Building a Better Breathalyzer

“Scientists have discovered a new material that allows light to be controlled and measured in surprising ways. Wired News reports a new type of material that has scientists speaking in almost mystical terms about light.

“The new substance is a ‘metamaterial,’ and it has a property called negative refraction. This means that, in theory, the material could be designed so that light would curve around an object made of the material, making the object invisible.”

Jonathan Kolber
October 31, 2007

Now for some more views from Short Fuse in California…

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Views from the Fuse:

A Happy Halloween to one and all – is everyone prepared for the hair-raising events coming our way today?

First of all – the Fed will announce their decision this afternoon…will they cut rates again? Or will they (gasp) do nothing? Only time will tell…

“Overnight, currency traders priced in a possible rate cut from the Fed. Translation: it was a bad day for the dollar,” write Addison and Ian in today’s super-scary issue of The 5 Min. Forecast.

“The pound leapt up to $2.07, a new 26-year high. The euro climbed higher into the $1.44s – marking its fourth record high in as many days. The Canadian dollar breached $1.05 setting a new high of it’s own…not since 1960 has the greenback fetched so little in a trade with our neighbors to the north.

“The dollar index sunk to 76.6 another all-time low.”

Fueled by the greenback’s record-breaking low, and a surprising discovery of supply shortages, crude hit yet another all-time high…surging up to $94 a barrel.

“Be afraid…be very afraid,” warned Byron King.

Last week, our intrepid correspondent hit the Association for the Study of Peak Oil (ASPO) convention in Houston…and he reports that, unsurprisingly, the news was pretty bleak.

“Slide after slide, chart after chart, speaker after speaker told the tale of the world’s oil fields peaking in output and, in due course, going into irreversible decline. From the North Slope to the North Sea, Saudi Arabia to Siberia, Canada to China, Iran to Indonesia, output of oil greatly exceeds new discovery. Many of the world’s largest oil fields and provinces, such as Saudi Arabia’s Ghawar, Kuwait’s Burgan, Russia’s Romashkino, Mexico’s Cantarell and others, are decades old, with no real replacements anywhere on any horizon,” he tells us.

Legendary oilman T. Boone Pickens was at the conference and on top of saying that world oil production peaked last year, he commented, “I think we are going to see $100 oil before we ever see $80 again. There might be a recession that would pull the price back to $80, but we’ll see $100 first.”

“Someone asked Mr. Pickens if there is some way to control demand for oil,” continued Byron. “He replied, ‘The only way to kill demand is with prices. Much higher prices. Looking ahead, higher prices will allocate the available supplies.'”

As the price of crude goes through the roof, interest in alternative energy (other than ethanol) is getting stronger. Byron has several alt. energy options on his radar – and several plays to put his readers out in front of these opportunities for major profits.

We’ll be back tomorrow with a post-Fed decision briefing. In the meantime, enjoy your Halloween. We will be packing up a blanket, some food and a cooler of beers this evening and heading to the Hollywood Forever cemetery in West Hollywood to watch the Stephen King classic, The Shining, on the big screen, under the stars and among the gravestones.

Here’s the latest development:

“The U.S. is committed to a strong dollar,” said Treasury chief Paulson in India yesterday. What was he thinking? Maybe he spoke with a smile…at least the audience could have taken it for a joke. But press reports make no mention of anyone laughing.

No, dear reader, it was simply another monumental lie…the monetary equivalent of “weapons of mass destruction” and “I did not have sex with that woman.”

After the Treasury Secretary affirmed his support for the buck, traders sensibly sold it. The dollar lost a little more ground against the euro (EUR).

Elsewhere in the financial news, the Dow lost a few points…oil dropped back to $90…and gold slipped back to $787.

But the big thing continues to be the decline of the dollar. So big, in fact, that our partner-in-crime, Addison Wiggin, even wrote a book about it.

“You are either a contrarian, or you are a victim,” says our old friend Rick Rule. Rick is thinking of the natural resource markets, where crowd following is always fatal.

But the idea applies to many other things. You do what everyone else does and you get what everyone else gets. If that is what you want, then by all means, just think what your neighbors think and do what they do. In general, you won’t do any better…or any worse.

In the commodity markets, doing what your neighbors do will not be a very rewarding strategy. Because commodities are extremely cyclical. The price of wheat goes up…farmers plant more wheat…and then the price of wheat goes down. The crowd-following farmer sees his neighbors making money and decides to join them. He buys more land – probably at the very top of the cycle…and then the new supplies kick in and the price of wheat drops. Uh oh.

The length of the cycle, for most commodities, is fairly predictable; it is the time it takes to increase production. Famously, the hog cycle was quoted as 18 months in the old economics textbooks.

There are cycles for everything. And you can be contrarian…and take advantage of the cyclical moves…or you can be a victim and get whacked by them.

But what is the cycle of the dollar? And when you have answered that question, here’s another one: how does the dollar affect prices of commodities…stocks…and everything else?

Ah…there’s the rub again. We talk about cycles in commodities…prices going up and down… When you are on solid land, or reading an economics textbook, you can see them clearly. But what about when you are on bobbing up and down yourself – floating on a sea of paper money? Is the price of wheat really going up…or is the dollar going down?

Gold seems to preparing for an assault on its old high – $835…a peak set 27 years ago. But what does it mean? Is this the gold cycle…or the dollar cycle? What are we looking at? What can we expect?

The entire world is watching the dollar today. Because today is the day the Fed is expected to announce a further rate cut of a quarter of a point. We have no inside track, but we have a hunch the Fed will do nothing. It has already shown itself willing to let the dollar fall. The world needs no further proof. Our guess is that the Fed will want to pause…and to keep traders from selling off the dollar too fast. Already, the greenback is down nearly 10% against the euro this year – to a record low. Against the Canadian dollar, it is at a 33-year low. Against gold, it seems to be heading for a new record. Against oil, it is already at a record low.

Of course, we don’t get to read tomorrow’s newspapers any sooner than anyone else. But it wouldn’t surprise us to see the Fed stand pat…and see the bounce back…

…before falling again.

But what is a contrarian to do? Buy? Sell? Do nothing?

It is still a dollar-based world. Oil…gold…and illegal drugs…tend to be quoted in dollars. And when bribes are handed out, anywhere in the world, they are still more likely to be in dollars than any other currency.

If it is a dollar-based world…most people are long dollars. So, we will be short…

Speaking about contrarianism…it is not always a good idea to go against the crowd. Sometimes, by dumb luck, the crowd is going in the right direction.

There are times, too, when you can go along with your neighbors and do fairly well. There are times when everyone seems to benefit – times of peace and prosperity.

But just as birth inevitably leads to death…so do peace and prosperity inevitably lead to crisis and war.

We saw in Argentina that most people did all right as long as things were going well. General prosperity helped people generally. But then came trouble. That was when you had to know when public officials were lying…and when it didn’t pay to go along with your neighbors. Only the smart…the fast…the well-informed…the few who really knew what was going on…came out okay. Everyone else suffered.

We recalled for you how Carlos Menem told us that that dollar-peso exchange rate was fixed at 1 to 1. It was reliable, immutable, eternal, he said. A few years later, it was history. Now, Henry Paulson tells us that the U.S. will maintain a ‘strong dollar.’ Don’t believe him, dear reader. The U.S. can’t afford a strong dollar.

How could so many things be so expensive…while consumer price inflation is so modest? Oil is over $90. Other commodities are soaring…hitting new all-time highs. Labor in China and India is rising at 10% per year. How is it possible that the cost of living remains…according to the feds…under control? In other words, how could the dollar be so weak in the face of every major asset category we read about…but so strong in the face of general, consumer spending?

The answer is simple; the feds are lying. So concludes the Economist, this week’s edition. It says that an average of “all items” is going up not at 2% or 3% per year as the U.S. government claims, but at 16.7% per year! Food is going up even faster – at 31.6%.

“With each new release of economic indicators – the consumer price index, the new employment numbers, trade deficits, gross domestic product, and more – every number, bad or not so bad, is contorted into ‘happy speak’ by the talking heads responsible for keeping the good times rolling,” Strategic Investment’s Dan Amoss tells us.

“Inflation is grossly understated,” he continues. “You see the Fed exclude three of your highest-priced budget items from the CPI – energy, food and the price of your home.

“Just imagine how great your family budget would look if you didn’t have to include your mortgage payment, the gas to run your car, your heating bill or the weekly grocery bill. You’d probably feel pretty rich too. But reasonable people know you just can’t ignore these bills without some pretty serious consequences.

“In addition to excluding the above three, the Fed also plays a cool sleight of hand with the prices it does include. For example, we all know that a computer is twice as capable as one from five years ago, but costs about the same price. But the Fed goes ahead and adjusts the price downward to contribute a 50% decline in price in the CPI.

“So if you were to take out the adjustment tricks, inflation would probably run 3 or 4 percentage points higher than what the government will admit. Just think how fast an 8% inflation rate can eat into savings and investments.”

Dan says that all is not lost…he has seven investments to help you protect every dollar you’ve invested from the ravages of inflation.

“How can you tell if a public official is lying?” asks an old friend.

“Easy…see if his lips are moving…”

The subprime loan mess is a $900 billion problem, says Fortune Magazine. But there’s another problem just as big right behind it. It’s credit card debt. And it, too, is a $900 billion problem…or $915 billion, to be more precise.

Here’s the story:

As long as property prices were going up, consumers were able to borrow against their houses in order to pay off more expensive credit card debt. The credit card companies, meanwhile, were able to unload the debt on Wall Street, where it was packaged up – just like mortgage loans – into CDO derivatives and sold on to investors.

All was well until property prices stopped going up. Then, consumers could no longer easily increase their mortgage debt. This left them more reliant on credit cards, and less able to pay off their credit card debt when something went wrong.

Something always goes wrong. Disease, divorce, economic disaster – something always comes along just when you need it.

In Britain, the cycle is a little further advanced. Property prices rose faster than in the United States. And households became even more reliant on credit. When the housing boom slowed, consumers were forced to turn to credit cards. Delinquencies on credit card debt have already risen 50% in Britain. In America, delinquencies are just beginning to go up.

Problems in the housing market have a lot further to go, says Angelo Mozilo, head of Countrywide (NYSE:CFC), one of the nation’s largest mortgage lenders. Countrywide reported a $1.2 billion loss on Friday.

Housing prices fell 4.4% across a sample of 20 cities in the 12 months through August, according to the Case Shiller index. Inventories of unsold houses are still at record levels, suggesting that Mozilo is right; it ain’t over yet.

Until tomorrow,

Bill Bonner

The Daily Reckoning