Recent Posts — from James O'Leary

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Getting back to Greece… there’s a beautiful little J.D. Salinger short story with that title, “A Perfect Day for Bananafish.” It’s a parable about greed and consequences. Surely Mr. Salinger did not have anything about Greece in mind when he wrote it. Those bananafish, however, have come ashore on the sun-drenched beaches of the troublesome euro-zone colony. The fish, you see, are the people of Greece. Oh, not all of them, to be sure. But from the halls of Athenian government to the alabaster homes of the populace, the bloated denizens of the deep in the Salinger saga now appear in all their brazen human form. Brazen because they are complaining and protesting over something they did to themselves.

As anyone following the story well knows by now, the root of Greece’s problem is having let the good times roll too far, too long. Those Salinger bananafish, as the story goes, swam through a hole into their undersea habitat where they proceeded to eat themselves into a gluttonous stupor. They stuffed themselves until they could not get back out the same way they came in. That meant they had to stay and suffer the consequences.

As for the bananafish of Greece, they are now in their third year of virtual sequestration fiscally. Their habitat has become their prison. They can’t get out until they lose some weight. Still, they don’t seem to get it. It is selective oblivion, a national sentiment summed up in this quote from a recent USA Today article by Nikolia Apostolou and Sumi Somaskanda: “We’re protesting against the harsh inhumane austerity measures that are going to be voted on in parliament. We’re living in complete terror.” And so were the poor bananafish. But this begs the question, “Who put you there?”  Which begs other questions like, “Didn’t you see it coming… couldn’t you see it coming?”

Oversized government spending, pensions, unrealistic tax policies, early retirement age, shadow economies allowed by officials and embraced by businesses and willing employee recipients…all of this went on with no one foreseeing calamity and collapse. If they did, they lived for the day and chose to ignore it. The 2009 OECD estimate of euro 65 billion in Greece’s black market contained approximately 20 billion euro annually of unpaid taxes. Nobody likes tax collectors of course, but in this case there is a certain undeniable righteousness to the occupation. The unrealized annual twenty billion would have gone a long way to making the crisis less critical. It would have helped alleviate a lot of EU scrambling.

We know what became of the poor bananafish in the story.  We can surmise from today’s headline events that they underwent some kind of Darwinian morphing into an isolated population whose fins turned to fingers that now point at others. “Harsh” and “inhumane” are terms that responsible folks elsewhere around the area might find a bit hard to swallow as they work hard in search of solutions to counteract the gluttony of a few.

The Salinger story did not have a happy ending. What will Greece’s be?

I read something the other day where a market watcher complained about an increase in day-trader activity in the U.S. among a growing group of lone-riders who bang away at trades for mere pennies in maneuvering hundred-share lots. I’m not sure what the commenter’s problem was because, with all due respect, such market small-fry wouldn’t create any great surge in individual stocks, let alone the broader market, in a measurable way. The penny-pushing investor is just trying to put a few bucks in his pocket each day. It is a good deal for all those electronic trade sites that pull in a couple or so dollars on every trade.

In China, the same sort of thing has been going on but for a different reason. The enormous rise in China’s economy has generated a vast new middle class. This in turn has spawned a cadre of crazed individual “little guy” investors who are in it more for the game than the higher, safer profits sought by seasoned professionals. China’s new small investor with the itchy finger is probably not as astute as his American counterpart. No matter, in both places markets move with the big boys, not these guys. Institutional investment results in about two-thirds of such movement in the U.S. The smaller daytime market surfers are really riding on the waves that come in and go out according to the flow of a much larger ocean, an ocean of “big” money.

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Turning to the much larger international picture, there has also been a paradigm shift, one that has gone to the issue of safety opposed to aggressively chasing big returns --- or, where to stash the cash until the global picture resolves its current tumult and uncertainty. The European bond market isn’t attractive even to Europeans despite record low, even negative, rates in some cases. Germany of course leads the way, but it and other Euro leaders face continued downgrades. The story now is about risk-aversion and weathering the storms. Parking your money with little or no return is a good option versus collapse. Post-2008 jitters linger most everywhere. Sovereign credit downgrades (unless we’re talking the likes of Greece and some other barnyard Euro-nations), just as with an individual’s bad credit, doesn’t carry the stigma it used to.

Thus, the U.S. debt market has proven the ultimate safe-haven by default. Never mind Standard & Poor’s 2011 downgrade of the U.S. from a triple-A rating. In Europe, every day is Halloween, so there’s nothing scary about the U.S. no matter what our problems. The U.S. is a national of fiscal solidarity governed by law, policy, and behavior that is a far cry from the European Union or anywhere else, regardless of what cliffs appear on America’s horizon.

That’s not to say that the Euro mess hasn’t washed some of its dead fish ashore in the U.S. It has. This has contributed to market volatility along with America’s own political and economic concerns. The U.S., despite the S&P downgrade, is truly the world’s safe house. American debt can be bought around 1.6% right now. That’s a form of stability that offers comfort in these uncomfortable times. Let the world go on buying U.S. debt at low prices. It’s good for them and it’s good for us.

We are living in a time of the headline market. Activity centers on European sovereign debt, Middle-East oil, and China’s quest for world economic dominance. Global money seeking safety right now translates to a block or two in America’s wall of security.

China is gorging itself with a hefty portion of exports from across many seas, but perhaps nowhere as wondrously as in Latin America. No wonder China has brought Peru and a slew of other Latin lands to their knees. Peru currently sends 18.3% of its exports to China, with almost all of those exports coming from its vital mining industry.

Finance Minister Castilla will continue to pray, but won’t the power of global economic forces intervene to save those Latin nations invested so heavily in exports to China should the Asian Dragon slow down a step or two? Doubtful. China owns L.A.’s trade soul, or so it would seem.  Latin America’s financial fortunes have risen in lock-step with China’s prosperity for about the last six years. But it has also created lopsided dependence, economically dangerous dependence.

Not to compare a bloc of Latin American heavy exporters to an altogether different financial situation in Europe, but building a house of cards --- any house of cards -- is a tenuous proposition. Those now-distressed southern European nations that greedily fattened themselves on whatever was in reach of their grubby little hands during the good times have learned that they now have to pay. Well, someone in Europe has to pay.

Europe’s miscreants acted irresponsibly by living lavishly because they could --- for a time. Latin America, meanwhile, has invested in China responsibly, though not necessarily wisely in the long run. Cashing in on China is sound practice. Everyone is doing it. But the proverbial “don’t put all your eggs in one basket” may have application here. It isn’t about the greed that was and is in the euro-zone debacle. Latin America simply appears to have lacked foresight in failing to cover its backside in case of a trade downside. Anticipating a China slowdown was not foreseeable given their runaway growth. But now it is here, however slightly, and it is having an impact on many of South America’s most important countries.

The Latin American scene looks something like this: in 2011, $97 billion went to China (up from $18 billion in 2005) in direct exports with more than half of that from Brazil, Columbia, Chile, and Peru. It represents a 10-fold increase in value since 2001 when the good times began to roll. China is the top export destination for each of the countries just mentioned with the exception of Columbia. A gluttonous 11.7% of all Latin exports in 2011 went to China. In 2005, that number was a mere 5%. Individually, these heavy exporters have enjoyed trade jumps to China that rose by as much as much as 500%. Pretty nice.

Those great trade jumps came as the exporting countries built factories and grew their businesses to handle the sudden surges in production needed to meet foreign demand. Invigorated growth elevated the bar in terms of maintenance costs to keep things going at such a high level. All of it was aimed at China. China’s growth, however, is slowing of late. This year’s first quarter dropped to 8.1% then to 7.6% in the second quarter. Previous highs reached double-digits.

Being joined at the trade-hip is suddenly a liability for these top-heavy Latin American exporters. The result is a Latin hangover that is causing finance ministers to fall on bended knees. The problems driving them there include high operating costs required to keep factories running, employees employed, and the increased public spending derived from once-plentiful tax revenues. In the meantime, Fitch Ratings says that a China growth slowdown to 8% for the full 2012 year would cost 1.5% growth to Argentina, Brazil, Chile, Columbia, Peru, Venezuela, and Uruguay. It also estimates that for every 1% China’s annual GDP declines, the seven largest commodity exporting economies in Latin America (Argentina, Brazil, Chile, Columbia, Peru, Venezuela, and Uruguay) will decelerate by 1.2% in average growth rate.

The beefed-up Latin export platform has been a success in terms of firing up economies. The problem was that the system outflow to China didn’t have a cutoff switch. Outflow surplus is becoming backwash. Still, the bills have to be paid. Paying for an expanded export platform without that one, main customer, China, is comparable to choking on something eaten a little too voraciously.

Fortunately, the growth story for that other ‘down under,’ the one in the western hemisphere, has a lot of built-in resiliency. In its April regional focus report the IMF said, “external conditions remain stimulative for much of Latin America.”

Peru’s economy is forecast to grow by about 6% this year. However challenging, dealing with the results of a China slowdown is merely a time for adjustment. This is not southern Europe.

How quickly things change. The perception around town now being quietly whispered is that there will never be enough oil to satisfy demand. Inevitable oil depletion is becoming old-school thought. One of the latest experts to throw down on the rising theory of oil abundance without end is Harvard researcher Leonardo Maugeri, an energy expert who in a former life was an executive with one of Italy’s major oil companies.

The Maugeri perspective was made clear in a recent Reuter’s article. He is quoted from a discussion before the Center for Strategic and International Studies saying, “Most analyses today are still marked by this obsession that oil is running out.” Ah, but not so fast…

His own analysis led him to conclude that there may be more to worry about from too much oil rather than too little. The analysis, published as a policy brief, said, “Contrary to what most people believe, oil supply capacity is growing worldwide at such an unprecedented level that it might outpace consumption.”  He went on to conclude that, “This could lead to a glut of overproduction and a steep dip in prices.” At least in the short run, if not in the long run. And therein lies the point which we are looking at today. It’s about the money --- oil so cheap it’s going to send suppliers into a panic, like chickens watching the butcher run through the barnyard, hatchet in-hand.

Today this may be just a theory, but the components fit the theory. This will have all sorts of ramifications for markets. Oil production is expected to increase in the United States, Brazil, Canada, and Iraq. Saudi oil will continue on its current course, but Iran’s production, along with Mexico, Venezuela, Norway, and the UK, is expected to decrease. And let’s not forget about Russia. They aren’t likely to let their cash cow get away. A look at OPEC in just a minute…

The shifting sands that may bring about a new oil era will re-allocate and increase suppliers, rather than remove supplies, to meet global demand, whatever it happens to be. The more salient point of the Maugeri analysis and conclusion is that abundance of supply could actually become oversupply. Oversupply to the point of out-of-control pricing going the other way --- down, rather than up. How novel and new, this kind of thinking.

According to Maugeri’s analysis, worldwide oil demand must continue at an annual rate of 1.6% for sustainability. If it doesn’t, then the price collapse scenario kicks in. Current demand is at a rate of just under 1%. And while developing economies will show rising energy needs, developed nations have a counterbalancing effect through new energy efficiencies. Throw in bruised economies --- most notably Europe --- and petroleum requirements further work to offset pockets of rising consumption.

Another market factor to consider is the possibility that OPEC, now supplying about 40% of the world’s oil, could fall into non-existence as a power cartel in the not-too-distant future. That view was put forth in a recent television interview with Dr. Kent Moors, a prominent international oil and energy expert and consultant from Duquesne University in Pittsburgh. OPEC’s market price fixing power is about to shift.

With global changes in supply sources and new technology, not to mention geo-political considerations, OPEC’s formula for success will not be so compelling. The cartel’s operating formula goes like this: it first determines international demand, and then subtracts non-OPEC production, resulting in what is termed ‘the call on OPEC.’ The cartel then assigns production quotas to the 12 member states. Saudi Arabia, Kuwait, and the United Arab Emirates have lately ruffled Iran’s feathers by maintaining strong output while Iran wants OPEC reductions in order to keep prices high. 80% of Iran’s exports is oil. Things aren’t going well for Iran these days.

Too much oil, or too little; prices too high, or too low. It’s getting to be a day-to-day thing trying to figure out what’s next. There is, however, a certainty in all this uncertainty when it comes to investing. It’s like the market’s version of crop rotation. It’s getting to be not so much gauging depth or dearth in oil supplies as it is in what the numbers dictate based on quantity of use, or, demand. Ultimately, markets have their own ways of shaking out. Once again, there’s always a market out there somewhere.

The wheat of the article was that Saudi Arabia has a growing economy on track to devour its own world-leading oil supply. Cannibalization of the Saudi oil supply is going to reduce the world leader to zero-level exports by 2038. Saudi export customers would suffer supply reduction of about 25% according to current measure. Indeed, this would happen if that’s all there was to the story.

So, what if this conclusion comes true? There are those who disagree that it will. That turns us to a speech delivered before the British think tank, Chatham House, this past January 30. The speech, titled “Investing for the Future in Turbulent Times,” was given at the Middle East and North Africa Energy 2012 conference. Saudi Arabia’s Minister of Petroleum and Mineral Resources, Ali Al-Naimi, warmed the fearful hearts of those worried believers (of which I was not one) in the apocalyptic theory of a 2038 Saudi export shutdown. He assured everyone that they can count on Saudi oil for a long time to come.

I doubt that Mr. Naimi was lucky enough, as I was, to be one of the recipients of that dazzling forecast article about his country’s 2038 negative prospects and how to get rich off of it today. There must be a rumor going around, however, because his conference speech went right to the article’s pivotal point. It did so in the form of an unintentional rebuttal. Straight to the point, it laid all Saudi cards on the table.

What he explained, in short, was that Saudi Arabia is growing at 7% right now, and the future looks bright. Saudi youth are in abundance and on the move. This is driving infrastructure development in the country and an upwardly mobile class of young, educated workers--- Saudi yuppies a few generations late. In other words, there will be a massive influx of Saudis spending money in the local economy, other than just members of the Royal Family. And this is what leads to the idea that domestic energy consumption will drain what had previously been pumped through pipelines and into tankers for export.

Minister Naimi’s Chatham speech outlined all the wonderful things his government is doing to address the fact that, yes, just as the glossy promotion article stated, eventually there won’t be enough Saudi oil for anyone except Saudis. But not to worry, the country’s prolific petroleum revenues are paving the way for the future with increased research and development in oil and natural gas, and even alternative energy; and money is being spent on national infrastructure and education for all those young up-and-comers. Over time, presumably the critical next 27 years, global demand will drop relative to supply, particularly from North America.

Minister Naimi summarized by disavowing anyone’s contrary presumptions about Saudi export sufficiency by saying, “So let me reiterate my over-arching message today: Saudi Arabia will continue to be a stable supplier of crude oil to world markets for many decades.” He even reassured the reassurance: “Saudi Arabia will continue to play its part by providing the energy required to fuel prosperity in the region and the world.”

The only conclusion I came away with after taking a look at both sides of these differing takes on Saudi Arabia 2038 is: Who is selling what to whom?The sales pitch forecasting article had an element of slick uneasiness about it. The Saudi oil minister reminded me of a line from Shakespeare’s Hamlet (I’ve abridged it slightly): “Methinks thou doest protest too much.”

In the end, who really cares, except maybe OPEC? Net demand is the key. It is shrinking and will probably continue to shrink. Supply elsewhere is popping up. North American supply through discovery and technology is going to be a game-changer on its own.

The news media is full of energy this-and-that, but putting it all together to form a composite energy picture for where we really are and where we are really going isn’t always so clear. Energy prophecy requires not clairvoyance, but clear vision. We see oil-rich Canada and Mexico at the top and bottom of the map, each of which produces about the same number of barrels per day, ranking them usually at fifth or sixth in global production, and the U.S. in the middle, ranking third in global production. That makes for a lot of oil, a lot of energy. It is a trilogy of global giants joined at the borders.

The boastful prognostication that this hemisphere need not look across any ocean to the plentiful rivers of petroleum rippling through sand-covered Middle Earth, that is largely OPEC et al, is at once daring, but not unreasonable. The oil and natural gas reserves needed are right here, right now. It is just a matter of time and extraction. New methods of exploration and drilling are allowing for far greater production than that which has already come to the surface ranging from Canada to Mexico. The supply problem is basically over. On paper, anyway.

Canada’s richly-sodden Alberta oil sands are the world’s third-largest recoverable reserve of crude. The Bakken, Eagle Ford, Barnett, and Haynesville shale fields of North Dakota and Texas have boosted total U.S. production potential to foreseeable levels of self-sufficiency across the next two-hundred and fifty years. Mexico’s oil supply looked to be dripping away over the past few years, but scientific and technological breakthroughs have allowed for revitalization as well as new sourcing. Dead or dying wells have been brought back to life. Mexico is now extracting more oil than we thought it had two or three years ago. That’s one reason why the Mexican economy is growing at 4.5%.

The process of horizontal drilling has been successfully used for several years, primarily in deep-water offshore drilling, especially so in Brazil’s huge Santos Basin. Applying the process to rock-laden sub-surface hard ground (hydraulic rock fracturing or ‘fracking’) is recent. It has opened up shale field extraction that appears almost limitless.

Pipelines and politics remain problems in the realization of the kind of hemispheric energy independence being talked about. But the global supply portrait has been re-touched thanks to science, technology, innovation, and action. Parochial supply in North America would affect broad trade considerations and have a pronounced influence on international political issues. Worries about maturing fields drying up have been displaced by optimism over discoveries, and potentially more discoveries, that can produce by way of new methods. For North America, this means never having to leave your own backyard.

If ever there was a hackneyed topic in the news, it has to be today’s Greece. That’s not to say it isn’t newsworthy. It is, for sure. Leave the foreign affairs political issues to places like Iran and North Korea. The foreign affairs economic issues currently settle on the tiny little space known as Greece and its broader European neighborhood.

Getting back to the ‘sinking’ metaphor, yes, let Greece sink back in the ocean. The consensus now seems to be that indeed, the Isle of Economic Woe will go down. But who knows what tomorrow may bring? Look at it this way: you can’t save a sinking ship on its way to the bottom. You really can’t. All that weight and gravitational force pulling it down is irreversible inertia of a fiscal sort. Rescue efforts are inevitably futile during the sinking process. Wait until the ship hits bottom. Resting on the ocean floor means the emergency is over. The task of recovery and salvage of a sunken ship is much more of an orderly process than the panic of throwing lifelines on the way down.

Meanwhile, it is worth noting that a seemingly resigned consensus as to Greece’s imminent Euro-demise may, in Mark Twain’s words, be “premature.” The opposing forces of the Merkel-driven austerity insistence and the popular block of anti-austerity voters backed by a fiery consortium of anti-incumbent parties have turned somewhat tepid recently. Mrs. Merkel has indicated she may be open to some softening in her all-or-nothing hard-line austerity stance. Maybe, possibly, perhaps just a wee bit.

Around the corner, those vehement voters wanting to toss out the old guard are reportedly re-thinking their position. Too much austerity, yes. But -- just but -- maybe a little slicing and dicing of job and benefits bloating may be a good thing. Or at least a necessary thing. Mob invective is often followed by a calmer disposition.

No one can really say for certain if a Greek exit will be a good thing in the long run, the short run, or any run. Nor can it be said for sure, even at this late date, that Greece is going to go down.

Maybe someone should just get it all over with and pull the plug at the bottom of the boat. At least Europe would be forced to KNOW what to do next!

While a number of Canadian oil companies have watched their stock values (or at least prices) fall of late, North Dakota has observed boom-town conditions. Small oil towns are bursting at the seams. It is true economic stimulation. Employment has skyrocketed, housing demands can’t be met fast enough, and retail businesses are thriving. Fast food chains are paying $18 an hour to lure workers. And it is all because of the Bakken oil shale. North Dakota just recently took over the number-two spot from Alaska in U.S. oil production. Texas remains number one.

The major implication here is that supply is quietly on the way to outstripping demand just when Mid-east madness has caused petroleum panic globally. It means cheaper gasoline prices across the board; beneficial to consumers and markets, beneficial to investment in some places, not so in others.

Supply panic caused gasoline once again to surpass $4 a gallon at the pumps over the last few months. But the early April peak prices of crude that hit $119 a barrel for international benchmark Brent and $103 a barrel for North American benchmark West Texas intermediate have subsided. It’s still a day-to-day proposition, but barrel prices have steadily dropped by about $10 for both over the past month.

Prospects for further drops look good for several reasons. The Bakken shale, for one. For another, all that Canadian oil is piling up and is expensive to produce. With Canada relying so heavily on its top customer, the United States, it will do most anything to keep the relationship going. That means selling cheaper despite reduced margins. America gets about 22% of its total oil imports from Canada with only about half that amount coming from each of the next two sources: Saudi Arabia and Mexico.

Saudi Arabia and Mexico have plenty of reserves and ample production and both are friendly to the U.S. for the most part. When the Arab Spring flare-ups occurred and spawned initial oil panic, Saudi Arabia stepped forward and promised to fill in supply gaps. Now, they have made the same offer in the face of the Iranian threat. Saudi Arabia is aware of Canada’s current glut and high production costs. They know Canada will lower prices if, and as, necessary. In response, the Saudis are up for a little price warfare. According to Phil Verleger, visiting economist at the University of Calgary, Saudi Arabia might lower its price to $50-$70 a barrel to combat Canada. That would be a dramatic move by the Saudis since it would mean red-lining their needed government break-even point of $90-$100 a barrel.

Another factor in the demand-supply picture is the ‘adjustment’ mentality taken hold here in the U.S. and other parts of the world. Consumer-driven oil austerity? People are driving less, and sales of more fuel-efficient vehicles are up. It is no small consideration. In the U.S. this translates to a gasoline demand reduction by 6% in 2012 over the same period last year. The reduction in global demand is almost a million barrels a day according to economist Verleger. This impacts even further on the lowering of crude prices.

Meanwhile pipeline expansion is easing petroleum transport costs in the U.S. and technological developments are increasing productivity while lowering costs. The fracking process at work in the Bakken region is a literal way of getting blood out of a stone --- oil out of a rock. Elsewhere around the globe, the world’s second-leading oil producer and exporter, Russia, is on a path for increasing production from new sources like its North Sea deals and other international corporate alliances, and its promising exploration of new fields in remote portions of Siberia. Actually, all of Siberia is remote.

In April, the International Energy Agency (IEA) declared that the supply-demand issue had clearly shifted in favor of supply. Energy analysts agreed. Price forecasts were dramatically revised downward for the medium and long terms. One noted analyst expects U.S. supply to grow from 2010 output of 5.1 million barrels per day to a staggering 9 million barrels per day by 2015. If it happens, this will put further downward pressure on oil prices regardless of those occasional spontaneous increases popping up from sheer emotion over Iran or other Mid-east uncertainties.

The Iran-centered game of threats, sanctions, warnings, and other global political hijinks is going to continue depending on who gets up on the wrong side of what bed any given morning. But, as the high drama of Hormuz ebbs and flows, the world is responding with ingenuity. Supply prospects look good no matter what the demand. Maybe there is too much oil! On second thought...

The fiscal fisticuffs between the challenger, Greece, in one corner, and that other guy --- the champion who goes by many names: European Commission, European Central Bank, European Financial Stability Facility, IMF, Germany, shall we go on? --- battle away, but we never know just where we are in the battle! Let’s give the undersized challenger credit: he sure knows how to hang in there, checkered past and all. A jab here, a jab there, and the fight moves into the next round, and the next, and the next. Just when the fight slows, things always pick up again.

The champion dropped his guard when French President Nikolas Sarkozy took one to the jaw and went down. That most likely invigorated Revolutionary Greece, knowing that its weakened austerity-demand opponent might have to re-strategize now that Greece itself has re-strategized into near-violent popular anti-austerity. The next round is whether or not the popular revolt produces a new government that refuses the bailout terms already agreed upon (kind of like punching yourself in the face; why wait for the other guy!). One never knows what round it is in this contest because the austerity approach is the only way to survival, and yet it is not a means of ultimate victory if jobs are cut and private spending is curtailed for too long.

The plan by opponent EU to duke it out by offering financial support with the stipulation that house-cleaning in the form of massive job and other cuts be put in place was a sure invitation to citizen revolt at some level inside Greece. And that is just what happened. A little noise from the crowd was to be expected in the beginning. But the latest round has removed Greece’s defensively-postured government of compliance agreeing to EU opponent demands for hard-punch austerity. It remains to be seen what stance a new Greek government will take. It may not be time for anyone to hit the canvas yet, but it is time for someone to get a nose bleed.

If austerity isn’t the long-term answer, but only a necessary means of conserving strength in order to let the other guy provide an opening by pumping in new life bailout after bailout, then Greece has just dropped its guard and moved in with arms swinging wildly against the other guy. On the other hand, maybe this isn’t a knock-out round after all, given the results of the recent French election.  A return to French socialism is like getting a broken bone in your hand---not good in a fight! Taxing French millionaires at 75% would provide minimal effect on public revenue, and in the end only drive French businesses and high earners elsewhere. When the retirement age drops to 60 from 62 it’s going to exacerbate the revenue problem even further. That’s just some of what is going to happen. It is going to drain France. Of course the solution will be to print more money. France is in for some challenging days of its own. Germany may end up standing pretty much alone in Europe’s battle for survival. Poor Angela Merkel:  Can anyone say “F-R-A-N-C-E”?  or “G-R-E-E-C-E”?

Yes, all of this is scaring markets again. But so what…it’s only a momentary thing. And besides, what seems so earth-shattering may not be so at all. Most multinational companies are doing quite well. Investment in the markets has produced annualized returns of 11-12%, if staying out of Europe since the beginning of their crisis which started in January 2010.

Just what round is it again?

Meanwhile, the remaining four troubled zone members have achieved their own degrees of failure. Portugal and Ireland are at, or somewhere around, the fourth degree and on their way. Rounding out the group, Spain and Italy can be labeled third-degree (under) achievers at this point. The irony goes deeper. They most likely won’t reach the higher degrees of underachievement since they rank as the third-and fourth-largest economies in the euro zone. The broader European Union won’t let them go under. Together they account for over 21% of the Union’s total GDP. The entire system would have to collapse first. In terms of importance within the EU, they can be considered flies in the ointment. Greece, Portugal, and Ireland are merely gnats in the ointment.

We read and hear more and more about all the possibilities for speculative outcomes of the euro zone, the European Union overall, and the euro currency. The effective sphere of influence beyond this troubled realm includes just about everywhere else, excepting perhaps the most fourth-world of nations. China, alone, may be the exception to experiencing some kind of ill effect. Trade considerations aside, it may actually reap some benefits from what is happening in and because of Europe. China’s enormous and growing domestic consumption is applying increased pressure on its manufacturing and services sectors. Turning from trade games with troubled outside suppliers will only increase the forces of internal production.

Getting back to Europe, the twisting and turning machinations of the EU rescue squad have produced a lot of optimism sprinkled with hope, but in the end it is all coming to naught. The euro zone’s composite purchase managers’ index, published by Markit, measures manufacturing and services production. Recent results were disappointing. Analyst forecasts for April expected an improvement to 49.3 points from the previous month’s 49.1 points. April dropped to 47.4 points. European economist Mark Miller read this as an indication that the coming year will probably see “recessionary conditions” throughout the euro zone. Such conditions would result in a further loss of confidence in chances that all previous help dished out to the troubled members would save the day. Instead, the day is slipping away by degrees.

By degrees the offending members of a once powerful economic alliance have moved toward separation from the stronger states. If there are any weaknesses in the remaining dozen states, the alliance could be forced to abandon all hope and optimism, not by choice, but by imperative.

Beyond the doors of Congress, damnation comes in the person of Iran’s insane leader and all-around government blabbermouth, Mahmoud Ahmadinejad, as he threatens to block the Strait of Hormuz in the Persian Gulf. It would choke off global petroleum supplies by more than 20%.

Speculation is the potentially profitable view that in the current oil crisis --- if it can be called that at this point --- there is a lot of return on investment available, as long as prices stay high. Nobody likes higher prices, unless, of course, they can be offset by even higher gains, the combination of which leads to that unavoidable throw-off known as inflation. Dramatic increases in energy prices force increases everywhere else in trickle-up fashion. Reduced supply, higher prices, bigger profits, opportunity.

Elsewhere, Russia is catching a little plus-side global spin-off from all this. As the world’s second-leading oil producer and exporter, Russia stands strong, and ready to get stronger, in its energy-based economy. (Our  Navellier Emerging Market Portfolio has taken advantage of this investment opportunity for some time.) There is, however, a political side to it. President-elect-again Vladimir Putin is making every effort to demonstrate to the world and to his own people that this is a country that intends to grow via its prodigious petroleum assets. If it comes to pass, it will be good for Russia and a boon to trade partners. There is a bright side to this and a dark side.

From Ahmadinejad and Iran, to Putin and Russia, one leader looks to put a major squeeze on the global oil supply so that he can build nuclear weapons and pretend they aren’t there, while the other looks to throw open spigots and fill that petroleum void--- and his country’s coffers. A new nuclear threat and an old nuclear threat going in opposite directions. One is making trouble, the other making hay.

Not every top Russian official is so certain of Putin optimism (also affectionately known from within as Putinism). The “he’s back” President tried to fight off election controversy with western style campaigning. Promises of higher wages to professionals and some government workers at a cost of more than $160 billion in his first term of six years, and investment in far-reaching regional projects located in the Siberian and Far East boondocks, would be drawn from the country’s flush reserve sovereign wealth funds. The Putin Promises are reliant on Russia’s continued enterprising in its economy-driving oil (and natural gas), as long as oil stays at $70 a barrel or higher. The Putin premise is based on continued high demand, something not necessarily shared by other top officials in the Russian government. Current Brent crude is priced at around $120 per barrel.

Realistically, it doesn’t look like the Iranian crisis has a favorable resolution in sight, especially with Europe’s full economic sanctions taking effect in July. The prospect of a diminutive nuclear winter in the coming summer is far-fetched perhaps, but the beating of atomic drums coming from Iran is once again joined by those heard oceans away in chummy North Korea. All-in-all, humanity’s better angels aside, this spells oil. And so, back to the beginning: Blabbermouth Economics are driving up prices, increasing demand, forcing opportunity ---- and scaring the hell out of everybody!

India has a mixed bag of natural resources that are mainly directed at domestic consumption. They don’t amount to much in the bigger scope of things. It’s the nation’s services industry that is currently powering the economy. More than half of the country’s economic output, coming from only about a third of the population, is in the service industry. Indian outsourcing is quite legendary along with some of the world’s best technology minds. The country has been exporting its hi-tech brainpower to the United States and Europe for a long time. During the tech boom of the 1990’s, American and German companies competed to lure these well-educated brainiacs to their lands. A third of India’s tech experts came to the United States where they could earn high incomes as opposed to driving cabs in their country, where professional employment was limited.

There’s some irony in noting that India’s educated comprise only about 25% of the population, while in the United States illiteracy is non-existent; and yet, India has roughly the same number of educated people. Simple math shows that 25% of 1.2 billion about equals the total U.S. population of 313 million. Poverty has diluted India’s large people pool, but the raw number of its educated human resource speaks to a turnaround. The bridge in Mumbai is emblematic of that turnaround.

So, why are the waters troubled beneath the beautiful new bridge? The bridge is an anomaly. India’s economy has grown at an impressive average of 7% since 1997, and is forecast to reach 9% this year. Not bad for a third-world country that seems more fourth-world when walking the streets of the big cities. It’s the same poverty picture when touring the countryside where some 840 million of the country’s residents live, nearly half of them without electric power. India sorely lacks electricity, public utilities of all kinds, railways, upgraded airports, mass transit, sufficient highways and modernized roads, and much more. In short, it is an environment not conducive to the kind of modernization and fulfillment needed to attract business and investment. At least that’s what it looks like on the surface.  

Contradicting the dour reflections and apparent moribund face of India, there is movement afoot to change things. An onslaught of progressive economic measures is underway. The key word for India’s future is infrastructure. And that takes us back to investment. If investment is the lifeblood of growth, it is government that must pave the way for business. India has emerged from its restrictive socialist economy that stretched from the 1950’s through the 1990’s, and lingered until recently. India needs to take a look at China and Russia. True, China is the only surviving communist government of any size, but it has been retrofitted by design with a free market system that has fueled jaw-dropping growth. Russia still hides its true governmental face behind a mask of managed democracy, but privatization of old Soviet industries has turned the bear loose in the name of capitalism. India must learn.

And, it appears, they are. Although the government has set out on a misguided old-style Maoist and Soviet calendar-date “planned” economy, some key liberalization has been inserted into the plan. Privatization, industrial deregulation, and reduced controls on foreign trade and investment are part of the plan. Throw in heavy public funding to spark infrastructure development and the prospect of much-needed foreign investment is materializing. Although India’s private investment is a limited resource, essential foreign investment is knocking at the door.

There are a few major Indian corporate giants who have managed to succeed in a morass of barriers at home, and they have been joined by several international corporations who have risked the barriers in light of opportunity. Many more large global companies are waiting for the troubled waters to calm. India, today, is where China was ten years ago. The bridge has been built. It’s time now to cross it.

If the unemployment rate decreases, GNP increases, and people feel good – then more than likely the President and Congress will maintain the status quo.  If the unemployment rate increases and the economy does not meet expectations, political change will likely occur. We may hear the same French campaign slogan, speaking of Greece in a negative tone, being bantered in the USA: that we are on a one-way ticket to Greece.  Personally, after I saw the play “Mamma Mia,” I always considered that a one-way ticket to Greece was a pleasant thought for all.

The big question: Will economic activity produce enough economic recovery to keep the economy going once the Fed quits printing money and the USA drowns in debt as Greece, Spain, and Italy are doing?  Other economies including Great Britain decided early on that printing money would only put off the day of reckoning.   

As Teresa Tritch pointed out in this past weekend’s New York Times Sunday  Review Section, “The current recovery is largely the result of support from Congress and the Federal Reserve. A self-reinforcing, virtuous cycle of growth has yet to take firm hold, and until it does, the need for help remains.”  

The help to which Ms. Tritch refers is increases in tax revenue, social security revenue, Medicare revenue, unemployment insurance funds, and state and local revenues -- and will only come if the number of people employed goes up and the unemployment rate goes down.

The internet story I mentioned focused on Dartmouth professor Ron Adner’s contention that the existing business model for today’s first-generation electric cars is unworkable. It is a model that dooms itself to failure. The fact that electric vehicle (EV) sales are up right now, with expected growth the rest of this year, is meaningless in the long haul. Professor Adner presents some compelling reasons why today’s EV marketing structure leads down a deep, dark rabbit hole. No argument with any of his adverse predictions over the plug-ins, as he goes on to prescribe a reformed business model that would bring a successful future for these non-gasoline cars.

The thinking here, however, counters even that. Mr. Adner talks about a redesigned electric grid that would take care of one of the crucial problems: the humungous drain on the electric power supply. And that is the real issue even if other concerns are worked out. There needs to be a burst of recharge outlets sufficiently available to match the EV sales market. This is logistically more than challenging. Realistically, it’s a prohibitive dead-zone.

Still, the reality of all-electric cars is no longer part of the dreamscape. It is infrastructure and marketing that stand in the way of widespread use, unlike other wild-eyed concept cars. There is not likely to be a wind-driven or solar-powered vehicle any time soon. Solar powered vehicles have been toyed with by some Jules Verne disciples tinkering away in their garages. One interesting alternative that has gotten some serious thought and experimentation is hydrogen power. It could be a step backward to take a step forward, reverting to the steam-engine technology of yore, which drove locomotives and ships. But for now, steam is best kept in a tea pot.

The dead zone lying between today’s limited selection and availability of EV’s and the prospect of mainstay market entrenchment centers on replacing the gas pumps of right now with the re-charge outlets of a futuristic tomorrow. It’s going to require scale, and that kind of scale doesn’t happen fast. Putting the old-fashioned gas station out to pasture won’t come about easily. Emerging economies could theoretically skip the high costs of a transition from gasoline to electric, much like China has seen with an explosion of first-generation cell phone users --- China never had much in the way of land-line infrastructure to render obsolete in the face of new technology. When it comes to highly-developed economies, instantaneous transition technologies can create logistical nightmares.  Or, in the case of electric cars, pain at the pump.

There are other problems. Even if adequate charging stations were available, the time it takes to reload the battery and get back on the road is impractical. As it is, most folks grow impatient standing at a gas pump for a meager three or four minutes waiting for the tank to fill. Imagine waiting overnight for a full charge! Running out of electric “fuel” on the way to an important meeting is the stuff of consumer nightmares. Beyond consumer concerns, other likely transitional barriers will include government regulatory requirements and corporate transportation industry revisions of the extreme kind. All of this takes time and costs money.

Meanwhile, the best way to go in reducing the need for more and more oil to fuel cars is the current, and successful, hybrid expression. Gas-electric hybrid technology will soon reach fuel efficiency ratings that exceed 100 miles per gallon. At that range, a car that now gets an average of 25 mpg at a cost of $4.00 would, in effect, cost only $1.00 per gallon. With enough of these vehicles on the world’s highways, global oil supply would be far less critical. Prices at the pump would quickly drop.

Oil demand will fall if electric vehicles actually do become commonplace. But it is merely a shift from pressure on one energy source to pressure on another. The energy question continues a circular path. Electricity has to come from one source or another, whether it’s coal, natural gas, or nuclear. If oil prices drop due to significant replacement by electric power, the world will be screaming for even more of its supply. A global shortage of electric power? If so, prices will rise dramatically, and we will hear the echoes of oil.

Of course there is a pleasant corollary to all this. When things turn around --- and they will --- the down-trodden will become the up-surging. Meanwhile, it’s at least good psychology to look at someone’s lighter, brighter side if it can be found. Indeed it can be, and it should give us hope.

Brazil has come up with an isolated answer, though it may not be a workable model for the rest of the troubled world. In an act of shared creativity, several small towns throughout Brazil have turned to the creation of self-designed local currencies.  Boutique currencies, if you will. These small towns are combating the economic exigency they have in common, namely poverty.

Maybe there is nothing to laugh about, but at least we can smile at the ingenuity of impoverished communities like Silva Jardim, whose story was highlighted recently in the Wall Street Journal. Silva Jardim, population 23,000, has its own legal tender to supplement the country’s official currency, the real. There’s no confusion as to which currency is being handed over when someone makes a purchase in Silva Jardim. No images of kings, queens, presidents, or other official dignitaries past or present appear on the face of this community’s bank notes. Silva Jardim’s currency, the capivari, named after the town’s bank, displays the face of a rat! Well, not really a rat. It’s a rodent, at any rate ---a large, handsome-looking thing that lives in the local rivers. Kind of a beloved village mascot, apparently.

The strategy behind the capivari, and other currencies like it, is to boost local economies on an individual level. The small community banks stand behind the new currencies, issuing them in selected denominations complete with secure holograms and watermarks on serialized notes. The currencies are offered to local businesses which may or may not decide to use them alongside the reais.

Overwhelmingly the new tender has been accepted. Merchants encourage buyers to use them by offering discounts on purchases. The discounts are compensated by increased volume. Consumers are led to trade locally rather than go outside the community, as a result. It is a clever way to buoy the small, distressed economies, and it is working. Some merchants have reported sales in capivarises as high as 12%, according to the WSJ article. The faithful church congregations are even tossing them into the basket on Sunday mornings.

As for stability, by government edict, alternative currencies are pegged to the real on a 1:1 basis, thus preventing fluctuations in value that could lead to systemic risks or trade disparities beyond communal borders. The issuing banks must at all time keep on deposit with the national bank reais on par to the local currency issued. No ‘QE’-anything, here! It’s a matter of “supplementing with…,” not “adding to…” and thereby diluting.

The whole thing is a nice idea. It’s theory put into practice in a way that works. When first introduced in 1998, in the town of Conjunto Palmeiras, the alternate currency idea was not keenly accepted by Brazil’s Central Bank. The Central Bank reacted with alarm when it got wind of the palma notes being printed and made available to the local economy. Police carrying machine guns invaded the small bank’s lone office, no pun intended, to confiscate the new form of cash. Once the central government understood what was going on, it did not object. Eventually it even helped promote the idea. In 2005, the Central Bank began assisting in creating additional community banking throughout the country. Official legal recognition of the ‘complementary’ currency concept came in late 2009.

At last count there were at least 63 such alternative currencies in Brazil. Argentina began using the local cash concept in the early part of the past decade. In Argentina’s case, however, it was in response to a distressed overall Argentine economy. Not so, with Brazil. Poverty affecting individual communities is behind the Brazilian concept. Brazil on the whole is doing quite nicely. This BRIC nation standout has emerged from the global downturn that began in 2008 with rapid currency appreciation and a GDP that grew by 7.5% in 2010 from the previous year.

It’s safe to say, at least for the time, that Brazil is addressing its growth and sustainability literally from top-to-bottom. Or is that bottom-to-top? There is a lesson to be learned here. Okay, economic models coming from tiny Brazilian and Argentine villages aren’t the ideal solutions for everyone. The idea is creativity and ingenuity. Are you listening, Europe?

Mr. Malpass writes, “The shortfalls and fights are challenging our democracies and shifting wealth from the private sector to ever bigger government.” Yes, bigger government. Of course he is talking about the U.S. as well as Europe. The solution has become the problem, reconfigured. Mr. Malpass refers to what he calls “an epic battle” among various participants in the funding process; those up and down the lines who getthe funding, and those who are supposed to be doing the funding.

The hope had been that Europe’s debt crisis would force government downsizing to meet cash flow requirements. But it’s not happening. There isn’t enough funding to support those with claims on political promises and previous programs from pandering politicians. It’s a common problem among the world’s politicians. They have to dangle something out in front of voter constituencies. Votes are political currency. Spending is the way to get votes. Malpass draws the conclusion that government is the winner in all this because governments get to continue spending. It is their aphrodisiac, not their answer.

Political solutions always take the same old shape. They offer costly plans to eliminate high (excess) public expending. These kinds of provisions usually come open-ended, meaning there aren’t any limits on spending. It’s spending more to spend less. The political answer, of course, is to pass-the-buck, or euro, onto the private sector in various forms of penalty taxes. Europe has already turned to such measures as the euphemistic value-added tax, as well as increases in property taxes; and, in Italy, even a proposed property tax on the venerable Roman Catholic Church.

It is the private sector that gets stiffed when governments beg for bailouts.  Open-ended government funding burdens private money. It leads to higher national unemployment, lower legitimate tax revenue flow into the public coffers, inflation, and, ultimately, bankruptcy for everybody. All of which means politicians and bureaucrats step in with every kind of administrative tool and device to pretend to solve the problem. That’s why we have seen bailouts, stimulus programs, bond market manipulations, banking fiascos, etc.

David Malpass looked at the whole process as an age-old government shell game in which “tax increases are projected to cause big revenue gains, which governments rush to spend.” He goes on to say, “When actual revenues fall short, the government blames the economy, borrows the shortfall, and proposes new taxes, creating a debt cycle.” Or, a dog chasing its own tail!

All such approaches and measures are a recycling of the original problem. Politicians and governments are highly proficient at this because it’s not really their money in the first place. They pursue the elusive, running in circles of futility. Funny to see a dog do this. Not so funny with governments going broke.

Shadow economies are clandestine versions of legitimate economies. They ape the legit economies at the front end where business is conducted, but not at the back end where incomes are reported. As a result, real GDP is misrepresented --- there is a lot more actual production than what the official numbers show.

Unreported private income means underpaid public revenues. And the fault largely goes to government for letting the culprits get away with it. Who, then, are the real culprits? In many cases, like the one in Wenzhou, China, private companies are forced to deal surreptitiously with loan sharks and the like because state banks will only lend to state-owned companies.

Is there some justification for this kind of circumvention? Perhaps. In other instances all that unreported activity can be attributed simply to greed. Hidden private deals are struck among key business people with each other as well as easy politicians and government officials. The hidden income can be from legal enterprises or illegal enterprises. Undeclared legal income goes unmeasured and deprives real GDP.

There’s no mistaking the city of Wenzhou for Greece. Debt is bringing all of Greece down, and tugging at the rest of Europe. Greece’s underground economy has been estimated at anywhere from 30% to as high as 60% of GDP. In the case of Wenzhou, economic infirmity is a localized event.

Wenzhou has a city-center population of more than 3 million, with an expanded metro population of over 9 million. It is the entrepreneurial capital of China, the first city to open free market doors back in 1978, initiating the post-Maoist economic reforms. Until recently Wenzhou remained a leading manufacturing center and port. The pervasive credit problems in the city, however, have brought about a near total collapse. The shadow credit market in Wenzhou is estimated at $19 million. The overall growth of illicit lending throughout all of China reached the $2.6 trillion mark in mid-2011, and is rising. It has gotten the attention of China’s leadership clear to the top.

Fearing shadow credit contagion throughout China, Premier Wen Jiaobao paid a visit to Wenzhou. Once he learned of the dire situation in the local economy, he employed measures to extend state bank lending to private companies at low interest rates and allowed higher debt levels. This was a dramatic reversal since earlier in the year when the government had tightened its lending to private businesses in an effort to address China’s rising inflation. This may be a permanent shift away from typical Chinese policy. If so, it represents Wen Jiaobao’s recognition of what is happening in Europe as something that could eventually appear at some level in stalwart China.

Despite China’s success in its ‘socialism with free market characteristics,’ many of the country’s top leaders are reluctant to give-up-the-ghost any further in their bedrock socialist economy. Mr. Gary Liu, head of the financial research center at the China-Europe International Business School campus in Shanghai, said, "Many top leaders don't really understand the market economy. And actually, they don't want to give up their power. When there is a problem, the first thing that comes into their mind is to control."

Bottom line, it is better to loosen the cords of communist restriction on the private sector, those who are doing the blood-and-guts work of the world’s second-largest economy, than to drive them into the shadows of despair, failure, and default.

Not so fast. Chinese implacability is being tested a little at the moment. It has arrived as a rapidly developing nation, and now it is feeling some of the growth problems that go with it. China has been battling creeping inflation of late. Add to that economic pressures from a trade fall-off with the U.S. and Europe that has caused a widening of the trade gap. The pressures are being heightened by the evolution of the Chinese labor market as it grows more sophisticated and demanding. It has become smaller through reduction in the migrant worker supply.

All of Asia has battled rising inflation, with the region’s central banks continuing to take steps in promoting growth as a fight-back measure. China fought back by reducing its cash reserve requirements. The People’s Bank of China cut cash reserve requirements for its large banks from a record high of 21.5% to 21.0%. It was the bank’s first cut since 2008. The consumer price index fell year-over-year this past October to 5.5%, its lowest level since May 2011 as food and housing prices moderated. This followed a year-over-year high of 6.5% reached in July 2011.

As China’s population enjoys the benefits of a rising society, particularly the middle class, consumer demand has absorbed a good portion of domestic manufacturing and production that would have otherwise gone abroad. It’s taking a toll on exports in pricing and supply despite a lessening in foreign demand. Those on the export receiving end are feeling the pain. That includes the United States, where prices on goods coming from China rose 3.9% last November over the previous year, the largest year-over-year monthly increase since 2008.

Meanwhile, Europe’s faltering economy and its dragging down of the U.S. has resulted in a significant decline in China’s imports.  With imports declining more than exports, China’s trade surplus has widened. This has sent the country’s officials out hawking trade business from such potential markets as Austria, Vietnam, Japan, and Canada in addition to the United States. Fortunately for China, its strong domestic demand has covered export “losses” to Europe and the U.S. in the current down-times, with production in the industrial sector growing appreciably. In October 2011 year-over-year industrial production growth reached 13.2%.

Contributing to the broader Asian growth challenge is stiffened bank lending from Europe. European banks provide about 20% of financing for the world’s aircraft and shipping industries, perhaps more. The European credit back-off is felt especially outside China. Fortunately for China, Europe’s bank restrictions are not a problem. China’s deep pockets and available outside resources ensure plenty of capital.

Although China is facing fragmented challenges that have gotten a little more complicated, in large part due to growth, these challenges have by no means become critical. Not yet, anyway. While Europe and the United States scratch to get back to even, China is merely scratching a little to keep from going down. Down for China is a long way off.

With Greece now on the road to bankruptcy, maybe someone should step forward from among the consolidated group of European lenders and play off of Gerald Ford’s words by telling Athens to “drachma dead!” What we get instead is day-after-day of the tired back and forth of lender insistence met with fingers-crossed-behind-the-back promises by Greece to do what it takes. Yes, Greece has achieved some small gains so far, including a reduction in the budget balance by around 8% since 2009. But small gains will not be enough as GDP fell by 6% last year and is on-pace to match that in 2012. Even the debt-to-GDP ratio going down to 120% by 2020 from the current 160% is speculative. It is a “political number” in the eyes of Financial Times writer Wolfgang Munchau in an article on February 12th.

Mr. Munchau’s article, “Why Greece and Portugal ought to go bankrupt,” unhesitatingly calls for the naïve, perhaps arrogant, European policymakers to stop kidding themselves. He says the policymakers thought they were being clever when they came up with the idea of expansionary fiscal contraction as a means to pull Greece out of the pit. All attempts we have seen since the May 2010 initial bailout have been unmitigated failures. Let them go under is the growing sentiment among northern European nations.

The belief among those who favor letting Greece and Portugal go under may have it right. Gerald Ford’s “drop dead” policy against New York City in 1975 suggests the possibility that Greece and Portugal can get their acts together by way of some introspective behavior modification through their own initiative. If Greece had been allowed to hit bottom early-on, some political house-cleaning and fiscal restructuring could have occurred by now. It would have paved the way for a massive infusion of outside assistance that was meaningful as reclamation rather than ransom. It would have eliminated a lot of nonsense.

After Ford refused federal assistance to New York, the city’s leaders from government, business, and labor took it upon themselves to save themselves. In a concerted movement, they changed the city’s destructive profligate behavior. They appealed to U.S. and foreign bankers who held hefty investments in New York City. The city’s default would have been costly to the banks. The city’s rescue operation was aided by New York state governor Hugh Carey. He called upon investment banker Felix G. Rohatyn.  Mr. Rohatyn summarized a possible default by saying it would be like “someone stepping into a tepid bath and slashing his wrists --- you might not feel yourself dying, but that’s what would happen.”

The prospect of imminent death led to renewed life for New York City. The Ford admonition is perhaps what Athens needs to hear from someone--- with a little twist: drachma dead!

Now here we are in 2012 and the whole generation gap thing is beginning to take hold in Russia. It comes in a much milder form for sure, but it is gaining sufficient traction to prompt suggestion that it could end in a bloody revolution (read more). That is, if the country’s current political leadership does not listen to a discontented new generation of citizens demanding reforms.

Multi-billionaire Mikhail Prokhorov is the leading potential upset candidate against Vladimir Putin’s return to the presidency in the upcoming March election. According to many ordinary Russians, and some experts, a Prokhorov candidacy may be nothing more than a piece of political footwork put together by Putin & Company intended to split any serious opposition. Prokhorov says not. It’s hard to tell at this point. His words echo the Putin detractors and may possibly be leading them.

Even outgoing President Dmitri Medvedev has been critical. He too has called for reforms in the Russian economy and in business practices, although this may be more political stoogery manufactured by Czar Putin. The whole Putin-Medvedev office-swapping does seem somewhat transparent.

The mounting public antagonism against the current government regime is primarily driven by Russia’s fast growing middle class. They are an electorate who are effectively saying they won’t tolerate more of that thinly-disguised Putinesque“managed democracy.” And it’s ironic because these are salad-days for the Russian people. Russia’s superior growth in the new millennium has spurred personal wealth to the point where the country now boasts the third-most billionaires in the world (Moscow leads all cities worldwide in billionaire residents) and a rising middle class that has no one looking back.

A preponderance of the new electorate doesn’t much remember things Soviet. They don’t really care about the folded tent of a Stalinist and post-Stalinist era that ran until a decade before the end of the 20th century. That’s the way it goes with a generational separation of time and mind. Things soon-forgotten are things not remembered.

There is no longer a strength-from-within when it comes to Europe’s single-currency monetary system. So much for the notion that the euro would provide protection against devaluation in individual currencies. The advent of the euro was meant to bring that strength, along with stability, way back in the distant financial epoch of 1999. It seemed like a good idea at the time.

Lacking ties that bind, the behaviorally wayward southern members of the euro-zone spent-and-sold, sold-and-spent, themselves into financial oblivion. The strength of the union covered the cracks in the monetary system’s weaker participants. The strength of a few covered the weakness of a few more. Inter-state investment among zone members capitalized on what appeared to be, as it was intended to be, a stable financial union.

The possibility of default by anyone in the group was all but nonexistent. If there was any risk sitting on anyone’s doorstep, it shifted to the newly-formed community-at-large, the common currency members comprising the zone. A country’s central bank was not the focal point of ultimate resort should travesty set-in; rather, the European Central Bank and other international apertures afforded protection. That was the idea, anyway. Alas, who could have foretold the misadventures of Greece and the rest of the Mediterranean Mob? To be sure, there were voices in the wind calling out, “Beware!”

The worst-of-the-worst may yet be unseen, but a concert of voices is now murmuring that perhaps it is time to leave the fold. The strongest of the zone members are easing away, and investment is quietly taking flight. They are leaving the danger zone and moving into their own markets or others thought to be beyond the pale of danger. It’s been called ‘de-Euroization.’ In reality, it is perhaps a precursive form of de-globalization. From March 2010 to September 2011 eighteen of the largest banks in northern Europe slashed bond holdings from about 230 billion euro to about 130 billion euro according to the European Banking Authority (EBA). A de-Euroization flight of investment away from sinking economies could eventually spell their doom. All the talks and strategizing to figure out how to save euro-zone miscreants will prove useless if relocated investment cuts the umbilical cord that has kept those sad few alive to this point.

We’ve had enough!

Finland, though small at a population of only about 5 million, is one of the euro-zone’s most stable members economically. The Finnish government enforced its skepticism towards Greece by demanding a ransom on their share of Greece’s August 2011 bailout. While it didn’t sit well with other members contributing to the 109 billion euro aid package, the Finns, nevertheless, insisted on an escrow deposit of 500 million euro from Greece in exchange for their 1.4 billion euro contribution. The escrow money, or ransom, was redirected to triple-A securities until full repayment on the debt or until it accumulated sufficient interest matching the contribution.

Timo Soini, leader of their anti-EU populist party, True Finns, characterizes the distressed southern economies bluntly, saying they were suffering from “economic gangrene.”  He said, “As long as we don’t amputate what can no longer be saved, we risk poisoning the rest of the body.” Sounds painful, but maybe he is right.

Similar sentiment came from an official of a Netherlands company that last year cashed out of some heavy investment in Greek and Spanish bonds. According to a Wall Street Journal article, when asked when his company would invest in Italian bonds, his reply was, “…when they have their own currency.”

Maybe it really is time to go for some.

It is really the let’s-not-say-it-too-loud proposal that came out of the Union’s home-study treaty revision session of late. Oh, no one went so far as to suggest anything like the United States of Europe or anything that far out. But the pressing by Germany, with a modicum of agreement from an otherwise reluctant-in-principle France, led the group to come away with a loosely threaded amalgam of New Deal non-legislation to be laid on the Euro table for approval in early March 2012.

Of course, in the end, it’s always about bonds. Bonds caused the mess --- in a way. Bad fiscal management led to bad bonds. Bad bonds led to bad debt. And that takes us to the notion of the ‘fiscal union.’  This concept, the fiscal union, does not tread on the idea of political union per se, and that’s a good thing. Instead it rests on the fiscal inter-reliance of all those culturally similar, but somehow different, nation states within the common monetary zone, plus ten.

A recent Wall Street Journal article presented an interesting look at Europe’s bond toxicity as compared with American bond behavior on a state-to-state basis. True, Euro nations and U.S. states are not the same thing; but they are similar enough in regard to individual sovereignty within a unified multi-sovereign framework. In the comparison the effects of American state bad debt produced inverse results from what is seen in Europe.

The suggestion is that a European fiscal union would work, with the intractable German view that absolute discipline is required. There are systemic protections in greater centralized fiscal control. But why then does European centralization have risks not found in the U.S. among faltering states? After all, states like California, Illinois, and Michigan have not pulled down their neighbors. In Europe, Greece’s problems reverberated immediately, first with Portugal and Ireland and on to Italy and Spain. Who is next?

The answer could be as simple as the fact that America is comprised of 50 separate states, which presents an inherently sturdier structure. A state here or there going broke doesn’t have any effect on a neighbor or another state further away. No one gets nervous next door or even down the road. A state’s sovereignty is its autonomy. That keeps it in fiscal self-quarantine, at least in theory, and, so far, in practice. One sovereign American state is just another brick in a very large wall compared to Europe.

The wall that is the entire European Union has only 27 of those bricks. More importantly, the euro-zone has a scant 17. The issue is not solidarity, it is solidity. U.S. common currency is diluted by virtue of the 50 states when it comes to bad debt in one or another of them. It is quite different in Europe. The euro has a sphere of obvious influence on those other currencies within the realm. Unfortunately, and ironically, it has an effect on the rest of the world as well.

The laboratory test to verify the anomaly that exists between Europe and the U.S. is seen in how one bad debtor in Europe causes bond rates to shoot up in another struggling member nation, while just the opposite holds true in the U.S. According to an International Monetary Fund report, increased borrowing costs in one state usually lower borrowing costs in other states. Experts have tried to explain why, but there seems to be no definitive answer.

Among the best answers is that the several U.S states are much more tightly integrated economically than the euro-zone. Borrowing costs are protectively buried among many other economic factors in the U.S. The calculated systemic risk for European bonds is high at 31%, according to a UCLA study, but only 12% for U.S. state bonds.

Fiscal union or no fiscal union ---that remains the question. No matter, it is probably not really the answer. There probably is no answer. So what else is new?

Earlier this month, we blogged of Wall Street’s desire to draw Russian companies to American stock exchanges. The country’s politicians seem to have decided to stop punching themselves in the face by embarking on a new policy of reasonable behavior. This, toward building a national image of stability worthy of global investment both incoming and outgoing. Then, all of a sudden, what seemed to be a little pimple of Red Square protest turned out to be the Russo version of 2011’s bigger stuff, Arabs taking to the streets in rebellion and revolt, and Occupiers of this-and-that dotting cities across the U.S. and elsewhere.

The December 24 March on Moscow contained a bit of reverberation from some of the worst of what we heard coming from places like Egypt, Libya, and Syria throughout the year. Estimates of the Moscow protesters ranged anywhere from 20,000 to 160,000.

Despite the disparity in those estimates, it’s clear that the people have had it with their country’s controversially corrupt rulers. Viewpoints from political experts close to the scene see the Russian popular backlash as a stern warning to Mr. Putin and others that they had better change their ways.

Admonishments suggest that while Putin will be president again come this March 4, his and the government’s after-election behavior will require a policy of pre-emptive pacification of the citizenry. And it had better be sincere. Something altogether new for Russian leadership going back to forever.

The unexpected bubbling-over by the Russian populace was a true kick in the pants for a certain ruling arrogance. Again, never so untimely in the face of the country’s clear desire to surrender herself to a lot of trade-interested suitors.

The on-going uncertainty of possible escalation between the People and the Putin surely raises the needle just a little on the caution-meter for what was shaping up as some possible global investment opportunity.

There is, however, a more bullish side to this. With a climate of greater popular scrutiny following the upcoming presidential election, the government’s goal of achieving growth through broader global market affiliations could well be a far more secure proposition.

And it’s about time.

It looked like new Russia, with its new name, The Russian Federation, was seriously trying to cast off any lasting identity with its old Union of Soviet Socialist Republics self. Wall Street has been trying to lure more Russian companies to its indexes for some time. Reports over the past year or so have indicated that Russia finally got it; Russia finally took it seriously that any chance of gaining wide, unfettered acceptance to international markets according to World Trade Organization standards first required acceptable standards of behavior among its leaders. It looked like Russia was trying to keep its nose clean.

With the latest news coming out of Moscow, however, it is evident that the current regime under Vladimir Putin and Dmitri Medvedev and their United Russia ruling party is still stumbling around in the figurative shadowy corridors of the old Lubyanka. Lubyanka, of course, is the legendary KGB fun-house headquarters of yore.  Accusations of ballot-box stuffing and other voting violations have resulted in Russians taking to the streets in protest.

Under Putin, the country’s economy has grown at an average rate of about 7% since coming out of the tumultuous 1990s and the collapse of the ruble in 1998. This emergence has been largely credited to Putin’s prudent management of Russia’s windfall energy wealth. The only blip in growth came as a result of the global collapse beginning in 2008. In 2009, the economy fell 7.8%. It recovered with growth of 4% in 2010. Putin and other officials, along with corporate Russia, know the kind of growth the country is capable of requires greater participation in world markets.

Russia’s economic fortunes are precipitously tied to its heavily-reliant commodity sector. Prospects look good for the near-term and beyond as the country moves toward an expanded economic base that won’t rely so heavily on its powerful energy and minerals sectors. That is, if the country’s political leadership doesn’t screw things up.  With United Russia getting hammered at recent parliamentary elections, the party nevertheless managed to come away with a majority of seats. Protestors say the election-rigging was why United Russia was able to hold onto its majority of seats. The party won with its questionable 50% of the votes compared with 64% during the last election.

With these kinds of results, there could be panic in the halls of the Kremlin. If the close parliamentary voting represents a shift in the popularity of Mr. Putin, there may be a genuine threat to his chances of regaining the country’s presidency in the 2012 election. This crack in the Kremlin wall has provided the best opportunity yet for a presidential contender of any note. In this case, it would be the fearless Mikhail Prokhorov, a multi-billionaire businessman and established Putin critic. Prokhorov is not without some experience when it comes to international investing. He is majority owner of the New Jersey Nets professional basketball franchise. The franchise will move into a new Prokhorov-financed facility when the team makes its scheduled move to Brooklyn, New York in the near future.

The political tumult is occurring just when Russia thinks it is about to take a seat among the 153 nation members of the World Trade Organization. It is something Russia has been trying to achieve for the past 18 years.  Membership in the WTO is important to Mr. Putin. It’s a voucher for Russia’s estimated growth of over 3% short-term and about 11% long-term according to World Bank estimates.

If Putin wins next year’s election, which he will, his heretofore impregnable hold on the country will require much more careful footing. He hears footsteps behind him now. With re-election he will undoubtedly be constantly looking over his shoulder at his countrymen. It should be anticipated that continued Putin-party leadership will be tempered by cautious consideration of a new populist movement stirring within the land.

An expanded Russian economic base with an open door to the rest of the world by way of WTO membership will go a long way toward the prosperity that will keep the people happy. More importantly for Russia’s once-and-future king, it will keep him happy.

There have been plentiful suggestions so far on how to correct the massive European stability problem, and even quite a few fruitless efforts at doing so. With nothing having worked, the solution mill keeps grinding out hope.

The latest suggestion, of course, is the call for a new treaty to govern the European economy on the whole by looking at the sum of its parts. The large shadows of Germany and France now loom powerfully over the December treaty process. Chancellor Merkel and President Sarkozy, the de facto leaders of the Euro consortium, met privately ahead of time to discuss the best path to follow in trying to figure out what can be done differently this time around. Maybe they should have invited Britain’s David Cameron.

Sarkozy sees the problem as an imbalance, with crisis nations causing a drain on the stronger, self-sustaining member nations. Sarkozy leans toward skipping ahead to a solution that will eventually strengthen the crisis nations to self-sustainability, thus ‘balancing.’  The problem is, though Sarkozy is getting it right, the implementations suggested are inadequate. They are a re-telling of all that has been tried and failed. It’s really more of the same, only re-packaged.

Examples: A European Monetary Fund?  Or, more from Evita, “When the money keeps rolling out, you don’t ask how…”  Once funded, what’s to keep it from drying up, just as all the previous funding has done requiring on-going replenishment?  Next, what ‘automatic penalties,’ as proposed, would work? You can’t levy a fine on the culprits --- they’re already broke! And one of the weakest suggested measures under treaty revision is to have ‘continuous monthly meetings.’ There’s no reason to think they would be any more effective than non-continuous, non-monthly meetings, as occur now and which prove fruitless beyond their can-kicking, band-aid non-outcomes.

Mr. Sarkozy specifically rejects bonds backed by euro zone members. Bonds for bailouts, or ‘bond-outs’ as he sees it, are not the answer. They would only facilitate the imbalances, which are the heart of his main objection. Euro bonds would intensify the imbalances. The haves giving more of what they have to the have-nots --- spending it without generating income from it, let alone paying it back --- accomplishes nothing. It would result in the haves having less, and someday maybe having nothing, thus joining the ranks of the have-nots. It is a destructive cycle. It all sounds like an Abbot and Costello routine.

The purpose of treaty reform is not to be viewed as one sudden transformative leap, in Mr. Sarkozy’s view, rather as measures taken to demonstrate market-calming positive action, which everyone is supposed to accept as meaning that their resolve will accomplish the end-game of eliminating the European crisis. One of the most important goals proposed in the revisions is to re-structure euro zone economic governance. It is an ambitious goal that could potentially work. Dramatic new structure to euro zone economic governance is a good starting point for a Sarkozy-minded long-term solution.

Another key feature of the treaty revisions iscentralized oversight of national budgets. Implementation would go so far as to monitor national budget decisions and override them if the central authority determines rules violations.  Violators would be subject to sanctions. But again, what is going to make a sanction effective? Where are the teeth in this dog’s mouth?

Chancellor Merkel’s insistence on budget discipline as one of the most important measures for mid-and long-term stability is right on the mark. However, it was the culprits’ lack of discipline that helped cause the problem in the first place. Leopards can’t change their spots. And if discipline through central authority enforcement is the answer, she hasn’t come up with any way to make it work.

Meanwhile, President Sarkozy conceded that, “things cannot continue as they are.” While he opposes the kind of strong centralized authority containing budget oversight powers, he went along with it in the 23-member consensus group at the initial treaty approval session December 9th.

Italy and Spain

Immediate focuses of the Sarkozy/Merkel-led treaty consortium are Italy and Spain. Italy’s recently proposed austerity package is the same circular solution formula already attempted (and failed) by others, those in critical condition and who are currently on life-support: Greece, Ireland, and Portugal. Italy’s “promise her anything” package of $32 trillion would rely, to one degree or another, on all the usual suspects --- the International Monetary Fund, European Central Bank, and European Financial Stability Facility --- to accompany the promise of fiscal discipline. It is almost as unlikely to work coming out of Italy’s mouth as it likewise did not with the others. On the other hand, there is reason to have a bit more optimism when it comes to Italian prospects. Italy is considered solvent despite debt of $2.6 trillion.

There is a degree of desperation coming from President Sarkozy and other European leaders to convince markets that Italy and Spain have no chance of going under. Sarkozy and others are trying to come up with a workable idea for some new, soft form of bailouts despite the mound of outside pessimism.

Treaty leadership

Recent history has shown the Merkel-Sarkozy relationship occasionally at odds. It is clear however that they must continue to work together in leading the treaty process. The fact that they have gotten together ahead of time to blueprint treaty proposals speaks for itself. It is recognition of the now-or-neverimportance of revising European inter-and intra-economic governance. Mrs. Merkel lobbies for the broadest version of economic governance and authority.

While Mr. Sarkozy sees that, “Europe must be refounded and rethought,” he rejects a stronger, more federal version of Economic Europe. It is, to him, a threat to national sovereignty over the long haul. Something perhaps gained now but to be paid for later --- the Grecian formula. The problem is there may not be a long haul if the short haul doesn’t work. And so far it hasn’t. The implications of a successful treaty outcome may be a New Europe--- or no Europe.

And a final thought, would any Europe be a Europe at all if Britain was not a part of it? Could Britain’s lack of treaty accession amount to its European secession?

The article was written by John H. Cochrane, professor of finance at the University of Chicago and a Cato Institute scholar. I read on, curious to see if this opinion piece was more of the same or something maybe with a new twist. The general topic, after all, is somewhat akin to mud-wrestling by now.

Sometimes there is a disconnect between the abstractions of uncertainty and real-world economics. Idealized solutions and realized results can be miles apart. Mr. Cochrane’s analysis bridges the two quite nicely. Pondering his mapping of how to handle the Euro-mess, I conjured in my mind the illusion of a ‘bridge to nowhere.’ There have been a few literal such bridges; flawed architectural design missing the connecting point at the other end.

The various bailout proposals on the table are clear enough: keep pumping funds into bottomless holes with finger-crossed-hopes that things will get straightened out one way or another, sooner or later. Mr. Cochrane’s assertions are a nicely packaged presentation that they won’t. EU bailout proposals are poor architecture --- bridges to nowhere.

Putting it in the form of a parable, it would go something like this:  The man on the bridge is carrying two large bundles of cash on his shoulders. They are to be handed over to some bad guys on the other side who are demanding a ransom. One of the bundles contains his own money. The other belongs to some friendly bankers he knows. Theirs is really money he loaned them some time ago. Friends or not, the loans had to be backed by more than just a handshake and a smile. Problem was, if the bad guys didn’t deliver from their end --- if they defaulted on that --- all of the ransom would be lost. His and theirs. And theirs was really his; and ALL of it was really somebody else’s!

This was quite a load to bear, even for a strong man.

To alleviate the problem, the strong man called back over his shoulder for some help. While he was standing in the middle of the bridge waiting, the bad guys made things worse --- they increased their demands. They wanted more! The man made a desperate plea to some of his richest friends standing at the foot of the bridge, but they just frowned and shook their heads. They had already contributed to both bundles of the money. They were not about to give more.

The man grew weary. To make matters worse, the bridge wasn’t all that stable and the waters beneath and around were suddenly rising dangerously high.  “Oh, what to do!” he thought in desperation. “What if I should drop all that I’m carrying?” He decided he should call back over his shoulder once again and ask several of his friends if they would help. But when he called out to them, they too only frowned, almost in anger, and walked away. “How silly of me,” he thought. “Why should they give hard-earned money to the bad guys with all those exorbitant, ridiculous demands?”  After all, who were they holding hostage but us? There are way more of us, and we are bigger and stronger --- and richer. They, on the other hand, are mere pygmies.

The man looked behind and thought about turning back. He looked down and saw the rising water all around. The bridge began to creak and sway. He didn’t know what to do. He began to realize it would have been far better if he had never set foot on the bridge in the first place.

Thank you, Professor.

A year or so ago, I was meandering through New York’s Museum of Natural History when they were having a pay-as-you-go Gold Exhibit. I plunked down the twenty bucks and stepped inside. I had no particular interest in the exhibit, it was just there, and I was killing time. Admittedly, however, I have been intrigued by those mystical qualities of gold that have fascinated the world since the beginning of history.

After touring the exhibit hall for a couple hours, I had acquired a pretty fair layman’s education on what gold is really all about. Most impressive of all is the tenacity required for mining the stuff. In most cases, this means looking for microscopic specks in vast quantities of dirt and rock. The lodes of old, as in the legendary California Gold Rush of the mid-1800s, have been ravaged to anorexic levels. Unlike commodities that can be produced or extracted from relatively bountiful, but hidden, sources, there is a limited quantity of gold tucked away in Mother Nature’s earthly arms.

By the time I left the exhibit, my eyes had been opened to the seemingly obvious fact that the coveted mineral really is rare, far rarer than I ever thought. Its scarcity increases by the day, as it is mined with a fervor driven by an insatiable worldwide appetite. It is highly unlikely that any sizeable new gold deposits are going to be found anywhere anymore, unlike oil, as per what is currently going on in the Atlantic North Sea region; or the vast offshore finds of Brazil a couple of years back.

What really got my attention in the museum exhibit was a very detailed, model-sized replication of the actual mining process. Getting gold out of the ground and bringing it to market is a challenge that requires painstaking effort. But mining companies are driven by the limitless buyers waiting at the other end.

In all things, market prices fluctuate according to changing dynamics. The prevailing market dynamic of gold is that it remains timeless. That means its value remains intrinsic and immutable. From ancient Biblical times, no other commodity has been so coveted. It is the hallmark of luxury, the measure of money, and a seducer to the human eye.

I read a Wall Street Journal article recently that discussed ownership in shares of gold companies versus gold itself. Mining stocks and ETFs can be profitable because of that which figuratively lies beneath them (check out our International Growthand International Selectportfolios which have exposure to precious metals securities). Companies may come and go, but gold has been forever.

When it comes to Europe, sovereign debt default is never far from anyone’s lips, with perennial bad-boy Greece the first place to look. A bond panacea among cash-crunched nations is not anything new.  We have only to peer back those 150 years to the American Civil War to see that bonds were a first-look solution in a divided nation cash-strapped on both sides.

The great academic question over the costly conflict of 1861-1865 remains: what caused the war, slavery or states’ rights?  There is, however, another major point of discussion – the Civil War’s huge cost and its enormous economic implications back then as well as now.

Following the National Bank Act of 1863, which established a national currency under the Hamiltonian concept and provided for a federal banking system, President Abraham Lincoln optimistically announced his financial emancipation proclamation, stating that “Finance will rule the world for the next fifty years.” He didn’t know how right he was. Fifty years out must have seemed a long, safe stretch of time to him. The great man was a fiscal visionary, though he was at least a hundred years short on his prediction.

Finance may rule the world, but that can have a downside as well as the Lincolnian upside. There are lessons to be learned from history, to be sure. History was kind to the Northern economy during the war. As the South fell apart, the Union only got stronger throughout 1861 to 1865. Except for an early run of incompetent military generals leading the armies, everything went the Union’s way. The stars in their courses set a timely gathering of economic, human, and historical factors for the North that resulted in prosperity unseen anywhere else in the world.  But both sides quickly learned that their budgets at the outset of 1861 were woefully insufficient to support the massive war machinery required in the days ahead.

While the cost of lives at the price of blood was immeasurable, the monetary cost of the war, though painful in its own way, revealed a bounty of human and natural resources in the surviving Northern states, and territories beyond. On the human side, two men in particular became lynchpins to the growing Northern economy: one was Montgomery C. Meigs, a West Point graduate; the other, Philadelphia banker, Jay Cooke.

Meigs was newly-appointed to manage the Northern war effort. His job was more than formidable. It required great skill and efficiency in procurement of contracts with manufacturers, shippers, and suppliers. He had to deal effectively with countless companies, individuals, and institutions as well as manage the financial system that was the underpinning of everything. Meigs’ department accounted for over 90% of all government expenditure by the time the war was over. This amounted to more than $1 billion. At war’s end, the national debt had reached $2.5 billion from $65 million in 1860. The cost of the war for the North was $3.4 billion, just slightly more than that of the South. Despite the exorbitant cost, prosperity was rippling through every phase of the Union economy, then comprised of the twenty remaining United States.

With the national debt skyrocketing, coming up with cash became a daunting challenge. Bonds were the immediate answer. Jay Cooke was the man chosen by Lincoln for the job. The new head of the Treasury Department would have his own formidable challenge: sell $500 million in bonds to the public at 6% interest. The bonds were known as ‘Five Twenties,’ redeemable in five years with a maturity date of twenty years.

Cooke’s bond sale was a huge success. At the peak of the sale, the public was buying more than $1 million worth of bonds a day. About 25% of Union families bought bonds. All told, bond sales funded 65% of the North’s war chest. The timeliness of Union victories at Gettysburg and Vicksburg on consecutive days (July 3, and July 4, 1863) boosted public confidence so much that there was a sudden run on the bonds and the sale had to be closed quickly.

The economy soared. Still, the cost of the war was so high that the success of the bond sale alone was not enough; thus, the printing of paper currency, “greenbacks.”  Initially $150 million of the new paper money was printed. The government made a move to underwrite confidence in the greenbacks by allowing their conversion to the Five-Twenty bonds.  

The North had become an industrial and financial juggernaut. The influx of bond money, printing greenbacks, and sweeping tax changes provided a virtually unrestricted source of revenue. In hindsight, a permanent platform was laid for America’s means of handling its fiscal and monetary systems into the twenty-first century.

Hard times in the South

The lost cause of the South was quite a different story. There were no superlatively brilliant financial figures emerging to take what little resources the South had and parlay them into something even remotely approaching economic viability. The only thing the South really had going for it was its chief product, cotton. Prior to the start of the war, Southern cotton provided 75% of the world’s supply and accounted for 60% of U.S. GDP. But political miscalculations derived from thinking that cotton would save the day for the South were economic mistakes.

Attempting to leverage their cotton power, the Confederacy looked to Great Britain and France for financial and military help. It didn’t work. The Union blockaded Southern ports, thereby prohibiting international cotton commerce for the Confederacy. Blocking the South’s cotton exports did not matter, regardless. Britain addressed the temporary shortfall simply by turning to India and Egypt to fill the hole. The real commodity problem for England and France was, instead, a grain shortage caused by widespread European crop failures. The North, meanwhile, had an abundance of grain. Northern grain shipments to Europe doubled, thereby reducing even further the chance of an anti-Union alliance between the Confederacy and European powers. The grain exports, along with the North’s own consumption to feed its armies as well as the civilian population, infused vast capital into the economy. It also created a lot of jobs.

The Confederate States of America turned to the idea of bond sales just as the North was doing. But Confederate bonds were an unstable proposition from the beginning. Sales fell flat because of a shortage of cash all throughout the Southern states. Inflation set in and bond yields were obliterated. The inflation rate for the South rose 9000% by war’s end. That was 112 times greater than the Northern inflation rate of 80%. Confederate bonds more closely resembled Greek bonds of 2010 and 2011.

Before giving up on bonds altogether, the Richmond government tried an international bond market of sorts. A large Paris bank floated a $15 million bond, a so-called cotton bond, using Confederate cotton as its backing. It was designed to provide the CSA with European credit, but only $8.5 million was raised on account of the North’s stubborn blockade.

Eventually the Southern economy reached crisis stage. Bonds didn’t save the day, nor did graybacks --- the South’s version of greenbacks --- nor did any form of taxation. Everything the North did right, the South did wrong. The Southern government went on to accumulate $500 million in certificates of indebtedness through its futile Impressments Act of 1863, whereby private property was seized for the war effort.

When the South finally succumbed to military and financial failure, their society crumbled --- truly, gone with the wind.  Strangely, the largest industry in the South had become healthcare (sounds familiar!). Practically every building had become a hospital. Health issues went beyond caring for wounded soldiers. Near-starvation and sanitation problems also affected the remaining general population of approximately five million non-slaves.

Looking Back, Looking Ahead

Reflecting on the course of America’s history, what the country is today can in large measure be traced back to the Civil War. Through that supremely painful ordeal, the war made the nation confront its own conscience on the value of humanity. The cost was high. But the result was an inescapable consequence that made the divided nation singular once again and powerful for decades to come.

This month, September, Americans endured two particularly somber annual observances in the country’s history:  the highest single-day losses of life on the country’s own soil. Casualties from the terrorist attacks of September 11, 2001 looked first as though they might surpass those of September 17, 1862, the date of the Battle of Antietam. Casualties on 9/11 turned out to be 3,000. Antietam suffered 22,720 casualties. America survived a war in its own land a century-and-a-half ago. The country emerged a stronger nation for it. Let’s hope that the same can be said of the war that began a decade ago.

With the European economy faltering these days, any positive signs are a welcome hope for the region. Alas, Scotland’s legendary golden nectar is faring well in its pocketed little sector when it comes to export growth. The Scotch whiskey industry has shown some remarkable growth in the first half of 2011. The Scotch Whiskey Association (SWA) reported an increase of 22% in total shipments, noting that the strongest demand increases came from emerging markets. Exports to South and Central America rose by 49%, Asia by 33%.

Sales on the European continent, meanwhile, remained relatively flat due to prevailing market saturation levels being hampered by the depressed regional economy. Greece, for example, increased duties three times during the year on Scotch whiskey imports. While this signaled the popularity of the product, it was just one more example of that country’s desperate attempt to solve its national debt crisis by whatever means possible. If it’s not bond inflation, then it’s booze inflation. As a result, the panic move defied product popularity and caused sharp sales declines.

Gavin Hewitt, chief executive of the Scotch Whiskey Association, observing Europe’s relative stagnation in his beloved product, may have been giving a pass to those regional blood kin when he declared that, “Scotch Whisky is a world class industry that consistently delivers for the UK.” It’s a good thing that something delivers for the U.K. Toasting a celebratory dram of the potent Scottish fluid among those in the EU who are still standingseems appropriate. France, despite weak economies in most of the rest of Europe, is one who is still standing. France continued as Scotland’s second largest customer, showing 13% growth in 2010 to $347.88 million.

The dramatic increase in exports during the first six months of 2011 --- occurring in eight of Scotland’s top ten markets --- is the culmination, so far, of what has been going on for more than a decade. Exports increased by 60% since 2000, with six consecutive years of growth through 2010. 2010 exports reached a single-year high of $5.45 billion, a 10% jump from the previous year. The United States remains the single largest imbiber of Scotland’s signature drink. U.S. first-half 2011 sales increased by 14% to $423.58 million following 2010 growth of 19%.

The 22% global sales increase to $1.8 billion from January through June of 2011 puts exports on a full-year pace to surpass last year’s record. Scotland’s Rural Affairs Secretary, Richard Lochhead termed these export numbers as “absolutely phenomenal.” Things aren’t so bad in all of Europe, after all!

Getting back to those impressively guzzling emerging markets, some of the biggest growth leaders include: Brazil, up 56% in the first half of 2011; Taiwan, up 45%; and Singapore, up 64%.

It should be noted that emerging market behemoth China is mired at only 14thplace worldwide in Scotch whiskey sales (according to volume). This is especially paradoxical considering the rise of the luxury goods market in China, in particular wine and high-end spirits. The explanation is that much of China’s sales beyond the recorded $49 million are built into Singapore’s 64% increase of an estimated $235-250 million.

Beyond the flourishing Latin American and Asian emerging market blocks, Russia is expanding from its strict vodka allegiance to participate in the Scotch revolution. Russian sales grew by 61% to $49 million year-over-year for 2010. Another perhaps unlikely devotee to the Scotch scene is South Africa, whose same-period sales grew by 24% to $104.36 million. First-half 2011 sales have risen by 56% to $267.11 in the year-over-year period. Word has it that something is brewing in the potentially massive India market as well.

One thing is certain: those burly, bearded men in the kilts aren’t alone when they lay down their bagpipes and pick up a glass of their country’s iconic quaff --- just about everyone is drinking with them!

Getting back to the BRIC hit, according to the IMF, America is the one feeling the pain. The IMF determined that the United States will abdicate its global economic supremacy as China takes over in 2016. The proclamation, issued in April of this year, may come as a surprise to many. General consensus among experts is that, indeed, the U.S. economy will slip below China’s at some point; most likely somewhere from 2020-2030, or later.

The IMF forecast of 2016 could be seen as a bit of a shock. America’s fall from the top spot, where it has reigned for over a century, is in part its own fault according to some. With struggles in the U.S. business environment lingering from the 2008-2009 recession, ongoing unemployment problems, a weak dollar, and other issues, America seems to be, at best, treading water. We may even be sinking beneath the surface as the recent credit downgrade has made the unthinkable become a reality.

China, meanwhile, is the runaway leader among those vaunted emerging markets. It is the runaway leader among all countries of any classification for that matter. The other BRICs, along with much of Latin America, are moving forward as well, although they seem to put more effort into lesser gains. China’s growth has been near effortless.

There’s nothing heartening in the observation that the U.S. is not alone in its frantic efforts to keep from dropping below the surface,as things aren’t going too well across the Atlantic either. Between faltering European economies and a struggling America, the primary developed nations of the world are diminishing in value and status. And so, China climbs!

Taking Measure

The basis of the IMF’s ‘declaration of abdication’ for the U.S. is founded on GDP measurement in terms of purchasing power parity (PPP) rather than the more widely held exchange rate yardstick. PPP is more accurate in this case, so the IMF says, and that is why the 2016 prognostication comes as something of a shock. The explanation is that currency markets fluctuate according to international money flows, not actual output. A usually acceptable metric, exchange rates are not wholly representative when it comes to China. That’s because China is the master of monetary manipulation insofar as undervaluing its own currency. This throws comparative GDP metrics off.

The CIA World Factbook notes: “because China's exchange rate is determined by fiat, rather than by market forces, the official exchange rate measure of GDP is not an accurate measure of China's output; GDP at the official exchange rate substantially understates the actual level of China's output vis-a-vis the rest of the world; in China's situation, GDP at purchasing power parity provides the best measure for comparing output across countries.”

In 2010, China’s GDP according to the official exchange rate was only $5.8 trillion (surpassing Japan’s $5.5 trillion for second place) compared to the U.S. leading at $14.6 trillion. It was big news witnessing China surpassing Japan at those numbers, but the comparison lacked when considering the validity of the PPP thesis. China survived the global downturn with growth of 9.0% in 2008 and 9.1% in 2009, rising to 10.3% in 2010. The culmination of China’s predicted economic supremacy in 2016 will mean that the U.S. percentage of world output will reduce to a low-point of 17.7%, with China at 18%.

After having kept close to the U.S. dollar for years, China revalued its currency by 2.1% in 2005, moving to an exchange rate system using a basket of currencies. The result was cumulative currency appreciation of over 20% against the dollar between 2005 and 2008. The United States and Europe have heavily criticized China for keeping its currency low. China’s response has been a disinterested yawn followed by some sharp criticism; and then came echoes from Russia and others slamming the U.S. dollar.

A recent MarketWatch article discussed implications of the IMF report, including some investment implications, mostly based on theory. The conclusion one might well draw from this, in terms of what to look for investment-wise can be summed up as: Damned if we do, damned if we don’t!

It’s actually a good situation, not necessarily a damnable one. Bearing in mind what the article terms keeping an eye on “paradigm shifts,” investment opportunities will open in some areas and close in others. The “do’s” and “don’ts” comprise the job of the investor. Shrewd judgment and careful maneuvering will capitalize on ever-present opportunity.

Differing Views

In a bit of self contradiction, the IMF did not particularly agree with the PPP thesis-of-measurement that its own forecasting laid out. The IMF responded to MarketWatch, saying that they, the IMF, regard the more commonly applied currency exchange rates method for looking at China. With that view in mind, they say the U.S. economy is currently 130% larger than China’s and will be 70% larger by 2016. The special notation by the CIA World Factbook, however, strongly endorses the exclusionary element in China’s picture. The view here is that PPP is the more accurate measure. The IMF seems confused by its own findings.

While paradigm shifts may influence particular investment landscapes in the days ahead, the biggest paradigm shift is the entire global landscape itself. As economies emerge and submerge, so, too, do investment opportunities. As some people like to say:  “There’s always a bull market somewhere!”

As far as anyone outside the area is concerned, the only issue is oil. A close look shows that many of these states aren’t much in the way of oil producers. Others, of course, are. This is a tight region culturally, so the economics of oil and the closeness of culture are keeping all eyes on the area. It is viewed communally by the outside world and that makes it politically and economically significant.

A vital thread running through all this is that oil production and export occupy a disproportionately large side of the ledger among some of these countries. It’s what keeps them going. The rest of them remain just plain poor. Lopsided oil economies are one more hallmark of Arab states. Collectively there is little else coming out of the Middle East. An economy run on only one thing can be dangerous to itself, and of concern to others.

Enter, Russia

While not sharing much else with the sandy energy bastions to the south, Russia does share with them, in part, its ownlopsided economic profile. It’s an energy-based profile, one that silhouettes the Russian economy as remarkably similar to the Arab oil spots.  In 2009, President Dmitri Medvedev referred to Russia’s successful, but energy-tilted economy, as “primitive” as it relies almost exclusively on its raw material exports --- especially oil and gas (read more). While the energy reliant parallel between these heavy oil producing regions exists, it is populist rejection of governments that has created the Arab Spring and differentiates the sand-lot nations from (believe it or not) stable Russia.

The Russian government is quite stable, though controversial. President Medvedev and Prime Minister Putin get along famously. More importantly to both of them, the people are happy. Despite an 8% drop in growth in 2009 due to the global recession, things are up and running once again. Russian polling shows that over half the country regard themselves as middle-class. With average annual growth of 7% after the 1998 collapse of the ruble, disposable income more than doubled until the recession in 2008-2009.The people attribute the rise to Vladimir Putin and his economic policies.

What makes it springtime for President Dmitri Medvedev is the scale of his country’s one-dimensional economy and what could happen if that one dimension fails. The oil dominance of Russia’s economy is strikingly similar to the likes of Kuwait, Saudi Arabia, Libya, and Yemen.  Oil accounts for 50% of Kuwait’s GDP, 45% for Saudi Arabia, 25% for Libya, and 25% for Yemen. It represents 25% of Russia’s GDP.  

Oil is responsible for almost all of the export revenues of Libya, Kuwait, and Saudi Arabia at 95%, 95%, and 90%, respectively. They rank 15th, 5th, and 1st among all exporters. Russia is the world’s second-leading oil exporter. But it is the mismanagement of those substantial oil incomes by totalitarian regimes that is the cause of the springtime disturbances. Oil represents 95% of Kuwait’s government income, 80% for both Libya and Saudi Arabia, and 70% for far smaller Yemen. All that money goes for propping up dictatorships and caliphates while the people struggle.

Filling in the picture, Russia, the world’s tenth largest economy, relies on oil revenues for about 50% of the federal budget. Unlike the Arab oil states, however, more than two-thirds of the Russian budget goes back to the people in the form of pensions and other social spending. And though the Russian revenue distribution path is indisputably better, it is still lacking.

Dmitri’s Plan

Russia has capitalized on the strength of its resources following the disastrous post-Soviet decade of the twentieth-century, and our Navellier Emerging Market Portfolio has capitalized on the strength of Russian oil and metals. But clearly Russia needs to expand its economic horizons. Although Mr. Medvedev may be positioning himself for the 2012 presidential election, his proposals for a broader Russian economy ring true. The Putin plan worked. But Dmitri Medvedev has set his own course, which aims to draw foreign investment and involve Russia to a greater degree in a global trade environment. Technology and banking are major growth areas President Medvedev has set his sights on. The concept of the limited, so-called Putin, Inc. model, has run its course in Mr. Medvedev’s view.

There is skepticism among economists and analysts worldwide over Russia’s presumptive adaptability to grow as it is capable of growing. It is likely, however, that if the country capitalizes on its economic potential, growth will follow with the same kind of success of the past decade. Russia is far from a third-world nation in its potential. The Arab Spring concept may have similarities in statistical numbers as relating to oil output, but it is that springtime of the eternal Middle Eastern mind that really doesn’t fit the Bear of the North, beyond a view of current petroleum lopsidedness.

 But it’s more than just oil. Little mention has been given to natural gas, a primary source of electricity worldwide along with coal and nuclear power. Much of Europe’s natural gas comes from the troubled Arab states. Most of it, however, comes from Russia, the world’s leading gas exporter.

While Arab natural gas supplies have fallen into uncertainty, Russia is ready to move in with opportunity. This is especially beneficial to Russia’s corporate giant, Gazprom OAO (OGZPY), the world’s biggest natural gas producer and a current top 10 holding in the Navellier Emerging Markets Portfolio. Gazprom has produced up to 20% of the world’s total natural gas output over the past few years and owns approximately 60% of the world’s known gas reserves.

Japan’s catastrophe has also contributed to this current critical gas demand. The disasters in Japan have damaged the country’s ability to generate sufficient electricity in the face of its half-dozen nuclear power plant shutdowns. The fallout from Japan’s nuclear shutdowns has produced endemic fears elsewhere in the world, even in nuke-friendly France, which relies on nuclear power for 78% of its electricity. Germany, too, has gone sour on nuclear in the midst of its intense political rhetoric over upcoming elections. Germany already relies heavily on natural gas, with 39% of its supply coming from Russia.

Gazprom to Open the Valve

Pointing directly to the Mid East situation and Japan’s national energy emergency, Gazprom officials recently announced that the company would throw open the valves in an all-out effort to meet the sudden demand crisis. In addition, the Russian domestic market remains at peak levels along with near-exclusive reliance by former Soviet states. Gazprom has the resources to answer demand; it’s just a matter of being able to tap reserves, and to do what has to be done to get them to market fast enough.

Russia, leading the world in natural gas exports and reserves, and a close second to the United States in production, sends more than 94% of its gas exports to Europe. Gazprom provides Europe with 25% of its natural gas. With an Arab shutdown, Europe’s Russian/Gazprom dependence will increase. The percentage of Russia’s natural gas used by the most dependent European countries over the past five years according to the 2006 Energy Information Administration’s Southeastern Europe Country Analysis Brief,World Oil & Gas Review are:

Greece                 82%

Austria                  69%

Turkey                  65%

Poland                  43%

Germany              39%

Italy                     31%

In answer to the overwhelming demand, Gazprom is raising its output at breakneck speed. It has revised this year’s production upward to 519 billion cubic meters. The company will reach 550 billion cubic meters by 2013, which would equal its 2006 peak production. Output of 570 billion cubic meters should be attained by 2014.

The combination of a changing Mid East environment, Japanese disasters, increased demand in Russia and the neighboring former Soviet states, and positive pricing have combined to make Gazprom’s investment environment even more promising.  And the company plans on doing a little investing of its own, in itself, with capital investment this year revised to $42.1 billion, a 50% increase over last year. Further upwardly-revised capital investment is planned beyond 2011 due to the continued rising demand.

The company further expects success as its Sakhalin-1, 2, and 3 projects emerge. Sakhalin-1 is currently producing oil with vast amounts of natural gas available, but not available before its second phase implementation sometime after 2016. Sakhalin-1 involves foreign partners, something that Russian officials are shying away from for the Far East Sakhalin-3 project.

Gazprom Health

In addition to current demand pressures created by the Mid East and Japan, natural gas prices have risen as inventory began to dry up following a glut immediately after the recession in 2008 and 2009. Gazprom’s sales have also risen. Net profit increased by 55.2% in the first quarter of 2011 over the same quarter 2010. Overall revenue grew by 27% for the same period of comparison, with gas proceeds alone growing about 42% on a 10% increase in sales volume and favorable pricing.

Since the latest reported quarter ended March 31, the Japanese and Arab events would not have been contributing factors to reported growth. Moscow-based investment bank VTB Capital estimates the effects from these events will drive Gazprom sales up by an additional 3% to 5% in 2011. The company expects gas sales to Japan to remain high throughout 2011 and continue at least through 2012 as the country moves through recovery. Japan lost about 15% of its electrical power in the March disasters. Meanwhile, Arab gas supplies to Europe remain as unpredictable as the unpredictability of the region’s political landscape.

Russia’s Climate Change

With the political and economic climate change of the Mid East region, Russia itself may be looking at a climate change of sorts. Russia’s, however, will not be in the same vein as the deleterious kind going on far to the south. The Russian version looks to be for the good. It, too, will be politically based --- but favorably so.  As the country prepares for the 2012 presidential election, incumbent President Dmitri Medvedev is calling for economic reforms. His view that oil, gas, and other resources must be seriously augmented by additional industries is the vision for a substantively new Russian economic model. The new model would call for stronger emphasis on such areas as pharmaceuticals, aerospace, and telecommunications.  Gas and oil, however, will remain the key to the country’s economic growth.

Gazprom’s posture within Russia is uniquely strong. With the government owning 51% of the company’s shares, there is little risk of the kind of adverse activity once demonstrated by privately-owned Yukos. Such inherent risk is part of the Russian business scene, but it is changing. Part of Mr. Medvedev’s platform is to make investing in Russian companies more attractive by increasing privatization and reducing risk of government interference. Gazprom is enjoying it both ways: highly privatized and also protected through its state-owned majority share position. Even citizen Putin privately holds a substantial amount of Gazprom stock!

Both President Medvedev and Prime Minister Putin appear to have reached the realization that their desire to attract foreign investment has to come with the perception --- and the reality --- by the outside world that the climate to do business with and in Russia is balmy, not ballistic.

Not to worry, though. Corrections have been made for safety’s sake ---except for maybe watermelon crops! In this case, it’s not a food contamination issue. It’s more of a shrapnel issue. Who wants to get plastered with flying chunks of watermelon hide, like what just happened in an area of eastern China? The 115 acres of exploding watermelons, confined to only about 20 farmers in a limited region, occurred because of a confluence of contributing factors, not the least of which was getting them all hopped up on drugs.

Levity aside, there’s some concern over the exploding watermelons, the broader issue being what can happen in chemical applications to nature’s basket. There is no question about an ever-increasing global food shortage. Food supplies are interconnected, and they are shrinking. Agricultural products are essential in impoverished nations as well as developed nations. This includes fruits, vegetables, and grains; especially rice, corn, and soy. Animals depend on cruder forms of grain, and we humans eat the animals that eat the grain. It’s a demanding cycle of survival. Cars even eat corn, in the form of ethanol.

The Fix

With modern technology to the rescue through agricultural science, a conundrum occurs: dramatic crop increases in the face of health risks. Responsible research and development are among the highest priorities of the world’s best seed and fertilizer companies, with legitimate government oversight an important part of the picture.

An increase in land devoted to genetic engineering rose 10% worldwide last year over the previous year. In the past 15 years, genetically engineered crops went from basically nothing to covering about 10% of the world’s farmlands. North America and South America, along with parts of Asia, especially China, have undertaken aggressive measures in soil and seed improvement and output. In deference to caution, Europe has conspicuously remained outside the global loop of science-for-food.

The fuse that lit the Chinese watermelon bomb was the chemical forchlorfenuron. It is classified by the U.S. Environmental Protection Agency as “not likely to be a human carcinogen” or cancer risk. Maybe “not likely” doesn’t sound all that reassuring when coming from the lips of a government agency whose job is public protection. On the other hand, Europe’s caution could well be classified as over-caution at the risk of starvation at some point.

The motive of pure profit through chemical enhancement in the production of food, without sufficient precautionary research and safeguards, contradicts the legitimate behavior of responsible companies. Fortunately, there are more responsible companies than not. It’s an ethic China is slowly learning in its bursting-at-the-seams growth story.

Keeping the world’s stomachs from growling is going to require a full-out balanced effort shared by science, government, and, most of all, corporations. Exploding watermelons, in any case, aren’t cause for alarm --- other than, don’t stand too close to one!

No backing off for brash, bold President Nikolas Sarkozy in the face of nuclear no, no! No, no indeed.  From his point of view, let others shudder and shake at fears emanating from natural disaster earthquakes and tidal waves, and the disruptive catastrophes sure to follow when man-made structures of the strongest kind get caught in the wake. Never mind that Vegas-style long-shot probabilities can rule rational thinking. Danger is where you find it. 

While Germany caves in to public sentiment over energy preferences, the world’s largest producer of nuclear power, France, is not about to follow the global crowd. To the contrary, Germany’s newfound political nuclear abstinence means they need to replace power sourcing with something else, somewhere else. And where ‘else’ than nearby EU good-neighbor, France? France is cranking out 74% of its own electrical energy from 58 nuclear reactors, with plans to build more (read more). Furthermore, it is the world’s number one exporter of electrical energy via nuclear generation.

Mr. Sarkozy dismissively tempered the global stoning of nuclear power post-Fukushima with a simple French idiom: “Le Balderdash!” Translated: (the moratorium on nuclear energy by most countries) “makes no sense,” he said.  Backing it up, Sarkozy pledged one billion euros for further investment by France in continuing nuclear energy development and implementation. He also pledged “substantial resources” toward strengthening research in nuclear safety. Very diplomatic. And, to further employ diplomacy in the face of the global nucleophobia, Sarkozy promised 1.3 billion euros toward research in renewables.  In other words, toss a few baguettes to everyone to keep them happy. Now that’s presidential!

Germany’s Chancellor Merkel, meanwhile? Oh, yes. She is teetering on the brink of political collapse –  hence her pronounced abandonment of anything nuclear. By 2017, Germany will divest itself of any and all remaining nuclear plants. There are currently 17. And to think it was only a few months ago that Chancellor Merkel put the nuclear question on-hold “for further study.” Ah, yes, elections. Her party and its affiliates haven’t fared all that well recently, and the predominant Deutsch-Force these days is very antiseptic ---- very green.

With Green Party victories in recent German elections (read more), Chancellor Merkel has done a not-so-proud about-face when it comes to nuclear energy as a primary source of her country’s power….which provides somewhere between 23%-39% of it! It has to be replaced with something. That’s good news for nuclear sellers. Do we hear, France, anyone? And it’s not such a bad deal for Russia, either. Germany doesn’t have to go strictly with nuclear energy. Natural gas is safe and clean, plentiful, and nearby. Already Russia is enjoying huge increases in its natural gas export market. So much so that chief producer Gazprom (OGZPY), a current top 10 holding in the Navellier Emerging Markets Portfolio, is straining to meet increased demand. Pricing has risen as a result, along with increased profits and revenue.

What all this means, of course, is rising prices in energy supply, whether it comes from demand in France’s nuclear power, Russia’s abundant natural gas supplies, or someone’s coal. Not so good for the German economy, true, and possibly not so for most of Europe as well. But very good for French and Russian markets, among others.

As for the stout German economy, time will tell. While Chancellor Merkel outlines a rather formulaic renewable energy prospectus for the future, the immediate cost to provide energy in Germany is a rising tide. Rising tides mean rising business and consumer costs and increased government support (i.e., spending) of costly renewable projects a long way from sustainability. This will present a formidable challenge to that great German economy of the present.

2011 looks to be a very good year --- for some. Vive le France!

Not so fast. Apparently Germany is in a reverse mode when it comes to the community assimilation. The rest of Europe appears to be pushing their German neighbor out to sea to become an island, apart from the rest of Europe, particularly the European Union. More particularly, the 17-member euro zone. A cruel and unusual punishment for Europe’s largest economy, and fifth largest in the world.

So, why? Germany is the pendulum of the EU, and the euro zone in particular. Whichever way it swings, so swings the corpus completum. Maybe that’s precisely the problem. Dominance engenders jealousy. The trilogy of parts to the conundrum of Germany is: (1) the cadre of Euro-brats, that handful of countries flailing in a cauldron of default; (2) the mid-level nations with relatively stable economies, but that have a cautious, fearful eye on the first group; and lastly, (3) Germany itself. The EU is looking at Germany to carry the load. If it doesn’t, it’s sent to the corner, alone and disrespected. Yes, alone, with the possible exception of a strange bedfellow in EU ally, France.

For France’s part, an ally of interests lies in the fact that it ranked just behind Germany as the two top economies in Europe. So, some of the mud slung at Germany is spattering to the side at France. France, however, is Europe’s historically pretty face, so she can never do too much wrong. The kind of wrong we’re talking about is decrying bailouts for potential defaulters. Since the EU’s system of default prevention loans falls heaviest on those members with the most cash to contribute, Germany and France must bear the brunt of the bailout burden.

Germany was most vocal in the Greek sovereign debt crisis of 2010 (and beyond) that started it all. Germany’s position held fast against shoving vaults full of euros at fiscal failure. It was as much a populous position as it was an official position. At the time, Chancellor Angela Merkel bluntly discounted anything other than Greece’s vast trough of indiscretions as the ultimate cause of its financial crisis. Not a popular position in Greece. It was also not a popular position among other European Union members.

France’s President Nicholas Sarkozy was on board with Chancellor Merkel.  Sorting it out, everyone was in it according to their own interests. Germany and France were looking to conserve cash against what they viewed as inequitable dispersions to freeloaders whose time had come to meet accounting’s grim reaper. Between the bottom-feeders and the top-seeders was the middle tier of nations that feared default decay spreading into the EU currency stream. In the end, no one really cared where the money came from --- just so it came from somewhere! No one cared, that is, except the ones who were going to have to pay the most: Germany in particular, and France.

Thus became the issue of equanimity, and the first real constitutional crisis of the European Union.  In the beginning, the idea was a good one: formation of the EU sought to unify a group of nations bound geographically, socially, culturally, and economically in a confederacy of efficiency. It made sense. No one (probably) thought it would come to the strains of sovereign breakdown as currently seen. The massive global collapses of 2008 sucked out any room for error. Falling back on the EU’s protective      multi-organ structure, the European Central Bank (ECB) looked to provisional and provincial resourcing to aid Greece. But the vast sea of financial difference between plentiful Germany and depleted Greece laid a foundation for the island-isolation construct placed on Germany.

According to an April 11, 2011 Financial Times article, the running question asked jokingly, but pointedly, among officials of the European Commission (the EU’s executive arm) whenever a new issue comes up is, “What’s Berlin’s position on this?” Other members of the Union have jumped on Germany’s rising dominance by accusing them of being high-handed and miserly while imposing a strict standard of budgetary discipline. Imagine that, budgetary discipline!

Poor Germany. Pushed out to sea and relegated to islandom by a desperately jealous cohort of neighbors who want, or are in support of, someone else to carry those debt-heavy buckets. During the original Greek crisis of 2010, Chancellor Merkel at first would not budge in her opposition to propping up Greece. Sensitive to an important upcoming provincial election, she toyed with appeasement in the face of voters who were angry at the prospect of paying for Greece’s spending ways. She knew the voice of the people could not be denied if she wanted to stay in office. She was aware, however, that the Greater Group --- Europe--- had to be reckoned with. She dug in, calling for a plan of strict austerity measures before Germany would go along.

Chancellor Merkel and President Sarkozy were concerned that a Greek bailout would establish a dangerous precedent. And indeed it did. Now, in 2011, we’re seeing Greece II, along with Ireland, Portugal, and probably Spain as beggars at the door of the ECB. It truly is Deutschland Uber Alles when it comes time to write the checks. Protestations by Germany are met with righteous indignation. Some of the prime recipients of the doled funds call the German position callous and unfeeling.

Former secretary-general of the French Foreign Ministry, Gerard Errera, said in the Financial Times piece, “The first law about Germany is that they are always wrong, like the Americans are for the French. If they are assertive, they are accused of building the Fourth Reich. If they are against the war in Libya, they are useless.”

And that takes us to the war in Libya. Heaping more disdain on evil Germany, some European critics took the opportunity to slam Germany’s decision to abstain from a UN vote calling for the no-fly zone over Libya. Ten nations voted in the Security Council for a no-fly zone. The four BRIC nations (Brazil, Russia, India, and China) coalesced in abstaining. Germany acted independently, viewing the proposed action as too risky (read more). So much for a Fourth Reich.

Confusing the matter, and lending to the EU exclusionary attitude toward one of its own, is the group’s coalition foray into the Libyan revolt under the guise of UN solidarity. Whether it was the correct thing to do or not, it is being driven, at least in part, to show everyone that the EU’s leaders want to demonstrate their “new strategy to encourage democracy, good governance and better living standards for countries on their southern borders,” according to a quote from another Financial Times article.

Germany’s decline to participate was perhaps due to what it regarded for itself as ‘better judgment.’ Lost causes can be expensive. The European Union attempted earlier, beginning in 2001, to form some sort of alliance with Egypt. The object was to promote regional prosperity and stability. It failed because Egypt would not live up to the human rights parts of the 355-page document of agreement. The culmination of their failure was this year’s Mubarak overthrow. Other discord in the Mid East and Africa has carried on the failings.

Germany, meanwhile, is taking its own practical approach. It’s staying out of things. Just

Regardless of its eventual resolution, the Libyan turmoil coming on the heels of the Egyptian turmoil, and surrounded by all the other turmoils that may or may not come to pass, is disrupting  stock markets (read more). Rising oil prices, despite the realities of supply, are contributing to the volatility of the markets. It’s a milder form of panic in the street than the confrontations involving regimes and rebels.

But what is the reality? As a recent Wall Street Journal article pointed out, Middle East upheaval has a long history of driving oil prices higher. The Iranian Revolution of 1979 drove barrel prices to a record high (adjusted for inflation) until the 2008 crisis. Other oil price surges included the Gulf War of 1990 and the Iraq invasion of 2003.

Libya is OPEC’s tenth leading producer, but there are currently twelve OPEC nations, so Libya’s relative importance is arguably diminished by the numbers. OPEC is responsible for 45% of the world’s petroleum production and 80% of reserves. Libya produces 1.8 million barrels a day compared with Saudi Arabia’s nearly 9 million barrels a day.

The warring anti-Khadafy revolutionaries seized three of Libya’s top four port cities early-on. Collectively, they represent about 45% of the country’s production. This resulted in production being reduced to between 500,000 and 750,000 barrels a day according to the International Energy Agency (IEA). Saudi Arabia strategically stepped in to tell an anxious world that it would make up the difference, though Saudi oil is more costly to refine. It is a heavier grade than Libya’s desirable light crude.

OPEC backed the Saudi “not to worry” assurances by saying it would cover anything approaching critical reductions. The reality of Libya’s oil importance can further be questioned in that its proven reserves of 44 to 47 billion barrels represent only 3% of world reserves. Libya’s oil production provides less than 2% of global supply and only about 1.5% of U.S. supply. Canada, by contrast, accounts for approximately 17% of America’s oil at 1.8 million barrels per day --- the equivalent of Libya’s total daily output!

The crisis perception of a wide-scale oil shortage as a result of Libya’s political problems is, in reality, more a crisis to Libya than to the rest of the world, particularly the United States. Oil represents 95% of Libya’s total exports and 25% of GDP. With its sparse population, per capita GDP is therefore misleadingly high. Oil provides 80% of government revenue, which, for the most part goes directly into Emperor Khadafy’s personal coffers. Any shortage will stifle Khadafy’s lifestyle more than the people of Libya, or the rest of the world.

The real oil threat coming out of the Libyan crisis is the potential for other regional petro producers of scale – collectively or individually – to follow suit. Seems it’s currently fashionable for Afro/Mid-East revolutionary upheavals. Transitional governments resulting from overthrows produce instability. And uncertainties are not what markets like. Perceptions can become realities.

A synopsis of the 1973 science fiction film Soylent Green is: “In the year 2022, overpopulation and the greenhouse effect have made life extremely difficult for the majority of people. The population of New York City is 40 million (it’s about 7.3 million now) and the constant heat is unbearable. The city's infrastructure has broken down. Water is rationed and fresh food is virtually non-existent.”

The film envisioned a food-depleted world rendered bio-unsustainable. Never mind what got them there according to the fictional plotline. Irrelevant. What is relevant is that today, eleven years short of the old flick’s apocalyptic setting, the world is on course for a real-life starvation scenario. It may not be 2022, but there is a day out there if something isn’t done!

One of the main factors concerning global food supply is a rising population estimated to hit 9 billion by 2050. And at all levels, it is going to have to be fed. As emerging economies rise ever higher, the middle class populace increases. Exponentially, a rising middle class within overall population growth combines to increase food demand according to better, more costly diets.

From the other direction, starvation levels among the world’s poorest societies will only get worse if something isn’t done. The Soylent Green solution presents the picture of a science fictional way of handling things.  Silly and trivialized is the film’s presentation of a mad-science biotech answer, but the fundamental intervention of genetic engineering and scienceis anything but silly or trivial. In the movie, the corporation is the villain (not a surprising way of looking at it in Hollywood terms). But today’s reality may well make corporate heroes out of film land villains. Navellier’s International Growth and Emerging Markets portfolios are taking advantage of companies working toward a biotech answer with stocks that genetically alter plant seeds, produce potash, and provide organic fertilizer to farmers around the world.

Scientific Business

Business and science have taken up the gauntlet in the fight against starvation as biotech farmlands are rapidly increasing. In 1996, there were basically no biotech crops being grown anywhere. Since that time, they have taken root, with 10% of the world’s farmlands given to genetically engineered crops. In 2010, the amount of bio farmland rose by 10%. Leading the way are the United States, Canada, China, Brazil, and Argentina. There are two dozen other countries that also raise so-called bio crops.  The U.S. has 165 million acres of genetically modified crops. Brazil is second with 63 million acres, followed by Argentina with 56 million acres.

The number of biotech plantings is increasing yearly as the world grows more dependent on them. Currently biotech soybeans are 81% of the total global crop; 29% of the world’s corn is bio-tech; and 23% of canola oil comes from the technology. Even cotton, not a foodstuff, is actively engaged in agricultural engineering. Cotton crops from biotech represent 64% of the global growth. Cross-over agriculture holds other possibilities for alleviating shortages. For example, corn is vital for not only direct human food consumption and animal feed, but it is part of the alternative energy solution for fueling vehicles.

Down on the farm

One idea behind genetic engineering is the efficiencies of plant yield: the production of potent seeds capable of higher yields per land area. The technology also employs techniques of gene insertion into crops so they will be resistant to herbicides and pesticides. Plant modification through gene techniques will allow plants to produce their own insecticides.

Products now on the market have made farm production more efficient. Although genetically engineered seeds and plant applications are more expensive, they reduce the farmer’s workload; thereby requiring less output in manpower and machine power. With decreased workload comes a reduction in time spent on planting and harvesting. Increased profits and safer bottom lines are the big picture for bigger production down on the farms.

Research and development will be key to the continual process of agricultural innovation requisite for a bio-technology victory over threats against nature’s own sustainability. Even as farmlands grow soil-weary from overplanting without rest and recovery, especially among more impoverished countries, the good fight for good planting goes on in other ways. Herbicides combat space-stealing weeds, and pesticides defeat insect armies bent on plant destruction. Even as science delivers bio-tech death blows, weeds and bugs can develop counter-defenses. The battle for agricultural supremacy between man and bug rages on.

The use of chemicals in combating a world agricultural food dilemma has been embraced by many nations. Europe, however, remains slow to participate. For the most part, they have refrained from genetic engineering due to potential health risks. Perhaps the best defense of the European point-of-view is that genetic modification as an answer to starvation is dangerously fraught with health uncertainties.  More time is needed to make a safe determination regarding genetic engineering concerning food, they say. The problem is ---- 2022 isn’t that far off! 

Aside from excessively hot summers, Baghdad has everything that one would look for in a holiday destination, including numerous sites bearing testament to its rich ancient history (not unlike Rome, but in the Middle East), fantastic natural scenery, and from what I hear, delicious local food. Many an opportunistic hotel developer must have been licking his/her lips at the prospect of this new market emerging.

Well, needless to say, if ‘hot summer fun’ in Iraq seemed an impossible proposition in 2003, it remains so in 2011 and beyond. Regrettably, despite the supposed progress the United States and its allies are making in the region, Iraq is still very much a war zone, a reality that would put off even the most adventurous tourist from paying a visit. Even those keen on exploring ‘the Arab world’ have been hindered by the widespread political violence and unrest in the region, from Tunisia to Yemen (however as a result vacationers can enjoy some fabulous offers to the Egyptian resort town Sharm el-Sheikh – it’s evidently pretty safe, too!).

So is tourism to this part of the world doomed, particularly to places that many Americans would deem as potentially undesirable vacation destinations like Saudi Arabia? The Britain-based InterContinental Hotels Group doesn’t seem to think so.

Despite what a layperson would see as reason not to invest in Middle Eastern tourism, InterContinental Hotels Group (IHG), a current top 10 holding in Navellier’s International Select Portfolio, plans to double its total number of hotels in the region (currently at 74) in the next 10 years. Interestingly, this figure is not the result of necessarily dominating trendy Arab tourist destinations for Westerners like Dubai or Abu Dhabi, but actually Saudi Arabia, the country that Intercontinental considers its largest market in the region.

InterContinental’s President for Europe, the Middle East, and Africa Kirk Kinsell confirmed its commitment to the region: “We’re the largest hotel company in this patch and we’d like to remain that way.”

InterContinental boasts its Dar al Tawhid Makkah luxury hotel in Mecca, which is literally across the street from the city’s holy Mosque. It is not difficult to see how this hotel might be massively busy as Muslim pilgrims visit Mecca year-round, particularly during the annual Hajj celebration; and evidently many of said pilgrims enjoy stylish accommodations.

Despite this, if there is money to be made in this sector, it is actually in the budget hotel arena, something to which the InterContinental Hotel Group is very privy. Kinsell says, “What we are seeing emerge across… the Middle East is a mass market. Not everybody is comfortable staying in a luxury resort, walking through a lobby and being dressed to the nines.

“You have a more fluid middle class [currently in the Middle East] and people in that category want to travel as well.”

With this in mind, InterContinental has signed a contract to open a new Holiday Inn in the holy Muslim city of Medina, Saudi Arabia.

It would seem there is opportunity in the Middle East that belies the chaos and violence that we as Americans tend to believe runs rife in the region. Whether InterContinental’s apparent strategy of linking religious travel with the burgeoning Arab middle class will prove successful remains to be seen. However, the truth is that Baghdad and other Arab capitals will one day be open for non-religious tourism (most, in fact, are when they are not in the midst of civil war), and when this happens, groups like InterContinental might have an advantage on this market.

Syria’s uprising is part of the “now it’s our turn” mentality that has taken hold, as was predicted. There is no unifying thread running through the revolutions; it’s just a nasty game of ‘Simon Says.’

As suspected, the instability of Arab banana republics has exposed their susceptibility to this kind of thing. It is a ‘domino effect.’ Contagion is the real key. These vulnerable nations have been held together this long by the sandy glue of Arab oil among OPEC members. The halo effect has helped keep unstable cultural models intact until now.

So who’s next? Yemen is a good guess. And, like Egypt, it doesn’t have much oil either.  The good news is that our Emerging Market country ranking system has steered Navellier’s Emerging Market Portfolio clear of all these countries.

The European Union, with the world’s largest GDP, is hardly a fragile entity. If not fragile, it is at least vulnerable. Europe imports more than half of its energy. Its vulnerability lies in dependence on Russia.  The EU imports about 80% of its oil supply with roughly one-third coming from Russia. Almost 60% of EU natural gas is imported, about 39% coming from Russia.

What’s considered by some as troubling, perhaps even frightening, is dependence on one country for such a considerable amount of something so critical. The old ‘eggs in one basket’ theorem. Critics of dependence on someone as unpredictable as Russia include the United States in particular, and a number of European Union members.

When the Ukraine-Russia gas disputes reached a head in early 2006, parts of Europe were without electricity for several days. Russia shut down its pipeline running across Ukraine. Western Europe was faced with no power for an indeterminate time. It became a powerful political show-of-force by Moscow, with Europe the useful pawn. The dispute was resolved, the pipes were opened, and Europe could turn the lights on again. And Russia made a point.

About one-third of Europe’s electrical power comes from nuclear sources, making it the chief source of regional energy. But, with the Japanese disaster this past March 11, nuclear energy took a hard hit. Germany, the EU’s leading economy, relies on nuclear energy for a quarter of its electricity. France relies on it for 78% of the country’s electricity. Recent elections in key German states strongly favored ‘green’ parties and candidates staunchly opposed to nuclear anything. The pro-nuclear Merkel coalition government had extended the life of the country’s reactors, but reversed on popular opposition. Even France has shown an increase in doubters.

Russia sits poised to exploit opportunities in energy supply to Europe. It’s got lots of gas, so a good thing just got better. In the area of investing, the Japan disaster naturally aroused speculation over which companies would reap benefits derived from the re-building process. Japanese markets have already shown rebound strength as the country tries to get back on its feet. Meanwhile, Gazprom, Russia’s leading oil and gas exporter to Europe, and a current top 10 holding in Navellier’s Emerging Markets Portfolio, was already poised for downstream growth in an existing European market. The increased aversion to nuclear energy will turn heads towards a natural gas alternative. This will favor Russia’s energy exports to Europe, and it will favor chief supplier, Gazprom.

How significant is Norway’s petroleum industry? Very --- if all the excitement over a perceived threat of global depletions due to Libya’s current fiasco is a measure. The fact is Norway outdoes Libya when it comes to oil production and export. By any measure, it is important to Norway’s economy and to Europe. Norway’s 2 million barrel-a-day production surpasses Libya’s 1.8 million barrels --- and that’s over the current decade-long decline of the former! Norway’s oil exports still rank 9th in the world at about 2.15 million barrels a day; Libya exports approximately 1.54 million barrels a day.

Maybe it’s the perception of immediacy that is grabbing all the headlines over Libyan oil concerns. The country’s sudden, trendy Middle East-North Africa rebellion put a bull’s eye on oil. This is understandable since Libya is an OPEC member confronted with the threat of violent overthrow in a nation that has nothing else to sell the world --- 95% of Libya’s exports are oil. Norway, meanwhile, has a lot of fish (the industry for which it is perhaps best known) and a far more diverse and stable economy than the likes of Libya. Norway is non-OPEC and not a member of the European Union. It is, nonetheless, a heavy participant in the broader European economy.

 Good News

The good news, and it is important good news, is that Norway has recently come up with a large and extremely promising oil find. A Norwegian petroleum company struck oil in the Skrugard area, about 120 miles offshore in the northern Barents Sea, and Navellier’s International Growth Portfolio  holds oil companies that will benefit greatly from the discovery. To be sure, the find is not anything approaching the size of the dramatic Brazilian offshore finds a few years back. But the discovery will put a stop to Norway’s decade-long decline. Without new discoveries, the country’s production would take an even more crippling drop-off beyond 2020. The prospects for petroleum stabilization in an otherwise severely declining national industry is the good news out of the North Sea Basin.

 Regardless of any immediate problems, the current rate of 2 million barrels a day will continue to surpass Libya’s output. Libya’s proven reserves, on the other hand, stand at nearly 47 billion barrels. Norway’s reserves pale by comparison at just below 7 billion barrels – all the more reason to view the Skrugard find as hugely important. Estimates for Skrugard range from 5 billion to 6 billion barrels of oil equivalent. A Soviet-era study placed the estimate for the Barents Sea region at a possible 10 billion barrels.

The opening of Skrugard has ushered in the near-certainty that there’s a lot more petro out there beneath the ocean floor awaiting discovery. The optimism has been infectious among the country’s oil companies and government officials. In a Reuters article Bente Nyland, head of the Norwegian Petroleum Directorate (NPD), says, “Skrugard means there will be a production facility running there, and that may be interesting in terms of looking at other discoveries in the neighboring areas." A spokesman for the company mainly involved in the discovery said, "This opens up a new oil province with enormous potential.” And that includes investment potential.

  Investment Perspective

The north Barents Sea is an area that has piqued petro interest in the neighborhood for some time. Russia and Norway have been negotiating a redefined sea border area broadly expected to contain high yields of oil and gas. Russia’s interest is obvious. It is the world’s leading natural gas exporter and second leading gas producer. It ranks first in oil production and second in oil exploration. The country ranks eighth in proven reserves with approximately 74 billion barrels. Navellier’s international investments remain well-positioned in Russian oil through our Emerging Markets Portfolio.

The likelihood of additional discoveries in this region is heightened by virtue of the sheer logic that geological factors dictate. But exploration requires committed investment. After shying away from Norway’s petroleum prospects, major oil companies are now taking a closer look thanks to Skrugard. As a result of the discovery, seven exploratory wells are scheduled for this year with another seven coming online post 2011.

Additional investment will allow full-scale exploration expected to proceed over the next 10 to 20 years. Investment required to maintain the older fields located in the North Sea Basin is expected to be around $25 billion in 2011. Oil desperation in Norway has turned into oil optimism. With broader, deeper prospects coming from offshore, and global petroleum companies taking renewed interest, energy investment -- often fickle -- is getting a nice little kick. Especially so with the uncertainty of where oil and energy are at the moment.

 Regarding the reality of high oil prices at this time, it’s a safe assertion that perception is, as has been said before, driving reality. There is no true shortage of oil as a result of Libya, Egypt, or anywhere else so far. Global oil inventories are high, and demand has remained static. Speculators have typically resorted to hyper-safety buy-ups over what could happenlong-term. It is basically irrational guesswork. Meanwhile a weakened U.S. dollar, the global oil-trading currency, is contributing to price increases.

It’s tough to find good news in these trying times, but the word out of Norway’s chilly northern waters is “oil,” and more of it.

 No such luck. As it turned out, all that optimism was a bust. The Friday confirmation of an inclusive plan that would present a strategy for solving the debt problem took a reversal of fortunes --- pun intended. Summit officials did not approve the European Commission’s request for “new powers,” including the all-important power to buy open market sovereign bonds from distressed members. Other measures bit the dust as well.

 EU summit officials side-stepped the position that they weren’t going to act at all. They just weren’t going to act the way everyone seemed to think they would.  Their new posture, and it was a new posture, was a bit more cautious, more reserved.

 The EU officials insisted the expanded funding powers and other measures remained “on the table.” The disappointed European Financial Stability Facility(EFSF) felt like someone had, in fact, cleared the table before they even got a chance to sit down. Meanwhile, EU leaders claimed the move was part of a “grand bargain” to be concluded in March. They insist that other economic and fiscal measures, as well as the revisited EFSF empowerment proposition, will be part of a broader plan that will solidify the euro.

 But financial markets weren’t buying it when markets opened Monday, three days after the disappointing announcement. Bond yields from distressed Spain, Portugal, and Italy fell precipitously, and in March, both Spainand Portugalhave seen their debt ratings cut. The punctured optimism that seemed to come out of nowhere actually came from the Netherlands.

 Dutch Prime Minister Mark Rutte apparently was the main opponent of the initial summit communiqué, which would have upheld expectations of immediate approval of the increased power of the EFSF. In a bit of politicizing during the internal negotiations, Mr. Rutte enlisted Germany’s Chancellor Angela Merkel to swing his way. The Netherlands and Germany maintain Triple-A ratings, so their financial stake in terms of funding a more empowered EFSF fund is far greater than other member states.

 The unexpected turn of events from the summit’s apparent reversal of what looked like a sure thing ends up resembling last year’s EU efforts to deal with the Greek sovereign debt crisis in the preliminary stages. There was a lot of looking-to-see-what-could-be-done early on, then some pressure, followed by half-hearted commitments of unspecified assurances. Finally, action and stop-gap solutions in May.

 The current situation in Europe looks to be following a similar storyline, though who could really blame the Dutch and the Germans for slowing things down by wanting less “flexibility” and more protective guarantees against the possibility of sovereign states’ bad behavior?

 International Investment Opportunities

Navellier researches investment opportunities around the world. We have successfully managed non-U.S. equity portfolios for over a decade, including Navellier International Growth, Navellier International Select, and Navellier Emerging Markets. To learn more about any of our international portfolios, please email Traci Sinclair at tracis@navellier.com. 

Not to fear, China, you are at an awkward age!  This anxiety over a sudden stop on the climb up the ladder is a superfluous dynamic of sudden growth. As the article points out, there are all kinds of crazy antics that go on in the United States as well. It goes with the territory. And it’s not just the U.S., it’s a condition that’s worldwide. It always has been, as any history will attest.

China’s paranoia should be quelled if it puts itself up against the United States in a discussion of correlation between economic success versus moral and ethical behavior. China just jumped into the number-two spot on the global GDP list. With its economy at the $5 trillion dollar level, it is still far behind the U.S. with its $14.3 trillion economy. So, if America with its Bernie Madoffs, Gordon Gekkos, some shady politicians, and a litany of bad boys and girls ranging from celebrities to star athletes is the pinnacle of economic accomplishment, it should be understood that there are going to be pitfalls and embarrassments along the way.

As the saying goes, you can’t legislate morality (although you can legislate ethics!). Morality and ethics are the domain of the human heart. And out of the human heart also comes the overflowing generosity of a nation in which 80% of charitable contributions come from businesses, private foundations, religious organizations, and -- yes—the individual. Among the nations of the world, the United States is the leading good-hearted giver hands-down as measured by charitable giving as a percentage of GDP. According to the Washington-based, non-partisan Center for Global Prosperity at the Hudson Institute, America gives at a rate of 1.67% of its GDP (read more). That’s more than double the U.K. at 0.73%, a distant second. Everyone else is way back.

So, if there is a worry among the Chinese that their economy is never going to make it to the next rung of the ladder due to instances of poor individual conduct scattered through its population, they can relax and take heart. America is the guide-on marker for economic empowerment that China is chasing. A little advice to the Chinese: confront bad behavior where you meet it --- but whatever else you are doing, keep on doing it! No need to fear a failure of growth because of occasional charlatans. There will always be snake-oil salesmen, hustlers, and crooks. It’s not an indictment on a system; it’s an indictment on the individual.

What’s notable about the region is its potential for generating some very good investment. Yes, investment! The image of banana republics, illicit drug cartels, and Flamenco dancers is selling Latin America short. While the area is not known for the smoothest-running governments or sophisticated economies, it is not without its share of high-value business assets and other resources primed for greater growth.

The picture is spotty, but promising --- and delivering!Some of Latin America lags and will continue to lag economically, but other parts represent very interesting emerging market value. Globalization has drawn attention to strength in this region; foreign investment is favorable, and trade with the U.S., Europe, China, and other parts of Asia is sizeable and on the move.

Latin America still lacks developed-nation status. But it has rising economies in newly-industrialized Mexico and emerging market superstar Brazil, along with Argentina, Chile, Columbia, Peru, and Venezuela. These countries comprise L.A.’s seven largest markets according to business researcher, LATIN FOCUS. Smaller but important economies include Bolivia, Ecuador, Paraguay, and Uruguay in South America, parts of Central America, and the Dominican Republic.

Diverse socioeconomic status within and among the Latin countries continues to present problems to be sure, but great progress has been made. The region’s best growth occurred from 2003 to 2008. Only the disruption of a global crisis broke the growth pattern. The Latin American Economic Roundtable (LAER) stated in its early and mid-2010 symposiums that the crisis cut deeply, but relatively briefly, thanks to stable macroeconomic policies and strong management.

The IMF has forecast Latin America’s growth rate to be 4% for 2010 due to low credit spreads and high debt issue. According to the LAER, “all financing windows are open.” This plays nicely into the broader investment picture with the turbo-charging of businesses and industries toward increased trade and domestic consumption within the region as well as beyond it.

Latin America has the highest GDP per capita among all emerging markets, 35% greater than that of China and twice that of India. Forecasts for Latin GDP growth in 2011 indicate a drop to around 2% to 3%. Microeconomic factors will hold back greater growth, although that could change with rapid implementation of recommended fixes. Legislative and other government reforms are needed to

encourage industrialization and additional business development in order to capitalize more fully on favorable market factors with an eye toward investment.

Meanwhile, it wouldn’t hurt to keep a watchful eye on the western hemisphere’s version of “down under.”