Buenos Aires, Argentina June 5, 2008

In 2007, the strong appreciation of the Chilean peso had been the central preoccupation of the Chilean businessmen. In the last few months, active policies initiated by the Central Bank of Chile, coupled with a fall in the international price of copper and a strengthening in the worldwide value of the dollar have noticeably depreciated the value of the Chilean peso. In fact, the Chilean peso is the currency that depreciated the most against the dollar in the month of May.

This depreciation in the rate of exchange must have created a certain level of calm for Chilean businessmen. But while the exchange rate adjusted to the situation, other negative factors attacked the way in which businesses operate. For this reason, businessmen were unable to take full advantage of the improvement in the rate of exchange.

Inflation is perhaps having the worst effect on the Chilean economy at the present time, with a year-on-year rise of 8.3% for the month of April. Meanwhile, the Central Bank of Chile has as its goal an increase of only 3%, with a margin of 1% either direction. While the rate of inflation has been harming the Chilean economy, it has been partially offset by an improvement in the overall competitiveness of the economy.

The issue of inflation is causing Chilean monetary policy to move in a more restrictive direction for the next few months. This is why on May 8, during the last meeting of the Council of the Central Bank of Chile, it was discussed whether to maintain or raise the interest rate from its current level of 6.25%.

Even worse, the price of fuel has continued to rise and it is effecting the costs of production. The price of fuel is continuing to rise, and has already reached its highest level since 2001. Yesterday 120,000 trucks were lined up on a highway in a show of protest over this increase in the price of fuels. The government of Chile had injected $1 billion to create a Stabilization Fund for Fuels. However this has not persuaded the truck drivers to halt their protests.

Chilean businessmen are pessimistic, and with good cause, for they are finding themselves in a time of inflation while at the same time the Central Bank is insinuating that an increase in interest rates would adversely affect internal demand. And to make matters worse, Chile’s problems regarding power have been aggravated in the last few days by the cancellation of gas shipments from Argentina.

It is for that reason that business confidence finds itself at a historical low point in Chile. In fact, according to the Monthly Indicator of Business Confidence (IMCE), the perspective for commerce, construction, industry and mining fell to 53.4 points in May, the lowest level for that month since this registry was created. Logically, the most pessimistic area is the industrial sector for which indicator IMCE showed a value of 47.2.

Nevertheless, in spite of the general pessimism of businessmen, one can still find companies with good prospects for growth. Such is the case with the Empresa Nacional de Electricidad SA, (NYSE: EOC). During the first quarter of this year, ENDESA Chile reported earnings of $77,649 million (U$S 160 million) which represents a year-on-year variation of 44.5% (although principally due to increases that were not the result of operating costs).

Although the operating costs of ENDESA Chile have been affected by the low water levels and the high amount of fuel purchased in Chile, adequate commercial policies and the emergence of highly efficient stock portfolios have created a situation offsetting the effects of those factors somewhat. And all of this allows ENDESA Chile to be in a suitable position not only to face its next challenges, but also to transform them into opportunities for growth.

ENDESA is initiating diverse projects of investment that are mainly in Chile, Colombia and Peru. Also it has planned investment projects in Argentina.

In the middle of January of 2008, ENDESA Chile’s San Isidro II power station closed its combined cycle with a total power load of 353 MW. In 2009, once liquefied natural gas (LNG) is available in Chile, the plant will reach a total production level of 377 MW. The projected figures for the early portion of 2008 serve as an endorsement of Chile’s local electrical production ability. Another important contribution made by ENDESA to Chile’s power supply for the next few years is the installation, this past March, of the N°1 unit of the Taltal power station. This station has a capacity of producing 120 MW of power, using a diesel engine. Additionally, ENDESA is participating in the initiative of the Government to diversify the electrical grid through a project entitled GNL Quintero.

In January of this year, ENDESA signed a contract in Peru with Siemens Power Generation, to install a turbine that produces 183 MW of power in Santa Rosa plant. This project required an investment of approximately U$S 90 million. In Colombia, ENDESA is considering bidding for a public contract for energy and power programs for this year in that market by means of the development of a hydroelectric power station, capable of producing 400 MW, in Quimbo located upstream from the Betania Station. In Argentina, through its branches, Endesa Costanera S.A. and Hidroeléctrica El Chocón S.A., the company has realized an investment of U$S 160 million, that includes a U$S 42 million loan. This means ENDESA has a participation level of 21% of the thermoelectric societies of José de San Martín S.A. and Termoeléctrica Manuel Belgrano S.A. (with each of them producing combined cycles of 800 MW each).

Additionally, ENDESA Chile is a company that has a strong commitment regarding the environment through its development of projects using non-conventional renewable energies (ERNC) through its ENDESA branch Echo. It has a wind power-generating park named Canela that has been in commercial operation since December of 2007 that contributes 18.15 MW to the Central Interconnected System (SIC), Chile’s national energy grid. Also, ENDESA is committed to the acquisition of adjacent lands for the development of an immediate extension of around 60 additional MW to the park.

ENDESA Chile is a good company to bet on as an investment as a medium to long-term addition to one’s investment portfolio.

We will meet again tomorrow,

Horacio Pozzo

Editor’s Note: in Chile, businessmen seem to have been infected by the same mood as their Argentine colleagues. Although the reasons that affect the growth of both countries are almost the same, the origin of the problems and the search for solutions vary. The recommendation of the week. You can send your comments to me at: paola@latinforme.com

The Colombian economy is going through one of its best economic periods in the last 50 years. Colombia is growing strong. In 2007 the economy grew by 7.52%, investments in the country multiplied, foreign direct investment in Colombia grew, and internal demand became more and more strong.

But in the midst of this moment of splendor for the Colombian economy, inflation hangs over it like a great black cloud that threatens to water down this good moment. The inflation in Colombia continues to increase and worrisome to its authorities, it creates several dilemmas that Colombia must face in resolving this problem of inflation. In the month of May, the Consumer Price Index (CPI) grew by 0.93%, the highest rate for that same month since 1999.

Already, in the first five months of this year, the retail inflation in Colombia has reached 5.12%, and 6.39% for the last 12 months. One needs to be sure to remember that the Central Bank of Colombia has a goal of 4% for inflation with a margin of a percentage point going either way. Clearlythe rate of inflation month to month has gone beyond this proposed goal.

It is for this very reason that one week ago the Central Bank of Colombia decided not to bother with raising interest rates. Currently they remain at 9.75%. In explaining this decision, the Central Bank stated: “Our meeting emphasized that inflation and the expectation of further inflation will continue at levels greater than our goals. This also appears to be happening with several other indicators of basic inflation”.

The Central bank is not only worried about the data present about inflation, but also about strong dynamics that are influencing the financing of consumption. That is a subject that the monetary authority is closely following, due to the impact that it has beyond the phenomenon in the internal demand (and consequently, in the inflationary pressures). This situation of major inflationary pressures and lending levels that encourage consumption is generating the sense that a period of a sustained rise of rates is approaching.

Market analysts are pessimistic about the inflation, since they think that the Central bank of Colombia cannot fulfill its goal of inflation for this year.

In this situation, a logical thing is to hope that the Central Bank of Colombia would decide to increase its interest rate, as the market is expecting. However the Central Bank of Colombia, and its monetary policy, seems to be facing a dilemma in considering whether to maintain or raise the interest rate. Some are pushing for high interest rates along with pressure to increase the currency’s rate of exchange in hopes of creating a context of stability within the Colombian economy. And that, in turn, it creates a situation where foreign investment capital becomes attractive.

These investments of foreign capital, so valued and hoped for by the economy, are generating problems for Colombia since they affect the type of change required to impact the competitiveness of the Colombian economy.

It is for that reason that the Treasury Department decided to elevate from 40% to 50% the minimum liquidity requirements that foreign investors are required to pay prior to creating a portfolio in the country. This policy was established by the Government for more than a year and additionally, the Government established a minimum time of permanence of two years for any Foreign Direct Investment (FDI) entering the country.

Logically these measures have generated a lot of criticism, mainly on the part of those harmed such as large foreign investment banks. However, from my perspective, it is a proper measure to take to limit the negative effects generated by raising interest rates.

It is true that these measures are an attempt to limit the free flow of capital, but I understand that sometimes this is one of the only valid alternatives that exist when dealing with speculative capital.

From my point of view, the message of Colombia is clear. “Colombia is willing to guarantee that foreign capital may enter the country, but at the same time it does not want that capital to work against the stability of the economy. For that reason, Colombia is encouraging those that invest capital in the country remain there for a substantial period of time.”

We will meet again tomorrow,

Horacio Pozzo

Editor’s note: Colombia has returned to its inflationary levels from 90s, and it is taking measures to avoid major inflationary pressures. But these measures are creating as much of a risk for the economy as a dissatisfaction for the international investors. You may leave your comments with us at: www.latinforme.com

The minutes of the last policymaking Federal Open Market Committee (FOMC) meeting, released on Wednesday, showed that the Fed’s inflation forecast was raised from a range of 2.1%-2.4% to a range of 3.1%-3.4%.

Add the zooming oil prices we have seen recently into the mix, and the conclusion is inevitable: The nation’s central bank will soon have to reverse course and start raising interest rates – and probably in a hurry, too, if the Fed wants to keep oil prices on this side of the stratosphere.

That’s no small shift: After all, for nearly eight months the central bank has been mounting one of the most aggressive rate-cutting campaigns on record, slashing the benchmark Federal Funds rate from 5.25% down to 2.0%.

The Key Catalysts

Several factors have made it imperative that rates head higher. Let’s take inflation first. The consumer price index (CPI) figures for the last couple of months actually have been encouraging for the market. CPI has been coming in lower than analysts had expected. However, in both March and April, the downward seasonal adjustment was huge, far above the average adjustment for the past 10 years.

Thus, in March, a price increase of 0.9% (equivalent to 11.1% per annum) was revised down by the magic of seasonal adjustment to a mere 0.3%. Similarly, in April, an unadjusted 0.6% figure was seasonally adjusted down to just 0.2%.

It doesn’t require a super suspicious person to find that odd, especially during a period in which everyone’s worried about inflation. If the average March and April seasonal adjustment for 1998-2007 had been applied to the unadjusted figures, the annual rate of inflation for March and April would have been above 7%, instead of the 3.1% officially reported.

In any case, the producer price index (PPI) inflation is running at 6.5%, which suggests the CPI figure could experience an uptick very soon.

Either way, if the Fed thinks inflation will be above 3%, and the monthly figures come in above that number – let alone as high as 6%-7% – it won’t be able to keep the Fed Funds rate at its current 2.0% for long. The FOMC knows quite well that a Fed Funds rate lower than the current inflation rate will only serve to fuel inflationary pressures, and force the inflation rate even higher. If the Fed thought inflation was at 2%, it could justify keeping the Federal Funds rate at 2%; but now that the FOMC has acknowledged that it thinks inflation will be above 3%, it’s difficult to justify such a low Federal Funds target – something around 3%-3.5% seems more plausible, even if the United States is fighting a recession.

If monthly inflation numbers were all the Fed was worried about, we could expect the central bank to gradually ratchet the Fed Funds rate up to about 3% – or perhaps even a little bit higher. This deft initiative might get under way at the FOMC’s June 24-25 meeting, or might start at its Aug. 5 meeting, but either way, short-term rates would reach 3% by the end of this year, unless the banking system suffered another real disaster before then.

However, the oil markets have given the Fed something else to worry about.

Oil prices at $133 per barrel last Wednesday were up 60% from the $83 per barrel level on Sept. 18, 2007, the day the Fed began easing cycle for interest rates [oil prices punched through the $135-per-barrel level on Thursday before sliding back]. Other commodity prices have also gone through the roof during that same period. While U.S. monetary policy isn’t the only thing affecting global oil prices, which are dollar-denominated, it’s pretty clear that the Fed rate cuts and the central bank’s creation of money through bailing out the banking system have made an awful lot of money available for oil speculators.

And while hedge funds and sovereign wealth funds are reaping these massive windfalls, don’t forget the flipside of this equation …

This pricing petro-gusher is costing the United States real money.

The Suicide Squeeze Play

Since the United States currently imports about 9.4 million barrels per day, the $50 price increase since September has cost the United States $470 million a day. That’s $170 billion per annum, more than 1% of gross domestic product (GDP), or 22% of the current U.S. balance of payments deficit.

T. Boone Pickens, the octogenarian Texas oil legend, has emerged with a prediction that the price of oil could reach $150 a barrel by the end of the year. He points out that the world oil supply is currently at a maximum of 85 million barrels per day, while demand is 87 million.

There’s just one problem. There’s no way this supply shortfall of just 2 million barrels per day, or 2.3%, should cause oil prices to soar 60% in eight months – let alone another 15% before year-end as Pickens predicts. Rising prices should reduce demand and (to a lesser extent) increase supply. Economists differ by how much, but no economist I know of thinks the price elasticity of oil is below 10%: And at 10% elasticity, a 2.4% supply shortfall should push the price up 24%, not 60%.

So where does the other 36% come from – not to mention the additional price increases that Pickens is predicting?

It must be “artificial” – that is, created by speculators.

With U.S. interest rates below the inflation rate, betting that oil prices will go up is like shooting fish in a barrel – you can’t miss, provided only that you and your friends are together rich enough to control the market. And with all the extra money that the Fed has created just sloshing around, speculators are nothing, if not rich.

How do you stop speculators? You whack them with a two-by-four, that’s how. You get their attention with a shock move. You bring them pain by increasing their financing cost, you insert in their mind the idea that you might really mean it, and underscore that you might go on attacking them until their speculative run-up in oil prices is ended.

One of them is detecting tremors from the change in the holdings of U.S. government debt by foreign central banks, as indicated by their accounts at the Fed. These guys bought up, last week alone, a mighty, mighty $22 billion’s worth!

If you are one of the people who write me and ask things like, “Do you realize you are an idiot?” (Answer: yes) and, “Why are interest rates so low that only a freaking idiot would be buying bonds that yielded less than the rate of inflation?”, then this, perhaps, is part of the answer you are looking for; foreign central banks are (for one) buying, buying, buying government bonds and increasing their ownership of your future tax dollars, and providing a lot of buying power to the bond markets, which makes bond prices go up and the yields go down, down, down.

For example, from Bloomberg.com we learn that the bond market is bad all over the place, and “Every industry group except energy and utilities posted negative returns this year. Bonds of finance companies lost 20 percent; media bonds, 10.2 percent; and real estate securities, 9.9 percent. High-yield, high-risk bonds are off to their worst start ever. Junk bonds have fallen an average 3.9 percent this year, losing about $35 billion, according to data from Merrill Lynch & Co. indexes.”

And one of the sensitive Mogambo Economic Tremor Detectors (METD) shows that the apparent slowdown in Total Fed Credit for the past few months has now been revealed as a mirage, and Federal Reserve Credit has now ballooned another $6.1 billion last week, handily taking the total to a new, all-time record of $876.6 billion.

Even more staggeringly, the Treasury Gross Public Debt expanded by over $150 billion in March! Hell, it was up $60 billion last week alone!

And not content to just destroy the currency, they are up even weirder stuff, and to show you the kind of weird things that you will see a lot of from now on, Jon Nadler at Kitco.com writes, “And now, for something completely different: The birth of the ‘BPT.’ The Bubble Protection Team. If anyone had (valid) doubts that the ‘Plunge Protection Team’ either existed at all, or was noticeable in certain markets, welcome to the new reality of a revamped Fed.”

He says that according to the New York Times, “The plan of Treasury Secretary Paulson to overhaul the financial system includes a crucial proposal: it would officially transform the Federal Reserve into a ‘market stability regulator’ rather than merely a banker’s bank. The Fed is no longer just a regulatory agency presiding over a narrow group of businesses called banks. Rather, its mission increasingly is to maintain macro confidence – confidence that the entire financial system is functioning well as part of the whole economy.”

Wow! The Fed deliberately created so much money and credit, for so long, totally distorting the economy of the United States and the world into a grotesque, twisted, cancerous monstrosity so that the entire financial system is choking to death on the poison of un-payable debt loads, and now this same Federal Reserve is going to get MORE powers to create MORE weird distortions and more inflation in the money supply and more inflation in consumer prices like food? Yow! We are freaking doomed!

The weird stuff at the Fed, the weird stuff at the Treasury, and the weird Bear Stearns fiasco becomes a little more suspicious, if that was even possible, after reading, “Wall Street’s Latest Illusion” in Barron’s. Andrew Bary explains, “some Wall Street titans have been able to book gains from the declining value of their own debt.”

If you are like me, you immediately stopped stuffing a yummy burrito into your mouth and intelligently asked, “Huh? Buh a baffa a uhki n aoo uh o eh? A ee nuh grah?” Junior Mogambo Rangers (JMRs) around the world, of course, immediately knew that I was saying “Huh? Book a profit on a decline in your own debt? What is this crap?”

Obviously repelled by the way I am spewing little bits of burrito and saliva all over everything while I speak, Mr. Bary explains, “When a company’s credit weakens and the yield on its debt rises relative to risk-free Treasuries, the debt becomes worth less to the holder. The financial company, which is the debt issuer, then takes a gain, because theoretically it could buy back its debt below face value.” Hahahaha!

So Bear Stearns, bankrupt as it is, would had to have booked a taxable profit on the collapse of their debt, on which taxes may be due? Hahaha! No wonder everybody wanted them to be bailed out!

And with free slop available to anybody who asks for it, from the AP we learn that the hogs are wallowing in the Fed slop, as they are borrowing like crazy from “the Federal Reserve’s unprecedented emergency lending program.”

The Federal Reserve admits that “that those firms averaged $38.1 billion in daily borrowing over the past week from the new lending program. That compared with $32.9 billion in the previous week and $13.4 billion in the first week the lending facility opened.”

Junior Mogambo Ranger (JMR) Paul H. noted that the Fed is going crazy in the Mortgage Backed Securities arena, too, and “Over $51 billion with over $24 billion in MBS alone for the past 2 days”, which he figures “Over a work week (5 days)” would come to “about $128 billion per week. That would make it somewhere in the neighborhood of $6,400 billion per year, if I am nice and give them a 2 week vacation! Yikes, that’s $6 trillion per year !!!”

JMR’s around the world note the use of three exclamation points, which seems just about right for such excesses!! Hell, I just used two of them to comment on his comment, which ought to show you how bad things are!

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Editor’s Note: Richard Daughty is general partner and COO for Smith Consultant Group, serving the financial and medical communities, and the editor of The Mogambo Guru economic newsletter – an avocational exercise to heap disrespect on those who desperately deserve it.

The Mogambo Guru is quoted frequently in Barron’s, The Daily Reckoning and other fine publications. Click here to visit the Mogambo archive page.