Of course it was misery for many of the test subjects. People were so eager to get out of the East German control group, they risked their lives jumping over the barbed wire. Then, when the wall was down, the population of East Germany collapsed…more than one out of every ten people moved to the West!

But it was a great experiment for economists. Too bad they didn’t learn anything.

To read the rest of Mr. Bonner’s article his long-term recommendation for protecting your financial security, finish the article at The Daily Reckoning.

The industrial dynamism that produced Germany’s post-war success is moving to the East…piece by piece.

The Ruhr Valley was the heart of Germany’s industrial might. For more than 200 years, the smokestacks in this northwest corner of Germany pounded out the steel and iron that would form the backbone of the nation’s industry. And when the war drums rumbled, these factories supplied imperial Germany with its field guns, armored tanks and shells.

Prosperous communities grew up around these old blast furnaces and mills. People took pride in the stuff they could make with their hands. Tens of thousands found work in the factories of the Ruhr. Generations passed with the knowledge that their sons and daughters could make a life here and carry on the legacy of such a place. For a long time, that was the way it went.

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There’s Another Bear Stearns Out There…

When Bear Stearns’ stock plunged from over $60 to under $3 a share, many unlucky investors lost their shirts. And many experts believe that history is going to repeat itself with another household name…

Don’t be caught off guard when the next “toxic stock” falls apart. Find out who the next Bear Stearns is — and how to make money-tripling gains in the next wave of wipeouts and writedowns — here.

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But the winds of change patiently grind away at even the most impressive of advantages. In the early 1990s, the industrious workers of Asia powered the mortar and pestle that would crush the Ruhr’s traditional way of life.

It was a slow process, but the endgame was not hard to see. While the South Koreans became the most efficient producers of steel in the world, German workers were agitating for a 35-hour workweek. While the Chinese worked all day in their mills and new factories sprouted up like spring peepers all through China, Germany increased taxes and expanded its bloated government programs.

By the turn of the millennium, no one could ignore the stark reality any longer. The mills and factories of the Ruhr started to close — forever. In his terrific book, China Shakes the World, James Kynge tells the story of ThyssenKrupp’s steel mill in Dortmund, one of the largest in Germany. The Germans called it the Phoenix, inspired by its rise from the ashes of bombing raids in World War II.

Within a month of ThyssenKrupp closing the mill, a Chinese company bought it with the idea of disassembling the entire mill and taking it to China, near the mouth of the Yangtze River. Soon after this Chinese company bought the mill, 1,000 Chinese workers arrived in Germany to begin the process of taking the plant apart and bringing it to China. The Germans got an up-close lesson in why they could not compete. The Chinese worked seven days a week for 12 hours a day. The Germans started to complain. So the Chinese, in deference to local law, took one day off.

In the end, the Chinese dismantled the mill in less than one year — a full two years ahead of the time ThyssenKrupp initially thought it would take.

When the Chinese departed, they left the makeshift dormitories and kitchens they occupied for a year neat and clean. There was, however, a single pair of black boots left in one of the dormitories. The boots carried the brand name Phoenix, which was the same name of the plant the Chinese just took apart. The boots also carried the label “Made in China.” Kynge writes, “Nobody could tell, however, whether the single pair of forgotten boots was an oversight or an intentional pun.”

Over 5,000 miles away, the Chinese rebuilt the steel mill exactly as it was in Germany. As Kynge writes: “Altogether, 275,000 tons of equipment had been shipped, along with 44 tons of documents that explained the intricacies of the reassembly process.” Doing all of this was still cheaper — by about 60% — than building a new mill. Plus, in China, the demand for steel was such that the mill could start producing steel immediately at full capacity.

As recently as 1975, China’s entire output of steel could not match this one mill in Dortmund. Now, the Dortmund plant itself stands in China. And in Germany, you have a dying industrial city, unemployed steelworkers and the scarred earth where the mill once stood. Germany is thinking of turning the site into parkland and perhaps creating a lake and marina. But as one burly steelworker says in Kynge’s book: “Do we look like yachtsmen to you?”

This remarkable vignette captures, on many levels, how the game has changed. Comfortable workers in the factories and mills of America and Western Europe have no idea what they are up against. Even so, the nature of global competition keeps shifting. We tend to think of emerging markets, such as China, as occupying a place down on the food chain of the global economy. We tend to think of these places as sources for cheap labor and natural resources. But more and more, these emerging markets are home to world-class companies in all kinds of industries.

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SUCCESS WITH STOCK OPTIONS: Once Difficult, Now Made Easy

The “pros” love ‘em…the gurus brag about ‘em…but maybe you were just never sure how to make stock options work for you…

Finally, the secret to making options pay…with much less risk and much less work…has just been revealed…for anybody who’s finally ready to get started… Read on.

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This is the thesis of Antoine van Agtmael, author of a new book called, The Emerging Markets Century. Agtmael is the man who coined the phrase “emerging markets” to describe growing, but less-developed economies such as China, India, Brazil, Argentina, Mexico, Thailand and other places. Before him, we called these markets “third-world” — which brings to mind many negative associations. To sell the idea, Agtmael came up with “emerging markets.”

After the various eurozone finance ministers gather for the traditional ‘family photo shoot’, “there will be some speeches, the cutting of a 10th birthday cake and then a closing concert”, says Raphael Anspach, a spokesperson for the ECB, rather enthusiastically. Sounds fun.

But before the string section pipes up, we recommend that the organisers have a think about sticking a cork in the trombones.  The second ten years are going to be a lot less triumphant than the first ten…

When the euro fell to 90 cents to the US dollar in the early 2000s, it was derided as a ‘toilet currency’ by nationalistic curmudgeons and currency traders alike. One single currency, it was thought, couldn’t possibly represent a jumble of nations on different economic cycles, not to mention a cacophony of countries with wildly divergent industrial bases and monetary needs.

The hidden weaknesses of the euro countries

How things have changed. The euro is up 60% against the US dollar since George Bush first came to power, as both Gulf states and Asian countries have begun ditching the greenback for safer stores of value. And the euro’s share of global foreign currency reserves rose from 18% back in 1999 to more than 25% by 2007. But that doesn’t necessarily mean that the fundamental position of the euro is any better than it was eight years ago. Investors may have fled the US dollar, and watched the eurozone grow relatively fast against its lagging American counterpart, but they’ve ignored the hidden weaknesses on this side of the Atlantic.

This year’s first-quarter GDP growth across the eurozone flipped up a good 0.7%, but that figure was skewed upwards by the rollicking performance of the German economy. German GDP growth climbed 1.5% on the back of a roaring manufacturing base oiled by booming exports. In contrast, Italy only managed expansion of 0.4% and Spain 0.3%, while in Portugal, growth actually fell by 0.2%.

Meanwhile, inflation is on the rise, led by a good 4.6% in Spain and 5% in Ireland. Both are well outside the ECB’s 2% target. The spectre of stagflation – a stagnant economy plus rising inflation – is rearing its ugly head. Indeed, “stagflation is a situation that we experienced some years ago, it could return,” said Spain’s Economy Minister Pedro Solbes earlier this month.

Why a strong euro is disastrous for Ireland

And that’s not the only problem. A strong euro might be good news for Germany, given the strength of its economy, but for Ireland, whose main export destinations are the UK and the US, it’s disastrous. Ireland has begun to lose its competitive advantage against other destinations for multinational companies, says Professor Rodney Thom, head of the School of Economics at University College Dublin, as it becomes more expensive to export pricey euro-denominated goods and services abroad.

“I never saw any advantages to us joining the euro”, says Professor Thom. “The last thing we needed was low interest rates when the economy was overheating”, and now that the currency has risen against sterling and the US dollar, “we’re losing our competitive edge. Ireland is on a limb”, he says, because it has given up one of the most significant economic levers open to any country – the ability to set its own interest rates.

In the 1990’s, when sterling depreciated 5% against the deutschmark, “the Irish central bank did something very clever”, he says. It let the Irish punt depreciate half way between the two currencies “to keep a balance. Now we can’t do that. The euro has given us a headache that we didn’t need.”

So there are plenty of things for Europe’s finance ministers to think about when they’re quaffing their champagne and gobbling their cake this Monday.

Source: It’s the ECB Birthday Party, but not Everyone gets Cake 

The United States is “already in recession … perhaps not in the sense that economists would define it [with two consecutive quarters of declining gross domestic product (GDP)] but the people are already feeling the effects,” Buffett said. “It will be deeper and last longer than many think.”

As Money Morning reported back in March, Buffett made a similar pronouncement to U.S. audiences during an interview with the popular cable-television network, CNBC-TV.

Buffett is the world’s richest man, with a net worth of $62 billion. As the chairman of Berkshire Hathaway Inc. (BRK.A, BRK.B), investors have for years followed Buffett’s moves to see which investments are going to take off next. Financial-research studies actually show that mimicking Buffet’s investment moves can be a most-profitable strategy.

A New Focus

Within the last year, Buffett has shifted his focus abroad – the precise strategy that Money Morning has been advocating since this global-investing news service was formed back in 2007.

Back in October, the Oracle of Omaha’s trip to South Korea encouraged our own bullishness on that country’s stock market.

And now Buffett has decided to have a look at Germany. However, Buffett remains most interested in German companies that are family-owned and well-managed. And he’s always in the hunt for carefully selected companies with great brand names and strong market positions.

“If the world were falling apart I’d still invest in companies,” he said.

Berkshire’s recent play for U.S. chewing gum icon Wm. Wrigley Jr. Co. (WWY) underscores that willingess to invest in the “right” opportunity, regardless of the general economic outlook. Just last month – against a backdrop of recessionary and inflationary fears, a weak dollar, soaring energy prices, and a spiraling credit crunch – Berkshire joined forces with closely held Mars Inc. and agreed to provide $4.4 billion in financing for the $23 billion deal. In addition to providing the debt financing, Berkshire will make a minority investment in Wrigley, valued at about $2.1 billion. It’s believed that Buffett is getting a discount on the Wrigley stake.

Once the deal closes, Wrigley will become a separate Mars subsidiary. And there may be a lot more to the deal in the long run, sources say. By helping Mars buy Wrigley, Buffett may actually be helping himself: As one, big privately held entity, the merged Mars-Wrigley giant would be much easier for Berkshire to buy outright should the secretive family that runs the business ever decide to sell it, sources said.

On a recent trip to Europe, Buffett made stops in Germany, Switzerland, Spain and Italy. But his first priority was to meet with leaders of the German mittelstand – the family-owned, medium-sized companies that are the backbone of the German economy.

“We would like more family owners of German businesses who, when they feel some need to monetize their business, think of Berkshire Hathaway,” Buffett said to the Financial Times.

Buying into privately held companies – usually those whose ownership remains in the hands of the founding family – is an investment play Buffett has run time and again – and virtually always successfully. Back in 2006, he made what then was his largest investment ever outside the U.S. market, when he spent $4 billion for an 80% stake of an Israeli metalworking firm that was family operated. At the time, Israel was out of fashion with U.S. investors, though Buffett’s headline-making deal changed those attitudes rather quickly.

Like Israel was then, and like Japan is now, Germany is currently unfashionable with U.S. analysts. As is also true of Japan, it seems to come as a surprise every time Germany comes out with a positive gross domestic product (GDP) number. Both countries had horrible periods in the 1990s, but analysts who think Germany is doomed to slow growth forever haven’t been paying attention.

Buffett also renewed his criticism of the derivatives trading that helped create the current global credit mess.

Buffett Criticizes Waste

“It’s not right that hundreds of thousands of jobs are being eliminated, that entire industrial sectors in the real economy are being wiped out by financial bets even though the sectors are actually in good health,” Buffett told the German magazine.

Buffett complained about the lack of effective controls.

“That’s the problem,” he said. “You can’t steer it, you can’t regulate it anymore. You can’t get the genie back in the bottle.”

When it comes to choosing investment targets, Buffett favors companies that have a competitive advantage, offering products or services that can’t easily be replicated by rivals. Businesses such as Mars and Wrigley, which each have strong consumer brands, fit the bill, Jerome V. Bruni, president of J.V. Bruni and Co., a Colorado Springs, Col.-based investment banking firm, recently told the Dow Jones Newswires.

The Wrigley deal is just the latest in a string of recent deals for the so-called “Oracle of Omaha.” Other recent investments include a stake in Kraft Foods Inc. (KFT) and GlaxoSmithKline PLC (GSK), Europe’s largest drugmaker.

Since taking over Berkshire Hathaway in 1965, Buffett has transformed the once-wheezing textile manufacturer into an investment vehicle that controls an amalgamation of more than 70 portfolio companies and that has a market value of $200 billion.

As of the end of last year, Berkshire owned 3.3% of Procter & Gamble Co. (PG), a consumer-products giant, along with big chunks of The Coca-Cola Co. (KO) and Anheuser-Busch Cos. Inc. (BUD).

Source: Warren Buffett, the “Oracle of Omaha,” Tells German Audiences That the U.S. Economy is in a Deep Recession

First-quarter GDP growth reached 0.7%, exceeding forecasts and keeping the annual rate flat at 2.2%. Chalk it up to Germany, which accounts for about a third of the eurozone. Its quarterly growth rate hit a 12-year high of 1.5% in the first three months of this year, shrugging off the strong euro, high oil prices and global financial turmoil. It was helped by a rise in investment and consumer spending, the latter marking a recovery from a sharp fall in the autumn.

Growth is heading down…

Nonetheless, this seems likely to prove a “high-water mark” for the euro area, said The Economist. Germany’s GDP figure was boosted by abnormally strong construction activity, due to mild weather. This fillip could easily knock 0.4% off growth next quarter as it unwinds, said Capital Economics.

More importantly, reliable surveys, including the purchasing managers’ index – the PMI gauging manufacturing activity hit a three-year low in April – point to much slower growth this quarter; eurozone industrial production growth has shrunk to 2%, with March’s fall in capital goods production a “sign that the strong euro and weakening global demand may be starting to take their toll”. Even German firms are now feeling the pinch from the strong euro – shipments fell in February and March, said The Economist.

Consumption is a further worry. The zone’s retail sales declined for a fourth time in six months in March and are 1.6% down on last year. Given worries about inflation and real income growth having slid over the past four years, it’s hard to be confident that German consumption is set for a significant boost, despite recent falls in unemployment and high consumer savings. That’s a pity, since shoppers in another heavyweight economy, Spain, are all spent out now that their housing bubble has collapsed. Quarterly growth is at a 13-year low. The debt deleveraging process in Spain and Ireland “has barely started”, said Julian Callow of Barclays Capital. Italy, meanwhile, appears in danger of slipping into recession.

…as the credit crunch tightens

And the credit squeeze is worsening. The latest ECB survey covering the first quarter shows that 49% of lenders tightened standards for corporate loans, up from 41% in the previous survey. This is significant, said Liam Halligan in The Sunday Telegraph, because 85% of eurozone finance is made up of bank credit, compared to under half in America. So the first quarter may have looked good, but the data is set to look a lot “less flattering”, as ECB president Jean-ClaudeTrichet put it, from now on.

Source: A High Water Mark for The Eurozone

Back in October, the Oracle of Omaha’s trip to South Korea encouraged our own bullishness on that country’s stock market.

And now Buffett has decided to have a look at Germany.

On a recent trip to Europe, Buffett made stops in Germany, Switzerland, Spain and Italy. But his first priority was to meet with leaders of the German mittelstand – the family-owned, medium-sized companies that are the backbone of the German economy.

“We would like more family owners of German businesses who, when they feel some need to monetize their business, think of Berkshire Hathaway,” Buffett said to the Financial Times.

Buying into privately held companies – usually those whose ownership remains in the hands of the founding family – is an investment play Buffett has run time and again – and virtually always successfully. Back in 2006, he made what then was his largest investment ever outside the U.S. market, when he spent $4 billion for an 80% stake of an Israeli metalworking firm that was family operated. At the time, Israel was out of fashion with U.S. investors, though Buffett’s headline-making deal changed those attitudes rather quickly.

Like Israel was then, and like Japan is now, Germany is currently unfashionable with U.S. analysts. As is also true of Japan, it seems to come as a surprise every time Germany comes out with a positive gross domestic product (GDP) number. Both countries had horrible periods in the 1990s, but analysts who think Germany is doomed to slow growth forever haven’t been paying attention.

The Seeds of a German Economic Rebound

Germany’s problems of that period were largely due to the 1990 German reunification, which German Chancellor Helmut Kohl foolishly carried out by equalizing the West and East German currencies and making East German labor hopelessly uncompetitive in the process. The net result was 15 years of huge subsidies from West to East and a series of real estate disasters as Western construction companies overbuilt in the East.

Since about 2005, however, the costs of reunification have begun to decline – they were always likely to be a finite problem, as the Eastern education system was reformed and produced more productive workers – and the German growth rate has begun to increase.

Indeed, over the near-decade since the introduction of the euro, German labor competitiveness has increased by about 20% against its fellow European Union members, a very good performance. German companies have a healthy position in Eastern Europe, too, where economic growth has been rapid and wage rates remain far lower than in the West.

Germany has a substantial balance of payments surplus – about 5.5% of GDP in 2007, slightly larger than the United States’ deficit – and a budget deficit of only 0.4% of GDP. The Economist estimates that Germany will grow at 1.7% in 2008 and 1.6% in 2009 – not stellar, but still faster than the United States, which will be lucky to eek out 1% GDP growth this year (and much faster per capita if you discount for the 1% annual U.S. population growth).

Unlike some of its EU neighbors, German industry has suffered only moderately because of the euro’s strength. It helps that many German companies have substantial manufacturing operations in central Europe, which has become a haven of German-style (and mostly German-speaking) labor practices and engineering skill, but where labor costs remain low. Add in German companies’ reputations for superb organization and quality control, and you have an industrial machine that is fairly immune to exchange rate fluctuations and even to cheaper emerging market competition.

Even inflation at 2.4% is not much of a problem in Germany, and the strong euro should hold German inflation down by suppressing rises in dollar-denominated energy and commodity prices, while not doing much damage to Germany’s healthy balance of payments surplus.

Profit Plays to Call Now

So, what to buy? Well, be careful with the banks. There are too many banks in Germany, most of them propped up by their local governments, and the banking system’s lack of good ideas for making money has recently been shown by two banks, IKB Deutsche Industriebank AG and Sachsen LB, getting in serious trouble for overexposure to U.S. subprime mortgages. However, most German banks do have an advantage over U.S. banks in their limited exposure to non-mortgage U.S. debt.

Nevertheless, if you want a German financial services play, I would avoid even the mighty Deutsche Bank AG (DB) and go for the banking/insurance conglomerate Allianz AG (ADR: AZ). While Allianz does own Dresdner Bank, which has had its own problems and write-offs, it is also Germany’s largest property, casualty and health insurance company, making it one of the world’s leading insurers. And Allianz is trading at a slightly lower price/earnings (P/E) ratio than Deutsche at about 7, has a nice dividend yield of 4% and is selling at less than 1.2 times book value, a key metric for financial services companies, which tend to sell at 2 or 3 times book.

You should also look at Germany’s great engineering companies. The largest, Siemens AG (ADR: SI), has recovered from its losses of a couple of years ago and is now selling at a P/E ratio of about 8, although its dividend yield is still only 1.6%. Still, Siemens’ powerful worldwide position should allow it to continue its recovery, and there is a good chance of dividend increases – a return to Germany’s traditional conservative 50% dividend payout rate would cause its dividend to treble.

A third possibility is Fresenius Medical Care AG & Co. (ADR: FMS), the world’s largest manufacturer of kidney-dialysis machines, again a global player. This firm has a somewhat higher Price/Earnings ratio, currently about 19 on projected 2008 earnings, but its technological capability and strong market position give it attractive growth potential.

Finally, in the tech sector you might look at the business-software provider, SAP AG (ADR: SAP), whose shares carry a P/E of about 18 on estimated 2008 earnings, though they yield only 1%. SAP is the leading manufacturer and installer of so-called “enterprise resource planning,” or ERP, software, a business whose usefulness to companies has greatly increased as its products have matured and the firm’s earlier installation problems have largely been overcome.

Unlike Buffett, most individual U.S. investors don’t have the opportunity to buy the German mittelstand directly, but even large German companies can offer attractive values.

Source: Germany, Warren Buffett Likes It, and So Do We

Just when I thought I had completely lost my sense of humor, I ran across a MoneyNews.com article titled “Lehman Bros. Report: Oil Bust in the Cards”. Hahahaha! Thanks, Lehman!! Hahaha! I needed the laugh!

Perhaps part of the humor is that this comes at the same time as the price of gasoline went up 3 cents to another record high of an average of $3.70 a gallon. This is up 22% from this time last year! 22 percent! 22! Hahahaha!

It gets even funnier when Lehman is not just predicting lower prices, but “Lehman is now predicting prices at $83 a barrel in 2009 and as low as $70 in 2010.” At this point I am laughing so hard that my stomach hurts, and since I am on the verge of pooping in my pants, I am desperately trying to stop laughing by sticking my own thumb in my eye, but it does no good! I just keep going, “Hahahaha! Oww! Hahahaha! Oww!”

But $70 a barrel of oil? Hahahaha! Oww! Hell, the cost of production is higher than that! So does Lehman think that production costs are going to go down? Hahahaha! Oww!

Bill Bonner here at The Daily Reckoning, taking no notice of my anguish or my thumb, says, “Ten years ago, China imported 165 million barrels of oil per year. Today, the total is more than 1 billion. Wonder why the price of oil hit a new high last week – above $126 a barrel? Well, China is a big part of the answer.” A whopping 600% increase in ten years, and yet Lehman thinks that oil will go down in price? Hahahaha! Oww!

Kevin Kerr at Whiskey and Gunpowder says, “According to the most recent data from the U.S. Energy Information Administration, oil demand for countries in the Organization for Economic Cooperation and Development – which includes developed nations like Japan, Germany and the United States – has gone up 14% since 1980. Oil demand for the rest of the world, however, has skyrocketed 43%. That’s more than three times as fast!”

And yet Lehman thinks that the price of oil will go down? Hahahaha! Owww!

So, handily summing up, you can take it from me, the Loudmouth Mogambo Prognosticator (LMP), the guy with the ready laugh and the sore eye where somebody keeps sticking his thumb in it, when I tell you that there is no way, absolutely no way, absolutely no freaking way in hell that oil will be that low next week, next month, next year or ever! Hahahaha! Oww!

I was going to go to the medicine cabinet to find something that would stop my eye from mysteriously hurting, when it fell on Sean Brodrick at MoneyandMarkets.com writing, “According to the International Energy Agency, China’s overall oil demand rose by 7.8% in February from a year earlier, much higher than earlier estimates of a 5.3% gain. And gasoline demand rose by 22.8%!”

Careful Mogambo Scholars will take particular note of the use of Mr. Brodrick’s use of exclamation points in highlighting the rise in gasoline demand, as this means to me a rise in the use of internal combustion engines, meaning that a lot of work is being done, which means that a lot of raw materials are being consumed.

In fact, he reports, “As a result of that surge in demand, China’s crude oil imports rose 15% in the first quarter and 25% in March. Its imports are rapidly accelerating!” Again one notes the use of the exclamation point!

And in another very populous country, India, he says that “oil product sales – a proxy of demand – surged by 10.9% in February compared to a year earlier.” Yow! Eleven percent in one year!

The interesting part, which is a euphemism for, “the price of oil is going to go through the freaking roof one of these days real soon, and for a long time after that, too, and if you want to make a lot of money, then get your worthless butt in gear and go out and buy things connected with oil” because all of this gigantic surge in demand is coming at a time when supply is shrinking.

This is made manifest when Mr. Brodrick reports that “oil production is already shrinking in 60 of the world’s 98 oil producing countries. So it’s no surprise that in March, global oil supply fell by 100,000 barrels per day, led by lower supplies last month from OPEC, the North Sea and non-OPEC Africa.”

And Kevin Kerr agrees, too. “Unfortunately” he writes, “there’s no way for supply to keep up.” As in “no way, absolutely no way, absolutely no freaking way in hell, just as The Mogambo put it in a previous paragraph”, which he could have said but didn’t.

This is important stuff, so I call up the local paper and tell them that I want one of their stupid little reporters to come over for my news conference so that I can tell the world what is happening. The little receptionist asks, “Is this The Mogambo?” and I proudly say, “Yes, it is!” Then, suddenly, the line goes dead! So I call back, and the same little receptionist asks, “Is this The Mogambo?” and I proudly say “no!”

Then she says, “Is this about inflation?”, and I say, yes, it will impact inflation, and before I can say another word, she says, “It’s you, you Stinking Mogambo Idiot (SMI)!”, and hangs up again!

So, if you never read in your newspaper how inflation is going to kill all of us, especially inflation in the price of energy, then blame the stupid little receptionist.

The inflation you can blame on the corrupt Federal Reserve, and the corrupt Congress (except Ron Paul), which encouraged them, and the corrupt Supreme Court, which let them continually ignore the part of the Constitution that requires that money be only of silver and gold.

Until next time,

The Mogambo Guru
for The Daily Reckoning

The Mogambo Sez: Being as sweet and brief as I can manage, under the circumstances, if you aren’t buying gold and silver, you are a moron.

Source:  ‘Oil Bust’ Headline Makes a Good Punch Line

Down in Putney, along the bank of the Thames, there’s an oldish Jag parked on a side street with a personalised number plate. Given the one time reliability reputation of Jags, it was perhaps chosen with some justification.

It reads: PE51MST.

The word fits the view prevailing on the UK economic outlook – whether you’re a central bankers, a politician or most likely amongst the majority economists call ‘consumers’. Bad news is chasing us down the street…

The Bank of England says it could be recession down the road. Inflation is going up for some time to come – north of 3%, unemployment is starting to edge up too, credit is harder to come by and costs more – in spite of the best efforts of the Bank of England, house prices are going down and house building has slumped, commercial property prices have too – by 16% since last summer says the Bank of England. Our leading banks have lost billions – Barclays announces another £1bn write down this morning – and once proudly touted government golden rules on borrowing become instead lead weights around Gordon Brown’s increasingly vulnerable neck.

Okay so we’ve had our fill of the bad news. Is there anything we can be OPT1M1ST about? Well, looking at the stock market Mr Market’s mood appears to be cautiously more positive. The FTSE 100 hit a low for the year to date on March 17 closing a little over 5,400. It’s up 15% since at a little over 6,200. MoneyWeek is bullish on Japan and the Nikkei is showing signs of recovery. It hit a four month high close today.

UK stock market sentiment as measured by Sharescope has risen since its March low though remains marginally bearish. As we’ve said, stock markets are the great expectation machines and always straining their eyes on the horizon to see what’s coming…then discounting it before it arrives.

The worst of the credit crisis is over they say but as we can see from Barclays latest £1bn write down and collapsing bank shares, it is by no means over. The FTSE 100 is marginally higher today yet RBS, a constituent of it, has slumped 14%. The bank has given up half its market value over the past year, a grim stat that causes some degree of personal financial pain to your editor. Given the bank is reported to be sounding out shareholders about the level of support for top management; it has hardly a vote of confidence.

Commodities have edged down from their highs perhaps only temporarily but no boom lasts forever. Central bankers will hope this one ends sooner rather than later and the market price mechanism will assert itself once again as the universal regulator of demand. Oil is a little down from its high at $124 and food prices are showing signs of stabilising reports the FT.

As for the Eurozone, “old Europe” – France and Germany – is leading the charge. European growth in the first quarter came in at 0.7% against consensus of 0.5% and that in spite of the drag of sluggish Med economies such as Spain and Italy.

Growth has hit its fastest pace in 12 years in Germany and surprised on the upside in France. Eurozone rates remain at 4% as inflation has bubbled up to a 3.6% high in March, easing to 3.3% in April. If he can keep that virtuous cycle going in the face of ‘cost shocks from abroad’ the European Central Bank’s Jean-Claude Trichet will be in clover.

*** News from the frontline on the ongoing creative destruction of traditional print media… Johnston Press plc, a regional newspaper publishing business with a heavy debt load, is raising £200m plus in emergency funds as ad revenue wilts under the pressure of the internet.

“Traditionally,” reports the Independent “three-quarters of its revenue comes from ad sales.” Those sales have been falling relentlessly. Last year classified ads fell over 3%, car ads more than 8% and larger display ads 4%. Ad revenue fell another 4% in January and February this year. We’ve said it before, we’ll say it again. Sooner or later someone is going to start closing newspapers.

Regards,

Rob Mackrill
The Daily Reckoning

Source: Old Europe, New Growth

Gross domestic product (GDP) in the 15-country Eurozone increased by 0.7% in the first three months of the year, Eurostat reported. Analysts had predicted a growth rate of 0.5%.

Germany and France – which together account for nearly half the Euro region’s GDP – made the difference. The German economy, the continent’s largest, expanded by 1.5% in the first quarter, compared with a growth rate of 0.3% in the final three months of 2007. France also turned in a respectable performance, advancing at a 0.6% clip.

Although the strong growth underscores the global economy’s resilience in the face of a sputtering U.S. economy, and appears to justify the European’s Central Bank’s focus on taming inflation, analysts warn the celebration may not last.

A key cause for concern: Despite their strong performance, both France and Germany showed signs of declining consumer demand, which is why analysts are skeptical that such stellar growth can continue.

“A Chinese proverb says that it is better to light a candle than to curse the darkness,” Carsten Brzeski, an economist for Dutch finance group ING Groep NV (ADR: ING), told Reuters.” However, at the current juncture, one should not be blinded by the German GDP numbers.”

Indeed, earlier this month, data from Germany’s Federal Statistics Office showed retail sales in March were down 0.1% from February, and down 6.3% from a year earlier. Food, drink, and tobacco sales led the decline, as consumers cut back in the face of soaring inflation.  Consumer prices in April jumped 2.4%.

The story is the same for a multitude of other European nations. Eurozone inflation backtracked slightly in the month of April, sliding to 3.3% from a 16-year high of 3.6% in March, but remained well above the ECB’s 2.0% ceiling.

“There are significant pressures facing consumers in Europe,” Howard Archer, chief European economist at Global Insight Inc., told Forbes.com. “Higher inflation and soaring food prices are weighing down on consumer purchasing power in Europe. It is a depressing factor throughout the continent.”

“Consumer confidence is weak in Europe and low spending is bound to hurt the overall economy,” he added.

The European Central Bank (ECB) has remained hawkish on inflation, which it considers “the main problem that we have to face in the short term.” The ECB has held its benchmark interest rate steady at 4.0% for nearly a year now, despite an aggressive string of rate cuts by the U.S. central bank that has left the benchmark Federal Funds Rate at 2.0%.

Still, rising worldwide commodities prices and a weak U.S. dollar continue to drive up inflation throughout the Euro region.

The European Commission (EC), the executive branch of the European Union, said last month that Eurozone growth would continue to erode throughout 2008 and 2009.

The EC predicted the combined growth rate for the 15 countries that use the euro would slow to 1.7% this year and 1.5% next year. It was second time in six months that the commission has reduced its growth estimate for the region. In November the group was projecting growth of 2.2%.

According to the EC, “the recent sharp rises in food and energy prices have depressed households’ purchasing power and consumer spending in the last quarter of 2007 and are expected to continue to do so during most of 2008.”

If the Eurozone does lose its momentum in the months ahead, the ECB could find itself in a precarious position, as abiding inflation might keep the bank from cutting rates to spur growth.

“There is definitely no room for the ECB to cut rates,” Joerg Kraemer, chief economist at Commerzbank AG (OTC: CRZBY) in Frankfurt told Bloomberg News.

Source: European Growth Strong in the First Quarter, but Will it Last?

There was no particular data to drive the price action on the day.

Some analysts cited comments from Bank of France Governor Christian Noyer, who told French radio that comments about the ECB being ready to take any “necessary” steps to bring inflation back down to its 2% target by 2009, were misinterpreted.

Noyer amended his remarks, saying that, “Movements can go both ways … I would never engage in a discussion about the future path of interest rates, simply because nobody knows.”

Today’s release of the key IFO business survey from Germany will be “a big test” for the euro, according to Ashraf Laidi, currency strategist at CMC Markets. “That survey has historically been the key dynamic that determined the euro’s moves higher.”