in the Iraq war run by the first President Bush. As Jeffrey R. Currie, the head of commodities research at Goldman Sachs in London, noted this week, the Saudis at the time were able to offset the temporary loss of exports from both Kuwait and Iraq. There was a brief spike in oil prices when that war began, but they retreated as rapidly as they climbed.

But this time the Saudis have not been able to come up with the oil. They claimed this week to have another 1.3 million barrels a day of available production, but there is widespread doubt they can produce that much now, or even after two new fields go online later this year.

Why not? The international energy business has been starved of major capital investment for two decades, since the price swoon of the early 1980's scared oil companies.

In the 1970's, oil and other commodities were hot, and there was overinvestment in them and in the infrastructure needed to get the commodities to market. ''We got a free ride in the 1980's and 1990's from investment in the 1970's,'' Mr. Currie said.

By the beginning of this decade, the excess capacity was dwindling. But the conviction persisted that high oil prices could never last for long. Even when spot prices did rise, the price of oil for delivery months or years later did not rise very much.

Then Sept. 11 temporarily depressed demand from one oil-consuming sector - the airline industry. That sent prices down and reinforced the belief that there was no real energy problem.

Most oil market commentary still makes it sound as if high prices are a passing phenomenon. Each spike is attributed to the threat of a loss of Iraqi exports, or possible Saudi instability, or Yukos's problems in Russia, even though what is happening there seems unlikely to affect oil production, just to change who profits from it.

But the markets are smelling something different. Oil to be delivered next year now fetches $39 a barrel, and oil to be delivered in 10 years costs almost $35.

The problem is not a lack of oil in the world. The problem is getting the oil to refineries and then to market. The large undeveloped resources are in West Africa, around the Caspian Sea and in Siberia. Two of those areas have issues of political stability and the third has severe weather.

The trend now, Mr. Currie said, is to ''have new oil produced in West Africa, shipped to Asia to be refined, and the product then shipped to North America.''

If he is right, many arguments in Washington have been irrelevant. It does not make much difference whether oil is pumped from the Arctic National Wildlife Refuge in Alaska because a shortage of oil is not the biggest problem. ''The real problem is the shortage of infrastructure to obtain and deliver the commodity,'' Mr. Currie said. ''That seemed to go completely unnoticed until the last six months.'' Neither Europe nor the United States shows any indication of willingness to build new refineries.

Mr. Currie says the oil industry invested about $100 billion a year in the 1990's, a figure that has grown to $150 billion but needs to rise to perhaps $250 billion. Until that investment bears fruit, the world faces both higher prices and the possibility that supply interruptions could have severe effects.

The reality is becoming clear because of Iraq, but Iraq was not the cause, and diplomacy will not make it go away.

Elliot Wave's Pokhlebkin on Euroland's Social Mood: Speed Limit? In Germany?!

Speed Limit? In Germany?!

by Vadim Pokhlebkin

Yes, you heard right. The world famous, bullet-fast, no-speed-limit German Autobahns may soon become just like every other highway -- boring.

According to a recent poll, "the majority of German citizens would welcome the introduction of a sweeping speed limit on Germany's notoriously fast highways," reports the Deutsche Welle.

The proposed new speed limit is 130 kmh. This may seem "fast enough" for most people, but come on... For every speed fanatic, or even for your average, law-abiding car enthusiast who's ever dreamed of someday "opening it up" on the German Autobahn, this is the end of an era. (And dare I say, an abomination.)

Yet for those of us who understand Elliott waves, this news is hardly shocking. Germany has been leading the current bear market in Europe. Now, a vote to slow down the nation’s highways would be a logical consequence of a major social mood downturn that began in Germany back in 2000. This is the “right time” to cap the highway speed in Germany: Speed limits usually get introduced during bear markets and repealed when bullish times return.

For example, in 1974, after the DJIA had been on a losing streak for several years, the U.S. introduced a 55-mph nationwide speed limit -- a move that “institutionalized the nation's depressed pace,” as we put it later. The federal speed limit was only lifted in 1995, after two decades of a rising social mood, stock market, and economy. By the way, Montana was the only state that went to the opposite extreme in 1995 and set no speed limit at all. But as the collective mood in the U.S. began to peak a few years later, in 1999 Montana joined the suit and capped its highway speed at 75 mph.

Another example is Australia. Until 2002, its Northern Territory remained the only place in the world -- besides Germany -- that had no official speed limit. However, in 2002, as the Australian ASX200 continued to fall, the Territory's government made the first step towards speed restrictions and slowed down one of its major highways to 110 kmh.

But let’s get back to Germany. How long will the country stay this sluggish? When will the German stocks wake up from their slumber? When will “Europe’s main economic engine” start revving up again?

August 11 Philippine Stock Market Review

August 11 Philippine Stock Market Review

That 1,600-level is proving to be a stubborn resistance level.

Obviously the Philippine as well as most Asia’s markets have been lifted by the sturdy gains in Wall Street, as US Fed Chair Alan Greenspan raised its short term interbank rates by an anticipated quarter percentage points and forecasted that the “economy nevertheless appears poised to resume a stronger pace of expansion going forward. Inflation has been somewhat elevated this year, though a portion of the rise in prices seems to reflect transitory factors.” The term ‘Transitory’ has been the vogue word of late and poses as a big QUESTION mark as crude OIL has been repeatedly establishing new heights. While the preeminent market mover was projecting an optimistic outlook, sweet crude oil broke past the $45 level the highest ever in New York, in current dollar terms. Oil tycoon T. Boone Picken’s forecast of oil prices hitting $50 per barrel before going down to around $30 but never to go below that level seems to be moving right on the mark.

Well as we mentioned before, it would take foreign money to power the major composite index while the locals drive the broader market. The Phisix is one of the Region’s best performer up by 13.14 points or .83% following Indonesia and Japan. Foreign money was again selectively upbeat scooping up shares of mostly key telecom issues and was a thin majority or 50.08% of today’s trade. Today’s net foreign capital inflow amounted to P 117.158 million or about 14.28% of today’s output.

Sentiment was mostly positive, as advancing issue beat declining issues 43 to 31 while industry sub-indices were all up except for the extractive industries which were hamstrung by profit-taking.

Except for the foreign supported PLDT (-.78%) today’s sole heavyweight in the red, Globe Telecoms (+1.65%), Ayala Land (+1.81%), San Miguel B (+3.61%) and Bank of the Philippine Islands were all up on foreign buying, while the rest, SM Prime, Metrobank and San Miguel A were unchanged.

Questions of whether Sir Greenspan of the US FOMC would continue to raise rates in the face of the recent weak economic data and falling Treasury yields, which have portrayed the US economy as decelerating from its robust past quarters of higher than average growth, has been gaining some ground. Yesterday’s rate hike still falls short of the prevailing inflation levels and a desistance with the normalization of the yield curve plus the declines in the value of the US dollar are fodders for continuing ‘carry trades’ and is seen as beneficial to emerging markets as ours.

We may see a telecom led breakout of the 1,600 levels tomorrow.

Arts as Investments "Where the Blue Chips Fall" by jori finkel

Where the Blue Chips Fall
economist michael moses tracks the high-end art market
by jori finkel

By now everybody knows the story of Picasso ’s Garçon à la pipe, from 1905.Bought by John Hay Whitney in 1950 for a reported $30,000,the Rose Period masterpiece sold for $104 million at Sotheby ’s in May, becoming the world ’s most expensive painting. Sotheby ’s described it as a “haunting and poetic ” portrait of adolescent beauty..Reporters called it “the best investment ” ever made in art..

Think again. Despite its staggering price, the Whitney picture did not generate an earth-shattering financial return, says Michael Moses, an economist at New York University ’s Stern School of Business. He calculates that the painting had a compound annual return of 16.3 percent. Yes, that ’s impressive, surpassing the S&P 500 ’s average return for the same period of 12.1 percent. But it ’s hardly the best investment ever made in art, and not even the best return for your money on a Picasso. According to Moses ’s research on auction results, that honor goes to a small drawing the artist made in 1903,Le vieillard. Purchased at Christie ’s in 1991 for $9,350, it sold two years later at Sotheby ’s for $25,300,making its annual return 64 percent.

Since this line of thought might surprise members of the art world, who are so often dazzled by high price tags, Art & Auction asked Moses to share his data. We asked him to rank the three heavyweights from the May sales —Picasso, Monet and Renoir —in terms of auction performance. Which of these artists has historically posted the best, and worst, returns? Do their works, which so often get labeled “blue-chip,” really resemble the tried-and-true stocks of ge,ibm or Microsoft?

Yes and no, says Moses, who used as his sample 372 works by the three artists that have sold more than once at auction. “Monet, Renoir and Picasso are very much the large-cap stocks of the art world, in that they are the most frequently traded of the truly expensive artists. We couldn ’t have done this study,for example, with Degas or van Gogh,” he says..“But when it comes to financial returns, our three great artists fall somewhat flat. We found that they underperform the art market as a whole.”

While Picasso leads the pack with an annual return of 8.9 percent (see bar graphs on page 51 ),the others lag behind the Mei Moses Art Index, which Moses and his nyu colleague Jian ping Mei developed using repeat auction sales for thousands of different artists. And all three trailed the S&P 500. This reflects a trend that Mei and Moses described in “Art as an Investment and the Underperformance of Masterpieces,” published in the American Economic Review. “The art market, like the stock market,is very democratic,” says Moses.“ If you slice the art market into thirds by purchase price, the works in the top third do not appreciate as much as those from the middle third, and works from the middle third do not appreciate as much as those from the bottom third.” Apparently the most expensive works have already made their way into the canon of art history and have that recognition written into their price tag. Pricey works have less room to grow.

Still, blue-chip art has one wonderfully redeeming feature, which may be best described as staying power. As shown in the bar graph on holding periods, all three artists promise strong returns, as long as you keep the works for several years. Just look at Monet, who posts the lowest average return (2.3 percent) for works sold within 5 years of purchase, but the highest (12 percent)for works sold after 15 years —a dramatic illustration of how art can appreciate over a long holding period. And that speaks to another finding Moses has made: While fine art sold at auction exhibits greater day-to-day volatility than stocks, it roughly matches the performance of the S&P 500 over the long haul.

Some data is ambiguous. Some numbers equivocate. But this much is clear: If you plan to park your money in art, you should make sure time is on your side. Take your cue from John Hay Whitney and hang on to that Picasso as long as you can.

JORI FINKEL IS THE SENIOR EDITOR OF ART +AUCTION

Ishida of Japan Times: Asian currency zone beckons

Asian currency zone beckons
By MAMORU ISHIDA
Special to The Japan Times

There is no doubt that the stable renminbi (RMB) exchange rate, pegged at about 8.25 yuan to the U.S. dollar, has helped China's economic development. It has brought about enormous production capacity in the export industries. Meanwhile, the sharp increase in exports to the United States has prompted America to pressure China to revalue the RMB. Earlier this year, Zhou Xiaochuan, governor of the People's Bank of China, said China planned to improve the mechanism for determining the RMB exchange rate.

Revaluing the RMB vis-a-vis the dollar could be like opening a Pandora's box. As the U.S. trade deficit is unlikely to decline significantly, the U.S. could claim that any revaluation was inadequate and demand further revaluations, as it did with Japan. The market would respond, driving the RMB to fluctuate wildly at the sacrifice of China's economic stability.

Alternatively, China could peg the RMB to a basket comprising the dollar, yen and euro. John Williamson of the Institute for International Economics proposes a respective dollar-yen-euro ratio of 35 to 40 percent, 30 to 35 percent and about 30 percent.

To the extent that fluctuations between the three currencies are offset, fluctuations of the effective exchange rate of the RMB would be reduced.

Some members of the Association of Southeast Asian Nations have already pegged their currencies to their own baskets including the yen and euro. China is reported to be studying a currency basket. If China and ASEAN countries move to a common basket regime, it could lead to a major change in the U.S. economy.

When the twin U.S. deficits kept increasing in the 1980s, Stephen Marris of the Institute for International Economics predicted that investors would one day refuse to lend to the U.S., causing a hard landing for the U.S. economy. That did not happen because the global capital market kept lending to the U.S.

Now, though, Japanese and Chinese monetary authorities have been financing a significant amount of the U.S. current-account deficits by buying dollars in the markets to prevent the yen and RMB from appreciating.

Two events could make further financing of the U.S. current-account deficits difficult: (1) It has already become possible for investors to shift their assets from the U.S. to the euro capital market; and (2) if China and ASEAN countries move to a basket currency regime, a certain portion of their foreign exchange reserves now invested mostly in dollar assets would shift to yen and euro assets.

Depending on the magnitude of such a shift, the supply of capital to finance U.S. current-account deficits would be reduced. That could signal the beginning of the U.S. becoming an ordinary country that cannot enjoy both economic prosperity and military power by piling up foreign liabilities.

Stephen Roach, chief economist at Morgan Stanley, has warned of vulnerability to the world economy, which depends on the U.S. economy, which in turn depends on ever-increasing foreign liabilities. The U.S. current-account deficits must be addressed. A sharp fall in the dollar is inevitable.

Growing Asia would be the only realistic candidate to take over the role of the world's growth engine. Asia would have to depend less on exports to the U.S. and more on regional economic activities. A currency system to reduce exchange risks in trade and investment within Asia would be indispensable. China and ASEAN countries could mark the first step in forming such a system by adopting a joint currency basket.

China could explain to the U.S. that the basket regime would possess flexibility to reflect changing economic fundamentals as well as stability, and that a stable currency zone in Asia would be in the interests of the world economy. The higher the weight of the dollar in the basket, the easier it would be for the U.S. to accept it.

A good time to implement the reform would be when U.S. pressure and the market's speculative waves had subsided as a result of China's economic boom and worsened trade balance. One idea for an interim measure is to allow a wider trading band.

Asia is practically a dollar zone now, as most Asian countries peg their currencies mainly to the dollar. Japanese companies take yen-to-dollar exchange risks even in trade with Asian countries. They would welcome an Asian currency zone that would result in a more mild fluctuation vis-a-vis the yen. In 1998, then-Finance Minister Kiichi Miyazawa recommended a basket currency regime to Asian countries. It is natural for Japan to participate. If an unprepared Japan faces the sharp fall of the dollar predicted by Stephen Roach, it will risk experiencing another lost decade.

Asian political leaders and monetary authorities are speaking frequently of an Asian common currency. Malaysian Prime Minister Ahmad Badawi said in Tokyo that East Asian integration was not a wish but a reality, and that it was not premature to start studying regional currency integration.

Yu Yongding, director of the Institute of World Economics and Politics at the Chinese Academy of Social Sciences, told a finance ministry's meeting in Tokyo that the three major international currencies in the future would be the dollar, euro and an Asian common currency, and urged China and its neighbors to cooperate to realize it. Officials of The People's Bank of China surprised visiting Japanese politicians by proposing a joint study of an Asian common currency. Obviously, Japan is not prepared.

Japan has a serious disadvantage. In Europe, the trust between German and French political leaders was crucially important in realizing the euro. Such trust does not exist between Chinese and Japanese leaders, as Japan has yet to come to terms with parts of its history.

Suppose an Asian currency zone with China but without Japan was formed. Its economic size would overwhelm Japan in time. According to the CIA's Global Trend, Japan's gross domestic product in 2015, measured by purchasing power parity, will be $4.5 trillion against China's $12 trillion.

It is time for Japan to decide how to live in the community of Asian nations and how to participate in forming an Asian currency zone.

Mamoru Ishida is a guest fellow at the Institute of Asia-Pacific Studies, Zhengzhou University, China, and an adviser to Itochu Corp.
The Japan Times: Aug. 10, 2004