Previous Columns
8:30 AM EST, Monday, November 19, 2007: Several readers have said I am "Gloom and Doom" because I don't like the stockmarket generally. I wish to make myself clear: Specifically there are opportunities in the market, especially in shorting yuchy performers or buying specific mining stocks. There are also huge areas outside the stockmarket -- like commodities, mining, real estate and entrepreneurial startups. Today is not for being Gloom and Doom. Today is for rebalancing, for checking what you own and junking what faces an iffy future, knowing that the U.S. economy is slowing down, the U.S. housing and financial business is a continuing mess, and China and India are booming.

To wit: I'm in a syndicate which owns an office building in Canada. Two and a half years ago, we paid $900,000 for the building. We just sold it and will pocket $3,500,000 for our "troubles." That's big gains in 2 1/2 years. The gains came twofold: First, we fixed up the building, increased occupancy and rents. Second, the Canadian dollar appreciated against the U.S. dollar.

As we rebalance our investments we need to move our assets to places where they're less dependent on the U.S. dollar. I anticipate that the dollar will continue to decline at least for the remaining term of this administration. The dollar's value is largely determined by what you can earn in government bonds in the U.S. versus what you can earn overseas. Here our short-term rates are low, and are being kept low by a Fed Reserve keen on stimulating our economy and saving our banks and sundry financial institutions. Overseas, they are raising rates to fight inflation. Hence the gap is widening, providing less and less incentive for anyone to give us their money. If a bunch of our large lenders -- China, Japan, the Mideast oil countries, etc. wake up one morning and say "Yuchy dollar!" a major crash in the U.S. dollar is possible.

Last Thursday, I wrote about currency, and my belief in higher oil, higher gold and higher silver prices.

Because mining is such an important part of the Australian economy, the Australian financial press is much better at reporting on mining and commodities. Here's a piece from The Sydney Morning Herald, the town's major newspaper on gold.

Perfect storm for gold as mines left empty

THE era of "peak gold" has arrived.

Try as they might, miners cannot find enough ore at viable costs to replace their fast-depleting reserves, even if they dig kilometres into the the Earth.

"There's not much gold out there," said Gregory Wilkins, chief executive of the producer Barrick Gold. "Global mine supply is going to decrease at a much faster rate than people generally believe. Many of the new mines that people are anticipating will never come into production," he told the RBC Capital Markets gold conference in London.

"There is a great disparity between the money spent on exploration and success. It's hard to say where the price of gold is going, because we're in uncharted waters. I would say it could easily move to $US900 ($1008), $US1000, or beyond. It could happen very quickly. .

"We know from the US Academy of Sciences that some 26 per cent of all the copper and 19 per cent of all the zinc that ever existed in the Earth's crust has already been lost to mankind, mostly wasted in milling or smelting or buried in landfills."

Data has never been collected for gold, and the 5 billion ounces mined over history is still around. Roughly 1 billion ounces are in central bank vaults. But the same patterns of exhaustion are emerging.

South Africa's output is down to the lowest since 1932. Much of what remains elsewhere is locked up in no-go countries run by demagogues or serial expropriators.

"You don't put yourself in harm's way," Mr Wilkins said. "It's a non-starter to invest in a country that takes your mine away from you.

"The list of countries where we won't go is getting longer. There's Venezuela, and all the countries in Latin America that are influenced by [President Hugo] Chavez. In Ecuador they withdraw licences after they have been issued: you can't tolerate that kind of instability. Russia is another country where things are deteriorating."

The chief executive of Goldcorp, Kevin McArthur, said his group would not set foot outside North America. "We won't build a mine where we won't go on holiday. We're even tending to stay out of the US because that has some of the highest political risk in terms of mining investment."

The gripe is that revisions to the 1872 Mine Act will add royalty costs and allow regulators to shut down projects on a whim.

Mr McArthur said global output was on a relentless slide. "We'll see four-digit gold. It will have to reach $US2500 an ounce to equal the 1980 record in today's terms, so we have a long way to go."

Gold reached a 27-year high of $US846 an ounce early this month following rate cuts by the US Federal Reserve, although it has fallen back on profit taking.

Investors seem to be betting on a "Bernanke reflation", suspecting that the Fed will turn the liquidity tap back on to cushion the US property slump.

The chairman of RBC Capital Markets, Tony Fell, said the world money supply had been growing by 5 to 10 per cent while the stock of mined gold had been rising at 1.6 per cent, creating a mismatch that must be covered.

Mr Fell said the total debt burden in the US had exploded to 340 per cent of GDP, in stark contrast to the steady levels of about 150 per cent of the postwar era.

It almost insures further dollar debasement. "We're in the very early phases of a prolonged bull market," he said.

RBC argues that the global dollar system known as Bretton Woods II is "coming apart at the seams" as Asian, Middle Eastern, and Latin American states start to break their dollar links to avoid importing US inflation. The result is to resurrect gold, which is fast regaining its role as the world's benchmark currency.

It was the last currency bust-up - caused by the US attempt to fight the Vietnam War and fund the Great Society without adequate taxes - that lay behind the 1970s bull market in gold.

RBC said in a recent report: "The late 1960s saw first France and then Germany and Britain all start to swap their dollar reserves for gold. We may well be witnessing a similar situation today as price pressures build in the emerging world."

This piece is also from The Sydney Morning Herald and talks about China's insatiable appetite for Australian iron ore.

Australia adds iron to China's soul

ON THE day BHP Billiton announced its bid for Rio Tinto, a local government official in Hebei province told the Herald that the mill he regulated produced 4 million tonnes of steel a year. He asked if we could avoid mentioning the name of the very large state-owned company involved - because it only has a licence to make 2.5 million tonnes.

The BHP Billiton chief, Marius Kloppers, does not know how much steel China makes each year, because China itself does not know. Similarly, Kloppers does not know how much iron ore China produces. The Government can guess at the volume of dirt being mined but it has little idea of the percentage of iron content.

But a lack of reliable supply and demand numbers does not mean the commodities super-cycle, which BHP's bid for Rio Tinto is premised upon, is any less real.

In the same corner of Hebei, south of the Great Wall between Beijing and the Bohai Sea, and hidden by a semi-permanent smog blanket, local miners told the Herald that they were now digging ore with as little as 20 per cent iron -- less than a third of what BHP would be bothered with in Australia.

Whole mountains are being ripped down and new ones created out of flat corn fields, as excavators shift millions of tonnes of waste rock to get to profitable ore. Mining costs are rising because the holes are getting deeper, placing more pressure on trucks and fuel.

Chinese ore production is also being squeezed by central government policies. Transforming low-grade ore into a resource that can be fed into blast furnaces requires an enormous volume of electricity - but some of those refiners said their electricity supplies were being rationed to just five days in every 10. The Government is systematically trying to strangle small, energy and pollution-intensive producers in a losing battle to clean up and consolidate the industry.

Some of the smaller mines are owned by young cowboys who drive flash cars and make a point of pulling out bricks of 100-yuan notes to pay small restaurant bills. They are not exactly doing it tough, but nor is the Government making it easy for them. Right now they are complaining because they cannot legally buy mining explosives, thanks to terrorism concerns around the recent Communist Party Congress.

They think the ban on detonator caps will be reimposed in time for the Beijing Olympics.

In this corner of China, which is the epicentre of the world's steel revolution, Australian ore is lauded, partly because of its high ore content -- typically two or three times the 20 and 30 per cent ore content that local miners say they are digging. Local mill executives also say Australian ore is particularly valuable because it has an acid content that blends perfectly with local ore and coking coal, inside the huge steel-making blast furnaces.

In most parts of China the word Australia invites a responses like "kangaroo" or "beautiful". But here the stock response is "Aokuang" -- an abbreviation for Australian ore.

On Wednesday Marius Kloppers will be in Shanghai to meet Xu Lejiang, the new chief of China's leading steelmaker, BaoSteel. He will fly over about 2000 buildings above 20 storeys, knowing that most buildings above six-storeys are reinforced with steel. One 101-storey building he would not have seen last time is the World Financial Centre, which alone contains 20 per cent more steel than the Sydney Harbour Bridge.

Kloppers will be comforted by the latest rash of extraordinary steel consumption statistics. It takes 200 grams of steel to make an umbrella - and China made 1.5 billion of them last year. China also made 85 million bicycles, with 20-25 kilograms of steel in each bike.

China's sheer desperation for Australian ore explains why Kloppers can credibly argue that he is not "scampering off to China" this week out of fear that the Chinese leadership could scuttle his audacious plan to swallow Rio Tinto. Rather, he would like to bill his trip as a pre-planned courtesy call on his most important customers and their key regulators, designed only to neutralise the impression that BHP is treating them with disrespect. There will be no offers to sell mining assets, or to cut an early iron ore contract deal.

On Thursday he will head for the Beijing headquarters of the two key steel regulators, the National Development and Reform Commission and the Ministry of Commerce. BHP lieutenants will fan out to see as many customers and officials as they can.

BHP's China representatives were in the same offices sending the same messages last week. The trip was planned weeks ago, well before news of BHP's bid for Rio Tinto was made public.

BHP is on the right side of the greatest commodities cycle the world has seen. It could stretch for decades.

But that does not mean that this second week of Kloppers' sales offensive will be any easier than the first. He will be telling his most important customers in East Asia that becoming dependent on an international iron ore duopoly will be good for them. It is not an argument he could hope to win.

Australia adds iron to China's soul.

The subprime mess continued: This is Fortune's latest cover.

It has photos of the erstwhile heads of Citigroup. Bear Stearns, Morgan Stanley and Merrill Lynch and underneath each photo showing how much money they're written off recently as a result of the subprime mess. The amounts are $9.8 billion, $450 million, $3.7 billion, and $7.9 billion.

Canada's Financial Post had this interesting story this weekend:

Subprime mess is a crime story

The subprime mortgage and asset-backed paper scandals constitute one of the biggest frauds ever perpetrated. They have resulted in mass foreclosures, writedowns, bankruptcies, firings and billions lost. The US$10-trillion U.S. home-lending sector was, and perhaps still is, rotten. At the top were mortgage lenders, then Wall Street and others who exported junk debts to lenders around the world after prettying them up.

At the bottom was a corrupt system that handed out mortgage broker licences like driver's licences, and then handed out mortgages like candy at Halloween. In between were crooked appraisers and organized crime.

The stories are now seeping out. A money manager friend of mine said his limousine driver in Chicago became a mortgage broker then made a fortune indiscriminately handing out mortgages to friends and relatives. He retired to Poland a multi-millionaire. In Cleveland, a church preacher moonlighted as a broker and put his parishioners into houses they could not afford, including a 78-year-old woman just kicked out of her home.

Miami police have uncovered a massive foreclosure fraud scheme involving appraisers, brokers and accountants who recruited straw buyers, inflated condo prices, drew up fake tax returns, got huge mortgages, paid developers less than the mortgage raised and pocketed the difference. The straw buyer was paid off and abandoned the property to foreclosure.

The press thinks this is a financial story. It's a police story. These scandals contain all the necessary elements that characterize all world-class frauds: 1. Many "little" people must be involved who don't know what others are up to or that they are party to a crime. That makes proving conspiracies and criminal intent difficult. 2. As many borders as possible must be put in place between the victims and the perpetrators. That makes investigation expensive or impossible. 3. Perpetrators should not be in the same country as victims. If victims are foreign, police investigations are less politically justifiable.

These three elements provide the "winning conditions" for every successful fraud because far-flung wrongdoing, involving many jurisdictions, frustrates the press, the law enforcement officials and makes litigation expensive or even impossible.

Offshore manoeuvres, like Enron or Bre-X's, allowed the frauds to grow undetected, giving the bad guys time to get away or to hide their ill-gotten gains. Some have had time enough to end up on a beach somewhere that doesn't have any extradition treaties.

This is why the RCMP did not "get their man" in the $9-billion Bre-X fraud. The case was too complicated and expensive to pursue and too many victims and the perpetrators were outside of Canada. Enron, by contrast, was heatedly pursued because the victims and the perpetrators were in the United States, plus there were links to the George Bush Presidency.

In the subprime mess, there seems little political will to do much of anything south of the border. Foreclosures dot the urban landscape, mostly affecting speculators or disenfranchised people. Wall Streeters get tossed from jobs, write down fortunes and collect obscene severance. It's all business and usual. I hope intermediaries will be sued out of existence by the deep pockets they damaged and defrauded.

Dedicated to my friends with young, creative children
The boss wondered why one of his most valued employees had not phoned in sick one day. Having an urgent problem with one of the main computers, he dialed the employee's home phone number and was greeted with a child's whisper. ' Hello ? '

'Is your daddy home?' he asked.

' Yes ,' whispered the small voice.

May I talk with him?'

The child whispered, ' No .'

Surprised and wanting to talk with an adult, the boss asked, 'Is your Mommy there?' ' Yes .'

'May I talk with her?' Again the small voice whispered, ' No .'

Hoping there was somebody with whom he could leave a message, the boss asked, 'Is anybody else there?'

"Yes," whispered the child, ' a policeman '.

Wondering what a cop would be doing at his employee's home, the boss asked, 'May I speak with the policeman?'

"No, he's busy," whispered the child.

'Busy doing what?'

' Talking to Daddy and Mommy and the Fireman ,' came the whispered answer.

Growing more worried as he heard a loud noise in the background through the earpiece on the phone, the boss asked, 'What is that noise?'

"A helicopter" answered the whispering voice.

'What is going on there?' demanded the boss, now truly apprehensive.

Again, whispering, the child answered, ' The search team just landed a helicopter .'

Alarmed, concerned and a little frustrated the boss asked, 'What are they searching for?'

Still whispering, the young voice replied with a muffled giggle... ' ME .

The Jewish President -- finally the right perspective
The year is 2016 and the United States has elected the first woman as well as the first Jewish president, Susan Goldfarb. She calls up her mother a few weeks after election day and says, "So, Mom, I assume you will be coming to my inauguration."

"I don't think so. It's a ten hour drive, your father isn't as young as he used to be, and please my arthritis is acting up again."

"Don't worry about it Mom, I'll send Air Force One to pick you up and take you home. And a limousine will pick you up at your door."

"I don't know. Everybody will be so fancy-schmantzy, what on earth would I wear?"

"Oh Mom" replies Susan, "I'll make sure you have a wonderful gown custom-made by the best designer in New York "

"Honey," Mom complains, "you know I can't eat those rich foods you and your friends like to eat."

The President-to-be responds, "Don't worry Mom. The entire affair is going to be handled by the best caterer in New York, kosher all the way.

Please, Mom, I really want you to come."

So Mom reluctantly agrees and on January 21, 2017, Susan Goldfarb is being sworn in as President of the United States

In the front row sits the new president's mother, who leans over to a senator sitting next to her.

"You see that woman over there with her hand on the Torah, becoming President of the United States ?"

The Senator whispers back, "Yes, I do."

Says Mom proudly, "Her brother is a doctor."

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads on this site. Thus I cannot endorse, though some look interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Michael's business school tuition. Read more about Google AdSense, click here and here.
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