Ugly Betty of Arabia

“In the world of fashion, long legs and high cheekbones win models the top contracts. In the world of energy, the longest legs and the highest cheekbones belong, undoubtedly, to oil and gas. They are, if you like, the Elle and Giselle of energy’s international catwalk.

“Given the Middle East’s long and prosperous relationship with these energy supermodels, one could be forgiven for thinking that an Ugly Betty like renewable energy may not lure many dates here. Surprisingly, this is not the case.

“Driving alongside Knowledge Village here in Dubai, you might notice a bit of a glare coming through your windshield. No, it’s not a desert mirage. It’s the reflection from a 40-meter wide solar panel.”

Joel Bowman
October 22, 2007

Keep reading today’s guest essay here:

Ugly Betty of Arabia

And some more views from Short Fuse in Los Angeles…

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Views from the Fuse:

Gold ended the week at a high not seen in 27 years: $764 an ounce. In 1980, gold was even higher than this, actually higher than its ever been, at $825.50. After reaching that price, it dropped like a stone. GoldMoney.com’s James Turk assures us that this time around, at least for gold, the situation is different.

“It is highly unlikely that gold is about to start another bear market. I put the probability about 1%.

“There are just too many factors pushing gold higher, and perhaps most importantly of all, gold remains cheap. It is one of the few commodities that has not yet made a new record high.

“While the $825.50 previous peak in gold may appear intimidating, we have to recognize that price was recorded in 1980-dollars, which had 1980-purchasing power. There have been 27 years of inflation since then. Adjusting for the loss of dollar purchasing power over those 27 years, gold today would need to reach $2,206 – and counting.

“I add the ‘and counting’ comment because the dollar is being inflated every day the Federal Reserve and the banks create more dollars than are demanded for trade and commerce. So if gold were to reach that $2,206 level at some future date, adjusting between now and then for future inflation, an even higher price will be needed to match that 1980 peak.”

Don’t let the possibility of an ever-higher price of gold unsettle you if had been batting around the idea of including some in your portfolio in the near future. We’ve found a way you can invest in the yellow metal for less than a penny per ounce. Many of our dear readers have taken advantage of this offer – and with good reason. You could make four times your money…even if gold doesn’t budge an inch.

The week didn’t end as well for other sectors…stocks ended lower, and have continued on down this morning, as it becomes clear that the credit squeeze and continued problems in the housing market will deter U.S. growth for some time to come.

“History rarely repeats, but it often rhymes…if only by degrees,” writes Addison in today’s issue of The 5 Min. Forecast.

“Domestic markets plunged on Friday, the 20th anniversary of the 1987 crash. They came nowhere near ‘Black Monday’s’ 22% freefall, but the Dow, NASDAQ, and S&P 500 all lost over 2.5% – about a tenth of the crash’s havoc.

“Why now? We saw enough bad news last week to fill plenty more than our daily 5 minutes. New housing starts were down 10.5%, builder confidence reached an all-time low, oil crested $90 a barrel, the dollar index reached an historic low, Wall Street’s biggest investment banks announced billions in bad mortgage write downs… Bank of America, J.P. Morgan Chase, Citigroup, all revealed lousy third quarters.

“Some ask, ‘why 2.5%?’ We ask, ‘why not 5%?'”

Last week was a tough one for the markets. Oil rose over $88 and the Dow got clobbered. It fell 366 points on Friday. The euro (EUR) rose to almost $1.43.

The Boston Globe gives us a quick update on the housing picture:

“‘You can see that it’s a crisis,’ said John L. O’Brien, registrar of deeds for southern Essex County, based in Salem [Massachusetts]. ‘It’s starting to take on a life of its own.'”

Foreclosures in the yankee state are running three times last year’s level. And losses are working their way up the socio-economic ladder. Goldman Sachs’ (NYSE:GS) Trust 2006-S3 is a sophisticated investment instrument containing 8,274 mortgages. One out of every six of those mortgages is in default – only 18 months after the thing was put together. When that many people stop paying, it wipes out the entire capital value of the derivative. And since speculators usually take leveraged positions, the losses can go much further.

We don’t know whose mortgage is going unpaid…or who invested in the trust…but according to former colleague Adrian Ash, after Goldman created the derivative and sold it to its customers, it then sold its own monster creation short in order to protect itself.

Goldman is a smart operator. The typical fellow has no obvious way to protect himself. His house falls in value…his earnings go down in value…his living costs go up…and he’s out of luck. And not all the big players are as smart as Goldman. There always has to be someone on the other side of these trades. Also last week, two major financial companies – one in London, the other in Düsseldorf – defaulted on $7 billion worth of debt.

What is going on? Time will tell.

“It’s funny because you can see it is a big problem,” said our cousin yesterday. “People have bought these huge houses. They don’t really need so much house, and they never intended to pay for it. They just figured that they’d stay in it for a few years…and then sell out at a big profit. The bigger the house, the more money they’d make. So they bought these McMansions, which really aren’t very well built. Everybody thought the same thing, so everyone was buying more house than he needed. That’s why the whole housing market went up…people were all pushing up to the next level.

“But now, no one is coming up. The pressure from the bottom has gone away. And these people are left with a lot more house than they can really afford, or that they even want. They have to keep it clean…and maintain it…and pay taxes on it. And property taxes are so high in Maryland now…especially for waterfront property…that you never really own your house; you just rent it from the government. I was going to build a house down on the bay…but the property taxes alone would have been between $15,000 and $20,000 per year. I said, ‘Forget it’.”

What will happen next? What happens when people say ‘forget it’ to new purchases? What happens when the bottom rung of the property ladder breaks? When happens to an economy that depends on consumer spending when consumers have no more money to spend?

For the moment, time is keeping its mouth shut. We have our opinions, of course. You can probably guess what they are. But we’ll keep our mouth shut too – at least until we get back from the ranch.

In the meantime, we pass along this from Julian H. Robertson, one of the smartest people in the hedge fund industry. The economy is headed for one “doozy of a recession,” says he.

Colleague Steve Sarnoff adds his two cents on the latest market happenings, saying, “Stocks slipped sharply on Friday and this morning, as disappointment, worry, and fear over housing, credit, currency, recession, and inflation spread like southern California wildfire. The financial media fans investors’ fear through the markets like Santa Ana winds funneling fire through dried out coastal sage and chaparral canyons.

“Prices move naturally from resistance to support and that is simply what is going on here. The pressure is on over the near-term, but watch how the news will change (sudden easing of fears) once technical support (demand) comes in.”

We’ll have to wait and see if what Steve says proves to be true…in the meantime, he’s found an aluminum play for his Options Hotline subscribers – and for a limited time, we’re offering an opportunity for new subscribers that you won’t want to miss!

Here’s our old Fed chief, Alan Greenspan, commenting on the effects of the credit bubble that he, more than anyone, created:

“The financial crisis that erupted on August 9 was an accident waiting to happen,” Greenspan said in a speech yesterday. “Credit spreads across all global asset classes had become suppressed to clearly unsustainable levels.

“Something had to give.”

Well, yes. Something has to give. We’ve said as much ourselves. Then again, we didn’t control short-term interest rates during the long period in which pressure was building up. We weren’t the ones with our hands on the credit throttle, shifting the lever to ‘Full Speed Ahead’ – even as the rivets began to pop. And we weren’t the one who reassured the public that all would be well, either.

But Alan Greenspan is a marvel. We admire him. Who else would have the chutzpah…the gall…the cheek?

He continued: “If the crisis had not been triggered by a mispricing of securitized U.S. subprime mortgages, it would eventually have erupted in some other sector or market.”

He makes it sound as though he played no part in it…as if it were an act of God when a credit expansion comes to an end. And then, he adds a warning:

“If the pernicious drift toward fiscal instability is not arrested and is compounded by a protectionist reversal of globalization, the current account adjustment could be quite painful for the United States and our trading partners.”

That Greenspan! What a character! If the authorities don’t get control of this thing, he says, it could hurt.

We’ve come to the ranch to count the cows. Unfortunately, the cows are spread over thousands of acres.

But let us back up and tell the new, dear readers how we got here.

Until we were nearly 50 years old, we scarcely ever left home. We lived only a mile or two from where we were born…and where our mother’s family had lived since the 17th century. We assumed we would die there too.

But in our 48th year, we began to wonder. Our area had completely changed. Rural Maryland was not nearly as rural – or as nice – as we remembered it from our childhood. The landscape had changed; tobacco fields had been replaced with housing developments. The roads were full of commuters. The people changed too – gone were all the old families with their local accents and local customs. The new people spoke in different tongues and worshipped different gods.

It was not so much that we disliked this new world. It’s just that we had no attachment to it. We had stayed put. But the world we knew and felt close to had left us. We looked around and realized that we weren’t at home anymore.

So, we decided to leave too.

At first, it was mostly curiosity that turned us into exiles. We wanted to know how other people lived…what they ate…and what they thought. So, we moved to France. We only intended to stay for a few months; but while we weren’t looking, Elizabeth put down roots. Soon, we were speaking French…going to church…and school meetings…and weddings. Our youngest children – who had spent most of their childhoods in France – actually began to seem more French than American.

We stayed in France for more than 10 years. We still have a house there and still spend vacations in France. But then, your editor realized that it would cost him a fortune in taxes if he remained in the land of the frogs; he was forced into exile again – this time in England, where he lives with his two daughters in a tiny apartment full of shampoo and young women’s underwear.

And now, because our anchor has been hauled up, we are adrift. Taking advantage of this little break in normal family life, for example, we exile ourselves to an even more remote region – out to the ranch, far beyond the pale of normal, civilized life…out in a high valley in the Andes mountains, about a 24-hour drive from Buenos Aires, Argentina.

“Don’t worry, Don Bill,” said Francisco. “Everything is all right here. We have had a very bad drought, but the rain should be coming in a couple of months. We have enough hay to last us until then. And if the rains don’t come, well…”

Francisco laughed. The ranch depends on water. If the water doesn’t come, the ranch will cease to exist. What could he do but laugh; he’d spent his whole life on the ranch. What does a gaucho do when his ranch disappears? Francisco could only laugh at the possibility. Unlike Maryland, nothing has changed at the ranch for a very long time. Three hundred years ago, the ranch supported 984 cows, according to a census conducted by the Spanish governor. Now, it is supposed to have about the same number.

The sun rose bright and hot yesterday. We went over to Maria’s kitchen for breakfast. Maria used to teach school. Now, she doesn’t mind correcting our Spanish while she cooks eggs.

“No, it’s ‘tenga’ not ‘tiene’…you need to use the subjunctive, Señor Bill.”

After breakfast, our friends mounted up on horses and went to have a look around. We sat down at the dining room table with Jorge and Francisco.

“How many cows do we have?” we asked.

“One thousand and twenty,” came the answer.

“Where are they?”

Jorge and Francisco looked at each while we studied their faces carefully. Jorge looked puzzled.

“What do you mean, Don Bill?”

We realized that we had just asked what must have seemed to them as the stupidest question they could imagine. The cows were not in the house. They were not in the church. They were not in the car. They were where they always were.

Jorge looked at your editor as though he might look at a lunatic, not knowing whether to call a doctor or a policeman:

“They are in the fields.”

Until tomorrow,

Bill Bonner
The Daily Reckoning