Money Supply Still in the Banks

No doubt you've been asking yourselves, "How's that money supply doing?" Well, it's not doing much.



Recall that there isn't just one measure of how much money is in the country. The Fed uses two measures (and used to use three). M1 is currency in circulation plus money in the banks. It is the most liquid measure of money. M2 is M1 plus savings, CDs, and money market funds. That is money not quite as liquid.

This graph of the money supply over the last 9 years is a logarithmic plot, which means a straight line represents constant growth, say 2% per year, and a big jump is a big deal. Note the increase in M1 toward the end of last year and note the slight increase in M2.

That increase in M1 was the Fed loaning money to the banks and buying up treasury securities while various organs of government doled out rescue money. Most of it has stayed in the banks (M1 rather than M2).

In fact, here's a look at the components of M2 that are not in M1 (savings, CDs, and money funds):

Certificates of deposit and money funds can be considered short-term investments. They have fluctuated in size over the years and have, in fact, decreased in the last 12 months along with many other forms of investment. Any increase in M2 has been in pure savings accounts.

For the last year, M2 has been flat. M1 is still rising, and the Fed is still distributing money, though not like the panic infusion of a year ago. Sooner or later, more of the money supply will make its way into consumer hands and M2. Ben Bernanke, Chairman of the Fed, knows this and says that the Fed will begin reducing the money supply at the right time. Else we get inflation, and lots of it. Let us hope that Chairman Bernanke knows when to begin turning around this money machine he has been driving.



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Taste-Testing President Obama's Un-COLA

Seven-Up for a while used an ad campaign in which it marketed itself as the "un-cola" alternative to cola drinks. In personal finance, COLA is a cost-of-living adjustment written into labor contracts to offset inflation. Social security also has an upwards COLA at the end of each year –



– except maybe this year. Why? Well, inflation has been negative. The consumer price index year-over-year has gone down:

As you can see, in the past 20 years, the cpi has usually gone up 2% to 4% per year, but the last data point is below the zero mark.

In a country of rules, that would be that, and social security payments in 2010 would be the same as in 2009. Yet, President Obama is proposing a $250 adjustment such as would have happened in a year withf inflation. This is pure pandering and bad economics.

Both individuals and businesses depend on predictable laws in order to make informed decisions. That's why one-time stimulus payments (such as President Bush distributed in 2008) have minimal effect – knowledgeable people are not going to change their lifestyle on the basis of a one-time windfall. Likewise, Congress each year delays the Medicare "sustainable growth rate" cuts that would reduce doctors' reimbursements. A rational policy would settle on a fixed long-term payment plan.

So, President Obama's COLA that is not a COLA is bad economic policy for reasons unrelated to the federal deficit. This un-COLA does not pass the taste test.




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Confidence in the Dow

The return of the Dow Industrial Average to 10,000 is a good excuse to resume blogging.



The Dow and other stock indices are, of course, forward-looking indicators of the economy.

No doubt, you've watched with greater or lesser interest as the stock market climbs back from its Feb-Mar lows. Investors are anticipating greater spending, as reflected in another measure of the economy, consumer confidence.


Consumer confidence was at an all-time low in February and March. (The actual numbers were 25.3 and 26.9, but as the Conference Board uses an arbitrary scale, that's not directly meaningful.) We see that confidence has climbed back to a still-low (preliminary) value of 53.
The DJIA has also had better days:

People who feel confident about their future are more likely to make big purchases. I don't want to make very much of the relationship, though. The actual correlation, if we overlay the two time series, is not that high:




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World Commodities

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Energy Commodities

Energy Commodities

We at Empire are primarily concerned with metals, but we also keep an eye on Earth=s other limited resources, including energy commodities. Energy commodities are almost synonymous with fossil fuels, mined and sold on global commodities markets.

Fossil fuels are believed to be the remains of ancient plant and animal matter, buried and then transformed by geologic processes. Fossil fuels are carbon or carbon compounds that can be burned as fuel after they are located and mined.

The world=s supply of fossil fuels is large but limited. Using reported (by British Petroleum) values for known reserves and consumption, the supply of the main fossil fuels is as follows:

In other words, the known coal reserves at current mining rate will be depleted in 132 years. If we convert all our energy use to coal, the supply will only last 38 years.

Fossil fuels are burned to generate heat, to propel vehicles, and to create electricity (from steam turbines). Because burning is never perfect, this burning creates carbon monoxide, nitrous oxides, and other pollutants. Because the input fuel may not be pure, this burning can create compounds of sulfur, mercury, and other toxins.

Fossil fuels have been known for decades to be major contributors of pollution. These fuels are more abundant (for now) and cheaper than alternatives, but are being gradually replaced where possible in the developed world. Replacement being not always possible or desirable, we will actually be using fossil fuels right up until they run out.

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Coal

Coal

Description and History
Coal, which is deposits of carbon, has been known since antiquity. Coal is a dark rock of varying hardness, formed from plant remains buried in sediment. Much of this coal formed during the plant-rich Carboniferous Period of around 300 million years ago. Although quite abundant, the coal being mined now will eventually be depleted.

Coal is burned as a fossil fuel. Although some coal was no doubt recovered and burned in prehistoric times, wood is more convenient as a low-temperature fuel. Coal only became necessary for Iron Age furnaces that burn much hotter. Formal surface mining of the mineral picked up during medieval times as ironworks increased substantially.

Large-scale coal extraction is a signature of the Industrial Revolution starting in the 18th Century. Coal fueled boilers for the steam engine; soot from coal fires blackened England; coal miners now working underground organized into unions. The steam engine made deep underground mining possible by pumping out water and pumping in air. Consequently, many of the negative aspects of the Industrial Revolution relate to coal mining, including exploitive work conditions, lung diseases, mine collapses, and fires.


Coal is held in mixed regard in modern politics and society. On the one hand, coal is the most abundant fossil fuel and therefore a source of future energy and jobs. On the other hand, coal is considered dirty, an irredeemable polluter, and a source of greenhouse gas. Expect much more discussion and activity about coal.

Mining and Production
Great quantities of coal are mined in comparison to any other mineral. From the US Geologic Survey report for 2008:

The major coal-producing countries are China (40%) and the United States (16%).

Coal mining is the canonical example of strip mining, even to the point of leveling and eliminating hills. Surface mines often cover several square miles. In modern practice, the overburden (rock other than coal) is set aside during mining, then replaced in such a way as to minimize erosion.


Purely underground mines become, in some cases, vast caverns interrupted by occasional support pillars. Underground mining is heavily automated these days, often with remotely controlled equipment, which minimizes the danger.

Extracted coal is usually washed and crushed to a powder before being shipped to its destination, often a smelter or furnace. The coal may also be treated to remove noxious pollutants such as sulfur and mercury; otherwise, these elements must be scrubbed from the products of burning.

Coke is coal treated by baking to drive off volatile contaminants. Coke is almost pure carbon; it is introduced into iron smelting to create steel.
Properties and Uses
Coal is a black mineral rock found in a range of hardnesses. The hardest coal is referred to as anthracite in the United States and is used for residential and commercial purposes. Softer coal, bituminous, is used for industrial and manufacturing purposes. There is also a range of softer rocks (Alignite@) from bituminous all the way to peat. Peat is compressed plant matter formed in swamps, not yet a mineral.

Most coal is used as a fuel, either for space heating or for driving steam turbines for electricity. Coal is the world=s biggest (40%) source of electricity.

Coal gasification turns coal into a fuel gas by reacting it with oxygen and water to produce a mixture of carbon monoxide and hydrogen. This synthetic fuel mix can be burned for power or it can be further converted into gasoline or diesel fuel.

A relatively small amount of coal is used in the chemicals industry. Coal is essentially the element carbon and can be converted to methane or coal tar (a mixture of organic molecules). Coal tar is the starting point for many synthetic dyes. Methane is a starting point for much organic chemistry.

Outlook
Of the several energy sources that are in limited supply, coal is the least limited.

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Natural Gas

Properties and Uses
Methane is a very clean-burning fuel, though found in shorter supply than either oil or coal. As a gas, it is also more difficult to transport. Natural gas therefore tends to be more expensive than other fossil fuels.
Description and History
Natural gas is a fossil fuel consisting primarily of methane, a colorless, odorless gas that is burned for electricity or heat. Although natural gas often occurs with petroleum, it has not been used commercially nearly as long as petroleum.

It is inherently more difficult to recover an underground gas vs. liquid. Thus, records of natural gas usage are very sparse before the 19th century. Gas encountered while mining other fossil fuels was either vented or burned in place for safety. In that century, though, a few gas companies emerged in in Europe and North America to tap wells and pipe natural gas short distances for lighting.

With electric lighting spreading at the beginning of the 20th century, the use of natural gas again diminished. Piping technology improved in the 1920s and especially during World War II. Networks of gas pipes spread after the war within cities and across longer distances. Natural gas began to be a practical energy source for heating and manufacturing.

Mining and Production
Natural gas occurs in pockets above underground oil fields, dissolved within coal seams, and occasionally by itself. In many parts of the world, gas is still simply burned off at the tops of oil derricks. Elsewhere, though, it is immediately separated from any other fossil fuels and treated like the valuable commodity it is.

Natural gas, as recovered, is a mixture. It must be dried, filtered, and separated into components B not just methane, but ethane, propane, and a few heavier organics. Each of these can be sold separately. The methane is also odorized for safety to make gas leaks detectable.


















Fueled by LNG
Nevertheless, in regions with well-developed piping systems, gas is the preferred choice for heating and various home appliances. It can be compressed and cooled into a liquid, making its transfer by tanker truck or ship over greater distances. Liquid natural gas (LNG) also powers vehicles such as buses.

Gas can also be used to drive steam turbines for generating electricity. This is relatively more expensive than other methods, so it tends to be put on standby for meeting peak power needs.


Methane is a useful building block of organic chemistry. As the smallest hydrocarbon, it is the input to much of the plastics industry. It is also important in making hydrogen and ammonia, which lead to further chemistry.

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OIL

Oil

Description and History
No fossil fuel commands more headlines than oil, petroleum. Petroleum is a fossil fuel consisting of a mixture of carbon compounds (hydrocarbons). Components vary by location and range from very lightweight (including natural gas) to heavy (such as tar).

Petroleum seeps up from the ground in places. These natural oil wells were used in ancient times as fuel sources and otherwise. For example, tar is useful for coating wood and rope. Medieval distillation in the early days of chemistry produced kerosene, a favorite lamp fuel for centuries thereafter.

Better oil distillation in the 19th century made possible splitting petroleum into a wider variety of more pure components. Oil wells began to be commercially viable, particularly after the development of the internal combustion engine. Petroleum is the source of gasoline and diesel fuel, now in great demand.

Petroleum reserves are distributed very unevenly, which has resulted in great wealth flowing to just a few countries, Saudi Arabia in particular. As these reserves are consumed, wealth will shift again. Petroleum will continue to command political attention and headlines.


Mining and Production
Petroleum is a liquid usually found by geological investigation to occur in pockets within layers of rock. Petroleum is typically under pressure; drilling a vertical hole for a pipe causes the petroleum to emerge naturally. Pumping and water injection are required for further extraction as the pressure eases.

Crude petroleum is sent by pipeline or tanker to a refinery, where it is separated by distillation into its various hydrocarbon components. Petroleum from each oil field has a different composition, which may include linear hydrocarbons, aromatics, and more complex molecules containing nitrogen, sulfur, and almost anything else.

This petroleum content is a great deal more varied than what is commercially interesting. Thus, refineries do some significant organic chemistry to process various distillation fractions into octane gasoline, jet fuel, and other interesting final products.

Properties and Uses

Since petroleum is a mixture of substances, it has a mixture of uses. The largest category of resulting product is the fuels that power vehicles and furnaces. Other organics from petroleum are the inputs for industries that produce solvents, synthetic fabrics, plastics, lubricants, and many, if not most, modern organic products.

Some of these products can also be produced from another input such as coal, but petroleum is generally the cheapest abundant source.

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Alternative Energy

Alternative Energy

Alternative energy is a very general term referring to nontraditional sources of electricity. Those traditional sources are out of favor with some political groups because they use exhaustible fuels, they pollute, or both.

Alternative sources of energy are often referred to as renewable or sustainable. A renewable source will replenish itself without effort. Examples include sunlight and wind. A sustainable source has to be actively managed or rationed, but with care, its use can be sustained. Examples include crops and wood.

Ideal alternative energy sources cause little or no pollution. Traditional sources require mining or other environmental disruption to acquire, and create noxious fumes, toxic waste, and other side effects in use. The division is not always clear. Nuclear power, for example, causes little or no traditional pollution, but is typically opposed by environmental factions because of its own unique problem with waste disposal.

In the end, alternative energy is usually Aalternative@ because it is less economical or less well-developed than traditional energy sources. Most electricity is, after all, produced by commercial interests or at least by public utilities with some limitations on available resources. For these decision-makers, other choices of technology usually require some kind of government mandate or subsidy to be attractive.

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Biofuels

Biofuel

Description and Purpose
Biofuel is dead plant or (sometimes) animal matter processed into a more efficient or convenient fuel. Biofuels are produced either from waste, such as plant trimmings, or from deliberately cultivated crops. The most common end products are ethanol, vegetable oil, and what can be called mixed refuse.

Biofuels are meant to be an economical and sustainable substitute for fossil fuels. As compared to petroleum, for example, solar cells and nuclear power are completely different technologies. The right liquid biofuel, though, can be used in combustion engines in place of petroleum products with little or no modifications. Similarly, coal as a fuel source can be replaced with an appropriate solid biofuel.

Additionally, the right biofuels pollute less than fossil fuels they replace. Biofuels reclaimed from waste also reduce landfill and other garbage disposal problems. To some extent, these two benefits are a tradeoff, for reclaimed biowaste tends to burn dirtier than fuels grown for the job.

Kinds of Biofuel

One of the most common biofuels is ethanol, ethyl alcohol. Ethanol is a liquid fuel with about 65% of the energy content of gasoline by volume. It can be added to gasoline in small amounts and used in automobile engines with only minor modifications. Pure ethanol is a viable fuel in areas where gasoline is expensive or ethanol manufacture is cheap. Brazil uses large amounts of ethanol as an automobile fuel in engines that are suitably designed.

Ethanol manufacture is a variation on the ancient craft of fermentation. Yeast converts glucose sugar from plants such as sugar cane to alcohol. Since starch is just a string of glucose molecules, starch from corn or other sources can also be converted to ethanol. Extracting and purifying the ethanol requires distillation, which requires heat. This is a major cost at the moment B producing energy requires energy.

A variety of vegetable oils are used as biofuels. Peanut oil is one choice; canola oil is another. These vegetable oils can be extracted from plants grown for the purpose, or they can be waste cooking oil from restaurants and food processing industries. Waste oil must be filtered before use.

Biofuel vegetable oils have two common uses. They can be burned in furnaces for heating or industrial applications. They are also suitable for diesel truck engines with slight retrofitting. (Vehicles running on peanut oil have a distinctive smell.) One administrative obstacle to using vegetable oils for this purpose is that gasoline taxes fund roads in many jurisdictions. Vegetable oil as fuel can be seen as circumventing the tax, and it may be illegal or taxed out of the realm of profitability.

Solid biofuels are yet another category. Solids tend to be mixtures of wood chips, lawn cuttings, and other combustible waste. Such waste is normally dried, mixed, and formed into relatively uniform pellets for burning. These pellets likely still contain dirt, trace toxins, and other problematic contaminants, limiting their use. Furnaces that use pellet fuel should be well vented or scrub their emissions of pollution, or both.

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Wind Power

Wind Power

Description
Wind power refers to the use of wind to drive a turbine, generally to create electricity. The wind turbine is the descendent of the windmill looking either like a giant propeller in the air or an eggbeater standing on its head. A row of wind turbines can be hypnotic as they turn slowly together.

The usefulness of wind turbines depends a great deal on location. Strong winds are obviously desirable, and gusts of higher speed produce most of the power. (Available power goes as the cube of wind speed.) Open areas where the wind flows smoothly are best, but the traditional Dutch image of a windmill on top of a house is still ok. Rows of wind turbines will capture a cross section of wind. Downwind rows should be set well back so as not to interfere with each other. This can be a problem when the wind direction varies. One solution is to put the turbines closer together and accept some inefficiency.

Engineering
A wind turbine is a basically a propeller on a pole, turning in a vertical plane. The whole rig will swivel like a weather vane to follow the wind. A brake prevents damage if the wind gets too strong. The spinning part is connected by gears to a generator and inverter (for AC current).

A field of wind turbines will be hooked together and into the local power grid B running power lines to the wind turbine farm can be a major expense. The coupling into the power grid has to be carefully regulated, for power companies like constant and controllable sources. Irregular inputs, such as from wind, can drive dangerous oscillations in the power grid and cause blackouts.

Some property owners run a single wind turbine for supplemental power. (It can=t provide all the power; wind speed isn=t constant.) When the wind drops, the property draws power from the local grid. When the wind generates more power than needed, in many jurisdictions the turbine feeds power back into the grid, earning a credit for the owner.

As wind turbines are usually well separated and elevated, the land dedicated to wind power can often be used for other purposes as well, for example, agriculture.

Outlook
Year
World Wind Power Capacity
(GWatt)
2005 59.1
2006 74.2
2007 93.8
2008 121.2

Wind energy is a small but growing fraction of the world=s total power generation. Usage as a percent of total energy needs is highest in Germany at around 6%. Total wind energy generated and maximum power capacity are similar for Germany and the United States, the two largest generators. Maximum capacity (shown in the table) is what could be generated with sustained high winds; actual power generation averaged over the year tends to be around 20% of that number.

Wind energy is nonpolluting and sustainable. Operating costs and maintenance tend to be very small. The installation costs can be high, particularly as the best locations are far from population centers, sometimes even offshore. Government subsidies of Agreen@ energy make the up-front costs more attractive to private investors.

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Solar Power

Solar Power

Description
Solar energy refers to using sunlight to generate energy in the form of electricity or heat. Green plants do something like this, turning sunlight and air into sugar. The technology approach is to use large flat panels filled with solar cells, which are silicon wafers (or other semiconductor).

Solar cells work because sunlight knocks loose electrons in the material. The semiconductor material is biased so electrons can only flow one direction, hence, electricity. Solar cells work on a small scale (hand-held calculator) or large (acres of panels). Large-scale arrangements are connected together in series and by an inverter to the local power grid.

Solar heating can be done with flat panels that absorb heat, backed by circulating hot water to transfer the heat. Solar heating is usually local. It can provide hot water, heat a building, or (through thermal transfer) cool the building. Here, solar panels heat a swimming pool. A heat reservoir, such as a pit full of hot rocks, can store heat during daytime for use at night.

Engineering and Economics
To date, solar power generation is not as economical as traditional energy sources. The usefulness is strongly dependent on location, with low latitudes and clear skies being preferred. Installation costs are significant. Solar power is quite attractive for isolated locations such as roadside signs, assuming that the intermittent flow of power is tolerable (no solar power at night).

Tracking panels
Most solar cells only convert 10-20% of the light energy falling on them. Tricks to up the yield include magnifying lenses, panels that track the sun (as in the image), and simply using more area. In other words, higher yields cost more. Meanwhile, significantly more efficient cells are being worked on.

The investment in solar cells pays back in 10 to 20 years depending on location, technology, and other factors. That can be good enough for governments and large businesses, but is marginal for residences and small businesses. But, solar energy is politically popular as a sustainable source with no pollution after the manufacturing stage. Consequently, tax credits and other subsidies encourage solar energy in many jurisdictions.

Solar Energy and Metals
Solar cells make use of metals and near-metals that are interesting to Empire. Germanium, a semiconductor, is a common replacement for silicon, especially in the recent past when pure silicon crystals were in short supply. Gallium arsenide and indium gallium arsenide are two other material choices. The new copper indium gallium diselenide is the material for solar thin films (see image).

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Geothermal Power

Description
Geothermal power is electricity generated from heat extracted from the earth. Geothermal power is possible in locations with volcanos, hot springs, or magma hot spots. This amounts to regions with tectonic activity, such as the Pacific rim, Africa=s Great Rift Valley, and Iceland.

Geothermal power can also be used directly for heating. Hot springs and thermal vents have heated baths and homes since ancient times. For example, the springs at Bath, England, have been in use since Roman times. This is a conceptually simple process, possibly after drilling to gain access to hot water. Underground water is pumped out and used to heat steam pipes. These pipes run to spas, greenhouses, local residences, and the like.

Geothermal electrical generation, by contrast, is only about 50 years old. The power source is underground steam or hot water under pressure that expands to form steam. Steam turbines then run generators. The efficiency of this process depends on the temperature of the input. Because underground steam is at a much lower temperature than, say, burning coal in a coal power plant, geothermal power is much less efficient. The operating costs are much lower, however.

Advantages and Disadvantages
Geothermal power has the advantage of being consistent, unlike other alternative sources such as solar and wind. Operating costs are low, as mentioned, although the initial exploration and drilling may be expensive.

In the way of disadvantages, pollution considerations are small but not zero B underground water may contain sulfur and other undesirable trace elements. These elements must be scrubbed from the steam or hot water before it is disposed of. Extraction of underground water can cause land to settle and can trigger minor quakes.

Because of the limited geographic availability, low efficiency, and other factors, geothermal electrical generation accounts for less than 1% of the world=s power use

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Water Power

Description
Water power is a category that encompasses several methods of generating electricity from the movement of water. Hydroelectric power from dams is the most important method, but other sources include tides, waves, and miscellaneous less common sources. Water power is sustainable because it comes ultimately from the sun=s energy driving the water cycle of rain and evaporation.

Hydroelectric power comes from the energy of falling water turning a turbine, and thus a generator. Hydroelectric power is almost always produced by a dam and reservoir on a river. The reservoir raises the level of the river (increasing available power) and evens out annual flow. Gates and spillways in the dam regulate water outflow to meet electrical demands.

Although dams are built in part to control flooding and manage water supplies, the world=s major dams B Grand Coolee on the Columbia, Three-Gorges on the Yangtse, and many others B all supply critical amounts of electricity. Hydroelectric power supplies about 20% of the world=s energy.

Tidal power is a much more modestly important source of energy. Oceanic tides follow an approximate 12 hour cycle based on the apparent movement of the moon around the earth. Strong tides are most promising for extracting power from places such as long thin bays and narrow straits between large bodies of water.

Tidal power is extracted most commonly by immersing water turbines in the tidal current to drive generators. This is conceptually much like using wind turbines, except that the much denser water produces more energy, and tides are more predictable than wind.

A much less common approach to exploiting tidal energy takes advantage of the change in ocean level from low to high tide. The incoming tide is allowed to fill a basin, either a natural lagoon that is dammed off or an artificial tidal basin constructed for the purpose. The basin drains again as the tide ebbs. Turbines drive generators during the filling, the emptying, or both.


Wave action can also generate power. This is mainly a theoretical source, being used in few locations on a small scale. A buoy on the ocean surface will bob up and down with the waves. This vertical motion can drive a generator. Wave motion is far from an ideal source, however. It is slow and irregular, usually small in amplitude, and diffused over a range of directions.

Environmental Concerns
Although the various water power technologies are sustainable and nonpolluting, they are not without environmental impact. Hydroelectric dams in particular are big, expensive projects that change the landscape forever. The reservoir behind the dam floods large amounts of land. The building of the Aswan Dam on the Nile, for example, threatened archaeological sites that had to be moved.

Dams and turbines interrupt water flow, which will deposit suspended sediment in new locations. Thus, erosion and deposition patterns will change. River deltas may shrink when not renewed from upstream silt.

Turbines in the water flow can also kill fish and marine mammals. Larger mammals such as dolphins can be screened out. Also, water turbines turn more slowly than wind turbines. Some fish die, but others survive. Dams are known to interfere with fish life cycles. Most famously, dams on the west coast of North America block salmon migration. This has been mitigated with water ramps that permit fish movement around the dams.

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Our team is feeling the econ and stock market recovery - and we are getting charged up to start putting out more content. Stay tuned! The Virtual Wall Street Team


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VWS Post #1- In The Beginning

As promised- the content will begin now. I thought about starting the blog from about 50 years ago and then working my way forward- but then I thought - why not just add three zeros and start at around 50,000. BC (give or take a couple of millenia). You may think this odd coming from an investment blog- but as you will see if you follow through until post 37 or so- priorities are actually coming full circle as time passes.......... Early man was quite primitive (sort of like a modern day Mets fan). Their needs were very basic and included food, water, shelter, 'clothing', and survival. Although we have many of the same basic needs today the average person doesn't need to spend nearly as much time gathering food or concerning themselves with survival. Now in the developing world, and even though 50 centuries have passed (during our blog's time frame) that is not the case and life for those poor soles is in many ways worse than that of their ancient ancestors. Basics were essential and as man learned how to harness the power of elements life began to progress. Fire allowed for heat and a well cooked meal. Skins and pelts provided warmth and the ability to venture into different climates and provided survival from harsh weather. Rocks and wood provided the weaponry to hunt, to dig, and to eventually plant crops. Evolution continued and as we were better able to make use of our resources we were able build better structures, support larger 'tribes', and provide comfort for our early family units. As time progressed we were able to use our resources to assist us in migrating to far flung corners of the globe where we continued to find, and to utilize new tools and new methods of advancement. Eventually we were able to plant and harvest our own crops, organize teams of hunters, and develop cohesive family and tribal units. And although the methods of survival and advancement continued to improve our basic needs remained the same. Life began to really advance when we were able to spend more time living and less time protecting life. In other words, in ancient times man and beast were more fairly matched. Through trial and error we learned to construct barriers and defenses to protect ourselves from predators. We then became more proficient in hunting in teams and developing better trapping and hunting techniques, and the weaponry to go along with it. Eventually we were able to devote more time to developing early 'luxuries' like cookware, farming tools, and housing structures. If we then fast forward a few thousand years we were able to utilize metals to a much larger extent that at any time in history. Metals have been vital for thousands years whether it was to produce a weapon, make a cup, or use as a form of currency. Metals allowed us to do things that had been virtually impossible up until their utilization- and continue to be vital to this day. Look around you and imagine any skyscraper or bridge or structure of any significance being built without the use of metals. The importance of metals has never been greater. Over time early man was able to continue to advance farming techniques and in doing so - was able to develop entire communities. Irrigation techniques helped to fuel early agricultural efforts. Food was an early form of wealth and those that possessed food began facing a new form of predator; humans. Long after the daily threat of survival at the claws or fangs of a wild beast subsided man now had to fear for and protect himself from the hands of man. Man, being primal, was a constant threat if you were in possession of food, tools, or even a beautiful cave woman (and I'm sure there were some real stunners). So the battle lines were drawn and the fight was over resources. Again, not much different than modern times- even though we would like to think that we are more civilized than that. As time progresses (from now) more wars will be fought over food, water, and oil. Some will be internal conflicts (civil) and others regional- but as resources become scarcer and population grows- the convergence of the two is actually stepping up the de-evolution of man. Eventually man will be brought back to his most primal and base needs. Let's take a look at the birthplace of Western Civilization; Athens. Athens has been around for about 10,000. years- with a real city beginning to take shape about 7,000years ago. The Greeks were blessed with an abundance of resources- a very mild climate, a wonderful centralized location, and plenty of neighboring cultures to trade with. The Greeks also enjoyed long periods of relative stability, and were therefore able to devote a greater percentage of time to 'higher thinking' which led to many of the advancements that we enjoy to this day. As a direct result of not having to spend as much time battling the elements, or each other - philosophy, art, mathematics, medicine, astronomy, and democracy were able to flourish. Much of the Ancient Greek advances made (along with their fellow ancient cultures) were as a direct result of developing and utilizing resources to a much greater extent than ever before. The balance of Athenian advances were also aided by a different breed of Greek that was a protective force - the Soldier State of Sparta. Through this entire period we continued to utilize - to a greater degree- a much wider variety of metals, minerals, food, wood, fabric, animals, and water. Man had stopped focusing on animal for food or as a predator and began to utilize them for transpiration, defense, and for agriculture. Life continued to improve. As man developed its resources- greed became magnified. Ancient civilizations began to war with one-another over resources and entire groups of people were lost to to pages (or in this case- tablets) of history. But as cultures were absorbed and transportation improved we also soaked in the new-found knowledge that came with assimilation. Civilizations clashed and empires were taken down one-by-one. All great empire's eventually come to an end and ancient Greece was no exception. The baton was passed to Rome- and the balance of Europe began to grow. As a direct result of the utilization of resources for transportation, shelter, protection, and virtually everything else- tribes were able to prosper in any climate- however harsh. Vikings, Teutonic tribes, Mongols, Huns, were all able to not only survive but prosper in environments and regions that only centuries before would have been uninhabitable. The battle for resources continued and entire continents were virtually monopolized for their resource wealth. South America, for example, was colonized and exploited by the Spaniards and the Portuguese. Resources allowed Europe to be the center of wealth and power. Metals had become very important- as not only a source of wealth- but a source of weaponry- bow and arrows were no match for a musket or cannon- and soon indigenous tribes fell one by one to the hands of their captors. One group of settlers set out to take up residence in one of these newly-discovered lands- the land that most of us reading this blog are Citizens of, what is now known as the United States of America. These early settlers had to overcome some very rough conditions. The climate was unforgiving, the food supply often scarce, and we hadn't actually developed a good neighbor policy. As time went on- many of our early ancestors began resenting the exorbitant demands made by the British Throne- and revolted. A war was fought, and won- and a country was born. Life progressed rapidly in America and the entrepreneurial spirit was alive and well. Unlike our former countries- most of which passed royalty and privilege through generations- an American was free to be whomever or whatever he wanted to be. This was truly a blessed country where motivation not lineage would provide success. Along came the industrial age and our use of materials was never greater. Mass transportation, the ability to drill for oil, trains, planes, and automobiles sprang up during and shortly after this era. We were even able to record our experiences on film instead of canvas for the first time. Life was good. America- much like Ancient Greece was blessed by having large gaps of relative security. Yes, there were wars and skirmishes between the 'new Americans' and neighboring countries or indigenous tribes but these squabbles were usually over quickly and our country was always victorious. The population was still fairly minimal and resources of all types were abundant. We were on our way to becoming the wealthiest country in the world- all being driven by our use and utilization of resources. One of the things that allowed many to become wealthy was the relative lack of regulation on the part of the State and Federal Governments (something we could use more of today). Yes, some used this power to abuse and exploit, but there were also advancements and opportunities created in an unfettered environment. The 20th Century brought much progress and promise. In a generation we had evolved from an era of horses to planes, trains, automobiles, and transcontinental shipping. Growth and technological advancement during the Industrial Revolution grew exponentially. This brings us to the year 1908 which was the 1st time the Times Square ball was dropped at New Years. Things that had been unheard of or that were beyond a person's imagination were now happening on a monthly basis. Life looked good for America and much of the world. We will now take a break at 1908.

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V Winner Post #2- 1908 to 1958- The American Dream

As you can see- I'm just painting the broad strokes and personal observations- details will follow. We covered almost 50,000. years in Post #1- and can't expect too many details from a one-page post. As the posts progress the details will make the picture clearer- but at this point I'm really just making these generalities to prove a point.

1908 to 1958 was another block of incredible change at an accelerated rate. We witnessed inter continental flight, two world wars, the Great Depression, the stock market crash of 1929, prohibition, the fall of Germany as a major power, the emergence of America as a super-power, the dust bowl, and the era in which the American dream was at its finest (the 50s

Coming out of the first decade of the 20th Century development of America was greatly aided by the use of rails. Florida was transformed into a vacation paradise. Some of the great industrialists continued their march to prosperity aided by conditions that allowed them to prosper in an era where the outlook had changed to one of anything being possible. As technological advances accelerated self-imposed limitations vanished. Man in flight has smashed pre-conceived notions about what was possible.

As we entered the 20s a new era of affluence was upon the investing class. The 'roaring 20s' offered a chance for a daring man with a dream the fuel to bring it to fruition. Shares were offered and traded and Wall Street was on fire. Construction was booming and cities throughout America were flourishing. Detroit, Los Angeles, Boston, New York, New Orleans, and so many others were bringing new energy and vast wealth to those that dared to dream big.

Along with the Industrial Revolution we had also had a wave of immigration and large Eastern Cities were full of new cultures. In those days a person had to make huge sacrifices to come to America and an often guaranteed path of poverty for years just to be here. Naturally, we attracted motivated individuals with strong minds and bodies. Our melting pot was at its finest and the creative synergies it brought together were dynamic. We were able to bring the best ideas from all corners of the globe and put them to work for one mission; making a better life.

Unfortunately, the more rapid the rise in any market- the harder the fall. Everything peaked in 1929 in the great stock market crash. Unlike modern times many stock was margined up to 90% (in stock)- and quickly lost everything. Those that were smart enough to see the writing on the wall- were no in possession of a valuable commodity- CASH. Many of those with the foresight to take their 'chips off the table' when they still had time- went on to become incredibly wealthy.

Our economy was in a tailspin and this country suffered as a whole more than at virtually any time in decades. To make matters worse the dust bowl devastated the lives of millions of Americans for the better part of the 30s. Life was bad- very bad.

Along came Adolph. Adolph had been bouncing around for a number of years in Munich. Adolph had a problem with anything or anyone Jewish. He was not a big fan and decided that he was going to do something about it. This, in turn, led to WWII- which led to our involvement.

It was the period starting in the early 40s that cemented our position as a manufacturing giant. Within a matter of months our entire country mobilized more so than at any time in history. We, again, made the best use of our materials and resources - and were able to outfit all branches of the military. Americans were one and the 40s demonstrated what a cohesive unit we WERE.

After WWII it was obvious that we had taken the throne away from Great Briton as the world's number one superpower in virtually every category. America was a liberator and most of the world loved us. For the rest of the world America represented advancement, freedom, liberty, and opportunity. People felt good and started having babies.

The term baby boomer applies to those born from 1946 and the early 60s. This is a large group of Americans- roughly 79 million strong (b. 1946-1964). This is also the most significant group for several reasons - most of which we will cover in subsequent posts.

America once again proved its desire to spread and defend liberty and freedom during the Korean War from 1950 to 1953. Once again we were viewed as a force for good by much of the world.

The 50s - more than any other decade - represent the most idyllic version of the American Dream. This was the family unit before widespread divorce. This was an era before therapists and divorce attorneys. This was an era of a home cooked meal and the local drive in. The American manufacturing might put two cars in many garages and gave us beautiful appliances that made our lives more convenient. There was a period of relative stability. Yes, there was the start of the cold war and fallout shelters- but for the most part- America was free of drug abuse, mass violence, overcrowded prisons, overburdened social programs, and a culture clash. People that had come here had assimilated and were proud to be American- and the rest of the world pretty much respected us.

Resources were plentiful, and we were the envy of the rest of the world. It seemed that life was good. American life continued to be stable throughout the 50s ....Lets take a break at 1958.

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V Winner Post #3- The Information Age

Well if you have bothered to read this far then you either think that I have too much time on my hands or there must be screw loose. Why is Jon talking about cavemen and the the Korean War. I came to this blog to discuss investments?! Be patient my friends. I am convinced that if I spend enough time discussing what ails us- we will build a team- and be able to counter the coming issues which will change the world's priorities. Post #4 will get to specifics. And just so don't think I'm nuts- let me just say that I don't believe that aliens are coming to abduct us.

Moving forward- lets talk about the 60s. The 60s was just one of those decades we have that changes the course of history. By this time many Americans began to rebel against the 'establishment'. Perhaps things were a bit too copacetic in Dodge City for many so it was time to shake things up a bit. The 60s was a decade of rebellion. Perhaps the 50s with Marlon Brando and James Dean has sparked a nerve and gave some mystique to the idea of being a rebel- but the 60s was the decade of mass rebellion.

From music to drugs to hair to clothes to politics to the entire counter-culture movement- people began to question their 'reality'. Many took it one step further and simply altered reality through the use of mind 'enhancing' chemicals. It did make for some pretty colorful t-shirts.

Women and minorities began to assert their rights. People got sick of sweaters. A lot was going on. What was once a fairly cohesive society began to fray at the edges- but by the end of the decade our country was polarized (much as it is today).

Vietnam was our most unpopular war and provided fuel for an already combustible situation. Riots, marches, and even the burning of the American flag became regular occurrences. The American dream wasn't so bright anymore.

Changes were made to the immigration laws and we began the first round of a wider variety of cultures assimilating into this broad melting pot we call America.

The 70's were in my mind a continuation of the 60's but with different drugs, worse clothes and music, and even worse hair. Vietnam finally came to an end- but many of the causes of the 60s were still being fought. We really had two entirely different cultures competing in this country at entirely opposite ends of the spectrum.

One thing is certain; the family unit began to break down and dysfunction slowly became the norm. Divorce was entirely acceptable as were drugs as was rejecting what 'the man' stood for.

Although the Vietnam War was extremely unpopular in our own country much of the world still had respect for us. America had not lost its glamor in the eyes of most.

The 70s also brought some of the first big cracks in our foundation for some time. The oil crisis showed the rest of the world that America had some big weaknesses. America was DEPENDENT of foreign oil. It was at that point that we should have IMMEDIATELY started doing something about the problem. When we became a nation that relies on foreign crude a long term solution needed to be implemented to ensure that we would eventually be self sufficient. It wasn't.

Some other trends started popping up in the 70s - trends that had actually started a decade earlier but were not apparent enough for many to notice for quite some time. We started seeing that more things were 'made in Japan' (remember when it was made in Japan- not China?). I used to think - even as a kid- why do we need products from Japan- can't we make it here? It still doesn't make sense to me that we let it all happen.

Soon cars with funny names- like the Datsun and Toyota began appearing. Then television sets- Sony- Hitashi- Toshiba. Then it was the Casio watch. After a while more and more foreign brands were showing up everywhere. Virtually every industry started losing market share.

It started in home entertainment with reel to reel and in televisions. VCRs and gaming equipment, home appliances, electronics, razors- you name it. Still not a problem- after all- they are going to open their markets to us right? Isn't that what 'free trade' is all about? Let them get on there feet- deal with the disparity for a while- and then they will open their markets to us. Well- gee whiz- ain't that the American way. And how many countries have done that for us???

Getting off on a tangent.

SOOOO- Then came the 80s - Video games - Computers- music got better- hair and clothes continued to get worse. By this time new drugs were coming around- continuing to let people take a vacation from this terrible affluent lifestyle where we have more than 95 percent of the world. The family unit was completely broken down. People didn't even know which cause they were supporting anymore- they just wanted to fight the system dammit!

Greed was in vogue- and I remember watching Wall Street when it came out- another era when anything was possible. Talk on Wall Street went from millions to billions- and another run was in session. In the mid 80s oil dropped from 35$ to 10$ a barrel so who needs energy efficient anything. Lets just forget about it.

Now by this time things were getting really strange to me- I would go in and ask if they sold an American TV and they would tell me that Zenith is still American- "but most of its parts are made elsewhere". I remember standing in some box retailer in shock as he told me that "you can't buy an American VCR- we don't make them anymore". That was a very strange moment to me. I took that as a sign of failure on our part.

As strange as it may sound the VCR 'moment' I had was a realization for me. From that point on I started watching - and observing - and becoming cognizant of how fast things were changing in this country. We were losing ground in many areas.

The 90s brought us into our first Gulf War. We had always had problems with much of the Middle East as a result of cultural differences. No knock against Muslims but they are not big fans of Western habits in general. The first Gulf War was a power grab. After Iraq and Iran had battled it out for eight years- Iraq decided on a smaller country- Kuwait.

There was really no way to win a PR battle in the Middle East going into an Arab country and blowing it to pieces. I think it was around this time that really strong anti-American sentiment began building to a much greater extent than at any time in the past. I suppose wearing t-shirts in Paris hadn't helped our cause either- but things weren't going well.

Most of the 90s really didn't seem all that eventful to me. Technology did improve- life was relatively stable. Just another decade, or so I thought.... Then along comes the INTERNET. Or, as many called it back then the WORLD WIDE WEB - how funny. The Internet really did change everything- as did the blazing speed at which new technology was developed. With it came great promise for the future. We were going to solve every problem known to man if we just had enough websites and bandwidth to make it happen. Soon any company with a .com at the end was virtually assured to raise capital. As long as your 'business model' is promising why shouldn't you have millions of dollars to develop it?

The dot-com frenzy drove many (including myself) to the brink of sanity. Yet- fast forward about 6 or 7 years and we obviously didn't learn our lesson. Stocks were only going to go up- quit that menial job as a dentist and become a day-trader! That makes sense.

Y2K didn't bring the world to its knees as promised- that just proves we have a grip on technology.

Painful reality followed in mid-2000 when the whole house of cards came tumbling down.
What followed was a very painful lesson and a very large bursting bubble.

While we were busy developing our 'technology' a strange thing had been taking place called globalization. Suddenly the rest of the world was becoming wealthy and we were continuing to spend more than we took in, and buy more product from others than they bought from us.

Shortly after the stock market crash of 2000 we were confronted by a new reality and a new vulnerability. It seemed that it had become popular to dislike, and even hate America. Many of our own Citizens began to openly proclaim how much they detest our country. Never had our people been at such opposite ends of the political spectrum.

But there was a solution to the recession- we moved from dot-coms to developers. Lets just buy eight houses- and 'flip' them. Don't worry about the mortgage- you can refinance next year. After all, real estate is only going up...... Cheap money- cheap credit- and a new group of investors to fleece. Everyone is having a party. Oops- things are starting to slow down. Maybe there's a problem... Now we are having a problem! Another bubble popped..

Well folks- that is it. In post 1-3 I really pretty much painted the broad strokes. Moving forward we are going to look at facts, figures, and actions that have taken place that have led us to the year 2008. Bottom line- don't expect me to sugar coat it for you. There comes a tipping point and we are nearing it. It is not what we are going through right now- it is what we are about to experience after the turn of the decade. Preparation is essential if we are to succeed. There are always winners in any down market. From those that cashed out their holdings prior to the market crash of 29- to those that got out of dot-coms in 99- and on to those that sold their real estate holdings in 2006. Bottom line- there are always two sides of a transaction- someone winning and someone losing. I am convinced we can be on the winning side of 2011/12.

Thank you for being patient and expect details to be less objective and more factual going forward.

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V Winner Post #4- A Tribute To Michael Hodges

As I told you the first three posts were really pretty much a little rambling on my part. For some strange reason I always feel the need to start at the beginning and work my way forward- perhaps this is a waste of time- but it helps me to feel more organized. From this point on we will begin focusing more on hard facts and hard data.

Before I begin what will most likely be a multi-dozen post process I wanted to take a moment to give a special thanks to Michael Hodges. Most of you have probably never heard of Michael but while surfing the net a couple years back I came across his website. As I continued to read what he had compiled I was not only shocked at the sheer volume of data- but the content as well.

Now I must admit that I have a common affliction- website snobbery. Basically we have become spoiled over time and dismiss a site if it is not 'crisp' or 'clean' and does not have the bells and whistles that we have become accustomed to. But as I read on- I realized that Michael was really onto something. His site opened my eyes more than any other single website I have come across. I personally believe that his website should be required reading for any econ student, stock analyst, or politician. Although politicians, in general, seem to be happy spending more of our money and not less....

At any rate- I ask that you not judge his work on appearance but substance. It will take some time to dig through the plethora- but when you do- you will probably have the same reaction that I did. The visuals, especially charts and graphs- are especially effective in boiling down fact versus fiction. From what I have seen his facts are pretty damn accurate- which is why I like facts as they are much stronger than opinion. The site is the: Grandfather Economic Report- by Michael Hodges

The link is: http://mwhodges.home.att.net/

Hope you find it as enjoyable as I did.

Jon

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V Winner Post #5- The Population BOMB!

I love the line in A Few Good Men where Colonel Nathan Jessup (Jack Nicholson) tells Kafee (Tom Cruise), "You can't handle the truth!" Well, let's see if our new Virtual Wall Street audience can handle it........

Before I post an article I wrote for a report I did recently on the value of metals as an investment, let me take a moment for a few observations. Recently we have heard the term 'peak oil' quite a bit. The theory is that we have reached the tipping point where the supply of crude is not able to meet current and future demand. When we look at the fact that wells are being drilled 150 miles offshore and to depths of 30,000. feet, this theory does seem plausible.

In agricultural commodities we have heard that speculators are partly to blame for parabolic price movements in the price of everything from corn, to rice, to wheat and so on. We have also begun blaming farmers for converting corn to ethanol. We have all heard the story that the developing world has gone from one meal to two-per-day.

Many metals have seen a 500% or more increase in price since year 2000. This has been blamed on both speculation, investment flow, and the growth in emerging markets-mainly China.

Many factors have been blamed for the incredible run-up in commodities (in general). There is some truth to the fact that as commodities have become a 'shelter' play some of the price movement can be attributed to speculation. The truth, however, is something that I really don't hear being addressed nearly as much as it should. What is the real reason behind the super-cyle commodities run that we are experiencing: OVERPOPULATION

In short, we have reached what I call PEAK RESOURCES. Years ago we were told the world would not be able to sustain itself when the global population reached 8 billion people. The problem with that statistic is that it did not take into consideration global consumption and demand growing at the rates we have experienced in recent years. We have now reached the tipping point and are pushing the limits of what the world will be able to tolerate.

Now before you think I'm exaggerating I need most of you to step outside the box for a moment. Many of the people reading this blog are from the US, most are from developed nations, and those from developing nations are of the 'investor class' and therefore insulated from what many in their nation are forced to deal with on a daily basis. The fact is that approximately 1/5th of the world currently faces food, water, and other resource shortages. In coming years this number will continue to grow as we simply cannot sustain the type of growth this planet has experienced.

As I have said early on- I am not going to sugar-coat anything. These are the facts and, unfortunately, many of us are oblivious to them. It is only when commodity prices became so exorbitant that it affected virtually all of us- did many of us actually begin to take notice as to what had happened. Now it is very difficult to be in denial about what will be one of the biggest issue that we will face during our lifetimes.

Now- we must wipe the tears from our eyes for the poor and suffering and determine what we as investors can do to protect ourselves from the inevitable. (And if you care about actually solving the problem you will be able to solve more problems as a wealthy investor than an average person) Resources will be the currency of the future. What the markets are reflecting recently is a shift away from wants and back to needs. As we discussed in Post number 1- our planet is coming full circle in terms of priorities and the future will bring the past and present together in a very tight circle.

We must realize the value of global currency in the form of tangible assets in coming years.

Here is an article I wrote about a year ago which pretty much sums it up:
The World Population Has Grown:

In 1 AD, there were roughly 300,000 people inhabiting Planet Earth. Nine hundred years later, by 1,900 AD, the world population stood at 1,650,000,000. By the year 2000, the planet held over 6,000,000,000 people. Today, in year 2007, there are 6,600,000,000 people worldwide. The global population is growing at a rate of over 75,000,000 people per year.

Estimates for future growth call for 6.8 billion people by 2010, 8.3 billion by 2030, and 9.4 billion by the year 2050. These numbers are staggering.

Asia accounts for over 60% of the world population with over 3.9 billion people. China and India comprise 20% and 17%, respectively. Africa follows with 934 million people, 14% of the world’s population. North America is home to about 523 million (3%), followed by South America at roughly 380 million, or 5.5%. America is home to roughly 300,000,000 people.

The World Is Continuing To Grow:
The world population increased from 3 billion in 1959 to 6 billion by 1999, a doubling that occurred over 40 years. The Census Bureau's latest projections imply that population growth will continue into the 21st century, although more slowly. The world population is projected to grow from 6 billion in 1999 to 9 billion by 2042, an increase of 50 percent.

Because of their low and declining rate of population growth, developed countries as awhole are expected to remain virtually unchanged in population between 2005 and 2050, at about 1.2 billion. In contrast, the population of the 50 least developed countries is projected to more than double, passing from 0.8 billion in 2005 to 1.7 billion in 2050. Growth in the rest of the developing world is also projected to be robust, though less rapid, with its population rising from 4.5 billion to 6.1 billion between 2005 and 2050.

During 2005-2050, eight countries are expected to account for half of the world’s projected population increase: India, Pakistan, Nigeria, Democratic Republic of the Congo, Bangladesh, Uganda, United States of America, Ethiopia, and China, listed according to the size of their contribution to population growth.

Very rapid population growth is expected to prevail in a number of developing countries, the majority of which are least developed. Between 2005 and 2050, the population is projected to at least triple in Afghanistan, Burkina Faso, Burundi, Chad, Congo, Democratic Republic of the Congo, Timor-Leste, Guinea-Bissau, Liberia, Mali, Niger, and Uganda.

What is important to note is that a majority of the growth projected in developing countries will come from the inclusion of migrants from developing countries into the native population of developed countries. In other words, net growth into wealthier countries will primarily be due to overflow from poor countries.

Competition has never been greater for natural resources, commodities, food, water, money, jobs, land, and opportunity. It is more important than at any time since the Industrial Revolution that investors factor globalization into all decisions, especially with regard to making investments in the future. The world most of us grew up in has permanently and irrevocably changed.

In Post #7- We will actually take a look at something positive: World Economic Growth (sort of like a bear market rally- we can feel good for a moment- before continuing to tackle the problem). Now keep in mind this is a multi-post series- so be patient.........

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V Winner Post #6-A Population Bomb Pictorial

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V Winner Post #7- Global Economic Expansion

This is an article I wrote a little over a year ago- and it is both positive and negative. Basically, U.S. GDP has grown substantially- which is good. The bad news is that over time our share of world GDP is shrinking as developing countries show more rapid annualized GDP growth.

Historic Gross World Product*
1950
7,100,000,000,000
1960
11,300,000,000,000
1970
18,500,000,000,000
1980
26,800,000,000,000
1990
36,300,000,000,000
2000
48,600,000,000,000
2006
65,000,000,000,000
(Estimate)
*All figures quoted are based on purchasing power parity and in 2005 dollars

We witnessed an approximate seven-fold increase in the world’s economic growth in the fifty years from 1950 until 2000. The gross world product is estimated at 65 billion dollars for year 2006, which equates roughly $10,000 gross domestic product per capita, or for each person on earth (again, based on purchasing power parity).

The estimate for 2005 is approximately 59.6 billion dollars in world gross domestic product. The United States accounted for roughly 12.4 billion, followed by China at 8.2 billion, Japan at 3.9 billion, India at 3.7 billion, and Germany at 2.45 billion. In US Dollars, not taking into consideration purchasing price parity, the numbers for the top five world economies were as follows: United States at 12.455 billion, Japan at 4.56 billion, Germany at 2.79 billion, China at 2.23 billion, followed by the United Kingdom at 2.29 billion.

The increasing speed of Globalization has created many new opportunities, such as niche markets, that require everyone to adapt quickly in order to stay competitive. With the increasing global economy, increasing wealth, global communication, and the Internet, companies and individuals are realizing that they are often competing with others around the world in virtually every industry.

The global economy has created an environment in which many large corporations are becoming trans-national firms. Whether we agree with, or like, globalization, it is here to stay. In such a turbulent and fast moving environment we must evolve to succeed, or we will surely perish.

We Can No Longer Take Economic Superiority For Granted The past twenty years has witnessed a huge shift in the world’s wealth. Countries that most of us thought of as third world nations are now economic superpowers. The balance of gross world product has already changed significantly, and further disparities are on the horizon. Unfortunately little of this news looks good for US investors.

The US Economy – The Strongest On Earth: The US has the largest and most technologically powerful economy in the world, with a per capita GDP of $43,500. The US GDP in 2006 was almost 13 trillion dollars. The US also benefits from a great diversification of industry and service sectors. We also enjoy one of the most favorable business climates when it comes to starting or expanding a business and gaining access to capital. US businesses enjoy much greater flexibility than their counterparts throughout the world in making decisions, expanding product lines, and recruiting talent.

The US Economy – The Downside: The US has continued to suffer from huge trade imbalances with many of our global trading partners, most notably China. Unless this trend is corrected, the trade imbalance will grow to staggering heights. Long term, China could overtake the US in terms of world trade unless we enhance our country’s ability to compete in the global environment.

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V Winner Post #7- Global Econ Expansion in Pictures

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V Winner Post #8- US National Debt.

Keep in mind- as is the case with my entire series- many of the articles are a year or more old, and as such some of the numbers have changed. One thing that will really skew trade imbalance going forward is 100$ + crude. At 100$ per barrel we could easily end up spending in the range of 10 TRILLION dollars over the next decade on imported crude. For now let us take a look at our national debt.

What about the US National Debt?
There are many economists who will tell you that there is no need to be alarmed. Their case for maintaining calm is that 9 trillion dollars is ONLY 65% of our gross domestic product. They will tell you that these numbers are in line with those of other industrialized countries. There are three problems with accepting a 9 trillion dollar debt:
• The debt is growing and continuing to grow.
• It takes roughly 1.5 billion a month just to service our interest.
• It is 9 trillion dollars!

The level of foreign ownership of US debt has never been higher. In 2006, roughly 45%of our national debt was owned by foreign interests, the highest level in history.

Russia and Saudi Arabia have both expressed interest in seeing the world’s oil markets trade in Euros, or any currency other than the US dollar. In the past five years, the US dollar has lost, by some estimates, up to 40% of its value.

In case the US does get tough on China, by imposing tariffs, trade restrictions, or other measures that the Chinese deem “protectionist”, China could retaliate by not purchasing US debt. China has openly stated that it is using the billions of US dollars it holds in foreign currency as political leverage.

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V Winner Post #9- New York is Still the Leader.

The good news is that New York and the US financial markets are still the dominant leaders in the world financial markets. Our stock and commodity exchanges far exceed the dollar volume of any other exchange on Earth. Our talent, access to capital, and liquidity are staggering. Many believe that Wall Street has too much liquidity chasing after too few quality 'deals'. In New York, this is called a 'high-class' problem. It is a 'problem' we hope to have for quite a while.

Being number one allows us to attract the best merger candidate, venture capital opportunities, talent, and exposure. We have consistently been on top of every major financial trend over the past two centuries, and have excelled where others have failed. Top US based investment-banking firms long ago developed relationships in global markets that continue to generate prosperity to this day.

Many of the new markets that have opened worldwide are part owned by either American commercial or investment banks or US stock and commodities exchanges. We are well positioned to take advantage of a burgeoning worldwide economic expansion.




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V Winner Post #10- New York is Losing Stature

The bad news is that we are losing market share in sectors previously thought secure. Last year, for the first year ever, London took the lead from New York City as the world’s top Initial Public Offering market. Some analysts believe that London also has more money under management than New York. These are two pillars of our strength as the global financial leader.

Foreign stock and futures exchanges have begun trending away from US Exchange trading and keeping business close to home. Dubai, Shanghai, Mumbai, and several other relatively new exchanges have begun chipping away at our established lead as the only place to get the biggest and best deals done. Regulatory changes after 2000 and 2001 have made doing business in the US very difficult for many growth companies. Large markets throughout the world have taken advantage of this by easing restrictions on doing business and providing incentives to move business to their markets.

Last, the global economic boom has brought a newfound swagger to those companies, firms, or exchanges that didn’t have the confidence or ability to go it alone. Many are now basking in their newfound pride the way a child feels when he or she is finally on their own. Simply not needing the US is enough of a motivation for many upstarts to break their own trail. As so many experience success, others grow more determined, and so the exodus has begun.

The moral of the story is that when you are on top, there is always someone who wants to knock you off the pinnacle. It is human nature and is what created our great country. Had our first settlers not taken their lives in their own hands and risked all for freedom, we would not be the magnificent country that we have become. The question that every American has to ask now is, “What do I have to do to stay number one?”



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V Winner Post #11- The Role of Investment Banks

Traditionally, investment banks helped companies and governments to raise money by issuing and selling securities in the primary market. Their role was to assist public and private corporations in raising funds in the equity and debt capital markets, as well as to provide advisory services for mergers, acquisitions, and other types of financial transactions. Investment banks differ from commercial banks, which take deposits and make commercial and retail loans. Investment banks also differ from brokerages, which in general assist in the purchase and sale of stocks, bonds, and mutual funds. Some firms operate as both brokerages and investment banks.

In recent years, however, the lines between commercial and investment banks have blurred. After the stock market crash of 1929, the Glass-Steagall Act was passed. Essentially, banks were prohibited from accepting deposits and underwriting securities. Glass-Steagall was repealed by the Gramm-Leach-Bliley Act in 1999. The new changes created significant consolidation in the banking industry and integration of banking services. Now many “banks” offer commercial banking, insurance products, investment banking, and brokerage services, all under one roof.

Today, other than a small amount of specialty firms, investment banks are heavily involved in providing a diverse array of financial services, such as fixed income trading, foreign exchange, commodity, and equity securities.

Financial Markets Division of an Investment Bank Sales and Trading is often the most profitable area of an investment bank today and is responsible for the majority of its revenue. In the process of market making, traders will buy and sell financial products with the goal of making an incremental amount of money on each trade. Sales is the term for the investment banks sales force, whose primary job is to call on institutional and high net worth investors to suggest trading ideas and take orders. Sales desks then communicate their clients’ orders to the appropriate trading desks, which can price and execute trades or structure new products that meet a specific need.

Research is the division that reviews companies and writes reports about their prospects, often with buy or sell ratings.

Recent Evolution Of Investment Banking
Investment banking is one of the most global industries and is hence continuously challenged to respond to new developments and innovation in the global financial markets. Throughout the history of investment banking, many have theorized that all investment banking products and services would be commoditized. Firms have been quick to adapt and to offer an ever-expanding selection of new and improved financial instruments. By doing so, banks are able to constantly evolve and stay ahead of trends.

Trading bonds and equities has become a commodity business, but structuring and trading derivatives is highly profitable. Each over the counter contract has to be uniquely structured and could involve complex pay off and risk profiles. An increasing amount of profit has come from proprietary trading, where size creates a positive network benefit (since the more trades an investment bank does, the more it knows about market flow, allowing it to make better trades and pass on better guidance to clients).

Another recent change is that many investment banks have focused on becoming lenders themselves. Instead of raising money for their clients, they have begun making the loans, with the goal of securitizing them. Many investment banks will offer commercial mortgages at very low rates in order to make money securitizing the loans, causing such loans to be a very popular financing option for commercial property investors and developers.

Technology has driven sales and trading in recent years as more sales and trading desk are using electronic trading platforms using complex model driven software to execute trades and to squeeze the profits out of the minutest changes in market conditions.

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V Winner Post #12- Just How Big is Wall Street?

Size Of The US Investment Bank And Securities Market

Revenue from the investment banking and securities dealing industry is well over 150 billion dollars annually, with tremendous growth occurring in the past four years. Revenue for the US securities industry as a whole was approximately $159 billion, which was a 25% increase over 2004 figures and was its strongest year on record. During this time, commodity contract revenue continued to grow, up to $3.9 billion or a $500 million jump in one year alone.

The Biggest US Players: Five US financial firms dominate the marketplace, Citigroup Inc., Goldman Sachs, Morgan Stanley, JP Morgan Chase & Company, and Merrill Lynch & Company. Together, these five firms generated more than $60 billion in 2006 just from underwriting securities and advising on mergers and acquisitions alone.

The biggest single player is Goldman Sachs. In 2006, Goldman produced record revenue of $37.7 billion. Trading and principal investments produced $25.6 billion, and investment banking produced $5.6 billion. Trading and principal investments made up almost 70% of Goldman’s revenue for the year. To illustrate how much the industry has changed in a decade, in 1997 investment banking and trading generated roughly equal revenue; now, investment banking has taken a back seat and is a diminishing part of Goldman’s business.

Wall Street’s Threat: The world has seen tremendous change in recent years, from political and economic integration of Europe, to the triumph of capitalism in Russia, to the emergence of China and India as economic powers. All of this has heightened global rivalries for deals and trading.
In 2006, more than 350 companies went public in Europe, selling 86 billion dollars worth of stock. In the US, 235 companies raised 48 billion in IPOs. In 1999, 507 companies went public in the US, selling a combined 64 billion in stock. Not one of the 10 largest stock issues in 2006 was in New York.

Since 2001, the US share of worldwide securities industry revenue has fallen to about 58% from 62%. The US is no longer the hyper power that it once was. Today, our equity market, the world’s largest, accounts for about 37% of combined value of public companies around the globe. In 2001, that figure was 50%.

London dominates the $2.7 trillion a day foreign exchange market, with 32.4% of all trades, compared with 18.2% for New York. At current rates, the European Union’s combined economic output will exceed that of the US this year, or next. Europe will soon have a bigger economy than the US.

Goldman Sachs estimates that the combined economies of Brazil, Russia, India, and China will dwarf those of today’s industrial economies, the US, Japan, Germany, the UK, France, and Italy, within 40 years.

What Can Be Done?

It has often been said that the first step in solving a problem is first admitting that you have one. This acknowledgement has led business and government leaders to recently rethink our securities and corporate laws as they apply to capital access.

We have begun to accept that we must make drastic changes in our way of doing business, in our beliefs and ideology, and most important, in our long term planning.

As we continue to evolve in the 21st Century, we, as investors and citizens of the greatest country on earth, need to adapt. We can no longer take economic supremacy for granted. We must not be complacent. We must be vigilant. We must, as people, evolve.

One definition of hedging is to avoid a rigid commitment by qualifying or modifying a position so as to permit withdrawal. In other words, be flexible. In order to succeed in the new economy we must be willing to change long-held beliefs and positions. Those that are able to adapt to their new environment will flourish. Those that maintain rigid inflexibility or refuse to accept their new circumstances will surely perish by paralysis.

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V Winner Post #13- Hedging Simplified.

An example of hedging is if you are a farmer and you have 1000 pounds of wheat to sell you could either wait until harvest and sell your wheat at the current market price, or you could use a futures contract to lock-in the price today. If the farmer is satisfied with the price of wheat today then he will sell (or short) the appropriate wheat futures contract. By shorting the contract he is guaranteed today’s price at harvest time. How does that work? The gain or loss on the futures contract will equal the gain or loss on the market price at harvest time; we call this a perfect hedge. A mutual fund manager would use this same strategy, but with index futures he would short futures contracts on a stock index, therefore reducing any downside risk for a certain period of time.

Risks associated with futures contracts apply mainly to speculators. Speculators take positions on their expectations of future price movement often with no intention of making or taking delivery of the commodity. They buy when they anticipate rising prices and sell when they anticipate declining prices. The reason futures carry high risk is because they are usually bought on margin, and each futures contract represents a large amount of the underlying asset. For example a futures contract might cost $10,000 but represent $100,000 in the commodity. Futures rules dictate the size of the deposit and the amount of the contract that can be purchased through the use of margin.

The Exchange is a public market forum and anyone can play a role in these vital global markets. Participation is not difficult, but a few requirements must be met. The first step is to open an account through a licensed, Series 3, commodity futures broker. The broker will be your point of entry to the markets, so make your selection with the same care and due diligence as you would any other financial services professional upon whom you rely.

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V Winner Post #14- A Pictorial of our Situation

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V Winner Post #15- A Pictorial Continued

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