Mike Shedlock of globaleconomicanalysis.blogspot.com writes that I – and people like me, who are expecting inflation – are a bunch of idiots, which is unfortunately true about me, and I am grateful that my Natural Mogambo Stupidity (NMS) is his only complaint about me. I only wish that others were equally restrained in their criticism, as there is apparently no end to either my personal shortcomings or their delight in pointing them out.

He writes, thankfully not mentioning me by name, “You would think that inflationistas would have caught on. But they haven’t. Nor will they. And articles about shrinking day care, collapsing retail sales, rising unemployment, record foreclosures, massive credit card defaults, bankrupt insurers, collapsing auto sales, sinking commercial real estate, plunging commodity prices, and dozens of other things will not change their minds either, including an implosion in China.”

I have to admit that he is right, as my wife and kids will happily tell you that I never change, except to get worse. On the other hand, I steadfastly say that neither the Federal Reserve, nor the federal government, are going to sit still when people are whining about “shrinking day care, collapsing retail sales, rising unemployment, record foreclosures, massive credit card defaults, bankrupt insurers, collapsing auto sales, sinking commercial real estate, plunging commodity prices, and dozens of other things” when they have a fiat currency that they can instantly create, with unlimited abandon, which they promised to do, will do, and are already doing.

Thus, with a staggering, unbelievable amount of money being created, these and many more deflationary problems will soon be just a quaint memory as voluntary fiscal and monetary restraints around the world are being thrown wholesale into the dumpster even as we speak, and humongous “economic stimulus plans” financed by massive increases in fiat money are being trotted out across the globe, all meaning that inflation will rise and rise.

As if to prove me right, the article went on to note that Professor Steve Hanke, formerly with Credit Suisse (NYSE:CS) and now a senior fellow at the Cato Institute in the United States, said that this month, “Zimbabwe’s annual inflation had soared to 2.79 quintillion percent”, which is the inevitable result of the moron government of Zimbabwe spending decades literally printing all the paper money that makes such inflation possible!

In case you were wondering, “a quintillion is a figure with 18 zeroes and is a rung above a quadrillion”, which I will helpfully write out as 2,790,000,000,000,000,000%!!!!!

If you are a Junior Mogambo Ranger (JMR), then you need no explanation as to why I included five exclamation points at the end of that sentence, which indicates some extreme significance.

But even if you are NOT a JMR, then you should still need no explanation as to the significance of inflation that is measured in quintillions of percent, or even inflation measured in quadrillions of percent, or inflation measured in trillions of percent, or inflation measured in billions of percent, or inflation measured in millions of percent, or inflation measured in thousands of percent, or inflation measured in hundreds of percent, or inflation measured in tens of percent, or Any Freaking Inflation At All (AFIAA) that is more than zero, because what it means is that Bad, Bad Times (BBT) are a-coming as all of this money starts chasing a static supply of goods and services and people get Very, Very Upset (VVU).

And besides the fact that inflation in the USA is already running between about 5% and 10% (depending on your source), it is going to get worse and worse, and thus a BBT and a VVU are a-coming, which is why you need gold, silver and oil.

And the fact that they have been sold off to (as is theorized) raise cash and thus drive their prices to Laughably Low Levels (LLL), should have you in a buying frenzy, gobbling up as much of each as you can, and then going around to your stupid neighbors and ringing, ringing, ringing their doorbells and knocking on their doors, and then kicking their damned doors over and over because you can hear them in there whispering to each other, “Shut up or he’ll hear you!” and so you yell out, “Buy gold, silver and oil as fast as you can, you morons, or die a horrible death by inflation like the people of Zimbabwe!”

But as usual, they don’t buy gold, silver and oil, and they don’t even answer the door. Don’t you make that mistake!

Source: When Inflation Comes a-Knockin’

Good day… And a Wonderful Wednesday to you! I had a long time friend – once a colleague and teammate on the company softball team – send me a note from Credit Suisse yesterday, that called for an end to the European currency strength versus the dollar. I love getting this stuff because, as they said in the Godfather… Keep your friends close, but your enemies closer… Yes, I like to see “their” side of the story.

In this case, it’s not too far off… While I think the European currencies, led by the euro (EUR), have more room to gain versus the dollar, you have to admit that the bulk of the euro’s gains are in the rear view mirror. But before everyone picks up their phones to call and sell their euros… WAIT! Think about this for a minute… The euro is the second most liquid currency in the world. It has taken over as the offset currency to the dollar. So… If the dollar were still going to weaken (which C.S. admitted it would), then the euro would see the offset trade. And… If the Asian currencies take over as the next shoe to drop for the dollar, as I’ve said they would for two years now, then the euro would see strength on the flip side of cross trades.

I’ve explained these cross trades before, but for the new readers, let’s review… Class, get out your #2 pencils… Currencies are traded in “pairs”. You are always shorting one currency and going long another currency. As U.S. investors, your base currency is dollars, so when you buy euros or yen (JPY), you are shorting the dollar and buying euros or yen. But U.S. investors aren’t the only players in this arena. You have investors around the world that have a different base currency… So you end up with “cross” trades – currencies that cross each other in this arena. Clear as mud? Sorry… This is the way I know how to explain it.

So… Euros, for instance, could gain in value due to people buying yen… On the crosses… And so on…

Alrighty then… I’m sure this will all sink in as you sink your teeth into your morning Honey Bun!

This morning, the euro has added to its gains from yesterday, as the German Business Confidence – as measured by the think tank, IFO – unexpectedly increased this month. I was all set to talk about the IFO being the more important measure of the German economy this morning, so… Let me go ahead and do just that! Yesterday, we saw weakness in the ZEW report on economic expectations… But that didn’t hurt the euro too much. The reason? The markets put more stock in the IFO report because it measures “current conditions” and therefore can be used as proxy for the European Central Bank (ECB) and their interest rates projections.

I saw a report on the IFO’s correlation with the euro’s past moves to higher ground… Made sense to me, as strong IFO reports came out right before the euro moved past previous big figures… Could certainly be the case again for the euro, eh?

So… The 1.56 level was taken out overnight, and as I write, the euro is trading well above the 1.57 level. Again, it’s too soon to tell if this is a “true reversal” of the sell off the past few weeks, or a false dawn… But to me, it certainly looks like we’re heading higher once again, and the negativism toward the U.S. dollar is slowly creeping back into the mindset of the markets.

The commodity currencies of Aussie (AUD), Canada (CAD), and Brazil (BRL) all “have it going for them” these days. Shoot Rudy, the Canadian loonie doesn’t even have the high interest rate like Aussie and Brazil, but with oil hitting $129 yesterday, it doesn’t seem to matter. I think that the markets have fully priced in one more rate cut from the Bank of Canada. With that out of the way, and commodities booming, the loonie could shake loose the pull down from the Bank of Canada!

I’ve heard a lot of talk about how people believe this commodity bull market is the latest “bubble”. Hmmm… That may be… But historically speaking, we’ve got a ways to go (time wise) before this bubble pops! Remember a month ago, when I kept telling you that the mass media didn’t know what they were talking about when they kept saying the bull market for commodities was over? I don’t hear these guys spouting off now. I wonder where they went? To hide under a rock?

I’m not going to dwell on this… But it just didn’t make sense to me that the bull market in commodities was over… And, now, we know why it didn’t make sense! Because it wasn’t over!

Second in command, Fed Head Kohn spoke yesterday, and sounded quite upbeat about the economy. Singing Ray Stevens… Everything is beautiful… What else did you expect? These guys have backed us into a corner that has three roads out… And none of them are a road to prosperity! 1. Inflation 2. Deflation 3. Stagflation… Oh… And they all merge with the recession highway!

Anyway… Fed Vice Chairman Kohn, speaking about interest rates said, “[it] appears to be appropriately calibrated for now to promote both rising employment and moderating inflation over the medium term.” The markets took this statement to mean Kohn was telling us that the Fed is unlikely to lower rates further.

Well… Baby, baby, it’s a wild world… And it’s hard to get by on just a smile. Kohn should be reminded of these words when the Fed comes back to the rate cut table later.

Speaking of the Fed… We’ll see the color of their last meeting minutes this afternoon. This was the meeting that they cut rates from 2.25% to 2%. I wonder if these meeting minutes will be in line with the press conference that was held after the rate cut… The reason I say this, is the suspicion I have toward the Fed after reading Bill Fleckenstein’s book, Greenspan’s Bubbles: The Age of Ignorance at the Federal Reserve.

The Fed will also be releasing their new growth and inflation forecasts. This ought to be worth the price of admission folks. What yarn will they spin for us? I’ll bet they tell us the future is so bright we gotta wear shades! And inflation? Don’t worry about it! Yeah, when the Fed says, “Don’t worry about it” you had better run for the hills!

How about gold? Did you see that rise in gold yesterday? When I left it was up over $15 on the day. The London Exchange issued a report showing that demand for gold was down 16% in the first quarter. That makes abundant sense given the losses gold put on the books in the first quarter… But now that the markets are coming to their senses, and the dollar is weaker (while oil continues to set records every day), gold is back in demand.

And speaking of gold… Remember about a month or so ago, I told you about how the dollar’s weakness had caused so much loss of purchasing power for us, and illustrated it with this: If you purchased oil with euros instead of dollars, the price increase in oil would represent 92%, which sounds high right? Well, since you don’t purchase your oil in euros, but dollars instead, your price increase represents a 319% gain! Well… To take this exercise one step further… If you had purchased your oil with gold, your price increase would be 57%! Now tell me again, how gold isn’t doing its part to provide an inflation hedge?

Though it currently holds third place behind London and New York, Hong Kong’s presence as a world financial center is growing by the day. Credit Suisse Group (CS) is the latest financial firm to move a top executive to the Asian city.

Vikram Gandhi, the Swiss bank’s head of global financial institutions group, will relocate to Hong Kong from New York this summer to tap growth in Asia, Bloomberg News reported.

“As part of our ongoing commitment to transfer talented bankers to other regions, Asia Pacific will benefit greatly from having a banker on the ground with Vikram’s experience and client relationships,” Jim Amine and Marc Granetz, co-heads of global investment banking at Credit Suisse, wrote in an internal memo. “We are going to continue to align our best bankers with areas of highest potential growth.”

This move follows similar relocations to Hong Kong by top brass at Deutsche Bank AG (DB), Morgan Stanley (MS) and Citigroup Inc. (C) as investment bankers look to cash in on the large number of sovereign wealth, private equity and corporate deals occurring in Asia.

China and the other emerging Asian economies haven’t been as adversely affected by the global credit crunch. While deals are slowing down in the United States and Europe, the pace of business is still fast and furious in the Pacific Rim.

“Investment bankers follow the money,” Scott Moeller, a Professor at the Cass Business School and former executive with Deutsche Bank and Morgan Stanley, told BBC News.

“With sovereign wealth funds having a lot of money, with Asia having escaped the worst of the credit crunch and with the crunch having hit the U.S. and Europe the hardest, it is not surprising at all,” Moeller said. “Once you get critical mass in a location, it begins to snowball and that is what is happening in Asia.”

But despite the growing number of deals happening in Asia, competition between Hong Kong and Shanghai is likely to keep the former city from overtaking London or New York as the new global financial capital.

“I would be more worried if I was in a third tier financial center like Paris or Frankfurt than in London or New York,” Moeller said. “I don’t think London or New York will be losing their crowns as leading financial centers any time soon.”

Source: Hong Kong Gaining Prominence as Leading Global Financial Center

He said, ‘“Look, those are the bankers’ and brokers’ yachts.” ‘“Where are all the customers’ yachts?” asked the naive investor.’

This old Wall St joke spawned the title for your editor’s favourite investment book, from which this extract comes – Where are all the Customers Yachts by Fred Schwed Jnr. It first appeared in 1940 and related to Schwed’s brief experience on Wall St as a broker in the early 1920s.

He was the son of a short seller who went bust in the ‘20s. Expelled from Princeton for having a girl in his room he lasted only two years on Wall St but long enough to understand how it works. In defiance of the Puritanical work ethic often associated with America, he preferred golf and drink. Billionaire financial information entrepreneur and New York mayor, Michael Bloomberg called the book a “hilarious classic that proves the more things change the more they stay the same”. His other written credits are few save this and a children’s book – Wacky the Small Boy – who perhaps grew up to become Wacky the prop desk trader, or Wacky the hedge fund manager…

I was reminded of this thanks to a report in today’s Telegraph. As the economic climate deteriorates, the knives are out for the financiers and corporate elite. Brussels is gearing up for an all out attack on bonus culture. The short-term pay structure of such schemes has become “deformed” and encourages excessive risk taking with little thought for the interests of “stakeholders” or “society” according to a confidential document prepared for EU finance ministers. Well, most EU finance ministers… Britain’s Alistair Darling and free market allies from Eastern Europe have been excluded! Curbs on bonuses, stock options and golden parachutes are on the table for the interventionists. Angela Merkel wants a €1m cap on pay… No free marketeer the German Chancellor.

There is no “concrete legislation” on the table notes the Telegraph but the mood is clear enough. After the private sector lash the public sector backlash and unsurprisingly, the proposal is viewed with alarm in the City…and we suspect their yacht brokers too.

Back to the topic of oil for a moment…now $3 down from its $126 peak and never far from our thoughts. The US’s thirst for oil is matched by its increasing dependence on others to provide it. In 1973, the US imported 33% of its oil. Today the figure is nearer double at about 60%. By 2020 it could be importing 70% of its needs says Gideon Rachman in the FT.

Meanwhile, on the other side of the Pacific, the competition continues to intensify. Chinese oil consumption doubled between 1994 and 2003 and will double again by 2010 when the International Energy Agency expects it to be the world’s largest consumer of energy. Overall, the world will need 50% more energy needs by 2030 thinks the IEA. Mr Rachman notes:

“While western politicians routinely worry about globalisation, they have yet to focus on a more plausible threat. It is not the outsourcing of well-paid jobs; or the inflow of cheap goods: it is the globalisation of western patterns of consumption. If the Chinese and Indians eventually eat and drive like Americans and Europeans, the current inflation in fuel and food prices could be just the beginning. The environmental implications are also obvious – and alarming.”

But as China emerges, one stage of its economic development appears to be ending notes a Bloomberg report…

“The end of an era of China’s mighty export industry has begun,” says Tao Dong Asia chief economist for Credit Suisse. A third of the factories in China’s southern Guangdong province which produce 30% of China’s exports will be closed in three years time he reckons.

Vietnam (voted top emerging market destination for manufacturing business by PwC last year), India and other Asian nations are aggressively pursuing foreign investment. Chinese labour is now being undercut by Vietnam and India. Vietnamese labour is more than 40% cheaper and Indian labour cheaper still. This won’t weaken Chinese growth but rather change the shape of it as it moves into higher up the manufacturing food chain into value added businesses such as computer chips, cars and electronics.

An interesting feature of Chinese economic growth is its geographic concentration. Four provinces in the south-east of the country account for 60% of the country’s exports. As such average incomes in the richest regions coastal are ten times those in the poorest in Western China. In spite of money spent on infrastructure, the transportation and other costs make heading West an uncompetitive option for business in comparison to other options such as Vietnam. The spread of prosperity in this notionally Communist country to the 700m in the west of the country is a major issue thinks Morgan Stanley’s Stephen Roach:

“It is absolutely key that China pushes its development model westward. The jury’s out on whether they will pull it off.”

Regards,

Rob Mackrill
The Daily Reckoning

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A typical hedge fund invests or goes long in stocks and other securities, and simultaneously bets against or shorts those overvalued securities. In theory, this means hedge funds are supposed to deliver an absolute return in all markets while protecting your capital. They’re also supposed to reduce your risk and hopefully, outpace stock benchmarks.

This strategy doesn’t come cheap. If you’re a hedge fund investor, you’re expected to fork over big bucks in management fees. And that’s not all. You could be subjected to 12-month lock-in periods (or more) and then hand over a 1% annual management fee and a slick 15% performance or incentive fee on new net profits. What a deal!

This pales in comparison to plain indexing or investing in active mutual funds, that don’t lock-in your capital and or charge obscene annual fees. Also, mutual funds rarely blow-up like some hedge funds…but hey, that’s not even worth mentioning right?

What Happened to Hedging?

Seriously, to be fair, hedge funds did protect investor capital in the last bear market from 2000 to 2002. So for two years, investors were satisfied with their hedge funds.

But, if you take a closer look, you’ll notice most so-called “hedge” funds simply failed to do that during the severe market dislocations in history. For example, most hedge funds lost a pile of dough during the fall of Long-Term Capital Management in August 1998, the aggressive rate hikes of 1994 and during the October crash of ‘87.

This is how hedge funds work. Hedge funds function properly and make money as long as there are a series of established trends in their respective sphere of trading. But once markets dive sharply, most hedge funds fall just as hard as everything else.

The Markets Have NOT Been Kind to Hedge Funds This Year

So far, 2008 has been one of the toughest years for global investors since 2002. As you might guess, the average hedge fund is losing money. In fact, some hedge fund categories are faring worse than the S&P 500 Index.

Go back a little farther and the hedge fund story just gets worse. Since 2007, a record number of hedge funds have either closed or collapsed. This market volatility has drawn the final curtain on some of the more inexperienced and highly leveraged operators.

According to the Credit Suisse Tremont Hedge Fund Index, those amazing Wall Street and London trading wizards are down an average 2.1% this year through March 31. Even worse, out of the 12 sub-indices that make up this database, only three are profitable.

The best-performing hedge fund sector this year is the short-selling category. That’s an obvious place to make money for any short-only focused hedge fund. But others, including distressed debt, event-driven, convertible arbitrage, and long/short equity are all suffering losses through March (latest data available).

So far in 2008, most hedge funds have failed to make the grade. Investor cash flows have tumbled more than 50% compared to 12 months ago as redemptions surge. Many investors have also grown concerned about prime-broker counterparty risk whereby investment banks like Bear Stearns conducted trading on behalf of large hedge funds.

Too Popular?

Back in the ‘80s and ‘90s, hedge fund managers only marketed these products to the super wealthy. But now, hedge funds are marketed to mainstream investors through publicly listed companies and retail hedge funds offshore. Pension funds, endowments and even sovereign wealth funds (SWFs) are climbing aboard hedge funds this decade for higher inflation-adjusted returns in this sluggish stock market environment.

Hedge funds grew so popular heading into the mid-2000s that several high-profile managers went public. Fortress Investment Group (FIG-NYSE) is no doubt one of the better hedge funds in the world. But even being one of the “better ones,” this hedge fund has still gotten slammed since going public in 2007 following a dismal first quarter as leveraged loans soured.

“Fortress” Doesn’t Live Up to its Name

Unfortunately, too many hedge funds fail to earn their stripes. They simply don’t deserve their fat 15% incentive fees. Many managers disguise themselves as long/short products. But in reality, they’re just glorified mutual funds that fail to properly hedge while levying huge fees.

Despite their ongoing issues, a small handful of hedge funds do belong in a large globally diversified portfolio. From a universe of more than 6,000 products, some are still worth your dollars. These managers have earned top performance accolades over the years, successfully protected investor capital and have a large portion of their net wealth invested in their funds.

But now, more than ever, you must conduct careful due diligence on any hedge fund product. Make sure you understand any potential hedge fund’s liquidity provisions, underlying leverage, lock-ups (if any) and the fund’s prime brokerage relationship.

Also, a true-blue hedge fund should be able to make money in most markets, including bear markets and crashes. Investors beware.

ERIC ROSEMAN, Investment Director

• PepsiCo Inc. (PEP) announced yesterday (Thursday) that a big rise in international revenue helped offset higher commodity costs and boost its first-quarter profit by 5%. Net income for the first quarter jumped to $1.15 billion (70 cents per share), up from $1.10 billion (65 cents per share) last year. Revenue in the international division grew the most, rising 27%, the Associated Press reported.

• Credit Suisse Group (CS), Switzerland’s second-largest bank, announced a ($2.1 billion) loss for the first quarter. The bank also said it had net writedowns of $5.3 billion for big buyout loans and mortgage-backed securities. The bank, which employs 48,000 people worldwide, said earlier this week that it was cutting a further 500 employees in addition to the 1,000 jobs it has already eliminated in investment banking, the Associated Press reported.

• Billionaire Nelson Peltz’s Triarc Companies Inc. agreed to buy Wendy’s International Inc. for about $2.4 billion, bring the third-biggest U.S. hamburger chain under the same umbrella as his Arby’s Restaurant Group Inc. restaurants, Bloomberg News reported. Wendy’s put itself up for sale last June, under pressure from Peltz, who controls nearly 10% of Wendy’s and has repeatedly pressed the chain for better financial results.

• Earnings for AstraZeneca PLC (AZN), Bristol-Myers Squibb Co. (BMY) and Bayer AG (OTC:BAYRY) declined for the first quarter, as the drugmakers faced increased competition from generic manufacturers. AstraZeneca’s net income unexpectedly fell 3.7% to $1.50 billion. Bristol-Myers’ first-quarter net income fell 4.2% to $661 million. Bayer reported that profit that beat analyst estimates, but net income fell 73% to $1.21 billion.

• State-owned aviation company Dubai Aerospace Enterprise said it plans to spend a further $2 billion through 2009 to expand its fleet. In November, the company ordered 200 Airbus SAS and The Boeing Co. (BA) planes, Bloomberg reported.

• Merrill Lynch & Co. Inc. (MER) shares gained after the securities firm announced it would maintain its dividend yesterday (Thursday). The board of directors declared a regular quarterly dividend of 35 cents per common share payable May 28, 2008, to shareholders of record on May 8, 2008, the company announced in a statement.

• Newmont Mining Corp. (NEM) Chief Executive Officer Richard O’Brien said yesterday (Thursday) that gold could reach $1,100 an ounce in 2009, Reuters reported. O’Brien went on to cite a number of factors that make him bullish on gold, including “diminishing mine output, strong jewelry demand, inflation and the dollar weakness.”

• Celestica Inc. (CLS), maker of Microsoft Corp.’s (MSFT) Xbox 360 video-game console, earned $29.8 million in profit for the first quarter compared to a $34.3 million loss for the same period on the prior year. Earnings of 13 cents per share compared to a loss of 15 cents per share the year prior beat analyst expectations, sending the stock up over 30% prior to the close yesterday (Thursday).

On the credit front, banks around the world may have lost somewhere in the region of a $1trn between them, so something has to give. Namely loans to customers. Whether they be first time buyers trying to get a foot on the housing ladder, a business needing finance or some private equity house putting together a leveraged buyout. Subprime has blown a large hole in the banks, and that means credit rationing for customers.

On the subject of mishaps… The one-time claim of Swiss banking conservatism looks again to be a claim as hollow as their Emmental today as Credit Suisse revealed anything but credit. They notched up a first quarter loss after a $5.2bn write-down.

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The problem is you need to help your old fighter in the blue corner back on his feet, but that is only going to wind up the bruiser in the red corner. That help is principally interest rates. But if you keep cutting them while a loaf of bread is £1.20 and rising and a litre of petrol is £1.09 and rising – £1.12 is anticipated next month – then that escalates the risk of ‘flation going berserk and flattening all in sight.

But if you don’t cut rates to choke inflation you risk a ‘70s style housing crash, says Edmund Conway of The Telegraph. This dilemma is taxing the nine member MPC and has created an unusual split in their thinking. Last time around, the majority voted on a quarter point cut, one voted for a half point cut and two voted to keep on hold.

The good news is Lombard Street Research note is that although food/fuel prices are on the march, this has not yet shown up in higher wage growth. To us, the key caveat there are the two words ‘not yet’. Today there’s a teachers strike today for the first time in 21 years as they bid for an inflation-proofed pay deal. Will more follow their example?

As for the era of cheap food, its return looks unlikely unless there’s a catastrophic reversal of the long-term economic and demographic growth trends in place. Or agricultural production revives once again confounds global warming and the Malthusians. China will one day boast a middle class whose numbers will equal the entire population of the US. Will they want to subsist on a bowl of rice a day?

No. They’ll be wanting hamburgers, pizza, steak and sushi… or the cultural equivalent thereof. The rich world will just have to learn to share with the nouveau riche world and bid more for it. Food rationing in the east. Food rationing in the west. Mighty US retailer Walmart is limiting the purchase of rice, reports Bloomberg, and another US retail giant, Costco, is considering a similar move. Elsewhere, Irish Banana importer Fyffes reports higher import costs are accelerating fruit price inflation.

And then there’s cheap energy… Well, maybe one day we’ll be saved by science, but the quest for an alternative to finite hydrocarbons remains a live one. And until that day comes we’ll continue to be pay close attention to the oil price, now retreated to $117 from its recent relentless march up to $120 high. And on the idea mentioned recently of what price oil has to hit before people start giving up on the car, a reader writes…

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“Oil at 200 bucks within the next five years? Quite probable, but down to 80-85 first as this spike runs out of steam. Overall when peak oil ( maximum daily supply exceeded by minimum daily demand – not the stuff in the ground ) hits us then the price will go as high as it can ($400) before the global transportation infrastructure grinds to a halt and with it the global economic infrastructure . Global warming just doesn’t stand a chance because we won’t see 2100 as a civilised planet.”

*** An item of business news catches the eye this morning…

Britain ’s largest housebuilder, Persimmon plc. reports sales have slipped by 24% this year and warns it faces the worst mortgage market since the ‘70s. News that has had investors running for cover and sent the shares more than 8% lower together with the broader market, down more than 100 points. But what did they expect? If you can’t get a mortgage how can you buy a house even if you’re brave enough to want to. The sector is facing a “triple witching” says Merrill Lynch:

“Worryingly, it is clear that the UK housebuilders are entering a new and potentially volatile period characterised by significantly constrained mortgage availability, buyers deferring purchases in anticipation of price falls, and, most recently, their growing concerns about employment security.”

Long time members of The Sovereign Society know that we never have recommended UBS as a Swiss bank for offshore accounts – and that was not only because of its monster size and impersonal service. What concerned us is the UBS anti-privacy policy.

The merger of Swiss Bank Corp and Union Bank of Switzerland creating UBS AG was approved by the U.S. Federal Reserve Board in 1999. But that was only after UBS agreed to provide the U.S. government with all information “necessary to determine and enforce compliance with . . . [U.S.] federal laws.”

This surrender went far beyond the normal financial information that Swiss banks must exchange with the U.S., under the current U.S.-Swiss Tax Treaty. This agreement also nullified Swiss bank secrecy laws that usually require a court order to release private banking information.

UBS caved in after the U.S. government threatened to shut down the bank’s extensive American financial operations. The UBS sell-out was bad news for financial privacy seekers -and it blew a large hole in the much vaunted concept of Swiss “bank secrecy.”

Then and now we advise U.S. and other potential depositors to avoid UBS AG and any Swiss bank that has active U.S. financial operations and offices beyond a mere “representative office.” (A similar privacy killing deal was made between the Fed and Credit Suisse when that leading Swiss bank merged with First Boston.)

Historically, there has long been a widespread belief that Switzerland is the place to safeguard cash and personal assets, especially in times of trouble. We think that still holds true.

Notwithstanding UBS, it is estimated that currently Swiss banks manage at least one third of all assets held offshore by the worlds wealthy. Total cash assets of the Swiss banking system are estimated at nearly US$2 trillion, while the value of total securities deposits are well over US$3 trillion. Assets under Swiss management have risen significantly in recent years, reaching a high of nearly US$4 trillion in 2007, according to the Swiss National Bank and the Swiss Bankers Association.

But the country’s political, financial and economic stability and strength are of far greater importance. Many of the world’s leading companies and hundreds of thousands of non-Swiss persons bank with the Swiss. Even the international intermediary banking institution for all other banks in the world, the Bank for International Settlements, is located in Basle, Switzerland.

Switzerland still is home to several hundred banks, including many small private and regional banks and more prudent large banks such as Bank Julius Baer, with branch offices in most of the world’s financial centers, from New York and Panama to Singapore and Hong Kong.

If nothing else, the UBS debacle is a stark warning to other Swiss bankers to stay with their traditional principles and, by all means, avoid Americanization.

BOB BAUMAN, Legal Counsel

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