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Monday, February 9, 2009 8:09 AM


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Sunday, February 8, 2009. VOL 3 ISSUE 6.























Petrobras, Brazil's national oil company, is in direct talks with governments including
Washington and Beijing to help finance the $174bn development of its huge reserves.

The partially traded gro
up recently discovered the biggest oil fields in Latin America in the
past 30 years and industry leaders, such as Tony Hayward, BP's chief executive, believe the
waters off Brazil's south
eastern coast hold oil reserves as big and important as those
ered in the North Sea in the 1970s.

José Sergio Gabrielli de Azevedo, Petrobras's president and chief executive, told the Financial
Times that Petrobras had secured almost all of its financing for this year and over the five
year period could finance $120
bn from its own cash flow.

But that still leaves the company with a large financial hole it will need to plug to realize its
goal of increasing current oil and gas production of 2.2m barrels a day to 3.3m b/d by 2013
and to 5.7m barrels a day by 2020.

t's going to be tough, it's going to be challenging, but it is not impossible." he said. "We
have had several talks with different countries, not only China, even the US. We think this is
going to be an important source of financing for us."

The UAE is al
so thought to have shown interest.

In the US, Mr. Gabrielli said Petrobras had held conversations with Export
Import Bank and
Overseas Private Investment Corporation, which he said wanted to improve the presence of
US companies in Brazil. But he said his
conversations in Washington were hampered by the
fact there was not one central institution.

He said that, in return for help financing the project, Petrobras would guarantee future oil
and oil products.

"In relation to the US, today we are already a net

exporter of petroleum products. This is
going to increase," Mr. Gabrielli said.

Analysts and other oil company executives agree that securing financing would be one of
Petrobras's two biggest hurdles, considering the credit crisis and the fall in oil pri
ces of more
than $100 a barrel in six months. The second hurdle is expected to be the technical challenge
of extracting oil trapped under thick layers of salt, far below the ocean's surface.

An executive from a competing oil company with operations in La
tin America and the North
Sea said: "They have found a North Sea. It took 15 big companies more than a decade to
develop that."

But Mr. Gabrielli said he believed companies that had not helped find the pre
salt fields
would be left out.

"Brazil's regula
tory system rewards the companies that took exploration risk." He noted that
these included: BG of the UK, Galp of Portugal, Repsol of Spain, ExxonMobil and Amerada
Hess of the US, and Anglo
Dutch Royal Dutch Shell. "The ones who didn't take it [the risk]
are not going to be rewarded," he said.

Presenting its business plan for 2009
2013 last week, Petrobras insisted it would push ahead
with plans not only to develop its newly discovered fields, but to build three oil refineries,
Brazil's first new refineri
es for almost 30 years. Mr. Gabrielli said Petrobras was unique
among big oil companies in having big new fields to develop and a big domestic market.

But its plans also involve expanding export sales of value
added refined products rather than
crude oil
. "To capture [our advantages] we need to build capacity now," Mr. Gabrielli said. "If
we don't build it now we will miss our chance."

Almir Barbosa, financial director, said Petrobras still needed to raise about $8bn to meet
investment targets of $28bn t
his year and $35bn in 2010. He said the company was striving
to reduce its financing needs by a cost
cutting program, involving renegotiations of all
projects, especially those still in their early stages.


The first phase of development of the massive Tupi oil field discovered offshore Brazil has
been sanctioned at a budget of $3.7 billion, said BG Group PLC (BG.LN) in a statement

First production of around 1
00,000 barrels of oil a day is expected from the field in 2010, the
company said.

BG Group has a 25% stake in the field and is partnered with Petroleo Brasileiro SA (PBR) and
Galp Energia SGPS SA (GALP.LB).

Credit Suisse analyst James Neale said this w
as below his current estimate of first phase
costs, supporting the view that the project will be economic in the prevailing macro


Petroleos Mexicanos has opened talk
s with the world's largest oil companies on investment
opportunities, and plans to present them with new contract models in the second or third
quarters of this year, Pemex Chief Executive Jesus Reyes Heroles said Tuesday.

Mexico is ramping up oil invest
ments in an attempt to arrest a dramatic fall in production
that started in 2004. Pemex hopes to lure foreign oil majors into Mexico to benefit from their
technology and expertise, especially with deepwater oilfields where Mexico has untapped

"We hope that in the second or third quarter, we are able to talk with some of the companies
about the terms of the new contracting models that are possible now thanks to the reform,"
Reyes Heroles told reporters after a conference in Mexico City.

The re
form preserves Pemex's monopoly on oil production and sales, but gives Pemex more
flexibility in drafting service contracts.

Last week, President Felipe Calderon met with the CEOs of BP PLC (BP), Exxon Mobil Corp.
(XOM), Petrobras (PBR), ENI SpA (E), Tot
al SA (TOT), StatoilHydro ASA (STO) and Chevron
Corp. (CVX) to discuss new possibilities under the energy reform that Mexico's Congress
approved last October.

Calderon and Reyes Heroles have admitted that the reform has shortcomings, such as not
Pemex sign production
sharing agreements with outside firms. Left
wing lawmakers in
Congress refused to consider legislation that broke up Pemex's monopoly on oil production
and sales.

Just the same, Pemex officials have said the new legal framework open
s possibilities for
integrated oil companies to invest in Mexico. The reform lets Pemex draft service contracts
where payments are linked to the success of the project.

"They all expressed interest," said Reyes Heroles, referring to Calderon's meeting la
st week
with oil executives.


Argentine oil company Repsol YPF SA (REP) said Monday it is continuing talks with
the Ecuadorean government despite escalating tensions between the two parties ove
r a tax

Ecuador's President Rafael Correa over the weekend threatened to expel Repsol if the
company doesn't drop a legal claim against the country over the dispute.

"At the moment we're talking with Ecuador about a solution (that would allow
Repsol to
continue to operate in the country) but we haven't withdrawn the arbitrage," a Repsol
spokesman said. He declined to comment further on the arbitrage.

Under terms of a transition contract between the company and Ecuador, Repsol agreed to
aw three arbitrage claims, but it kept the fourth claim. The Repsol spokesman said the
company isn't actively encouraging the process in the courts.

Ecuador's previous administration mandated that when oil prices rise above those in
operating contracts,
the government's share of the excess would be 50%. Correa's
administration raised the figure to 99% in October 2007.

Various private companies have said the windfall tax has made their businesses unprofitable.

Repsol owes the government around $400 mil
lion because of the tax, a sum that Repsol said
it has provisioned for but not paid.


The government of Brazil will not allow the entry of the state owned Venezuelan petroleum
company PDVSA into Brazil's f
uel markets, in Northeast Brazil, because of its low prices.

"PDVSA will sell fuel at banana prices," said Edson Lobao, Brazil's Minister of Mines and
Energy, who added that this would harm many Brazilian distributors.

In a new chapter between bilateral
relations between the two companies, Lobao's
declarations increase the distance in the association between PDVSA and Petrobras, for the
construction of the Abreu Lima refinery in Pernambuco.

The project, in which Petrobras would have a 60% interest and PD
VSA 40%, has been
negotiated by the two countries for the last three years, and on February 17 a decision will
be made as to whether the Venezuelan company will participate, or not, in the construction
of the refinery, since it has yet to invest in its con

According to Lobao, PDVSA is requesting, as a condition of its participation, that the diesel to
be produced in the refinery of Porto de Suape in Pernambuco be sold in the Brazilian market,
according to Monitor Mercantil.

It is estimated that
Abreu de Lima will be able to process 300,000 bpd of heavy crude.


Representatives of the state owned petroleum company Petroproduccion, a subsidiary of
Petroecuador, as well as service providers Or
ienco and Energy Petrol, held a press
conference this past Thursday to deny the use of corruption in obtaining petroleum contracts,
made by the financial authorities of the country.

The vice president of Petroproduccion, Camilo Delgado, said that the info
rmation released by
the financial authorities and reported by the press have "errors of amounts, data, pictures,
values, percentages and phrases recorded based on imprecise and incorrect information." He
added that next week he will release documentation s
howing the transparency of the
company, according to a report in El Comercio.

Energy Petrol is presently installing on Petroproduccion's pipelines, the systems and
equipment necessary to reduce the percentage difference between the crude oil being
d at the fields, and that being reported at Lago Agrio.

Orienco is presently renovating 83KM of obsolete pipeline of the state owned petroleum
company, which presently is allowing theft of fuels to take place, according to El Universo.


The president of Bolivian state owned petroleum company YPFB, Carlos Villegas, the general
manager of Gazprom, Vladimir Kulikov, and Alexander Kazak, director of Vniigaz, signed
agreements to obtain investments a
nd cooperation in the natural gas and petroleum sectors
until 2030.

The agreements, signed this past Thursday at the Bolivian city of Santa Cruz, establish the
"general scheme to develop the natural gas industry in Bolivia until 2030 and sets the

hydrocarbons strategy," said the Russian press agency Novosti.

In the signing of the agreements also participated the Russian firm Vniigaz, which will be the
company responsible for carrying out the project.

The parties agreed upon a work schedule, deba
ted the state of another project to form a
mixed company which will be responsible for producing hydrocarbons at the Acero field, and
looked into, finally, increasing the participation to include Bolivian
Venezuelan company

No amounts were me
ntioned, however last Wednesday Bolivia's Vice
Minister of Energy,
William Donaire, stated that Gazprom is planning to invest as much as $3 billion in natural
gas projects in Bolivia, According to Los Tiempos.


The government of Bolivia last Monday began a thorough audit of YPFB, two days after
dismissing its president due to a case of corruption.

Investigators, accountants and the police took control of the central office of YPFB in La Paz
as well as in the rest of the country, to begin an investigation ordered by president Evo
Morales, under the program "zero corruption."

"We have initiated a judicial, administrative and technical audit by orders of the president,
who has ordered that th
e regular YPFB functions should continue normally," said the Vice
Minister of Transparency, Nardy Suxo, to reporters, upon arriving at the national
headquarters of YPFB.

Suxo was received by the new president of YPFB, the powerful ex
Minister of Hydrocarb
Carlos Villegas, while outside the building the previous president of the company, Santos
Ramirez, declared his willingness to give "the maximum cooperation" to the investigators,
and repeated his claims of innocence.

Almost all managers and national

executives of YPFB also remained at the disposal of the
investigators, by order of the president, according to state television.

By afternoon, the ex commercial manager, Rodrigo Carrasco, and administration manager,
Julio Anagua, both high level executiv
es of YPFB, were arrested for hiding information
regarding the workings of the state owned company, said Jose Gutierrez, one of the

"They were trying to hide the documents, and remove documents," said Gutierrez, one of the
15 fiscal inspect
ors assigned to the investigation of corruption charges at YPFB.

Santos Ramirez was fired by Morales on Saturday, due to charges that $450,000 in cash
stolen a few days earlier from a local businessman were for political relatives of the
executive, who us
ed to be president of the Senate.

The businessman, Jorge O'Connor, died during the attack, which opened a web of
irregularities in which politicians of all sides are involved.

O'Connor was president of Catler Uniservice, an Argentinean
Bolivian consortiu
m which is
building a liquid and gas separation plant for YPFB, for more than $80 million.

The Vice
Minister Suxo said that she will investigate the circumstances and progress of the
Catler Uniservice project, the largest single project by YPFB, since Mor
ales nationalized the
hydrocarbons industry in 2006.

She added that all YPFB documentation will be at the simultaneous disposal of the police
investigating the murder, as well as a legislative commission which is trying to establish
political connections.

The new president of YPFB said that his initial task will be to "provide complete transparency
and guarantee continuity" of the operations of the petroleum company, which controls
natural gas exports to Argentina and Brazil, Bolivia's largest internation
al revenue generator.


The Colombian
Ecuadorean consortium Interpec presented the only bid to explore and
develop the marginal fields Ocano
Pena Blanca and Eno
Ron, located in the province

Sucumbios, proposing to pay $30 million for each.

The special awards committee (CEL) of the Ecuadorean government said that in 15 days it
will announce if the bid is acceptable, and noted that the contract terms call for a state
participation of 70%.

Interpec is owned by Colombian company Integrales de Servicios Petroleros and the
Ecuadorean company Petro Ecologica Clining Sistem (Pecs). German Avila, legal
representative of the consortium, told the press that they may be operating in eight months,

the government agrees, and that at first they expect to produce 500 bpd, with the goal of
increasing that to 2,500 bpd in two years, according to El Telegrafo.

With this new award, Ecuador would be violating its OPEC agreement to reduce daily
to 490,000 bpd from the 504,000 bpd it is presently producing, which may
subject it to sanctions, according to Confirmado.


The state owned Colombian petroleum company, Ecopetrol, announced on Friday

that jointly
with KNOC, the national petroleum company of South Korea, it had purchased Petro
Tech of
Peru from the Offshore International Group, Inc. of the U.S., for $900 million.

The acquisition is the first incursion by the Colombian company into Per
u, one of the South
American countries with the largest reserves of crude oil and natural gas, and one of the
most stable economies in the region.

"The value of the transaction is $900 million dollars. The investment will be made in equal
parts," said an
Ecopetrol press release.

The largest activity of Offshore International Group is Petro
Tech Peruana S.A., a company
dedicated to the exploration, development, production and processing of hydrocarbons in

During a press conference in Lima, the execu
tive V.P. of E & P for Ecopetrol, Nelson
Navarrete, said that the investment planned for Petro
Tech will be $250 million per year
during the next five or six years.

The acquisition is part of the internationalization process of the state owned Colombian
ompany and its strategy to reach a production of 1 million barrels of oil per day by 2015.

"The acquisition demonstrates the trust that Ecopetrol and KNOC have in Peru's economy, in
its institutions and in its petroleum potential," said a press release by

both firms released in

"The companies intend to increase their investments in the coming years with the goal of
increasing reserves and production of hydrocarbons," it added. The Colombian
South Korean
partnership won over other interested partie
s, such as CNPC and CNOOC of China, Petrobras
of Brazil, and BPZ Resources Inc.

Ecopetrol and KNOC announced that one of the objectives of the acquisition is to at least
double Petro
Tech's production in the next three years.

Tech presently produce
s about 12,000 bpd of crude oil and has 11 blocks in Peru, one
with production and 10 being explored, which together add up to one of the largest offshore
exploration areas in South America, with 9.5 million hectares.

As of November 30, 2008, total revenu
es of the Peruvian company were $359 million, with
$134 million in net profit.

Tech was implicated in Peruvian circles with the release of recordings which showed
corruption acts in the awards of petroleum blocks to a Norwegian company.

The company

denied being behind the release of the recordings, which provoked the largest
scandal during the rule of Peruvian president, Alan Garcia. Presently, Ecopetrol has
exploration blocks in Peru, Brazil, and the Gulf of Mexico.


The Colombian state owned petroleum company Ecopetrol and British
Australian company
BHP Billiton Petroleum Corp., through its Colombian subsidiary, signed an agreement to
increase Ecopetrol's participation in the Fuerte

Norte and Fuerte Sur blocks, announced the
financial authorities of Colombia this past Thursday.

Both petroleum blocks, located in the Colombian Caribbean, and which include contracts for
the exploration, production, and joint operation of hydrocarbons p
roduction, which were
signed in 2006 and 2007 by BHP Billiton and Ecopetrol, with Colombia's National
Hydrocarbons Agency (ANH).

The two blocks, which total 954,050 hectares, are located in an area which is believed to
contain large natural gas reserves.

According to the contractual terms, BHP Billiton will assign 25% of its interest to Ecopetrol,
and as a result, each company will now have equal 50% interests in the blocks, according to
a company press release reported by Portafolio on Monday.

This chan
ge in participation interests will require the approval of the National Hydrocarbons
Agency (ANH).


The Spanish petroleum company Repsol
YPF has set the objective of reducing costs by $1.91
billion, to
help it weather the 2009 economic crisis, stated a spokesman to Reuters last week.

The plan freezes executive salaries throughout the company, according to the spokesman,
citing a letter released by the company's president.

"The plan is to make it throug
h 2009," said the spokesman, adding that the cost savings will
not affect the company's 2008
2009 strategic plan, which calls for investments of 32.8 billion

Spanish newspaper El Pais reported that the 1.91 billion that Repsol plans to save in 2009

about 10% of the company's budget for the year.


Sugar prices rose on Tuesday after India announced approval for duty free imports of raw
sugar to bolster domestic supplies. Although the decision was expected,

traders said the
move represented an important shift for the global market and will see India swing from a
net exporter of sugar to a net importer.

ICE March raw sugar rose 1.5 per cent to 12.94 cents per pound.

Downward revisions to Indian sugar outp
ut also provided a boost for sentiment, with one
producer suggesting sugar production could drop by almost half to 16m tons from 29m tons
last year.

Some imports will go to India but it is unclear how much, given that some 10m tons remain
stored somewher
e in the country.

Elsewhere in commodity markets, oil prices managed a modest rebound after falling in the
previous session. Gold held above the $900 level and base metals were mixed as traders
digested the latest forecasts for economic growth in Asia fr
om the International Monetary

The IMF cut its forecast for Asian GDP growth in 2009 to just 2.7 per cent this year, a sharp
reduction from the 4.9 per cent expansion that was predicted as recently as November. The
IMF also warned that the outlook f
or Asia was "very uncertain" and that a "worse outcome"
could not be ruled out.

For China, the IMF repeated its forecast growth of 6.7 per cent in 2009 and said that that an
additional stimulus package could help Beijing reach its own GDP growth target o
f 8 per cent.

ICE March Brent, which is seen as the best indicator of global oil prices, rose 32 cents to
$44.14 a barrel.

Nymex March West Texas Intermediate added 12 cents at $40.20 a barrel, while the April
contract gained 18 cents at $44.10 a barre

JBC Energy, the Vienna
based consultancy, said the 11 Opec members bound by output

excluding Iraq

had reduced their crude oil output by a "massive" 1.57m
barrels a day between the end of December and the end of January.

"The impact of

Opec's most recent efforts should not be underestimated," the consultancy
said, adding that "the group is serious about reducing the current supply overhang".

Gold was trading at $904 a troy ounce, moving between a narrow range between a low of
and a high of $905.85, after ending trading in New York on Monday at $901.25.

James Steel, precious metals analyst at HSBC, said evidence of disinflation and financial
market weakness had encouraged investors to liquidate long gold positions.

He added
that although investment demand for gold had been strong in recent weeks,
demand for jewelry was continuing to weaken, as shown by the latest sales data from Abu
Dhabi, which showed a 70 per cent drop in jewelry sales in January.

"The Arab emirates are h
istorically an accurate barometer of demand in the region. The
slump in sales, combined with recent weak Indian gold import data for January, strongly
imply weak retail gold demand in much of the emerging world," Mr. Steel said. He cautioned
that weak reta
il demand could present a headwind to any future price rallies.

Among base metals, aluminum traded 1.3 per cent lower at $1,367 a ton amid ongoing
concerns about the outlook for demand this year.

The head of Rusal, the world's largest aluminum producer,

warned that world demand would
tumble by nearly one
quarter this year and prices would not rebound, forcing smelters to
slash costs or go out of business.


Sugar cane production in the Center
region of Brazil will exceed for the first time the
500 million ton level during this harvest (2008/09), because the harvesting activity has
continued during the in between harvests period, confirmed UNICA last week.

Up until January 15 total sugar cane p
rocessed in the region was 499.6 million tons, which is
15.88% more than for the same period last year. During the first 15 days of January, 2.34
million tons of sugar cane was processed.

The main reason for the increased production is that 46 production
facilities continued to
operate; and at least 10 might continue to operate non
stop until the next harvest begins in

"Operations are continuing because several new facilities began operating only at the end of
last year," said Antonio de Padua Rodr
igues, Technical Director of UNICA. An increase in
productivity during this period is also contributing to the overall performance of this sector.


Orbital Corporation Limited (ASX: OEC

) and Sygma Motors

Engenharia, Industria
E Comercio de Motores Ltda of Brazil ("Sygma") are pleased to announce that agreement has
been reached on two significant engineering programs, with Vale Solutions in Energy ("VSE")
as the end customer.

Senior r
epresentatives of Orbital and Sygma, including Directors of Sygma Group and Sygma
Motors, and the Chief Executive Officer of Orbital, have met for discussions regarding joint
business initiatives in Brazil. The discussions were supported by the President o
f VSE,
Sygma's exclusive partner for engine development.

Orbital's FlexDI(TM) has been selected as the most promising technology for a new family of
high efficiency heavy duty Flex Fuel engines currently being developed by Sygma for VSE.
The application
will commence with an engine test and development program supported by
Orbital with a total value of $A1.6m; also included in the scope is co
development of a spark
ignited ethanol combustion system to be used in a demonstration program, and targeted for
etrofit of existing diesel engine applications.

Applications include ethanol and CNG flex
fuelled internal combustion engines; initially, but
not limited to the 80 to 1500 hp power generation class in Brazil, and subsequently in other
markets and sectors
. VSE intends to utilize these engines, primarily in the resources sector,
in support of a clean energy strategy.

The companies will also cooperate on possible flex
fuel OE and retrofit applications for
transportation, either with spark ignition FlexDI(T
M) or diesel pilot ignition, for Ethanol and
CNG fuelling of heavy duty engines, and for the light duty commercial vehicle sector.

The Companies recognize the primary market drivers for uptake of flex
fuel ethanol
engines will include environmental b
enefits for local air quality together with greenhouse gas
abatement, operational cost savings, and the market appeal of clean energy solutions.

Terry Stinson, Orbital's Chief Executive Officer, commented "Our new alliance with Sygma
Motors is in line wi
th Orbital's strategy to expand into alternative fuels. We are very pleased
to continue our initiatives with Sygma Motors in Brazil. Brazil is recognized as the leading
country in the use of renewable fuels and provides an excellent foundation for the expa
of FlexDI(TM) ethanol

CNG engine applications".

Sygma Motors co
founder and Managing Director, Marcos Langeani, added "The Orbital
FlexDI(TM) system provides a series of potential solutions that we will be busy developing in
the months to come. W
e believe that we will be able to achieve spark ignited operation with
ethanol that matches or exceeds that obtained with advanced high efficiency natural gas
reciprocating engines of equivalent size".


he number of new sales contracts on existing homes jumped a seasonally adjusted 6.3% in
December as buyers took advantage of lower mortgage rates and falling prices, a real estate
trade group said Tuesday. The pending home sales index rose 6.3% in December

and is now
up 2.1% compared with a year earlier, the National Association of Realtors said. The increase
points to a healthy gain in existing
home sales in January and February. The index is based
on signed sales contracts, which usually occur a month or
two before the sale is closed, when
sales are reported in the NAR's existing
home sales report.


The U.S. private sector shed 522,000 jobs in January, according to the ADP employment
index, po
inting to another hefty month of job losses when the government reports its payroll
figures on Friday. The ADP index, compiled from anonymous payroll data, showed the goods
producing industries lost 243,000 jobs, while the service
producing industries lost

jobs. The ADP index covers only private
sector jobs, adding in some 10,000 government jobs
created in a typical month, the report suggests nonfarm payrolls fell by about 510,000 in
January. Economists now expect payrolls to fall by 525,000, the fi
fth straight month of at
least 400,000 jobs lost.


battered employers eliminated 598,000 jobs in January, the most since the end of
1974, and catapulted the unemployment rate to 7.6 perc
ent. The grim figures were further
proof that the nation's job climate is deteriorating at an alarming clip with no end in sight.

The Labor Department's report, released Friday, showed the terrible toll the drawn
recession is having on workers and com
panies. It also puts even more pressure on President
Barack Obama to revive the economy.

The latest net total of job losses was far worse than the 524,000 that economists expected.
Job reductions in November and December also were deeper than previously r

With cost
cutting employers in no mood to hire, the unemployment rate bolted to 7.6
percent in January, the highest since September 1992. The increase in the jobless rate from
7.2 percent in December also was worse than the 7.5 percent rate econo
mists expected.

All told, the economy has lost a staggering 3.6 million jobs since the recession began in
December 2007. About half of this decline occurred in the past three months.

Factories slashed 207,000 jobs in January, the largest one
month drop s
ince October 1982,
partly reflecting heavy losses at plants making autos and related parts. Construction
companies got rid of 111,000 jobs. Professional and business services chopped 121,000
positions. Retailers eliminated 45,000 jobs. Leisure and hospital
ity axed 28,000 slots.

Those reductions swamped employment gains in education and health services, as well as in
the government.

Just in the 12 months ending January, an astonishing 3.5 million jobs have vanished, the
most on record going back to 1939, a
lthough the total number of jobs has grown significantly
since then.

Employers are slashing payrolls and turning to other ways to cut costs

including trimming
workers' hours, freezing wages or cutting pay

to cope with shrinking appetites from
s in the U.S. and overseas, who are struggling with their own economic troubles.

The average work week in January stayed at 33.3 hours, matching the record low set in

With no place to go, the number of unemployed workers climbed to 11.6 million

Over the past 12 months, the number of unemployed has increased by 4.1 million, and the
unemployment rate has risen by 2.7 percentage points.

Job hunters also are facing longer searches for work.

The average time it took for an unemployed person to fi
nd any job

full or part time

to 19.8 weeks in January, compared with 17.5 weeks a year ago, underscoring the increasing
difficulty the out
work are having in finding a new job.

Workers with jobs saw modest wage gains.

Average hourly earnings
rose to $18.46 in January, up 0.3 percent from the previous month.
Over the year, wages have risen 3.9 percent.

An avalanche of layoffs is slamming the nation from a wide swath of employers.

Caterpillar Inc., Pfizer Inc., Microsoft Corp., Estee Lauder Co
s., Time Warner Cable Inc., and
Sprint Nextel Corp. are among the companies slicing payrolls. Manufacturers

especially car

construction companies and retailers have been particularly hard hit by the
recession. Talbots Inc., Liz Claiborne Inc., M
acy's Inc. and Home Depot Inc. are all cutting
jobs. So are Detroit's General Motors Corp. and Ford Motor Co.

Americans cut back sharply on spending at the end of last year, thrusting the economy into
its worst backslide in a quarter
century. The tailspi
n could well accelerate in the current
March quarter to a rate of 5 percent or more as the recession drags on into a second
year, and consumers and businesses burrow deeper.

Vanishing jobs and evaporating wealth from tanking home values, 401(k)s
and other
investments have forced consumers to retrench, which has required companies to pull back.
It's a vicious cycle where the economy's problems feed on each other, perpetuating a
downward spiral.

Many economists predict the current quarter

in ter
ms of lost economic growth

will be
the worst of the recession.

With fallout from the housing, credit and financial crises

the worst since the 1930s

ripping through the economy, analysts predict up to 3 million jobs will vanish this year

even if C
ongress quickly approves the stimulus measure, which has ballooned to more than
$900 billion in the Senate.

Obama has been making repeated pleas to Congress to swiftly enact a package of increased
government spending, including big public works projects
and tax cuts, to revive the
economy and create jobs. Obama says his plan will save or create more than 3 million jobs in
the next two years.

The economy's problems have proven stubborn. Despite record low interest rates ordered by
the Federal Reserve and

a raft of radical programs, including a $700 billion financial bailout,
consumers and businesses face high hurdles to borrow money. Foreclosures are
skyrocketing, home prices are sinking and Wall Street remains on edge.


FirstBank Financial Services of McDonough, Ga. became the seventh bank of 2009 to fail and
the 32nd of the recession on Friday, according to the Federal Deposit Insurance Corporation.
Regions Financial Corp. said it will assume about

$285 million in total deposits from
FirstBank, and that the FDIC will retain most of FirstBank's loan portfolio for later disposition.


Tough times, this week, for anyone who believes in the virtues of free trade and
free markets

although Wen Jiabao, China's premier and leader of the world's largest centrally
economy, said he had started reading Adam Smith lately for inspiration.

As President Obama said this week, "This recession might linger for years. Our
economy will
lose 5 million more jobs. Unemployment will approach double digits. Our nation will sink
deeper into a crisis that, at some point, we may not be able to reverse."

Bloomberg reports that, "Moody's Investors Service is reviewing the ratings of
$302.6 billion
in commercial mortgage
backed securities as real
estate values drop and property owners
fall behind on payments."

Macy's said it laid off 7,000 people. California says it is kiting checks.

The chill wind has already blown over Iceland, whe
re 20 years of right
wing rule came to an
end and the largest remaining listed bank contemplated a move to London or Stockholm.
France also felt the effects as over 1m demonstrators protested against the government's
response to the economic crisis. And in

a single day the whirlwind claimed the jobs of over
76,000 workers in the US and Europe.

Banks and miners continued to batten down the hatches. ING was helped by the Dutch
government, which insured 80 per cent of its mortgage
backed securities for a fee
pledges of continued lending to Dutch companies and consumers. Barclays reassured
investors in an open letter about its own financial strength, and saw its shares leap, for now.
Xstrata tried to beat others to the capital trough by launching a £4bn ri
ghts issue while Rio
Tinto acknowledged it may soon have to follow suit to cut its debt mountain.

They say that the banks have stopped calling in their loans on the commercial real estate,
even though the owners of the malls and strip malls have arrived f
irmly in default. Calling in
the loans would only pin another horrifying liability on the banks' balance sheets. So all
parties join in a game of "pretend," that nothing has really happened to the fundamental
equations of business life. Something similar g
oes on at the next level down, where the
tenants of the malls and strip malls sink deeper into rent arrears every month, and the
eviction process is simply postponed, while the stores themselves put off paying their
vendors and suppliers

as the whole sys
tem, the whole way of life, enters upon a circle
of mutual denial in a last desperate effort to forestall the mandates of reality.

Goldman Sachs estimated that it would take on the order of $4 trillion to buy troubled
mortgage and consumer debt. That

number could shrink if the program was limited to only
certain loans or banks, but it could also grow if other asset classes such as commercial real
estate loans were included.

How much is $4 trillion? At $4 trillion, that would be the equivalent of near
ly 1/3 of U.S.
gross domestic product. If the government had to fund that amount by issuing additional
debt, it would intensify investor concerns about massive supply scaring off demand.

Yes. You can imagine the world's main owners of dollar
denominated r
eserve assets (China,
Japan, the Petro states) would be intensely concerned about a $4 trillion increase in dollar
denominated debt. But wait a tick...

Its one thing to say you might need to float as much as $4 trillion in debt to fund your bad
bank. It's

another thing to sell that debt? Who will buy it? Even these days, $4 trillion is a lot
of capital to loan. Maybe that number has been floated to make a smaller number, say $2
trillion, and look small by comparison.

How much debt is too much? Well, priva
te debt is usually about 80% of GDP. Now, it's about
140% of GDP. That's about $6 trillion of debt that needs to be paid off...or written off. And
that's after $1 trillion of write
offs in 2007 & 2008.

There are only three ways to attack this debt: infla
tion, liquidation, or boondogglization.
Friedman...and practically all mainstream economists and politicians...favor the third choice.
A little of this...a little of that...and something for everyone...

Eventually, when their boondoggling is clearly not w
orking...and when unemployment is over
12%...they will turn to Gideon Gono and ask for his help.

According to a MarketWatch.com news story released Wednesday, worried that the interbank
market is becoming tighter again, since the three
month London Interb
ank Offered Rate
(LIBOR) has risen from a low of 1.09% on Jan. 13 to 1.23% Wednesday, while the
benchmark Federal Funds rate has remained in target range of 0.00% to 0.25%. They fear
that banks are once again becoming nervous about the health and stability

of their sector
brethren, making them even more reluctant to lend to one another.

However, if people are worried about the creditworthiness of banks, they're a lot more
worried about the U.S. Treasury. The 10
year Treasury bond yield bottomed out at 2.07
% on
Dec. 17. Wednesday's closing yield was 2.93%.

Thus, while LIBOR has increased by 14 basis points, or 0.14%, the 10
year Treasury bond
yield, which is supposed to be less volatile than short
term rates, has risen by 86 basis
points, or 0.86%.

This i
s not entirely a panic reaction by investors fearful that the U.S. government will go bust
(although credit
swap spreads on the U.S government debt have widened recently,
and are higher than on Germany). It also represents two other factors:

• The

fear of inflation.

• And the increasing difficulty the U.S. Treasury is likely to find in financing its gigantic
borrowing requirements.

The Treasury Borrowing Advisory Committee paints a bleak picture. The average maturity of
Treasury debt has decline
d from the 60

month average that was the rule from 1986
to 2002, all the way down to the 48 months that's been the norm of late.

And that's at a time of exceptionally low real interest rates, which the Treasury could have
locked in for decades to c
ome if it had borrowed long
term. From 2001 to 2007, Treasury
abolished the 30
year Treasury bond, financing only shorter
term during a period in which
rates were low and the budget deficit was exploding upwards. We're not talking great
foresight here!

is tactic

borrowing short
term and hoping for the best

is still being used. All the existing
issue maturities

in two, three, five, 10 and 30 years

are being increased and the 30
issues are being moved from quarterly to monthly.

However, the a
dvisory committee recognized that even these changes would not be enough
to fund the U.S. Treasury's borrowing requirement, which the Committee estimated could be
as much as $3 trillion to $4 trillion between now and September 2010.

(In addition to the of
ficial budget deficit, the federal government's various "investments" in
the U.S. banking system, the automobile sector and elsewhere must be financed somehow).

A Mismatched Strategy?

The committee didn't take the opportunity to recommend issuing 50

bonds, which
Britain has done very successfully, and which would have had the advantage of postponing
the maturity beyond the problems caused by Baby Boomer retirements and medical needs
(by 2059, the youngest Baby Boomers would be 95, so there won't be m
any left). Instead,
the government decided to issue seven
year bonds, hoping for some unexpected additional
investor demand in the range between five years and 10 years.

The committee's schedule will cause real problems with refinancing. The plan to issue

billion annually in two
year notes and $420 billion in three
year notes brings huge
refinancing problems in 2011 and 2012, precisely when the budget deficit will still be gigantic
and credit will be needed to finance the (hoped
for) early stages of a
n economic recovery. By
keeping debt maturities so short, the committee raises the risk of serious market indigestion,
which would force yields much higher and cause major damage to the economy.

This financing problem is the hidden side of stimulus packag
es. The federal budget deficit is
likely to run around 10% of U.S. gross domestic product (GDP) in 2009 and 2010, and
should continue close to that level for several years thereafter (because the government
could not risk killing a fragile recovery by push
ing too hard to get the budget back into

With Treasury bond issue maturities being so short, producing large refinancing needs, the
impact of such huge financing demands on the economy will be huge.

Recessions are perfectly natural in the busin
ess cycle. Human beings take risks with
borrowed money during a growth phase. Some risks pay off. Some don't. A recession is a
reckoning up of the risks. The bad investments are liquidated, asset values readjust, and the
next cycle begins.

You can only ge
t a depression when the government and the monetary authorities take
unusual steps
driven by political motives
to prevent the natural process of recession. This is
why today's policy moves are setting us up for a Depression. And it's not the first time.

he origin of the Depression is in the credit boom that preceded it. The credit boom of the
1920s made it inevitable that the natural rhythm of the business cycle would be amplified
and made more severe. The boom was boomier. The bust was...worse than it ha
d to be.

It was made worse by government policies that put America into debt, allocated capital in
the most inefficient hands possible while crowding out business investment, and locked in
wages and prices higher than they ought to have been, further dela
ying the vigorous
rebound in employment and wages you usually get in a recovery.

To repeat, recessions are a natural and unavoidable part of the business cycle. Depressions
are the bill you pay for trying to avoid recessions with even looser monetary poli
cy and more
government spending to stimulate consumption. What you need is a cleansing break. What
you get is a money
induced fever of pointless economic activity, full of noisy cash registers,
signifying nothing.

It seems that things are getting better,
in China!

Economists React: Signs of Stabilization in China?

Analysts respond to the January uptick in China's purchasing managers' index. Though still in
negative territory, the latest reading was quickly seized on by those looking for signs of
ent after a sharp slowdown.

January's PMI shows that the Chinese economy is bottoming out and the trend of a gradual
recovery is taking shape. In 2008 there were large fluctuations in the prices of domestic and
foreign raw materials, resulting in a severe

inventory adjustment and a sharp decline in
industrial production. Since November 2008, the inventory adjustment has been largely
completed, and the domestic prices of some raw materials, for instance iron and steel, have


Zhang Liqun, China
Federation of Logistics & Purchasing

Manufacturing in China is still contracting, but the bottom is now in sight. The purchasing
managers' index rose for the second straight month in January, coming in at a reading of
45.3 compared with 41.2 for December.

… China's PMI may have bottomed in November,
when an alarming reading of 38.8 was reported. Although manufacturing continued to
contract in January, the pace has clearly slowed. A rebound in activity may be not far from
now. The massive fiscal stimulus an
nounced late last year has not only helped to sustain
business confidence, but has also given direct support to local manufacturers.

Chan, Moody's Economy.com

The January reading suggests 1) sequential manufacturing growth momentum has been
oving from its trough in November; 2) but it is still contracting at a sub
level. To put it plainly, things are still getting worse though the pace of deterioration is not
quite as rapid as it was in November and December. … However, year
ear activity
growth is likely to remain weak at least in 1Q2009 due to a high base and the time lag for
the effects of the stimulus measures to fully surface.

Yu Song & Helen Qiao, Goldman

While there is still a risk that continued fall
off in gl
obal demand may further undermine
China's growth, the January PMI data at least provide further support to our view that GDP
growth should be stronger in Q1 2009 than in Q4 2008. In fact, we believe the government's
massive stimulus package should be able
to push up GDP growth further in coming quarters
and help achieve 8.0% growth in 2009.

Mingchun Sun, Nomura

Overall, we take this, together with the CLSA PMI released yesterday, as an early sign of a
stabilization in manufacturing contraction. Combined
with the reports of a sharp acceleration
in bank credit growth in January following a strong expansion in December, and signs of
progress in the implementation of the fiscal stimulus, we expect final domestic demand will
increasingly become an offsetting f
orce to the weak external demand.

Wensheng Peng,
Barclays Capital

The accelerated rise of manufacturing PMI undoubtedly points to a recovery in China. The
rebound of PMI in December and January suggests that the Chinese economy is resilient
(due partial
ly to the economic
stimulus plan) and the destocking process is near its end.
Today's PMI reading supports our call of a V
shape recovery and an 8.0% GDP growth
forecast for 2009… The first quarter will still be tough for China, as the decline of exports w
offset some of the rise in domestic demand; but we expect the economy on the whole to see
a salient rebound in as early as 2Q09.

Ting Lu, Merrill Lynch

Avoiding Depression: Writing for the Project Syndicate, Brad DeLong outlines four tools for
ing depression: fiscal policy, credit policy, monetary policy and inflation. "The third tool
is credit policy. We would like to boost spending immediately by getting businesses to invest
not only in projects that trade safe cash now for safe profits in the

future, but also in those
that are risky or uncertain. But few businesses are currently able to raise money to do so.
Risky projects are at a steep discount today, because the private
sector financial market's
risk tolerance has collapsed. No one is willi
ng to buy assets and take on additional
uncertainty, because everyone fears that somebody else knows more than they do

that anyone would be a fool to buy. Although the world's central banks and finance ministries
have been devising many ingenious

and innovative policies to stimulate credit, so far they
have not had much success. This brings us to the fourth tool: fiscal policy. Have the
government borrow and spend, thereby pulling people out of unemployment and pushing up
capacity utilization to n
ormal levels. There are drawbacks: the subsequent dead
weight loss
of financing all the extra government debt that has been incurred, and the fear that too rapid
a run
up in debt may discourage private investors from building physical assets, which form
e tax base for future governments that will have to amortize the extra debt. But when you
have only two tools left, neither of which is perfect for the job

credit policy and fiscal policy

the rational thing is to try both, at the same time. That is wha
t the Obama administration
in the United States and other governments are attempting to do right now."

Global Depression: On his blog, William Buiter fears that global political leaders aren't doing
enough to avoid depression. "We can go down in history a
s the generation that created the
Great Depression of the Naughties. Just keep on beating the protectionist drums. Keep on
the foot dragging that prevents effective qualitative and quantitative monetary policy easing
in the Eurozone and the UK. And go ahea
d with unsustainable fiscal stimuli in the US, the UK
and elsewhere that will spook markets, push up long
term interest rates and raise the
specter of sovereign default by countries not belonging to the group of usual suspects. Yes
we can! I hope we won't.

Positives From Recession: Writing for the New York Times, Tyler Cowen looks at some
positive social changes that can come out of recessions. "Recessions and depressions, of
course, are not good for mental health. But it is less widely known that in the
United States
and other affluent countries, physical health seems to improve, on average, during a
downturn. Sure, it's stressful to miss a paycheck, but eliminating the stresses of a job may
have some beneficial effects. Perhaps more important, people may

take fewer car trips, thus
lowering the risk of accidents, and spend less on alcohol and tobacco. They also have more
time for exercise and sleep, and tend to choose home cooking over fast food. In a 2003
paper, "Healthy Living in Hard Times," Christopher

J. Ruhm, an economist at the University
of North Carolina at Greensboro, found that the death rate falls as unemployment rises. In
the United States, he found, a 1 percent increase in the unemployment rate, on average,
decreases the death rate by 0.5 perc

And just for the entertainment value, here is John Carney's "Two Cow Version of the AIG

Still confused about how AIG lost its shirt by going into the securities lending business big
time? We understand. It's terribly complex and full of

words that make your eyes glaze over.

So we decided to break it down into the simplest terms Wall Street transactions can be
explained: the two cows story.

You have two cows.

John Paulson borrows one cow so he can sell it for $100. He gives you $10 as

You buy your neighbors cow for $100, which you finance by taking out a $90 loan from the
bank and use John's $10 to make up the rest.

You brag to everyone about your financial health. You have assets
two cows you own, plus
one Paulson owes y
worth $300, and liabilities of just $100.

A third of the country goes vegetarian.

You thought your two cows were worth $200 and now they are worth $140.

You express confidence in your financial health. Your assets are now worth only $200
two c
ows plus the one John owes you
but your liabilities are still only $100. If necessary,
you could sell the assets at this distressed price and pay off all your loans.

You hold onto your cows because you are sure the market is "dislocated." Some day
e will want to eat beef again.

The rest of the country goes vegetarian. Your two cows are now worth $2 each to guys who
want to make dog food.

John Paulson buys a cow in the market for $2 and he gives it to you as repayment of the
loan. You now have thre
e cows worth six bucks.

John wants his $10 back.

The bank calls. It wants its $90 back.

You call the Federal Reserve and ask for a bailout.

(Just so you know, I could not stop laughing after I read the above).

Economists React: Jobs Report Shows 'Slow

Motion Train Wreck'

Economists and others weigh in on the January employment report, which showed a loss of
nearly 600,000 jobs and a rise in the unemployment rate to 7.6%.

Another horrific report, showing job losses across the economy. Manufacturing jo
bs down a
huge 207,000

that's a 1.6% drop in one month

construction down 111,000, retail down
45,000, business services down 121,000. The only private sector gain was in education and
health. Household survey employment fell 1.239 million, the worst si
nce records began in
1948. Only a dip in participation prevented an even bigger rise in the unemployment rate… If
ever there were an economy in need of stimulus, this is it.

Ian Shepherdson, High
Frequency Economics

There can be no sugar
coating this rep
ort. As suggested by the initial jobless claims data, the
labor market remains in the grip of the worst jobs market since the 1981
82 recession, the
rate of job losses massively intensified in November and there has been no change in trend
since then… As f
or the seasonal distortion in January retail payrolls, it turns out that the
retail payrolls declined despite an adjustment factor that added 687,000 to the retail
employment change in January.

RDQ Economics

The January payroll report and the accompanyi
ng annual benchmark reinforced the
impression of the slow motion train wreck that has become the U.S. economy… As one might
expect the burden of the current increase in the rate of unemployment is disproportionately
placed among young people and minorities
. The unemployment rate among teenagers
remained elevated at 20.8% while that among African
Americans jumped to 12.6% and
Hispanics increased to 9.7%. Given the evolution of the employment data it does seem clear
that the current expectation of a 9.0% rate

of unemployment on the part of the
Congressional Budget Office and the $43.0 billion in outlays on unemployment insurance in
the stimulus, which may be voted on later today seems a bit on the optimistic side.

Brusuelas, Moody's Economy.com

e hemorrhage is occurring from sea to shining sea in America and the recession is
deepening. The loss of 3.6 million jobs in this recession has eliminated $360 billion in buying
power in the economy. More and more businesses are cutting jobs in anticipatio
n of tougher
times. They want to trim fats and stay lean and mean for the tough times ahead.

Sung Won
Sohn, Smith School of Business and Economics

Job losses are not only deepening but are becoming more broad
based, with the diffusion
indexes of employme
nt change, which show the net percentage of private sector industries
adding to payrolls, at their lowest levels since the inception of the data… The reality is that,
with the recession having intensified over the past few months, the credit markets still
in a
dysfunctional state, and business and investor confidence at rock bottom levels, even with
the passage of a large fiscal stimulus package, whatever its merits may be, labor market
conditions will continue to deteriorate through 2009, though the pace o
f decline will
moderate as the year progresses, with the jobless rate likely rising into early 2010.

F. Moody, Mission Residential

The employment report indicated that the labor market continues to deteriorate at a rapid
clip… The latest unemploy
ment claims data suggest that the pace of job loss may be
accelerating in February. We look for the unemployment rate to continue to rise to about
9.75% by the end of 2009.

David Greenlaw, Morgan Stanley

There is no end in sight to the huge payroll declin
es, as high
profile lay
off announcements
keep coming, and initial unemployment insurance claims have moved above 600,000 for the
first time in this cycle. February might be even worse than January. We have now lost 3.6
million jobs since the cycle peak in

December 2007, with 1.8 million lost in the last three
months alone. We are heading for total job losses in the 6
7 million range and an
unemployment rate well above 9%.

Nigel Gault, IHS Global Insight

The decline in payrolls flirted with the psychologi
cally important 600,000 number for the third
consecutive month. Based on the rising number of "real" (as opposed to liquidity
bankruptcies in the retail sector, we see job losses accelerating for at least the next several
months to the point where
that 600,000 mark will soon be a dot in the distance behind us

Guy LeBas, Janney Montgomery Scott

Only about 12.7 million workers are employed by U.S. manufacturers, the fewest since
February 1946. While this structural downtrend in manufacturing employm
ent is likely to
continue even after the recession ends, the steep job cuts accompanied by reductions in
hours and overtime, indicate manufacturers are wasting no time cutting production in
response to the sharp drop in total demand. That sort of adaptatio
n makes it more likely that
the overhang of inventories can be drawn down more quickly leaving the economy better
poised to boost production if and when demand begins to improve.

David Resler, Nomura

The Other Unemployment Rate: 13.9%

The Lab
or Department's official unemployment rate hit 7.6% in January, and its jump from
4.9% a year earlier marks the largest annual increase in the unemployment rate since 1975.

But the government's broader measure of unemployment hit a more stunning level: 13
up from 13.5% in December.

The figure, which largely accounts for people who have stopped looking for work or can't find
time jobs, is the highest since the Labor Department started the data series in 1994. It's
just shy of a discontinued and e
ven broader measure that hit 15% in late 1982, when the
official unemployment rate was 10.8%. (That data series goes back to the 1970s.)

How does the government calculate two unemployment rates? The widely followed figure is
based on people who do not ha
ve a job, are available for work and have actively looked for
work in the prior four weeks. The official definition of "actively looking for work" includes
contacting an employer, employment agency, job center or friends; sending out resumes or
filling out

applications; and answering or placing ads, among other things.

The 13.9% unemployment rate

known as the "U
6″ for its Bureau of Labor Statistics

includes everyone in the official unemployment rate plus "marginally
attached workers,"
who are neither working nor looking for work but say they want a job and
have looked for work recently, and people who are employed part
time for economic reasons

they want and are available for full
time work but took a part
time schedule because

all they could get.

Because it's a relatively young data series, the U
6 doesn't get much attention beyond
researchers. But it may deserve more focus over the coming year as the labor market
continues its purge. Many employers are still focused on cuttin
g jobs quickly to get through
this downturn, pushing job
seekers aside for an extended period. After long searches

we're in the fifteenth month of this recession

some job hunters are likely to give up and
wait out the recession. Without the broader une
mployment rate, many of them wouldn't be

The International Herald Tribune :

"Japan's rural areas have been paved over and filled in with roads, dams, and other big
infrastructure projects, the legacy of trillions of dollars spent to lift the ec
onomy from a
severe downturn caused by the bursting of a real estate bubble in the late 1980s."

Public spending was so aggressive, it boosted Japan's government debt to 180% of GDP

more than two times the current U.S. level. But did all that cement buy
Japan out of its

You be the judge. Housing prices in Japan are now back down to where they were in 1975

nearly 90% below the late
'80s peak. And stocks? The Nikkei index is back down to where it
was a quarter century ago. Stocks sell for half the
ir book value

and they're still considered
too expensive for beaten
down, hyper
fearful Japanese investors. The downturn began in
1990. Over the following 19 years, it did more property damage than the Great Tokyo Fire of
'23 and the Enola Gay combined,
wiping out wealth equal to three times the country's GDP.
This was despite interest rates at zero...and a heroic effort at Keynesian stimulation.

If America were to follow Japan's example, it would have to leave its interest rates near zero
for the next
decade...and add about $10 TRILLION to its public debt. And if it got the same
results, you'll be able to sell your house in 2026 for the same price you paid in 1992.

But the simpletons have no other idea.

"In a nutshell," continues the IHT report, "Ja
pan's experience suggests that infrastructure
spending, while a blunt instrument, can help revive a developed economy, say many

Are these, perhaps, the same economists who thought America's super
debt economy would never
fail? The same economists who thought the bankers were
providing a public service, by offering so many people so much credit...and then planting
their debt bombs all over the planet? The same economists who forecast rising stock prices
in 2008?


They talk "change," but the only change they want is for things to go back to the way they
were. So, they're trying to stop the correction. And they're using every worn
out trick, every
blunderbuss weapon and every claptrap theory they can think of. Bailo
ut the banks...create a
'bad bank'...nationalize the banks...stop the foreclosures...send out checks...lower interest
rates...build bridges to nowhere

they'll do it all. But it won't work. All these measures are
designed to encourage consumption...in ord
er to support the old structures. But more
consumption is just what the economy doesn't need. It is in trouble because people have
spent too much. Now, they have to cut back...and when they do, every enterprise,
speculative investment, and household that d
epended on excess consumption is in trouble.

A little bit of the old juice from the central bank will cure a typical recession. It is nothing
more than a pause in the inventory cycle, allowing businesses to clear their shelves before
they are restocked. B
ut this is not an inventory
driven recession; this is a balance
depression. The problem is not really an absence of credit, but an excess of debt. Throughout
most of the post
WWII period, private sector debt in the USA, for example, equaled about

of GDP. In the '90s and '00s, debt rose to 140% of GDP. The difference is about $6
trillion. Until this debt is reduced, Americans will be reluctant to borrow or spend.

And it is not just the debt itself that must be eliminated. There are too many factor
producing too many goods for too many people who can't pay for them. You can see excess
capacity in the unemployment lines too. Suddenly, the world seems not to need so many
sales clerks, or welders, or financial engineers. The United States alone may
have $1 trillion
of excess output capacity and 10 million people too many in the workforce.

Debt and excess capacity can be liquidated quickly

as they were in the panics of the 19th

through bankruptcies and defaults. But, today, liquidation wo
uld have to take place
over the dead body of U.S. Fed chief, Ben Bernanke. While that would be our preferred
method; alas, it's not going to happen.

We conclude that, under a paper
money system, a determined government can always
generate higher spending
and hence positive inflation," wrote Bernanke. But with $7 trillion
in excess in debt and spare capacity, neither business nor labor has any pricing power.
Normally, it would take a long time before inflation returns.

We will do "whatever it takes," says
new US Treasury Secretary Tim Geithner.

Here come a lot of zeros.

Yes dear reader. Expect a lot of zeroes.

"The root cause of hyperinflation is excessive money supply growth, usually caused by
governments instructing their central banks to help finance

expenditures through rapid
money creation. Hyperinflations have mostly occurred in a context of political instability,
adverse economic shocks and chronically high fiscal deficits."

Joachim Fels and Spyros Andreopoulos, Morgan Stanley Global Economic Fo

"The entire economic growth system, where one regional center prints money without respite
and consumes material wealth, while another regional center manufactures inexpensive
goods ... has suffered a major setback.

"Today, investment banks, the pride

of Wall Street, have virtually ceased to exist."

Russian Premier Vladimir Putin

"The global financial crisis would be attributable to inappropriate macroeconomic policies of
some economies and their unsustainable model of development characterized by pro
low savings and high consumption; excessive expansion of financial institutions in blind
pursuit of profit

and other excesses."

Chinese Premier Wen Jiabao

"Never expect the people who caused a problem to solve it."

Albert Einstein

Yes dear reade
r. There is only one way through a time like this. You have to have a plan. You
have to use your own brain. And you have to have some idea of what's coming so you can
put yourself in a position to avoid the calamity and profit from the opportunity.

I hope

I have given you some food for thought.

Jose Cavaliere


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