Death and Derivatives

Dear Reader,

It is said that one should not speak poorly of the dead. But it is also said that one should not discuss politics or religion in polite company, and we regularly violate that dictum. Thus, committing another faux pas gives us no real pause.

I am, of course, warming up to say a few unkind words about the just deceased Sen. Kennedy.

In reviewing his life, his fans will hold him up as a flawed but still shining beacon for the common man. Quoting one mostly favorable article today…

“Kennedy entered Harvard College in 1950, but was suspended the following year for allowing another student to take a Spanish test for him.”

And people claim there is such a thing as media bias! Pshaw!

I’m sure that the student Kennedy so kindly “allowed” to take his Spanish test – no doubt because the poor fellow needed to hone his test-taking skills – virtually begged Ted to let him stand in.

But his cheating ways, which extended to drunkenly chasing the girlfriends of younger clan members around family compounds, are not the source of my gripe about the all-too-human Kennedy.

My issue emanates from a stop some years ago by the side of the road in Martha’s Vineyard. On the island for a vacation, I took the short detour to see the site of Kennedy’s infamous accident at the bridge to Chappaquiddick. Getting out of the car, I vividly remember my first impression.

“This is it? That’s where Kennedy’s car went in?”

The thing is that the canal is narrow and shallow. I’ll give Kennedy the benefit of the doubt that he was disoriented – massive quantities of alcohol will do that to a guy – but I won’t give him anything toward his contention that he couldn’t have taken more active measures to save Mary Jo Kopechne’s life.

Any reasonably strong swimmer – which I assume he was, having grown up on the water – could have made the shallow dive necessary to get her out. But even if he was too drunk or scared to pull that off, he could have quickly found the help needed to get her out before the air bubble in the car was exhausted and she drowned. Instead, walking by a fire station and a private house, stopping at neither to request help, he trod a circuitous path to his hotel, where, after changing into dry clothes and lamely trying to establish an alibi by visiting the front desk to complain of a loud party, he turned in.

It was only nine hours after driving off the bridge, and after a local fisherman had discovered the car, that Kennedy finally reported the accident.

This is, of course, all part of the historical record – an interesting part of which you can read by following the link below to the FBI files on the accident, made available thanks to a Freedom of Information Act request.  

http://foia.fbi.gov/foiaindex/chappaquiddick.htm

But I will never forget my visceral reaction to the sight of that small and shallow channel, the certain knowledge that Ted Kennedy was a sociopath, a coward, and a cretin, who made every possible move to rescue his political career and almost none to save the life of a young woman.

That he wasn’t properly prosecuted but received a slap on the wrist with a two-month suspended sentence speaks volumes about the nature of political power and our justice system.

And that he subsequently went on to become a political icon, idolized as a champion of the downtrodden, says everything there is to say about human gullibility.

Ted Kennedy, R.I.H.

Cross Border Derivatives on the Rise

By Bud Conrad

The global derivatives market has grown rapidly in the past decade. By one measure of market size – the notional value, which is the value of the underlying derivatives contract – the derivatives market expanded from $87 trillion in 1998 to $592 trillion as of the end of 2008. To date, the United States has published very little information on cross-border derivatives because of the limited availability of data.

The U.S. Department of the Treasury, the Federal Reserve Bank of New York, and the Federal Reserve Board began collecting data on U.S. cross-border transactions and positions in derivatives in March 2005. They collect the data through the Treasury International Capital (TIC) reporting system, which for many years has collected similar data for securities such as stocks and bonds. Below is a chart of the growth in the size of derivatives of just cross-border transactions for U.S. banks:

Most of these positions net against each other, so the $6 trillion vastly overstates the risks involved, but such a big number certainly carries some concern for its size. It’s amazing that this grew so much from a little over $1 trillion in 2006, at the onset of the Credit Crisis. It’s impossible to know how much risk is involved in such positions, but one measure is the difference of the positives and negatives, which is calculated below for all derivatives combined. That measure has doubled since the end of 2007.

As derivatives are difficult to value, they are usually just ignored in traditional statistical measures like our international investment accounts. Now they are so big, they can affect the measures, and there is some evidence that the discrepancy in international accounts would be less if these were properly included. My interpretation is only that there is a growing risk (not decreasing, as might be expected because of the financial crisis) to financial systems buried in these huge and still growing derivatives.

Lawyers Run Amok

I was driving down the road listening to the radio recently when a story came on the BBC that had me laughing out loud.

It has to do with a herd of lawyers running wild in Pakistan. An excerpt from the program’s transcript…

These days, their footage is all over the Pakistani news channels. Lawyers, dressed in black suits and ties, on the attack.

Every few days seem to bring a new incident; the beating of a policeman; a scuffle with members of the press outside the high court in Lahore.

The newspapers scream that lawyers have become a public menace. The police are incensed.

"Lawyers used to be a very gentle people," says superintendent Sohail Sukhera of Lahore police force. "They were polite and educated. But the last couple of years have converted them into an absolutely different commodity."

He says that, in the last month, there have been 18 cases of assaults carried out by lawyers in Lahore alone.

"In one case, lawyers broke the leg of a police inspector. Others have had their skulls exposed when lawyers have hit them on the head with stones or chair legs. It's really uncalled for."

Visibly upset

Too embarrassed to talk to us at the police station at which he works, we go to meet one of the victims elsewhere.

He is a 52-year-old officer, Fakir Muhammed. A cameraman filmed the moment he was punched and slapped and harassed by lawyers at the high court. 

"I had just testified against a man accused of kidnapping a woman," he says. "As I was leaving the court, I was surrounded by 10 or 11 lawyers."

Mr Muhammed is visibly upset as he recounts how one snatched and broke his glasses before a few of the others tore his uniform and beat him.

"They really hurt me and it was so sudden," he says.

"I tried to reason with them but they didn't listen and I still have no idea what it was about. I feel so insulted. My whole department looks at me as the guy that got beaten up. It's humiliating."

So what is going on? Many look to Pakistan's recent history for answers.

When Pervez Musharraf resigned as president of Pakistan one year ago, the country's lawyers were among those who danced in the streets in celebration.

It was the huge protests and collective civil disobedience they had organised that had been the catalyst for Mr Musharraf's political demise.

The lawyers' demonstrations continued until March this year when the chief justice who had sacked by Mr Musharraf was restored to his post.

'Above law'

"Since then, a small group of lawyers is exploiting the mob mentality they developed during their protests," hypothesises Mr Sukhera.

"They now feel they are above the law, and can do what they want."

Mr Sukhera acknowledges that it is a slim percentage of the legal community that is involved, but he says it is having serious implications on policing capacity all the same.

"The resources that we should be using towards fighting terrorism and for other challenges unfortunately have to be used to deal with this problem," he says.

The lawyers that have the fingers pointed at them are furious. They feel it is the media that is at fault.

If I were a member of the media in Pakistan, I’d be worried. Wait, what’s that? Arrgh, it’s the lawyers! Run away! Run away!

Human Ingenuity

As I have often said, human beings are remarkably resilient. Throw what you might at them, they’ll survive and, given a toehold, prosper. Human ingenuity is a related trait – the constant quest to do things better, different, faster, easier, and more creatively.

I came across a couple of inspirational examples of that ingenuity to share with you.

The first was something Ed Steer recently posted in his new, free e-letter, Ed Steer’s Gold & Silver Daily (which you can sign up for here). It’s of a contestant in what looks to me like the Czech version of an “America’s Got Talent” style competition. To save you guessing, sand in a lighted box is the medium the young woman is working with. Truly amazing… follow the link just below.

http://www.youtube.com/watch?v=Z1JZ9O15280&feature=related

The second example is aimed at those of you who appreciate machinery, and doubly so if you have ever split firewood.

http://www.youtube.com/watch?v=YeanPDO-D6M

Do you have an example of human ingenuity you want to share? Send it along, along with any other comments you might have, to david@CaseyResearch.com.

Power in Your Pocket

Speaking of ingenuity, there is what you might term a “Space Race” underway, as companies the world over scramble to find new and improved ways to power the handheld digital devices (formerly known as “cell phones”), which are now ubiquitous. 

Personally, I pack a Blackberry Storm, which I am quite happy with. Just a few years ago, my mobile phone served just that function. Now, I use my device to listen to music, browse the web, track stocks, as a GPS, and even to watch movies. And these are but early steps on a path that will lead to the sort of personal tech previously imagined only in sci-fi.

These new applications require more powerful and increasingly compact battery technology. The winners – which is to say, the patent holders – for the new technologies will make fortunes. As will, very selectively, the companies well positioned to provide the raw materials required to make the new technologies work. At this point, the leading entries in that regard are those from the lithium complex.

Here’s one recent story on the subject of newer, better lithium batteries and the opportunities they bring:

http://www.eetimes.com/news/latest/showArticle.jhtml?articleID=219400089

Both the Casey Research Metals and Energy Divisions are following the booming interest in all things lithium quite closely and have already generated high double- and even triple-digit gains in less than a year for subscribers. Of course, those sorts of returns, and increasing media coverage of the sector, inevitably give rise to a new wave of “me too” companies, looking to capitalize.

Already, the number of TSX-listed companies chasing lithium has just about tripled over the last year – a mini-mania is in the making. Be careful, because most of these companies are not even worth the paper that their stock certificates are printed on. This is not the place for me to go into detail on the specific companies worth your investment dollars. For that, I would recommend you either take a subscription to our International Speculator, for ongoing coverage… or, for a comprehensive briefing on lithium and the latest research on the best of the best companies for your investments, make the effort to join us in Denver for our upcoming Casey Research Energy & Special Situations Summit. More details here.

Miscellany

• A coffee house in Calgary was the site of the first-ever Casey phyle. However, the head of that meet-up group has moved on (literally, to Russia). Fortunately, a new volunteer has raised his hand for the informal role of coordinator. If you are in Calgary and want to connect with other Casey Research subscribers to share notes and casual conversation, drop us a note at phyles@CaseyResearch.com and we’ll get you set up.
  
  
• End of tax-exempt muni bonds? A recent article in Bloomberg suggested that the federal government has its sights on the muni bond market and is considering replacing their tax-free status with a credit that the federal government would adjust based on the type of bond and its “perceived benefit to the public.” It is thought that, in this way, the feds would be able to generate something on the order of $30 billion in foregone taxes. In the final analysis, investors will act entirely in what they calculate to be their personal best interest – matching the potential reward against the perceived risk. Municipalities, already struggling to raise funds, will see their funding costs go up while the federal government will lean its considerable weight on the economy even more. Something to watch.   

And that, dear readers, is that for today. As I sign off, I see the stock market engaged in erratic behavior, down, then up, then down again, the latter move being something of a surprise given cheery news on the housing front. Including, it seems, that housing inventories have miraculously fallen to the lowest levels in 16 years.

I will confess to being stupefied, given the steady news to the contrary, including the tangible evidence I can see with my own eyes. There are dozens of houses for sale on the local market, and everyone I speak to in the business hereabouts tells me that things are still dismal. And the last time I looked, which wasn’t long ago, housing inventories were at multi-decade highs… so, I must be misinterpreting, or misunderstanding, the inventory numbers now being reported. I will endeavor to correct that by tomorrow’s edition.

Until then, thank you for reading and for being a subscriber to a Casey Research service!

David Galland
Managing Director
Casey Research