Gloom Boom Doom September 2009

THE GLOOM, BOOM & DOOM REPORT
ISSN 1017-1371 A PUBLICATION OF MARC FABER LIMITED SEPTEMBER 1, 2009
A Depressive Optimist
In politics, stupidity is not a handicap.
Napoleon Bonaparte
The know-nothings are, unfortunately, seldom the do-nothings.

Mignon McLaughlin
I compared Alan Greenspan to Casablancas Captain Louis Renault, who said, Im shocked, shocked to find that gambling is going on in here! I must admit that I too am shocked, shocked by how much gambling has been going on in the financial markets around the world. Increasingly, it seems that the subprime mortgage market was just one of many tables in the global gambling hall. Could it be that the Greatest Global Boom of All Time was financed by the Greatest Global Casino of All Time? Sadly, the answer is yes.
Ed Yardeni
The measure of success is not whether you have a tough problem to deal with, but whether it is the same problem you had last year.
John Foster Dulles
INTRODUCTION
Whenever I start to write, Thomas Mann comes to mind. Mann expressed the view that a writer is somebody for whom writing is more difficult than it is for other people. While it sometimes takes me three days to come up with the first sentence of a new GBD report, that fact isnt the cause of my current depression. Nor am I depressed because of family reasons. On the invitation of fund manager Peter
Sartori (a delightful, frank, and very smart person), my wife and I recently enjoyed a trip to Australia. Aside from a few days of hard work, we had a marvellous time visiting Melbourne, Sydney, Perth, and Ayers Rock (now known by its more politically correct native name, Uluru). Australia has come a very long way since the early 1970s, when I first visited, and Sydney and Melbourne are now world-class cities. Perth (the lovely, but rather remote, capital of Western Australia) looks to
be on the verge of another resourcerelated boom, as the A$50 billion Gorgon LNG project (the partners are Chevron, Exxon, Mobil, and Royal Dutch Shell) located off WAs Barrow Island is likely to go ahead next month. Im not sure that I would travel all the way from the US or Europe just to see Ayers Rock, but if you find yourself in Australia I think Uluru and its surroundings (Kata Tjuta The Olgas is an even more impressive rock formation, in my
opinion; while wild camels can be spotted at the huge salt lake, Lake Amadeus) are definitely worth a visit even for busy fund managers who, as Michael Steinhardt puts it, have all become a product of the last tick. In terms of landmass, Australia is the sixth-largest country in the world, after Russia, Canada, the US, China, and Brazil. However, whereas the US has a population of over 300 million and a population density of 31.6 people per square kilometre, Australias population is just 22 million and its population density 2.7. Most of the country is hardly inhabited because of the arid conditions (see also below), but the vastness of the country and its fascinating geological formations make it a very special place for anyone with the time to travel there to observe the beauty of our natural habitat. (Even better, it is free.) From sunrise to sunset, Ayers Rock, which can be climbed (I failed to reach the top), continuously changes colour. As an aside, I was surprised by how expensive Australia has become compared to a few years ago. In my view, inflation in Australia has been far higher than the statistics would indicate, and prices are also high by international standards because of the appreciation of the currency (see Figure 1). Outside the major cities in the United States, I now find that country to be rather inexpensive! My depression also doesnt have to do with any financial problems. Having avoided the financial meltdown of 2007/08, I began to accumulate Asian stocks in late 2008 and this has proven to be rewarding at least, so far (see Figure 2). I am also fortunate that I can travel extensively, and that I have scattered around the world a large number of really lovely friends, many of whom I met through this newsletter. In short, with the exception of free time, which is a rare resource, I have everything and I am extremely grateful for that. The cause of my depression is the fact that, even under the most optimistic assumption, I dont believe that a bunch of government officials will be able to solve, by fiscal and
2 The Gloom, Boom & Doom Report
Figure 1
Australian Dollar ($XAD), 20022009
Source: www.decisionpoint.com
Figure 2
Singapore Straits Times Index (EOD) ($STI), 20032009
monetary means, the very serious structural problems that exist in the global economy. Lee Iacocca, who at 82 years has a new book out, Where Have All the Leaders Gone?, best expresses my concerns about the
Western world and specifically about the US when he writes: Am I the only guy in this country whos fed up with whats happening? Where the hell is our
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outrage? We should be screaming bloody murder! Weve got a gang of clueless bozos steering our ship of state right over a cliff, weve got corporate gangsters stealing us blind, and we cant even clean up after a hurricane much less build a hybrid car. But instead of getting mad, everyone sits around and nods their heads when the politicians say, Stay the course. Stay the course? Youve got to be kidding. This is America, not the damned Titanic. Ill give you a sound bite: Throw all the bums out! You might think Im getting senile, that Ive gone off my rocker, and maybe I have. But someone has to speak up. I hardly recognize this country anymore. The most famous business leaders are not the innovators but the guys in handcuffs. While were fiddling in Iraq, the Middle East is burning and nobody seems to know what to do. And the press is waving pom-poms instead of asking hard questions. Thats not the promise of the America my parents and yours traveled across the ocean for. Ive had enough. How about you?... Leaders are made, not born. Leadership is forged in times of crisis. Its easy to sit there with your feet up on the desk and talk theory. Or send someone elses kids off to war when youve never seen a battlefield yourself. Its another thing to lead when your world comes tumbling down. On September 11, 2001, we needed a strong leader more than any other time in our history. We needed a steady hand to guide us out of the ashes. A hell of a mess, so heres where we stand. Were immersed in a bloody war with no plan for winning and no plan for leaving. Were running the biggest deficit in the history of the country. Were losing the manufacturing edge to Asia, while our once-great companies are getting slaughtered by health care costs.
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Gas prices are skyrocketing, and nobody in power has a coherent energy policy. Our schools are in trouble. Our borders are like sieves. The middle class is being squeezed every which way. These are times that cry out for leadership. But when you look around, youve got to ask: Where have all the leaders gone? Where are the curious, creative communicators? Where are the people of character, courage, conviction, omnipotence, and common sense? I may be a sucker for alliteration, but I think you get the point. Name me a leader who has a better idea for homeland security than making us take off our shoes in airports and throw away our shampoo? Weve spent billions of dollars building a huge new bureaucracy, and all we know how to do is react to things that have already happened. Name me one leader who emerged from the crisis of Hurricane Katrina. Congress has yet to spend a single day evaluating the response to the hurricane or demanding accountability for the decisions that were made in the crucial hours after the storm. Everyones hunkering down, fingers crossed, hoping it doesnt happen again. Now, thats just crazy. Storms happen. Deal with it. Make a plan. Figure out what youre going to do the next time Name me a government leader who can articulate a plan for paying down the debit, or solving the energy crisis, or managing the health care problem without a TELEPROMPTER. The silence is deafening. But these are the crises that are eating away at our country and milking the middle class dry. I have news for the gang in Congress. We didnt elect you to sit on your asses and do nothing and remain silent while our democracy is being hijacked and
our greatness is being replaced with mediocrity. What is everybody so afraid of? That some bonehead on CNN will call them a name? Give me a break. Why dont you guys show some spine for a change? Had enough? Hey, Im not trying to be the voice of gloom and doom here. Im trying to light a fire. Im speaking out because I have hope I believe in America. In my lifetime, Ive had the privilege of living through some of Americas greatest moments. Ive also experienced some of our worst crises: The Great Depression, World War II, the Korean War, the Kennedy assassination, the Vietnam War, the 1970s oil crisis, and the struggles of recent years culminating with 9/11. If Ive learned one thing, its this: You dont get anywhere by standing on the sidelines waiting for somebody else to take action. Whether its building a better car or building a better future for our children, we all have a role to play. Thats the challenge Im raising in this book. Its a Call to Action for people who, like me, believe in America. Its not too late, but its getting pretty close. So lets shake off the crap and go to work. Lets tell em all weve had enough [Emphasis added] Iacocca uses some very strong words, but no one reading this report would deny that he makes some very good points. Moreover, we not only have a gang of clueless bozos steering our ship of state right over a cliff; we have the same gang in charge of our economic policies. Iacocca asks in vain for the name of one leader who emerged from the crisis of Hurricane Katrina and laments that Congress has yet to spend a single day evaluating the response to the hurricane or demanding accountability for the decisions that were made in the crucial hours after the storm. He adds: Everyones hunkering down, fingers crossed, hoping it doesnt happen again. Now, thats just crazy.
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Storms happen. Deal with it. Make a plan. Figure out what youre going to do the next time Like storms of nature, economic and financial storms happen. However, it seems to me that the current gang of clueless economic policy makers who brought about the crisis in the first place has no plan for dealing with it, let alone figuring out what to do the next time were faced with such an event. Now, I am aware that a number of my readers will disagree with my harsh assessment of the economic policy team in the US. According to Bloomberg, Global investors give Federal Reserve Chairman Ben S. Bernanke top marks for combating the worst financial crisis since the Great Depression and overwhelmingly favor his reappointment amid optimism that the world economy is on the mend. (Sixty-one per cent of investors surveyed in the first Quarterly Bloomberg Global Poll say the world economy is stable or improving, and almost 75% take a favourable view of the 55-year-old chairman. By almost a three-to-one margin, they say Bernanke has earned another fouryear term when his current one expires in January 2010.) In particular, Mr. Bernanke is being applauded for having countered the credit crisis with actions unprecedented in the central banks 95-year history. He cut the benchmark lending rate to as low as zero and expanded credit to the economy by $1.1 trillion over the past year. Adds a financial consultant: The U.S. economy may be ailing, but these financial leaders agree the man at the helm of the economy is the right guy for the job, for now and for another term. There are some points to consider before supporting and endorsing the favourable view of Mr. Bernanke by these financial leaders. These financial leaders are basically interested in only one thing: that stocks go up, which will then enable them to earn higher fees! So, whoever can engineer a rally in equities through monetary measures is a hero. Second, one should take
the judgment of these financial leaders with a grain of salt, since 95% of them had no clue about the unfolding crisis until late 2008. But what is most depressing for me is that 75% of these portfolio managers who have a favourable opinion of Bernanke dont seem to have a clue about what really caused the crisis in the first place. I admit that I have some sympathy for the argument by fund managers that, over the last few months, the US Treasury and the Fed have stabilised the financial system and the economy. However, we should consider two points in this respect. No one (including me) knows for sure what the longer-term and unintended consequences of these asset market support measures will be. As Michael Steinhardt succinctly says, It is very difficult to tell what the future will be. Personally, I think the future will be a total disaster, with a collapse of our capitalistic system as we know it today, wars, massive government debt defaults, and the impoverishment of large segments of Western society. But what I dont know is whether this final collapse, which is inevitable, will occur tomorrow, or in five or ten years, and whether it will occur with the Dow at 100,000 and gold at US$50,000 per ounce or even confiscated, or with the Dow at 3000 and gold at US$1,000. How are you so sure about this final collapse? the reader may ask. Of all the questions I have about the future, this is the easiest one to answer. Every successful society or centre of prosperity (city) began from a base of thrift, frugality, hard work (also in warfare), innovation, and as a result of some kind of pressure, either from nature (cold winters, floods, droughts, or some other inhospitable environment) or from social or political adversaries (powerful enemies, competition, oppressive regimes). In short, successful societies and centres of prosperity (cities, regions) grow out of some kind of challenge. Once a society becomes successful it becomes arrogant, righteous, overconfident, corrupt, and decadent. It then
overspends (usually on costly wars to protect its interests); wealth inequity and social tensions increase; and society enters a secular decline, which leads to state bankruptcies (frequently initially postponed by monetary depreciation read inflation), decay, and a loss of its political and economic power relative to other nations. According to Scottish jurist and historian Sir Alex Fraser Tyler (17421813), the average life span of the worlds greatest civilisations has been 200 years. These nations progressed through the following sequence: from bondage to spiritual faith; from spiritual faith to great courage; from courage to liberty; from liberty to abundance; from abundance to selfishness; from selfishness to complacency; from complacency to apathy; from apathy to dependence; and from dependency back into bondage! Very few societies aged gracefully by recognising early that eternal prosperity was unattainable. Most societies decayed because the cost of maintaining their high level of prosperity increased (overspending). In my opinion, it is most unlikely that Western societies and especially the US will be an exception to this typical society cycle. In fact, I guess that the US is somewhere between the phase where it moves from complacency to apathy and from apathy to dependence. Second, as opined above, I have some sympathy (though not much) for the view that the Fed under Mr. Bernanke has contained the economic contraction and financial crisis (at least for now). However, within the context of Bernankes monetary policies, which were largely responsible (along with those of Mr. Greenspan) for the current economic and financial crisis, his recent market support measures are completely insignificant. Mr. Bernanke reminds me of a ships captain who, through negligence and by ignoring warning signals from the coastguard, sinks a cruise-ship, resulting in the deaths of 1,000 passengers and crew, but gets a medal for bravery because he
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manages to get the ships top five officers, all dressed in their elegant uniforms, into a lifeboat. A reader of Mish Shedlocks blog about his unfortunate experience with a house he bought in 2005 (http://globaleconomicanalysis. blogspot.com) wrote recently: I purchased a house in 2005. It was a new build that was completed in May 2006, and I have been living in it since. The house is in Scottsdale, AZ (a non-recourse state). I purchased it for $740K with minimal money down ($40K). The house is now worth maybe $450K ... maybe. I feel sorry for this man. The only
thing is, I dont know whether I should feel more sorry for his current dire financial condition or for his stupidity! But the wider issue relates to the question of how on earth could the regulatory bodies allow someone (and there were millions more like him) with $40,000 in equity to purchase a house worth $740,000 and fail to see that there was a gigantic credit bubble. In fact, I am deeply concerned that our society has come to the point where this kind of leverage is still encouraged by the government (and the Fed) and is regarded as the norm. That the policy makers couldnt see the danger of
such leverage everywhere (not just in housing) is beyond my understanding as a simple, commonsense economist. (I should add that total credit as a percentage of the economy is still growing!) So, even if the Fed did a good job of containing the crisis, we need to look at its longer-term performance in order to make a judgment. In this respect, I am very indebted to my friend Fred Sheehan for having taken the time to read Mr. Bernankes Essays on the Great Depression and for expressing some criticisms of his policies and actions prior to the crisis.
Simple Ben
Frederick J. Sheehan Tel: (1-617) 875 8150; E-mail: FSheehan@AuContrarian.com
Fred Sheehans book, Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, will be published by McGraw-Hill in November 2009.
Federal Reserve chairman Ben S. Bernanke lives in a simple world where exchanges of opinion dont exist. This, from a man who often reminds his audiences that he wrote a textbook, and a macroeconomic textbook at that. The Investopedia. com website explains that [m]acroeconomics is focused on the movement and trends in the economy as a whole. Yet, Ben Bernanke didnt understand that the level of debt produced during the recent, mortgage-driven financial economy could never be paid back by the real (non-financial) economy. Today, his money printing segregates these two economies to an even greater degree than before the Fed imposed his MIT thesis on the world. His macroeconomics, at least in his Essays on the Great Depression, is statistical. He inputs his chosen variables and outputs his solution to prevent another great depression: print more money. Bernanke doesnt consider that a future (or current) depression may take another form than Great Depression I. He appears to think that falling prices (he would
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call this deflation) is synonymous with an economic depression. Bernanke knows that debt became a greater burden as income fell in the 1930s, but his book doesnt consider, other than in side comments and footnotes, the possibility that the enormous growth of debt in the 1920s was the reason these loans couldnt be paid back in the 1930s. He is convinced that falling prices even the possibility of falling prices are the enemy and can be defeated by printing more money. His Essays gives the impression of a man devoid of curiosity. A telling comment on page 6 of the book: I am a macroeconomist rather than a historian, my focus will be on economic issues rather than details. The former head of the Princeton University economics department mentions 139 names in his Essays 135 of whom are economists, mostly macroeconomists, and most having written after 1980. He never mentions or cites Robbins, Hayek, Mises or Roepke economists who wrote in the 1930s that the cause of the debt bust in the thirties was the debt boom of the twenties. From
what I am told, this is ignorance rather than wilful exclusion he has probably never read from these authors. Most of what he has read was produced by like-minded economists on other campuses who likewise have mostly read each others papers and textbooks. He writes about money, but not much about banking. He mentions only one US bank in the book, but gets its name wrong. It was the Bank of United States, not the Bank of the United States. A small error, but it persists in the paperback edition. (To give him his due, Bernanke noted his lack of interest in historical details.) His input-output, money-printing theory has failed. His equations treat the banking system as a perpetual, never-varying conveyor belt. He seemed (and seems) not to understand that undercapitalised banks dont lend. Confusing banks with robots, he doesnt grasp the connection between a healthy banking system and a healthy economy. (Even odder for someone who studies the economy as a whole, he doesnt seem to notice how finance has come to dominate
the American economy.) He expresses reverence for his mathematical findings even though his explanation of inputs leaves this non-economist wondering how he can be so sure of his conclusions. (From page 102 of his Essays: [I]t is possible an additional factor such as debt deflation should be considered.) In Bernankes simple world, more numbers solve our ills. From page 5 of his Essays: [B]y expanding the data set, there is the potential to bring the profession into agreement on the causes of the Depression. His essays give the impression that his real objective is to suffocate disagreement with him and his fellow apparatchiks. Bernankes essays crossreference essays by Frederic Mishkin, Christina Romer, and Janet Yellen; those who dominate academia and government bureaucracies. This lack of oxygen in economic discussion isnt lost on an elder statesman of the field. Paul Samuelson, President Kennedys primary economic adviser, author of the textbook Economics (now in its 19th edition), and retired MIT professor, was recently interviewed by The Atlantic: The 1980s trained macroeconomics like Ben Bernanke and so forth became a very complacent group, very ill adapted to meet with a completely unpredictable and new situation, such as weve had. I looked up Bernankes PhD thesis [written when Bernanke was a student at MIT authors note], which was on the Great Depression, and I realized that when youre writing in the 1980s, and theres a mindset thats almost universal, you miss a lot of the nuances of what actually happened during the depression. (This shows why the argument of whether Bernanke should be reappointed as Fed chairman isnt too important. A replacement would be another economist trained in the 1980s, such as Paul Samuelsons nephew, Larry Summers.) On February 20, 2004, Bernanke gave a speech that should have disabused any notion that he could think of the economy as a whole. The Great Moderation was the title
of his address. Bernanke offered interpretations of the remarkable decline in the variability of both output and inflation over the past two decades. He left no doubt that improved performance of macroeconomic policies, particularly monetary policy, should receive the Nobel Prize. [Bernankes italics.] Bernankes great moderation has since exploded. He was ignorant of the financial mayhem that accompanied his economic moderation. In 2008, researchers at the IMF identified 124 international banking crises since 1970. Four were in the 1970s; 39 were in the 1980s; 74 in the 1990s; and seven this decade. The current worldwide banking crisis isnt included. It would be premature to quantify it. Bernanke seemed and seems blind to how the banking system, lurching towards meltdown, had absorbed the instability that was missing from his remarkable macroeconomic data. That speech came before his chairmanship. (He relieved Alan Greenspan on February 1, 2006.) Greenspan handed Bernanke a banking system that was possibly beyond saving. Notable though is how the excesses of the banks and brokers accelerated after Bernankes accession. The nominal value of derivative contracts held by US commercial banks (over which the Fed has regulatory authority) leapt from $33 trillion at the end of 1998 to $101 trillion at the end of 2005, about the time Greenspan left office. This was roughly a 17% annual increase. By June 30, 2007, 17 months into Bernankes chairmanship, the nominal value had risen another 50% to $153 trillion. The problems with supersonic derivatives were evident. CDO (collateralised-debt obligation) indexes were collapsing. By the end of March 2007, some of the largest vacuums that sucked in borrowers had left the mortgage business or entered bankruptcy: HSBC Mortgage Services, Ameriquest, ACC Wholesale, New Century, Wachovia Mortgage. New Century alone had made over $60 billion in mortgage loans during 2006.
Bernanke, still living on his own planet, couldnt see how such a turn of events might slow an economy that was driven by an increasing growth of mortgage debt. (Home mortgage debt rose by $380 billion in 2000. In 2005, it increased by $1.1 trillion.) On May 17, 2007, he thought all was well: [W]e believe the effect of the troubles in the subprime sector on the broader housing market will likely be limited, and we do not expect significant spillovers from the subprime market to the rest of the economy or to the financial system. Northern Trust economist Asha Bangalore had calculated that 43% of the rise in private payrolls between 2001 and early 2005 were housing-related jobs. Car dealers also knew better than the Fed chairman: when New Century went under, all the Lamborghini dealers in Orange County flew their flags at half-mast. The macroeconomist (Bernanke loves referring to himself as that) not only missed the macro mortgage data; he also didnt understand how overdrawn were those who held the mortgages. He rationalised chaos with such abstractions as the global savings glut while, in the same speech, he stated: Increases in home values, together with a stock-market recovery that began in 2003, have [aided] [t]he expansion of U.S. housing wealth, much of it easily accessible to households through cash-out refinancing and homeequity lines of credit. That speech was delivered in March 2005. His lesson in home economics was no more enlightened a month later: [T]he recent capital inflow into the developed world has shown up in higher rates of home construction and in higher home prices. Higher home prices in turn have encouraged households to increase their consumption. Of course, increased rates of homeownership and household consumption are both good things. An adroit attendee at a November 2006 Bernanke speech would have known the banking system was a short sale: [T]he expansion of subprime lending has
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contributed importantly to the substantial increase in the overall use of mortgage credit. From 1995 to 2004, the share of households with mortgage debt increased 17 percent, and in the lowest income quintile, the share of households with mortgage debt rose 53 percent. This was good news in Bernankes view, although he did advise greater financial literacy for borrowers with lower incomes and education levels. The lowest quintile was the last group that needed a financial lesson. It was already neck deep in the muck. ACNielsen had recently published a report that described Americans as among the worlds most cashstrapped people. With 22% of Americans having no money left after they paid for essential living expenses, the US ranked number one among 42 countries for saving futility. The rise of mortgage debt among the poorly educated was not, in itself, a reason to rein in the bankers, but Bernanke was surrounded by disturbing trends. For the period ending June 30, 2006, the Federal Deposit Insurance Commission (FDIC) reported 32% of US commercial bank assets were construction loans, land development loans, and direct mortgages. Another 11% of bank assets were mortgage securities. And who were they lending to? By July 2005, 42% of first-time home buyers were putting no money down. In every category, bank lending was diving off the precipice. Bernankes banks were closing leveraged syndicated deals at an accelerating pace: from $220 billion in 2005 to $360 billion in 2006 to $570 billion in the first half of 2007. Please note again how recklessness skyrocketed after Bernanke replaced Greenspan. Maybe the trend would have been no different, but to leave Bernanke in charge of the banking system today is a sign of senile leadership. There was practically no spread (profit) on these leveraged deals. (Leveraged loans are made to companies with heavy debt burdens. The growing leverage in privateSeptember 2009
equity deals needed the rising quantity of bank loans.) A novice could see the buyout binge was loading companies with unsupportable debt, since many novices lost their jobs as the companies entered bankruptcy. A non-novice, Steven Rattner, managing principal of Quadrangle Group LLC, was quoted by Reuters in April 2007: Of all the bubbles, the bubble in the credit market today is one of the greatest it is beyond any rational measure. Did Bernanke read the newspapers? To clarify the Feds authority: it has direct supervisory authority over US bank holding companies. The Fed cannot direct the banks where to lend (although, who knows what additional authority it has usurped in the past 24 hours), but, as regulator, it has the ability to halt dangerous excesses. The Fed had restricted bank credit used for acquisitions in 1980. It would have been worth the trouble to do so again. Banks wrote off $3.8 billion of leveraged loans in 2007 and another $54.4 billion in 2008 It is a good bet the rise of write downs from 2007 through 2011 will approximate the trajectory of new syndicated deals from 2005 through the first half of 2007. On it went. Bernanke saw clear skies in a June 5, 2007 speech: [W]e have not seen major spillovers from housing onto other sectors of the economy. In October 2007, asked about collapsing derivatives (CDOs), Bernanke admitted: Id like to know what those damn things are worth. This seemed a promising evolution in the chairmans mind, yet, in the same month Bernanke told a group of central bankers and economists he didnt know if there had been a housing bubble. (This was mentioned in a profile of Bernanke in the December 1, 2008, issue of the New Yorker, in which the macroeconomists strength appears to be administration.) Bernanke has shown similar weaknesses when addressing some elementary economic concepts. In November 2007, Congressman Ron Paul berated Bernanke. The Feds loose money policy was devaluing the
dollar and causing consumer prices to rise. According to the Fed chairman, this wasnt the case: If somebody has their wealth in dollars, and theyre going to buy consumer goods in dollars, for the typical American, then the deval-, the decline in the dollar, the only effect it has on their buying power is it makes foreign goods more expensive. What wasnt a foreign good other than ham and eggs? Even these prices were rising from the energy consumed in their production and transportation, energy that was being repriced by higher economic activity in China and India. Simple Ben sounded like a theoretical physicist who doesnt know that water boils but writes textbooks on the eighth dimension. Bernanke threw in the towel on money. At a conference in November 2006, he told his audience: It would be fair to say that monetary and credit aggregates have not played a central role in the formulation of U.S. monetary policy since [1982], although policymakers continue to use monetary data as a source of information about the state of the economy. After he spoke, the former college professor sat at the other end of a lecture. Lucas Papademos, vice president of the European Central Bank, questioned Bernanke: Is it really possible for a policy described as monetary to be formulated and implemented without money playing a central role in it? Indeed, the suggestion that monetary policy can be conducted without assigning a prominent role to money seems like an oxymoron a statement containing apparently contradictory terms, if not worse: for the literal meaning of the Greek word oxymoron is pointedly foolish. Foolish has been the Federal Reserve Systems ballooning balance sheet from around $800 billion of assets in December 2007 to $2 trillion today. The Feds balance sheet is what stands behind the dollar, a reason its assets were (until 2008) predominantly US Treasury securities. The rise in Fed assets was accomplished by machinations, including the sale of Treasury securities to buy dubious bonds and
derivatives from financial institutions that are probably insolvent. Many of these securities are probably worthless. At least, that is the strong suspicion and will remain so as long as the Fed resists the Congressional initiative to audit the Federal Reserve.
Bernankes Great Depression theory was a flop, but he may not recognise his failure. He has spent his career following a single train-ofthought. That will persist: a debtdeflation can be prevented by printing money, ever-increasing mountains of money, if the incidence * * *
of mortgage defaults, consumer loans, and leveraged loans continues to rise. We can expect Simple Ben to boost the Feds balance sheet from $2 trillion to $4 trillion, and, if given the time, to $10 trillion. Maybe 100% inflation will solve the mortgage problem.
Some readers will find Fred Sheehans observations to be overly critical. But before passing a judgment I suggest you watch the footage of Mr. Bernanke being questioned by Congressman Alan Grayson concerning the Feds central bank liquidity swaps. (Its hard to be impressed by the current Fed chairman.) There is simply no denying that, by neglecting the implications of excessive credit growth and the worsening quality of credit, people like Alan Greenspan, Ben Bernanke, Tim Geithner, and Frederic Mishkin, supported by economists such as Paul Krugman who believe that another bubble would help the global economy, were the principal architects of an unsustainable credit-driven economic boom that had to burst at some point. Now, if we accept that the Fed was largely responsible for the creation of the credit bubble, then it is most depressing that the very same people, with the same policies and surrounded by the same cronies, are still in charge of the worlds (still) most important financial institution. As General Schwarzkopf observed, Theres more than one way to look at a problem, and they all may be right. That, as Fred Sheehan makes clear above, does seem to have escaped the attention of Mr. Bernanke, Geithner & Co. I suppose this explains my depressed state of mind and why I think that the ultimate crisis still lies ahead of us. As long as policy makers have no better ideas for homeland security than making us take off our shoes in airports and throw away our shampoo (Lee Iacocca), and than creating another bubble to bail out the system, I cannot be optimistic about the future.
I have so far in this report refrained from commenting on the Obama administration. However, it increasingly looks to me as if Obama & Co. makes Mr. Bush and his senior staff members look like geniuses. To provide our readers with just a taste of the quality of some of Obamas people, we need look no further than a favourite story (sent to me by a faithful reader) of Dr. David Cole, chairman, Center for Automotive Research (CAR), and a professor at the University of Michigan, which he recounted as a guest speaker at a breakfast meeting. According to a senior Chrysler executive who attended the meeting, Dr. Cole found it very difficult to work with the folks the Obama administration has sent to save the auto industry. According to Cole, there have been many meetings where automotive experts with 30+ years of experience have had to listen to a newcomer to the industry someone with zero manufacturing experience, zero auto industry experience, zero business experience, zero finance experience, and zero engineering experience tell them how to run their business. (This isnt to say that a savvy industry outsider cannot occasionally make an important contribution to a companys success by introducing entirely new and refreshing ideas.) There was also a team of Obama people who explained to Dr. Cole that the auto companies needed to make a car that was electric and utilised liquid natural gas (LNG) with enough combined fuel to go 500 miles so that we wouldnt need so many gas stations (a whole other topic). They were quoting the BTUs of LNG and battery life that they had looked up on some website.
Dr. Cole explained that, in order to do this, the trunk would need to be filled with batteries, and the LNG tank would need to be as big as the car. There were also problems related to the basic laws of physics, he began to say, that prevented them from... The Obama person interrupted and said (and I am quoting here): These laws of physics? Whose rules are those? We need to change that. [Someone diligently wrote down the name so they could look it up later.] We have both the Congress and the administration. We can repeal that law, amend it, or use an executive order to get rid of that problem. Thats why we are here, to fix these sorts of issues. I hope my readers understand now why I cannot be optimistic about what lies ahead of us and why the US is in big trouble!
INVESTMENT CONSIDERATIONS
I started to write asset market comments in the early 1970s. One of my first commentaries was in August 1971, entitled Dollar Devaluation Beneficiaries. By coincidence, a day later Mr. Nixon closed the gold window and a long bear market in the US dollar followed. (I instantly became White Welds currency expert.) Over the years, my emphasis has always been on longer-term trends in asset markets and on identifying excesses both in terms of under- and overvaluations. I am also far more interested in and concerned about the historical and social aspects of economics than are the current economic policy makers and opinion leaders in the US. However, this year I have
September 2009
become more mindful of short-term trends because of my belief that both economic and financial volatility will be extremely high due to the unprecedented and coordinated government interventions in the market economy. Just look at the performance of the Shanghai stock market since late last year (see Figure 3). Between a low of 1664 on October 28, 2008 and its recent high on August 4, 2009 the Index more than doubled, but subsequently lost 20% very quickly. Since the Shanghai Index led the world on the upside (the low was at the end of October 2008, and when the S&P 500 made its March 6 low at 666 the Shanghai Index was already up 10%), its recent downturn may be an early indicator for a global correction in stocks and commodities. Volatility will also stay high because we have all become momentum players and are, as Michael Steinhardt recently opined, a product of the last tick. As mentioned in last months report, the holding period has declined in recent times to less than one year and for some stocks it is less than half a year (see Figure 4). What are the consequences of such a short holding period? In my opinion, it means that portfolio managers will frequently rebalance their portfolios and in rapid sequence shift from one group of stocks into another, which will lead to very high volatility within the market even if the indices dont reflect such volatility. Rapid shifts between asset markets should also be expected, with portfolio managers continuously moving their funds between bonds and equities. As at the end of August, stocks were probably as overbought as they were oversold earlier this year. Gerard Minack of Morgan Stanley recently showed that emerging market stocks in mid-August were more overbought (in terms of trading in percentage above their 200-day moving average) than at any time since 2002 (see Figure 5). In addition, the percentage of S&P 500 stocks above their 200-day moving average is now at the highest level since 2007 (see Figure 6). Add to overbought stock market
September 2009
Figure 3
Shanghai Stock Exchange Composite Index (EOD) ($SSEC), 20042009
Figure 4
Everybody Has Become a Trader Current Holding Periods (Top Dow Stocks (months held))
Source: Alan Newman, www.cross-currents.net
conditions heavy insider selling as a potential problem for equity. In August, company executives were selling stocks at the heaviest rate in two years. This was in stark contrast to insider buying in early March, which recorded its fourth-highest reading. Particularly heavy was selling in semiconductor and retail shares, whereas financial insiders
were on balance net buyers (see Figure 7). Finally, Nasdaq volume as a percentage of New York Stock Exchange volume is at the highest level since 2001 and indicates that speculative intensity has been building. By themselves, these technical factors dont imply that a sharp correction is necessarily imminent,
Figure 5
MSCI Emerging Market Index, 20012009
Source: Gerard Minack, Morgan Stanley
but they suggest that the risks of buying stocks right now are beginning to outweigh the potential near-term rewards. Also, in light of the short holding
period, investors will increasingly need to focus on sectors that develop relative strength, and to move out of sectors that underperform. As an example, a case could be made right
now for reducing the exposure to retail and semiconductor stocks and increasing the weighting of financial stocks, which is also one of the few sectors where insider buying is high (see Figure 7). Similarly, it would make sense now to underweight emerging markets, which significantly outperformed the US stock market this year, and overweight the US. The impact of strong and unsustainable money supply and loan growth in China is beginning to wane and will likely bring about relative weakness to emerging markets (see Figure 8). This doesnt mean that I am turning away from emerging markets from a longerterm perspective, where plenty of opportunities are still available either because valuations have become reasonable, such as in Vietnam, or where a large number of stocks have recently broken out on the upside with very heavy volume (see Figures 9 and 10). (I still consider Thai stocks to offer some of the best longterm value.) Also, investors wishing to take advantage of Vietnams longterm potential should be interested to know that there is now a Vietnam Stock Market Index ETF (VNM US). I am a director of the Vietnam Growth Fund run by Dragon Capital and an adviser to Indochina Capital Vietnam Holdings, which is listed in London (ICV LN). However, aside from some pockets of value, emerging
Figure 6
Stocks: More Overbought Than at Any Time since 2007!
Source: Ron Griess, www.thechartstore.com
10
The Gloom, Boom & Doom Report
September 2009
Figure 7
Insider Buying in the Financial Sector Financial Insiders (Insider Activity for Top 10 IYF Cos.)
Source: Alan Newman, www.cross-currents.net
Figure 8
China: Money Supply and Loan Growth, 19982009
Source: Andrew Orchard, ABN AMRO, Hong Kong
markets seem to be near-term overextended (see Figure 5). In fact, I think that investors should shift money from the lowestquality and highest-volatility stocks to more defensive sectors. In the US, I find pharmaceutical companies such as Pfizer (PFE), Merck (MRK), Bristol Meyers Squibb (BMY), and Johnson & Johnson to be attractive.
September 2009
In the commodities space, our long sugar recommendation has performed well (see Figure 11). A further increase in prices to around 30 cents per pound is possible, but I am now out of the market. (Traders should use tight stops.) Incidentally, as a contrarian, one of the few investments that has attracted my attention is natural gas (see Figure 12). Either the price of natural gas is far too low or
the prices of oil and other industrial commodities are far too high! The problem, however, for individual investors is to find a suitable natural gas investment vehicle aside from the futures. I have mentioned in the past Pioneer Natural Resources (PXD) or the First Trust ISE Revere Natural Gas Index Fund (FCG) as probably the best plays. There are natural gas ETFs (UNG, GAZ), but costs are high. The relationship of strong equities and commodities = weak US dollar, and weak equities and commodities = strong US dollar, still seems to exist. As of mid-August, equities were overbought and investors sentiment became overly optimistic and complacent. At the same time, the US dollar has become oversold and investors sentiment is extremely negative. Since early June the US dollar has traded in a very narrow range against the Euro and a big breakout move is increasingly likely. My suspicion is that this breakout move could be in favour of the US dollar, with the Euro and commodity-related currencies such as the Canadian and Australian dollars weakening at least temporarily (see Figures 13 and 1). I still recommend the gradual accumulation of physical gold, and of gold exploration companies on weakness. I should like to stress that I continue to believe that we have seen major stock market lows in March 2009 and that on weakness equities should be accumulated for the long term. In Asia I recently increased, or initiated, positions in Parkway Life REIT (PREIT SP), MobilOne (M1 SP), Kingsmen Creatives (KMEN SP), Quality House Property Fund (QHPF TB), and Thai Airways (THAI TB). Below you will find two reports. My friend Bill Leavitt writes first about Water: Cycle of Life. William Leavitt is the president of Leavitt Capital Management, Inc., a registered investment advisory firm established in 1985 (www. leavittcapital.com). His firm specialises in identifying and investing in unique investments,
Figure 9
Vietnam Stock Exchange Index, 20042009
Source: Bloomberg
Figure 10 Thailand: TMB Bank (TMB TB), 20042009
Source: Bloomberg
12
September 2009
Figure 11 Sugar Prices, 19732009
Source: Bloomberg
Figure 12 Natural Gas ($ per MMBtu), 20032009
Source: Bloomberg
September 2009
13
Figure 13 Euro Index ($XEU), 20072009
affording clients exposure to a multitude of opportunities, including water, food, agriculture, energy, environmental solutions and timber, among others. Bills research has
taken him to virtually every corner of the earth, including sugarcane ethanol plants in rural Brazil, timber harvesting sites in New Zealand, and manufacturing facilities in Vietnam
and China. His most recent excursion was a summer research trip to Africa, which included a visit to a water bottling plant in Ghana. The problem for investors is that, according to Bill, the most attractive opportunities exist in private equity investments. He has promised to follow up sometime in the future with some specific recommendations. My personal investments in water are through Thai Tap Water Supply (TTW TB) and Glow Energy (involved in power and water utilities) in Thailand and in Singapore through Hyflux (HYF SP) and Hyflux Water Trust (HYFT SP see Figure 14). As depressing as the ultimate economic and political outcome may appear, I find solace when I read the reports my friends Marc Jenni and Daniel Siegriest send me periodically about the activities of Childs Dream a charity they set up in order to support refugee and orphaned children. My decision to support them right from the start, and to continue to do so, along with many of my readers, has been my best investment! Their August newsletter follows at the end of this report.
Figure 14 Hyflux Water Trust, 20072009
Source: Bloomberg
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September 2009
Water: Cycle of Life

William Leavitt, Leavitt Capital Management 3000 Dundee Road, Suite 101, Northbrook, IL 60062, USA Tel: (1-847) 205 1300; Fax: (1-847) 205 1350; E-mail: wleavitt@leavittcapital.com; Website: www.leavittcapital.com of the water is renewable, a great deal of the available water is used in ways that diminish its quality so that it becomes essentially worthless. Due to the inefficient usage, contamination and overuse of renewable and nonrenewable sources of water, as well as the disparate distribution of the earths water sources, many areas are essentially running out of water. Over the last century, the global population has doubled, while water use has grown four times. By 2050, the worlds population is expected to grow 50%, from six billion to nine billion people. Total global freshwater use is estimated at approximately 4,000 cubic kilometres per year, supplemented by 6,400 cubic kilometres of rainwater per year. Of this freshwater supply, approximately 70% is used for agriculture, with the balance used by industry (including 20% for energy), and domestic usage. Population growth, as well as rapid economic growth, particularly in developing nations, has created a dislocation between water resources and water requirements (see Chart 1). Water withdrawals have tripled over the past 50 years as a result of population growth and increased development of irrigation for food demand. As developing populations grow wealthier, they consume more protein, which further stresses water. The United States Department of Agriculture (USDA) estimates that it takes seven pounds of grain to produce one pound of beef. Many commonly used products require significant amounts of water during
We sing to the water because it is alive, it hears, it has feeling. It is a living thing. We are drops from the same river, part of the same water cycle.
Arhuaca (Colombia), female tribe-member Morning comes quickly for the women of Kutch, a village on the edge of the desert in the state of Gujarat, India. At 4.30 a.m., daily chores begin, often including walking four hours to collect water. They are, according to the World Health Organization (WHO), among the almost 900 million (one-eighth of the worlds population) people without access to safe drinking water. The Organization for Economic Cooperation and Development (OECD) estimates that 2.5 billion people (almost half of the worlds population) dont have access to proper sanitation. By 2025, the WHO estimates that approximately two-thirds of the worlds population will live in water stressed areas. While those reading this report are not likely to experience a lack of clean water, it is likely that all of our lives will be impacted by water, in one way or another. Besides our daily water use, water is critical in food production and energy. Ninety-seven per cent of the earths water is saltwater in oceans. Of the 3% of the earths 35 million cubic kilometres (km3) of freshwater reserves, most is inaccessible to humans, buried in glaciers, permanent snow cover, or in very deep groundwater. Humans use water from rainwater, surface and groundwater stocks, soil moisture, as well as other sources. In aggregate, less than 1% of the earths water is available for our use. While much
Chart 1 Global Demand (in millions of cubic metres), 19002030
Chart 2 Litres of Water Necessary to Form Various Products

Beverages Glass of water Bottled water Glass of beer Glass of wine Milk Cup of coffee Roasted coffee Assorted produced goods Finished cotton textile Per litre ~1 3-4 300 960 1,000 1,120 21,000 Per kilo 11,000 16,000 16,000 16,600 Per kilo 1,1002,000 1,9005,000 Per kilo 15,00070,000
Sources: Pacific Institute; The Worlds Water, 200809
Hamburger Microchip Leather shoes Assorted crops Soybeans Rice Assorted animals Beef
Sources: The Worlds Water, 200809; www.water footprint.org
September 2009
15
the production process, which most people dont realise. Such dramatic increases have created conflicts between urban and rural demand for water, as well as regional disputes (see Chart 2). According to the University of Technology in Sydney, Australia, 2008 was the eighth year in a row that the six billion inhabitants of the planet consumed more food than was produced by farmers. The Food and Agriculture Organization (FAO) of the United Nations (UN) estimated that there was only sufficient food in storage, globally, to feed the planet for 55 days, less than half the supply in the 1990s and the lowest level in 37 years. According to the UN, in 1960 there were 1.1 acres of arable farmland per capita throughout the world. By 2000, that number had dropped to 0.6 acres (see Chart 3).
Chart 3
Precious Acres
Growing population and widespread development are shrinking the amount of farmland per person.
Arable land per capita worldwide
Source: Food and Agriculture Organization of the United Nations
Drought, or water scarcity, is a problem on every continent. Demand for water has particularly stressed the southwestern United States, where population growth and food production is incompatible with water resources. California is a prime example of this phenomenon. The state, which produces more than half the nations fruits, vegetables, and nuts, faces severe water shortages. Reuters recently reported that some federal sources of irrigation water will be dry this year and the top state water
project will not fulfil more than 15% of requested water. Recently, the cities of Sacramento, San Diego, and Los Angeles introduced water rationing programs limiting water for lawn watering and car washing. California, like many other western states, receives its water from the Colorado River, which faces increasing demand and depletion. Farmers of thousands of acres of agricultural land in Californias important Central Valley were forced to leave land fallow, as authorities cut off water deliveries to the valley due to low reservoir levels. This February, California governor Arnold Schwarzenegger declared a state of emergency (the first since 1991) requesting residents of the nations most populous state to reduce water use by 20%. Las Vegas, an oasis constructed in the middle of the Mojave Desert, also has severe water problems. For years, Las Vegas was one of the fastest growing cities (and Nevada one of the fastest growing states) in the US. An example of a growing population pitted against limited resources, Las Vegas receives an average of only four inches (10 cm) of rain per year, 10% of that received by the city of Chicago. Amid the worst ten-year drought in recorded history along the Colorado River, Las Vegas has looming water problems. The city depends on Lake Mead, a 110 milelong reservoir that feeds off the Colorado River, for its water. Lake Meads level has dropped 1% per year since 1999. By 2012, the surface of the lake could fall below the existing pipe that delivers 40% of the citys water. That would also cause the federal government to cut the supply of water to the seven states that depend on the Colorado River for water. The Hoover Dam, constructed in 1935, which regulates the river and forms Lake Mead, would also be unable to supply electricity to 750,000 residents of Los Angeles. The arid southwest isnt the only area impacted. The Ogallala Aquifer, which supplies water to the Great Plains and the Midwest (breadbaskets of the US), is at record lows in some areas. The aquifer, the largest in the US, is depleting at the rate of 12
billion cubic metres per year. Pumping from the aquifer began 60 years ago and since then, water levels have dropped 100 feet (30.48 metres) in some places. The withdrawal rate is far in excess of the rate of replenishment. Other areas of the US are water stressed, as well, as seen by water restrictions being imposed by authorities in Texas, Florida, North Carolina, and Georgia. Globally, the situation is just as dire. Australia is in the midst of a severe drought. Last year, the one million ton rice crop in the Murray Darling Basin failed, driving up prices which, among other crop price increases, resulted in food riots in 34 countries. Australia, which was the worlds sixth-largest exporter of wheat the last two years, managed to harvest a little more than 50% of the million tons of grain it normally produces. Argentina, the worlds thirdlargest exporter of corn, recently experienced its worst drought in 38 years. Estimates are that the nations corn harvest will be reduced by 25%, and wheat production will be down by 50%. Chile experienced a spring drought that increased the risk of blackouts in its most populous regions and at copper mines. The Mexico City Water System cut water service for a third time this year. According to Global Water News Watch, water from the Lerma System, which also supplies the Mexican Federal District, has dropped from 4,000 litres per second to 1,000 litres per second. Further, dry weather this year will lead to a decrease in Colombian coffee production by an estimated 13%. Africa has also been harshly impacted by drought and water shortage. This year alone, drought has stressed Ethiopia, Somalia, Kenya, Eritrea, Djibouti, and Uganda, among other nations. In central Africa, Lake Chad, once the third-largest source of freshwater in Africa, is disappearing, threatening millions of people in Chad, Cameroon, Niger, and Nigeria. Due to long-term drought and excessive withdrawals, the lake is a mere 5% of its previous size.
September 2009
16
The Middle East consumes more water than it receives from renewable sources. Kuwait consumes 22 times its annual rainfall, according to a report by UBS. Saudi Arabia, which will exhaust its aquifers within the next ten years, announced that it will become 100% reliant on food imports by 2016. Also, in July of this year, Israel restricted water use for each household, with penalties for exceeding the limitations, in an effort to reduce water consumption. The Middle Eastern governments of Qatar, Abu Dhabi, and Saudi Arabia have begun acquiring or leasing large tracts of farmland in Asia and Africa (including in war-torn Sudan). Of course, the poster child for water stress is China, one of the earths most arid regions, with 20% of the worlds population and only 7% of the worlds water supply. Following an economic growth rate averaging 20% per year for the last 20 years, Chinas water resources are overallocated, inefficiently used, and terribly polluted, according to The Worlds Water 20082009 (TWW) (see Chart 4). Much of Chinas water is beyond reclamation, with many dead rivers and lakes polluted by industrial and human waste. The TWW report notes that of the 20 most polluted cities in the world, 16 are in China. Three hundred million of the nations people lack access to safe drinking water. The Chinese State Environmental Protection Agency, the WHO, and the OECD report that 40% of Chinese surface water is fit only for industrial or agricultural use, even after treatment. Approximately 20,000 chemical factories, half along the Yangzte River, discharge untreated or partially treated contaminants into Chinese rivers. Only 69% of Chinas largest cities meet national potable water standards. Drought and floods also devastate China. According to Chinas State Flood Control and Drought Relief agency, annual losses from drought since the 1990s have been the equivalent of 1.1% of GDP, while annual losses from floods averaged nearly 2% of GDP. (US losses from floods, for the comparable
September 2009
Chart 4
Emissions of Organic Water Pollution (000 kilos per day), 2003
Sources: World Bank; Independent Strategy
period, were 0.25% of GDP.) Within China, the uneven distribution of water resources and the transfer of water between regions have led to regional conflicts. Violence over allocations of water from the Zhang River has been escalating for over 30 years between villages in Shexian and Linzhou counties, according to TWW. Both Beijing and Hebei provincial officials have diverted water from the Juma River, leading to conflicts between the two governments. Perhaps the most significant conflict is the one between the Chinese government and Tibetan protesters. The Tibetan Plateau has plentiful water and serves as the headwaters of many of Asias most important rivers, including the Yellow, Yangtze, and Mekong. While routinely thought of as a religious dispute, some observers think the conflict may also result from disagreements over the management of Tibets freshwater. Industrial activities and deforestation have already impacted Tibets freshwater reserves, according to the Chinese Academy of Science. Other regional conflicts, some in already unstable regions, could be triggered by water stress as well. Shrinkage of the Himalayan Mountain glaciers could trigger
conflicts between China, India, and Pakistan. According to a report by the Asia Society, 77% of Pakistans water emanates from beyond its borders. India and Pakistan have a water treaty, in effect since Pakistan gained independence, but the two nations have been arguing about violations of the treaty. Israel, Jordan, Lebanon, and Syria have all diverted water upstream from the Jordan River. Contaminated water is a significant issue. Where freshwater is scarce, brackish water and waste water are also utilised to meet water demand. According to the World Water Development Report (WWDR), in 2006, 54% of the worlds population had piped water connections to their dwelling, plot, or yard, while 33% used other improved drinking water sources. The balance, 13% (884 million people), were forced to use unimproved water sources. In a recently published study by the WHO, it was estimated that China suffers 750,000 deaths per year, in excess of normal mortality rates, due to pollution (see Chart 5). Some potentially long-term harmful effects of water contamination have recently been noted. The Associated Press reports that many pharmaceutical products,
Chart 5
Mortality Rates for Diseases Associated with Water Pollution (per 100,000) in China in 2003 and World Averages in 2000
Sources: MoH, 2004; WHO, 2006
including antibiotics, anticonvulsants, chemotherapy products, mood stabilisers, and sex hormones, as well as veterinary medications, have been detected in the drinking water supplies of the US, Europe, Asia, Australia, and Canada. The presence of so many medications, which are partially absorbed by the body, but mostly pass through as waste, raises concerns about the longterm consequences of even small detectable amounts. With advances in pharmaceutical products, global water systems are not designed to detect or eradicate these contaminants. A huge market exists for those creating techniques to protect the integrity of water. There are also indications that adding chlorine, one of the most common methods of treating drinking water, elevates the toxicity of some of these pharmaceuticals. Malnutrition is another consequence of water stress and contaminated water. According to the WWDR, malnutrition accounts for approximately one-third of disease in developing nations. Another consequence of lack of water and malnutrition is stunting (low height for age), also more prevalent in developing nations. While we have only touched upon some of the problems associated
with water, we will offer a few solutions to the gloomy picture. Obviously, significant public and private resources will have to be dedicated to relieving some of the water stress, particularly given the stressed financial status of many cities, villages, states, and nations. Interestingly, bottled water isnt a real solution to water problems. While travellers from developed nations dont leave home without it, bottled water is at least 2,000 times more energy-intensive than tap water. Much of the energy is involved in the production of plastic bottles, as well as the energy required to transport the bottles over long distances. Generally, the bottles end up in landfills, presenting other environmental issues. With more than one unit of water used to produce one unit of bottled water, one solution to water stress is to reduce the amount of water consumed in bottled water production. Nestl SA, maker of Perrier and San Pellegrino water, has announced that it has reduced the amount of liquid it requires to produce one litre of bottled water to 1.76 litres, 26% less than in 1999. Safina, a Ghanian bottled water producer, has managed to produce its products with only a 30% loss of liquids. Such thinking, unheard of
years ago, is critical to conserving a shrinking resource. Ironically, few people have any sense of the cost of water. Although it is a necessity, water is generally not competitively priced between regions and is certainly not priced according to its value, as it is often subsidised by governments (see Chart 6). Perhaps the most significant improvement that would lessen the stress on the global water supply is more efficient usage and recycling. As we continue to overburden a finite freshwater system, any means to reduce demand or increase supply is paramount. For example, many residents of the US and other nations use water that is partially treated, as well as recycled sewage. The practice is growing. Although the concept may not be appetising, it is quite effective. After treatment, recycled sewage allows the 2.4 million residents of Santa Ana, California to enjoy water with a measure of purity (TDS total dissolvable solids) of 30 parts per million, less than many brand-name bottled waters. Santa Anas system also allows it to provide water to meet the needs of 500,000 more people, without taxing its own supply. More efficiency in transporting water is a critical solution to water stress. Water is very expensive to transport (estimates for water pipe production and installation are from $1 million per mile in rural areas to $10 million per mile in urban areas in the US), so preventing leakage and water loss (which can be up to 40% of transported water) is critical. Leaking pipes in the US lose an estimated seven billion gallons of drinking water per day, according to the American Society of Civil Engineers. The group states that water systems in the US face an annual shortfall of $11 billion to replace crumbling water facilities. Over the next five years, 70% of the one million-mile US water system will have surpassed its useful life. Some water pipes in the US predate the 1860s. Over the next 20 years, over $1 trillion will be required to upgrade the US water infrastructure. Water is also transported by
September 2009
Chart 6
Product Tap water Gasoline Coca-Cola Organic milk Tide liquid detergent Imported beer Evian bottled water Pepto-Bismol American whisky Revlon nail enamel Chanel #5 perfume Average price ($/gallon) $0.0025 $2.20 $2.64 $4.25 $8.39 $12.00 $21.19 $58.52 $150.00 $983.04 $45,056.00
Chart 7
Investment in Water Infrastructure (1999 US$ billions, adjusted using Construction Cost Index), 19281999
US government investments in water infrastructure during 193096 yielded $6 in damages averted for each $1 invested.
Source: The Environmental Benchmarker and Strategist
Source: Based on Delli Priscoli and Wolff, 2009
canals. Lining irrigation canals, along with smaller opening gates and narrower channels, has reduced agricultural water loss by 50% in parts of Australias MurrayDarling Basin. Hardwood from Cameroon is processed and shipped to the Netherlands to line the canal systems there, also to prevent leakage. China has constructed a new system of canals and pumps to transfer water from the southern region of the country to the north. However, transporting water by pipe is not only expensive, but energy intensive. The New York Times estimates that 20% of Californias energy use is for the transporting of water from the north to the south. Nevertheless, investments in water infrastructure have been effective (see Chart 7). Often simple ideas, such as catchment (retaining and storing water) and conservation, are significant. Using existing deltas (low-lying level areas of terrain), or excavating the deltas to create reservoirs, is quite effective at catching groundwater or mountain runoff, which would otherwise be lost at sea or to evaporation. This is particularly effective in central California. According to the International Union for Conservation of Nature, based in Switzerland, cities like Caracas,
September 2009
Venezuela, are protecting local water basins, as a method of reducing new investments in pipes and pumps. Jakarta, Indonesia is among many cities preserving forests, as trees shield streams and rivers from evaporation and erosion, providing cheap water for the city and avoiding $1.5 billion per year to transport water from distant reservoirs. As irrigation use continues to grow, more efficient techniques are necessary. Netafim, an Israeli company that started as an experiment in 1965, has grown into a large enterprise controlling over onethird of the global drip irrigation market. Drip irrigation is a system of low-volume irrigation that is less water intensive. Recently, the company launched a low-pressure irrigation system that is suitable for areas where water pressure or electrical generation isnt conducive to high-pressure systems. The concept of virtual water, or replacing uses of water from areas of water scarcity to areas where water is more plentiful, or externalising water usage, is growing. Approximately 80% of virtual water is related to trade in agricultural products and the remainder to industrial products. The global volume of virtual water flows in commodities each year accounts for
approximately 40% of all water consumption, according to WWDR. As an example, Mexico imports wheat, maize, and sorghum from the US, which requires 7.1 billion cubic metres of water per year in the US to produce. If Mexico was to produce the imported crops domestically, it would require 15.6 billion cubic metres per year. Global water savings through international trade of agricultural products has been estimated by the WWDR at approximately 350 billion cubic metres of water per year (6% of water used globally for agricultural production). In the first four months of 2009, China, which had to abandon its policy of food selfreliance, imported a record 13.9 million tons of soybeans. A number of countries, including Japan, Mexico, most of Europe, the Middle East, and North Africa, are net importers of virtual water. A final example of solutions to freshwater stress is desalination. Although an expensive option (estimated cost $1,700$2,200 per acre foot) versus treated water (approximately $600 per acre foot, in the same region) and energy intensive, as well as creating an environmental footprint (desalination chemicals can be harmful to marine life), its use is
increasing as a measure of last resort (see Chart 8). China will be forced to use desalination as a source of coastal water supply. Due to the high cost of transporting water, desalination isnt the answer for water-stressed inland areas. Many countries allow the purchase of water rights either with or without the land under which the water flows. Distressed real estate developers, and banks offloading bad loans, often are compelled to sell assets with embedded water rights. Also, allocation of water can be sold or adjusted. For example, agricultural land can be removed from production, and its accompanying water allocation can be sold to a buyer willing to pay dearly. We have found this activity to be a very interesting investment. Often, there is additional optionality, such as using the fallow land to generate wind or solar power. Water, which we often take for granted, is a finite resource and we are using it up or contaminating it. It isnt only future generations who will bear the consequences even now, wealthy and developing nations have
Chart 8
Cumulative Installed Desalination Capacity, 19452004
Source: The Worlds Water, 200607
been forced to confront the consequences of misuse of one of our most precious resources. As with all problems, the solutions arent necessarily easy. However, with recycling, better infrastructure, more efficient allocation, and other remedies, as a world of water users, we can better address the issue. So,
the next time you take a leisurely shower, leave the water running while you brush your teeth, or eat a steak, think about the women of Kutch, or the farmers in the MurrayDarling Basin, or the children of stunted growth in Africa. After all, we are all drops from the same river.
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September 2009
Childs Dream
Marc Thomas Jenni and Daniel Siegriest, Co-founders, Childs Dream Foundation/diversethics Foundation 238/3 Wualai Road, T. Haiya, A. Muang, Chiang Mai 50100, Thailand Tel: (66-53) 201 811; Mobile: (66-86) 6723 430; Fax: (66-53) 201 812; Website: www.childsdream.org; www.diversethics-foundation.org
AUGUST 2009
Daniel Siegfried I cannot believe that it has already been six years since Marc Jenni and I embarked on a journey that transformed our lives forever. In 2003, we made a conscious decision to change our lifestyles in pursuit of happiness and fulfilment. At the time, we had no idea what we were getting into, but we found exactly what we were looking for in Childs Dream: our own charity organisation with a simple mission and enthusiastic employees who share our passion and motivation, despite their diverse backgrounds and education attainments. As our uncomplicated, hands-on approach and our lets do it attitude attracted more and more donations, Childs Dream grew bigger and bigger. As our primary goal is to help as many children as possible, we were thrilled about the influx of these funds. However, earlier this year we realised that we had reached our optimal size. It is now time to consolidate our organisational structure and focus on our mission and geographical coverage. We once again want to put childrens health and education at the heart of our work, while seeking greater involvement of the beneficiaries and their communities in our efforts. This will allow us to build stronger relationships with communities and create a stronger sense of responsibility among the children and youth towards their social origin and the society in general. In this way, we hope to give the children the opportunity to become responsible and productive members of their communities. This is our vision of sustainable development. We plan to spend more time in our target communities; we therefore need to narrow our geographical scope. For this reason, we have decided not to
September 2009
start new projects in southern Laos but focus on the north, which can be accessed more easily from Chiang Mai. We will, of course, fulfil our commitments to existing and ongoing projects in the south. In hiring three senior staff members in 2008, we hoped that their expertise and knowledge would complement the strong motivation and drive of our younger staff. However, we underestimated the cultural respect for these three new staff members and we soon realised that the very heart of Childs Dream, the spirit and goodwill of our younger staff, was at risk. We recognised our mistake and asked these three employees to leave the organisation. We now strive again for a flatter organisational structure, whereby the true motivation and dedication of our staff rates higher than experience or technical knowledge. Our new structure includes three focus groups; health, basic education, and higher education. This structure encourages the sharing of responsibilities and greater involvement of our administrative staff in field work, which ultimately leads to a higher job satisfaction and fosters a stronger team spirit. We have already observed that the younger staff have regained their confidence, motivation, drive, and lets do it attitude.
depends on the skills and resources of its own people, but also on the health and prosperity of the communities in which it operates. More information will follow as soon as we start construction.
Recent activities
CDC school opening, Thailand

On May 26, we celebrated the opening of the Childrens Development Center (CDC), our largest project ever! The sheer scale of the opening ceremony attracted an audience of nearly 2,000 people composed of students, parents, teachers, government officials, and NGO workers. The diversity and strength of the audience attests to the importance of the project. CDC is a school for the children of migrant workers, predominantly Burmese, residing in Thailand. Over the years, the old school has steadily grown from only including the children of workers at the nearby Mae Taew Clinic into what is quite possibly the largest migrant learning centre in Thailand, with approximately 1,200 children. Before Childs Dreams support, the school was operating across several buildings, including an old wooden two-storey house and a disused factory. The school now has a beautiful and spacious campus, consisting of two two-storey buildings with a total of 38 rooms for classes and offices, a school canteen/assembly hall, and three separate buildings housing toilets and hand washing stations. The campus also includes a large grassy assembly field and three sports courts for basketball, takraw (cane ball, a local favourite), and volleyball, as well as three separate playground areas complete with swings, see-saws, climbing towers, and bridges.
Highlight: Grant from Credit Suisse

We are thrilled to announce that the Asian Pacific Philanthropy Committee of Credit Suisse has awarded Childs Dream a grant of US$250,000 to build 30 new classrooms in Laos. We want to take this opportunity to sincerely thank Credit Suisse for this outstanding support and trust. We congratulate Credit Suisse for recognising that its success not only
The landscape design has ensured that shade-giving trees will quickly grow to provide cool spaces for children to take refuge from the hot sun during their breaks throughout the day. Overall, the campus provides a well-balanced environment for children to further their development, both inside and outside of the classroom. Two months into the school year, the enthusiasm of the students and teachers continues to be apparent upon entrance through the main gate. The campus is teeming with masses of students and teachers busily moving between classes. Our sincere gratitude goes again to SK Dream Japan for the generous support in realising this tremendous project.
We are also very happy to have received support from Julius Baer Bank and its employees in Hong Kong. Thanks to this joint initiative by the staff and the bank, this project was made possible.
Minmahaw Higher Education Program (MHEP)

One of the many hurdles of getting Burmese students into university is that their education is often non-formal or non-accredited, and they are thus ineligible for university admission. Minmahaw Higher Education Program (MHEP) is an exam-focused course that aims to fill this gap by legitimising Burmese students education. Students without accredited high school certificates compete to be admitted to the year-long MHEP course, where they will prepare to sit an internationally recognised and accredited high school exam in order to make them eligible for university education. If students pass the exam, they receive a high school diploma and can therefore advance to university. In early 2009, we trialled the MHEP by supporting nine students. The trial was very successful, with all nine students passing. Childs Dream has therefore decided to fully fund the course on an annual basis. This course will provide an academic pathway for students we currently support across our schools in refugee camps, as well as those in migrant learning centres. We anticipate the school will accept 2030 students annually at full capacity.
University Scholarship Program

Since we launched our university scholarship program in May 2006, it has grown considerably: our first student intake had eight Burmese students, and the program now has 79 students in total. Most of our students are Burmese nationals, but starting this year, we accepted our first two Laotian scholars. Perhaps the biggest challenge of this program is not supporting students during their semesters through to graduation, but getting them admitted to the universities in the first place. This is a situation of shifting sands, where universities change admission criteria from year to year and according to the nationalities of students, even after officially admitting them. Universities occasionally even invent additional compulsory courses in international study programs for financial gain. For almost a year now a very committed volunteer Bryan Clapper has been working alongside us on this program. Bryan is a professional IT programmer who designed a fantastic new scholarship database that makes the financial and academic management of our scholars a lot easier. We highly appreciate his outstanding patience with us when we change database requirements as we go along! Perhaps we are his shifting sands? Over the years, only five students have left our scholarship program. Two students have resettled to the USA under UNHCR resettlement initiatives, one student had a baby, and one student disappeared for reasons unknown to us. Only in one case have we discontinued a scholarship because the student didnt comply with mutually agreed rules. We feel that our retention rate in the university scholarship program is high by any standard, despite the very demanding circumstances. We trust this positive trend will continue in the years to come.
Baan Tonhan High School, Laos

The village of Tonhan is located about 40 kilometres from the town of Xeno in Sawannakhet Province in Southern Laos. The village secondary school was built in 1978 by a group of 12 villages. They managed to fund and construct five buildings, with three classrooms each, without the help of the government. The school now offers education to 790 students, but given their limited financial means, the villagers have been unable to maintain the facilities properly, and two of the buildings are now in such bad repair that it is very unsafe to continue classes. Childs Dream agreed to construct a new building with six classrooms, with the participation of the Tonhan community. The plans include provisions for four new toilets and new school furniture for all classrooms. The community agreed to help with the preparation of the land and to contribute the earth, stones, sand, and bricks required for construction. The local education ministry will provide all teaching materials, and the parents will be responsible for school uniforms and books. Childs Dream will provide supplementary stationery if and when required. All additional construction material will be purchased directly by Childs Dream from a shop in Xeno. This project is scheduled to be completed by October 2009.
Cyclone Nargis EAT Burma (update)

It seems long ago that the devastating power of Cyclone Nargis swept over the Irrawaddy, Rangoon, and Puga divisions in Burma, causing death and destruction in a country already suffering under one of the most restrictive and repressive regimes in the world. In fact, this catastrophe occurred just over a year ago. Many of the survivors of this cyclone, one of the deadliest natural disasters ever recorded, continue to suffer, struggling to meet their basic needs and to cope with all that they have lost. Long after the attention of the world steered away from the misery of the aftermath of the catastrophe, that misery remains. Soon after Nargis hit, the Emergency Assistance Team Burma (EAT-Burma) was established to provide aid and assistance to the people affected by the cyclone. Coordinated by the Mae Tao Clinic,
September 2009
EAT-Burma is a collaboration of several Burmese community-based organisations working at the grassroots level. As we were confident this cooperative model would be effective, we decided to financially support their activities. The first phase of the relief effort focused on emergency aid in the immediate aftermath of the cyclone. Childs Dream and our sister organisation, diversethics Foundation, contributed US$200,000 to this phase. During the second phase emergency aid continued, but the activities expanded to include the rebuilding or infrastructure and restoration of food production and livelihood activities. Our contribution here was an additional US$150,000. A few examples of what EAT-Burma, with our support, has achieved: 106 boats and 112 fishing nets were provided to groups of one to three families to share. Seven villages were provided with a large boat with an engine to assist them to fetch clean water five to six hours away. 4,050 gallons of diesel were also provided to run the engines. 513 students received support for uniforms, school fees, and stationery. 100 children, mainly orphans, in three boarding houses were supported with a stipend of 3,000 THB per child. 20 villages received prenatal and child health support in the form of nutrition, medicine, and newborn supplies. 500 pregnant women were provided with maternity kits. Eleven water pumps were provided to ten villages with a total population of 7,600. 236 families were given materials to rebuild their houses. Support for the construction of four bridges enabled over 15,000 villagers from seven villages to be reconnected to the main road to gain better access to health care, education, and supplies. 15,200 people were provided with emergency food relief. Plans are under way to begin a third phase focusing mainly on sustainable development and community participation. We are
September 2009
currently awaiting the final proposal before committing to funding this phase.
Update: Baan Gua Fan, Thailand

Baan Gua Fan (Dream House) in Chiang Mai was a boarding house for 11 teenagers, mostly from the Akha hill tribe and all from extremely poor backgrounds. They moved to Baan Gua Fan after the closure of our ChildsArt project in Mae Sai, in February 2007. Their financial hardship, lack of education, and absence of a support network put them in a very vulnerable position in an environment where the dangers of drug trafficking, prostitution, and crime were an everyday reality. Baan Gua Fan gave them the opportunity to attend non-formal education and vocational training and, consequently, improve their employability and life opportunities. Having achieved most of our goals, we decided to close the house in April 2008. We now have some excellent news about five of our former protgs. All are doing great. One of the former students receives a Childs Dream scholarship for his secondary school studies in Chiang Rai. He is in his final school year, and his results last year were very good. Two other young men and one young lady work in barber shops in Chiang Mai and make decent livings. A fifth former-student, who during his time in Baan Gua Fan showed an interest in motorbikes, now works in a motorbike repair shop not far from Chiang Mai. He told us he is very happy there and continues to learn a lot. He and the three barbers all earn a salary that allows them even to send some money home to support their families. They told us that although they dont go to school anymore, they still practise their reading and writing skills and are grateful for their time at Baan Gua Fan.
progress. The school building, as well as the attached office, is complete. The toilets and the canteen will be finished when the rain recedes and the material can be transported to the village again.
Prasath Bei School, Cambodia

We visited the construction site and everything is going very well. The school looks nice and strong. About 90% of the work is done. The contractor told us that the school will be finished within the next few days.
Volunteers
Since our last newsletter was published, we have hosted several volunteers, each of whom supported us greatly. Bryan Clapper has constructed an incredible database for our scholarship program; Benjamin Cavalli helped us in our office in Chiang Mai during April and May; and Sarah Rajkumar spent three months with our team in Siem Reap and is now succeeded there by Kaspar Weilenmann. Patrizia Carbone, Massimo Marletto, and Magdalena Frydrych all taught English in Tomato Village. A very big thank you to all of them!
European tax domiciles confirmed

As reported in the April newsletter, over the past many months we have been working on offering tax breaks for donors living in a number of European countries. Today we are happy to let you know that taxefficient giving is now possible in Germany, France, Italy, and the UK. Please visit the donor section of our webpage for more information.
Thank you very much

A big thank you again to all our donors, small and big! The current economic crisis is difficult for all of us; hence, we are even happier to see so many of our friends and supporters living up to their commitments and continuing to support us. We are fully aware that this is difficult for many of you and we therefore appreciate your trust and support more than ever. Your Childs Dream Team
Project updates
Loi Tai Leng, Burma

We visited the project in July. After a lengthy delay in implementing this project due to transportation problems, we were very pleased to see good
THE GLOOM, BOOM & DOOM REPORT

Marc Faber, 2009
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Gloom Boom Doom September 2009

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THE GLOOM, BOOM & DOOM REPORT

ISSN 1017-1371 A PUBLICATION OF MARC FABER LIMITED SEPTEMBER 1, 2009

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Update: Baan Gua Fan, Thailand

Prasath Bei School, Cambodia

European tax domiciles confirmed

Thank you very much

Loi Tai Leng, Burma

THE GLOOM, BOOM & DOOM REPORT

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