2007: A Year in Review, Part II

2007: A Year in Review, Part II

“New Year’s Day – Now is the accepted time to make your regular annual good resolutions. Next week you can begin paving hell with them as usual.” – Mark Twain

The first day of a new year gives us an interesting opportunity to look back at the year behind us…and to try to learn from our experiences and mistakes. And so, we give you:

2007: The Year in Review, Part II…

by Bill Bonner “With the housing market in free fall, it is sometimes difficult to decipher exactly where everything began to go wrong. This week, Bill Bonner sifts through CDO’s, MBS’s, and falling asset prices to explain what is really happening. Read on…”

by Mark Skousen “Hans Sennholz, who passed away two weeks ago, was a died-in-the-wool doomsayer, a charismatic speaker, and an influential player in the financial freedom movement. Mark Skousen, who was a close friend of Dr. Sennholz’s, gives us a snapshot of his life, below…”

by Bill Bonner “The symmetry of the system is simple: the East makes; the West takes. The East saves; the West spends. The East lends; the West borrows. The boom in the East is real; in the West it is a fraud.”

by Bill Bonner “On Friday, the Bernanke Fed looked a lot like the old Greenspan Fed…riding out to rescue speculators like the cavalry to the aid of desperate pioneers. The trumpet sounded…the rifles fired…and the savages were beaten back.

by Bill Bonner “Pity the poor American householder. Just a few months ago he had people lining up to lend him money. Now they’re on the phone wanting it back! He had gotten used to refinancing. But now refinancing is tough…and more expensive.”

by Kate “Short Fuse” Incontrera “Wow, the dollar has certainly taken a beating this past week following the Fed’s rate cut. It has fallen to a 15-year low in the world dollar index, hitting the weakest level ever against the euro at just under $1.40.”

by Bill Bonner “The results, announced two weeks ago, made it clear that Bernanke is heir to Alan Greenspan, not Paul Volcker. That is, the Bank of Ben Bernanke will not fight inflation…instead, it will battle deflation to the bitter end.”

by Addison Wiggin “The lesson not yet learned has everything to do with the reasons why the gold standard was so important. We have given control of economic forces over to government tinkering.”

by Kate “Short Fuse” Incontrera “The dollar is quickly becoming the red-headed stepchild of the currency world. First, supermodel Gisele came out saying she didn’t want to be paid in dollars for her latest campaign. Then, rap superstar Jay-Z released a video in which he was doing something very odd – flashing money around.”

by The Mogambo Guru “People want to know why things in the financial markets are so damned weird, and I answer that there are many reasons, all of them concerned with greed. And it may also have something to do with ‘making hay while the sun shines’.”

by Ed Bugos “Writing from Vancouver, British Columbia, Strategic Investment contributor Ed Bugos estimates the value of gold adjusted for the exploding supply of dollars. He also provides a trader’s perspective on the likelihood of a gold correction. Read on…”

by Bill Bonner “Yes, dear reader…a recession is probably on the way…And it will probably be a real recession this time, not just a phony recession such as we had in 2001. This time the consumer will actually have to cut back on his spending.”

Happy New Year from all of us here at The Daily Reckoning!

Short Fuse
The Daily Reckoning
January 1, 2007

P.S. You have hours left to get in on our most elite service – The Agora Financial Reserve. We only open the door to new members twice a year – so once we shut them at midnight tonight, we won’t open them again until June 2008.

The Daily Reckoning PRESENTS: Last week’s assassination of Benazir Bhutto took the markets by storm, as prices for precious metals and oil shot up. Byron King explains the importance of investing defensively in the right sectors – and takes a look back at an old college acquaintance, Benzair Bhutto. Read on…

“CHOP YOUR OWN WOOD, AND IT WILL WARM YOU TWICE”

“If it bleeds, it leads” goes the old saying in the newsrooms of the world. Bad news in the daily headlines is usually related to some sort of tragedy or hardship for people somewhere. Whether it is war, crime, large-scale setback, natural disaster or whatever else, those headline news stories usually deal with how somebody out there is holding the short end of the stick.

Every day has its headlines, of course. And there was certainly some bad news last week out of nuclear-armed Pakistan. The prices for gold, silver and oil promptly spiked upward with the news of the assassination of Pakistan’s former Prime Minister Benazir Bhutto. (I knew her many years ago at Harvard. See below.) And as bad and tragic as the news out of Pakistan is, it highlights the importance of investing defensively and in the right kinds of sectors. I think that we are doing just that in Energy & Scarcity Investor.

In early December, a lot of people were selling stocks in our seven portfolio companies, most likely to lock in some gains for 2007. And in consequence, the stock prices drifted downward. But toward the end of December, people have been buying our seven portfolio stocks, so as to hold shares on the books by the end of the year. This is good news for 2008. Investors see the value in the stocks and want to own shares. Here is what I see, going forward.

Pakistan’s bad news has a silver lining for people who invest in precious metals plays. With the news out of Pakistan, silver rose from $14 to $14.70 per ounce, or 5% in one day.

Now let’s discuss oil. The price of oil rose with the news of the assassination of Benazir Bhutto. Of course, the supply of oil in this world is balanced on a knife’s edge with demand. So in general, the slightest amount of bad news can add dollars to the trading range. The other day, for example, an earthquake in Venezuela also shook the price of oil on world markets. No, there was no damage to Venezuela’s oil infrastructure. But just the thought that the quake might have broken something was enough to trigger the “buy” buttons in the minds of traders everywhere.

Pakistan is not a world oil power, so why did the death of Mrs. Bhutto cause oil prices to rise? Because a lot of people in the West were hopeful that Benazir Bhutto would return to political power in Pakistan and help to get things more under control. Among other things, Mrs. Bhutto would probably have been more accommodating than other leaders to Western efforts to secure Pakistan’s nuclear weapons. And “loose nukes” are a nightmare to people who dream of world stability. So now that Mrs. Bhutto has been assassinated, it is all but certain that nothing like the formerly hoped-for nuclear security will occur anytime soon. Worse, Pakistan may be sliding downhill into its own form of revolution. And a nuclear-armed nation in revolution is not a good thing.

Will the events in Pakistan lead to some sort of eruption within the Islamic world? Really, nobody knows. So we will just have to wait and see. But from the perspective of the Western world, and certainly the perspective of the U.S. and its national interests, if there is going to be a revolution in oil extraction technology, it cannot come about too soon.

The danger and instability that we see in Pakistan also support every argument one can make for the U.S. pursuing its own pathways to long-term sustainable domestic energy production. Really, the less we have to rely upon the Middle East for anything, the better. And there is no better means of providing long-term base-load low-pollution electricity than with geothermal power generation. You are, in essence, mining heat from the Earth at a price that is competitive with the lowest-cost coal generation (but without the 600-foot-tall smokestack, the CO2 emissions, the railroad back to the coal mine or even the coal mine). And depending on the locale, there are vast stores of heat within the Earth.

I mentioned earlier that I knew Benazir Bhutto back in the 1970s at Harvard. She was a lively, very bright person. Her friends called her “Bennie.” Instead of what we consider high school, she had been privately tutored at a convent in Pakistan. So Bennie was fairly innocent and rather unaware of the ways of the world, and certainly of the Western world as exemplified by Boston in the disco age. Still, Bennie walked unafraid (and sometimes alone) and wide-eyed through everything that the U.S. had to offer. Early on, Bennie Bhutto started writing for the school newspaper, The Harvard Crimson, and covered everything from freshman sports events to visits to campus from distinguished guests like Henry Kissinger or her father, the late Pakistani Prime Minister Ali Bhutto. (Her father had helped arrange Kissinger’s trip to Beijing that laid the groundwork for President Nixon to go to China.) When Bennie started talking at the dinner table, you knew that you should just settle in for a long and interesting discussion, filled with what my old roommate used to call “Bennie-vision.” Yes indeed, she had some opinions.

Over the years, and as I followed her career, I always wondered how Bennie Bhutto was able to balance her inner modernism with the traditional Islam of a place like Pakistan. In 1979, her father was indicted, tried in a kangaroo court and executed by Pakistan’s Zia-ul-Haq. Afterward, Bennie and her mother went through some very hard times under house arrest. Still, I think that Bennie believed she was bulletproof because she just got out in front of Pakistani politics and rose to become the first female prime minister of an Islamic nation. It was not to last, because there were too many people feeding out of the trough of sinecures and corruption. Bennie was a threat to all of that, particularly to the power of the Pakistani intelligence services and secret police. In the process of trying to initiate too much change too fast, Bennie apparently got mixed up with her own form of family self-enrichment. That was too bad, because in some respects, Bennie became a caricature of the feminine misuse of power, similar to Imelda Marcos and her closets full of shoes.

Bennie spent many years living in Dubai, London and New York. She had “enough money,” if you know what I mean. Bennie did not have to return to Pakistan. But in October 2007, she flew in to Karachi, where she was greeted by thronging masses that included a man who tried to hand her a baby to kiss. But the baby was wired up with a bomb that detonated and killed 140. This pretty much set the stage for the next few months of Bennie’s life.

It all ended for Benazir Bhutto the other day in Rawalpindi, with two bullets and a bomb, according to news accounts. RIP Benazir. She did not deserve such an ending. No one does. But the death of Benazir Bhutto illustrates the current fate of much of what passes for modernism within a traditional and corrupt culture.

The death of Bennie Bhutto also illustrates why the U.S. and West need to focus on rebuilding our own energy systems and larger economy. Thoreau wrote that if you “Chop your own wood, and it will warm you twice.” So we ought to get prepared and do what we need to do to survive in this world. Dig silver, recover hydrocarbons, mine heat from the Earth. And we have to keep our eyes open while we settle in for a long struggle with people who wire babies with bombs.

Best wishes for the New Year.

Until we meet again….

Byron W. King
for The Daily Reckoning
January 1, 2008

P.S. I can report to you that at Energy & Scarcity Investor, we avoided holding the short end of any sticks during the past week. The stocks of the seven companies in our Energy & Scarcity portfolio all had good runs, even if the world at large had its troubles. All of the stocks are generally “up” this week, which I believe is a harbinger for what is ahead in 2008.

Editor’s Note: Editor’s Note: Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. In addition to being editor of Energy & Scarcity Investor, Byron is also co-editor of Outstanding Investments, and frequent contributor to Whiskey and Gunpowder.