Man-Made Catastrophes

Here in Ireland, the traveler gets little news, unless he turns on the TV. And then, he discovers that England is under-water…a fact reported in some parts of the Irish media as a biblical judgment on their old persecutor.

England’s flooding, we now discover, may be a consequence of “global climate change.” Gone is the “global warming” bugaboo. This new tag is a threat for all seasons. Now, it doesn’t matter what the weather does – floods, droughts, heat waves, cold spells – it is all part of the new climate change story. And according to the delusionist we saw on TV this morning, governments had better act fast to get control of it.

How governments get control of the weather no one is saying. But the message is clear – if something is not done soon, we can expect even more natural calamities in the future.

It is tempting, of course, to take the weather for a market metaphor. Both are natural systems. Both are marked by cyclical patterns, broadly predictable – and punctuated by surprises. There are storms in the financial markets, just as there are in storms in the weather.

Here at The Daily Reckoning, too, we occasionally indulge in a climatic metaphor. “A hard rain’s gonna fall,” we keep saying…and saying…and saying…

But there is a very important difference between the weather and the markets. In nature, you get occasional catastrophes. But, despite the climate change theorists, these episodes of wind and water, heat and cold are not the fault of the human race. At least, not since The Flood. It was not man who caused Vesuvius to erupt, or who swamped Galveston, or caused the creeping freeze of the “Little Ice Age” in Europe, at the end of the middle ages. No, man is innocent. Nature herself is the culprit.

But who caused The Crash of ’29? What made the tech bubble blow up in 2000? Who’s behind the huge run-up in prices in Shanghai in 2007?

Ah, there’s the difference. Nature acts more or less independently of mankind. She may be cruel, but she is not perverse. She does not conspire to bring down a shower only when most people have left their umbrellas at home. Nor does she collude to cause temperatures to drop just when people have forgotten to cut firewood. No, she can be tough, but she is not malicious.

Markets, on the other hand, have a malevolent streak. They get together and cause storms precisely when they will do the most damage – just take a look at the housing market.

The crash of the NASDAQ, for example, was caused by the people who bid up prices in the years preceding. In the five years ahead of the 2000 crash, prices rose six times. Had buyers not been so bullish, sellers would not have had so much to sell. In the event, prices fell in half…and then in half again.

The crash did not just happen; it happened because of the bubble in tech shares. A bubble is a natural market phenomenon. But bubbles are created by man; all bubbles are destroyed by men, too. And then, investors are underwater.

Sic transit gloria bubbli.

Bill Bonner
The Daily Reckoning
Waterford, Ireland
Wednesday, June 27, 2007

More news:


Addison Wiggin, reporting from muggy Baltimore…

“Exxon Mobil and ConocoPhillips thumbed their noses at President Chavez this week. Both companies refused to sign equity interest agreements on their Orinoco Belt projects.

“On May 1, Chavez set a deadline for oil companies to sign over 60% of their share in the belt to the national oil firm Petroleos de Venezuela S.A. Four of the six major firms operating on the belt signed the deal by the deadline this past Monday. But as of today, Exxon and Conoco have taken an ‘all-or-nothing approach…”

For the rest of this story – and more market insights, see today’s issue of The 5 Min. Forecast


And more thoughts:

*** The Economist includes a handy bubble reference chart. It shows how similar were the Japanese stock market bubble of ’89 and the U.S. bubble of ’29 – a point made in a previous book by your editor (along with Addison Wiggin).

In the six years preceding the top, both markets rose about 300%. Subsequently, prices were cut in half…or worse.

The Economist includes a chart of the Shanghai stock exchange, circa 2007, for comparison. What we notice is that prices in China have not reached the levels seen in the other notorious bubbles. On the other hand, the rise in Chinese share prices is much steeper. It has all happened in the last 18 months. The Economist assures us that this bubble is not ready to pop – because the bubble itself is not mature. We’re not so sure. Generally, the steeper the increase in prices, the faster the subsequent decline. Easy come, easy go.

But analysts have never been more bullish on China, says today’s International Herald Tribune. “We’re still in the middle of the bull market and the uptrend is irreversible,” says Zhang Shibao, perhaps exaggerating.

(Are there really places that you can safely invest in China? Join us in Vancouver in July to find out what Agora’s best and brightest think of the Asian boom – but hurry…the Agora Financial Investment Symposium is sure to sell out.

*** Blackstone founders wouldn’t sell their company cheap, we guessed at the time it went public. If they were selling at all, it was because they thought the masses would pay more for the shares than they were really worth. Of course, it is too early to tell how well buyers will eventually fare, and the worldwide credit bubble hasn’t even begun to deflate, but yesterday Blackstone shares fell below the IPO price.

*** “Ireland is really a third-world country,” said a colleague yesterday.

We wondered how that could be. It’s cold and rainy. The third world is supposed to have good weather and bad beer. Ireland has just the opposite.

Even stranger is the fact that Ireland is richer than almost any country in Europe – on paper. Housing prices have gone up so much, even the average homeowner has gotten rich.

And yet, there is something dismal and fraudulent in the whole thing.

The typical Irish house may be worth a fortune, but it is still far from civilized habitation…even the new places. An advertisement in the Dublin train station offers new townhouses on the outskirts of the city, starting at about $400,000. Yet, they are small and unattractive, the kind of place you would expect to find outside Little Rock for $120,000 – only not as nice. It takes more than a single generation to achieve real wealth and much of Ireland’s instant wealth is a sham.

Still, there’s no doubt that the place is booming. It is moving up and moving up fast. Houses, office buildings, even little factories are going up. Down at the docks in Dublin, they’re putting up a whole new city of offices and apartments. Traffic is heavy; people are working. And everyone seems to want to buy property. Now, practically on every street corner is an office offering to sell Irishmen property overseas – in Croatia, in Spain, in France. Today, Irishmen no longer leave the Emerald Isle as poor refugees. They leave as retirees…and vacationers.

The Daily Reckoning PRESENTS: In this highly inflationary world, where more or less everything is in a bull-market (at least when measured against various currencies), the only “asset” that is in the bear’s lair is central bank produced paper money. Puru Saxena explores…


Cash is trash! Today, currencies continue to perform their function as a medium of exchange, but they certainly aren’t a genuine store of value; or a guardian of purchasing power. Thanks to the ongoing unprecedented money supply and credit growth (inflation) on a global scale, currencies have stopped fulfilling this crucial function; thereby robbing the masses of their hard-earned savings.

The major world currencies have lost between 25% and 75% of their purchasing power through inflation since 1980! For this system to work however, this solitary bear-market in “money” must remain concealed from the public for the fear that the masses may stop accepting these currencies as a medium of exchange. In order to proliferate this fraud, the officials keep up with the “inflation-fighting” propaganda through their totally bogus and meaningless “inflation” figures that are constantly spewed out by the media.

Taking into account the course of action chosen by the various central banks, I am convinced that the various currencies will continue to depreciate in value against assets. In other words, I expect that the stealth confiscation of savings will continue through inflation. For sure, they may be temporary setbacks or corrections in asset-prices, but the major trend is up. Before you disagree with my assessment, take into account the fact that despite an average economic backdrop (sky-high deficits and debt-levels in the developed nations), over the past four years, all assets appreciated at the same time. Despite rising interest-rates and geo-political tensions, even property and bond prices managed to stay strong together with equities, commodities and collectibles.

At the beginning of this decade, if I had told you that seven years later crude oil would be trading above $60 per barrel, gold would be close to $700 per ounce, food prices would be at multi-year highs and the Dow Jones would be trading around 13,500, you would have pronounced me crazy! However, this is exactly what has happened, and there is nothing in the works to suggest that this major trend is about to change in the near future.

In other words, I anticipate that barring short or medium-term corrections, asset-prices will continue to trend higher in nominal terms UNLESS the central-banks change their expansionary monetary policies and decide to rapidly raise interest-rates. In all likelihood, this scenario may not unfold for a few more years and until such time, investors should be able to protect their savings through the returns generated from the capital markets.

In the world of investing, it all comes down to supply and demand. Items which are in high demand tend to rise in value against items whose supply is increasing rapidly. So, turning to today’s situation, the money supply is rising by roughly 10% per annum in several countries and the supply of assets is not keeping pace. Hence the bull-market in asset-prices when measured in terms of currencies. Now, I am not saying that the explosive growth in the supply of currencies cannot and will not be reversed in the future, thereby causing sharp contractions in asset-prices. For sure, it could easily reverse. But for that to happen, we would have to see genuine monetary-tightening through significantly higher interest-rates and a sharp increase in the banks’ minimum reserve requirements. The central banks know fully well that given the high debt levels, such drastic measures would probably cause a global depression, widespread unemployment and social unrest. So, they will try and avoid or delay this outcome as much as possible, thereby further assisting the bull-market in asset-prices and the death spiral for your cash savings.

Recently, several well-regarded economists and analysts have issued compelling reports explaining why the end is nigh. I tend to agree with their assessment that some assets are over-stretched and ripe for a correction (Chinese A-shares come to mind). However, I do not buy into the thesis that just because the bull-market in equities and commodities is five years old, it must stop immediately. History has shown that since the abandonment of gold in the early 1970’s, bull-markets have lasted for very long periods of time. Moreover, the current bull-market in equities (especially my preferred emerging-markets) and natural resources is well supported by the very real forces of Asian industrialization, urbanization together with supply and demand imbalances. So, taking into account the strong money-supply growth and the rapid transformation of Asia and Latin America, I am inclined to think that the global boom in stocks and commodities will continue for several more years.

There can be no disputing the fact that the global expansion is now five years old and well advertised, accordingly the “low-hanging fruit” may not come by so easily. Furthermore, I envisage that in the future, investors will have to become more selective when making decisions and deploying their capital. For maximum success and safety, I would urge you to invest your capital during pullbacks whilst avoiding overstretched markets. Despite all the talk of “doom and gloom”, this strategy should continue to deliver reasonable returns in the period ahead.


Puru Saxena
for The Daily Reckoning
June 27, 2007

Editor’s Note: Puru Saxena is the editor and publisher of Money Matters, an economic and financial publication available at

An investment adviser based in Hong Kong, he is a regular guest on CNN, BBC World, CNBC, Bloomberg TV & Radio, NDTV, RTHK Radio 3 and writes for several newspapers and financial journals.

The above is an excerpt from Money Matters, a monthly economic publication, which highlights extraordinary’ investment opportunities in all major markets. In addition to the monthly reports, subscribers also benefit from timely and concise “Email Updates”, which are sent out when an important development in the capital markets warrants immediate attention. Subscribe Today!

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