Prudent Investor: The Talisman and the Philippine Stockmarket

The Talisman and the Philippine Stockmarket
March 19, 2005

It is revolting to see how media can easily pollute and manipulate the minds of the gullible public. One late night domestic narrative TV program featured on the efficacy of the talisman, locally known as the ‘anting-anting’. First, it portrayed of the seeming invincibility of amulet. Second, how the talisman is made, and lastly, the show concludes (sic) that the potency of the talisman depends on the underlying faith of its bearer.

While the TV program did feature a tad of skepticism about its effectivity, nonetheless it was totally amiss with scientific evidences proving or disproving its utility. The show’s vignette was primarily based on empirical or observational proofs. It catered to the viewing public’s intuition and not to reason. In other words, the manner of presentation actually frames or impresses on the public to accept these mysterious objects as factual, in condition that it was accompanied by faith.

There are millions of zealots or fanatics of various religious persuasions around the globe who would have gladly used these age old mystical items to promote their interests without the need of blowing up themselves.

The world spends close to a trillion dollars in defense and by discovering and improving on the functional utility of such mystic devices that may substitute for armaments, global poverty may be alleviated as allocations towards defense may instead be channeled towards developmental assistance. That is IF these were genuine.

Unfortunately for the unwitting TV program producers, the show may be indirectly inciting violence, giving goofballs the incentive of proving their unassailability.

In the financial markets, the Talisman analogy can frequently be seen in media which oftenly attaches plausible but uncorrelated events to the market’s movements. This is because the public clamors for instinctive responses to the market’s action.

Take for example this week’s market decline. Mainstream media alongside most experts and observers seems to be groping for a cause citing the Abu Sayyaf retaliation threats and other security issues, failure of to pass VAT and IPO related selloffs as possible reasons for the Phisix’s hefty 4.08% decline. In other words, the market found ‘no domestic walls of worry’ to climb and has left the public bewildered by the recent carnage.

However looking at the global markets, we note that MOST emerging markets were shellacked over the week such as the horrendous declines of the bourses of Romania, Ukraine, Czech Republic, Turkey, Egypt, China, South Korea and etc. In Asia, it was more of the rule, and Indonesia and Australia, being the exceptions.

In my previous newsletter, I have noted of the sharp decline in emerging market bonds which could spillover the Philippine bourse. Apparently and coincidently, these have been the case. Both, JP Morgan Emerging debt funds and Salomon Bros Emerging Debt funds continued to post steep losses this week.

Swooning emerging debts coupled with overbought technical indicators overwhelmed my bullish outlook brought about by the firming peso and the falling US dollar.

The Peso which was down by .39% to 54.34 and should be expected to fall further as the huge block sales of Globe Telecoms led the market to register an outflow of P 1.803 billion over the week. In addition the Peso’s decline was mostly in tandem with the region.

Further, the US dollar could be seen rallying this week highlighted by the US Federal Reserve meeting this March 22. The Fed rate is expected to be raised by a quarter percentage points and any major changes/alterations in the ‘measured’ pace may stir the hornet’s nest in the financial markets.

Next, you have crude oil and other energy prices at record levels for the week and this may exacerbate the liquidations in the global financial markets on SELECT asset classes.

Energy related issues dominated global markets EXCEPT the Philippines.

In Asia, Bloomberg’s Neha Kumar reports, “The MSCI Asia-Pacific Energy index, which tracks energy stocks including Woodside Petroleum Ltd., climbed for the 10th straight week.”

In Europe, Brian McGee of Bloomberg reports, “Oil shares, this year's biggest gainer among the 18 industry groups in the Stoxx 600, paced today's advance…The Stoxx 600's basic-resources and oil and gas groups have added 14 percent and 12 percent respectively in 2005. The broader measure has increased 4.3 percent.”

Bloomberg European Analyst Matthew Lynn says, “The London stock market is going through a speculative frenzy over oil exploration stocks. Investors are piling into stocks based on little more than rumors and hope. Shares are being sold on the back of the purported expertise of developers, not business plans.”

In the Philippines, energy and oil stocks are getting clobbered together with trash issues. In the era of globalization and internet are we still insulated from the world?

Finally, declining bond prices/higher yields and record high oil/energy prices seem to signal an imminent tightening of global liquidity conditions. This is where the rubber meets the road.

World Bank Press: Asia Needs Trillion Dollars Over Five Years To Boost Infrastructure

Asia Needs Trillion Dollars Over Five Years To Boost Infrastructure: Study

Asia-Pacific developing economies led by China need to invest more than one trillion dollars over the next five years to upgrade their infrastructure and sustain growth, Agence France Presse notes a report said Wednesday.

China alone is estimated to account for 80 percent of the total amount needed, the Asian Development Bank (ADB), the World Bank and the Japan Bank for International Cooperation (JBIC) said after a joint study. The 21 economies covered in the report face a massive funding challenge with more than $200 billion required annually from public and private sources for roads, power plants, communications, water and sanitation systems during the five-year period.

The report noted that some of the poorest economies such as Laos and Cambodia have little or no infrastructure investment while the 1997-98 Asian crisis forced others like Indonesia and the Philippines to spend less in this area. "The economic crisis is now over, most countries have resumed high level growth levels and private investment in general is beginning to recover but private investment in infrastructure is returning only very cautiously and governments are sometimes tentative in their response," it said.

The three lending institutions, however, noted important developments since the regional financial meltdown in the late 1990s. The countries affected now have more open governments, allowing vigorous debate on policy and spending issues, as well as stronger state institutions capable of handling large transactions and investments more efficiently. "And significantly, while it is hard to say that there is less corruption, there is less tolerance of it and fewer illusions about its hidden costs on business and the poor," they said. The report covered Cambodia, China, Fiji, Indonesia, Kiribati, Laos, Malaysia, Marshall Islands, Micronesia, Mongolia, Myanmar, Palau, Papua New Guinea, the Philippines, Samoa, Solomon Islands, Thailand, East Timor, Tonga, Vanuatu and Vietnam.

Reuters explains that the study said 65 percent of the required funds was needed for new investment and the remainder for maintenance of roads, power plants, communications, water and sanitation systems. Infrastructure was particularly important at a time when the region was "increasingly interconnected through supply chain production networks and expanding cross-border trade, fuelled by China, which has served as a magnet for regional growth", they said. For China, total needs account for almost 7 percent of GDP, the study estimated. ADB Vice-President Geert van der Linden told Reuters in an interview that China's rapid rate of growth requires an expansion in infrastructure as the economy demands more power generation and transmission networks. Refocusing on infrastructure was important for boosting both economic and social linkage within the region and reminding the donor community of the "essential part of development", which he said had been somewhat forgotten.

Dow Jones adds that private investment in infrastructure today accounts for only about five percent. Though overall investment levels in East Asia are high, averaging over 30 percent of gross domestic product since the 1990s, with several countries investing over seven percent of GDP in infrastructure alone, private investors have fed only about $190 billion into East Asian infrastructure since 1990, the study said. Private companies worldwide are willing to contribute to that investment as long as government policies and regulations are predictable.

Reuters adds that Jemal-ud-din Kassum, the World Bank's regional vice president for East Asia and the Pacific, stressed the need for proper use of infrastructure funds amid concerns about the impact on the environment and local communities and about corruption. "Over the course of the study, we heard clearly that while infrastructure can indeed be a force for good, we also have to make sure it is done well," Kassum told a symposium in Tokyo at which the three organizations presented the study. "Increased funding both from the private sector and particularly on the public side must be used in a way that maximizes the development impact. That means linking infrastructure projects to countries' overall development and poverty reduction strategies," he added.

Prudent Investor comments…

There are several items that can be gleaned from the article,

One, the appreciating currencies of the region translates to a more conducive environment for infrastructure investments

Two, the massive stash of US dollars by the held by region’s central banks increases the probability for increased regional investment spending as dollar diversification becomes a plausible option

Lastly, infrastructure investments would boost demand for basic materials, commodity and energy raw materials.

Bloomberg: Oil Surges to a Record on Concern Demand Is Outpacing Supply

Oil Surges to a Record on Concern Demand Is Outpacing Supply

March 17 (Bloomberg) -- Crude oil surged to a record $56.69 a barrel as a promise of increased output from OPEC failed to ease concern that demand for gasoline and other fuels is rising faster than supply.

OPEC said yesterday's agreement to add 500,000 barrels a day to its output quota won't immediately change supply, which already exceeds the limit. U.S. gasoline rose to a record after stockpiles last week had their biggest decline since September. Saudi Arabia, the only OPEC member with significant untapped production capacity, warned of higher demand later this year.

``Traders know that there is very little ability for a big increase'' in OPEC's output, Tom James, managing partner in London of energy and commodity consultant Global Risk Partners, said in an e-mail. ``This year we're not looking to see any major drop in oil demand.''

Crude oil for April rose as much as 23 cents, or 0.4 percent, in after-hours electronic trading on the New York Mercantile Exchange to the highest intraday price since the contract was introduced in 1983. It was at $56.64 at 8:30 a.m. Singapore time.

Yesterday, the April contract rose $1.41, or 2.6 percent, to $56.46 a barrel, a record closing price.

Futures jumped more than $1.50 in 15 minutes after the Energy Department's weekly report showed U.S. gasoline supplies fell by 2.9 million barrels last week, almost three times the decline expected by analysts in a Bloomberg survey.

OPEC

The Organization of Petroleum Exporting Countries will hold talks on another 500,000 barrels a day increase in the output quota starting from May 1, OPEC President Sheikh Ahmad Fahd al- Sabah told reporters in Isfahan, Iran, where the group met yesterday. Because members are already supplying more than planned, additional barrels may not come until May, he said.

``There is little OPEC can do to get more on the market,'' said John Kilduff, senior vice president of energy risk management with Fimat USA in New York. ``OPEC has ended up marginalizing themselves. The increase in quotas only highlights their lack of spare capacity.''

U.S. crude-oil supplies gained 2.6 million barrels to 305.2 million last week, the highest since June, and 8.2 percent higher than a year earlier, according to Energy Department data. Analysts surveyed by Bloomberg forecast a 2 million barrel increase.

Gasoline supplies fell for a second week to 221.4 million barrels, the report showed. Supplies remained 9.4 percent higher than a year earlier.

`Gasoline Spooked Market'

``It was the gasoline number that spooked the market,'' said David Thurtell, commodity strategist at Commonwealth Bank of Australia in Sydney.

Gasoline for April delivery rose 4.1 cents, or 2.7 percent, to $1.5483 a gallon in New York, the highest closing price since the contract was introduced in 1984. It was at $1.55 in after- hours trading.

``We're worried about the high-demand period this summer and our ability to keep up with gasoline consumption,'' said Phil Flynn, vice president of risk management with Alaron Trading Corp. in Chicago. ``U.S. crude supplies rose last week but with the growth of China there's going to be more competition for barrels in the months ahead.''

China's fuel use will rise 7.9 percent this year, or 500,000 barrels a day, to 6.88 million barrels a day, according to the Paris-based agency. China is the second biggest oil consumer after the U.S.

Al-Naimi

Global supply is sufficient to boost inventories now, Saudi Oil Minister Ali al-Naimi said yesterday in Isfahan.

``When we project into the fourth quarter, we see a substantial rise between the third quarter and the fourth,'' he said. ``We believe additional crude is needed. How much, we don't know.''

OPEC pumped 29.85 million barrels of oil a day in February, according to a Bloomberg survey of oil companies, producers and analysts. The ten members with quotas, all except Iraq, have a production ceiling of 27 million barrels a day and exceeded that by almost a million barrels last month.

The International Energy Agency, an adviser on energy policy to 26 industrialized nations, forecast in a report last week that oil consumption will climb by 1.81 million barrels, or 2.2 percent, to 84.3 million barrels a day this year. It was 330,000 barrels more than the agency forecast last month.

Prices rose in 1974 after an oil embargo that followed the Arab-Israeli war and from 1979 through 1981 after Iran cut oil exports. The average cost of oil used by U.S. refiners was $35.24 a barrel in 1981, according to the Energy Department, or $75.71 in today's dollars.

Prudent Investor comments...

As noted before a weakening dollar, demand supply imbalances, government interventions, terrorism and geopolitical tensions have all contributed to the bull market of energy prices such as crude oil. We are poised to see a continuation of higher oil prices, higher inflation levels and higher interest rates which will be detrimental to most financial markets.

As of this writing most Asian bourses are down almost in sympathy with the shellacked US equity markets. However, defying the trend are the global oil stocks which have risen in the recent past in congruence to higher oil prices, as Matthew Lynn of Bloomberg says, “The London stock market is going through a speculative frenzy over oil exploration stocks. Investors are piling into stocks based on little more than rumors and hope. Shares are being sold on the back of the purported expertise of developers, not business plans.” But not in the Philippines, whose market looks insulated from macro developments and has been a playground for speculative ‘trash’ issues.

CNN.com: China Congress passes Taiwan bill

China Congress passes Taiwan bill
CNN.com

BEIJING, China (CNN) -- China's top legislative body has approved a resolution that authorizes Beijing to use military force to prevent Taiwan from declaring its independence.

The measure, passed on Monday by the National People's Congress, "represents the common will and strong determination of the Chinese people to safeguard the territorial integrity" of China, NPC chairman Wu Bangguo said.

Wu said the measure would "promote the peaceful reunification" and "contain secessionist forces in Taiwan," which China's ruling Communist Party considers a renegade province.

The law allows China's State Council and the Central Military Commission to move against any formal secession attempt by Taiwan as a last resort, should chances for peaceful reunification "be completely exhausted."

But Chinese Premier Wen Jiabao said the new legislation was not a "war bill."

"This is a law advancing peaceful unification between the sides. It is not targeted at the people of Taiwan, nor is it a war bill," Wen said at a news conference, shortly after the law was passed.

China has long threatened to take military action to prevent Taiwan from declaring formal independence.

Monday's resolution, approved as the annual National People's Congress came to a close, puts a legal framework behind those threats.

The law also declares that the status of Taiwan "is China's internal affair, which subjects to no interference by any outside forces."

The measure has triggered widespread criticism from Taiwan, where one leader called it a "dark cloud" hanging over relations with mainland China. There was no immediate reaction to its passage from Taipei.

In Washington, the Bush administration last week called it "unhelpful" and urged Beijing to reconsider the bill. But Wu waid the measure would promote peaceful reunification and regional stability.

"This law has practical and profound historical significance," he said.

China hopes the law will deter Taiwan President Chen Shui-bian from pushing for the island's independence before the end of his second and last term in 2008, analysts say, Reuters reported.

Despite the legislation, analysts say the People's Liberation Army has no immediate plans to attack Taiwan and the "non-peaceful" means is not specifically a reference to war. It could, for example, be economic sanctions or blockades.

Beijing has claimed sovereignty over Taiwan, which lies east of the Chinese coast, since Nationalist troops lost the Chinese civil war on the mainland and fled to the island in 1949.

Reuters reports the new law will feature in talks between U.S. Secretary of State Condoleezza Rice and her Chinese counterpart Li Zhaoxing in Beijing on March 20-21.

Washington recognizes China but is Taiwan's main supporter and arms supplier.

U.S. President George W. Bush has pledged to help Taiwan defend itself against any Chinese attack.

****

Prudent Investor comments…

A casus belli to World War III?

Jonathan Davis: "Secrets of Success: No one sees when bullish turn to bearish" published by the Independent UK

Secrets of Success: No one sees when bullish turn to bearish
By Jonathan Davis
12 March 2005
The Independent UK

Market timing, a hundred academic studies have told us, does not really work. Calling the precise points at which markets turn from bullish to bearish, or vice versa, is simply not a feasible option. You might get lucky once or even twice in a row, but to hope to do it on a consistent, regular basis is the stuff of dreams (though that does not stop investment banks and a host of other dream-peddlers continuing to offer advice of this sort).

This is one reason why, for most of us, professional and amateur alike, a more sensible approach is not to try. It is a better use of your time and emotional energy to stick to focusing on a few big-picture trends and stick with them until or unless they begin to show signs of excess. Investing on a regular basis and rebalancing your portfolio once a year to adjust for valuation shifts is another tried and tested way of protecting your assets from bad timing calls.

Yet the reality is that most of us cannot resist getting involved in trying to call the twists and turns of each successive market phase. Market timing is an addictive drug, which fulfils some deep-seated emotional need we all share. Why do bull markets have to "climb a wall of worry", as the old market saying has it? Because deep down we are all market junkies and would not have it otherwise.

The same goes for the age-old debate about whether "growth" or "value" is the better investment approach. There is no debate, as far as I am aware: all the evidence I have seen shows that, in the long run, a buy-and-hold value-based approach will provide the better, more reliable returns. But it can be dull work putting such a philosophy into action.

The real fun in the stock market comes in phases when either growth stocks do spectacularly well as a class, or there is some great speculative surge that holds out the prospect of sudden, large-scale returns. We are seeing one develop in the mining and natural resources sector at the moment. You only have to look at the exotica now finding its way daily to the Alternative Investment Market (AIM) to see that. It is all intoxicating stuff - and probably worth joining in with your fun money. The evidence that we are entering a new long bull market phase in commodities and natural resources seems pretty robust. Coupled with a low interest rate environment (the essential precondition of any speculative bubble), that provides a useful backcloth against which speculative stocks can flourish.

Many new mining exploration companies now appearing will turn out to be worthless.

It will all end in tears, though not for some time. The prudent investor will look to play the new bull market in commodities in a more cautious, strategic way: for example, through well-diversified dedicated funds and the larger diversified oil and mineral companies.

There is, as the market strategist David Fuller points out, a common theme in these developments. It is what he calls "supply inelasticity", the notion that demand for many natural resources and industrial commodities is growing strongly while, after years of weak or falling prices, the investment needed to bring on new sources of supply will take time to mature. That imbalance will underpin the upward trend in the oil, gold and industrial commodities markets for some years to come, although the trend will be obscured from month to month by periodic sharp falls in prices.

By contrast, Fuller suspects that stock markets in general will shortly be heading in the opposite direction: in his view, we are now two years into a typical "bear market rally" that will in due course see Wall Street and other leading markets resume the secular downward trend that began in 2000. This seems a plausible argument to me, and one I find that is quite widely shared by the professionals whose opinions I rate highly. We should all be preparing ourselves for such an eventuality. As a long-standing Warren Buffett watcher, I think that this is also the real message contained in his latest letter to shareholders, which came out last weekend. Having moved a lot of money into bonds four years ago, and bought into the energy sector in a big way more recently, Buffett is now sitting on $40 billion of cash and signaling that he is not tempted by values in the stock market at current levels. But the most important thing to remember, as a pragmatic investor, is not to let feelings about markets, however strong they might be, tempt you into too much precipitate action - which is the real snare of market timing.

The bullish phase of the stock market is still running, and there is no powerful reason yet to jump off, at least without more compelling evidence that the markets have turned. Fuller advises us to look out for what happens to the Australian and New Zealand stock markets. In his experience, the markets that lead the global stock markets up tend to be the ones that "top out" first. Australia and New Zealand have both carried out that role in the global stock market rally of the past two years. When they start to deteriorate, that could be a powerful signal that the bigger market trend is drawing to an end - especially if it is seen to be combined with evidence that bond yields are also starting to rise. Just don't expect to catch the turn precisely. Most successful investors are brilliant market timers in retrospect, but rarely in advance.

What they tend to do, if they think the market might be turning, is put a small bet on the fact and then gradually increase their exposure to that point of view, if the subsequent market action suggests that the move is indeed becoming an enduring trend, rather than a short-term alarum of the kind that keeps all market junkies happy.

Financial Times: Growing fears credit boom may implode

Growing fears credit boom may implode
By Dan Roberts and David Wighton in New York and Peter Thal Larsen in London
Published: March 13 2005 21:42 | Last updated: March 13 2005 21:42
Financial Times

Bankruptcy advisers are hiring extra staff amid fears that an end to the global credit boom could spark a surge in business failures in the US and Europe.

Unusually loose lending conditions have encouraged record borrowing by speculative-grade companies, with leveraged buy-outs and debt refinancing on both sides of the Atlantic generating more than $100bn of deals in the past eight months.

But last week's fall in the price of US Treasury bonds, coinciding with signs that bankers are struggling to complete riskier corporate bond issues, has added to a sense of nervousness in some quarters.

Although corporate default rates remain low, some fear the legacy of recent private equity buy-outs and hedge fund investments in distressed debt will be a swath of over-leveraged companies ill-equipped to survive in less benign conditions.

PwC, the largest corporate recovery adviser, said it was hiring insolvency specialists in sectors such as retailing, utilities and telecommunications in preparation for the expected fall-out.

Scott Bok, president of Greenhill & Co, an investment bank specialising in merger advice and restructuring, also predicts the cycle will end with a lot of companies in trouble. “In many of the deals being done today you can foresee the debt restructurings to come in a year or two,” he said.

Last week, the Financial Stability Forum, a group of national and international central banks and regulators, pointed to the levels of liquidity as one of the main risks to the stability of the global financial system.

Following a meeting in Tokyo, the FSF said that, according to some of its members, tight credit spreads and low long-term interest rates suggested some in the market might be underpricing risks. It urged banks and investors to monitor their exposures by stress-testing what would happen in the event of a market shock. Chuck Prince, chief executive of Citigroup, said: “The possibility of a liquidity bubble around the world concerns me. A very cautionary thing is that it feels like the world is changing and traditional indices may not give a complete picture.” Some say markets are becoming more nervous. Paul Hsi, a senior analyst at Moody's, said: “There is a little bit more caution in the market right now as some of the weaker credits come up with ‘me-too' offerings and investors take a harder look.”

Ian Powell, head of European business recovery for PWC, added: “You only need one of these really big financing deals to go sour and confidence will evaporate very quickly.”

However, investors say the market is more aware of the risks than in previous credit cycles and that funds are managing their exposure accordingly.

“People are on ‘bubblewatch' since almost every market got burnt in the last five years,” said Stephen Peacher, head of high-yield investment at Putnam, the fund manager.

“We know that bond prices are certainly not cheap but, given that default rates are so very low, we feel comfortable that spreads are in a fair value range.”

Additional reporting by Jennifer Hughes in New York

NIALL FERGUSON: "Our Currency, Your Problem" published by the New York Times

Our Currency, Your Problem
By NIALL FERGUSON
New York Times
March 13, 2005

Every congressman knows that the United States currently runs large ''twin deficits'' on its budget and current accounts. Deficit 1, as we well know, is just the difference between federal tax revenues and expenditures. Deficit 2 is generally less well understood: it's the difference between all that Americans earn from foreigners (mainly from exports, services and investments abroad) and all that they pay out to foreigners (for imports, services and loans). When a government runs a deficit, it can tap public savings by selling bonds. But when the economy as a whole is running a deficit -- when American households are saving next to nothing of their disposable income -- there is no option but to borrow abroad.

There was a time when foreign investors were ready and willing to finance the U.S. current account deficit by buying large pieces of corporate America. But that's not the case today. Perhaps the most amazing economic fact of our time is that between 70 and 80 percent of the American economy's vast and continuing borrowing requirement is being met by foreign (mainly Asian) central banks.

Let's translate that into political terms. In effect, the Bush administration's combination of tax cuts for the Republican ''base'' and a Global War on Terror is being financed with a multibillion dollar overdraft facility at the People's Bank of China. Without East Asia, your mortgage might well be costing you more. The toys you buy for your kids certainly would.

Why are the Chinese monetary authorities so willing to underwrite American profligacy? Not out of altruism. The principal reason is that if they don't keep on buying dollars and dollar-based securities as fast as the Federal Reserve and the U.S. Treasury can print them, the dollar could slide substantially against the Chinese renminbi, much as it has declined against the euro over the past three years. Knowing the importance of the U.S. market to their export industries, the Chinese authorities dread such a dollar slide. The effect would be to raise the price, and hence reduce the appeal, of Chinese goods to American consumers -- and that includes everything from my snowproof hiking boots to the modem on my desk. A fall in exports would almost certainly translate into job losses in China at a time when millions of migrants from the countryside are pouring into the country's manufacturing sector.

So when Treasury Secretary John Snow insists that the United States has a ''strong dollar'' policy, what he really means is that the People's Republic of China has a ''weak renminbi'' policy. Sure, this is bad news if you happen to be an American toy manufacturer. But there are three good reasons that the administration is tacitly delighted by the Asian central banks' support. Not only is it keeping the lid on the price of American imports from Asia (a potential source of inflationary pressure). It is also propping up the price of U.S. Treasury bonds; this in turns depresses the yield on those bonds, allowing the federal government to borrow at historically very low rates of interest. Reason No. 3 is that low long-term interest rates keep the Bush recovery jogging along.

Sadly, according to a growing number of eminent economists, this arrangement simply cannot last. The dollar pessimists argue that the Asian central banks are already dangerously overexposed both to the dollar and the U.S. bond market. Sooner or later, they have to get out -- at which point the dollar could plunge relative to Asian currencies by as much as a third or two-fifths, and U.S. interest rates could leap upward. (When the South Korean central bank recently appeared to indicate that it was shifting out of dollars, there was indeed a brief run on the U.S. currency -- until the Koreans hastily issued a denial.)

Are the pessimists right? The U.S. current account deficit is now within sight of 6 percent of G.D.P., and net external debt stands at around 30 percent. The precipitous economic history of Latin America shows that an external-debt burden in excess of 20 percent of G.D.P. is potentially dangerous.

Yet there is one key difference between the United States and the countries south of the Rio Grande. Latin American economies have trouble with their foreign debts because those debts are denominated in foreign currency. The United States' external liabilities, by contrast, are almost entirely denominated in its own currency.

It therefore makes more sense to compare the United States with other members of that exclusive club of countries that have produced -- and hence been able to borrow -- in international currencies. The most obvious analogy that springs to mind is the United Kingdom 60 years ago.

During the Second World War, Britain financed its wartime deficits partly by borrowing substantial amounts of sterling from the colonies and dominions within her empire. And yet by the mid-1950's, these very substantial debts had largely disappeared. Unfortunately, this was partly because the value of sterling itself fell significantly. Moreover, sterling's decline and fall did not reduce the U.K.'s chronic trade deficit, least of all with respect to manufacturing. On the contrary, British industry declined in tandem with the pound's status as a global currency. And, needless to say, the decline of sterling coincided with Britain's decline as an empire.

From an American perspective, all this might seem to suggest worrying parallels. Could our own obligations to foreigners presage not just devaluation but also industrial and imperial decline?

Possibly. Yet there are some pretty important differences between 2005 and 1945. The United States is not in nearly as bad an economic mess as postwar Britain, which also owed large sums in dollars to the United States. The American empire is also in much better shape than the British empire was back in 1945.

Even the gloomiest pessimists accept that a steep dollar depreciation would inflict more suffering on China and other Asian economies than on the United States. John Snow's counterpart in the Nixon administration once told his European counterparts that ''the dollar is our currency, but your problem.'' Snow could say the same to Asians today. If the dollar fell by a third against the renminbi, according to Nouriel Roubini, an economist at New York University, the People's Bank of China could suffer a capital loss equivalent to 10 percent of China's gross domestic product. For that reason alone, the P.B.O.C. has every reason to carry on printing renminbi in order to buy dollars.

Though neither side wants to admit it, today's Sino-American economic relationship has an imperial character. Empires, remember, traditionally collect ''tributes'' from subject peoples. That is how their costs -- in terms of blood and treasure -- can best be justified to the populace back in the imperial capital. Today's ''tribute'' is effectively paid to the American empire by China and other East Asian economies in the form of underpriced exports and low-interest, high-risk loans.

How long can the Chinese go on financing America's twin deficits? The answer may be a lot longer than the dollar pessimists expect. After all, this form of tribute is much less humiliating than those exacted by the last Anglophone empire, which occupied China's best ports and took over the country's customs system (partly in order to flood the country with Indian opium). There was no obvious upside to that arrangement for the Chinese; the growth rate of per capita G.D.P. was probably negative in that era, compared with 8 or 9 percent a year since 1990.

Meanwhile, the United States may be discovering what the British found in their imperial heyday. If you are a truly powerful empire, you can borrow a lot of money at surprisingly reasonable rates. Today's deficits are in fact dwarfed in relative terms by the amounts the British borrowed to finance their Global War on (French) Terror between 1793 and 1815. Yet British long-term rates in that era averaged just 4.77 percent, and the pound's exchange rate was restored to its prewar level within a few years of peace.

It is only when your power wanes -- as the British learned after 1945 -- that owing a fortune in your own currency becomes a real problem. As opposed, that is, to someone else's problem.

Niall Ferguson is professor of history at Harvard and author of ''Colossus: The Price of America's Empire.''

World Bank Press: Water Worries Start to Gain Attention

World Bank Press: Water Worries Start to Gain Attention

Expect to hear a lot more talk about water, The Wall Street Journal writes. As the world population has tripled during the past century, the use of water has increased sevenfold.

The World Commission on Water predicts water use will increase 50 percent during the next 30 years and bemoans "the gloomy arithmetic of water." Others project that a decade from now 40 percent of the world's population -- three billion people -- will live in countries that hydrologists classify as "water stressed."

Even though more than 2.4 billion people got access to safe drinking water for the first time during the past 20 years, an estimated 1.7 billion people still lack it, and perhaps 2.6 billion people lack basic sanitation. Two million tons of human waste is released into rivers and streams around the world annually. About 1.8 million people, mostly young children, die from diarrhea and related diseases each year; many of those deaths could be prevented with clean water and sanitation.

Worrying about water isn't new. But there is a new intensity. "Water has come to the top of things that we can do something measurable about," says Steven Radelet, an economist at the Center for Global Development, a Washington think tank that focuses on global poverty. Among foreign-aid thinkers, there is a growing consensus that improving health isn't just a byproduct of wealth, it is a vital factor in fostering economic growth, and that water is key to health. "Water," the World Bank's Claudia Sadoff said, "was an early and large priority in the development of this country's economy, yet we seem to place very little emphasis on water in our foreign aid relative to what it deserves."

Much of the conversation is -- encouragingly -- focused on perfecting technologies to increase the supply of water, making its use more efficient (drip irrigation, for instance), strengthening the institutions that manage water resources and relying more on market mechanisms to encourage wise use. Water is, in short, best viewed as a challenge – but a manageable one. It won't be easy, though. Yemen, [for example,] is a poor country with near 20 million people, close to half of whom live in poverty. Its population is growing rapidly; by 2045, projections show it will have nearly as many people as Germany will. Most of its populace lives too far from the coast to make transport of desalinated water practical; most of its water is drawn from an underground aquifer that is likely to be depleted within a couple of decades.

International Herald Tribune: For canny gold buyers, it's time to mine

For canny gold buyers, it's time to mine
By Barbara Wall International Herald Tribune
Tuesday, March 8, 2005

You do not have to be a gold bug to realize that gold and precious metals should do well this year. But you might also want to reserve some space in your portfolio for industrial mining companies because, according to fund managers, their star is also rising.

Gold bulls had a great run in February, with the price hitting a high of just over $440 an ounce in the past week. Fund managers predict that the upward trend in metals will continue as central banks, particularly in Asia, diversify away from the dollar and buy gold and platinum to bolster confidence in their currencies.

The recent appearance of gold-linked exchange traded funds has opened up the sector to institutional and retail investors. StreetTracks Gold was introduced at the end of 2004, while Barclays iShares Comex Gold Trust made its debut in January. The investment concept is simple enough: The funds buy physical gold and the shares reflect the changing price of the metal, minus expenses.

For a minimum investment of $10,000, investors could get direct exposure to gold and other precious metals through an open-ended investment fund like the Aliquot Gold Bullion Fund, managed by Castlestone Management. An additional advantage is that Castlestone leases out its gold holdings during the month and uses the leasing income to offset fund costs.

Daris Delins, a director at Castlestone Management, said that a gold bullion fund was similar to hedging against a paper currency investment.

Most investors think of gold equities when they think of gold as an asset class," Delin said. "However, gold-related equities funds are two to three times more volatile than a pure bullion fund. When you buy mining company stock, you add an extra layer of complexity to the portfolio. As well as getting exposure to the metal, you are also exposed to foreign currency risks and management issues."

Aliquot Gold Bullion rose 4 percent in the three months to the end of February, while the average offshore gold equity fund lost 8 percent over the same period, according to Standard & Poor's.

Gold equities tend to follow, though not mirror, the direction of the gold price. Last year, the relationship decoupled. Evy Hambro, manager of a mining equities fund for Merrill Lynch, in London, explained: "Gold equities went through the roof in December 2003, as analysts were predicting the collapse of the U.S. dollar. When this failed to materialize, valuations came under the spotlight, and share prices suffered. "

Managers generally like gold companies because many pay dividends. In good times, shares can also do better than bullion because companies are leveraged. The main problem at the moment is that valuations are still considered to be on the high side. Eberhard Weinberger, manager of a gold and resources fund for DJE Investments in Germany, said a catalyst was needed to push gold shares higher.

"A significant rise in the gold price or a further weakening of the dollar could help matters, but investors need to be selective," Weinberger said.

"I would go for defensive blue-chip names, such as Anglo Gold, as they tend to do better in periods of high volatility."

It is not just the gold price that is replete with possibilities. Hambro said that he expected it to be a "fantastic" year for industrial mining companies on the strength of their improved earnings.

"Mining companies that focus on base metals and industrial materials are making money faster than they count it," he said.

"Earnings at Anglo American and Rio Tinto were up 59 percent and 61 percent respectively on last year."

This is not just a one-time thing, Hambro added. Assuming that commodity prices remain fairly stable, he predicted that earnings growth over the next few years would be huge. But will this lead to higher share prices?

"We believe higher than long term average commodity prices should be around for a while," Hambro said. "This means that mining company share prices could be due for a significant rerating. At one point the sector was trading on 16 times future earnings. It is now trading on just 10 times."

And if Hambro is proved wrong, shareholders are unlikely to be too disappointed.

Analysts expect mining companies to return significant cash to shareholders over the coming years, given high commodity prices. Teck Cominco increased its dividend by 100 percent last year and Rio Tinto has just announced plans to return $1.5 billion of capital to shareholders over two years through a share repurchase program. Now that is food for thought.

Prudent Investor comments...Oh no! Mainstream media is now into it...a bad sign.

Earth Policy's Lester R. Brown: LEARNING FROM CHINA

LEARNING FROM CHINA
Why the Western Economic Model Will not Work for the World
Lester R. Brown

Could the American dream in China become a nightmare for the world? For China's 1.3 billion people, the American dream is fast becoming the Chinese dream. Already millions of Chinese are living like Americans--eating more meat, driving cars, traveling abroad, and otherwise spending their fast-rising incomes much as Americans do. Although these U.S.-style consumers are only a small fraction of the population, China's claims on the earth's resources are already becoming highly visible.

In an Eco-Economy Update released in February, we pointed out that China has replaced the United States as the world's leading consumer of most basic commodities, like grain, coal, and steel. Now the question is, What if consumption per person of these resources in China one day reaches the current U.S. level? And, closely related, how long will it take for China's annual income per person of $5,300 to reach the 2004 U.S. figure of $38,000?

During the 26 years since the far-reaching economic reforms of 1978, China's economy has been growing at a breakneck pace of 9.5 percent a year. If it were now to grow at 8 percent per year, doubling every nine years, income per person in 2031 for China's projected population of 1.45 billion would reach $38,000. (At a more conservative 6 percent annual growth rate, the economy would double every 12 years, overtaking the current U.S. income per person in 2040.)

For this exercise we will assume an 8 percent annual economic growth rate. If the Chinese consume resources in 2031 as voraciously as Americans do now, grain consumption per person there would climb from 291 kilograms today to the 935 kilograms needed to sustain a U.S.-style diet rich in meat, milk, and eggs. In 2031 China would consume 1,352 million tons of grain, far above the 382 million tons used in 2004. This is equal to two thirds of the entire 2004 world grain harvest of just over 2 billion tons. Given the limited potential for further raising the productivity of the world's existing cropland, producing an additional 1 billion tons of grain for consumption in China would require converting a large part of Brazil's remaining rainforests to grain production. This assumes, of course, that once they are cleared these soils could sustain crop production.

To reach the U.S. 2004 meat intake of 125 kilograms per person, China's meat consumption would rise from the current 64 million tons to 181 million tons in 2031, or roughly four fifths of current world meat production of 239 million tons.

With energy, the numbers are even more startling. If the Chinese use oil at the same rate as Americans now do, by 2031 China would need 99 million barrels of oil a day. The world currently produces 79 million barrels per day and may never produce much more than that.

Similarly with coal. If China's coal burning were to reach the current U.S. level of nearly 2 tons per person, the country would use 2.8 billion tons annually--more than the current world production of 2.5 billion tons.

Apart from the unbreathable air that such coal burning would create, carbon emissions from fossil fuel burning in China alone would rival those of the entire world today. Climate change could spiral out of control, undermining food security and inundating coastal cities.

If steel consumption per person in China were to climb to the U.S. level, it would mean that China's aggregate steel use would jump from 258 million tons today to 511 million tons, more than the current consumption of the entire Western industrialized world.

Or consider the use of paper, another hallmark of modernization. If China's meager annual consumption of 27 kilograms of paper per person were to rise in 2031 to the current U.S. level of 210 kilograms, China would need 303 million tons of paper, roughly double the current world production of 157 million tons. There go the world's forests.

And what about cars? If automobile ownership in China were to reach the U.S. level of 0.77 cars per person (three cars for every four people), China would have a fleet of 1.1 billion cars in 2031--well beyond the current world fleet of 795 million. The paving of land for roads, highways, and parking lots for such a fleet would approach the area now planted to rice in China. The competition between automobile owners and farmers for productive cropland would be intense.

The point of this exercise of projections is not to blame China for consuming so much, but rather to learn what happens when a large segment of humanity moves quickly up the global economic ladder. What we learn is that the economic model that evolved in the West--the fossil-fuel-based, auto-centered, throwaway economy--will not work for China simply because there are not enough resources.

If it does not work for China, it will not work for India, which has an economy growing at 7 percent per year and a population projected to surpass China's in 2030. Nor will it work for the other 3 billion people in the developing world who also want to consume like Americans. Perhaps most important, in an increasingly integrated global economy where all countries are competing for the same dwindling resources it will not continue to work for the 1.2 billion who currently live in the affluent industrial societies either.

The sooner we recognize that our existing economic model cannot sustain economic progress, the better it will be for the entire world. The claims on the earth by the existing model at current consumption levels are such that we are fast depleting the energy and mineral resources on which our modern industrial economy depends. We are also consuming beyond the sustainable yield of the earth's natural systems. As we overcut, overplow, overpump, overgraze, and overfish, we are consuming not only the interest from our natural endowment, we are devouring the endowment itself. In ecology, as in economics, this leads to bankruptcy.

China is teaching us that we need a new economic model, one that is based not on fossil fuels but that instead harnesses renewable sources of energy, including wind power, hydropower, geothermal energy, solar cells, solar thermal power plants, and biofuels. In the search for new energy, wind meteorologists will replace petroleum geologists. Energy architects will be centrally involved in the design of buildings.

In the new economy, the transport system will be designed to maximize mobility rather than automobile use. This new economy comprehensively reuses and recycles materials of all kinds. The goal in designing industrial processes and products is zero emissions and zero waste.

Plan A, business as usual, is no longer a viable option. We need to turn quickly to Plan B before the geopolitics of oil, grain, and raw material scarcity lead to political conflict and disruption of the social order on which economic progress depends.

Prudent Investor comments,

I don't think that the estimated pace of growth will be maintained at 8% and that China will reach the American level of consumption in such a short period. Although the vital lesson here is that with a large segment of global population climbing up the economic ladder, this could represent an economic and political source of instability given the strains to the world's finite natural resources. Hence the emerging political trend is now tilted towards the securitization of natural resources as seen in China's and India's recent venture across to globe.