For the week 10/20-10/24

Wall Street….back to doom and gloom 

Mervyn King, Governor of the Bank of England: Since the collapse of Lehman Brothers on September 15, markets have been hit by an “extraordinary, almost unimaginable sequence of events. It is difficult to exaggerate the severity and importance of (them). Not since the beginning of the First World War has our banking system been so close to collapse.” 

Economist Nouriel Roubini: “We’ve reached a situation of sheer panic. There will be massive dumping of assets” and “hundreds of hedge funds are going to go bust.” Roubini added at a London conference, “Don’t be surprised if policy makers need to close down markets for a week or two in coming days.” On the plight of the developing world, “We used to say when the U.S. catches a cold, the rest of the world sneezes. Well, the U.S. now has chronic and persistent pneumonia. It’s becoming a mess in emerging markets.” 

Chinese President Hu Jintao: “The current world economic situation is grim and complicated.” 

On the corporate side, Sony shares plunged 13% on Friday to a 13-year low after the company announced it was halving its profit forecast because of tumbling demand for cameras and flat-screen TVs. Earlier you had Texas Instruments say the “order trend has progressively grown worse.” Caterpillar said projects were being delayed due to financing issues. Industrial powerhouse ABB saw a sharp drop around the world, adding “no one can forecast the future.” DuPont and Dow Chemical had similar statements accompanying their quarterly reports. Amazon, in so many words, said the Christmas season, even for it, was going to be terrible. And Apple had to admit it’s not immune to the global meltdown. 

On the employment front, Goldman Sachs is lopping off 3,200; Chrysler first said 1,800 blue-collar workers would have more leisure time, then added up to 5,000 white-collar types would too by week’s end; General Motors is slashing 4,800 white-collar employees; National City Corp., before an announcement it was being rescued by PNC, was cutting 4,000; Xerox, which had laid off 8,800 since 2005, said it was handing pink slips to another 3,000; Merck’s restructuring involves 7,200 that will have to find employment elsewhere; and Yahoo is jettisoning 1,500 into cyberspace where their family and friends will never see them again. It’s all happening so fast and because it is unprecedented it’s far more disturbing than anything anyone…and I mean anyone…could have forecast. 

Oh, there are those who called the housing bubble like yours truly, and recognized it was a global phenomenon that would take us down (me again), but then those who forecast a crash in the equity markets (not me), such as David Tice and Peter Schiff, are discredited some because they advised putting your money in gold and betting against the dollar (I said neither) and if you did this you would have been crushed along with the rest. So, yes, there has truly been no place to hide except in cash/treasuries.  

It’s just been brutal. As noted above in Nouriel Roubini’s comments (and he’s discredited some because when asked what he was doing with his own money, he told CNBC, ‘Oh, I’ve got it in passive index funds’), emerging markets are getting slaughtered. Brazil and Argentina, to name two, had 10% down days this week, the latter largely because the government is threatening to take over private pension funds to use the assets to stave off the second default this decade. [Talk about bad government making matters worse.] 

I’ve been arguing much of this year that even in calling for a down 2008 in the stock market, I said the major averages would only finish off 3-5% because you had to separate sentiment from market fundamentals; the latter referring to my correct call from end of 2006 that recession would come in ’08. In principle this remains true, but where I’ve been very wrong is in the degree of damage to the fundamentals, worldwide. 

But let me update you on some of my thinking for, say, the next six months. 

The NBER, the folks who will one of these days decide when the recession started, will say it commenced early this year, if not last December. The 2.8% GDP figure for the second quarter was meaningless when looking at the bigger picture; the crash in housing and negative job growth. I have said, though, that the recession, when measured by actual numbers, would seem mild but would last a while. Now, I don’t have a clue where the numbers will come in. 

I believe those saying unemployment will only hit 7-8% are full of it. We will see 9%+ at some point. [Much higher than this and you’re talking depression when combined with the massive deleveraging taking place around the world.] 

I have been correct in not worrying about inflation one iota. Obviously, we’re now in the midst of significant asset deflation across the board. Those saying, yeah, but look at all the money being thrown at the problem, so inflation will one day reemerge, are correct but we will have plenty of time to prepare for this and I think all of you agree that when it comes to your home and investments, you’d love inflation today! 

Housing, I’ve been arguing, will bottom late first quarter next year. I stick to this forecast. I’ve also said that when we bottom, we’ll just sit there. No change here as well. But as my real estate expert on the West Coast, Josh P., and I were discussing this week, this last leg down that started probably about four weeks ago is going to be wicked. 

I believe the consumer is shot well into 2009, not that this is any great revelation. If you’re concerned about your job, and very few shouldn’t be, and you’re already saddled with debt, as many are, and your home and 401(k) are disasters, you’re drinking domestic, not premium. More likely, you’re drinking tap water, which we’re all learning is the best buy in the history of man. [I have to come clean here, however. In my office I have to drink bottled water because my freakin’ landlord hasn’t had the water cooler serviced in the ten years I’ve been here and I’ll be damned if I’m touching the stuff.] 

Energy: I nailed the top of the oil bubble (as I did other commodities), but never thought we’d go below $80 to $100 in this cycle. Thus, as I further spell out below, in overshooting we are killing the alternative energy sector and hated Big Oil is rapidly pulling in their horns on all manner of major projects (despite what you hear from some of them) that are simply not economical at $65 crude, let alone if we head much lower. You know what this means. Some day, in our lifetime, I swear, the global economy will turn around again and yours truly still believes in Peak Oil. I just pray, from a personal standpoint, that I still have some cash left to play what is going to be another spectacular opportunity to buy energy stocks. I bought this sector heavily, and successfully, from 1999 (the very bottom, to the day, actually) through about 2004 and then sold out too soon. Now, Mr. Market is giving some of us another opportunity if we’re patient. In the meantime I just hope my alt energy plays can survive until they have the chance to rock and roll with the next spike up in crude. 

Lastly, a word on our debts at the government level, both the national debt, now streaking towards $11 trillion, and the federal budget deficit, which, depending on the timing of the disbursement of the bailout funds, as well as a new stimulus package, should easily exceed $600 billion for fiscal 2009 (commencing 10/1/08), and probably reach $1 trillion or higher. One thing is certain. Tax revenues, at all levels, are drying up faster than a quick sprinkle in the desert.  

Of course this is a problem, and I continue to maintain one of the crimes of the century is the amount of interest we are paying on the national debt. And, yes, long term we will one day pay the piper in terms of the dollar and other nations that have been financing these massive loads. 

But, like entitlements, you can waste a lot of time thinking about it and our markets can go lengthy stretches without deficits, Social Security and Medicare having an impact on actual market behavior. I just had to get down that I’m well aware of this ticking time bomb but at the same time, week to week, I won’t be harping on it much other than to state the facts. 

Former Fed chairman Alan Greenspan was asked in a congressional hearing, “You found that your view of the world…was not working?” 

Mr. Bubble: “Absolutely, precisely. You know, that’s precisely the reason I was shocked, because I have been going for 40 years or more with very considerable evidence that it was working exceptionally well.” 

“Credit markets have started to thaw, yet stocks and the larger economy keep sliding. What’s going on? Among the problems are the reality of recession and the uncertainty over Barack Obama’s policies. But the larger story is that the global economy is fast popping its latest monetary bubble, the one over the last 14 months in commodity prices and non-dollar currencies. 

“The original bubble was in housing prices and mortgage-related assets, which the Federal Reserve helped to create with its negative real interest rates from 2002 into 2005. This was Alan Greenspan’s tragic mistake…. 

“As for the second bubble, this one began in August 2007 with the onset of the credit panic. This is Ben Bernanke’s creation. The Fed chose to confront the credit crunch as if it were mainly a problem of too little liquidity, not fear of insolvency. To that end it flooded the economy with money, while taking short-term interest rates down to 2% from 5.25% in seven months. The panic only got worse, and this September’s stampede finally led the Treasury and Fed to address the solvency problem by supplying public capital and numerous guarantees to the financial system…. 

“The tragedy of the second bubble is that it has left the economy in a weaker position to ride out the housing slump and credit panic. The American consumer has been whipsawed with $4 dollar gas and food inflation, while entire industries have been put on the edge of bankruptcy. Detroit’s auto makers have spent the last year taking down their truck and SUV assembly lines while gearing up to make hybrids and electric cars, even as their cash flow has been ravaged. Their new investments are based on the expectation that oil will stay high permanently, but will the market for hybrids exist if oil is $50 a barrel? 

“As Congress plumbs the causes of our current mess, the main one is hiding in plain sight: Reckless monetary policy that did so much to create the credit mania and then compounded the felony with a commodity bubble and run on the dollar whose damage is now becoming apparent. The American people intuitively understand what’s been done to them, which is why they are so angry. If the next President ignores the monetary roots of our troubles, he is courting the same fate as George W. Bush.” 

Just a terrible week as the broad averages have now registered declines of 25-30% in the month of October alone and you can see below that the year overall is now beyond ugly. The Dow Jones fell 5.4% to 8378, the S&P 500 declined 6.8% and Nasdaq, in losing 9.3% to 1552, has taken weekly hits of 9.3%, 15.3% and 10.8% in just the last four weeks. All three indices are now at April/May 2003 levels, while the total carnage this month exceeds $10 trillion. 

Earnings reports, and there were a slew of them, were totally irrelevant. It’s all about the forecasts for Q4 and 2009, and there isn’t a company in the world who can give investors an accurate reading of the tea leaves at this point. 

And here’s a scary thought. The consensus is building that the S&P 500 may earn $60 in 2009. The index today resides at 876, or a multiple of 14.6. At times in market history, the p/e has been 8-10 during recessions. You do the math. 

–U.S. Treasury Yields 

Credit markets continued to improve, slightly, but uncertainty over how deep the recession will be could put an end to any progress at a moment’s notice. 

–In an emergency session, OPEC, attempting to stop the bleeding, slashed production but oil, trading on sliding global demand, fell another few bucks anyway, down to $65. 

–Even Russian energy giant Gazprom, flush with cash, is in dire shape as CEO Alexei Miller said the company might have trouble obtaining new loans and refinancing debts. 

“Deteriorating operating conditions for borrowers may also have an impact on management’s cash-flow forecasts,” the company said. 

Just a few weeks earlier Miller said the credit squeeze was not a “troubling factor” for the company. Gazprom had been talking of spending more than $30 billion this year on new projects as output drops at mature fields, but now those plans are in serious jeopardy. 

–S&P lowered its outlook for Russia to negative on Thursday, warning of the costs of bailing out troubled banks. Russia, which as of this summer had the world’s third-largest currency reserves thanks to high oil prices, is pledging $100s of billions to support its economy and banking system as a result of the meltdown, but what was once a peak of $597.5 billion on Aug. 8, right when tanks were rolling into Georgia, incidentally, are now already approaching $500 billion and falling fast. 

[The main Russian equity index, by the way, is now off 78% since May 19. You’re reading that right.] 

–Mexico’s Congress approved legislation reforming the state-owned oil sector, a long-overdue move designed to halt rapidly declining production, but the rules are still too restrictive in terms of incentives, such as production-sharing agreements, for private companies to want to make major commitments here. 

[State oil monopoly Pemex announced total production of crude in September declined 10% compared to a year earlier, of major concern to the government as oil revenue accounts for 40% of federal income.] 

–2 million households in Britain will enter negative equity on their homes by 2010, far exceeding the last housing crash there in the early 1990s. Opposition parties blamed Labour for a “culture of indebtedness….after being encouraged by the government to overstretch themselves to get on the property ladder.” Sound familiar? Britain’s economy slid 0.5% in Q3, it’s first negative quarter of growth since 1991. 

–It’s commonly been felt that China needs 8% growth to keep the economy chugging while finding employment for those leaving rural areas for the big cities. Some are now saying it’s more like 6%. Regardless, China said its third quarter GDP had slid to 9%. Who knows if it’s really 6, 7, 8 or 9, but the fact is there is far less activity than has been the case the last five years. I’m going to hold off on further comment until I get over there in two weeks, at which time I hope to give you some real insight. As in I’m expecting I’ll be the only person at Hong Kong Disneyland, for example. 

–As of this writing, Iceland is receiving a bailout package from the International Monetary Fund, a Nordic bloc (Norway, Sweden and Denmark) and Russia. Some authorities in Iceland have said that once the country stabilizes, which for all we know could be like 2024, it should adopt the euro outright.  

–The Federal Reserve announced it would finance up to $540 billion in purchases of short-term debt from money market funds, which have faced severe redemption pressures that in turn have led to a scaling back of short-term lending to banks as the funds have been forced to sell their holdings of commercial paper. The Fed’s move will create five special purpose vehicles that will purchase assets from the funds. 

–Incredibly, AIG has already gone through three-quarters of a federal $123 billion rescue loan, a month after the government stepped in to save the company from bankruptcy. Already, $90 billion has gone towards paying off bad bets the company made in guaranteeing others’ risky mortgage investments. And here’s the problem. AIG was supposed to be making money during this time selling off major assets to pay off the government’s loans, but interested parties are now holding off as they see prices continue to collapse in the overall marketplace. 

–General Motors, in announcing the above-mentioned new job cuts, is bleeding $1 billion in cash each month and since its cash position is now well below $20 billion, you can see what it’s up against. GM said it needs $11-$14bn just to keep its operations on an even keel. 

–Southern California home prices continue to collapse and now sit at levels not seen since the period late 1996 to early 1999. The median for the six-county region is $308,500, down from the peak of $505,000. [Josh P. points out that in San Diego, the median dropped 8% in September from August! $350,000 to $322,000.] Houses are moving, though, but this is largely due to foreclosure sales. 

But going back years, I always said the issue was affordability and in reading a piece by Peter Hong in the Los Angeles Times, he notes “15% of Los Angeles-area residents could afford to buy a median-priced house in the second quarter of this year, according to a National Association of Home Builders index, up from less than 11% the previous quarter.” Two things. Obviously, many are still stretching, especially given the dire employment outlook, and, second, you can see just how few could really afford their homes at the peak. 

–The House Oversight and Government Reform Committee in Washington grilled executives from the ratings agencies. Committee Chairman Henry Waxman (D-Calif.) correctly said “The story of the credit rating agencies is a story of colossal failure. The result is that our entire financial system is now at risk.” Uncovered emails are devastating. One S&P employee wrote to a co-worker in 2006, “Let’s hope we are all wealthy and retired by the time this house of cards falters.” S&P President Deven Sharma told Congress, “It is by now clear that a number of the assumptions we used in preparing our ratings on mortgage-backed securities issued between the last quarter of 2005 and the middle of 2007 did not work.” 

–Pete Yost of the AP did an excellent report on Fannie and Freddie. For its part, Freddie “secretly paid a Republican consulting firm $2 million to kill legislation that would have regulated and trimmed the mortgage finance giant and its sister company, Fannie Mae, three years before the government took control to prevent their collapse. 

“In the cross hairs of the campaign carried out by DCI of Washington were Republican senators and a regulatory overhaul bill sponsored by Sen. Chuck Hagel, R-Neb. DCI’s chief executive is Doug Goodyear, whom John McCain’s campaign later hired to manage the GOP convention in September. 

“Freddie Mac’s payments to DCI began shortly after the Senate Banking, Housing and Urban Affairs Committee sent Hagel’s bill to the then GOP-run Senate on July 28, 2005. All GOP members of the committee supported it; all Democrats opposed it. 

“In the midst of DCI’s yearlong effort, Hagel and 25 other Republican senators pleaded unsuccessfully with Senate Majority Leader Bill Frist, R-Tenn., to allow a vote. 

“ ‘If effective regulatory reform legislation…is not enacted this year, American taxpayers will continue to be exposed to the enormous risk that Fannie Mae and Freddie Mac pose to the housing market, the overall financial system and the economy as a whole,’ the senators wrote in a letter that proved prescient.” 

But unknown to the senators, DCI was undermining support for the bill by targeting 17 Republican senators (nine of whom did not sign the letter…among those who did were Jim Bunning and Lindsey Graham) and in the end there was not enough Republican support for Hagel’s bill to warrant bringing it to the floor for a vote. John McCain was not a target of DCI, signed Hagel’s letter, and later signed off as a co-sponsor. But bottom line, while McCain can claim he was on the right side, his associations, including with campaign manager Rick Davis, who received more than $2 million from Fannie and Freddie through his firm’s lobbying efforts, are as dirty as some of Senator Obama’s. 

–Wachovia reported a $23.9 billion loss for the third quarter, giving acquirer Wells Fargo a painful reminder of the issues facing it. Wachovia’s losses were the largest of any lender since Pompeii Mutual became a victim of Mount Vesuvius in 79 A.D. Of the bank’s losses, $18.7 billion were for writedowns in its mortgage securities positions, while the balance was to cover future credit losses. CEO Robert Steel echoed today’s refrain throughout the land: “The market environment changed more precipitously than anyone had expected.” 

–Citic Pacific, a Hong Kong-listed company with Chinese backing, said it faces losses of up to $2 billion due to a complex derivatives trade on the Australian currency. Basically, the bank’s traders bet the Aussie dollar would rally when it ended up collapsing.  

–Apple CEO Steve Jobs hopped on the company’s quarterly conference call, a bit of a surprise as he normally doesn’t appear on them, calling iPhone sales a “truly stunning” achievement. Apple has sold 13 million – 3 million more than Jobs’ original prediction of 10 million in the first calendar year. I can’t help but add, not owning an iPhone myself, that the global economy has been sliding ever since. 

–91-year-old billionaire Kirk Kerkorian supposedly made the depressing statement this week that he had “lived one year too long.” Just last spring, Kerkorian placed a $1 billion bet on Ford and this week he announced he was throwing in the towel, selling his full stake at a huge loss because Ford is now viewed as dead money. Kerkorian, much the same as Sumner Redstone of Viacom, is also a victim of leveraging up his holdings; such as in Kirk’s case, having overlapping collateral involving his shares of Delta Petroleum and MGM Mirage. A margin call on one leads to selling of another. It’s said Kerkorian’s net worth has declined from $16 billion to $3 billion, or less, in just the past few months. 

–Wall Street has not seen an initial public offering in 11 weeks, the longest such streak since Thomson Reuters began tracking deals in 1980. [Some say since 1974.] 

–With all the bad news in the market these days, a few of us are at least getting a smile out of Standard & Poor’s taking its rating on the New York Times Co. down to junk following dire corporate developments, including the accelerating fall in advertising revenues. 

–Officials in London are just thrilled they are hosting the 2012 Olympic Games…not! Plans are already drastically being scaled back due to the financial meltdown and there are dangers private financing will fail to come through. One expense out of a total projected budget of $16.5 billion is for a $700 million media center. Goodness gracious. How absurd is that? And by the way, if you plan on being an athlete at the 2012 Games, understand organizers are now going to cram five in apartments originally designed for four. So someone has to sleep on the floor. That’s it. I’m stopping training for the 1500. 

–Thousands of mostly small investors in Jordan were hit by an investment scheme, wiping out savings. As reported by the Jerusalem Post, “Nearly $2 billion of hard-earned money was siphoned from the pockets of tens of thousands of ordinary citizens on promises of making big bucks fast.” The problem was unregulated companies claimed they could make money in foreign exchanges, including trades in currency, oil and gold, promising monthly returns of 10-25%. The government then passed a law regulating the investment companies and when the first one was exposed and stopped taking investor money, within 24 hours the scam was exposed nationwide.  

–The moves in commodities have been extraordinary. Here is some data from Sue Kirchhoff of USA Today. 

“From 1975 to 2006, the cash price for a bushel of corn averaged $2.40. In the past four months, the price is down $4. Corn contracts for December delivery at the Chicago Board of Trade closed at $3.85 per bushel Wednesday, down from more than $7.80 in June. Wheat futures plunged from about $12 a bushel in March to $5.18. Soybean prices have slid to $8.59, from more than $16 in July.” 

[At Friday’s close corn was down to $3.72 and wheat $5.16. Soybeans were at $8.67.] 

–In another sign of the times, the Star-Ledger in New Jersey reports that health care premiums here have risen five times faster than wages this decade; 71% vs. earnings increases of just 15% between 2000 and 2007. Supposedly, our state is in the middle of the pack nationwide in this regard. 

–9 out of 10 American families shop at Wal-Mart at least once a year. I never knew this. I’ll be shopping at the Wal-Mart in Spearfish, South Dakota this coming week myself. [Seriously] 

–Andrew Lahde, a 37-year-old hedge fund manager who posted astounding gains of 870% last year, abruptly closed his operation (a relatively small $80 million). But in returning investor cash, he wrote: 

“I was in this game for money. The low-hanging fruit, i.e. idiots whose parents paid for prep school, Yale and then the Harvard MBA, was there for the taking. These people who were (often) truly not worthy of the education they received (or supposedly received) rose to the top of companies such as AIG, Bear Stearns and Lehman Brothers and all levels of our government. 

“All of this behavior supporting the Aristocracy, only ended up making it easier for me to find people stupid enough to take the other sides of my trades. God bless America.” 

Lahde added, “Give up on leaving your mark. Throw the Blackberry away and enjoy life.” He also basically called for revolution and the legalization of marijuana. 

–Shares in Carlsberg, the Danish brewer, tumbled this week as it announced it is losing market share, particularly with its French subsidiary, Brasseries Kronenbourg. I feel compelled to issue a statement on my behalf. 

“Due to economic conditions largely beyond my control, I am forced to drink domestic.” 

–The stories on how rapidly tourism is dropping are unreal. In the first two weeks of October, U.S. trips to China, for example, were off 20%. 

–Remember those days, growing up, when doctors and traditional lawyers and bankers were the most respected in town and owned the best homes?   And no one begrudged them their wealth because, compared to the average worker, it didn’t seem in the least bit out of whack? It would be nice if in our lifetime we returned to those days. And to those then worried about innovation, it seems to me we did quite well in the 1950s and 60s, for example. Our own Dr. Bortrum had a hand in some of it. 

–My portfolio: The China company announced a delay in bringing its new plant online, blaming weather (I follow it every day and this is true) and engineering issues. Nothing on the economy, however. I’ll be out there soon enough. As for my geothermal holding, those of us in the alternative energy sector just can’t catch a break. We get our tax credits extended, critical, but then the credit crisis hits in force and oil drops like a stone. So it just doesn’t matter that the Interior Department announced a major geothermal initiative this week. No one cares. I feel like I did all the right things with my few equity holdings but at the same time, I still blew it. More than a few of us can’t wait to kiss 2008 goodbye. 

Iraq: The situation has gotten very complicated. The U.N. mandate for U.S. troops to remain in Iraq expires December 31 and all year the parties have been working on a new status of forces agreement that would allow them to stay. 

This week, though, Gen. Ray Odierno, who replaced Gen. David Petraeus as commander in Iraq, royally ticked off Iraqi Prime Minister Maliki when he said the U.S. had evidence Iran was bribing Iraqi lawmakers to oppose the latest draft of the security agreement that would keep U.S. forces there into 2011. Shia opposition leader Moqtada al-Sadr has said the pact does not give Iraqis sovereignty. Another issue that has Iran all hot and bothered is a provision for U.S. forces maintaining a presence near the border with Iran. All of this is dependent on the status of Iraqi security forces, which everyone is in agreement (except Iran) are nowhere near ready to take over. 

The other big issue is whether or not U.S. soldiers will be subject to Iraqi prosecution and, supposedly, Washington has said it would allow Iraqi jurisdiction for crimes American soldiers commit when off base. The problem is time is running out on the whole matter. As of this writing, there is a slim chance the U.S. would have to withdraw come year end, though few believe it will come to that. Even Russia has said it would support some kind of extension through the U.N. 

[Sidebar: The U.N. High Commission for refugees estimates that 1.8 million have been internally displaced in Iraq and only 150,000 of those have returned. As for the 1.5 million refugees who left the country entirely, only 60,000 have come back.] 

Afghanistan: “60 Minutes” and NBC News ran some powerful reports from the Afghan theater this week, where the action has been far more intense, and deadly, than Iraq these days. But at one point on “60 Minutes” an American soldier said “I want to help the good people (and) the Army to put the bad people away.” 

What good people? That’s the problem in Afghanistan. There are only a handful, like literally 6 or 7, all women. These people, as was the case in Iraq before the Awakening, have to help themselves. Consider the case of the female aid worker, Gayle Williams, who worked with the British Christian group, Serve Afghanistan, and was gunned down in Kabul the other day; targeted, supposedly, because she was accused of proselytizing. [She wasn’t.] Following is from Carlotta Gall of the Herald Tribune. 

“Williams was killed as she was walking to her office, dressed in pants, a long shirt, and a blue veil. Construction workers at a building site across the road said they saw the man riding passenger on the motorbike get off, shoot three bullets, remount and zoom off. Face covered by her veil, her body lay on the pavement beside a wall for 20 minutes, they said, until police officers got there.” Ms. Williams was dead at that point. 

North Korea: Japan refuses to supply its share of heavy fuel oil to North Korea as part of the pledge Pyongyang made to eliminate its nuclear weapons program. Tokyo is still ticked the North hasn’t come clean on the abduction of Japanese citizens in the 1970s and 80s. The U.S. is hoping Australia will fill the breach. 

Meanwhile, North Korea has cut rations for farmers in order to stock up on supplies for its military, according to a South Korean aid group. The renewed famine is the worst in at least ten years. One aid organization said it hears Central party officials were told the greatly reduced harvest figures won’t meet the quota for the soldiers. 

Russia: Officials from Russia, Iran and Qatar met this week to strengthen cooperation on the natural gas front, with Gazprom saying it sought to create a “big gas troika” or gas OPEC. The three are ranked the first-, second- and third-biggest holders of natural gas reserves and together comprise half of the global total. 

Separately, Russia, Venezuela, and Iran met to discuss oil, what is being labeled the Axis of Diesel. Russia needs $75 to balance its budget, supposedly, while Venezuela and Iran need up to $95. 

But on a number of fronts, Russia appeared to be conciliatory this week.  The top U.S. military officer, Admiral Michael Mullen, chairman of the Joint Chiefs of Staff, met with his Russian counterpart, General Nikolai Makarov, in Helsinki; the highest-level military meeting between our two nations since the Russian war with Georgia, which strained ties. Separately, Sergei Ivanov, deputy to Prime Minister Putin, promised Russia’s intentions were entirely peaceful despite the invasion. 

“We are not aggressive,” Ivanov said in an interview. “We have recognized the territorial integrity of all former Soviet republics….Russia (has) no territorial ambitions regarding any former Soviet countries.” 

Oh yes it does, take Ukraine, where the Kremlin is siding with Prime Minister Tymoshenko in an attempt to create chaos amidst the government crisis there. Sergei Ivanov said this week that Russia was prepared to vacate its naval base in Sevastopol, Ukraine (the Crimea), which raised some eyebrows, but I immediately thought, what a great smokescreen. They don’t have to abandon the port until 2017 so why not talk a good game now? If the Kremlin can sow the chaos in Kiev it seeks, it then has an excuse to move more forces into Sevastopol, not withdraw them. [The locals there love the Russians.] 

But lest you fall for Ivanov’s happy talk, remember, 7,000 Russian troops remain in the Georgian provinces of South Ossetia and Abkhazia, in direct violation of the Kremlin’s commitment to return to the status quo of Aug. 7 before the invasion. 

Israel: In a mildly positive development, United Nations Secretary-General Ban Ki-moon called for Hizbullah to be disbanded in Lebanon. Fat chance this will happen but it was nice to see him say it. 

India: In a race against China and for prestige, India launched its first unmanned spacecraft to orbit the moon. There are major commercial applications at play here, including the launching of satellites. 

China: The Communist Party announced rural land reform for the first time. Farmers will now be able to lease or transfer rights, join cooperatives, and generally have freer rein in selling their products and turning a profit. 

Croatia: A leading newspaper executive was killed in a car bomb in the capital, Zagreb; the latest victim in what is a surge in organized crime activity. I had no idea how much violence has risen here and it threatens Croatia’s European Union candidacy. For example, earlier this month the daughter of a prominent lawyer was shot dead and the prime minister sacked his interior and justice ministers. The newspaper exec, Ivo Pukanic, owned a weekly that was investigating corruption and human rights abuses and had earlier spoken of an assassination plot. Another nation in the region, Bulgaria, has major issues with the mob. 

South Africa: As I call for this country to implode in 2009 (remember, this is a commodities-based economy, which further exacerbates the situation these days), I keep forgetting to mention the World Cup here in 2010. If you have plans to attend, cancel now. 

Austria: The nation has been rocked by details on the personal life of deceased far-right leader Jorg Haider, killed recently in an auto accident. Haider, 58, had groomed Stefan Petzner, 27, to be his successor so Petzner was so named. But then Petzner said “(Haider) was the man of my life. Our relationship went far beyond friendship,” adding Haider’s wife “did not object” to their relationship. Outraged by the interviews Petzner granted, the party dismissed him as new details emerged of Haider’s final night. The two had been drinking together when Haider left in a hurry to go to a gay club in his home town, where he drank vodka with male escorts. He later crashed at both twice the speed limit and allowable alcohol level. 

Mexico: Last month, 23 prisoners were killed in a riot at a jail in Tijuana, a fight between drug gangs. Then the other day, in the border town of Reynosa, 21 prisoners were killed as rival gangs staged “a gun battle.” Yup, a gun battle in prison. That pretty much says it all about the state of Mexico these days. 

–The polls are more erratic than ever. NBC/Wall Street Journal has it 52-42 Obama; Reuters/Zogby has it 51-41 Obama; and Pew Research Center has it 52-38 Obama. But an AP survey puts it at just 44-43 Obama; Rasmussen has it at 51-45; and the Gallup daily tracking polls have it anywhere between 6 and 10 points for the Illinois senator. One worrisome indicator for McCain is that all the polls show Obama with a substantial advantage among independents. 

Charles Krauthammer / Washington Post 

“Contrarian that I am, I’m voting for John McCain. I’m not talking about bucking the polls or the media consensus that it’s over before it’s over. I’m talking about bucking the rush of wet-fingered conservatives leaping to Barack Obama before they’re left out in the cold without a single state dinner for the next four years. 

“I stand athwart the rush of conservative ship-jumpers of every stripe – neo (Ken Adelman), moderate (Colin Powell), genetic/ironic (Christopher Buckley) and socialist/atheist (Christopher Hitchens) – yelling ‘Stop!’ I shall have no part of this motley crew. I will go down with the McCain ship. I’d rather lose an election than lose my bearings. 

“First, I’ll have no truck with the phony case ginned up to rationalize voting for the most liberal and inexperienced presidential nominee in living memory…. 

“The case for McCain is straightforward. The financial crisis has made us forget, or just blindly deny, how dangerous the world out there is. We have a generations-long struggle with Islamic jihadism. And an apocalyptic soon-to-be-nuclear Iran. A nuclear-armed Pakistan in danger of fragmentation. A rising Russia pushing the limits of revanchism. Plus the sure-to-come Falklands-like surprise popping out of nowhere. 

“There’s just no comparison. Obama’s own running mate warned this week that Obama’s youth and inexperience will invite a crisis – indeed a crisis ‘generated’ precisely to test him. Can you be serious about national security and vote on Nov. 4 to invite that test?…. 

“Today’s economic crisis, like every other in our history, will in time pass. But the barbarians will still be at the gates. Whom do you want on the parapet? I’m for the guy who can tell the lion from the lamb.” 

“(The) general election was supposed to be mostly about national security – about Iraq and the best commander in chief. On that, at least, there was party unity. But as gas prices soared, the economy quickly became the top issue – and that’s Democratic terrain. That’s when the McCain campaign took a dark turn, deciding character was now the only key to the kingdom. Disqualifying Obama became its chief goal: The untested celebrity. The liberal. The novice. The unknown. And worse. When it came time to choose a vice president, McCain would have loved onetime Democrat Joe Lieberman. But the wiseguys once again advised that the party’s base would revolt. So McCain blew the base a kiss: Sarah Palin. Those voters who always wanted to know more about how Obama spends his time ‘palling around with terrorists’ were thrilled. The rest just wondered how McCain ever thought she was qualified for that job. 

“The nastiness was infectious. McCain himself started asking, ‘Who is the real Barack Obama?’ and his crowds sometimes turned scary. But the rest of the public wanted to know more about its economic future, not Obama’s past. When McCain finally came up with a plan for the economy, the vision thing was still overwhelmed by his inability to hide a genuine disdain for Obama. At every debate, the edge in his voice and grimace on his face were unmistakable. If this indignant McCain had a bubble over his head, it would no doubt say, ‘Can you believe I’m in the ring with this unqualified guy and he’s beating me?’ 

“I have…watched over the last six or seven weeks as both of them have really taken a final exam with respect to this economic crisis that we are in and coming out of the conventions. And I must say that I’ve gotten a good measure of both. In the case of Mr. McCain, I found that he was a little unsure as to how to deal with the economic problems that we were having and almost every day there was a different approach to the problem. And that concerned me, sensing that he didn’t have a complete grasp of the economic problems that we had. And I was also concerned at the selection of Governor Palin. She’s a very distinguished woman, and she’s to be admired; but at the same time, now that we have had a chance to watch her for some seven weeks, I don’t believe she’s ready to be president of the United States, which is the job of the vice president. And so that raised some question in my mind as to the judgment that Senator McCain made. 

“On the Obama side, I watched Mr. Obama and I watched him during this seven-week period. And he displayed a steadiness, an intellectual curiosity, a depth of knowledge and an approach to looking at problems like this and picking a vice president that, I think, is ready to be president on day one. And also, in not just jumping in and changing every day, but showing intellectual vigor. I think that he has a definitive way of doing business that would serve us well. I also believe on the Republican side over the last seven weeks, the approach of the Republican Party and Mr. McCain has become narrower and narrower. Mr. Obama, at the same time, has given us a more inclusive, broader reach into the needs and aspirations of our people. He’s crossing lines – ethnic lines, racial lines, generational lines. He’s thinking about all villages have values, all towns have values, not just small towns have values…. 

“So, when I look at all of this and I think back to my Army career, we’ve got two individuals, either one of them could be a good president. But which is the president that we need now? Which is the individual that serves the needs of the nation for the next period of time? And I come to the conclusion that because of his ability to inspire, because of the inclusive nature of his campaign, because he is reaching out all across America, because of who he is and his rhetorical abilities – and we have to take that into account – as well as his substance – he has met the standard of being a successful president, being an exceptional president. I think he is a transformational figure. He is a new generation coming into the world – onto the world stage, the American stage, and for that reason I’ll be voting for Senator Barack Obama.” 

“Obama knows that where he comes from is far outside the American mainstream. For what are flip-flops other than concessions that a position is untenable and must be abandoned?…. 

“No Democrat has ever come out of the far left of his party to win the presidency. McGovern, the furthest left, stayed true to his convictions and lost 49 states. 

“Obama has chosen another course. Though he comes out of the McGovern-Jesse Jackson left, he has shed past positions like support for partial-birth abortion as fast as he has shed past associations, from William Ayers to ACORN, from the Rev. Jeremiah Wright to his fellow parishioners at Trinity United. 

“One question remains: Will a President Obama, with his party in absolute control of both Houses, revert to the politics and policies of the left that brought him the nomination, or resist his ex-comrades’ demands that he seize the hour and impose the agenda ACORN, Ayers, Jesse and Wright have long dreamed of? 

“Whichever way he decides, he will be at war with them, or at war with us. If Barack wins, a backlash is coming.” 

Gerard Baker / London Times

“Some conservatives (always described in the media as thoughtful, to distinguish them from the braying masses that make up the bulk of the conservative class) worry that Mrs. Palin represents a nadir for their movement – the pitiful but logical reduction ad absurdum of the populist, identity-over-issues approach that the party has taken of late. They see – in her ‘You betcha, gosh darnit’ colloquialisms, her narrative of a frontierswoman of simplistically heroic personal virtue, her instinctual identification with a narrow and exclusive parody of ordinary Americans – an anti-intellectualism, a repudiation of the very idea that ideas matter, an unspoken assertion that thinking about complexity is for cissies and Frenchmen. 

“It’s hard to know what to make of this Palintology. It’s hard to make a reasoned and fair judgment about the Alaska Governor because she has been the victim of one of the nastiest, most sustained and comprehensive slime-jobs ever performed by a hyper-partisan national and global media…. 

“As for the anti-intellectualism she seems to represent, this is a favorite old saw not only of the Left but also of the whole Establishment crowd. There’s an unshakeable view among the coastal elites that real wisdom is acquired only by circulating between the ivy-encrusted walls of scholarship and the Manhattan and Hollywood cocktail set. 

“But there’s real wisdom among those derided Americans who have never even ventured to the coasts, but whose steady consistent voice and values have been truly responsible for America’s many successes.” 

“There is now something infantilizing about this election. Mr. Obama continued to claim he will remove wasteful spending by sitting down with the federal budget and going through it ‘line by line.’ This is absurd, and he must know it. Mr. McCain continued to vow he will ‘balance the budget’ in the next four years. Who believes that? Does even he? 

“More than ever on the campaign trail, the candidates are dropping their G’s. Hardworkin’ families are strainin’ and tryin’a get ahead. It’s not only Sarah Palin but Mr. McCain, too, occasionally Mr. Obama, and, of course, George W. Bush when he darts out like the bird in a cuckoo clock to tell us we are in crisis. All of the candidates say ‘mom and dad’: ‘our moms and dads who are struggling.’ This is Mr. Bush’s former communications adviser Karen Hughes’s contribution to our democratic life, that you cannot speak like an adult in politics now, that’s too austere and detached, snobby. No one can say mothers and fathers, it’s all now the faux down-home, patronizing – and infantilizing – moms and dads. Do politicians ever remember that in a nation obsessed with politics, our children – sorry, our kids – look to political figures for a model as to how adults sound?” 

Amen. Ms. Noonan continues, re Sarah Palin. 

“(We) have seen Mrs. Palin on the national stage for seven weeks now, and there is little sign that she has the equipment, the knowledge or the philosophical grounding one hopes for, and expects, in a holder of high office. She is a person of great ambition, but the question remains: What is the purpose of the ambition? She wants to rise, but what for? For seven weeks I’ve listened to her, trying to understand if she is Bushian or Reaganite – a spender, to speak briefly, whose political decisions seem untethered to a political philosophy, and whose foreign policy is shaped by a certain emotionalism, or a conservative whose principles are rooted in philosophy, and whose foreign policy leans more toward what might be called romantic realism, and that is speak truth, know America, be America, watch for openings, move diplomatically, respect public opinion, and move within an awareness and appreciation of reality. 

–Obama has raised a staggering, record $600 million, including a record $150 million in September. 

–A Quinnipiac University poll released Thursday found Floridian Jews back Obama by a 77-20 margin. A Gallup survey found that nationwide, Jews prefer Obama 74-22. [Jerusalem Post] 

–Sarah Palin, in an interview with People magazine, said she’s reading a lot of briefing papers. 

“I appreciate a lot of information. I think that comes from growing up in a family of school teachers.” 

Like Peggy Noonan said, Sarah just likes to “say things.” She also said that if she and husband Todd had had a sixth child, they had already picked a name for a boy.  

–New York Mayor Michael Bloomberg won a vote in the City Council, 29-22, allowing him to circumvent the existing term limit statute to run for a third term next fall. Needless to say, this could make for a most interesting election, though he’ll outspend any opposition 200 to 1, one must assume. 

I believe Bloomberg should have run for president as a third-party candidate, just to shake things up. But I’m against changing the law on term limits. 

However, New York faces as big a financial crisis as anywhere else in the country and New York matters. Bloomberg, to me, is the best to handle it. I just hate that he had to pull this stunt. 

–I also can’t stand this early voting in our presidential election. What if there was a health scare? What if there was an accident? What if there was a geopolitical October surprise? What if a true scandal hit? 

–Thanks to the global recession and rapidly rising unemployment, the immigration wars are about to heat up in a big way, particularly in Europe. By year end, there will be some very scary incidents and the turmoil could easily lead to a charismatic figure down the road, a la the 1930s. 

–An old friend, Dr. Whit, was commenting on how 73% of American adults do not have a college education and there hasn’t been a more important time to bring some manufacturing jobs back home and/or infrastructure projects in which to put them to work. I agree, especially if we are going to have another mammoth stimulus program. 

But the Journal had a chart of some of our largest cities and the percentage who graduate high school, such as 73% in San Francisco, yet we also have the following graduation rates: 

Baltimore, 34.6%; Cleveland, 34.1%; Indianapolis, 30.5%; Detroit, 24.9%. 

–The case of the white powder (harmless) being sent to about 30 Chase bank offices around the country is but one example of the threat posed by home-grown terrorists these days. Those who are disgruntled certainly have more than their share of targets. 

–Finally, in what was a truly dreadful week in a month of them, there was one ray of sunshine amidst the gloom, that being the migration of the bar-tailed godwit. Biologists at the U.S. Geological Survey outfitted 23 of these shore birds with satellite transmitters and proved they can fly up to 7,242 miles without stopping in their annual fall migration from Alaska to New Zealand, taking five to nine days. The previous record was held by the eastern curlew, which has been proved to fly 4,000 miles non-stop from eastern Australia to China. Researchers say that as a feat of sustained exercise, unrelieved by sleeping, eating or drinking, it is without precedent. 

The bar-tailed godwit is not to be confused with the bar-stained twit, which you can find peopling Congress. 

Returns for the week 10/20-10/24 

Dow Jones -5.4% [8378]
S&P 500 -6.8% [876]
S&P MidCap -9.6%
Russell 2000 -10.5%
Nasdaq -9.3% [1552…5048 all-time high] 

Returns for the period 1/1/08-10/24/08 

Note: I am holding off initiating the subscription service (which will be free) due to the fact I am going to be on the road much of the next three weeks. New podcasts are also on hold until later, both around 11/20. The next three reviews I’ll be coming to you from Deadwood, South Dakota, and then Hong Kong. Next week’s will be brief. If you see my brother and me at Mt. Rushmore or Little Bighorn, say hello. The first round is on us.