YOU SAY “CON*TRAIR*IAN”, I SAY “CON*TRAAR*IAN”

STOCK UP ON SNOWSHOVELS WHEN THE SUN SHINES

Most folks know contrarians. Some folks are contrarians. When the consensus opinion is wrong (“it’s different this time” circa. Late-1999, “the Iraqis will dance in the streets, throw flowers and greet US troops as liberators”), it pays to be a contrarian. But when the consensus opinion is wrong, a contrarian is just one more ignorant SOB. So being a contrarian requires a methodology. And a steel spine and a casehardened head. Check out this quote from “On the Contrary: Why it Pays to be Different by James Montier in Investor Insights[i]:

Doing the opposite of everyone else is not something that comes naturally to us. Neuropsychologists Naomi Eisenberger and Matt Lieberman have found that social pain (the pain of not being included in the in-crowd) is experienced in exactly the same areas of the brain as real physical pain. So following a contrarian approach might well feel like having your arm broken on a regular basis. (Eisenberger and Lieberman (2005) Why it hurts to be left out: The neurocognitive overlap between physical and social pain, in Williams, Forgas and Von Hippel (2005) The Social Outcast: Ostracism, Social Exclusion, Rejection and Bullying, Cambridge University Press)

The Montier article quoted above recites several studies that demonstrate that a contrarian, value oriented approach can generate better returns that mainstream growth investing. And Montier cites a GMO[ii] study that the Author cited in a“Desert of the Real” Newsletter. This GMO study demonstrates that as stock market volatility increases (stock prices fluctuate), people are less comfortable owning stocks.

Conversely, when prices are relatively stable, people are more comfortable owning stock. This probably reflects human nature and investor psychology. Rapid swings in price cause concern, fear, sometimes panic in people. But when stock prices are stable, the boat doesn’t rock and most folks are contented. Grantham divides periods of volatility into deciles, with the lower periods of volatility being the “comfort zone” and the highest periods of volatility comprising the “uncomfortable zone”.

NO PAIN, LITTLE GAIN
RIDE THE ROLLERCOASTER TO RICHES

As you can imagine, those who held stocks when volatility (and psychic pain) was the highest had the highest returns. Stocks returned 16% in the periods of the highest volatility. But those hammock loungers who held stocks only in the periods of the lowest volatility managed a return of less than 2%.

So those who jumped in during times of volatility had far better results. There are a few common explanations for these contrarian results. One is that many investors are unsophisticated chumps, buying high, selling low. Constitutionally incapable of playing the market right. There is some element of that. But there is another element to this phenomenon that is grounded not in psychology but in simple economics. Supply and demand.

TRY FINDING A SNOWSHOVEL AT THE HARDWARE STORE AFTER THE BLIZZARD HITS

Lord Keynes describes the logic of a contrarian investment approach quite elegantly:

The central principle of investment is to go contrary to the general opinion, on the grounds that if everyone agreed about its merits, the investment is inevitably too dear and therefore unattractive.[iii]

This statement reflects the central theme of capitalist markets.

“[E]conomic trends mean revert because there is a powerful and persistent normal return toward which capitalist competition strives, competing down handsome margins and P/Es and avoiding low returns until shortages develop.”


THE AUTHOR’S NOT A PATIENT MAN

The Author has used value approaches on occasion. After the tech stock crash of 2000, the Author bought US Steel as a value play and made a decent return, selling it in 2003. Later, in 2004 when steel stocks were rising based upon high international demand for steel, the Author bought US Steel as a momentum play. And that play worked as well.

The Author does see merit in a value approach. At certain times in certain markets. The means reversion mechanisms of markets never fail. But who knows when they will work?

But since the Author uses a relative strength, momentum based investment style, he leaves his value investment portfolio component to the experts, value fund managers. The Author’s value investment is the First Eagle Global Value Fund, SGENX. The fund is closed to new investors at this time, but the Author will inform his readers when it reopens.

Value investing also requires strong analytical capabilities to ferret out under priced investments and the patience to hold them until their value is again recognized by the market. And who knows how much time and patience it will take. Remember another thing that Lord Keynes said:

The markets may remain irrational longer than you can remain solvent [!]

WISHING YOU PATIENCE IN TIMES OF VOLATILITY IN THE DESERT OF THE REAL!

[i] http://www.investorinsights.com/. January 30, 2006.
[ii] http://www.gmo.com/ Jeremy Grantham runs the GMO investment firm. The author frequently cites Grantham in his posts and newsletters. The Author does not own any GMO investments, but members of his family do. Please also read the Disclaimer at the end of the post.
[iii] http://www.gmo.com/



IMPORANT DISCLAIMER: This newsletter is offered for informational purposes only. Sources of information provided are believed to be reliable, but are not guaranteed to be complete or without error. Opinions and suggestions are provided with the understanding that readers acting on information contained herein assume all risks involved. The Author may or may not buy or sell securities discussed in this newsletter.

SUNNY-THE MOUTH OF MAYHEM

THE DOG ATE MY BLOG

THE DOG ATE MY BLOG.
AND THE CAT WAS IN ON IT.

The Author has a dog and two cats. The dog is an 80lb Rhodesian Ridgeback mix named Sunny. The cats are a male named Dudley and a female named Shakti. Sunny is about two years old, with a short sand colored coat and the jaws of the Looney Tunes Tasmanian Devil. A gnawing, crunching, chewing engine that leaves behind her a wake of slobbered-up plastic pieces, dog-toy shavings, and dog-biscuit tailings. Imagine a volcano that erupted daily, sending out tornadoes. That is the level of havoc wreaked by this otherwise good-natured pup.

Like all dogs, Sunny is as guileless as Gomer Pyle. She tongue bathes everyone she greets. She sits on laps and sleeps in bed. But with equal love and intensity, she grinds modern technology and manufactured products into recyclable pellets. Her tastes range from designer Oakley sunglasses to DVDs to toothpaste tubes. Sunny’s masticating mania is well known through expensive lessons. Anything the Author wants to spare from a spit-shredded fate is kept locked away, encased in a titanium shell, or stored high in the air and away from her dresser top surfing tongue.

That third defense option has now been breached. Dog non-consumables must now go under lock and key or be hidden behind the titanium curtain. Friday night, or early Saturday morning, Dudley the cat jumped up onto a five-foot high dresser to sleep. Dudley found some of the Author’s possessions where he intended to bed down and scooted them off the dresser and onto the floor. Among these formerly safe possessions were a comb, a set of keys, and the Author’s flash drive.

The comb and keys were spared. The flash drive was crunched into subcomponents. For the nontechies, a flash drive is a portable computer storage device. They are basically portable computer memory chips. The devices are about the size of a dog biscuit, plug into a port on a personal computer, and can store huge amounts of data and programs. The Author stored web posts, web post research, technical stuff and a couple pictures of his dog on his flash drive.

The flash drive also stored the next three posts for this blog. All in all, over two hundred documents and a couple hundred hours of research. The value of the flash drive was about $80. The value of the documents? No man can say.

A NEW FLASH DRIVE. AND FLEETING THOUGHTS ABOUT A NEW DOG.

The Author replaced his flash drive with a similar model. The march of technological innovation, or the cutthroat nature of Chinese manufacturing, had dropped the price of a new flash drive to $60. Some of the former flash drive’s documents were backed up elsewhere. Some are now just distant, electron-depleted memories. And a few, like the dog’s pictures, appear not to have been worth saving.

But the Author quickly made peace with the cat and the chip-crunching canine. He went to the kitchen, dipped into the 55-gallon drum of dog biscuits, and feed a few short-lived morsels into the gaping maw. And then headed out to buy a bigger safe. And a few more sheets of titanium.

PETS, IF MUZZLED, ARE WELCOME IN THE DESERT OF THE REAL!

WAR IS ABOUT THE LEAST CULPABLE SUFFERING THE GREATEST HARM.

WAR IS ABOUT THE LEAST CULPABLE SUFFERING THE GREATEST HARM.

While the Author is still in a "Thinking but not Concluding" mode, he is reprinting past posts. The one below was posted on December 6th, 2005.

War leaves holes in the fabric of humanity, broken links in the Great Chain of Being. Fathers bury their sons and mothers sing the Death Songs. Yet still, war’s slakeless siren resounds in the ears and stirs in the hearts of tyrants. And the most venal in the land stand in the counting house door and take off their hats as the funeral procession passes.

Below is an essay written by Mrs. Mary Lou Brown Byrd from Kentucky. She and other members of her family answered the call to service some years ago. Please read what she has to say.Counting the Costby Mary Lou Brown ByrdKentucky's famous Trappist monk

Thomas Merton said it best: "Nothing is lost by peace, yet everything may be lost by war."

Keeping count "by the numbers"(army parlance) tells us that more than 2000 of our young warriors have died for their country in this war. But these dead should be more than statistics. It galls me that they are not being given the honor and recognition they deserve. Why not? We do it for presidents -- President Reagan, for instance-- a full week of mourning and Old Glory at half-staff for 30 days. Even now, the flag should be flying at half-mast every day, for we are losing far too many brave men and women.Yet we see nothing and hear little of our dead being brought home in flag-draped coffins. Is it a deliberate attempt by this administration to promulgate the old saying "out of sight, out of mind?" If it is, it won't work, for there are those of us who still grieve for our loved ones lost many years ago, in other wars:

Words cannot express the desolation of that bleak Kentucky winter of 1944 when the message came -- a telegram regretting to inform my parents that their eldest son had died of wounds received in action. He died near Metz, France with Patton's army. The grandstanding general (who reminds me so much of our present Commander-in-Chief!) had outrun his supply and support lines in his rush to glory. My brother bled to death before medics could reach him.

Later, a special packet arrived: a gilded Purple Heart medal and a letter of condolence from President Roosevelt. My mother could not, would not, accept his death, even when his personal possessions came home in a box. She fondled his wallet, empty except for a few faded photographs of the family. There was his pocket comb with two teeth missing and a worn handkerchief. She hugged to her breast all these personal things he had last touched, some of them still encrusted with the mud from a far away field in France where he had fallen.Letters came, one from a Catholic chaplain to my Protestant mother advising her that he had been with her son at the end. His company commander wrote that Staff Sgt. William Franklin Preston had been one of his best soldiers, a credit to his family and to the nation.

She put away the treasured medal and letters in a small cedar box, symbolically burying her great loss. But she was inconsolable. Her 21 year old son dead -- and she hadn't seen him since he was 16 -- the day he quit shucking corn in the field and hitchhiked to Lexington to join the army. But what choices did a poor farm boy have during the hard, lean years of the Great Depression? The army had good food, clothing, and $21 a month to offer -- which was a step up from nothing.The memory of my mother's grieving face that cold Kentucky winter haunts me still. Although my sisters and I had quit our jobs housekeeping for "rich" people in Cincinnati to come home to help strip the tobacco crop, our best efforts in assuaging her grief failed.

From the stripping room in the barn we could hear her keening, heartbroken wailing. We looked at each other, stopped stripping the leaves from the tobacco stalks, waiting, knowing it wouldn't be long before she'd be there at the door, swollen-eyed and desperate, seeking a solace none of us could give.My dad, his own eyes brimming, stopped work to hold her. We stood silent, stricken, there at the stripping bench, our "hands' of tobacco still untied, each of us sharing their hurt, yet lost in our own private grief:

Dear Brother, 21 is so young to die! Much too young. You hadn't begun to live.My mind wanders: Long rows of tobacco stretching endlessly under the hot sun -- a gaggle of ragged children with goose-neck hoes chopping Johnson grass and thistles out of the weedy tobacco rows -- daydreaming, talking about what we would do when we got "rich." What regret, Bill, now that you would never get married, have the daughter you were going to name "Alice"; never get to live in a big, fine house with a bathroom; never get all the graham crackers and peanut butter you could eat. Not that you didn't enjoy our daily fare -- pinto beans, fried potatoes and cornbread, but that fancy food you'd had once at a neighbor's house fired your imagination.

A wistful bunch of kids, leaning on our hoes, wishing and wanting. You wanted books to read -- not the kid stuff in the school library, but about the Graf Zeppelin and the China Clipper, and about G-8 and his Battle Aces. You wanted to play basketball, but you had no athletic shoes to wear, and that's really why you quit high school. The coach ran you off the floor because you couldn't afford a pair of proper shoes. Six-feet two inches at age 16, quick and smart, you would have made a fine basketball player. You traded your old shotgun (you'd painted the barrel blue) for a guitar, and you were getting pretty good on it before you left. You had such a good baritone voice, and sang "Man of Constant Sorrow" and "Little Maggie" as good as Bill Monroe or Ralph Stanley. You were just a boy, the apple of your mother's eye, when you stood in the recruiting office and swore to defend your country against all enemies. Bless your dear heart! You did that, did it well, and died in the process.I think of my brother, William Franklin Preston, 10th Infantry Division (Camp McCoy, Iceland, Ireland, and D-ay) so often. He would be today 82 years old.

Even now, so many years later. I have one consolation that siblings today don't have: He fought in probably the one war that needed fighting -- World War II, a war that resembles Bush's War in Iraq not one whit!

QUIET THOUGHTS FROM THE DESERT OF THE REAL

ORDER A PIE CHART FROM YOUR BROKER AND SOMEONE ELSE WILL EAT YOUR LUNCH. AND HAVE MONEY LEFT OVER FOR PIE

While the Author is in a “Thinking but not Concluding” mode, he will reprint from past posts. This one was from December 8th. If your broker or financial advisor is telling you to reallocate your portfolio as the pie chart says, pass this post along to her or him.

“WAITER, I WILL HAVE A PIE-CHART WITH LUNCH.”
”HMM, SHE IS HAVING THE PIE CHART. WELL THEN I WILL HAVE HER LUNCH AND SHE CAN HAVE HER PIE CHART. AND SHE WILL PICK UP MY TAB.”

The Author’s post of December 8th[i], was a smarmy dismissive of the “Buy and Hold”, pie chart asset allocation product that nearly all brokers and financial clients sell to their clients. The Author uses the word “product:” because that is what it is called in the investment industry. It is a semi-standardized investment methodology, along with “preferred” mutual funds, pre-selected stock portfolios, exchange traded funds or other packaged investments. The industry generally refers to these packages as “investment products”.

They are often marketed as “conservative”, “moderate”, or “aggressive”. This refers to the “risk” that each product takes in an attempt to generate a higher return. But as stated in earlier posts, risk is not a knob that can be turned to automatically generate a higher return.[ii] Risk and expected return have a complex interplay, especially in a Bear Market. As the recent posts discussing Alpha have demonstrated, investments that appear to have less risk, like a value stock mutual fund, can have higher returns than aggressive, more risky, stock funds.

RISK AND REWARD, VOLATILITY AND CIRCUMSTANCE

Volatility was a big topic in the earlier posts on Alpha and Beta. Beta is a specific gauge of volatility that compares the volatility of a mutual fund or stock to the volatility of the S&P 500 index. Investments with a Beta of 1 move in unison with the S&P. Investments with Betas less than 1 swing less in value than the S&P. Investments with a Beta higher than 1 fluctuate more than the S&P.

Remember how it worked with the high Beta Afterburner Tech stock fund and the low Beta Slow and Steady Value stock fund? In a down-trending market, Slow and Steady beat the tech stock fund. If the trend of the market is down, and an investment is more volatile than the market, such volatility will amplify its moves to the downside because the investment will be going down more than up. This is the reason that a Bull Market style aggressive stock portfolio is a formula for financial disaster in a Bear Market. The next section of this post will show how such a disaster often plays out, using a hypothetical client and broker.

DISAPPOINTED WITH YOUR LOW OR NEGATIVE RETURNS? DON’T LET YOUR BROKER MAKE THINGS WORSE.

Let’s assume that an investor holds a pre-selected mutual fund portfolio with a “moderate” risk rating. The “moderate” portfolio was selected in 1998 and contains the client’s retirement savings portfolio. The investor turned 45 in 1998 and then had 22 years until her proposed retirement in 2020 at the age of 67. She did well in 1998 and 1999, but the 2000 stock plunge saw her portfolio fall by 1/3 between 2000 and 2002. Today, she is still a little below what she had in 2000. The investor is 15 years away from retirement and she is worried she will not have enough money for retirement. Sound familiar?

If she goes to her broker and shares her fears that her money may not grow enough to allow her to retire in 2020, what is her broker likely to do? If you guessed that her broker, a “buy and hold” pie chart devotee, may tell her to shift her funds into the “aggressive” portfolio to seek higher returns, you are right!

The broker will tell our investor that the stock market has been down the last few years and that her portfolio went down with the general stock market. But, the broker will go on to say the stock market has been up “lately”. And over time, the growth stocks in the “aggressive” portfolio should outperform the more conservative stocks the investor holds in the “moderate” portfolio.

The broker will probably make the obligatory disclaimer that “past performance is no guarantee of future results”. The broker and investor will ignore this statement, even though it is likely correct for the rest of this Secular Bear Market.

The broker will probably also show the investor the historical 5-year, 10-year, and 20-year performance figures of the “aggressive” portfolio and compare that to the “moderate” portfolio’s returns. The investor and broker will take comfort in the fact that the 10-year and 20-year returns for the “aggressive” portfolio are higher than the “moderate” portfolio. The broker and investor will not consider the fact that these returns were made during the Secular Bull Market of 1982-2000 and likely will not be repeated in the current Secular Bear Market.

“Remember,” the broker will then say, “You are investing for the long term, and over the long term, the aggressive fund should give you higher returns than the moderate portfolio. And look, this aggressive portfolio has a higher Beta than the moderate portfolio. That is good.” The conversation will end, the investor will shift portfolios, and she will set herself up for even lower returns for the next few years.[iii]

THE BROKER TOOK A BAD SITUATION AND PROBABLY MADE IT WORSE.

If the broker and/or the client understood that the market is in a Secular Bear cycle that began in 2000 and will not end for a number of years, the investment change from moderate to aggressive would not have been made. They would have understood that in a down-trending market, the greater volatility of the “aggressive portfolio” would tend to cause greater losses and lower gains than the more conservative portfolios.

CODA. WHY DID YOU BRING YOUR SNOW SKIS TO GO WATER SKIING?

Investors and their advisors must understand that the tools that worked in the Secular Bull Market of 1982 to 2000 will NOT work well in this Secular Bear Market. It must be considered that most of the brokers and many of the investment tools and methodologies were not operating in the Secular Bear Market of 1966 through 1982. So these strategies were not tested in a Secular Bear Market and should not be expected to work in a Secular Bear Market.

If the tone of the Author in criticizing the “Buy and Hold” methodology seems harsh and sarcastic, well, it sometimes is. The intent is not malicious. The intent is to help investors and investment advisors get better results. It is often difficult for people to turn away from the “tried and true”, what has always worked. What “got them to where they are today.” But too often the “today” people are looking at has long been yesterday. The recognition that yesterday’s methodology is today’s disaster dawns on most people far too late.

LIVE AND LEARN, LIVE AND RELEARN, IN THE DESERT OF THE REAL!


[i] http://desertoftherealecononomicanalysis.blogspot.com/
2005_12_08_desertoftherealecononomicanalysis_archive.html
[ii] This analogy of risk to a “Knob” or “Dial” is not the Author’s. Gary Easterling of Crestmont Research frequently uses it in his writings. www.crestmonresearch.com.
[iii] The market is in a current upswing, but this is at best a Cycle Bull Market within the longer Secular Bear Market. So traders and active investors can take large equity exposures right now, but with the understanding that when the Cyclical Bull ends, you must sell, take your gains, and move back to defense. Long term investors must pursue absolute return strategies. Posts in the Archive section address absolute, or real return, strategies.

THINKING BUT NOT CONCLUDING

Economic news has not been particularly interesting lately. We have a good January, added to a good December of 2005, for the general equity markets. The Author’s Quantum Multiplier portfolio is pulling down a 10% return while the general indices are in the 2-4% range.

But the Author is supposed to beat the indices. That is why he invests and that is why he shares his observations and ideas about general economics, finance and investment in this blog.

All of the market indicators, with the exception of one very short-term indicator, are positive. So we let the ponies run. And keep shoveling more cash into the fire. So if you are still on the sidelines, get some cash into the equity market.

The Author’s more general point is that he is doing a lot of thinking and reading without much concluding. Some weeks generate an explosive amount of ideas for posts. He can write two or three posts in a day. But occasionally, periods like this come along. They are not devoid of ideas. In fact, the Author has been doing a good deal of science, technical and economic reading. But there just seems little to say.

THE FERMENT

The Author, then, has learned to look at these times as periods of ferment, when ideas assemble, dissemble, and reassemble just below the surface of the conscious mind. When the Author’s last post weaves together radial aircraft engine failure analysis, Creative Destruction and evolution, something lurks across the courtyard. But there is value in staying quiet until you have something to say.

CONLUDING WITHOUT THINKING WOULD BE FAR WORSE.
BUT FAR MORE COMMON IN “THE IMAGE CULTURE”.

We will become a society of a million pictures without much memory, a society that looks forward every second to an immediate replication of what it has just done . . .

So writes Christine Rosen in “The Image Culture”, an article in the Fall Edition of “The New Atlantis”.[i] In “The Image Culture” Ms. Rosen writes about the predominance and saturation of the visual image in our culture. The article proceeds from the invention of the photograph through the motion picture, video, consumer video cameras, video games, digital cameras and Power Point. The tools of immediacy and abbreviation. The roadways of the analytical shortcut. Thoughts without thinking, ideology without the necessity of ideas.

Nearly every media critic since H.L Mencken has noted the erosion of intellect in the post-literate television, (or multi-media) world. The Author no longer watches television neither news nor television talk shows. Occasionally the Author will watch an extended interview, however. Nothing that cannot be said in sound bite is offered. A commentator who will not try to yell over his/her opponent will not be booked for another show. And a convincing lie or a focus-group tested myth will always trump the more complex truth. That is the truth in the post-literate world.

IF A PICTURE IS WORTH A THOUSAND WORDS, WHAT HAPPENS TO THE WORDS WHEN THEY TAKE THE PICTURE?

The Author wishes there was more to say right now on this subject (or others), but maybe his “say” is still fermenting.

EVERY WORD HAS AN ECHO IN THE DESERT OF THE REAL. SO DOES EVERY SILENCE.[ii]

[i] www.TheNewAtlantis.com

[ii] Sartre, Jean-Paul. A rough paraphrase. From the Desert of the Real, the roughest of places.

THE INEVITABILITY (AND NECCESSITY) OF BEING WRONG LOTS OF TIMES

CREATIVE DESTRUCTION IS THE FORCE OF RADIAL AIRCRAFT ENGINE IMPROVEMENT, ECONOMICS AND THE DRIVER OF EVOLUTION

One of the Author’s favorite writers is Kevin Cameron, the Technical Editor at Cycle World magazine[i]. Mr. Cameron writes a column called “TDC” (Top Dead Center). Mr. Cameron is likely an engineer and he knows a lot about engines and the mechanics and technical intricacies of motorcycles. And he is able to explain these concepts clearly and concisely in his column. He is the kind of guy you would like to have as a neighbor or a friend to talk with about motors, mechanics and motorcycles.

January’s TDC was about spark duration in engines and how changes in spark duration aided (or degraded) the performance of air-cooled radial aircraft engines, nitrous-burning dragsters and two-cycle engines[ii]. Particularly interesting to the Author was the discussion of radial aircraft engines. A couple of pictures of these unique power plants are posted below this article. The performance curve of the radial aircraft engine peaked shortly after World War II[iii]. The jet engine replaced these workhorses in fighter aircraft by the time the Korean War began.

Engineers struggled to squeeze every ounce of horsepower from these huge radial engines before and during World War II. Lives and victory over the Axis powers depended, in part, upon the performance of these machines. So lots of solutions were tried. A few worked.

ORDER FROM APPARENT CHAOS

Mr. Cameron’s February article is entitled “Untying Knots”. Cameron reviewed documents circa 1920-1926 from the military’s aircraft development center. The documents were related to the testing of early rotary aircraft engines. The point of the article was how small changes to the interrelated elements of engine operation had large, and often fatal, effects upon other elements of engine operation. Change one thing and another thing fails. Tweak this and then that breaks. Yet it is only through these putative “mistakes” that success emerges.
And over time with much experimentation, and almost countless failures, solutions emerge. Creative Destruction. Order from apparent chaos.

CREATIVE DESTRUCTION AND NATURAL SELECTION

“Creative Destruction” is a concept and a process originally developed by Joseph Schumpter in his 1942 book “Capitalism, Socialism and Democracy”[iv]. Creative Destruction is the process by which product and technological innovation challenge, overtake and eventually supplant existing firms, services and products. Examples are PCs that eliminated many mainframe and minicomputers, diesel locomotives that replaced steam engines, and the cassette that supplanted the eight-track. This Creative Destruction is the engine of innovation that creates new value even as it destroys the value of existing firms.

Evolution is a similar process. It of course operates without direction or design, but it has the same effect as creative destruction. Small mutations (putative “mistakes”) in organisms compete for resources with non-mutated organisms. Most fail, like nearly all of the radial aircraft engine experiments. But a few succeed and pass their genetic information on to the next generation. Over vast periods of time and nearly countless small experiments, different, and better, organisms move forward.

THE SAME THING HAPPENS WITH ENGINES AND EAGLES.
HATE WALMART OR MICROSOFT? WAIT A FEW DECADES.

Better performing radial engines resulted from multiple experiments. And they worked well. However, the radial engine was creatively destroyed when the jet engine came along. And the same fate will probably befall the jet engine.

Similar fates await living organisms. It is commonly stated that 99.99 percent of species that ever lived are now extinct. The Creative Destruction that is the process of evolution ensures that this will be the result. Just as Creative Destruction will probably knock out Microsoft, WalMart and yes, possibly even Ducati, at some point in the future. And probably the human species, felines, canines and cetaceans. [v]

But there is another way to conceive of Creative Destruction. Each improved iteration of an organism, idea, a product, or a service has a better chance of survival by avoiding subsequent failure. One can also think of these as the beneficial mutations that drive the evolutionary process.

Similarly, failed engine designs or noncompetitive companies are cast aside, like deleterious mutations. There elimination removes the probability of similar failures in the future.

FUEL INJECTION REFUTES IRRREDUCIBLE COMPLEXITY?

But just one final twist. What has failed in one iteration may yet comeback as a positive addition in the future. Sometimes changed conditions can later resurrect and idea or product feature that previously failed. Consider fuel injection.

Fuel injected engines were built at least as far back as the 1950s. These systems were mechanical and did not function well enough to receive broad acceptance. In the 1980s, however, computer technology took over the fuel metering functions of fuel injection and nearly all current vehicles have fuel-injected engines. So much for irreducible complexity!

MISTAKES MADE IN PURSUIT OF INNOVATION NARROW THE FIELD FOR SUCCESS IN THE DESERT OF THE REAL!


[i] www.cycleworld.com
[ii] Old school dirtbikers, streetbikers and snowmobilers will remember the frustration of two-stroke engine spark plug fouling. And the spare plugs that one bought by the dozen.
[iii] Radial engines are still used in some aircraft and power many of the antique aircraft so popular at air shows. And just as the descendants of the dinosaur soar overhead as our feathered friends (modern birds), the radial aircraft engine lives on as the air-cooled, pushrod activated, single-pin crank V-Twin that powers Harley-Davidson motorcycles.
[iv] http://en.wikipedia.org/wiki/Creative_destruction
[v] Forgive the Author if he is mixing Orders, Families and Species. He doesn’t know much about taxonomy.

Wright Whirlwind J5 C. This engine powered Charles Lindbergh's plane "Spirit of St. Louis" on the first Trans-Atlantic flight.

Wright Cyclone Rotary Engine 

THE IMPORTANCE OF BEING WRONG OCCASIONALLY

The Author is sometimes wrong. No really, seriously, he is. About both big things and little things. Most everyone is wrong now and then. Some more wrong than right, some more right than wrong.

But the Author has never known anyone who has never been wrong. Even President Bush, who claims he has never made a mistake as president, has sometimes been wrong. Being wrong gives humans an opportunity, although not an opportunity we would seek out. An opportunity to learn from the mistake and do the right thing next time.

Being wrong sometimes allows us to correct a wrong action. Sometimes not. But being wrong gives us the chance to figure out why we were wrong, usually in the light of subsequently discovered facts, and the opportunity to avoid similar mistakes in the future. Mistakes are ways of adversely selecting against future failure.

CAN WHEN YOU ARE WRONG BE AS IMPORTANT AS HOW MUCH YOU ARE WRONG?

People make mistakes in their lives. Young people with less experience in the world and less mature decision-making mechanisms in their adolescent brains, make lots of mistakes. Most recover from early, big mistakes. But some don’t.

And big mistakes early in adulthood may also hobble a person through their life as mistakes may close off avenues to better jobs or better social environments.

But later life mistakes can be equally devastating. A bad business or financial decision can mean bankruptcy. A brush with the law at 40 finds the courts less forgiving than when an immature kid makes the same transgression. But it would appear that the more years of the experience one has, the better their decision- making skills will be.

IF YOU CAN AFFORD YOUR MISTAKES, CAN YOU EVER BE WRONG?

But there are some in this world that continually make mistakes with few if any consequences. Paris Hilton comes promptly to mind[i]. Two such people in one of the cannon of American literature also come to mind. Tom and Daisy Buchanan of F. Scott Fitzgerald’s novel “The Great Gatsby” are the prototypical scions of the idle rich. Remember what Nick Carraway said near the end of the book and the 1974 movie of the same title of Tom and Daisy?

“Careless people [Tom and Daisy]… they smashed up things and creatures and then retreated back into their money or their vast carelessness or whatever it was that kept them together…”

But in the end, it was their money that gave them retreat. It paid for their vast carelessness. It was the Faustian bargain they struck. The money was the unspoken “whatever” that kept them together.

This is a rhetorical question, to be sure. Someone usually pays when a mistake is made. Nearly always the one in error and usually a bystander, or two, or two hundred. Or two hundred thousand. But when someone can retreat into their money, their family connections, their networks of sycophants and cronies, can such a person ever make a mistake? Will that lesson never taught produce a pupil never schooled? Probably so.

“ANYONE ELSE, I’D SAY THIS WOULD BE A LESSON”

In the classic film “Citizen Kane”, political boss Jim Gettys threatens to expose Kane’s tryst with his lover unless Kane drops out of the race for New York Governor. Kane refuses and Gettys goes public with the story of Kane’s extramarital affair. Gettys tells Kane “Anyone else, I’d say this would be a lesson”.

Kane goes on to loose the election, divorce his wife and marry his lover. But Charles Foster Kane is not just “anyone else”. Kane kept his vast wealth and control over a financial empire built in the Gilded Age and large enough to ride out the impending Great Depression.

IS THERE EVER A LESSON IF THERE CAN NEVER BE A “MISTAKE”?
MUSINGS AND THOUGHTS UNGUIDED FROM THE DESERT OF THE REAL!

[i] [i] But in her media choreographed life, are they really “mistakes”?

CHINA AND INDIA HOLD KEY TO WORLD'S RICHES OR RUIN – REPORT

IN THE 1980s IT WAS THOUGHT THAT JAPAN WOULD MAKE THE 21ST CENTURY “The Asian Century”.
RIGHT CONTINENT. WRONG COUNTRY.

From an article on Yahoo, 1.12.2006, from OneWorld US[i]:

China and India are poised to shape the world's future and decisions made by the ascendant Asian giants in the next few years will determine whether that will be for better or worse, a prominent environmental think-tank said Wednesday.

The good news, according to the Washington, D.C.-based Worldwatch Institute, is that the average Chinese or Indian person consumes, wastes, and pollutes far less than the average American or European. Additionally, both countries have taken decisive steps to improve environmental performance.

The “bad news” is that there are so many more Asians and Indians. There are about 296 energy and resource swilling Americans. But there are 1.3 billion Chinese and 1.1 billion Indians. Even if they consume far less resources as their nations develop, the pressure on resources will continue and pollution and greenhouse gases will still increase.


WILL CHINA AND INDIA, AND THE REST OF THE DEVELOPING WORLD, PUSH PAST THE WEST IN SUSTAINABLE DEVELOPMENT?
THEY MUST.

Natural resources, oil supplies, and the environment, cannot support nor withstand another “American Century”. The energy and resource consumption patterns of the US cannot be sustained. Many Americans haven’t figured this out, but most of Europe has and Asian planners know that the American model of development, based upon abundant and cheap resources, will not be repeated.[ii] But can Asia avoid the energy and resource crunch?

SOME OF THE STEPS IN CHINA AND INDIA CONTAINED IN THE WORLD WATCH REPORT:

· In 2005, both nations committed to accelerating the development of new energy sources. India will seek to increase renewable energy's share of its power from 5 percent to 20-25 percent, while China's ambitious renewable energy law stands a good chance of jumpstarting wind power, biofuels, and other new energy options.
· Seeking to provide mass mobility to over a billion people without diverting resources required to meet other human needs, the Chinese Ministry of Construction recently declared public transport a national priority and is promoting Bus Rapid Transit (BRT).
· In India, where 43 percent of the annual rain and snowfall fails to reach rivers and aquifers, NGOs have championed water harvesting, using simple technologies that capture and store water before it can flow away. In Chennai, the country's fourth largest city, some 70,000 buildings harvest rainwater.
· In 2004, China implemented automobile fuel economy standards that are based on European standards and tougher than those in the United States. China's commitment to energy efficiency is also reflected in its status as the world leader in producing and installing compact fluorescent light bulbs.
· Indian officials recently replicated successful small-scalebiodiesel programs in 100 additional villages in the hopes of bringing revenue to depressed rural communities while powering local electrical grids and irrigation pumps.
· New laws in 2004 gave Chinese non-governmental organizations (NGOs) stronger legal standing to participate in policy decision-making. There are now more than 2,000 environmental NGOs in China—a sector that barely existed as recently as the early 1990s.

Emphasis in the original article, cited directly from World Watch Institute.[iii]

REMEMBER WHAT THIS HOOSIER SAID?

Last summer, when gas prices topped $3 per gallon, media outlets across the nation featured the obligatory indignant “man/woman on the street” interviews. The Kendallville News-Sun (the daily newspaper in the rural Indiana county where the Author was born) paper quoted an interview with a union heavy equipment operator. The man bemoaned the effect of the increased prices and stated that he drives 75 to 100 miles per day to higher-paying union construction sites. He also drove a fuel-swilling pickup. He stated that he could save money driving a “cracker box”, but did not wish to “drive a crackerbox”. He went on to say that fuel prices should be lower because “we (US) spend all this money keeping the ‘world free”.

This quote was from a post from November 2005. The Author frequently recalls what this man said. The statement about “spending all the money to keep the world free” seems savagely and and painfully comical. Recent estimates put the cost of the Iraq invasion and occupation at a minimum of one TRILLION dollars. That is 2,857 times the 70 billion dollar cost of the war originally estimated by the Bush administration.

What would a one TRILLION dollar investment in alternative fuels, alternative energy, pollution controls, deficit reduction, just about any freakin’ thing done to keep the world “free”? A Fark of a lot more. A whole gosh darn Fark of a lot more than the forcible seizure of Iraq by American military power.

ANOTHER HARD LESSON

How does one conclude this post? Americans must recognize the world that is now encroaching on their “exceptional life”. And this world recognizes no exceptions. No exceptions.

TWO ROAD DIVERGED IN THE DESERT OF THE REAL. TAKE THE ONE LESS TRAVELED BY. IT WILL MAKE ALL THE DIFFERENCE!

[i] http://www.yahoo.com/. OneWorld’s website is: http://www.oneworld.net/
[ii] In fairness to the American model, oil and metals were abundant in America in a time in its development, and the world’s development, when the environmental cost of their wanton use was not fully understood. The world now knows the environmental costs of wanton consumption. But many Americans seem ambivalent at best to the environmental costs of their lifestyle. And American political leadership is hostile to environmental stewardship, placing its short-term political power above national and international comity and necessity.
[iii] http://www.oneworld.net/external/?url=http%3A%2F%2F
www.worldwatch.org%2Fpress%2Fnews%2F2006%2F01%2F11%2F

MARKETS TO DATE. SO FAR (AND NOT VERY FAR) SO GOOD

MARKETS TO DATE
SO FAR (AND NOT VERY FAR) SO GOOD

Two weeks into 2006 and the broad market indices have made some progress.
The S&P 500 has moved from 1248 to nearly 1288 as of 1.13.06, a move of about 3%. The NASDAQ has jumped to 2,317(1.13.06) from 2205, up 5%. And the DJIA is up from 10,718 to 10,959 (1.13.06), an increase of 2%. The DJIA even closed above 11,000 on 1.9, 1.10 and 1.11.

The S&P 500 equal-weighted index, represented by the ETF RSP, is up 3%, in line with the capitalization weighted S&P 500 index.

MARKET MAXIMS:
AS GOES THE FIRST WEEK OF JANUARY, SO GOES JANUARY
AS GOES JANUARY, SO GOES THE YEAR

These maxims are correct more often than they are incorrect. So 2006 may be a good year, it may not be. Can we be more nebulous and evasive?

The Author’s investment methodology is trend-following, not predictive. It is a concentrated investment strategy, nor a diversified one. It is Buy and Sell, not Buy and Hold(while the price plummets). It is a relative strength, momentum based methodology. It is straightforward and simple to explain. And it is not extremely difficult to execute. It is an engine that gets more finely-tuned over time, not a crystal ball that gets better reception the more it is polished.

A REMINDER OF THE AUTHOR’S METHODOLOGY (Reprinted, in main, from the 8.2005 Desert of the Real Newsletter)

Studies show that 70 to 80% of a stock’s movement can be attributed to the movement of the overall market and the movement in the particular stock’s sector. Yet most analysts concentrate their efforts on analyzing a stock’s fundamental indicia. And most portfolio strategists just conjure up newer quantitatively derived strategies for portfolio diversification.[1] So most of what you read or hear about a stock from the analysts only influences 20-30% of its movement. How would you like a doctor that could only cure 20% of your ailments or a fire department that would only respond to 30% of fire alarms?

AN OVERVIEW OF HOW IT WORKS

1. When the stock market is moving forward, you are fully invested in stocks. When the market is reversing course, move to wealth preservation strategies. I am sure some readers are thinking ‘Yeah, right smart guy. How can you tell when the market is going to move up?’ The simple answer is you cannot predict when it will go up or down. But you can employ technical indicators that are trend tracking and trend following. You stay invested until these technical indicators reverse to negative.
2. Within all markets, some sectors will outperform others. Find the best sectors and find the best performing stocks in those sectors.
3. When you find the best stocks in those sectors find the best price points to buy, sell, and plot stop loss points. On this last point, proper implementation of stop loss orders is key to a good strategy. It sounds counterintuitive, but knowing when to cut losses is as important (if not more important) as knowing what to buy.

Here is why:

A. If you are buying good stocks in a moving market, you are almost sure to get gains that beat, or at least equal, market-equivalent gains. If you do it well, you will substantially exceed the relevant indices.
B. Despite your best efforts, some of your picks will lose money. That is inevitable. Just keep your losses very small and put your money elsewhere. Being a stock trader is like managing a major league baseball club. The season stretches from April to October. You are bound to lose some games, but consistently win more than you lose and you will keep your job and your club will make the playoffs.
C. Put in stop losses and be mechanical about them. The author usually sets stop loss orders at 7% below the purchase price, or a point on the chart where short-term price support will break down. No exceptions. Also, when you have good gains in a stock, raise the stop-loss price to keep your profits.

The author did not create all of this methodology. It is in part his methodology, in part the methodology used by Dorsey, Wright and Associates.[2] Let’s talk a little about the Author’s investments over the past six months with an eye toward providing the readers some insights.

In September and October, the Author moved his portfolio to a defensive configuration based upon the market indicators he follows. These are medium-term and short-term relative strength and momentum indicators. They were all negative at that point. This portfolio included lots of cash, inverse funds, or mutual funds that operate inversely to the S&P 500 and the NASDAQ. So when these indices dropped, the funds went up. And gold, an investment the Author has never held. But the chart and indicators looked good.

But late in October, something happened. The indicators reversed and we switched from defense to offense. The Author sold the defensive investments. To get quick equity market exposure, the Author bought RSP, the equal-weighted S&P index ETF. After some time for research, the Author bought emerging markets, Korean, and Latin American ETFs, and other investments in fast moving sectors such as oil services and Internet. These investments will be held until they lose relative strength, market indicators move to negative, or chart patterns reverse.

When the market turns negative again, the Author will put investments in place that will work more effectively in a down market. Like the defensive portfolio described above.

WHAT’S NEXT? WHO KNOWS?

We do know that this market will reverse, but we do not know when. We will have indications, as certain shorter-term indicators stall and reverse. At this point we will become more cautious. When the indicators all reverse, we put the defense and the wealth-preservation strategies in place.

We know that all assets will revert to their mean pricing. But that does not mean we will hold on to them as our account balances revert with them. Buy when things are moving up-sell when things are moving down. Simple? No. But mechanical indicators do most of the work for us. We just need to watch them and listen to them. And most importantly, do what they tell us.

ONE EAR ON THE GROUND, ONE EYE ON THE TACHOMETER IN THE DESERT OF THE REAL!


IMPORANT DISCLAIMER: This newsletter is offered for informational purposes only. Sources of information provided are believed to be reliable, but are not guaranteed to be complete or without error. Opinions and suggestions are provided with the understanding that readers acting on information contained herein assume all risks involved. The Author may or may not buy or sell securities discussed in this newsletter.


[1] Try saying that real fast with a medium binder clip on your tongue. And then try putting all of the binders back in their box so the office supply martinet will not discover that you used office supplies in an unauthorized manner.
[2] www.doreseywright.com. There are probably other investment services that employ a similar methodology, but the author likes DWA. He vets all of his potential investments through the Dorsey Wright System. An attractive feature of DWA methodology is that it also works in reverse. In a falling market, the methodology can help you find the weakest stocks in the weakest sectors. It will then help you find crucial short sale and short cover prices. NOTE: This should not be interpreted as a recommendation of DWA’s services. Investors should carefully examine all investment strategies to determine which will fit their individual need.

GET DOWN OFF THE PLATFORM AND GET YOUR PROCESSES DIRTY.

COOPERATION AND CREATIVE FRICTION WITHIN THE PRODUCTION CHAIN WILL SIGNAL SUCCESS OR FAILURE IN 21st CENTURY MARKETS.

In the book The Only Sustainable Edge: Why Business Strategy Depends on Productive Friction and Dynamic Specialization (Harvard Business School Press, April 2005), Authors John Hagel III and John Seely Brown argue that sustainable competitive advantage in the future will come from a capacity to work closely with other highly specialized companies around the globe to get better faster. Simply using outsourcing to trim costs from processes and components will not provide a sustainable economic advantage for American companies.

The groundwork for these changes is already being put in place in the form of global process networks, an innovative way to flexibly mobilize specialized capabilities on a global scale. These networks take an end-to-end view of business activity that extends well beyond the traditional boundaries of an individual enterprise. For example, most companies today focus on the challenge of coordinating activity with their first-tier suppliers and distribution channels. But few have developed the skills needed to reach beyond this tier and coordinate the sourcing of raw materials to their final delivery..[i]

This mode of manufacturing has also been called “modularization”, where each component of a product or a service delivery is modularized, performed by a partner in the network, and later brought back together in the final product. Modular partners are allowed freedom to innovate and offer lower-cost and/or better quality products or services within broad design and function parameters.

This stands in contrast to traditional supply chain management, where organizations present detailed standards and specifications to a small pool of their vendors. These organizations then attempt to squeeze price, finance term and other concessions from these suppliers. Rather than leverage the comparative knowledge advantages of these suppliers, the large organizations lose much of the comparative knowledge advantages through inflexible product standards.

BACK ON THE BIKES.

Hegel and Brown illustrate their argument with the example of the Chinese motorcycle manufacturers centralized around Chongqing, China.

To imagine how Western companies may need to adapt to emerging markets, consider the way motorcycles are designed and built in China. Since the mid-1990s Chongqing—and its 32 million people—has been home to a vibrant business ecosystem built around incremental innovation in motorcycle design and manufacturing. This growth is being driven by several process networks focused on product innovation and commercialization. The orchestrators of these process networks are entrepreneurial Chinese companies that few Westerners have heard of, such as Dachangjiang, Longxin, and Zongshen…

Within Chongqing, substantial incremental innovation occurs at the level of product architecture, redesign of components, and savings in sourcing. Many Japanese motorcycle manufacturers would challenge this assertion, arguing that these companies are imitating Japanese products and violating their intellectual-property rights. Ge Dongsheng and Takahiro Fujimoto, two economists at Tokyo University, have studied the experience of Chongqing's motorcycle design-process networks in some depth. They document a new approach to product development, which they describe as "localized modularization."

The economists note that Chongqing's privately owned motorcycle assemblers serve as design orchestrators. They first define the key modules of the product, specifying broad performance parameters, such as weight and size, in rough design blueprints. Then they work with major suppliers for more detailed designs of components and subsystems. The key to this approach lies in the partners' ability to redefine the product architecture within relatively independent functional modules. They've moved to a loosely coupled product architecture.

With this architecture, companies in a process network can deliver lower-cost components with satisfactory quality much more quickly than with conventional, top-down product design. They can also harness the power of what we call "productive friction"—what happens when people with diverse backgrounds, experience, and skill sets engage one another on real problems, especially across enterprise boundaries. When the right conditions are in place, the exchange generates not only negative friction [Author’s Note: “Negative Friction” is an oxymoron if there ever was one] but also a creative resolution of the issue. The participants also deepen their own capabilities.[ii]

LEVERAGING “COMPARTIVE ADVANTAGES” CREATES GREATER VALUE FOR EVERYONE. CONSUMERS, ASSEMBLERS, SUPPLIERS, FINANCIERS.

The Author is using “comparative advantage” in the sense of comparative advantages among and between economic actors, not in its more classic sense of comparative advantages between countries as a rational for free trade. In the context of international trade, and to support the concept of free and open international markets, economists describe some countries as having “comparative advantages” over others in the production of certain types of products.

For example, Honduras grows excellent bananas. Its climate and soil is adapted to banana growing. Iceland could develop an internal banana growing industry with greenhouses and artificial light in the winter. But the cost of growing bananas would be extremely expensive; far more that Iceland would spend by importing bananas. Similarly, Iceland can raise and/or catch fish like Arctic Char and Salmon at a competitive cost and sell them to Honduras for a far lower price than Honduras could raise similar fish in refrigerated tanks.

A similar situation exists amongst economic participants. Ford could make its own shock absorbers, but finds it is cheaper to buy them from a shock absorber manufacturer. So the concept of comparative advantage works in both contexts.

TAKE “COMPARATIVE ADVANTAGE” OUT ONE MORE STEP
OR ONE MORE DERIVATIVE

Let’s imagine we manufacture headlights for motorcycles, ATVs and snowmobiles. Our customers send us specifications for bulb headlamps, even though we have developed an LED (Light-emitting diode) headlight that is actually cheaper than a sealed beam headlamp. We can of course go to the motorcycle, ATV or snowmobile company and advise them of our better alternative. But this would require an expenditure of time and effort by all parties and require people to actually make and justify decisions. An uphill fight. And as those who have worked in large organizations know, you have to pick and choose your fights carefully.

BRIGHT LIGHTS. BIG SAVINGS.

However, if our customers just tell us that they want a headlight of a certain size, luminosity, ECT., and we are in a modular development model, we simply deliver our LED model We make more money, the assembler gets a lower cost and better headlight, and the rider, of course, gets a better headlight. Everyone in the value chain gets more value.

This is admittedly a simplified example. But it is an example of real world scenarios where value can be added to a chain of events or sucked out of a chain of events.

ADD VALUE AND YOU WILL FIND A WARM WELCOME IN THE DESERT OF THE REAL!



[i] “The Shifting Industrial Landscape, Hagel and Brown, Optimize, April 2005.
[ii] “The Shifting Industrial Landscape, Hagel and Brown, Optimize, April 2005.

“THE CENTER OF GRAVITY DOESN'T HAVE TO BE THE U.S”

“The center of gravity doesn't have to be the U.S”
In 25 years, it may not be.
In 50 years, it won’t be.

"The center of gravity doesn't have to be the U.S.," states Prashanath H. Boccasa in a Washington Post article entitled, “India's New Faces of Outsourcing: High-Level Technicians Lead a Transcontinental Shift in Business Culture”.[i] Boccasa is the founder of Approva, a Reston, VA company.

Mr. Boccasa is an Indian-born American entrepreneur. His company, Approva Corp., is a computer software company that makes compliance software for the Sarbanes-Oxley law. This law is aimed at improved corporate reporting and internal accounting practices. Approva has sites in Reston, VA and Pune, India. The office in Pune, India handles programming and development. The Reston office provides marketing, sales and management. What distinguishes Approva and some other companies is that Indian-American employees are stepping out of the more traditional tech roles into management and other non-technical roles.

INDIAN-AMERICAN PLATFORM COMPANIES

Approva, and other organizations with Indian and American operations, are demonstrating that American organizations will have no lock on the Platform Company model. As readers recall, Platform Companies are the corporate model where Western companies retain the high-margin marketing, sales, design and engineering functions, while the low-margin, high risk manufacturing (or programming) work is done in Asia and other developing companies.
Things are already changing. Listen to what Constancia Fernandes, an Indiana employee of Approva says:

Fernandes represents a generation of Indian workers that is redefining outsourcing from call-center and back-office work into higher-level management and strategy jobs -- areas that Americans workers have often regarded as safe from overseas competition. As they climb higher in the corporate food chain in transnational firms, Indian workers and executives are pushing their U.S. counterparts to take them seriously, taking on greater responsibilities and subtly changing the corporate culture of both countries.[ii]

Approva, and other Indian ventures, are now straddling the frontier between the US and India. Approva provides a service exclusively to American companies or foreign affiliates of American companies under the Sarbanes-Oxley law. But perhaps as Indian corporate governance rules grow and change, Approva’s products may find a market in India. Or in other nations.
And at some point in the future Approva may step back across the Pacific Ocean and conduct operations in India alone. It will take its Platform and go home to serve its international customers.

ONE PLATFORM COMPANY DOES NOT AN ECONOMIC MODEL MAKE

The central question is how many exclusively American or European Platform Companies will remain free to slough off the grunt work to Asian manufacturers? In 25 years, there will still be quite a few. In 50, maybe not so many. See you in Pune!

THE DESERT OF THE REAL STRADDLES ALL FRONTIERS!

[i] www.washingtonpost.com, 1.11.2006.
[ii] www.washingtonpost.com, 1.11.2006

THIS AIN’T NO BRAVE NEW WORLD. IT’S JUST A PLAIN OLD EMPIRE.

AMERICA-AN EMPIRE OF INCOMPTENCY?
WRITING IOUs INSTEAD OF DEMANDING TRIBUTE?

As the Author stated before the Christmas Holiday, he intended to read two books over the holidays and advise his Readers of the widely divergent views expressed in each book. And the Author always keeps his word. Three of the most recent posts have discussed the book “Our Brave New World” by Charles Gave, Anatole Kaletsky, and Louis-Vincent Gave of GaveKal Research[i].

A BRAVE NEW WORLD WOULD BE THE BETTER NEW WORLD.

The book “Our Brave New World” argues that structural changes in the world economy and the manufacturing industry could ensure that US and European countries maintain their dominance as designers, marketers and financiers of the world’s goods and services, while China and the rest of the developing world will perform the low profit tasks of manufacturing and routine service provision. This relationship has been paraphrased as “They sweat, we (US, Europe) think.”

ON A MUCH DARKER NOTE …

Empire of Debt, by Bill Bonner and Addison Wiggin[ii] sees not a glass half empty, but American coffers nearly empty. The Authors, libertarians, classical economic liberals, and old-style isolationists, first demonstrate, very convincingly, that America IS an imperial power, operating in the interventionist spirit of prior empires. The US, according to the authors, began its first steps toward empire with the taking of Cuba, Puerto Rico and the Philippines in the Spanish-American War of 1898[iii]. The next step, according to the Authors, was the US intervention in World War I, a war that did not threaten the vital interests of the US. The American empire grew between the wars, expanded greatly after World War II, and has found its latest expansion in the forcible occupation of Iraq. With these facts, the Author finds no argument, and objective observers can find little credible argument with this position.

WHAT KIND OF AN IDIOT EMPIRE STARTS OUT TO LOSE MONEY ON ITS COLONIES?

The Empire of Debt authors then make the point that unlike “rational” empires that extract tribute (wealth) from their imperial possessions, the US employs its vast military might to divest itself of its assets. It buys beads and trinkets from the rest of the world and sells of its capital assets in the form of treasury debt. It is a stark picture of an irrational nation doing irrational things to maintain its profligate consumer ways.

NOT A GARDEN OF SAND. AN EMPIRE OF SAND.

The Empire of Debt cannot long survive, argue the Authors. A nation cannot borrow its way to prosperity, nor consume without producing. It must use its capital account (here, in the form of debt), to balance its current account (trade deficit). Like sand though the hourglass, so are the slipping days of US prosperity. It is a view hard to reject, but it is a reality that the US must reject if it seeks to maintain itself as a dominant economic power.

IS THERE A THIRD WAY?

The Empire of Debt may presage the future of the American economy. American debt cannot finance indefinite consumption. Americans must create value and export it in rough balance with what it imports. The US traditional manufacturing base will inexorably shrink as lower cost producers come into the market. But there are other things to make, other services to provide. Americans must think better and not sweat harder. Save more and consume less. And bring government spending in line with revenues.

And, in the Author’s opinion, the US must slash military spending and pursue multilateral solutions through established world bodies. Signal the end of the Neocon death machine, the ad hoc international gangs of the “willing”, and the delusions of empire building. Become a great, generous and humble nation again. Have and show faith in the future and in our fellow humans to do the right thing.

THERE IS ALWAYS ANOTHER WAY IN THE DESERT OF THE REAL!
AND WE WILL ALWAYS WORK TO FIND IT!


[i] www.gavekal.com
[ii] http://www.invest-store.com/dailyreckoning/
[iii] The American empire began much earlier, of course. First with the genocide of the Native Americans and later with the Mexican War of 1848 where the US took by force of arms from Mexico the states of California, Arizona, and New Mexico.

OUR BRAVE NEW WORLD SEEMS LIKE THE SAME OLD PLACE.

WHAT WORKS IN THE DESERT OF THE REAL WORKS IN OUR BRAVE NEW WORLD.

The GaveKal authors of “Our Brave New World” have a couple of chapters on investing in the Platform Economy era. They, like this Author, generally reject broad indexing as a means of investing. In the opinion of the GaveKal authors, index investing (such as the popular S&P 500 index mutual funds), allocate capital by means of the size of companies, not their ability to earn better returns on invested capital. Readers know that the S&P 500 index is a capitalization weighted index and “overrepresents” a handful of stocks and “underrepresents” most other stocks in the index.

The investment style recommendations of the GaveKal authors are similar to the Author’s investment style. First and foremost, absolute return investing. DO NOT LOSE MONEY. Even if you only squeak out a point or two when the market is down 5%, you are earning big.

We are players not gamblers. We train and play to WIN GAMES, not just BEAT THE SPREAD. Second, follow the trends and buy what is moving up. Sell when the momentum stalls out. The GaveKal Authors lay out some more ideas:

1. Means reversion investing. Buy what is undervalued and sell what is overvalued. All assets rise and fall in price and will eventually revert to a mean valuation. (That is in effect the concept behind the Secular Bull and Bear market strategies. Stocks, over long periods of time, swing from overvalued to undervalued.) Two well-known mutual funds that follow this means reversion strategy are the First Eagle Family of Funds[i] and the GMO funds[ii].

2. Carry Trade Strategies. This is a simple technique, in theory. Borrow money on one end of the yield curve where it is cheaper and loan it on the other end of the yield curve where the interest rate is higher. This is difficult for individuals to do without large amounts of capital and sophisticated strategies. But hedge funds engage in this practice and placing some of one’s portfolio in a carefully selected hedge fund can get some carry-trade exposure.

The GaveKal Authors also recommend timely investments in emerging markets and investments in the Platform Companies that they believe will dominate the world economy through the foreseeable future. The Author has large percentages of his portfolio in emerging markets through emerging market ETFs (exchange-traded funds).

LOTS TO THINK ABOUT, EH?

“Our Brave New World” is an interesting book and worth a read. It is fast paced and well documented. But is its Brave New World the Real New World?

The Author believes that the weak link in the Author’s argument is that China and other developing countries will not be condemned to remain in the low margin manufacturing business and will become the Platform Companies that design, market, manufacture and sell their products. A good bellwether of Chinese manufacturer’s success as emerging Platform Companies may come in the American automobile market.

A story on the AP Business Wire today (1.10.2006), “Chinese Automaker Plans Exports to US”[iii], states that two automobile companies in China plan to import autos to the US beginning in 2007. The article states:

Our goal is to present to the American people another choice for the family sedan, a vehicle that possesses the highest quality but is available at the lowest price," Li Shufu, chairman and founder of Geely, said in a statement Tuesday at the North American International Auto Show in Detroit.
He said Geely "will bring to the people of the United States a safe, high quality, family-friendly automobile" for less than $10,000. Chinese rival Chery Automotive also plans to begin exports to the U.S., as early as 2007, in association with American entrepreneur Malcolm Bricklin's Visionary Vehicles. It hopes eventually to sell 2 million vehicles a year. (AUTHOR’S NOTE: IN FUTURE POSTS LONG BLOCKS OF QUOTED TEXT WILL BE ITALICIZED TO ASSIST THE READER.)

If these Chinese automobile makers can succeed as the Japanese companies have, two Chinese “Platform Companies” will be competing alongside GM, VW, Toyota, KIA, Honda and others.

ALL WORLDS IN THE DESERT OF THE REAL ARE BRAVE NEW WORLDS!

IMPORANT DISCLAIMER: This blog is offered for informational purposes only. Sources of information provided are believed to be reliable, but are not guaranteed to be complete or without error. Opinions and suggestions are provided with the understanding that readers acting on information contained herein assume all risks involved. The Author may or may not buy or sell securities discussed in this newsletter
[i] http://www.firsteaglefunds.com/firstEagle/index.jsp. Approximately 20% of the Author’s portfolio is invested in First Eagle Global Fund. This fund has been closed to new investors since March 1, 2005. When the fund reopens, the Author will advise his readers of this fact.
[ii] http://www.gmo.com/america. Jeremy Grantham is one of the principals of GMO and is frequently quoted in the Desert of the Real. A few of the Author’s extended family members own GMO funds.
[iii] http://news.yahoo.com/s/ap/20060110/ap_on_bi_ge/china_geely_us
;_ylt=Agb4kIORTABFrylsyrX3hL2yBhIF
;_ylu=X3oDMTA5aHJvMDdwBHNlYwN5bmNhdA--

VESPAS OF THE WORLD, UNITE.

VESPAS OF THE WORLD, UNITE.
WHERE’S MY FREAKING TAX BREAK?[i]

Is, as Vice President Dick Cheney once said, energy conversation just a personal virtue and not a credible and wise policy choice? The Author believes that energy conservation is both-a personal virtue that places concern for the planet’s future above profligate consumerism and a wise policy choice. But Cheney’s personal and political loyalties aside, federal and state governments are making some tax incentives available for hybrid vehicles and other high-mileage vehicles. So watch what the government does, not what Cheney says.

For a roundup of some of these incentives, see the link below:

http://go.ucsusa.org/hybridcenter/incentives.cfm

Should tax breaks be extended to other vehicle types? Scooters, motorcycles, bicycles used in commuting? The Ducati Kid states in his Weblog that his Piaggio scooter and other such vehicles should receive some tax preferences and there are some good policy reasons to support his position. And conversely, should those Americans that drive low mileage SUVs and log-hauling sized pickup trucks suffer tax disincentives for their Keith Richard size oil addictions? The Author says yes, but he is not running for office. And he drives semi-econo. And his 140hp race-bred Ducati motorcycle still gets better mileage than nearly every car or truck on the road. [ii] Even at unlawfully high rates of speed.

TAX POLICIES AFFECT ECONOMIC ACTIVITY

Government’s craft tax policies to accommodate at least three goals. Unless you are an elected senator or congressmen with the power of deficit spending, your first goal as a unit of government is to raise enough revenue to cover the cost of government. Secondly, you will reward your political contributors with tax breaks and punish your opponents with tax increases, real and/or nominal. And finally, you will usually enact some provisions to encourage “good conduct” and discourage “bad conduct”. So-called “sin taxes”, high taxes on alcohol and tobacco, are a common example of taxes designed to discourage certain conduct.[iii]

So-called “good conduct” tax incentives would be charitable contribution deductibility, education tax credits, and the automobile hybrid incentives. Taking that argument further, if lower US energy consumption were the universally desired goal, American politicians might consider expanding that favorable tax treatment to vehicles that get over 40 mpg, motorcycles, scooters and mopeds. The results would be less fuel consumption, cleaner air, lower CO2 emissions and less road congestion. So where’s the catch?

BREAKING THE LAW OF “REASONABLY FORESEEABLE” CONSEQUENSES.

If fuel consumption goes down and fuel supply remains the same, the cost of fuel will fall. The value of the tax incentives on efficient vehicles will fall somewhat, and there will be a smaller financial disincentive to drive larger vehicles. Enter a targeted tax to maintain fuel price, a sliding tax to maintain conservation incentive parity.

REMEMBER PAUL TSONGAS?
HE WOULD HAVE MADE A DARN GOOD PRESIDENT.

Paul Tsongas was a Democratic candidate for the US presidency in 1992. One of his proposals was a $.50 per gallon tax on gasoline to encourage conservation and combat pollution. Let’s take Mr. Tsongas’ idea a bit further. Make the tax approximately $1.00 and aim it at a determined conservation price of $3.00 per gallon. If fuel spikes and rises above $3.00, the tax would be temporarily decreased to keep fuel at or near $3.00. If gasoline falls in price, the tax increases to raise the price to $3.00. The parity price of $3.00 could be adjusted yearly for overall inflation, conservation goals and could contain outliers for extreme situations.

Consumers would get higher, but more predictable prices. Environmental and conservation goals would be explicitly addressed. And government needs the revenue. What’s to stop it? Nearly everything that is wrong with a government run by industry lobbyists and their congressional stooges.

The oil industry, the auto industry, anti-tax (anti-fiscal responsibility) zealots, and many owners of gas-guzzlers. And maybe that it is the test of a good proposal. If it works as intended, inflicts economic pain in a way that will encourage salutary conduct, and has predicable outcomes, it is a good proposal. But a good proposal that is condemned to political death in the cesspool of American politics.

WHATEVER COMES, WE WILL WALK INTO IT ARM-IN-ARM IN THE DESERT OF THE REAL!

[i] So asks The Ducati Kid, a New York City Ducatista, Piaggio scooter owner and blogger. www.theducatikid.blogspot.com
[ii] But even if the Author did not own a motorcycle he would still support such a proposal. The Author is absolutely committed to separating his own personal financial and economic interests from his analysis and his recommendations. And he always discloses his personal financial interests when he discusses individual investments.

You get it straight and unglossed in the Desert of the Real. We may be the last of a breed of commentators and analysts here in the Desert of the Real. Poor (unsponsored) but honest. And the Author aims to keep it that way. Unlike syndicated columnists (i.e., Kathleen Parker, that have contracts) bloggers have only the credibility.they have earned from their readers.
[iii] Or these taxes could be a way for the government to profit from addictive behavior. Can you say Powerball? Or ten scratch off tickets, please?

OUR BRAVE NEW WORLD

OUR BRAVE NEW WORLD
OR JUST A GARDEN OF SAND?

Yesterday’s post discussed some of the reasoning in the GaveKal book, “Our Brave New World”. A premise of the book is that Western economies will move to “Platform Companies” that design, market and sell goods and services, and Asian economies will be relegated to the low margin activities of manufacturing the goods or delivering the routine services. The West retains the high margin activities and the East takes the hindmost.

So how will workers in Western counties earn a living? If Wal-mart is one answer, it is a correct one. Wal-mart is a prototypical Platform Company. And it is a direct pipeline to the Chinese factory floor. It markets and sells. It does not make, it does not repair. It takes the customer’s money, keeps its cut, and pays the manufacturers. Wal-mart has some high-knowledge positions at its home office and its regional centers. But most of its hands are low-skilled sales clerks.

CHINESE HARLEY-DAVIDSONS?

Not likely, given the American mythology that infuses the brand. But would Americans buy Chinese Chevys? Or Indian Infinitis? If the Platform Company concept plays out, this will be a logical conclusion. The American, European and Japanese auto companies will design and engineer the vehicles and the lower-cost Asian factories will produce them for export back to the Western markets. The UAW gets cut out of the transaction and autoworkers will be working somewhere else. They can get engineering or marketing degrees and work at the automakers design or marketing facilities, or find work elsewhere. But where is elsewhere?

WILL FLOWERS BLOOM IN A GARDEN OF SAND?

The Platform Company model will eliminate many manufacturing jobs in Western economies. It already has. Those will be $20/hour autoworker jobs and $9/hour injection modeling jobs. Income dispersion is on the rise in the US as higher-paying manufacturing jobs move East and replacement jobs in the service sector pay less well. Although, as GaveKal remind, the will be less wage volatility from this lower salary range, there will be less earnings. And that is an outcome of the Platform Company environment. Lots of people will be working in lower paying service jobs. Over time individuals will retrain and reeducate. Some will move up, some will move down. But move they must. That is the nature of the market. But it does not have to be the nature of a political system. When our political and economic choices disadvantage others, we must be ready to assist people with a hand up. Not a handout, necessarily, but a hand up so they can find their own way out.

YOU GET MORE THAN WHAT YOU SEE

The GaveKal Authors quote the 19th century French economist Frederic Bastiat. Bastiat developed an early version of the “law of unintended (unseen) consequences”. Bastiat’s law states that an economist must take into account “both what is seen and what is not seen.[i]” This rule, in some absurdist reductionist way, should go without saying. But we know what the GaveKal authors are saying about the loss of manufacturing in the West and the growth of manufacturing in the East. We see it, we measure it, and we extrapolate therefrom. We have seen it and measured it for years. And absent more protectionist measures, (and even with them), we cannot stop the move of manufacturing jobs from Michigan to Malaysia, Indiana to India, and Pittsburgh to Shandong Province.

WE WATCH FOR WHAT OTHERS DON’T SEE

Kind of a grand pronouncement, but that is what the Author looks for. What are we missing? What isn’t there but should be. What is there but might look different this time. But that is why the Author writes this blog. If readers want the conventional wisdom there is the Wall Street Journal and CNBC.

The GaveKal Authors present some investment ideas that they believe will succeed in “Our Brave New World”. The Author will share them in another post.

WHAT WAS THAT FAMILY ACT IN THE DESERT OF THE REAL CALLED AGAIN? THE ARISTOCRATS?


[i] http://en.wikipedia.org/wiki/Frederic_Bastiat. Bastiat is often seen as a forerunner of libertarian economic thinking and the Austrian School of Friedrich von Hayek and Milton Friedmann.

A TEMPEST IS CLOSE UPON US

“How beauteous mankind is! O brave new world that has such people in it!” said Miranda.
“Tis new to thee,” replied her father, Prospero.

“Our Brave New World” is the title of the book written by Charles Gave, Anatole Kaletsky, and Louis-Vincent Gave of GaveKal Research[i]. GaveKal is an international economics research firm. Our Brave New World is a book the Author read over the Christmas Holiday. The central thesis of the book is that structural changes in the world economy and the manufacturing industry could ensure that US and European countries maintain their dominance as designers, marketers and financiers of the worlds goods and services, while China and the rest of the developing world will perform the low profit tasks of manufacturing and routine service provision. This relationship has been paraphrased as “They sweat, we (US, Europe) think.”

The authors of Our Brave New World are bright and literate men. They are no doubt aware of the quote’s source in Shakespeare’s “The Tempest” (and Prospero’s sardonic reply to his wide-eyed daughter). They must also be aware of the Aldous Huxley novel of the same name, a statement of uber-industrial dystopia[ii]. So it is with this title they develop their argument that the US (and Europe) can outsource their manufacturing and routine service industries, buy imported goods and services with increasing US debt, and continue to grow the US economy. Nice work, if the US can keep it.

ITS DIFFERENT THIS TIME

At least the GaveKal authors start their arguments with the revelation that it is “different this time”[iii]. Having shown their hole card, it is up to the critics to beat their hand. It is a strong hand but the Author fears the world not so brave and Prospero more correct in his sage resignation. [iv]

The last time investors heard that “things are different this time” was the run-up to the 2000 tech-stock bubble. Things weren’t different that time and the market punished those of misplaced optimism. That is in the nature of capitalist, mean-reverting markets. Markets overprice and underprice, swing high and swing low, but always revert to mean valuation. So telling grizzled investors and even guarded optimists that “things are different this time” is no mean feat. But we must also recognize that sometimes, just sometimes, things WILL be different.

The GaveKal authors assemble many disparate and interrelated sources of evidence. They make a good case. The next few posts will examine some of the main arguments that we are in a “Brave New World”, and some arguments that fail to convince.

THE PLATFORM COMPANY STANDS ABOVE THE COMPETITION

The new business model that GaveKal elevates is the “platform company”. The platform company is a multinational organization that does most everything required to bring a product to market except actually manufacturing the product. The platform company retains the high-value, knowledge-based activities such as research and development, design and engineering, marketing and post-sales activity. Examples of “Platform Companies” are Wal-Mart, Dell, Carrefour, the French\European retailing giant, and IKEA, the Swedish home furnishings retailer. Using Dell for example, Dell designs the computer, markets it, sells it and supports it. But the actual sourcing of the components is sent to China, Taiwan and elsewhere.

The actual manufacturing of the product is outsourced to Chinese or other manufacturers. Manufacturing is outsourced because it is currently cheaper, and will generally continue to be cheaper, in the developing countries, especially China. The type of manufacturing the Chinese and the Asians are doing is low-margin, high capital cost activity. GaveKal argues that it is also very competitive and there is little room for attractive profit margins. And if the Chinese don’t want the work, there will always be the Indians, the Malays, and the Indonesians.

HAVE THE ACCOUNTANTS OUTSMARTED THE INTERNATIONAL ECONOMISTS?

GaveKal gives an interesting example in the book. Assume Dell sells a $700 computer system. The computer package is comprised of the following parts:

Flat Screen Monitor made in Taiwan. Price $300. The Taiwanese manufacturer makes $30 profit.
Computer hardware (box, motherboard, ect.) made in China. Price $100. The Chinese manufacturer ekes out a $5 profit.
Intel microprocessor chip. Designed in the US but built under contact in Taiwan. Cost $70. $35 profit goes to US company Intel and $5 profit goes to Taiwanese chipmaker.
Windows Operating System. Designed and reproduced in the US by our old friends at Microsoft. Cost $200, $180 profit to Microsoft.
Sales Markup for Dell. Dell keeps a $30 profit for selling the PC.

Accountants would divvy up the profit as follows:

US economy. $245 Profit (Intel $35, Microsoft $180, Dell $30).
Asian economies. $40 Profit (Taiwanese monitor manufacturer, $30, Taiwanese chip maker $5, Chinese computer builder $5).

Under this analysis, US companies make $205 more than the Asian companies and an American consumer gets a cheap PC. In the case of Dell, it is a “cheap PC”, but that is another article!

A balance of trade analysis would see it differently, however.

Imports: $470 (cost of flat screen monitor, computer box and chip)
Exports: $0

Under this balance of trade analysis, each computer contributes $470 to a current account deficit. Yet American companies earned a nice profit on the transaction. And as Americans, would we rather earn $245 on a $ 700 sale, a 35% profit, or just $40 on a $470 sale (8.5%)?

Outsource Manufacturing, Outsource Volatility

The GaveKal authors take a look back at the manufacturing-based economy of the United States and note the boom and bust cycles then endemic to a manufacturing economy. Economic expansion is followed by low unemployment, fast economic growth, inflation, overcapacity, recession, and unemployment. And the cycle starts over again. The growth of the US economy, as tracked by gross domestic product (GDP), follows a similar roller coaster.

But as the US economy moves from a manufacturing base to a service and a “platform economy” base, unemployment stabilizes at a lower level and GDP volatility narrows. Many of the high-paying manufacturing jobs have been replaced with lower-paying service jobs, but the positions are more stable and the wages more predictable. And it is this predictability of wages, notes the GaveKal authors, that permits deeper mortgage and consumer debt levels for American wage earners. So along with the manufacturing, the US is outsourcing economic volatility to China and the developing economies.

VOLATILITY MAKES FOR NICE TRADING RESULTS, BUT CAN DAMPEN OVERALL GROWTH RATES.
WHAT GOES UP FAST GOES DOWN FAST

Let’s put ourselves in the shoes of the Taiwanese and Chinese manufacturers. We are manufacturing low margin products that have high fixed capital costs. Any changes in demand for the products or our costs will quickly threaten our already slim margins. And since we our manufacturers, most of our workers are variable costs, costs that we quickly shed when business slows. We don’t make large margins, we have to hire and fire our workers frequently, and we still have lots of competition. Not an enviable position.

But we are not stupid. We are sitting in Qingdao, Shandong Province, reading GaveKal’s books and thinking to ourselves, what if our company becomes a Platform Company. In less than 20 years we have gone from making bicycles to making computer motherboards. What is to stop us from moving up the economic food chain? The Author believes that this is may be the ultimate weakness in the GaveKal argument. The Chinese and the Asians will not be content with the grunt work for long. They will figure out how to market and sell to Americans and Europeans just as the Japanese did. And the American and European Platform Companies will be fighting for every penny.

This is a lot of material for one post. In the next few posts we will revisit some of these topics and open up some new ones. There are great changes afoot and as investors we must stay in front of them.

THE DOLLARS RISE IN THE EAST

Asian and some international investments have been rocketing ahead in the first few days of 2006. The Author’s Quantum Multiplier Portfolio contains a 20% holding in EEM, the Emerging Markets Exchange-Traded Fund (ETF), a 20% stake in EWY, the Korean ETF, a 5% state in ILF, the Latin American 40 Index ETF. The Author is also considering a position in EWJ, the Japanese Market ETF.

Here are the early returns as of about noon EST on January 5, 2006:

EEM Emerging Markets- 24.99% (Since Nov. 30, 2005)
EWJ Japan- 14.10% (Since Nov. 30, 2005)
EWY Korea- 39.45% (Since Nov. 30, 2005)
ILF Latin America- 52.70% (Since Nov. 30, 2005)

WE HAVE THE FUNNIEST ACT CALLED THE "ARISTOCRATS" HERE IN THE DESERT OF THE REAL!

[i] www.gavekal.com
[ii] And who gets which Brave New World. In Huxley’s novel, “Brave New World”, people are engineered and bred for certain roles in life. Alphas are the educated elite, Betas are administrative and clerical, while Epsilon semi-morons are a class of proles that do the nasty work of keeping the machines and production engines running.
[iii] “Our Brave New World”, p. 2. The Authors didn't wait very long!
[iv] The Author does find much merit in the GaveKal book and believes most of its claims to be accurate and hopes that the economic model proposed by GaveKal is the more correct one. The US current account and capital account situation is untenable and it seems that is must end in a deeply recessionary fashion. If there is a different outcome, the Author wishes to share it with his readers.