BusinessWeek Magazine - Oct.20, 2008

THE BUSINESS BOOM UNFOLDING DOWN ON THE RUSSIAN FARM by Jason Bush (excerpt)

Farming in the area (ie.Usman, rural district 300 miles south of Moscow), and across Russia's traditional grain belt, is making a comeback. Commodities traders, food processors, shipping outfits, and others are buying up farms, hoping to cash in on high global grain prices. These new investors are pouring billions of dollars into land, then revamping management and technology in operations that span thousands of acres. Today, large agricultural holding companies control some 10% of Russia's farmland, up from 4% in 2003—though in the most productive areas they have more than a quarter of the land, according to the Institute for Agricultural Market Studies in Moscow. "There's huge potential here," says Robert Coleman, a South African who oversees farms in the region for Agro-Invest, a Moscow group that owns 100,000 acres around Usman. "We've invested in big machines, are applying Western ideas, and are getting great results."

It's easy to see why there's so much interest. The U.N. says Russia has some 480,000 square miles of arable land—an area more than twice the size of France. That's 8% of the world's total, much of it highly fertile "black earth." But owing to decades of agricultural mismanagement, Russia accounts for less than 4% of global crop production and is a net food importer.

THE NEW AGE OF FRUGALITY by Steve Hamm (excerpt)

On a shady lane in New Hope, Pa., a quiet revolution in American culture may be taking shape. Here, a family of four lives in a white, colonial-style house in a manner that once would have been considered All-American but more recently has been seen as just plain weird: They're frugal.

Meet Leah Ingram, Bill Behre, and daughters Jane, 13, and Annie, 11. They walk most everywhere, they rarely eat out, they sometimes buy clothing at consignment shops, and they turn the lights off when they leave a room.

Theirs is no hard-luck-in-a-recession story. The Ingram-Behre family is solidly middle-class, fully employed, and not especially threatened by the conniptions gripping Wall Street. Behre, 43, is a dean at the College of New Jersey, while Ingram, 42, is a successful freelance writer and etiquette expert. They have no credit card debt.

That's now. A little more than a year ago, the family was ensnared in America's consume-at-all-costs culture. During the days of soaring home prices and easy credit, they took out a $101,000 home-equity loan on a previous house and spent lavishly on a lifestyle upgrade—going on three cruises in two years and taking the kids on annual pilgrimages to Disney World. "After 9/11 it became patriotic to shop, and we became as patriotic as anybody," laments Behre, sitting in the dining room after a meal of chicken stir-fry—washed down with tap water.

Ingram and Behre are harbingers of a dawning Age of Frugality. People who overconsumed during the past decade are now rejecting extravagant lifestyles. They're spending less, and more wisely. Some are getting their finances in order. Others are fearful of losing their jobs, shocked by investment losses, or hunkering down amid the general uncertainty.

The penny-pinching is already showing up in the numbers; this quarter could mark the first fall in personal consumption in 17 years. And with credit tight and Americans loaded down with $2.6 trillion in personal debt, consumer borrowing dropped in August, the first such contraction since 1991. Menzie D. Chinn, who teaches economics at the University of Wisconsin, figures consumers won't be in a position to spend freely for five years.

Which brings us to what John Maynard Keynes called the paradox of thrift. What's good for the individual, argued the famous economist, can ignite or deepen a recession. But that won't deter the newly thrifty. "I can't help the economy," says Kim Schultz, a resident of hard-hit Avoca, Mich., who with her husband, Jon, owes $40,000 in credit-card debt. "I've got to help myself." On the other hand, this newfound austerity could—emphasis on could—rewire Americans as savers rather than spenders. And that would help put the economy on a sounder footing over the long haul.

COSTCO'S ARTFUL DISCOUNTS by Jena McGregor (excerpt)

At Costco, where more than 29 million households pay $50 to $100 a year to shop, low prices aren't just a nice-to-have. They're a way of life. Not only does Costco's famously frugal CEO James D. Sinegal cap margins at a sacrosanct 14% on branded goods, he's constantly pushing his buyers to find creative ways to lower prices and add value while getting his managers to crank up their efficiency efforts. Besides the buy-in strategy, Costco has been redesigning product packaging to squeeze more bulky goods onto trucks and revamping processes for moving goods through its depots. Even small tweaks to its well-oiled operations can have a big impact. "If that stuff doesn't really turn you on," says Sinegal, "then you're in the wrong business."

Such tactics are keeping customers' shopping carts full—the $72 billion retailer's sales have been one of the only bright spots in today's brutal retail economy. But they've also been pinching profits. As commodities surged over the summer, Sinegal's call to hold the line on pricing helped prompt Costco to warn in July that its fourth-quarter earnings would be "well below" expectations. On Oct. 8, it announced quarterly net income of $398 million, slightly lower than Wall Street's revised expectations.

But to Sinegal, the short-term earnings pain is worth the potential for long-term market share gain. For one, holding prices low is the best way to protect profits: About 75% of Costco's operating earnings come directly from membership fees, and if prices rose too quickly, some members could flee. In addition, the 72-year-old warehouse club veteran knows that in this environment, Costco's reputation for bargain prices and surprise designer goods could inspire a new crop of warehouse chic devotees. "We should shine at a time like this," he says. "We have always believed that great companies build market share in really tough times."

What Sinegal isn't doing is wavering from the basic model that helped him and co-founder Jeffrey Brotman build Costco into a retail phenomenon. The Issaquah (Wash.)-based company's warehouse model relies on selling core items at rock-bottom prices while scooping up excess inventory from high-end brands. The here-today, gone-tomorrow nature of Costco products tends to foster carts full of impulse buys. The average store does $137 million in annual sales, a volume so high that Costco turns its inventory 11.9 times a year, meaning it often sells goods before it technically has to pay its suppliers. Combine that with high-income customers—the average Costco household makes upwards of $75,000—and "what they're doing is really high velocity retailing," says Boston Consulting Group Managing Director Michael Silverstein, who has studied Costco.

Even CEOs who'd rather not find their designer brands discounted in a warehouse are happy to say they shop there. "I think they have a terrific concept," says Eric Wiseman, CEO of VF Corp., which owns the North Face and 7 For All Mankind clothing lines. David Novak, CEO of YUM Brands, says he buys wine and cleaning equipment there. And QVC CEO Michael George is a proud card-carrying member of one of the first Seattle stores. "You don't just go there for bargains," says George. "You go there for the treasure hunt."

Lately, the loot in that treasure chest is getting even more high end. Over the last year, Versace dinnerware, Waterford crystal, and pastel girls' Lilly Pulitzer dresses have all made their way into Costco's stores, either through new direct selling agreements or diversions from distributors. As consumers cut back, Costco is finding more available inventory and fielding more calls from companies hungry to boost slumping sales. "I think their store will probably look like Saks pretty soon," says an executive at one popular high-end fashion brand. "Their ability to sell stuff is staggering."

"In a tough economy, the ability to change your assortment towards products that are selling more is a huge advantage," says Michael Clayman, a former buyer for Costco and the editor of trade publication Warehouse Club Focus. "If the item isn't a value anymore, or isn't generating the sales hurdles, it'll be deleted."

To hedge against price increases, the giant retailer is even taking the unusual step of commissioning its own pumpkin patches. For years, Costco has offered customers a pumpkin pie for $5.99, selling more than a million of the store-baked pies in the three days before Thanksgiving. Despite margins getting whacked by higher prices on canned pumpkin prices, Costco has opted to maintain its price. So this year, Jeffrey Lyons (head of fresh-food buying) began testing a way to get around the food processing companies' high prices, asking some of the farms that grow its melons to cultivate pumpkins. It will experiment with using the pumpkin in some of next year's pies. "It's not beyond us to figure this out," Lyons says. "We won't be held hostage."

Costco has even gotten vendors to redesign product packages to fit more items on a pallet, the wooden platforms it uses to ship and display its goods. Putting cashews into square containers instead of round ones will decrease the number of pallets shipped by 24,000 this year, cutting the number of trucks by 600. By reshaping everything from laundry detergent buckets to milk jugs, Costco has needed 200,000 fewer pallets a year overall.

Sinegal acknowledges that he can't hold back the cost increases forever. Indeed, within the past six months Costco has twice raised the price of its popular rotisserie chickens, by a total of 20%, to $5.99. But he isn't giving in to higher costs without a fight. "The biggest concern to me is that we lose our way and start thinking it doesn't matter if you charge another dime or another dollar or another hundred dollars," he says. "Without those disciplines, we don't have anything."


WINMARK: A BRIGHT SPOT IN DARK TIMES by Jane Porter

Hard times have been pretty good to Rita Cortese. Since 2006, she has owned a Plato's Closet used clothing store in Deptford, N.J. In recent months, Cortese says, business has exploded as people descend on her store to buy or sell castoff shirts, dresses, and jeans. Cortese is so busy she recently built a shed out back to contain her overflowing inventory.

Winmark, the Nasdaq-listed company that sold Cortese her Plato's Closet franchise, is a rarity in a scorched retail landscape: It's growing rapidly and making money. Sales at Plato's Closet outlets open more than a year were up 19.6% in August, vs. 1.7% for the industry as a whole. "I don't wish this economy on anyone," says John Morgan, Winmark's chief executive. "But we're going to make hay while the sun shines."

The company that would become Winmark was born 25 years ago as Play It Again Sports, which sold used hockey sticks, baseball mitts, and so forth. Ten years later the company went public as Grow Biz. But by 2000, it was suffering the usual ills of overexpansion. Enter Morgan, who renamed it Winmark and focused on four franchises: Play It Again Sports, Once Upon A Child (kids' apparel), Music Go Round (used musical instruments), and Plato's Closet (which, like the other franchises, also sells some new items). Today, Winmark has 861 stores nationwide.

Franchisees pay a $20,000 one-time fee, plus 3% to 5% of weekly sales. In return, Winmark provides the business model, training, and marketing. "All the risk falls on the franchisee," says Graeme Rein, research analyst for Bares Capital Management, which owns 14% of the company. "It's on their shoulders to create a profit." Because franchisees pay cash on the spot, they have powerful bargaining leverage. For example, Cortese pays $6.80 for a pair of Hollister jeans and resells them for $18.

Since consumers are going to be hurting for a while, it's a fair bet that Winmark, whose stock has suffered this year along with the rest of the market, will continue to outperform the retail sector. Not that Morgan, who owns a quarter of the company, is standing pat. He's plowing Winmark profits into another franchise operation he expects to do well in hard times—leasing office equipment to credit-parched small businesses. And guess who he's recruiting to run the franchises: managers who've lost their jobs.

ZARA THRIVES BY BREAKING ALL THE RULES by Kerry Capell

ARTEIXO, SPAIN Many U.S. apparel retailers are choking on slow-moving inventories as consumers hold back on spending. But Spain's Inditex, whose Zara chain pioneered cheap chic, is zipping ahead. The $13.8 billion company, which is closing in on Gap for the title of world's biggest clothing retailer, has nearly quadrupled sales, profits, and locations since 2000. This year, Inditex plans to expand by up to 640 stores. "They will weather the storms better than most of their rivals," says Michael Lewis, a supply-management professor at University of Bath's School of Management.

Inditex's secret? Besides selling relatively cheap clothes, which fit the times, the company maintains an iron grip on every link in its supply chain. That enables it to move designs from sketch pad to store rack in as little as two weeks. This "fast fashion" way of doing things has become a model for other apparel chains, such as Los Angeles-based Forever 21, Spain's Mango, and Britain's Topshop, which is set to open in New York next year.

Inditex has spent more than three decades perfecting its strategy. Along the way it has broken almost every rule in retailing. At most clothing companies, the supply chain starts with designers, who plan collections as much as a year in advance. At Inditex, Zara store managers monitor what's selling daily—and with up to 70% of their salaries coming from commission, there's a lot of incentive to get it right. They track everything from current sales trends to merchandise customers want but can't find in stores, then shoot orders to Inditex's 300 designers, who fashion what's needed instantly.

Typically, apparel chains outsource the bulk of production to low-cost countries in Asia. Inditex produces half of its merchandise in factories in Spain, Portugal, and Morocco, keeping the manufacturing of the most fashionable items in-house while buying basics such as T-shirts from shops in Eastern Europe, Africa, and Asia. Wages are higher at Inditex—its factory workers in Spain make an average of $1,650 a month, vs. $206 in China's Guandong Province. But the company saves time and money on shipping. Also, Inditex's plants use just-in-time systems developed in cooperation with logistics experts from Toyota Motor, which gives the company a level of control that would be impossible if it were entirely dependent on outsiders.

In addition, Inditex supplies every market from warehouses in Spain. Even so, it manages to get new merchandise to European stores within 24 hours, and, by flying goods via commercial airliners, to stores in the Americas and Asia in 48 hours or less.

Air shipments cost more than transporting bulk packages on ocean freighters. But Inditex can afford them. The company produces smaller batches of clothing, adding an air of exclusivity that encourages customers to shop often. As a result, the chain doesn't have to slash prices by 50%, as rivals often do, to move mass quantities of out-of-season stock. Since the chain is more attuned to the most current looks, it also can get away with charging more than, say, Gap. "If you produce what the street is already wearing, you minimize fashion risk," notes José Luis Nueno, a marketing professor at IESE Business School in Barcelona.

For rivals hoping to mimic Inditex's results, analyst Luca Solca of Sanford C. Bernstein has a bit of advice: Don't follow the Zara pattern halfheartedly. "The Inditex way is an all-or-nothing proposition that has to be fully embraced to yield results."

READER COMMENTS:

Zara is a interesting case study. Together with Apple, they seem to be redefining the process of delivering consumer products. Both exercise tight control over process and are optimized to meet customer demands rather than mere supply side cost management. The freedom, store managers enjoy at Zara to get the stuff they expect their customers to pick up, and Apple stores that allow customers to walk-in and talk face to face with service people, reasserts that the "human" acting as the bridge between customer and company can still make a difference on customer experience and profits. -Ajay

In the Zara model, who in the supply chain holds the raw materials inventory (fabric, zippers, trims, etc.)? How far in advance to they have to commit to it, and how do they know how much to buy? -mark erickson

I wonder if it is sustainable? As they open even more stores is their supply chain scalable enough to sustain the model and keep their tight processes on track? They certainly know how to run a value chain and make it hum but I have some concern that it may start getting too big to properly manage as they face more constraints. -TR

Thanks very much for your responses to the story. @TR: Yes, the challenge Inditex faces is as it expands further from Spain will it still be able to wield the tight control over its supply chain. I think it is sustainable as long as like-for-like sales are growing--if these fall for say, several consecutive qrts and Inditex's costs rise, it could be difficult. @mark erickson: Inditex owns 100 other companies that handle various parts of its supply chain. So for instance, Zara sources around 40% of its fabric from another Inditex-owned company, Comditel. Fabric is purchased in grey so that it can be dyed in season to react more quickly to trends. Prof. Nueno says Zara commits to 35% of raw material purchases and up to 50% of purchases of finished products once the season has already started. -kerry

Zara has excellent products, but the service in its stores is terrible - long lines at the cash register, the runaround for simple returns, etc. I've stopped shopping there. -Kay

It was about time Inditex entered the US market. Here in Europe we've been studying ZARA strategies as a very good example of SWOT analysis and Competitive Advantage. Thumbs up Inditex, break the american rules ;) -Ermela

Zara has another interesting thing. They spend ZERO on marketing. No advertising, no marketing stunts, nothing. Just good prices and word-of-mouth. -Lucio

Sounds like a standard model for success. Give 'em what they want, don't pick up deadwood, stay lean and flexible, be adaptable and move fast. -Christopher H

Although Zara's clothes are fashionable and very cute, I believe they also keep their costs low by producing low quality clothing. I have bought several items there, only to have them fall apart in a matter of weeks. A friend and I who bought the same sweater weeks before me, were in amazement as our sweaters fell apart in unison week after week, until while travelling in Austria in dead winter, I was forced to buy a new one...Never shop there if you would like your clothes to last for the season...Never... -Former Zara Shopper


A CONTRARIAN'S GUIDE TO UGLY MUNIS by Aaron Pressman
Oppenheimer Funds' Ron Fielding likes to find gems among tax-exempt bonds that others dump—and often winds up scoring big

"They do take on a lot of risk," says Morningstar analyst Greg Carlson. "But they've got a pretty impressive research team, and they've gotten so many calls right over the long term."

Contrarian's Guide


BusinessWeek - Oct.20,2008

Perspective is Everything

Leading Church Bodies of America - 2000
(incredimazing.com)

Click on map to enlarge.

Perspective is Everything

(incredimazing.com)

Perspective is Everything

BP Statistical Review - 2004
(incredimazing.com)

Click on map to enlarge.

mafiaboy

As a 15 year old, Michael Calce aka "mafiaboy" made history when he shut down CNN, Yahoo, Amazon & ebay.

The Hour interview
cbc.ca/thehour/videos.html?id=882780325

How I Cracked the Internet & Why it's Still Broken
amazon.ca/Mafiaboy-Cracked-Internet-Still-Broken/dp/0670067482/ref=pd_bbs_sr_1?ie=UTF8&s=books&qid=1224230768&sr=8-1

Book's site
mafiaboybook.com/

Dragon's Den

WIN
youtube.com/watch?v=BFTJ0i0lT8s&feature=related

WIN
youtube.com/watch?v=cYcS6v589eI

FAIL
youtube.com/watch?v=HDczbpIO85g

Dragon's Den
cbc.ca/dragonsden/

Dragon's Den UK
bbc.co.uk/dragonsden/

thestar.com feature
thestar.com/columnists/article/263075
"At the end, it's you who does the work & takes the fame or blame, not others. You're the one."

Crash Proof: How to Profit From the Coming Economic Collapse

by Peter D. Schiff & John Downes
amazon.com/Crash-Proof-Economic-Collapse-Sonberg/dp/0470043601/ref=sr_1_1?ie=UTF8&s=books&qid=1224143826&sr=1-1

Peter Schiff on Crash Proof: amazon.com/gp/mpd/permalink/m9NA2D6ADKBP0


PRODUCT DESCRIPTION The economic tipping point for the United States is no longer theoretical. It is a reality today. The country has gone from the world's largest creditor to its greatest debtor; the value of the dollar is sinking; domestic manufacturing is winding down - and these trends don't seem to be slowing. Peter Schiff casts a sharp, clear-sighted eye on these factors and explains what the possible effects may be and how investors can protect themselves. For more than a decade, Schiff has not only observed the U.S. economy, but also helped his clients reposition their portfolios to reflect his outlook. What he sees is a nation facing an economic storm brought on by growing federal, personal, and corporate debt, too-little savings, a declining dollar, and lack of domestic manufacturing.

Crash-Proof is an informed and informative warning of a looming period marked by sizeable tax hikes, loss of retirement benefits, double digit inflation, even - as happened recently in Argentina - the possible collapse of the middle class. However, Schiff does have a survival plan that can provide the protection that readers will need in the coming years.


CUSTOMER REVIEWS Peter Schiff, son of American patriot Irwin Schiff, has written a very useful book that can not only assist you to take the concrete steps necessary for financial survival, but also change your individual psychology toward the storm on the horizon that is rapidly gathering strength. Today, we have the illusion of prosperity, and the sooner we break through that delusional state, the sooner we can prepare for darker days.

At this point, there are so many possible triggers for the Second Great Depression, it's striking that it has not already begun. The sub-prime meltdown may just be such a trigger that brings down the house of cards, once it becomes more clear which entities actually hold all the risk created as part of the Housing Bubble. Wall Street, sub-prime lenders, and the large banks have been ingenious in their ability to push risk onto other parties, but it's not clear if the counter-parties will have the ability to weather the defaults. Thus, the risk may yet reside with the banks, which normally would have been more restricted in the number of loans they could create by more traditional standards. So much debt has been created, and so much risk obfuscated, that it is hard to imagine our present illusion of prosperity can be maintained much longer.

Mr. Schiff breaks through our modern mythology by shattering these illusions, and here is where he shines best. A bear's bear, Mr. Schiff steps down from the towers of the economic elite to provide analogies that can be readily digested by more casual readers. The analogy of the Asians and the American trapped on an island together is apropos, as it reveals much about the true state of international trade. The Dollar Bubble heavily distorts trade in favor of America, which benefits disproportionately from the inflated value of the dollar.

Mr. Schiff also understands very well the entitlement crisis brewing, and aptly names Social Security a Ponzi Scheme. Most people in Generations X and Y understand that we're the bagholders scheduled for the Ponzi Scheme, but many Baby Boomers love to be delusional about this tragic farce, thinking it's a form of savings rather than our government writing worthless IOUs to itself and lying to the American people. They think Gen X "owes" it to them! Ha Ha! The sooner we can end social security, the sooner we can start saving real money with real assets. Until then, we are slaves waiting for generational emancipation.

I remember the first time I heard Mr. Schiff speak on CNBC. The discussion was about inflation, and I couldn't help but notice Mr. Schiff's definition diverged significantly from the definition used by the brainless cheerleaders on CNBC, and for that matter, our government and most of Wall Street. The proper definition of inflation is "debasement" and secondarily, "an increase in the supply of money which causes a rise in prices" (Webster's 1982). Note the difference between these two definitions and the more commonly used definition today, which is simply "a rise in prices."

CNBC would have us believe that money supply doesn't matter when you can fool people into believing that the risks associated with exuberant money creation won't be felt by anyone, or only by parties "most able to bear that risk." How convenient! What the government doesn't want you to know is that the Federal Reserve creates inflation, and both government and the Federal Reserve benefit from this inflation at everyone else's expense. In the history of every mania and crash, rampant money creation is behind the genesis of every one. Usually, it takes a unique form. In this case, it was the Housing Bubble. So, inflation and the Housing Bubble are intimately linked. As many have often pointed out, the Housing Bubble was needed to replace the Nasdaq Bubble that popped in 2000-2002.

Finally, the juicy part - how to survive. Mr. Schiff advocates foreign equities that are sound and pay excellent dividends, which due to the Dollar Bubble, might do very well. So long as there is sufficient domestic demand (abroad) after a currency revaluation, this appears good advice. Although, one has to wonder if the U.S. catches cold, would Asians follow?

Next, buy gold and silver, and mining shares. This is pretty standard advice from the "Gloom and Doom" crowd as we are sometimes named. Lastly, he recommends staying liquid, which generally means reducing debt and keeping assets in a form that can be readily converted from one type to another. He recommends leveraging overvalued home equity in other currencies and storing small amounts of imported goods likely to rise in price, and a few other measures.

The piggy bank on the cover is a nice touch, and the list of books for further reading is most helpful for those who have not already read many of the titles.

A very quick read, easy to understand, and very well put together. I highly recommend this book. -Patrick M. Hussey (Mar.07)

>Andrew Coonce says: Good review. When I first heard about Schiff's book, I read a negative review on Amazon, and, as a result, I almost didn't buy the book. The only reason I got it was because it was part of a 3-for-1 deal at the time. Man, am I glad I did that! I know enough economics and politics to recognize that his reasoning is sound and dead spot on. That's been confirmed by the fact that everthing he predicted in the book is now happening. I'm now a cleint of Europacific Capital, and I've made some pretty sweeping changes in my investments. I've been trying to tell family and friends about the book, and about what's coming, but they pretty much don't listen. I only wish I had read the book a year earlier.................... (Jun.29-08)

This book is nothing more that an overt advertisement for Peter Schiff's brokerage firm Euro Pacific Capital. There are no specific investment recommendations.

Here's the gist: The US dollar will collapse pretty soon. Schiff cites the usual suspects--- large trade deficit, large private and public debt held by foreigners, decimated manufacturing base in USA. 7 out of 10 chapters are a very generic rehash of these arguments. So you should have all of your assets in non-dollar investments (except 10-30% in gold and gold equities.) You should buy dividend paying foreign stocks through Euro Pacific Capital. Countries to consider are Canada, Hong Kong, Singapore, Japan and maybe some other pac rim countries. He particularly likes commodities. That's it. He says, "the stocks of the caliber we've been talking about will probably never need to be sold and will provide a lifetime of increasing income." If these stocks are so stable he could list 10 or 20 examples. Yet, not a single specific stock is mentioned in the book. For that contact Euro Pacific Capital. Did I mention Euro Pacific Capital? -M. Passey (Mar.07)

>a satisfied reader says: I disagree with this reviewers complaint (and SWT's agreement) that

Schiff didn't supply specific recommendations on what stocks to buy. THis book will be in print for years and it would be irresponsible to suggest specific stock buys. Besides,as a licensed stock broker he is actually NOT ALLOWED
to do so unless he knows a person's specific financial situation. His goal was much more global and I think he did a good job. (Mar.07)

>Ron Kokish says: AN unfair review. Not only is it illegal for a licensed broker to make specific stock recommendations in a book, it's unfair to expect it. However, I've been a EuroPac client for two years during which, in spite of hefty 2% commissions the $100,000 I had them invest for me has turned into $153,000. Maybe it's luck. Or, maybe they are actually on to something. (May.07)

>"Fed Up With Liars" says: As of 6/11/07--You want MEAT? Then listen to Bill Gross, bond king at PIMCO--he's specifically saying that a "bond bear market" is occurring in the U.S., and the best moves to make for the future are investing in the Brazilian currency (the real) and investing in foreign bonds that currently carry a double-digit return.

Why Brazilian currency? Brazil is the ONLY country on the planet that is energy self-sufficient, meaning it imports absolutely no oil from outside. In an otherwise darkening future, this means that their money and economy will likely only be side-swiped instead of t-boned.

Why foreign bonds? That's where the Chinese are now spending their huge wads of money--they're no longer buying our bonds hand-over-fist. Without a huge and active buyer for our bonds, what do you think is going to happen to Uncle Sam's spending habits? He's lost his #1 financier.

Rats (even Chinese ones) know when to leave a sinking ship. Bill Gross just happened to bring it to our attention...on CNBC, no less! Some cheerleaders are worth listening to.

I'm ordering this book--not for basing my entire strategy on, but as part of an overall picture of how to protect myself. (Jun.07)

>Bruno says: 1. This is a book, not a magazine column. Any stock recommendation would be out of date soon.

2. HE wrote the book, why wouldn't HE tout HIS brokerage?

3. One man's "no meat" is another man's "easy to understand". (Aug.07)

>M. Beaston says: I've been making a ton of money following Peter's advice. I don't know what planet this bad review came from. Thanks for Crash Proof! (Nov.07)

>P. Smith says: What is this dude smokin'? I searched long and hard to find someone who could make sense of this market for me. That guy is Peter Schiff. I have done every single thing he has suggested and am tremendously grateful I learned about him. I've become an evangelist, of sorts.

The U.S. is one big Enron, people. Make no mistake: The guys at the top have all gotten their money out of US-denominated assets, while telling us "deficits don't matter." Peter is right--get out of the dollar while you still can.

I'd be the first one to say Peter shamelessly touting his company would be obnoxiuos...but I didn't find it to be that way at all. In fact, a few times I wondered if Euro Pac could help me because Peter talks generically about where to buy foreign stocks. (Nov.07)

Traders, Guns & Money: Knowns and Unknowns in the Dazzling World of Derivatives

by Satyajit Das

amazon.com/Traders-Guns-Money-unknowns-derivatives/dp/0273704745/ref=sr_1_1?ie=UTF8&s=books&qid=1223802667&sr=1-1

PRODUCT DESCRIPTION Warren Buffet once labelled derivatives “financial weapons of mass destruction”. Unlike the military kind, financial WMD are not hard to find. Many great companies use them. These businesses use derivatives to make money or protect them from risk. It’s a simple case of greed or fear. Or is it?

In derivatives, whoever you are, there are things that you don’t know that you don’t know. These are the real risks of derivatives. They’re generally left to the client to discover. So, if you’re entering the dazzling world of derivatives, ask yourself this: What do I know? What do I need to know? What don’t I know? What am I doing?

Traders, Guns & Money throws light on the culture, games, and pure deceptions played out every day in trading rooms around the world, and played out with other people’s money. It describes the processes by which a small group of gifted, if avaricious, individuals parlay their knowledge of the arcane world of financial products into wealth, leaving shareholders, clients, regulators, and the tax paying ordinary public to bear most of the risk.


EDITORIAL REVIEWS "A must read for all CEOs, CFOs, Bankers and anyone who cares about what banks are doing with their money." - Finance Asia, May 2006

"... a scalpel of a book" - Financial Engineering News, July 2006

"Das is especially good on structured products and on the recently fashionable world of structured credit... a diverting read" - Financial World, July 2006

CUSTOMER REVIEWS I read an article by the author, Satyajit Das today. In the article he mentioned that "1 dollar supports 20-30 dollars worth of loans" and that the derivatives market at the moment is valued at 485 trillion dollars, or to make that a little more understandable, 8 times the global gross domestic product. 8 times the GDP of the entire planet. Wow.

This book is a great introduction to the world of derivatives and I highly recommend it. -Jaronimo (Sept.07)

>JA Ramsey says: Seems like the Fed Reserve, SEC and Treasury Secretary should have read this book BEFORE this mess made a $700B bailout necessary!! any comments? (Sept.25-08)

>Jaronimo says: That's absolutely true. They let these guys run rampant and and everyone knew from the start this would be an issue, they just all figured they would repackage it and sell it before the music stopped so some other sucker is left holding the bag.

The funny part is these guys are supposed to be financial geniuses, and are supposed to be looking out for their customers, but they screwed them to make a few bucks on products they didn't fully understand. I am all for free markets and buyer beware, etc. But these guys purposely made these packages so complicated nobody could understand them, even the guys selling them, and people are suckers, so they bought them.

I think people need to be put in prison for this mess. (Sept.27-08)

This is not another journalist musing on the financial world. This is not an academic explanation of how financial instruments work. It's something else entirely -- a rare inside glimpse into the world of derivatives by a literate professional who's been a handshake away (or closer) from the major events in the market. Das leavens a series of technical discussions about particular strategies with more entertaining glimpses into the culture the drives the deals. Although I have bones to pick with the book's episodic structure, I can't think of a better way to get a crash course in how the capital markets really work. -Joe Kolman (Nov.06)

Just enough quantitative stuff to be dangerous, and enough humor and anecdotal info to make this a page turner from start to finish. -The Cranky Consumer (Mar.08)

I picked up this book after finished reading David Roche's New Monetarism. What a GEM!!!! First of all, of all the economic commentators on the scene, nobody, I repeat NOBODY got it right about the cause of the current U.S/W.Europe economic problem (hint: subprime is NOT the cause). David Roche's New Monetarism accurately pointed out "derivatives" which created the asset bubble is the cause of our present economic turmoil. Problem is, David Roche's New Monetarism can be difficult for most reader to follow unless you were part of the "landscape" of the derivative industry. For example, concept like Yen Carry Trade or CDS (Credit Default Swap) were flying in and out in New Monetarism without detailed explanation or definition. Readers may be left behind without truly getting the education they deserved. However, in Guns, Traders... Mr. Das used common English to explain to the readers the basic concept of the complicated derivative industry, he even went on to provide math formulae and swap structures. I am just so thankful to Mr. Das for doing this. The title of this book may give a wrong impression that this is a sexy tabloid writing, less economic and more "National Enquirer" (nothing wrong with National Enquirer as I consider they are a better newspaper than New York Times). This is a serious finance book about capital markets, be prepared to study some maths and financial fundamentals. For capital markets professional, especially those with an experience in derivatives, this book brings you extra joy as you felt like "hey! I was there!!!". For regular reader, this book allows you onto the trading floor, the sale call conference and even place you in front of the computer screens of structuring specialists. If you read David Roche's New Monetarism and did not understand many of the concepts, this book is a must. However, this book is studying derivatives at the ground level, micro economic level. You still need to go back to David Roche's New Monetarism to get an understanding from the Macro, 50,000 feet level.

Finally, allow me to make one political comment. The present economic problem in U.S. has nothing to do with mortgage or subprime. There is nothing the government, federal or local can do. Just like your dying of aging the government cannot do anything to "fix". McCain and Obama may be making a lot of political statements as how to "fix" this economy, the reality is, the economy is way beyond the government's ability and "intellect" can deal with, this book offer the reasons. -jason francisco (Sept.08)

The Glenn Beck Program

Economy in Crisis
CNN
Oct.6-2008
europac.net/Schiff-CNN-10-6-08_lg.asp


QUOTES

Gold is money. Gold has intrinsic value. -Peter Schiff

The number one problem is how many jobs we keep or lose. -Ali Velshi

America: buckle up. It's going to be a very bumpy ride. -Glenn Beck

In Washington, there's no Plan B. -Stephen Moore

That's the danger of any bailout: it rewards behaviour that isn't responsible. -AV

We've learned nothing. -PS

It's the wrong dream we've been pushing. -AV

Stop listening to the lies. -GB

Buy silver. It's actually used in more applications than gold. -AV

(The government is) the only sector of the economy that's been growing jobs. -SM

C'mon. You're not going to get it (Social Security). -GB

It's dangerous for a country of this size to be economically vulnerable. -AV

Make no mistake, America. Washington has sold you down the river. And they've done it for power. -GB

You couldn't not see this tragedy coming. -GB

He (Barack Obama) wants to put the economy back on track. The problem is, the track is leading to a brick wall. -PS

Those numbers are all phoney. Unemployment is probably a lot higher, as is inflation. -PS

We're at the early stages of this (the financial crisis). We'll see how it is in 3 or 4 years. -PS

Greed is normally balanced by fear. -PS

The real crisis is when people all around the world - Japan, China & Saudi Arabia - no longer want to hold our dollars & then the dollar really goes down & prices just go through the roof. -PS

GB: Are people going to be able to get a student loan in the next 12 months?
Bob O'Brien: No.
GB: So what's going to happen to college tuitions? Are they going to plummet?
BO'B: Yes.

How do we get more savings when we punish savers & encourage borrowing? -PS

The only way you're going to be able to sell your house is if you dramatically lower the price. -PS

The economy is down on the ground, flat on its back, but what this bill does is kick it in the groin. -PS

The federal government is the only one with the printing press. -PS

Chances are good you're about 30% less rich than you were in October of last year. -BO'B

In Washington, we reward vice & punish virtue. -SM

Nobody's going to get a tax cut (under Barack Obama). We're spending trillions of dollars - where's that money going to come from? -PS

Oil prices are going to go a lot higher because Russia can't afford to have them this low. -GB

Transcript: transcripts.cnn.com/TRANSCRIPTS/0810/06/gb.01.html

Steven Pearlstein

Steven Pearlstein is an American columnist. He writes a column on business and the economy that is published twice weekly in The Washington Post. In 2008 Pearlstein received the Pulitzer Prize for Commentary for "his insightful columns that explore the nation's complex economic ills with masterful clarity." (Wikipedia)


The following columns were submitted for the 2008 Pulitzer Prize for Commentary:

Industries Could Take Cues From Hollywood on Self-Control
May 9-2007
(Excerpt)

When the studios found themselves in a competitive race to the bottom in the smuttiness and violence of their movies, Jack was clever enough to foresee the likely political and regulatory backlash, and convincing enough to persuade his members to accept a movie rating system that has, in effect, become a form of industry self-regulation.

Mortgage brokers, student lenders and health insurers are only now realizing what Jack Valenti learned long ago: The purpose of a trade association is not simply to protect its members from government, but to protect its members from themselves.

washingtonpost.com/wp-dyn/content/article/2007/05/08/AR2007050801861.html

The Takeover Boom, About to Go Bust (Jun.13-2007)

In other words, a deal like this would never get financed in normal times. Bank lenders and bondholders would demand that the new owners use more of their own money and take on less debt. Or they would demand interest rates so high that the company, as presently configured, wouldn't be able to generate enough cash to cover debt service. Either way, the buyers would never have agreed to pay $8.2 billion.

But these are not normal times, and overpriced and over-leveraged deals like Avaya have been getting financed in record numbers. Back in 2004, about $275 billion in loans were issued for such highly leveraged transactions. By last year, that had risen to $490 billion. And in just the first five months of 2007, that record was broken.

washingtonpost.com/wp-dyn/content/article/2007/06/12/AR2007061201801.html

New Order Ushers In a World of Instability (Aug.10-2007)

One concern is that rather than spreading risk among millions of investors, the current system has reconcentrated risk on the books of a dozen global broker-dealers who lend most of the money to fund managers so they can buy all those credit instruments. And it is many of the same firms -- Goldman Sachs, Bear Stearns, Deutsche Bank, Citicorp -- that have also underwritten hundreds of billions of dollars in corporate takeover loans that, suddenly, they cannot sell as they had planned. It's no coincidence that the shares of such firms have taken a beating in the past few months as rumors swirl around Wall Street that one or another is facing major losses.

washingtonpost.com/wp-dyn/content/article/2007/08/09/AR2007080902192.html

It's Not 1929, But It's The Biggest Mess Since (Dec.5-2007)

It was Charles Mackay, the 19th-century Scottish journalist, who observed that men go mad in herds but only come to their senses one by one.

We are only at the beginning of the financial world coming to its senses after the bursting of the biggest credit bubble the world has seen. Everyone seems to acknowledge now that there will be lots of mortgage foreclosures and that house prices will fall nationally for the first time since the Great Depression. Some lenders and hedge funds have failed, while some banks have taken painful write-offs and fired executives. There's even a growing recognition that a recession is over the horizon.

But let me assure you, you ain't seen nothing yet.

washingtonpost.com/wp-dyn/content/article/2007/12/04/AR2007120402186.html

More columns: washingtonpost.com/wp-dyn/content/linkset/2005/03/24/LI2005032400138.html

An Economy Based on IOUs

(Planet Money)

Another Frightening Show About the Economy:

thislife.org/Radio_Episode.aspx?episode=365

"If they see a light at the end of the tunnel, it's another train coming." -Manhattan trader

He Saw it Coming

Former Chairman of the Fed Paul Volcker

Volcker was chairman of the Federal Reserve from 1979 to 1987. This is from a February 2005 speech at an economic summit sponsored by the Stanford Institute for Economic Policy Research.


An Economy On Thin Ice
By Paul A. Volcker

The U.S. expansion appears on track. Europe and Japan may lack exuberance, but their economies are at least on the plus side. China and India -- with close to 40 percent of the world's population -- have sustained growth at rates that not so long ago would have seemed, if not impossible, highly improbable.

Yet, under the placid surface, there are disturbing trends: huge imbalances, disequilibria, risks -- call them what you will. Altogether the circumstances seem to me as dangerous and intractable as any I can remember, and I can remember quite a lot. What really concerns me is that there seems to be so little willingness or capacity to do much about it.

We sit here absorbed in a debate about how to maintain Social Security -- and, more important, Medicare -- when the baby boomers retire. But right now, those same boomers are spending like there's no tomorrow. If we can believe the numbers, personal savings in the United States have practically disappeared.

To be sure, businesses have begun to rebuild their financial reserves. But in the space of a few years, the federal deficit has come to offset that source of national savings.

We are buying a lot of housing at rising prices, but home ownership has become a vehicle for borrowing as much as a source of financial security. As a nation we are consuming and investing about 6 percent more than we are producing.

What holds it all together is a massive and growing flow of capital from abroad, running to more than $2 billion every working day, and growing. There is no sense of strain. As a nation we don't consciously borrow or beg. We aren't even offering attractive interest rates, nor do we have to offer our creditors protection against the risk of a declining dollar.

Most of the time, it has been private capital that has freely flowed into our markets from abroad -- where better to invest in an uncertain world, the refrain has gone, than the United States?

More recently, we've become more dependent on foreign central banks, particularly in China and Japan and elsewhere in East Asia.

It's all quite comfortable for us. We fill our shops and our garages with goods from abroad, and the competition has been a powerful restraint on our internal prices. It's surely helped keep interest rates exceptionally low despite our vanishing savings and rapid growth.

And it's comfortable for our trading partners and for those supplying the capital. Some, such as China, depend heavily on our expanding domestic markets. And for the most part, the central banks of the emerging world have been willing to hold more and more dollars, which are, after all, the closest thing the world has to a truly international currency.

The difficulty is that this seemingly comfortable pattern can't go on indefinitely. I don't know of any country that has managed to consume and invest 6 percent more than it produces for long. The United States is absorbing about 80 percent of the net flow of international capital. And at some point, both central banks and private institutions will have their fill of dollars.

I don't know whether change will come with a bang or a whimper, whether sooner or later. But as things stand, it is more likely than not that it will be financial crises rather than policy foresight that will force the change.

It's not that it is so difficult intellectually to set out a scenario for a "soft landing" and sustained growth. There is a wide area of agreement among establishment economists about a textbook pretty picture: China and other continental Asian economies should permit and encourage a substantial exchange rate appreciation against the dollar. Japan and Europe should work promptly and aggressively toward domestic stimulus and deal more effectively and speedily with structural obstacles to growth. And the United States, by some combination of measures, should forcibly increase its rate of internal saving, thereby reducing its import demand.

But can we, with any degree of confidence today, look forward to any one of these policies being put in place any time soon, much less a combination of all?

The answer is no. So I think we are skating on increasingly thin ice. On the present trajectory, the deficits and imbalances will increase. At some point, the sense of confidence in capital markets that today so benignly supports the flow of funds to the United States and the growing world economy could fade. Then some event, or combination of events, could come along to disturb markets, with damaging volatility in both exchange markets and interest rates. We had a taste of that in the stagflation of the 1970s -- a volatile and depressed dollar, inflationary pressures, a sudden increase in interest rates and a couple of big recessions.

The clear lesson I draw is that there is a high premium on doing what we can to minimize the risks and to ensure that there is time for orderly adjustment. I'm not suggesting anything unorthodox or arcane. What is required is a willingness to act now -- and next year, and the following year, and to act even when, on the surface, everything seems so placid and favorable.

What I am talking about really boils down to the oldest lesson of economic policy: a strong sense of monetary and fiscal discipline. This is not a time for ideological intransigence and partisan posturing on the budget at the expense of the deficit rising still higher. Surely we would all be better off if other countries did their part. But their failures must not deflect us from what we can do, in our own self-interest.

A wise observer of the economic scene once commented that "what can be left to later, usually is -- and then, alas, it's too late." I don't want to let that stand as the epitaph of what has been an unparalleled period of success for the American economy and of enormous potential for the world at large.

(goldprice.org)

American Financial Crisis: The Pundits

ANDREW ROSS SORKIN
Mergers & Acquisitions Reporter
The New York Times

What Goes Before a Fall? On Wall Street, Reassurance.
nytimes.com
Sept.29-2008
(Excerpt)
“Jim, we have a great future as an independent company,” Robert K. Steel, Wachovia’s chief executive, told James Cramer on CNBC’s “Mad Money.” “We’re also focused on very exciting prospects when we get things right going forward. I didn’t have time today to talk about the good things going on at Wachovia.”

That interview wasn’t last month or last year — it took place, amazingly, two weeks ago. Wachovia’s shares closed at $10.71 that day. On Monday, Citigroup bought the company for $1 a share.

What was Mr. Steel thinking? Did he think he could “spin” his way to survival?

By all accounts, Mr. Steel is a pretty smart guy. He had to know that going on television the same day that Lehman Brothers went bankrupt, Bank of America bought Merrill Lynch and A.I.G. was on the brink of collapse was just asking for trouble. And it’s hard to imagine he didn’t appreciate the precarious state of his own company given the carnage around him. He knew how fast a bank’s fate can turn. Worse, he and all the other happy-talk executives put themselves in legal jeopardy.
nytimes.com/2008/09/30/business/30sorkin.html?_r=1&scp=2&sq=&st=nyt&oref=slogin

Interview on Charlie Rose: youtube.com/watch?v=T5L0BLQRcHs
Sorkin's bio: topics.nytimes.com/top/reference/timestopics/people/s/andrew_ross_sorkin/index.html



WARREN BUFFETT
American investor, businessman and philanthropist. He is regarded as one of the world's greatest investors, and is the largest shareholder and CEO of Berkshire Hathaway. He was ranked by Forbes as the second richest American with an estimated net worth of $50 billion as of September 17, 2008. (Wikipedia)

Quotes
"Last week, we were at the brink of something that would have made anything that's happened in financial history pale," Buffett told CNBC television. "I'm not saying the Paulson plan will eliminate the problems but it's absolutely necessary, in my view, to avoid going off the precipice." (guardian.co.uk / Sept.24-2008)
guardian.co.uk/business/2008/sep/24/warrenbuffett.wallstreet

Interview on Charlie Rose (Oct.1-2008):

"You don't want 300 million Americans putting their money under the mattress."

"Everybody goes along & you look silly if you disagree."

"As long as you have markets, you have excesses."

"I'm paying the lowest tax rate that I've paid in my life. Now that's crazy."

Interview excerpt: youtube.com/watch?v=ejIWp5E8_Fo

MORTIMER B. ZUCKERMAN
Mortimer Zuckerman is the editor-in-chief of U.S.News & World Report. He is also chairman and co-publisher of the New York Daily News and has substantial real estate holdings, including properties in Boston, New York, Washington, and San Francisco. (usnews.com)

Fannie Mae & Freddie Mac: Too Fat to Fail (usnews.com / July 25-2008)

(Excerpt) The predicaments have long been predicted. F&F, along with Wall Street and home builders, staved off proper regulations by hiring political elites and lobbyists from both parties. They should have raised more equity but preferred higher profits per share. Their senior officers have made millions of dollars from their shareholdings. They are the winners. Now the losers will be we, the taxpayers, because F&F are too big to fail. The bailout legislation provides for more oversight, but it must be through a regulator with real teeth. It would be unconscionable for Congress to bail them out without making sure that this dangerous aunt and uncle will hereafter be restrained for the public good. usnews.com/articles/opinion/mzuckerman/2008/07/25/fannie-mae-and-freddie-mac-too-fat-to-fail.html

An Economy on the Brink (usnews.com / Aug.11-2008)

(Excerpt) What's more, we don't have confidence in our political leaders—despite the bipartisan passage of the very necessary, if flawed, housing support bill. Polls put the president's approval at about 30 percent and Congress at half that. In one recent survey, only 6 percent viewed the economy positively, while 84 percent of us think we are headed in the wrong direction. usnews.com/articles/opinion/mzuckerman/2008/08/11/an-economy-on-the-brink.html

Wall Street's Day of Reckoning (usnews.com / Sept.19-2008)

(Excerpt) The world was awash not with cash but with credit. The global issuance of credit instruments went from $250 billion to $3 trillion a year. Many of these securities were rated, but last year, the agencies started downgrading billions of dollars of debt they had once deemed safe. Prices tumbled as investors stopped trusting the ratings and stopped buying complex instruments. Financial institutions began to hoard cash and cut back on loans even to other banks. Witness the sharp rise in the London Interbank offered rate—the main measure of banks lending to one another. usnews.com/articles/opinion/mzuckerman/2008/09/19/wall-streets-day-of-reckoning.html


Quote
"I think everybody realized something has to be done," Zuckerman told Reuters, speaking after the U.S. House of Representatives rejected the bailout plan.

But Zuckerman, who does not endorse the plan, said its not the right move.

"I think this was the wrong approach," he said. "I believe everybody should take a step back. I think basically they should invest in perpetual preferred (shares), and shareholders will accept the losses. They made money on the way up; they should have to accept the losses." (reuters.com / Sept.29-2008)reuters.com/article/reutersEdge/idUSTRE48S94620080929