Copyright The Financial Times Limited 2008

Despite all of the dire predictions about the price of oil, the truth is that it will go down, all markets do. What we are witnessing is the last stages of a buying frenzy as part of a commodities bubble. If for no other reason the price of oil will go down, because the higher it rises, the greater the possibility of recession. A high price of oil means that one of the largest inputs for any economic activity is priced out of reach. Margins go down as the price of oil goes up. Either inflation goes up or the economic activity stops or both. If the economic activity stops or slows, a recession occurs. If inflation goes up, eventually the central bank or government will have to slow the economy to get rid of inflation or face social and economic disaster. In either event, the country goes into recession. Since the price of oil is high around the world, the process repeats itself in country after country as the world goes into recession. With economic growth stifled around the world, the demands for oil declines as will its price.

The analysis of why there is an oil shortage is also wrong. The real reason for high prices is socialism. From a supply side, the problem is state owned oil companies. While everyone focuses their criticism on large multinational oil companies, the real culprits, huge state owned companies, never get mentioned. The truth is that the multinational oil companies are midgets compared to the state owned companies like Saudi Aramco, Qatar Petroleum, Venezuela’s PDVSA, National Iranian Oil Company, and Russia’s Rosneft and Gazprom. These are the real companies who control the price of oil and they all have a problem. They are run by politicians who steal and who can’t develop the reserves they have. As a result the amount of oil that these companies produce is often declining resulting in less oil for the world market.

The other part of the socialist problem is demand. Countries from China, Russia, India, Indonesia and many others subsidize the price of fuel. This is supposed to help the poor, but it also encourages people to be wasteful and economies to be inefficient. It wastes scarce resources, but many of these countries are not democracies, so the social unrest from the loss of these subsidies cannot be contemplated. Eventually the costs from these subsidies will be simply too great. China is running its national oil companies into the ground by forcing them to subsidize the price of energy. Its power plants are closing because the price of electricity is fixed but the price of coal is not. Eventually this system collapses and will result in less demand and lower prices, to say nothing of the misery that these countries will inflict on their own citizens.

William Gamble
 Author: Freedom: America’s Competitive Advantage in the Global Market
 EMERGING MARKET STRATEGIES
 Suite 1D
 1990 Pawtucket Ave
 East Providence, RI 02914
 Tel: 401-272-8906; Fax:401-272-8139; Cell 401–829-6729
 Internet: william@emergingmarketstrategies.com
 http://www.emergingmarketstrategies.com/

The causes of rising food prices have been ascribed to ethanol production, rising standards of living in India and China and even evil speculators. It is true that ethanol production has contributed an estimated 20% to the rise of food prices. It is also true that rising standards of living have pushed up the price of food as more meat, which requires more grain, to be included in the diets of people in developing world. Speculation has also played a part, but the real reason is for the present rise in food and oil prices is poor government policy.

Most of the large grain exporting countries, Argentina, Russia, Ukraine and Kazakhstan and the rice exporting countries like Vietnam and Egypt have placed higher export tariffs or restrictions to lower local food prices and mollify restive populations. This has restricted supplies on international markets and raised prices everywhere. It also lessens economic incentives to local farmers in those countries to produce more. Worse, many countries have instituted price controls that just delays increases in prices.

Oil has been restricted by nationalizations of oil industries in Venezuela and Russia by inefficient and corrupt national corporations have lowered the amount of oil produced. Increases in national taxes and exploration restrictions have lowered the incentives for oil companies to produce and discover new sources.

Eventually both oil and food prices will come down as the world demand lessens as result of a global recession. However, the point is that the world has always been resource poor for any species including us. We should encourage markets to provide alternatives rather than provide subsidies or restrictions that discourage them.

Recently there have been a great deal of interest among financial analysts in ornithology, specifically black swans. This is due to a book by Nassim Nicholas Talebs best-selling book Black Swans. When Europeans explored Australia, they were surprised to find black swans, something they did not think existed. The idea was that past experience in markets does not always predict extreme and rare situations that can create panic and disaster.

The point about black swans is not that they were unique; it is simply that the Europeans did not know about them. The same is true of the credit crises. The issue is not the rarity of the event but the quality and the availability of information. The present subprime crises occurred because securitization changed the economic incentives for lenders. Since it was no longer necessary to keep a loan on their books, their economic incentive was to make as many as possible without regard to quality. They lost the economic incentive to get and update information. As George Soros put it, "Securitization had the effect of transferring risk from people who are supposed to know risk and know the borrowers to people who don’t."

The problem with any management model is that it is based on the information put into it. If there are economic incentives to provide bad, late or incomplete information to the markets, problems will occur. There are enormous economic incentives in both developed and emerging markets to obfuscate, spin or simply lie. No set of regulatory regimes can provide sufficient legal disincentives to solve the problem even in the most open law abiding markets. They do not exist in others. As Warren Buffet points out, "If I cannot understand an annual report, perhaps someone does not want me to".

The point for risk managers is not that the numbers or models do not accurately forecast rare events. It is that obtaining and understanding accurate and complete information is in itself a rare event. It’s not the unexpected that causes trouble. It’s what is ignored, unavailable or untrue.

It is generally agreed that food prices have risen for three reasons:

1) The first is the sharp rise in demand for grain in China. The Chinese are increasing the quantity of meat in their own diet. (Meat production requires significant input of grain.)

2) the promotion of alternative sources of energy -- primarily ethanol -- by the governments of developed countries, which has significantly cut into the supply of grain in the world market.

3) ongoing droughts in Australia

This is wrong. All of these factors do contribute to the rise of the food prices, but they are also all foreseeable. They would not cause such a rapid increase of food in such a short period of time. The main problem has two aspects. Global inflation which is running at all time highs almost everywhere in the world. Second, and more importantly, government regulations. With a few exceptions all of the major exporters of wheat and rice have slapped either high tariffs or export bands. This has reduced the amount of food getting to market at the expense of local farmers and the poor around the world. The bands are in place to placate and protect restive populations usually in totalitarian countries from rises in food prices. The price rises happened rapidly because these controls were put in place recently and their effects on the markets have been dramatic.

There is no food crises. There is a crises of bad government.

I am William Gamble, JD, LLM, Ex MBA, KSC, a consultant specializing in emerging markets. I have been quoted or interviewed by ABC, CNN Asia, Bloomberg, Fox, CNBC, NPR and other television and radio stations around the world. I have published 24 letters in Financial Times and articles in Foreign Affairs, and Harvard International Review. I have been quoted USA TODAY, The Far Eastern Economic Review, The International Herald Tribune, The South China Morning Post, Sankei Shimbun. I have written two books Investing in China and Freedom: America’s Competitive Advantage in the Global Market. In the past year I have spoken to CFA societies in 10 countries and 8 US cities as well as conferences all over the world.

William Gamble

Author: Freedom: America’s Competitive Advantage in the Global Market

EMERGING MARKET STRATEGIES

Suite 1D

1990 Pawtucket Ave

East Providence, RI 02914

Tel: 401-272-8906; Fax:401-272-8139; Cell 401–829-6729

Internet: william@emergingmarketstrategies.com

http://www.emergingmarketstrategies.com/

The real China story is not really about the Olympic or Tibet, but it is about China’s image. It is far more damaging and will last a long time. It is about the collapsing Chinese economy. The stock market is off 50%. Real estate in Shanghai is off 10%. In Shenzhen real estate prices have fallen an average of 28% and there are reports of falls of up to 50%. These have occurred since last fall! Far faster than anywhere in the world. The collapse of these markets will undoubtedly have an effect on the Chinese bad loan problem and its financial system. Can you say subprime in Chinese? The number of shoe factories in Guangdong has dropped 40% since 2002. Over 40% of Chinese textile factories are losing money. After the lunar New Year, 30% of the Guangdong migrant workers did not return. According to a survey of the American Chamber of Commerce in Shanghai, two thirds of the members thought China was losing its edge as a source for manufacturing and 17% were thinking of leaving. Of course we don’t really know what the real numbers are because the press is restricted. Markets are about choice. To make a good choice you need information. To get accurate and timely information you need free speech. Without information markets eventually collapse.

William Gamble
Author: Freedom: America’s Competitive Advantage in the Global Market
EMERGING MARKET STRATEGIES
Suite 1D
1990 Pawtucket Ave
East Providence, RI 02914
Tel: 401-272-8906; Fax:401-272-8139; Cell 401–829-6729
Internet: william@emergingmarketstrategies.com
http://www.emergingmarketstrategies.com/

Why build a fence when you can stop immigration with the value of the dollar? One of the unintended consequences of the falling dollar is falling illegal immigration. It has been generally reported that the dollar has fallen against the Euro and the Yen. What has not generally been reported is that it has also fallen against the Filipino Peso and the Brazilian real. This makes any money earned in the US worth less when it is sent home. As a result the US is not longer the country of choice for illegal immigrants from countries with strong currencies. They would rather go to Europe. The US share of remittances to Latin America has declined from 90% to 80%. The Mexican Peso has been relatively stable against the dollar, but construction jobs in the US have fallen and with them the lure of better wages.

The total projected that remittances to developing countries increased to $240bn in 2007 compared to $221bn in 2006, but the value of some of those remittances has declined with the dollar. India was the biggest remittances recipient last year with $24.5bn, followed by Mexico at $24.2bn and China with $21bn. However, because of the dollar's decline against the Filipinos peso (25%), and against the Brazilian real (21%) have been particularly acute, remittances to those countries have declined in purchasing power. Of course, most Filipinos do not work in the US. They are still hurt by the dollar's decline because they work in Arab Gulf countries and Hong Kong where the local currency is pegged to the dollar.

The Chinese stock market closed down over 5% yesterday, 45% off of its all time high last October. With one notable exception this is contrary to most analysts’ predictions. IT is always impressive how much financial experts are paid to be wrong.

"The collapse of the Chinese stock market is not a question of if, only when. The real question will be how many dominoes it will take with it." William Gamble Financial Times May 15, 2007

"This month Stanley Ho, the Macao gaming king, signaled his bullishness about the Hong Kong market by predicting that, once the flagship index breached 30,000 (it finally did yesterday, hitting 30,405.22), it would power towards 40,000" Financial Times Oct 27, 2007

"Jing Ulrich, JPMorgan chairman of China equities, rates the A-share market as expensive but doesn't believe it will crash - corporate earnings growth remains robust, the quality of listed companies joining the stock market is rising every month and the macroeconomy remains strong." Financial Times Oct 27, 2007

"If share prices in Shanghai continue to soar and more Chinese companies carry out IPOS, it will push China’s total stockmarket capitalisation ahead of Japan’s and second only to America’s. Chinese firms will increasingly dominate international corporate rankings. Already, by late 2007, three of the world’s six biggest companies by market capitalisation were Chinese. In 2008 PetroChina could even eclipse Exxon Mobil as the world’s largest company by market value " Pam Woodall | HONG KONG From The World in 2008 Economist print edition

"Jim Rogers, the investor and author, has warned of an "incipient bubble" in the mainland Chinese stock market in an interview with the Financial Times. He is recommending that investors should buy Hong Kong-listed shares in Chinese companies instead." Financial Times Oct 30, 2007

"Adrian Mowat, JPMorgan's chief Asian and emerging markets equity strategist, says this huge discount on Hong Kong-listed mainland companies now represents an excellent buying opportunity for investors to accumulate Hong Kong-listed shares of mainland companies. What message is Mowat conveying to clients in the U.S.? "I am telling them to buy, and buy aggressively," he says." Business week August 22, 2007

"Gene Sit of Sit Investment Associates says once the hot market cools down, a soft landing will make many stocks attractive. Gene Sit thinks China's stock market is ready to burst. But he figures the damage won't go deep. A soft landing to us means a correction to about 5,300—so 1,000 points, or around 15% below where we are now. That would bring the p-e to 35 on next year's earnings. If we're wrong and all hell breaks lose, you could see 4,500, or a p-e of 30." Business Week October 17, 2007

"Some fearless forecasters predict that the Dow will streak to 16,000 and that the Standard & Poor's 500-stock index will go to 1,700 over the next 6 to 12 months. I agree with that forecast. Why? Let me be brief: It's the global economic boom" Gene Marcial Business Week October 17, 2007