2005 and 2006 Forecast

Warren Pollock

The Macroeconomic Newsletter

eMail: wepollock@wepollock.com

December 28, 2004

Special thanks to Jeremy Irwin, for managing to proof this

document while experiencing a Tsunami.

"Hi Warren

Yeah, still here. (in Thailand) I was lying in bed at 8.30 yesterday
morning, half-awake, when the bed started moving, and then the
window started rattling. Earthquake, I thought. Big deal, it'll
pass. Then I thought: Wait a minute, I'm not in Tokyo!

It stopped after a few seconds, and then I came awake and

wondered if I'd imagined it. I walked to the window and looked
down at the hotel swimming pool, four floors below. The water
surface was rippled, whereas it's usually dead flat.

It was on the TV news all day. The epicentre was in northern

Indonesia, but it killed plenty in Bangladesh and Sri Lanka! The
last count I heard for Thailand was 168 dead, but I bet it's higher
today. These poor sods were all down on the south coast, in the
beach resorts like Phuket and Krabi. I'm hundreds of miles north
of there, and well away from any oceans.

OK, I will edit your second modified text sent to me. I will need a
day or two, though. Stand by.

Jeremy"

2005 and 2006 Forecast

Index

1.0. Coping Skills 1.1. The bottom line 1.2. Labor Deflation
1.3. Duck Diving The Wave 1.4. Embracing Stoic Paradoxes 1.5.
When and How the System Will Fail

2.0. The Chessboard 2.1. The Soft War: China vs. the US 2.2.
America As Visionary 2.3. China, Russia, and the Shanghai Six
2.4. Playing India vs. Pakistan 2.5. Preemption and
Deterrence 2.6. Back to Iraq, Iran, and Saudi Arabia 2.7. Policy,
immobile or movable?

3.0. The Trap 3.1. US Dollars as the Common Denominator 3.2.

Currencies, Real Estate, and Easy Money

4.0. Commodities Shocks 4.1. Oil 4.2. Agriculture

5.0. Next Steps 5.1. Currency controls, Customs 5.2. Command

Economy vs. Socialism 5.3. A Canadian Wilderness Guide 5.4.
Pandemics and other Questions 5.5. Blockbuster Drugs and Bad
Movies 5.6 Real Estate - How Real Estate Ate the Stock Market
(Reprint) 5.7 FNM Using Sarbanes-Oxley as a Crucifix

6.0. Readings

***

1.1 The Bottom Line

The global economic system has to be rebalanced. Beyond the

symptomatic details, the world needs to figure out how much
labor will be worth, where goods will flow, and to whom
purchasing power will be allocated. It's more than likely that this
major adjustment will be more noticeable starting in 2005 or
2006.

The next flourish of greed, trying to take formation now, will

confirm that a major adjustment will shortly follow.

Note: Section 2.6 is a suitable place to start reading this

forecast.

1.2. Labor Deflation

Many countries, resource rich and otherwise, believe erroneously

that the strength of their domestic economies depends entirely
upon their ability to supply the United States with a readily
transportable supply of cheap labor value - labor value exported
through the physical transfer of trade goods and the
telecommunication of services which readily flow to the
unflappable American consumer.

If resource rich countries were organized and confident, they

could unilaterally set the market price for many commodities.
These countries could also influence which "currency" will be
accepted as a store of value.

But which paper currency has value?

Perhaps those things that we think of as real and tangible

commodities are really currencies. Historically strong evidence
exists to support this contention. In medieval Japan for example,
"rice signaled wealth and also determined wealth through the use
of a sho, a measure of rice. At various times rice was an
instrument of trade, functioning as hard currency. Rice measured
the wealth of the daimyo (lord) and provided payment for
samurai (warriors)." Gold, oil, and food have the conceptual and
historic potential to be used as measures of transferable value or
currency. Therefore, as the United States dollar (USD) weakens,
the subservience of the resource rich countries to the United
States declines.

Over a long period of time, something happed to reduce the

efficacy of the USD as a measuring tool of value. The United
States ceased being able to build the kind of productivity it needs
to offset the inflow of wealth that it imports. Instead the United
States took advantage of the fact that it held a monopoly of
currency designed to provide an advantage to global trade.

What broke this protectionist advantage down was the free flow
of cheap global labor value. The United States cannot produce a
return on investment because it cannot trim its labor value added
costs. This means that debt levels and deficits have to increase.

Deficit spending has gone unnoticed by the majority because

labor deflation temporarily offsets declining purchasing power.
The global economic system has to be rebalanced.

With the dollar in the middle of every transaction and every

livelihood, many blocking forces exist to keep the status quo in
place.

If not in the United States, then where in the world do earnings

and return on investment exist? It's true that Japan, Europe, and
America have cutting edge technical, intellectual, and marketing
expertise. The problem is that these advantages need to be
continually renewed. Countries that have ownership of physical
resources, and countries with the lowest labor costs (a good skill-
to-cost curve) can provide added value and therefore a return on
investment.

The true value of Canada, for example -- the future purchasing

power of that nation -- derives entirely from the fact that it has
few people and large amounts of untapped natural resources.
The country has a large net present value relative to its internal
demand for consumption. This holds true for several other
resource rich countries.

It seems to me that Russia knows better how to manage its

commodity wealth. Russia considers its oil and gold, its natural
resource wealth, as its reserve currency. Russia will hoard its
natural resources and will sell only to the highest or most
amicable bidder. It will use oil as a strategic tool in courting
China.

Russians know how to concentrate capital and will do so, with

wild west bravado. The best use of a tax system resides in
quashing political dissent and scaring away the vultures of
international investing.
In another great misallocation, the Saudi royal family decided to
concentrate wealth while entirely neglecting the needs of their
internal economy. The great bugaboo of religious zealotry was an
international weapon of mass distraction. As payback the Saudi
royal family will have an internal reckoning day that cannot be
too far in the future. As it stands, a high price will be extracted of
the US for its connection with this thievery.

Closer to home, the Canadian government can take fallacious

reasoning regarding labor value to the highest level of irony.
Applying the same kind of nonsensical reasoning to China, the
Canadian government envisions that it can provide labor value as
a manufacturer-exporter of trains and planes. Costly Canadian
labor cannot have intrinsic export value to China. Europeans too
are fixated with the manufacture of airframes. But if the world
becomes more regional, just where will these planes fly and what
will they carry?

When China buys expensive items from Canada, Europe or the

United States, they are doing no more than throwing a political
bone. US trade figures that occasionally improve by three to five
billion USD are sculpted by this facade.

China of course, and India as well, are at the nexus of global

labor deflation. Both have well-trained labor pools willing to
outbid any competitor. Information technology and inter-modal
global transport facilitate the international flow of labor value.
Again, the story of labor deflation masks the demise of American
purchasing power. Beyond the details, the world needs to figure
out how much labor will be worth, where goods will flow, and to
whom purchasing power will be allocated.

1.3. Duck-Diving the Wave

Since starting in 2002, this newsletter has tried to describe the

conditions of change which are occurring worldwide. The most
challenging part of my educational process is to organize
observations into a usable product. We are participating in a
process that will ultimately allocate purchasing power, wealth, to
those economies and peoples that can provide a value added
return on investment.

Therefore, in this forecast I am not going to list a litany of

symptoms. Instead I will try to concentrate on providing you with
the basis of a future trend, a foundation on which to structure
your investments.

To provide meaningful result, forecasts don't necessarily need to

be one hundred percent correct. With this in mind I am satisfied
with the quality of forecasting projections made to date. If you
were reading carefully since 2002, you would have been buying
Canadian dollars and gold near lows. You would have ignored the
Dow entirely, sampled commodity funds, and focused on the
most important investment objective of all: not losing your
capital or purchasing power.

Some of the supposedly radical calls we have made, the ones

which people most violently reacted to as impossible, are
becoming grudgingly accepted by a growing number.
Nevertheless we still hold a minority view because cognitive
dissonance locks people into the familiar and prevents them from
seeing the obvious.

From 2002 to 2004, when trends were working in our favor, we

rode them. In contrast, in 2005 and 2006 we must be concerned
not with riding waves forward but ducking under them in order
not to be swept away. The waves we need to avoid are called
economic "dislocation" and societal "realization."

1.4. Embracing Stoic Paradoxes

Before I get too deep into this forecast I will provide you with a
method for absorbing and coping with the information presented.

Many people refuse to acknowledge facts when it is emotionally

difficult to do so. In 1842, economist Charles MacKay made this
observation: "Men, it has been well said, think in herds; it will be
seen that they go mad in herds, while they only recover their
senses slowly, and one by one." In our analysis we are looking at
the herd, and in contrast to them we have the confidence to
point ourselves in another direction entirely.

Economic systems operate like a huge organism.

Systems are born, mature, decay, and die, only to be reborn.

Therefore we need to participate in the changing economic
landscape by knowing that we play a part in it. As one system
falls so will another rise. Our goal resides in preserving our
purchasing power through these transitions, so we are fully
equipped to participate in growth phases of the newborn
economy.

The reality of life is that the physical world does not change very
much, even though economic systems do. Wise men are content
in the face of events. We live in the physical world, thus we will
participate in the rebirth of a new economic system. By being
observant we ensure our prosperity.

Conventions of trade, finance, paper money, banking, and even

economics are conceptual constructs that we use. Volatility and
forecasts are nothing to get emotional about. Simply, we need to
avoid the fatalism of the "dismal science." For us, happiness,
contentment and harmony are possible and achievable under any
and all circumstances.

1.5. When and how the system will fail

Economic systems die slow and painful deaths, and at the point
of death, great drama usually occurs. History usually records the
dramatic blindside as the cause of change. An example for this
would be the stock market crash of 1929. Yet an entire global
economic system was slowly failing long before that dramatic
crash occurred. As reported in December's interim bulletin,
volatility has been rising. This indicates that dramatically rough
waters are ahead.

Denial and volatility will continue to expand in every way possible

until these dynamics can no longer do so. Emotionally this may
be frustrating because if everyone acknowledged that an
economic system was aging, the birth of a new economy could
occur swiftly.

In 2005 and 2006 I would avoid getting sucked into short term
plays. Emotionally speaking, traders might find it difficult to
ignore clear buy and sell signals on chart patterns, moving
average crossovers, and the oversold-overbought technical
oscillators. Therefore, they do not quantify the growing level of
risk permeating the markets and the global economic system.
They may care to remind themselves that trading tools are
technical, not fundamental.

The right thing to do in my opinion is to hold unleveraged safe

harbor positions in gold and, to a lesser extent, oil; and in select
foreign currencies via cash or bonds. My rationale for this advice
stems from the fact that I cannot tell when the drama of
adjustment will occur, other than to say that it will happen
somewhere within the span of this forecast.

Like you, I have not experienced the set of conditions and

possibilities now unfolding worldwide. I look, and in almost every
direction I see an economic and political system that has
exhausted itself.

Within the United States both economics and politics were

organized into participatory activities. In the ideal, the idea was
to allow a large group of people access to activities that were
once the purview of elites.

The cost, or entry ticket, to open and free participatory activities

is informed consent. The informed part of the freedom equation
has atrophied.

When I talk to highly educated people, it's surprising to find that

they may be so highly specialized that they lack broad knowledge
about sociology, history, economics, and politics. The majority of
people don't have the time to become virtuous through
knowledge. They cannot contribute to effective governance.

In 500BC, Confucius put the importance of investigative

knowledge this way.
"Things being investigated, knowledge became complete. Their
knowledge being complete, their thoughts were sincere. Their
thoughts being sincere, their hearts were then rectified. Their
hearts being rectified, their persons were cultivated. Their
persons being cultivated, their families were regulated. Their
families being regulated, their states were rightly governed. Their
states being rightly governed, the whole kingdom was made
tranquil and happy."

I mention Confucius because his and other ancient eastern

philosophies are actively influencing the future of the world.

2.1. The Soft War: China vs. the US

China will solidify internal stability by procuring for its people

higher amounts of societal, and small amounts of marginal
(personal), purchasing power.

What of value does the United States provide China? The flow of
capital and machine tools has already occurred. IBM has sold its
personal computer license to Chinese interests. China is now
bidding for natural resource companies in Canada. It was also
alleged that a deal was struck between Russia and China
regarding the future disposition of the oil reserved once owned
by Yukos Oil. How can these absorptions benefit the strategic
position of the United States? The answer is of course that they
cannot.

The US cannot continue to provide value as a major consumer of

Chinese goods. The Chinese majority lack the purchasing power
to consume what they produce. Eventually, however, the Chinese
people will be economically empowered to be better equipped
consumers. Thus the flow of goods will shift.

Where possible, the Chinese will use soft power to achieve its
objectives. It will do so with a long-term view, with pragmatism,
and with the dynamism and depth of Asian philosophies.

By 'soft power,' I am trying to describe how China will design its

policies to benefit much of the world that the United States has
shunned. The United States works without subtlety, without
consistency, and with an overly direct and confrontational
approach.

In contrast, the term 'cooperative imperialism' might apply to the

Chinese method. For example, China may fund improvements in
Latin America that will result in it having access to a supply of
resources it needs.

As a cooperative imperialist, China will convince its partners that

they are working to mutual benefit. In fact, China will hold most
of the negotiating power. The Chinese too will become
imperialists. However, its satellites in a global sphere of influence
might not recognize this to be fact.

China has also applied a cooperative imperialist ethos to its

dealings with the United States. The Chinese know that US
politicians will do anything possible to buttress US purchasing
power through importation of cheap manufactured goods. The US
intentionally subjected itself to Chinese labor deflation because it
provided the illusion of domestic economic dynamism.

In the United States, "Hard power, the ability to coerce, grows

out of a country's military and economic might. Soft power arises
from the attractiveness of a country's culture, political ideals, and
policies."

The United States proved that it can move aircraft carriers

around. China will move its diplomats. Ultimately, the cost of this
"war" to the United States will be the American Dream. If bullets
fly they will do so over the issue of Taiwan, the Spratley Islands,
or to contain the possible re-emergence of Japanese military
might. I would rank the probability of a Chinese military
expedition in 2005 and 2006 as very remote.

US companies should not look upon China as a profit center. The

capital now provided by these firms will be replaced with input
from domestic sources.

Within the United States, "dramatic events" will eventually cause

the loss of domestic tranquility. These events will adversely affect
the Chinese economy, but any dislocation will be used to
restructure that country towards assertion. The time frames of
these two countries are entirely different.

I would expect the Chinese growth curve to be entirely different

from the Japanese economic miracle that was the envy of the
United States during the 1970s. The Chinese will build with
permanent impermanence, by which I mean they will initiate
impractical projects which speak more to the society's long-term
capability than to permanently addressing a major need.

The Three Gorges Dam project would be a case in point. The

Shanghai mag-lev train is another. These projects build
international "face" by asserting that China will become the
preeminent world power. Immediate practicality, and operable
longevity, plays little part in these initiatives. Thus, they will be
impermanent.

Make no mistake, however, that these initiatives are in fact

pragmatic endeavors because these types of projects illustrate
that a society has vision. A vision to grab hold in the future
whereby a long term experience base can be built which will
eventually justify and mainstream the seemingly impractical. The
United States used to have this kind of vision.

2.2. America as Visionary

The failure of the Shuttle program was not isolated drama; it was
instead illustrative of a systemic trend.

The US government dramatically lost its capability for manned

spaceflight because it lost the vision to do so. The explosion of
two space shuttles provided the drama, but the actual failure
occurred long before those two instances.

A thematic connection exists between the space program and the

declining dynamism of US policy. The main point being that as
US policy became bombastic, the innovation and follow-on
reformation occurred elsewhere.
A system for manned spaceflight will be reborn, and companies
like Scaled Composites will provide the momentum. They will do
so on a shoestring budget as well. Let's say that instead of a
company filling a leadership vacuum, that in the geopolitical
landscape a competing country, peoples, or region will do so.

The societal effects of visionary public policy initiatives are more

participatory than are privately sponsored endeavors because
they provide direct motivation and empowerment. They also
build a foundation for a future filled with technological
innovation. If all men are created equal, what would preclude
China or India from having an inventory of the smartest
scientists and engineers?

In the US, public policy initiatives can be created but cannot be

abandoned or modified or updated. The result has been selective
vision, a scatterbrained blurry kind of initiative, a condition ripe
for a dramatic unfolding of events.

Arbitrarily government either gets out of the way of technological

vision (because it cannot come to grips with change), or provides
arbitrary barriers to it. Due to religious feudalism, the
government has blocked initiatives into stem cell research. On
the other hand, the Internet contains more religiously offensive
pornography than the now politically correct 42nd street in NY
ever did.

Don't get me wrong, the United States certainly has its corporate
visionaries. Private initiatives are pursing technological
opportunities in nano-technology, ceramics, and private space
exploration.

Small companies are more flexible than brand name corporate

behemoths. Therefore they are responsible for the lion's share of
innovation. After any adjustment we will make it a point to invest
in these types of companies. But presently, the stocks of these
companies might be swept away with all the others in any
downdraft.

The declining dynamism of US policy has become a pervasive

theme. The September 11th attack did not produce more than a
stopgap approach to problem solving. The event itself
demonstrated a major lack of vision in a basic task of
governance, namely societal defense. Costs have been incurred,
governance has become rigid more oppressive and risky, little
else has changed.

In contrast, it could be argued that the Tianenman Square

uprising was a great enabling force for societal progress and
economic ascendancy. To the astute, the drama of disaster
brings with it some form of opportunity.

2.3. China, Russia, and the Shanghai Six - Kazakhstan,

Kyrgyzatan, Tadzhikistan and Uzbekistan - and for good
measure, let's add Georgia, Osettia and Chechnya.

The days whereby Henry Kissinger could play China against the
Soviet Union are over. Historical considerations, issues of trust,
and demographic incursions of territory aside, Russia (and the
surrounding region) has the raw materials and China has the
market.

Transportation systems will grow to meld common pragmatic

economic and political interests together. In contrast, any supply
chain that the United States might rely upon to transport oil
away from these two behemoths will have the resilience of "two
cups and a string."

Militarily, the two major players will continue to cooperate

against a common enemy, namely ethnic and regional dissent.
The Shanghai Cooperation Organization (SCO) puts it this way:
"Security cooperation focuses on the fight against the evils of
terrorism, separatism and extremism."

Of what use would the United States be to this growing

relationship, other than an irritant and/or a blocking force?

The United States has a sophisticated asymmetric military

presence in key cultural and geographic inflection points within
the Chinese and Russian sphere of influence. The US has
imposed itself as a splinter under the fingernail of an emerging
regional block. I would not be surprised if, in a crisis, US forces
were simply asked to leave.

The internal political story of both China and Russia can be

summed up as follows: If you give someone something new, they
will be happy. As long as the citizens of these countries see
gradual improvement in their purchasing power and standard of
living, they will generally ignore the political constraint of a
dictatorial system of governance. The global rebalancing will
occur west to east.

2.4. Playing India vs. Pakistan

Where does India fit in?

It was a reach in prior forecasts to suggest that India would work

with Russia and China as to eventually fit into a complementary
union. Instead China, and to a lesser extent Russia, may use the
India-Pakistani situation to advantage by encouraging instability.

Pakistan will never be a useful international partner, but India

will. Pakistan has had historic problems with self governance in
that it has never since inception enjoyed stability of leadership.

Instability between these two players prevents the United States

from pursuing a progressive policy in which it can become
warmer towards India and intentionally more distant to Pakistan.
China sees this.

Additionally, the US remains one Pakistani leader away from a

disastrous situation. Dysfunctional countries, and countries with
a weak internal leadership, see the atomic bomb, missile
systems, and other aggressive technologies both as a poison pill
and a nationalistic rallying point.

On a positive note, between 2001 and the present I

underestimated the potential for the United States to contain
and/or safeguard Pakistan's nuclear inventory. In the short term,
the United States has been very effective in containing Pakistan's
nuclear arsenal.

In terms of the nuclear card, the United States has been

consistently able to build a winning hand from a position of
weakness. It cannot afford to fail, not even once.

On the down side, America has lost credibility with the future
that is India. It has had limited results in meeting its objectives
against enemies lurking in the Pakistani badland, and it has failed
to contain Pakistan's slippery grip on the export of nuclear
technology. Popular (and frequently induced) hatred against the
prosperity and policies of the United States provide the thematic
twist to the story.

I am also certain that China asymmetrically asserted itself by

selectively providing technical expertise to an expanded axis of
evil. Dysfunctional countries can be partially but not completely
contained. Therefore, nuclear technology will leak. Eventually an
unstable nation, or peoples, will be impossible to deal with.

2.5. Preemption and Deterrence

A policy of preemption was a logical offshoot of this kind of bad-

to-worse quandary. Preemption represents an action done and
executed, not talked about. Roosevelt knew, and expressed in his
corollary to the Monroe doctrine, that the worst thing a national
leader could do in terms of credibility was to use "high sounding
language" and fail to follow through.

Preemption has not occurred as regards Iran, North Korea,

Pakistan and Saudi Arabia. The United States has not positioned
itself to preempt against a large strategic threat. Instead it has
used its reputation to skate along in the hope that time will solve
the myriad of strategic concerns which are relentlessly mounting
in number, potential impact, and scope.

The cost of preemption could be high in that it would radically

upset the status quo in favor of the drama of an unpredictable
situation -- a scenario to which the United States would have
difficulty responding.
Economically, politically and culturally the United States cannot
commit itself to the demands of a changed world. I am tired of
asking year over year whether or not the United States is at war.
Conventionally the United States lacks a draft and it still does not
have a wartime economy or the capacity defend itself and/or
mobilize.

It could be that a temporary and illusory situation now exists

because deterrence, rather than preemption, has been effective.
Many of the players in this global drama are small potentates,
like Libya.

When the country is a person unto himself, intimidation and

bluster can be very effective. These leaders see Iraq, and they
know that they must kowtow because the tiger has most of its
claws intact. If the tiger is wounded again, these leaders will
assert themselves into weakness.

Drama can happen in many unpredictable ways. The United

States can continue to be bogged down in Iraq, it could
experience a market adjustment, be roiled by a third party
regional conflict, or experience a terror event. It could suffer the
dislocation of an economic event, have an interruption in oil
supply, or participate in a conflict at a naval choke point. It could
be branded by the world community as a rogue nation!

This list is no more than an incomplete litany of possibilities.

Forget about the details; instead, qualify these potentialities as
risk factors.

Who would place one hundred percent of their purchasing power

into circumstances where the only certainty is a large overhang
of risk? The answer, of course, is Americans whose money is
trapped in US dollars.

2.6. Back to Iraq, Iran, and Saudi Arabia

Shortly after 9-11, a basic question was asked of some

unfortunate four star general regarding the next logical steps to
be taken in Middle East. We will call this fictionally illustrative
individual General Stan D. Down, because he no longer has a job.
In response to this query about what to do, the fictional General
Stand Down whipped out a non-fictional set of preexisting
planning documents. Like the framework for the Homeland
Security Department, academically envisioned wartime plans for
the Middle East were on the shelf and ready to use!

In the rush of crisis, the President can make any of these plans
national policy; however neither he nor the congress should be
expected to read these plans prior to implementation.

As I have mentioned in previous newsletters, the Middle East war

plan had its origin in the brainstorming that occurred during the
oil crises of the 1970s. The general listened carefully to his peers,
experts who sincerely believed at the time that nuclear suitcase
bombs would shortly be detonated in a major US city or two.

General Stand Down clearly stated that, "Under these dire

conditions, the first step to insure our national survival must be
to capture the oil fields in Saudi Arabia. The initial operation to
capture the fields will be a push over. Thereafter we need to
mobilize the nation. All our lives depend on it."

Daniel Perle, one of the administration's "Vulcans" (I am not

kidding!), chimed in: "Gentlemen, the Saudi oil fields are hanging
out in the middle of nowhere, we have our troops and supplies
prepositioned to do the job. We won't need to touch the Saudi
cities, the Islamic political problem in the Middle East and
elsewhere will become irrelevant to us. With Saudi oil, the war
effort will not be a problem. Additionally, we can choose which of
our allies to supply, therefore insuring our strategic and
economic dominance." Perle was eventually authorized to float a
trial balloon in this regard.

Major Quan Dary, the general's aide de camp and now an

unemployed civilian, made his fatal political move with full and
total sincerity. Major Quandary stated that, "As it stands, the
armed forces don't have enough manpower or material for a
protracted struggle. A quick takeover of Saudi Arabia would
afford us the benefit of using the equipment that they purchased
from us as interim supply."

General Stand Down chimed in: "In contrast to Saudi Arabia, we

all know Iraq has no strategic importance. Once we touch Iraq it
will be broken and our war games indicate that we will be in an
uncomfortable situation. Per our planning documents, we will
have little upside in terms of oil supply. Having to occupy large
blocks of land and to manage large numbers of people will
irrevocably erode our longterm strategic position. Of paramount
concern is Iran's nuclear capability and its relationship with other
nations undermining our interests. With our troops going into
Afghanistan and a position in Saudi Arabia, we can attempt to
isolate Iran."

At the following cabinet meeting, the now defunct secretary of

the treasury, Paul O'Neill, had his say. "First of all, we don't have
the domestic industrial capacity to wage the kind of war General
Stand Down was talking about. Our military supply chain has
been outsourced thus we will not be able to import the
component parts needed for everything from radios to J-Dams.
To have a future, we have to get our domestic house in order
before we do anything."

At this point Donald Rumsfeld lost his cool, "Paul, unlike you,
Dick and I have run some real kick ass companies, we are not old
farts wasting away at Alcoa! First off, I am going to grab the
generals by the nose and kick 'em in the tail, thus we will have
this war delivered to the American people like a sloppy Joe hero
packed in aluminum wrap."

Saving his political demise for a later day, Colin Powell stepped
into the fray. "Guys, we need to talk to more people, and we
need to build an international coalition."

Absorbing all this information, and having penny socials and

business deals with the Saudi royal posse, the President made a
bold decision. "Since we need to talk to more people, let's call
Henry Kissinger."

History will record that with Kissinger, the confusion ended.

Henry went on a media roadshow, ping-ponging between various
television interviews. His policy pitch was slicker than snake oil,
easy to understand, and would provide leadership where it was
lacking.

Heralded to one and all, Henry stated that, "The problem for the
United States is weapons of mass destruction. On this basis alone
Iraq has to be dealt with. The Saudis on the other hand can be
managed."

When Henry was asked by Charlie Rose if Iraq was a threat in

regard to WMDs, his answer was that "They are if the President
tells us that they are. The American people will believe him. Why
wouldn't they?"

And they did, the American people believed the president and
they reelected him. After months of angst and indecision the
President of the United States was elated -- he finally had a
policy.

Those that did not agree were shown the door. With a resisting
world community, and Colin Powell in tow, the United States was
moving towards an objective.

(As of December 2004, operatives, middle managers and top

executives of the CIA have hit the exits along with a bevy of
administration heavyweights, cabinet officials, civil servants and
generals. Voting with their jobs and pensions, the best interests
of many insiders reside in getting permission to go elsewhere.
The administration reserves the right to moderate the flow from
the floodgates.)

2.7. Policy, immobile or movable?

As a young manager I was once taken aback when my mentor,

an officer of a major public corporation, told me that one of his
jobs was to get the immobile moving. He was counting on me as
his proxy in a half-dozen countries to convince, trick, treat,
cajole, or bully his underlings into action. In the organization
food chain, all the people I was trying to influence were much
bigger fish than me. Like some stoic corporation, the United
States too can become stuck in an immovable situation.

Another great surprise to me was that this executive really did

not care whether or not the direction that things were moving
was correct or not. He was more concerned that movement
occurred simply because it extended the operational life of the
corporation. This was many years ago, and the corporation in
question will certainly fail within a year or two of this writing.

After September 11th, the United States had to do something or

all would have been lost. Against the wishes of the international
community, and with marginal domestic support, the managing
executives of the United States got the nation moving. The
direction taken was to go back to Iraq and into Afghanistan. The
real issues and concerns (a nuclear-ICBM enabled Pakistan,
Korea, Iran; and oil-rich Saudi Arabia as the true nexus of terror)
would have to be set aside for another day. Organizations
without vision, or without a sustainable future, have to move
forward because doing so will provide more longevity than doing
nothing.

3.1. US Dollars as the Common Denominator

Paper currencies are non-interest bearing, negotiable notes

drawn on the good faith and credit of the country of issuance. In
concept, the money in your pocket differs little from interest
bearing treasury bills and notes. When central banks buy US
dollars, they don't buy circulated paper currency. They buy bonds
and bills. All currencies not being equal, ratings agencies go
through all sorts of permutations and eventually a currency gets
assigned a "Sovereign Credit Rating."

Ratings criteria include such factors as purchasing power parity,

per capita GDP, inflation, growth rates, perceptions regarding
legal stability-corruption, political risk factors, years since last
default, imports versus exports, debt levels, and the list goes on.
Once value and risk have been defined, a yield needs to be set to
provide holders of these instruments with the incentive to hold
them.
Currency can be readily transferred as an exchange of value, it
has functional utility for that reason, thus as creditors we don't
require paper money instruments to provide yield.

The world would become so reliant on the debt of a single nation

that sovereign credit ratings and the risk reward curve are now
ignored. In 1995 the Federal Reserve Bank of New York must
have seen 2005 and 2006 coming when they stated that
"sovereign ratings are assessments of the relative likelihood a
borrower will default on its obligations." .... " Sovereign lending
has historically been a risky business. A burst in sovereign
lending in the 1920s-the closest precedent for the recent spiral in
sovereign bond issuance-ended with a wave of defaults during
the Great Depression. Twenty-one out of fifty-eight nations
defaulted on their international bonds between 1930 and 1935;
another four had already defaulted by 1929 (Suter 1992)." ...
"Moody's was one of many parties taken by surprise by the
extent of the sovereign default wave: a majority of the defaulting
countries had investment grade ratings from this agency in 1929
(Moody's 1981)."

Today world currencies are so interconnected they use dollar

holdings as a major store of collateral value. Were the sovereign
rating of the United States to be downgraded, to realistically
reflect fundamental value, or were the yield increased to reflect
growing risk, the world would experience a wave of global
default.

Entities buying or holding US dollars are creditors. Large

creditors know that were they to sell even a small amount of
their holdings, they would trigger a default. Therefore, the knee
jerk reaction of creditor nations has been to support the value of
the dollar. The creditors could also upset the market by failing to
buy additional debt, evidence exists this has just occurred.

With USD 1.9 trillion in currencies changing hands every day,

preserving a currency devoid of value becomes a very difficult
thing to do. It becomes even harder to save a currency that
grows debt faster than it can grow its future earnings potential.
In such circumstances monetary inflation occurs, the effects of
which are to cause necessity commodities like energy and food to
become expensive. The broad stroke of inflation also causes
leveraged and derivative assets to become overly attractive.
Debt multiplies gains and losses and the herd gets suckered into
chasing yield without considering the fact that on the down side,
their losses could exceed their working capital.

When this type of inflation fails to weaken the purchasing power

of a currency, then debt default forces the issue and a severe
adjustment occurs. When debt cannot be negotiated downward,
default usually follows.

3.2. Currencies, Real Estate and Easy Money

In 2004, and before that, the ability to earn "easy money"

abounded.

In its December 2004 report, The Bank of International

Settlements identified the fact that large traders were selling US
dollars (and the Swiss and Japanese currencies) to buy Australian
and New Zealand dollars. In doing so they were enlarging the
volume of the foreign exchange market.

Easy money could be found because the interest rate carrying

costs of short-selling US Treasury bonds was less than the yield
provided on Australian and New Zealand bonds. By selling
something you don't have but which has a low carrying cost,
selling short a borrowed US security, the money needed to buy
another currency with a larger revenue stream was free. In fact,
it provided a profit margin! With more buyers wanting Australian
and New Zealand bonds, the value of those currencies increased
against the USD, so amplifying profits.

Fundamentally, no reason exists to justify the type of capital flow

that has occurred towards Australia and New Zealand, two tiny
economies.

As a result of this inflow, asset valuations across the full

spectrum of Australian and New Zealand assets have bubbled.
Trade gaps, over leverage, and other symptoms speak to this
fact.

Ironically, Australia has in my estimation the best central

bankers in the world. Australia has consistently reduced its
holding of US debt. Through its rate policy it tried to lead the
United States and the world by example. Nobody was listening.

Interest rate differentials between currencies allow the Bank of

Japan to make easy money. They sell yen to domestic savers via
bank accounts, the revenue stream of these accounts depending
on Japanese Treasury Bonds. Then the Bank of Japan buys US
Treasury bonds because they provide a much higher return.
Artificial demand for the dollar is a benefit of this policy, and
intentionally so.

In September of 2004 the Japanese finally balked at purchasing

still more dollars. To prevent a panic, the dollar received broad
support from a spectrum of central banks, as described in my
December 10 newsletter: "The injection of volatility can be
construed as the input of artificially induced risk. So here we
have it. The only way the US dollar can be preserved is to make
it risky to sell it against the most popular and traded currencies,
which are the Australian dollar (AUD), the New Zealand dollar
(NZD), and the omnipresent euro."

The USD has been made risky to sell, but has also become more
risky to hold! But most US investors don't know how to hold
anything but dollars. Domestic US investors hold huge amounts
of wealth in overvalued dollar-denominated real estate, dollar-
denominated stocks and dollar-denominated bonds. The easy
money structure of these assets provides merely an illusion of
value.

For example, US domestic real estate has an easy money

structure. Instead of selling one currency against another,
mortgage lenders use differences in time and rate to their
advantage. Here, too, a leveraged bubble has been created.

Banks and finance companies, tax services and car

manufacturers are all addicted to easy money through arbitrage.
Individual investors are addicted to the upside of leveraged
investments.

In an adjustment, to occur and be visible by 2005 or 2006, these

easy money positions have to blow up. An adjustment has to
occur because everything has been mis-priced -- the majority of
assets in the global economic community, in fact. Creditors (or
their insurers) will have to absorb a loss. Savers, in their efforts
to obtain a return, have unknowingly extended credit.

The solution resides in diversification to points outside the

arbitrage equation, to those economies that are undervalued
because of resources or purchasing power, and to those
commodities which can function as a currency or which are
indispensable essentials.

With the rules of economic gravity intact:

1) the yen and Singapore dollar (SGD) should strengthen against

the USD; 2) the Canadian dollar (CAD) should be much stronger
than it is versus the euro; (but don't bet on it) 3) gold should be
getting stronger against the euro (EUR) JPY (yen), and the CAD.

The problem with this assessment is that the rules of economic

gravity are not intact. Credit ratings are out of kilter, yields are
out of alignment, and purchasing power parity valuations are
qualitative.

My conclusion therefore resides in chasing zero yield, and finding

the exits. The exists are those currencies and assets which are
the most difficult to purchase. The SGD, a permanent position in
gold as a currency, a straddled JPY position, liquidity-flexibility,
and later I will consider whether or not to re-enter the Swiss
franc. At some point I might want to be overweight to gold; it's
too early to tell. I want to see gold in a clear uptrend against the
EUR.

Gold should move up against the EUR. That currency has been
bubbled on the expectations that it has the fundamentals to
replace the USD as a reserve currency. It does not. Smart
Europeans have, as discussed previously, been moving money to
the Swiss franc.

At the start of this thesis I concluded that, "Beyond the

symptomatic details, the world needs to figure out how much
labor will be worth, where goods will flow, and to whom
purchasing power will be allocated."

In 2005 and 2006, neither a borrower nor a lender be. The

problem with that axiom being that currencies stored in a bank
account, bond, stock, or in your pocket, are nothing more than
credit! Gold, oil, rare materials and food stock are value storage
alternates that come to mind.

4.1. Oil

Without considering the current market price of oil, I am fully

confident in drawing the conclusion that an oil shock did in fact
occur during 2004. Simply put, more people are competing for
lesser amounts of cheap oil worldwide. Oil is the ultimate
diplomatic tool. The controller of the oil is the sculptor of the
global economic and political framework.

Any economic or military power needs access to energy. A glance

at the map shows that cheap oil was naturally located in the
most conflict-prone or remote regions of the world. Additionally,
with oil being harvested in remote and unstable regions, can it
retain its ability to be cheaply and reliably transported?

The "oil shortage story" has been unfolding since the 1970s, so
we should not be surprised at any drama that might occur in
coming years. It's highly likely that a crisis will unfold during
2005 or 2006.

During 2004 it was prudent for President Bush to fill the Strategic
Petroleum Reserve. It was a wise move regardless of its impact
on oil prices. Paradoxically, an oil shortage could be assuaged by
a global economic slowdown because, in the United States,
personal transportation (not heating) represents the primary use
for oil.

Oil in the SPR might be adequate to command oil towards the

direction of next immediate crisis, but then again it might not.
These reserves cannot address the fact that since the 1970s the
US has had no energy vision. A fully stocked reserve provides a
next step, not a solution.

In 1977 the much-maligned Jimmy Carter presented an energy

action plan "to give our children and grandchildren a world richer
in possibilities than we've had." I suggest that the US vision was
in that decade at an important inflection or crisis point.

It was a point in time when we could have chosen the harder and
more sustainable path. With the Reagan administration strategic
focus was placed on the Soviet Union, with the oil crisis left for us
to deal with now. The Soviet Union fell, but was a victory over
the evil empire really won?

Russia may not have the military might it did, but neither does
the United States. The net present value of people to resources
within Russia is much greater than in the United States. After a
few setbacks, Russia may become more visionary.

4.2. Agriculture

Our food supply and domestic agriculture system stands

vulnerable to events of variable and multiple complexity. It's
always a great surprise when a system we rely upon for seamless
operations breaks in some unexpected way.

I am not quite sure how the failure will manifest itself, or how
severe it will be, only that it will occur. The knee jerk reaction to
any agricultural dislocation will naturally be price inflation. At
what point, however, does inflationary price pressure in this
sector constrain people from obtaining a necessity?

The domestic food production system relies heavily on fertilizer.

Fertilizer depends upon energy input. In 2004 the dislocations we
experienced in energy supply, which drove up prices, must and
will transfer to the agricultural sector. It will make no difference
if oil supply increases in late 2004 and 2005, because the costs
of the initial price change have already occurred.

Investment in land conservation-sustainability and water

infrastructure have not occurred because an oligarchy of
corporations (some privately held) maximize profits by depleting
and depreciating the foundation stock of agriculture -- land. The
farm stock of America, land, has been depleted of important
trace nutrients. Selenium would be but one example.

A similar dynamic occurred in regards to the failed electric

distribution system of the US in 2004, the rail system, the
natural gas pipelines, and public transport. How could anyone be
so naive as to assume that agriculture can be any different?
Depletion means fragility.

Imports will initially compensate for decreased domestic

production. Exchange rates will make these imports overly
expensive. Additionally, China and other nations will look to build
strategic partnerships with countries worldwide, such as Brazil, to
secure the agricultural resources they will need.

A system can also be forced to fail to the will of politics. Trade

protectionism provides one party with benefits and one with
costs. The US corporate oligarchy benefits by having the flow of
food from Canada to the US constrained. With increased price,
reduced supply and inelastic demand, consumers lose and
bottom line profitability goes up.

5.1. Currency controls, Customs, and the Transport of

Monetary Instruments

Transiting between the US and Canada as I regularly do, I need

to report to you the factual impression that the surreal has been
trying to assert itself. Most of the aberrations occur when
crossing from Canada to the US side.

This time around, a question was asked of me on the Amtrak

train, by the US agent, as to whether or not I was carrying more
than $10,000 worth of monetary instruments including checks
and cash. The folks on the US side have figured out that terror
can be prevented if you keep cash money from landing on US
shores. Not being a terrorist, I am not interested in moving
money into the US. Instead I have been steadily moving money
out!

I don't want all my money sitting in a US brokerage house, even

if that account can purchase gold shares and foreign currency
denominated bonds. For safety, a portion of my wealth has to be
located outside the United States, period. As actionable advice, a
portion of your wealth needs to be allocated outside this country
as well.

The last time I moved gold to Canada, in my car, I made sure to

declare the fact that I was moving more that $10,000 worth of
gold so I had Homeland Security and Canadian forms ready. The
gold was in the form of .9999 bullion bars and the Homeland
Security folks would not take my form.

The guys in blue wanted to see what the gold looked like, and
they asked me what each little bar was worth. To them it was not
money but a commodity covered by NAFTA. Coins would be
another issue entirely. Anything coin shaped could potentially be
construed (or not, depending on someone's discretion) as a
monetary instrument.

On the Canadian side they took my form but they were not sure
if they needed it or not. They wanted to be sure that I made my
US declaration before moving the gold. I guess they are obliged
by treaty to cooperate with the US when it comes to enforcing US
law. Lesser quality gold and US coins would be another issue to
Canada Customs, and the transfer or either might be subject to
taxes. For this reason I only recommend the purchase of gold
bars.

The moral of this story is that the US side of the border

has not yet figured out that they need to keep money in
the country. Economically, they are looking in the wrong
direction.
Money can flow out of the country, and it won't be confiscated as
long as you have your paperwork in order. If you were to wire
money out of the country, your bank would look the transaction
over to assure itself that it complies with homeland security
regulations. In the economic crisis, between now and 2006, it's
likely that it will become increasingly difficult to move money out
of the US.

My experience transiting the border tells me that drama may not

be too far off in the future, at which point it will be structurally
impossible for your money to find an exit. By that time currency
controls may be in place, and hopefully we will have advance
notice before they stop the flow of people looking to exit the US
as well.

5.2. Command Economy vs. Socialism

If an expanding number of people are unable to afford

necessities, they are going to get angry. As an inhabitant and
denizen of NAFTA I have perspective from both sides of the US
and Canadian border.

I get to enjoy the diametrically opposed but equally frustrating

operating philosophies of two styles of governance. In the US we
have a republican oligarchy whereby a select group of the
familiar and economically privileged exchange leadership
positions. In Canada, majority rule can be a cruel dictator to the
excellence of private sector initiative. Both systems can be either
enabling or oppressive, based on your perspective.

The unworkable universal solution on the Canadian side of the

border usually consists of greater amounts of socialization and
taxation. When people are hurting, the initial reaction is to throw
money at the problem. Over-governance must find a funding
source, so the productive parts of the private economy are
pummeled.

In the United States the selective solution of choice will be the

Halliburton model. The concentration of wealth will occur to the
extent it can.
Nobody in the younger generations knows how to protest
effectively, and the Vietnam generation is just too tired, strung
out and scattered to provide leadership. In 2006 I envision
"homies" milling about their destitute middle class neighborhoods
in much the same way they were doing when I did some door-to-
door campaigning in Pennsylvania.

I cannot envision a time where the US would find a

comprehensive socialistic solution to anything. I doubt that the
next New Deal could take hold under the present structure of US
governance. It's more likely that the economy will be selectively
commanded into action, and that the result will be the selective
allocation and concentration of wealth. This is what I mean by
the Halliburton model. This will occur until the system breaks
entirely, at which point someone will take advantage of the
situation.

Sarcastically speaking, in the race to be a savior I would not lay

odds on Elliott Spitzer, Jeb Bush, Hillary Clinton or Carlos
Menem. To assume that democracy remains or even exists as
functioning governance should be considered naive. In this
respect Canada has much more stability, stability being a
cornerstone of investment.

Even if things got so bad in the US that it had a "cultural

revolution," a question remains as to whether or not US citizens
still have the skills and inclination to work in the dirt building rail
systems, or stamping out metal parts in a factory. Does the US
have the capital stock or machine tools to do so? Do we have a
foundation in the practice and physical economy of true
productivity?

The United States might experience a long period of economic

stagnation until such time as the natural hand of dislocation has
its way, correcting all the structural imbalances that need to be
worked out of the system.

5.3. A Canadian Wilderness Guide

Saving money is hard for individual Canadians. It's very hard to

accrue a large enough pool of savings-capital in order to
participate in ventures that harvest leveraged profits from
intrinsic natural resource wealth. Here too the Canadian
government has an answer: allow the sale of untapped natural
resource deposits to the Chinese in the hope that it will generate
jobs.

What a foolish strategy -- giving your wealth away, your real

physical wealth! A fire sale of wealth designed to address a
transitory social concern like employment.

If the Canadians are foolish enough to tax, socially reallocate

their strategic advantages, or just give wealth away, then why
not as an international investor take the windfall that has been
offered?

Oh Canada, hear the words of Veblin: "Abstention from labour is

the convenient evidence of wealth and is therefore the
conventional mark of social standing; and this insistence on the
meritoriousness of wealth leads to a more strenuous insistence
on leisure. Nota notae est nota rei ipsius."

Time will tell if Canada has the midset of governance to prevent

it from becoming another Saudi Arabia, a country rich in wealth
but filled with poor people. For Canadians to become rich they
need to be able to form capital, they need to develop business
acumen, have confidence, and say no to social governance. With
capital, they could become part of Veblin's leisured class. If you
are an international investor, be aware that Canada is running a
fire sale on wealth.

5.4. Pandemics and Other Questions

On this issue I have more questions than answers.

Could the bird flu or some other plague force the restructure of
global free trade? Could a pandemic be used as an excuse for a
failing economic system? How will pandemics affect air travel?
Could a pandemic be used as a method for making the world
more sustainable through asymmetric theocratic genocide?
"The Bush Administration is spending millions of dollars on
abstinence-only programs that mislead people at risk of
HIV/AIDS about the effectiveness of condoms," said Rebecca
Schleifer, another Human Rights Watch researcher. "Exporting
these programs to countries facing even more serious epidemics
will only make the situation worse."...

To me this issue supports the contention that the world will

become less global and more regional.

5.5 Blockbuster Drugs and Bad Movies

Corporate executives don't feather their wallets by hitting

singles, they need to constantly hit home runs. The rest of us,
and society at large, would be much better off if the spectacular
was replaced by consistency and conscience.

Big pharmacy has been playing the same irresponsible tune as

Enron, airlines, energy, mortgage lending, and everyone else.
The difference between movies and drugs being that when
corporations try for the blockbuster movie, nobody dies.

5.6 The real estate bubble that ate the stock market
(reprint)

Real estate's contribution to the over-inflation of the Dow may

prove to be the greatest of all present economic dangers to the
US economy. The current price-to-earnings (P/E) ratios of
financial service companies are very low. This means the lack of
profitability elsewhere has been artificially masked. But what do
the forward ratios look like? I contend that, on a forward basis,
aggregate P/E ratios are back at historic highs. Current market
P/E ratios are high by historic standards. But they are low
according to media opinion, and this has led to complacency and
misplaced optimism. Highly profitable financial companies have
low current P/E ratios but their earnings have clearly peaked.
We know that demand for new mortgage originations is slowing.
"Industry-wide, residential mortgage originations were
approximately $800 billion during the second quarter of 2004,
down from approximately $1,075 billion in the second quarter of
2003." (Source: Inside Mortgage Finance.) The present danger
resides in the point that most of the easy money in the mortgage
industry is made through mortgage resale and loan origination
activities. This is why there is no shortage of lending companies
and salespeople. Low-hanging fruit tends to be the most
profitable. To retain forward earnings, financial companies must
continually write more and more business. At the current point of
saturated demand, this cannot occur. Yet, while some companies
are already laying off, others are hiring aggressively, and all of
them are adopting risky business strategies. The companies
which are laying off workers are doing so in order to retain
bottom-line earnings. As a leading indicator of stock market
over-valuation, consider this fresh report from the Bureau of
Labor Statistics: "Employment in financial activities fell by 23,000
in July. The credit intermediation industry, which includes
mortgage banking, shed 16,000 jobs over the month. Securities,
commodity contracts, and investments lost 4,000 jobs." Other
mortgage lenders are trying to hire mortgage originators as fast
as they can. This too may be a sign of failure. The managements
of these companies don't yet realize they cannot market pencils
to paupers. Some companies are bloating their balance sheets
with assets (loans) so they retain earnings in a downturn. We
know these assets are increasingly risky because the companies
themselves report that they are selling sub-prime and exotic
products. I just finished reading the latest 10Q of a large
financial institution. It suggests that net yield on asset base has
also been declining. To these banks, changing interest rates
means that non-hedged portfolio yield has declined year over
year. Portfolio size and risk will rise concurrently. A masking
factor exists in that bottom-line corporate profits are sticky,
because they can be managed. However -- and this is not for the
faint hearted -- the danger can be seen lurking in the footnotes
of financial statements everywhere. The next accounting scandal
resides in the depths of financed real estate. Perhaps well
intentioned CPAs will be summarily executed. A contraction in
new loan originations will have a dramatic effect, and not just on
the health of mortgage companies. Lower earnings for this
important sector will raise the consolidated price-to-earnings
ratios of the major stock indexes. In a real estate contraction,
the stock market and employment will adjust long before the
main event, which is the collapse of real estate properties and
valuations.

5.7 Using Sarbanes-Oxley as a Crucifix

As the economy cascades, the Sarbanes Oxley act will be used in

a selective fashion, to criminally prosecute as many corporate
fiduciaries as it takes to placate the mob.

Presently, legitimate corporations are chasing their tails, with

multiple auditors in tow, in hopes that they will generate enough
paper trail to claim that they are complying with the nebulous or
the impossible.

Fraudulently structured corporations are signing off on

compliance documents because they have no choice other than
to do so. Guys like Franklin Raines, the now departed CEO of
Fannie Mae, have been willfully certifying financial statements
that cannot be fairly presented because their companies would
have failed under their tenure thereby collapsing the US
economy. Unless he wins on the merits of ignorance, insanity, or
admitted incompetence, he will be crucified.

"This situation with Fannie Mae raises big, red flags by former
Wall Street financial wizards like Harvey Gordin, President of El
Dorado Gold "There are great concerns about mutual funds that
have invested in debt and mortgage-backed securities issued by
Freddie Mac, Fannie Mae and the Federal Home Loan Banks
(FHLB). Thirty percent of the loans being carried by these entities
are substandard. Even though these investments must be
disclosed in any fund's registration statement, too many
investors incorrectly assume that such securities are backed by
the full faith and credit of the U.S. Government. They are not.
While these operations are chartered or sponsored by Congress,
they are not funded by Congressional appropriations. This means
that those debt and mortgage back securities are not guaranteed
or insured by the U.S. government."

6.0. Reading

http://www.wto.org/english/res_e/booksp_e/anrep_e/world_trad
e_report04_e.pdfhttp://www.indiana.edu/~japan/digest6.htmlhtt
p://www.econlib.org/library/Mackay/macEx.htmlhttp://classics.m
it.edu/Confucius/http://www.ksg.harvard.edu/news/opeds/2003/
nye_usiraq_foraffairs_070103.htmhttp://www.chinaonline.com/r
efer/ministry_profiles/threegorgesdam.asphttp://www.travelchin
aguide.com/attraction/hubei/yichang/three-gorges-
dam.htmhttp://home.wangjianshuo.com/archives/20030809_pud
ong_airport_maglev_in_depth.htmhttp://www.pbs.org/wgbh/am
ex/carter/filmmore/ps_energy.htmlhttp://www.china.org.cn/engli
sh/FR/9686.htmhttp://english.pravda.ru/world/2002/12/02/4025
8.htmlhttp://carlisle-
www.army.mil/usawc/Parameters/03spring/malik.htmhttp://socs
erv2.socsci.mcmaster.ca/~econ/ugcm/3ll3/veblen/leisure/chap03
.txthttp://www.bis.org/publ/qtrpdf/r_qt0412.pdfhttp://www.ustr
eas.gov/organization/bios/oneill-
e.htmlhttp://news.ft.com/cms/s/a5f52dfa-5462-11d9-a749-
00000e2511c8.htmlhttp://www.newswithviews.com/NWVexclusiv
e/exclusive42.htmhttp://law.wustl.edu/WULQ/Hodge/2003/

December 28, 2004

Warren Pollock
The Macroeconomic Newsletter