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Warren Buffett quotables from the new 2008 annual letter

The master is always good for a homespun phrase or two and as usual I've enjoyed reading his 2008 review letter (available on this link). Here are a few of the pearls that he's come up with this year.


"This debilitating spiral has spurred our government to take massive action. In poker terms, the Treasury and the Fed have gone “all in.”"

"...our $58.5 billion of insurance “float” – money that doesn’t belong to us but that we hold and invest for our own benefit – cost us less than zero. In fact, we were paid $2.8 billion to hold our float during 2008. Charlie and I find this enjoyable."

"When investing, pessimism is your friend, euphoria the enemy."

"As we view GEICO’s current opportunities, Tony (Geico CEO) and I feel like two hungry mosquitoes in a nudist camp."

"At the moment, it is much better to be a financial cripple with a government guarantee than a Gibraltar without one."

"Investors should be skeptical of history-based models. Constructed by a nerdy-sounding priesthood using esoteric terms such as beta, gamma, sigma and the like, these models tend to look impressive. Too often, though, investors forget to examine the assumptions behind the symbols. Our advice: Beware of geeks bearing formulas."

"When I read the pages of “disclosure” in 10-Ks of companies that are entangled with these instruments (derivatives), all I end up knowing is that I don’t know what is going on in their portfolios (and then I reach for some aspirin)."

"The First Law of Corporate Survival for ambitious CEOs who pile on leverage and run large and unfathomable derivatives books: Modest incompetence simply won’t do; it’s mindboggling screw-ups that are required."

Weekend Freestuff

Free free free, the price for me! Here we go with another round of boredom breakers and interest arousers. Take your pick from this little lot, sit back and read yourself into a stupor.

The Fraser Institute's 2009 World Mining Survey is out, so get your copy right here. You'll find the latest league tables, comments and all the usual stuff. It's one of those 'need to read' publications if you're into the industry, so read it.

Here's a good interview with Eric Coffin of HRA, as featured in yesterday's Late Edition with David Pescod. Late Edition has recently turned into a pumphouse for Canaccord approved stocks (or maybe it was always like that...I forget) but every so often it's well worth reading. This edition is the best of examples as we get to hear from one half of the Coffin Brothers team, best of breed in resource newsletters.

On the subject of good interviews, here's one that The Globe and Mail did with Don Coxe (of Basic Points and BMO fame). It was published on February 19th but somehow I missed it in the rush. Thank you B for passing it on.

Here's a great looking report about customer service practices. Called "Extraordinary Customer Service" it explores what customer contact people should do to win and keep clients. An important subject in these days of dwindling revenues and one that can give you the all-important edge over competitors.

Finally, read the 2009 edition of Warren Buffett's to Berkshire Hathaway shareholders that was released today by clicking right here for the full 22 page PDF version.

Good weekend reading from respected bruddasites

The magnificent Jurgen Schuldt takes on the issue of the Peruvian Nuevo Sol. He starts by rightly laughing his socks off at those who say "Let it float freely, no more political interventions from the Central Bank" and then argues that the Nuevo Sol is heading for S/3.50 to the dollar at end 2009. I totally agree with both reasoning and conclusion (I'd be mad not to; Schuldt's much smarter than me). The post is in Spanish but this Google autotranslation isn't bad at all. Well worth the effort, either way.

Still think Asia will come to the rescue of the world economy? Hmmm, read this post by Brad Setser and wake up to some cruel reality.

Wave Journal has my intrepid dudepal with stitches in his head after clashing with a greenhorm surfer and the fins of his board. Also nice post on ceviche, Peru's wonderful fish dish.

Plan Colombia and Beyond has more details on the DAS phonetapping scandal that hit last weekend. If you go over you also get a comprehensive translation of the original breaking article from last week's Semana magazine. Good job, guys.


Alex Dalmady on CNBC!!!

Yay! Go Alex!!!

Nice tie, too.

Citigroup (C): One for Ripley's Believe It Or Not

Here's what one point eight billion shares traded looks like on a chart.

A full-blown case of stock market shock'n'awe.

All sorts of funny things around C today, but here's a little calculation I did. With the US gov't's deal to take up 36% of stock at $3.25, today's close effectively means Tim Geithner has today thrown around $15Bn of taxpayer (i.e. your) money down the ravenous and bottomless pit of no return.

Now here's the funny bit (as long as you find this stuff isn't on several levels): That works out at about 33 shares of Citigroup per US citizen! ($15Bn by 300m population X $1.50 closing price). The whole show is capped off by the fact that you'd need 10 billion shares in order to give 33 to every US citizen, and Citigroup only has 5.45Bn shares out.

That's all for just 36% of Citigroup, remember. Ladies and gentlemen, a warm round of applause for your government.

Trading Post (end the week edition)

Talisman Energy ( up 2% at $11.93. The Peruvian supreme court (equivalent) handed down an important ruling today that stops TLM, along with Petrobras and Repsol, from exploring an area of jungle known as Lot 103 until the companies provide detailed explanations about how they will safeguard and ensure the non-pollution of water supplies.

Troy Resources ( up 5% at $1.05. Volumes are tiny again. Even though gold doesn't know which way it wants to run and the whole sector is nervy, TRY refuses to let me buy more at under $1. So be it, got plenty already.

Petaquilla Minerals ( down 2.5% at $0.39. I'm not joking, these criminals refuse to pay the $1m fine imposed on them by Panama's enviro agency, ANAM. Now remember this is the very same agency has to speak with to get the permits it needs to operate. Amazingly, not a word of this has reached the English media. Jeesh, this story needs more coverage than my poxy little blog. Sometimes I wonder if Canadian mining journalists are just plain lazy, or whether they have some kind of unwritten "oh we can't talk bad about miners" thing going on.

Gold Reserve (GRZ) down 1% at $0.585. Doug Belanger was at the BMO conference in Miami this week. Amazingly enough he didn't change the habit of a decade and continue on to Venezuela afterwards. I mean, why should a CEO ever visit his only asset anyway? So here we are with the GRZ share price cut in half since the Rusoro bid was knocked back. How are you feeling, oh loyal shareholders? HAH!

Four reasons why South American Silver ( is untouchable

When three people on the same morning write to me asking or commenting about the same company, there's something afoot. The exploration-stage miner is South American Silver ( and the catalyst is the 43-101 compliant Preliminiary Economic Assessment (PEA) that was published Wednesday (here's the PR).

Four reasons why not on this stock.

1) It's being pumped in SinkingAlpha by a shameless promo artist named Mike Niehuser. Just look at the guy's track record with Nadagold (NG) pumps. Then make sure you read the disclosures at the bottom of his "reports" and that should be enough to unfurl your red flags, too. If it's not, then I really advise you to avoid the junior miner sector. This person and all the other parasites that sold their souls long ago so as to continue this corrupt 'mining the stock market*' system should be ignored now and forever.

2) The press release offers highly massaged numbers. The whole premise of offering indium as a significant revenue generator at a $530/kg is ridiculous enough to begin with, but then the way that 0% discount to NPV calculations are presented as "the project economics" is downright dishonest. The smell of BS turns into a stench.

3) It's in Bolivia. Look guys, if you're a regular reader you'll know I'm sympathetic to Evo Morales and his gvernment. I think he's doing a great service to the vast majority of his people by standing up to the landed, rich oligarchs. But foreign investment there right now? No thanks. Bolivia doesn't need your money, is that clear? It should be by now. There's no way you can seriously consider investing in a new, greenfield project in Bolivia right now. Sure, for those already there and working things aren't bad at all (CDE, ORV.v etc), but do you honestly believe that Bolivia will let a foreign junior miner in on world standard terms and make itself rich while the State sits back and applauds its initiative? If so, I have a really nice bridge that I'd like to show you round one day.

4) does not have surface rights at its Malku Khota concession. If you don't understand what that means you shouldn't even be considering an investment in Amazingly, the company never seems to mention this point in its promotional literature and pumpers like Niehuser kinda forget to put it in their everso objective reports.

The bottom line here should be no surprise to regular readers. Avoid South American Silver ( Don't buy it, don't short it, just avoid it.

* copyright Mickey Fulp

Argentina: Nationalized grains?

Just in case you don't know what world class silo areas look like these days. Forget those
quaint free-standing towers, this is the real deal.

Today I got this in my mailbox, kindly sent along by regular reader "Patria Grande".


Argentina: May Nationalize Grain Commerce

February 27, 2009

Argentina’s government is considering the nationalization of its grain commerce, La Nacion reported Feb. 27. Federal Administration of Public Income (AFIP) chief Ricardo Echegaray said the government agency would purchase all of Argentina’s grain, flour, and oil production and ensure that domestic demand is met before exporting the remaining quantities. The National Office of Agriculture Commerce Control currently administers grain exports.

Any comment on this, Otto?


Here's my comment: Right now the Argentine gov't is sat down with "El Campo" trying to work out a new deal on taxes. Both sides have made their point fairly, and away from some of the more inflammatory rhetoric the Campo says that the high tax regime is killing them now that the prices for Soya, Corn, Wheat etc are off their highs. They do have a point. Also, the gov't has been fair with them in this round of talks, it has to be said. There's a new deal on the table now that gives farmers a break (quite literally).

But the gov't is also mightily annoyed that most of the big agro players (and the co-operatives too) are just storing a lot of the grain and waiting for a combo of a new tax deal and higher market prices. With so much grain just sitting in silos the gov't isn't getting its tax income for sales abroad, hence the threat that Patria Grande sent along. The gov't will moan about "domestic demand" but that's just so much BS. Klishtina isn't worried about Buenos Aires bakeries running out of bread (cos they won't) and much more worried about the state coffers running out of moolah.

The bottom line is that for the moment it's a bit of posturing by the Argentina gov't to get the deal struck, but it's also a move that has a set of back teeth. If the agro boyz try to push the limit this threat could turn into action. So right now it's something to keep an eye on and not make into screaming NYT polemic headlines. The politics of soybeans.

UPDATE: I note Bloomberg is running the story too. True to Bloomie form, even in what passes for a 'report' it manages to quote just one side of the story and genuflects at the altar of free trade. Why doesn't anyone care for reporting the story as it is instead of shilling any more? If it bleeds it leads, that right?

The IKN PDAC Primer, 2009

Yes indeed it's Peedac time again. Next week the whole of the Canadian mining community (and most of the rest of the world, too) gather in one very cold spot to get drunk, do deals and slap each other on the back. So to help those planning on visiting the show to survive PDAC, here's a list of 25 LatAm exposed (well mostly) miners among the exhibitors you can visit. I've chosen these because they top out my personal list of "gotta visits" this year. Now PDAC is a big place and there's always a ton of stuff to cover, so it's always best to get straight to the point.Therefore as well as finding the name of the company and its PDAC 2009 stand number, you'll also see what Otto suggests is an apt question to throw at the company people on at the show.

And for extra convenience, here's a PDF copy of the list. Just download, print out and take it along. Here we go with Otto's 25 to visit!

Company Name Ticker Stand Thing to Say
Amerigo Resources 2123 "What are the guys at EuroPac like, anyway?"
Candente Resource 2148 "OK, that Caña-whatsit thing is dead..what about drilling those Au projects, Freeze?"
Colossus Minerals 2850 "So what do you know about a guy called Josimar Barbosa, folks?"
Comaplex Minerals 2805 "When is AEM going to step up? Now or later?"
Crystallex KRY 2523 No question, simply point and go, "HAHAHAHAHAHAHAHAHAHAHAHA"
Dia Bras Exploration DIB.v 3009 "Tell me you have financing waiting to build the new plant. Just tell me it's true."
Dynasty Metals 2146 No question, just high-five tham all and smile a lot.
Exeter Resource XRC.v 2942 "That Caspiche thing. Low grade suphide that needs 500m dug first.. joking, right?"
Fortuna Silver Mines FVI.v 3033 "So c'mon, tell me again about the grades you're hitting at Soledad, Silvia and Bateas."
Geologix Explorations 2223A "OK, bummer about Mexico. How's that NEM JV coming on in Peru?"
Hochschild Mining HOC.L 2117 "Rob McEwen whupped your asses, didn't he?"
Jaguar Mining JAG 3129 "Spoken to Peter Marrone yet?"
Latin American Min LAT.v 2518 "Diamonds in Paraguay. Joking, right? Lithium in Argentina. Joking, right?
Mansfield Minerals MDR.v 3101 "This gold heap leach project in Argentina. Are we really talking two million oz Au?"
Minera Andes 2337 No question, just grab McEwen if you see him there and highfive.
Nautilus Minerals 2846 "Don't worry guys, we're all underwater nowadays."
NovaGold Resources NG 2243 "So tell me again about those "forced options sales" from October 23rd, Mr Johnson."
Petaquilla Minerals 2602B "Why are you refusing to pay the U$1m fine to the Panamanian Enviro agency?"
Radius Gold RDU.v 2433 No question, just check out Ridgway's accent and see if you can understand him.
Rusoro Mining RML.v 3136 "Don't worry Mr. Salamis, you'll get offered the operating contract anyway."
Salazar Resources SRL.v 2945 "You still fighting with the locals round that patch of Ecuador, Freddy?"
Strathmore Minerals STM.v 2643 "What's that about a garage full of U308 ore hidden in a lock-up in Juliaca?"
Tamerlane Ventures TAM.v 2126 "Have you been back to Peru since that police detention order was issued, Peg?"
Troy Resources 3340 "When you going operational, mate? C'mon, gimme a date, strewth."
Vena Resources 3023 "So tell me about a place called Esquilache, Juan."

Redundacies: understanding the system

Even though management are pinkslipping you left, right and centre they still care! Check out this recent memo that did the rounds in a large financial institution: (H/T bina)

Dear employees,

Due to the current financial situation caused by the slowdown of the
economy, Management has decided to implement a scheme to put workers 40 years of age and above on early retirement. This scheme will be known as RAPE (Retire Aged People Early).

Persons selected to be RAPEd can apply to management to be eligible for
the SHAFT scheme(Special Help After Forced Termination). Persons who have been RAPEd and SHAFTed will be reviewed under the SCREW program (Scheme Covering Retired Early Workers). A person may be RAPEd once, SHAFTed twice and SCREWed as many times as Management deems appropriate.

Persons who have been RAPEd can only get AIDS (Additional Income for
Dependents & Spouse) or HERPES (Half Earnings for Retired Personnel
Early Severance). Obviously persons who have AIDS or HERPES will not be SHAFTed or SCREWed any further by Management.

Persons who are not RAPEd and are staying on will receive as much SHIT (Special High Intensity Training) as possible. Management has always prided itself on the amount of SHIT it gives employees. Should you feel that you do not receive enough SHIT, please bring to the attention of your Supervisor.

They have been trained to give you all the SHIT you can handle.


The Management

Chart of the day is.........


The number of deaths over the Carnaval period in Ecuador, 2007 to 2009.

Yes indeed, 178 people went to meet their maker over Carnavales in Ecuador this year.

But what to do? Stay indoors with a blanket over your head, or party and risk death by drowning, shooting, mugging, traffic accident or whatever fun way there is to pop your clogs?

Party on Garth.


"World Oil": An excellent free magazine subscription offer

Here's a great free offer for you care of your loving and respectful IKN.

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Request your free subscription by clicking this link. The offer is available in close on every country around the world, too. Get yours today, it only takes a minute.

Peruvian soccer academy tales

This story is pretty difficult to take in, not only for the person at the centre of it but also the jaw-dropping attitude of Peruvian authorities.

In the year 2000, a certain Andrés Nevado Mera was working as the trainer of a boys' football club in the town of Pomalca in northern Peru. He was convicted of the rape and murder of one of the boys in the football academy and sent to jail. At this precise time nobody really knows how he got out of that prison, but leave he did. What we do know now is that he moved to the South of Peru and took a job as, believe it or not, the trainer of a boys' soccer team in the city of Puno.

Last night, after luring one of the boys back to his house, he tried and failed to rape the 12 year old and then slit his throat, cutting the jugular vein and cutting down as far as the thyroid gland. He then threw the boy out of his house and left him for dead in the street. Fortunately, the boy's life was saved by a passing motor-taxi that spotted him in the gutter and rushed him to a nearby hospital.

Andrés Nevado Mera is now on the run. Incredibly, it turns out that not only did the local Puno authorities know of his murderous background, but he was also facing charges for a similar pederast attack on a boy in Puno just a few months ago! Just the kind of person you'd allow to continue running a boys' football team in your town as well, no?

Trading Post (afternoon edition)

Two Trading Posts in one day? Yep, if only to celebrate the fact I've actually done some trading for once.

Cosan (CZZ) down 0.5% at $3.56. Profits definitively taken as I sold my remaining CZZ at $3.71 (the same price the first chunk went for). Three reasons: 1) I was getting sick of the rollercoaster that hasn't been getting anywhere, 2) after adding to the NG short I wanted to raise a little more cash and 3) I sense that might be on offer soon so I'd like some spending money on hand. CZZ was a fairly chunky position in my port and I like the feeling of more cash right now...never been afraid to sell things. For the record the profit was 30% on the play, which isn't bad after two months or so. Wanted more, but hey...that's the game.

Soquimich (SQM) up 2.4% at $29.48. SQM put on a bullish conference call this morning, forecasting higher prices and growth in its main products (fertilizer, iodine, lithium). Up 20% or so in 2009 and looking solid now. Well-run company that covers interesting sectors.

Troy Resources ( down 6.5% at $1.00. Volumes are tiny and with bid $1.00 / ask $1.08 it can hardly be called a trading vehicle. These kinds of illiquid moments can throw out downspikes as someone sells on a panic. I'm now watching and hoping I can pick up some more down in the 90s somewhere. If my price doens't appear there will be no sweating; it's already my biggest position.

Spanish professional soccer a front for narcotrafficking

Carlos de la Vega. A very naughty boy, it seems

Carlos de la Vega, a professional footballer for Spain's Rayo Vallecano, has been arrested today along with two ex-professionals, Pablo Acosta and Zoran Matijevic (both from Spanish side Hercules) for belonging to a major cocaine smuggling operation with around a dozen other people. In fact Matijevic (a Serbian national with French passport) is the presumed ringleader of the gang. He was also the manager for French side Nice and, embarrassingly, an official F.I.F.A (the world football governing body) agent.

Spanish police have been tracking the gang since mid-2008, apparently. Under the guise of their frequent transatlantic trips to scout for footballing talent in South America, the group has been trafficking cocaine from Colombia, Peru and Bolivia. Today's raid has apparently caught the gang red-handed with a 600kg consignment of cocaine that left Argentina and arrived in Spain via Tangiers. At the time of this post the English-speaking press had not yet worked out a way of getting the name "Hugo Chávez" into their reports which explains the lack of coverage so far.

UPDATE: English language reports are starting to appear. This will make big news in Europe, for sure. Here's the Reuters version.

The Nuevo York Times

Hey gringo! You please tell me another funny joke 'bout mejicanos that are lazy and only do nothing and sleep all to mañana and don't have no money?

Carlos Slim just loaned the New York Times $250m. Pachakuti strikes again, as Slim's idea of hobby money to snag a trophy bails out some desperate Statesiders in a dying industry. The guy already owns a touch under 7% of the NYT, and as this loan is guaranteed by a lump of stock, he could move to 17% stakeholder at any given moment.

Hey, Carlos...get us a better class of LatAm correspondent, please?

Trading Post (Star Wars' Yoda edition)

IKN has invited Yoda from the Star Wars movies along to comment today's Trading Post. Let's see if the crinkly Jedi can offer up some wisdom.

Freeport McMoRan (FCX) up 7.3% at $31.48. A good day it is having and enjoying the Obama effect in copper? Southern Copper (PCU) up 7% at $14.47 and having nearly as much fun as Freeport, is it. Hmmmmmm.

Dynasty Metals ( down 6.25% at $4.50. is clearly enjoying the drop in gold not. If it goes under four dollars, consider buying some more, I will. Yes, hmmm.

Vena Resources ( UNCH at $0.16. My Jedi powers see a bright future and happy news. Stock to keep on your radar in the near future, this is. Hmmmmmm.

Nadagold (NG) up 2.1% at U$2.86. Save this brute, not even an upgrade by RBC Capital Markets will. Advise Otto to short some more if it rises to three dollars, will I. Yes, hmmm.

Petrobras (PBR) up 4.9% at $28.57. Along for the ride, oil is enjoying a big jump today and petrobras is. The price it wants, it seems like opec will cut until it gets. Yes, hmmm.

I just took Yoda's advice on NG at U$3.02

Allow me to direct your attention to.....

....these three links.

Market Memorandum does a good job of analysing the new IADB paper entitled, "Dealing with an International Credit Crunch: Policy Responses to Sudden Stops in Latin America." Recommended reading for those who need to know the subject but don't have time to wade through the whole IADB report (like me, for example).

Biiwii does his own analysis of the Gold/Silver Ratio mentioned here yesterday. As you might expect Gary does it better, though it is nice to see him basically in agreement.

This short'n'sweet report from Bloomberg probably flew under most radars this morning, but I find it very interesting. The Chinese government has approved the construction of an oil refinery in China to process 200,000bbl/d of Venezuelan crude oil. How do we know the oil will be from Venezuela? That's because the Venezuelan stuff tends to be very heavy and sulfur-rich, which means it needs special treatment and refineries must be custom-built to handle it. For sure it's a long-term project and the plant doesn't even have a final location decided upon yet, but it's a sign of the times.

ECH: the easy way to play Chile's currency revival

Following on from yesterday's post that noted the recent rebound in the Chilean Peso (CLP) compared to all other Americas currencies (including the US dollar), here's a way of playing Chile's currency strength without all that mucking about in the forex market and with leverage to boot.

ECH is the iShares Chile ETF, with a basket of local stocks from the Santiago bourse. But really and truly it's less a play on companies and more a play on the CLP, as this one year chart shows.

But if we now focus in on the three month chart, the leverage to the CLP is shown. The Peso has outperformed other currencies ever since the Bachelet government took the gloves off and started getting countercyclical on the recession that's affecting Chile and the world, tapping the reserves it had squirreled away in the previous boom years.

So with copper looking like it will be used as a "Obama stimulus will save us all" vehicle to the upside, playing the CLP via this ETF is a simple alternative that may offer decent leverage in the next couple of weeks. Today ECH stands at $33. I'd envisage this as a short-term play and would provisionally target $40 or so, I suppose, without getting too slide-rule accurate or deep into my own calculations. That target could adjust at any moment. Here's the price chart for ECH that shows how it's come back from the doldrums but has plenty of room before it regains its mid 2008 position.

DYODD, dude.

Chart of the day is......

.....the number of people "disappeared" for political motives in South America in 2008, by country.

The source is the US State Department 2008 report on Human Rights that was published yesterday.

Now that may be just another collection of numbers to you, but live in South America a while and you get to know what it means, too. During my time in Buenos Aires I was close to a person who lived through the 1970's dictatorship while at university. That person told me about how fellow students would suddenly stop coming to classes, with the more charismatic ones often the 'dropouts' (as the college authorities called them). The overriding emotion was fear and you just shut your mouth.

Remember that next time you see a band of 20something students making noise in the streets of Venezuela, because the lack of fear they have in protesting and voicing their opposition is indicative of a healthy democracy. Which reminds me; when was the last time CNN televised a student protest march in Colombia?

A photo.....

....of my wife.

Isn't she pretty (and the answer is 'yes')? No biggie here, just a happy picture to brighten up the blog. So do yourself a favour today; If you have a partner, remember to give that person a kiss and say how you feel about them. Have a good day.


Paul Volcker: Yes, yes and thrice yes

This recent Paul Volcker speech has reached me via this post at BiiWii. If it were possible to agree more than 100%, I would. This is one of the smartest and most integral finance guys out there and once Geithner is done he'll get his turn at bat. When he does, things will get better.

Read it. Proof that to be finance doesn't involve selling your soul to greed. Thanks Gary for passing it on. I hope somebody else copypastes this speech in their blog.


I really feel a sense of profound disappointment coming up here. We are having a great financial problem around the world. And finance doesn't work without some sense of trust and confidence and people meaning what they say. You take their oral word and their written word as a sign that their intentions will be carried out.

The letter of invitation I had to this affair indicated that there would be about 40 people here, people with whom I could have an intimate conversation. So I feel a bit betrayed this evening. Forty has swelled to I don't know how many, and I don't know how intimate our conversation can be. But I will, at the very least, be informal.

There is a certain interest in what's going on in the financial world. And I will disappoint you by saying I don't know all the answers. But I know something about the problem. Let me just sketch it out a little bit and suggest where we may be going. There is a lot of talk about how we get out of this, but I think it's worth remembering, or analyzing, how this all started.

This is not an ordinary recession. I have never, in my lifetime, seen a financial problem of this sort. It has the makings of something much more serious than an ordinary recession where you go down for a while and then you bounce up and it's partly a monetary - but a self-correcting - phenomenon. The ordinary recession does not bring into question the stability and the solidity of the whole financial system. Why is it that this is so much more profound a crisis? I'm not saying it's going to get anywhere as serious as the Great Depression, but that was not an ordinary business cycle either.

This phenomenon can be traced back at least five or six years. We had, at that time, a major underlying imbalance in the world economy. The American proclivity to consume was in full force. Our consumption rate was about 5% higher, relative to our GNP or what our production normally is. Our spending - consumption, investment, government -- was running about 5% or more above our production, even though we were more or less at full employment.

You had the opposite in China and Asia, generally, where the Chinese were consuming maybe 40% of their GNP - we consumed 70% of our GNP. They had a lot of surplus dollars because they had a lot of exports. Their exports were feeding our consumption and they were financing it very nicely with very cheap money. That was a very convenient but unsustainable situation. The money was so easy, funds were so easily available that there was, in effect, a kind of incentive to finding ways to spend it.

When we finished with the ordinary ways of spending it - with the help of our new profession of financial engineering - we developed ways of making weaker and weaker mortgages. The biggest investment in the economy was residential housing. And we developed a technique of manufacturing class D mortgages but putting them in packages which the financial engineers said were class A.

So there was an enormous incentive to take advantage of this bit of arbitrage - cheap money, poor mortgages but saleable mortgages. A lot of people made money through this process. I won't go over all the details, but you had then a normal business cycle on top of it. It was a period of enthusiasm. Everybody was feeling exuberant. They wanted to invest and spend.

You had a bubble first in the stock market and then in the housing market. You had a big increase in housing prices in the United States, held up by these new mortgages. It was true in other countries as well, but particularly in the United States. It was all fine for a while, but of course, eventually, the house prices levelled off and began going down. At some point people began getting nervous and the whole process stopped because they realized these mortgages were no good.

You might ask how it went on as long as it did. The grading agencies didn't do their job and the banks didn't do their job and the accountants went haywire. I have my own take on this. There were two things that were particularly contributory and very simple. Compensation practices had gotten totally out of hand and spurred financial people to aim for a lot of short-term money without worrying about the eventual consequences. And then there was this obscure financial engineering that none of them understood, but all their mathematical experts were telling them to trust. These two things carried us over the brink.

One of the saddest days of my life was when my grandson - and he's a particularly brilliant grandson - went to college. He was good at mathematics. And after he had been at college for a year or two I asked him what he wanted to do when he grew up. He said, "I want to be a financial engineer." My heart sank. Why was he going to waste his life on this profession?

A year or so ago, my daughter had seen something in the paper, some disparaging remarks I had made about financial engineering. She sent it to my grandson, who normally didn't communicate with me very much. He sent me an email, "Grandpa, don't blame it on us! We were just following the orders we were getting from our bosses." The only thing I could do was send him back an email, "I will not accept the Nuremberg excuse."

There was so much opaqueness, so many complications and misunderstandings involved in very complex financial engineering by people who, in my opinion, did not know financial markets. They knew mathematics. They thought financial markets obeyed mathematical laws. They have found out differently now. You know, they all said these events only happen once every hundred years. But we have "once every hundred years" events happening every year or two, which tells me something is the matter with the analysis.

So I think we have a problem which is not an ordinary business cycle problem. It is much more difficult to get out of and it has shaken the foundations of our financial institutions. The system is broken. I'm not going to linger over what to do about it. It is very difficult. It is going to take a lot of money and a lot of losses in the banking system. It is not unique to the United States. It is probably worse in the UK and it is just about as bad in Europe and it has infected other economies as well. Canada is relatively less infected, for reasons that are consistent with the direction in which I think the financial markets and financial institutions should go.

So I'll jump over the short-term process, which is how we get out of the mess, and consider what we should be aiming for when we get out of the mess. That, in turn, might help instruct the kind of action we should be taking in the interim to get out of it.

In the United States, in the UK, as well - and potentially elsewhere - things are partly being held together by totally extraordinary actions by a central bank. In the United States, it's the Federal Reserve, in London, the Bank of England. They are providing direct credit to markets in massive volume, in a way that contradicts all the traditions and laws that have governed central banking behaviour for a hundred years.

So what are we aiming for? I mention this because I recently chaired a report on this. It was part of the so-called Group of 30, which has got some attention. It's a long and rather turgid report but let me simplify what the conclusion is, which I will state more boldly than the report itself does.

In the future, we are going to need a financial system which is not going to be so prone to crisis and certainly will not be prone to the severity of a crisis of this sort. Financial systems always fluctuate and go up and down and have crises, but let's not have a big crisis that undermines the whole economy. And if that's the kind of financial system we want and should have, it's going to be different from the financial system that has developed in the last 20 years.

What do I mean by different? I think a primary characteristic of the system ought to be a strong, traditional, commercial banking-type system. Probably we ought to have some very large institutions - or at least that's the way the market is going - whose primary purpose is a kind of fiduciary responsibility to service consumers, individuals, businesses and governments by providing outlets for their money and by providing credit. They ought to be the core of the credit and financial system.

This kind of system was in place in the United States thirty years ago and is still in place in Canada, and may have provided support for the Canadian system during this particularly difficult time. I'm not arguing that you need an oligopoly to the extent you have one in Canada, but you do know by experience that these big commercial banking institutions will be protected by the government, de facto. No government has been willing to permit these institutions, or the creditors and depositors to these institutions, to be damaged. They recognize that the damage to the economy would be too great.

What has happened recently just underscores that. And I think we're at the point where we can no longer fool ourselves by saying that is not the case. The government will support these institutions, which in turn implies a closer supervision and regulation of those institutions, a more effective regulation than we've had, at least in the United States, in the recent past. And that may involve a lot of different agencies and so forth. I won't get into that.

But I think it does say that those institutions should not engage in highly risky entrepreneurial activity. That's not their job because it brings into question the stability of the institution. They may make a lot of money and they may have a lot of fun, in the short run. It may encourage pursuit of a profit in the short run. But it is not consistent with the stability that those institutions should be about. It's not consistent at all with avoiding conflict of interest.

These institutions that have arisen in the United States and the UK that combine hedge funds, equity funds, large proprietary trading with commercial banks, have enormous conflicts of interest. And I think the conflicts of interest contribute to their instability. So I would say let's get rid of that. Let's have big and small commercial banks and protect them - it's the service part of the financial system.

And then we have the other part, which I'll call the capital market system, which by and large isn't directly dealing with customers. They're dealing with each other. They're trading. They're about hedge funds and equity funds. And they have a function in providing fluid markets and innovating and providing some flexibility, and I don't think they need to be so highly regulated. They're not at the core of the system, unless they get really big. If they get really big then you have to regulate them, too. But I don't think we need to have close regulation of every peewee hedge fund in the world.

So you have this bifurcated - in a sense - financial system that implies a lot about regulation and national governments. If you're going to have an open system, you have got to get much more cooperation and coordination from different countries. I think that's possible, given what we're going through. You've got to do something about the infrastructure of the system and you have to worry about the credit rating agencies.

These banks were relying on credit rating agencies while putting these big packages of securities together and selling them. They had practically - they would never admit this - given up credit departments in their own institutions that were sophisticated and well-developed. That was a cost centre - why do we need it, they thought. Obviously that hasn't worked out very well.

We have to look at the accounting system. We have to look at the system for dealing with derivatives and how they're settled. So there are a lot of systemic issues. The main point I'm making is that we want to emerge from this with a more stable system. It will be less exciting for many people, but it will not warrant - I don't think the present system does, either -- $50 million dollar paydays in that central part of the system. Or even $25 or $100 million dollar paydays. If somebody can go out and gamble and make that money, okay. But don't gamble with the public's money. And that's an important distinction.

It's interesting that what I'm arguing for looks more like the Canadian system than the American system. When we delivered this report in a press conference, people said, "Oh you mean, banks won't be able to have hedge funds? What are you talking about?" That same day, Citigroup announced, "We want to get rid of all that stuff. We now realize it was a mistake. We want to go back to our roots and be a real commercial bank." I don't know whether they'll do that or not. But the fact that one of the leading proponents of the other system basically said, "We give up. It's not the right system," is interesting.

So let me just leave it at that. We've got more than 40 people here but they're permitted to ask questions, is that the deal?

Trading Post (Cruel Reality edition)

So I actually get a mail from a cyberpal about an hour ago saying that I shouldn't talk the way I talked in that currency rant post earlier this morning. Something about how politics and business don't mix, and how I might put people off visiting here and by being insensitive I might stunt the growth of the blog, y'see.

So let's make it clear; I'd rather close the blog down right now than to pander to an audience that is currently sitting in a recession of their own making specifically because they couldn't face facts and just swallowed whole all the lies they were fed. I'm just a dude with a blog, take it or leave it, read it or don't. If you don't like the politics and like the stock picks, don't read the politics. If you just too shocked and offended, don't come back. Sometimes I'm right about things and sometimes I'm wrong, but don't ever expect an apology from me for trying to treat you as adults.

Fortuna Silver (FVI.v) UNCH at $1.06. Fortuna got a dose of solid, good fundamental news today. Its deal to buy out Continuum Resources (CNU.v) has been approved by the CNU.v shareholders, so just a rubber stamp or two and the job is done. The market has clearly discounted that this would happen, as no pop recorded.

Ventana Gold ( up 18% at $1.12 and popping again after a short consolidation period. Very strong volume recorded today. I like this company so far. Doing things the right way.

Vale (RIO) down 0.9% at $12.82. What's that splitting, cracking sound I can hear in the distance? It sounds like a tree that's been axed and is just about the start falling. What could it be? OH, IT'S VALE! Check the Brazil action to see what I mean, not the ADR.

Dynasty Metals ( down 3.9% at $4.90, unsurprising due to the weakness in gold. There's somebody painting the tape at the end of the last two days, too. Volumes low.

Aquiline ( UNCH at $2.61 on low volumes. Have you seen the way this thing has traded the last five days?
When a company has serious and persistent buyout rumours floating around its head, this kind of spike often happens out of nowhere. Whispery rumours and all that jazz. I've already posted all that I know on AQI. DYODD, dude.

Peruvian reality check

More claptrap from the USA's new best regional friend, i.e. Twobreakfasts' Peru.

February 24th: Peru Ex-Vice Minister of Commerce gives a bright and shiny interview to El Comercio, explaining how it would be great to be the supplier to Japanese industry.

February 25th: Japan's export trade figures show a 45.7% YoY drop the country runs a record deficit and goes deeper into recession.

It's incredible the lengths this officialist mouthpiece Comercio will go to get a positive spin on things. Yep, they featured the EX VICE minister, a nonentity named Diego Calmet (probably now at a nce cushy post with Toyota or Sumitomo or something). These people will do anything and say anything to maintain this ongoing lie.

Lilly-livered yellow-bellied political opportunists and their lapdog media are currently selling a whole country down the river in exchange for some nominal GDP growth number that is largely dependent on foreign investors coming in and extracting all profits as remittances. Peru's pandering to the failed neoliberal policies of the United States and their corrupt banking system makes me want to vomit. Watching a whole country get raped by greedy and uncaring egoists is not much fun.

A loosely connected rant about LatAm currencies

Every now and again, even a dyed-in-the-wool, professional politician will say something that's actually the truth. I was struck by this line spoken by Argentina's Eduardo Duhalde yesterday (as reported in this post).

"This crisis was born in the USA, it hurts all of us and they have the chance to print money and save their own people. We don't have that opportunity."

It makes sense on plenty of levels, not least of which the context of Duhalde's argument yesterday, that of "sauve qu'il peut". A couple of mental connections later, and here are two charts that show the evolution of local currencies against the greenback. This one has a 12 month timescale......

.......and we see the Argentine Peso and the Peruvian Sol as having held up the far. But looking at the shorter-term movements.....'s the Chilean Peso that has kicked back strongest in the three month period chosen by default, care of Yahoo Charts. That would be the moment when Bachelet&Co stopped the free-floating rot and due to direct, Keynesian government intervention policies and self-protection, dontcha know....

(Glossary: COP = Colombia Peso, MXN = Mexico Peso, ARS = Argentina Peso, PEN = Peru Nuevo Sol, BRL = Brazil Real, CLP = Chile Peso)

As just one example of the consequences here, the relatively strong dollar helps LatAm exports, of course. However you would expect a strong dollar in a time of strong US economy, not right now in the biggest financial and economic crisis to have hit the industrialized nations (led by the US) in modern times. What's the use of a strong dollar and its ensuing export market advantage when there's no market, except of course to make breathing space and prepare the way for the next round of helicopter flights from Bennyboy?

I could go on and on and on with this particular post, as the angles and tangents are manifold. I could talk about that post way back when I said that the US was keeping its dollar as strong as possible to make sure it doesn't lose its place at the head of the world table. I could talk about inflation risk of weak currencies. There's the whole issue of how soft pegged currencies like the Nuevo Sol and the Argentine Peso have performed much better than the more freely floated regional currencies such as the Mexican Peso or Brazil's Real. The case of the Chilean Peso and its dependence on copper is a particularly fascinating one for a wonk like me.

All those and more. But no, let's stop here. What I really want to say is that Duhalde made a great point yesterday, whether or not he was looking at it in a wider context. The bottom line is that if the USA has decided to protect itself at all costs and let others like us guys down here drown in the muck of its making, then why the **** should we keep playing ball with you guys?

Seriously. What have you guys done for us lately? Your economic policies suck and you still try and tell us how to runs things. You screw up the whole financial world and now you're getting the innocent victims to carry the can.

It's taken me a while but I'm beginning to see that Rafael Correa is absolutely right, basically because I'm not as smart as he is. Take your sovereign bonds, gringos, and stuff them where the sun doesn't shine. We have an abundance of water, farmland, power supply, region-wide democratic governments and importantly a population of caring, kind, willing and hard-working people, from Tijuana to Tierra del Fuego who are evermore pissed at the way the USA and the wider world community has been treating them all this time.

Quid pro quo, dudes. Quid pro quo.

Hochschild (HOC.L) downgraded by UBS after a great run

Interesting analysis call out of London this morning. UBS has cut its rating on Hochschild (HOC.L) from 'buy' to 'neutral'. HOC.L is 7.1% down right now at 232p. The stock peaked two days ago at 278p intraday, which is quite the blowoff top, is it not? Checking the chart..... seems like UBS nailed that call and has had a great run so maybe they see no more rebound left in HOC.L, one of the world's largest dedicated silver miners. There's certainly no nitpicking possible at the original UBS call last year and its clients that took the sellside advice must be very happy with their advisors now.

Keep it clear that guys like UBS don't mess around with the little equities that I tend to feature here (like FVI.v, for example). The big boys swim in big pools, which means that in the case of dedicated silver plays choices are rather limited. Apart from HOC.L there's FRES.L, PAAS, HL counts I suppose (but already we're encroaching on larger gold production in the mix) the original Peñoles company of course (from where Fresnillo was spun off), Silver Wheaton (SLW) and then SLV the metal ETF. But then my "off top of head" list starts to get thin. Maybe you can add a couple more, but there aren't many out there, that's for sure.

So with UBS downgrading HOC.L today, it's sending more than a simple message about a single stock, methinks. My best interpretation is one of UBS saying "party's over for a while...time for a bit of consolidation after the nice rebound." But that's just my dos centavos.

Chart of the day is....

....the gold-silver ratio, one year timescale.

Your humble correspondent used to watch this relationship very closely until the latter the latter part of 2008 made it go haywire, but I've noticed it popping up on the radars of chartheads recently and being featured in essays good and bad.

What do we see here? There's no return of the so-called benchmark of 50:1 in the near future, that's for sure. Techies will grab the MACD and RSI both clearly oversold and say the bias is likely to swing back towards gold in the near future. I agree. Those moving averages also seem to be heading for a pinch moment.

Final thought: Silver is more constrained by traditional Adam Smith-like factors of supply and demand. This because its supply is largely as a by-product of industrial metals and its demand has a larger proportion of commodity-based uses. It's not simply a store of wealth like gold. Silver strengthening against gold would imply, therefore and theoretically, a better world economy, so maybe we can follow this ratio chart as a sentiment guide. When is the recession going to end? Bernanke's pie-in-the-sky 2009? Roubini's L-shaped lost decade to come? My own thumb-in-the-air guess of late 2010? Maybe our old friend the GSR can help map it for us.

DYODD, dude.


The Monterrico Metal Torturers: They're after you in Sweden now, bitches

Thought we'd forgotten about you, Bristow?
Check out the following, kindly sent along earlier by reader MH. Straight pastes of the two reports about how Sweden's Securitas are investigating the torture of locals in Peru. They're coming at you from all sides now, Bristow. Run and hide and don't tell anyone! Great PR tactics so far, idiot!


Unofficial translation provided by Business & Human Rights Resource Centre:

Company owned by Securitas accused of torture

Ove Gustavsson, GT-Expressen, 10 Feb 2009

The Peruvian company Forza, owned by Swedish Securitas, is accused of having tied and beaten demonstrators – one to death. The abuses are said to have occurred at a demonstration against a mining operation in Rio Blanco, in Peru, 2005. According to Reuters, photographs representing the alleged incident have been published by a Peruvian human rights association.

- If this is true we have to take action, says Gisela Lindstrand, [Senior Vice President for Corporate Communications] at Securitas AB to

The photographs, distributed by an anonymous source, show men covered in blood with their hands tied behind their backs and plastic bags over their heads. One of the men is later seen dead in another photograph. In the photographs one can also see men wearing vests with the text Forza.

The photos clearly show that personnel of Forza played an active role in the repression and torture, said Javier Jahncke at the human rights organisation Fedepaz to Reuters.

The tortured men are said to be demonstrators against the mining operation which was about to start in Rio Blanco in 2005.

Local police accused

The company Forza was responsible for the mining venture’s security.

Also local police are accused of having helped put down the demonstration.

After receiving the allegations, Peru’s congress is initiating an investigation of the incident.

- We have contacted our subsidiary and we are investigating this in peace and quiet, says Gisela Lindstrand [Senior Vice President for Corporate Communications] at the international section of Securitas AB.

According to her, Securitas bought Forza in 2007, two years after the alleged events.

- If this is true and these persons remain at the company we have to take action.

Distancing itself

Gisela Lindstrand explains that Securitas asked Forza if they comply with laws and regulations when it bought the company.

Securitas distances itself from the behavior shown in the photographs.

- It is not conceivable that we would act this way. We are a serious security company, says Gisela Lindstrand.

Reuters have been in touch with Forza, but they decline to comment.


Unofficial translation provided by Business & Human Rights Resource Centre:

Company owned by Securitas investigated for torture

Norrlänska Socialdemokraten, 10 Feb 2009

A company which is today owned by the Swedish security group Securitas will be investigated in Peru concerning suspected torture and abuse of the local population in relation to surveillance of mines in the country.

- We are trying to find out what has happened. It will take a while to investigate, says Gisela Lindstrand, Securitas Group [Senior Vice President for Corporate Communications], to TT [Tidningarnas Telegrambyrå].

Peru’s congress has said that suspected crimes by police and private security firms in 2005 will be investigated. Prosecutors are allegedly already working on it.

Last month, a human rights organization published photographs of men and women protesting against mining in Rio Blanco, in Peru.

The victims bled heavily and some had their hands tied behind their backs and plastic bags over their heads. One photograph shows a man bleeding heavily from his neck, and another photograph shows the same man dead one day later, according to Reuters.

“Want to investigate”

In one photograph, an armed guard from the company Forza, can be seen. Forza was bought by the multinational Securitas in 2007.

The photos clearly show that personnel of Forza played an active role in the repression and torture, said Javier Jahncke at the human rights organization to Reuters.

Lindstrand reports that she contacted Peru on Tuesday.

- I have spoken with our country manager and said that I want an investigation into what happened.

In Rio Blanco, Forza is working for the mining company Moterrico, which was bought by the Chinese Group Zijin in 2007. The mining company states that the allegations are one in a sequence of “resistance activities” against mining activity.

The police force in Peru is under-funded. Security at the country’s remote mines is contracted out to private security companies, which in turn hire former policemen and soldiers. They often face local protests against the social and environmental downsides of mining.

Trained security guards

According to human rights organizations, private companies often go way beyond the limits of the law in their assignments.

Lindstrand points out that the company [Forza] was bought after the suspected abuse, and that all Securitas Group’s security guards are trained in human rights.

- If this has happened, it is something which could never happen today, because now Securitas’ rules apply.

- TT: Can you guarantee that even in remote locations in Peru?

- Yes, actually I can, replies Lindstrand.