21700502 Gloom Boom Doom September 2009

THE GLOOM, BOOM & DOOM REPORTISSN 1017-1371 A PUBLICATION OF MARC FABER LIMITED SEPTEMBER 1, 2009

A Depressive Optimist

“In politics, stupidity is not a handicap.”

Napoleon Bonaparte

“The know-nothings are, unfortunately, seldom the do-nothings.”

Mignon McLaughlin

“I compared Alan Greenspan to Casablanca’s Captain LouisRenault, who said, ‘I’m shocked, shocked to find thatgambling is going on in here!’ I must admit that I too amshocked, shocked by how much gambling has been going onin the financial markets around the world. Increasingly, itseems that the subprime mortgage market was just one ofmany tables in the global gambling hall. Could it be that theGreatest Global Boom of All Time was financed by theGreatest Global Casino of All Time? Sadly, the answer is ‘yes.’”

Ed Yardeni

“The measure of success is not whether you have a toughproblem to deal with, but whether it is the same problem youhad last year.”

John Foster Dulles

INTRODUCTION

Whenever I start to write, ThomasMann comes to mind. Mannexpressed the view that “a writer issomebody for whom writing is moredifficult than it is for other people”.While it sometimes takes me threedays to come up with the firstsentence of a new GBD report, thatfact isn’t the cause of my currentdepression. Nor am I depressedbecause of family reasons. On theinvitation of fund manager Peter

Sartori (a delightful, frank, and verysmart person), my wife and I recentlyenjoyed a trip to Australia. Asidefrom a few days of hard work, we hada marvellous time visitingMelbourne, Sydney, Perth, and AyersRock (now known by its morepolitically correct native name,Uluru). Australia has come a verylong way since the early 1970s, whenI first visited, and Sydney andMelbourne are now world-class cities.Perth (the lovely, but rather remote,capital of Western Australia) looks to

be on the verge of another resource-related boom, as the A$50 billionGorgon LNG project (the partnersare Chevron, Exxon, Mobil, andRoyal Dutch Shell) located off WA’sBarrow Island is likely to go aheadnext month.

I’m not sure that I would travel allthe way from the US or Europe justto see Ayers Rock, but if you findyourself in Australia I think Uluruand its surroundings (Kata Tjuta —The Olgas — is an even moreimpressive rock formation, in my

2 The Gloom, Boom & Doom Report September 2009

Figure 1 Australian Dollar ($XAD), 2002–2009

Source: www.decisionpoint.com

Figure 2 Singapore Straits Times Index (EOD) ($STI), 2003–2009


opinion; while wild camels can bespotted at the huge salt lake, LakeAmadeus) are definitely worth a visit— even for busy fund managers who,as Michael Steinhardt puts it, haveall become “a product of the lasttick”. In terms of landmass, Australiais the sixth-largest country in theworld, after Russia, Canada, the US,China, and Brazil. However, whereasthe US has a population of over 300million and a population density of31.6 people per square kilometre,Australia’s population is just 22million and its population density2.7. Most of the country is hardlyinhabited because of the aridconditions (see also below), but thevastness of the country and itsfascinating geological formationsmake it a very special place foranyone with the time to travel thereto observe the beauty of our naturalhabitat. (Even better, it is free.) Fromsunrise to sunset, Ayers Rock, whichcan be climbed (I failed to reach thetop), continuously changes colour.As an aside, I was surprised by howexpensive Australia has becomecompared to a few years ago. In myview, inflation in Australia has beenfar higher than the statistics wouldindicate, and prices are also high byinternational standards because ofthe appreciation of the currency (seeFigure 1). Outside the major cities inthe United States, I now find thatcountry to be rather inexpensive!

My depression also doesn’t haveto do with any financial problems.Having avoided the financialmeltdown of 2007/08, I began toaccumulate Asian stocks in late 2008and this has proven to be rewarding— at least, so far (see Figure 2). I amalso fortunate that I can travelextensively, and that I have scatteredaround the world a large number ofreally lovely friends, many of whom Imet through this newsletter. In short,with the exception of free time,which is a rare resource, I have“everything” — and I am extremelygrateful for that.

The cause of my depression is thefact that, even under the mostoptimistic assumption, I don’t believethat a bunch of government officialswill be able to solve, by fiscal and

monetary means, the very seriousstructural problems that exist in theglobal economy. Lee Iacocca, who at82 years has a new book out, WhereHave All the Leaders Gone?, bestexpresses my concerns about the

Western world — and specificallyabout the US — when he writes:

Am I the only guy in this countrywho’s fed up with what’shappening? Where the hell is our

September 2009 The Gloom, Boom & Doom Report 3

outrage? We should be screamingbloody murder! We’ve got a gangof clueless bozos steering ourship of state right over a cliff,we’ve got corporate gangstersstealing us blind, and we can’teven clean up after a hurricanemuch less build a hybrid car. Butinstead of getting mad, everyonesits around and nods their headswhen the politicians say, “Staythe course.”

Stay the course? You’ve got tobe kidding. This is America, notthe damned Titanic. I’ll give you asound bite: “Throw all the bumsout!”

You might think I’m gettingsenile, that I’ve gone off myrocker, and maybe I have. Butsomeone has to speak up. I hardlyrecognize this country anymore.

The most famous businessleaders are not the innovators butthe guys in handcuffs. While we’refiddling in Iraq, the Middle East isburning and nobody seems toknow what to do. And the press iswaving “pom-poms” instead ofasking hard questions. That’s notthe promise of the “America” myparents and yours traveled acrossthe ocean for. I’ve had enough.How about you?...

Leaders are made, not born.Leadership is forged in times ofcrisis. It’s easy to sit there withyour feet up on the desk and talktheory. Or send someone else’skids off to war when you’ve neverseen a battlefield yourself. It’sanother thing to lead when yourworld comes tumbling down.

On September 11, 2001, weneeded a strong leader more thanany other time in our history. Weneeded a steady hand to guide usout of the ashes. A hell of a mess,so here’s where we stand.

We’re immersed in a bloodywar with no plan for winning andno plan for leaving.

We’re running the biggestdeficit in the history of thecountry.

We’re losing the manufacturingedge to Asia, while our once-greatcompanies are getting slaughteredby health care costs.

Gas prices are skyrocketing,and nobody in power has acoherent energy policy. Ourschools are in trouble.

Our borders are like sieves.The middle class is being

squeezed every which way.These are times that cry out

for leadership. But when you lookaround, you’ve got to ask: “Wherehave all the leaders gone?” Whereare the curious, creativecommunicators? Where are thepeople of character, courage,conviction, omnipotence, andcommon sense? I may be a suckerfor alliteration, but I think you getthe point.

Name me a leader who has abetter idea for homeland securitythan making us take off our shoesin airports and throw away ourshampoo?

We’ve spent billions of dollarsbuilding a huge new bureaucracy,and all we know how to do isreact to things that have alreadyhappened.

Name me one leader whoemerged from the crisis ofHurricane Katrina. Congress hasyet to spend a single dayevaluating the response to thehurricane or demandingaccountability for the decisionsthat were made in the crucialhours after the storm.

Everyone’s hunkering down,fingers crossed, hoping it doesn’thappen again. Now, that’s justcrazy. Storms happen. Deal withit. Make a plan. Figure out whatyou’re going to do the nexttime…

Name me a government leaderwho can articulate a plan forpaying down the debit, or solvingthe energy crisis, or managing thehealth care problem without aTELEPROMPTER. The silence isdeafening. But these are the crisesthat are eating away at ourcountry and milking the middleclass dry.

I have news for the gang inCongress. We didn’t elect you tosit on your asses and do nothingand remain silent while ourdemocracy is being hijacked and

our greatness is being replacedwith mediocrity. What iseverybody so afraid of? That somebonehead on CNN will call thema name?

Give me a break. Why don’tyou guys show some spine for achange? Had enough? Hey, I’mnot trying to be the voice ofgloom and doom here. I’m tryingto light a fire. I’m speaking outbecause I have hope — I believein America. In my lifetime, I’vehad the privilege of living throughsome of America’s greatestmoments. I’ve also experiencedsome of our worst crises: TheGreat Depression, World War II,the Korean War, the Kennedyassassination, the Vietnam War,the 1970’s oil crisis, and thestruggles of recent yearsculminating with 9/11.

If I’ve learned one thing, it’sthis: You don’t get anywhere bystanding on the sidelines waitingfor somebody else to take action.Whether it’s building a better caror building a better future for ourchildren, we all have a role toplay. That’s the challenge I’mraising in this book. It’s a “Call toAction” for people who, like me,believe in America. It’s not toolate, but it’s getting pretty close.So let’s shake off the crap and goto work. Let’s tell ’em all we’vehad “enough”… [Emphasis added]

Iacocca uses some very strongwords, but no one reading this reportwould deny that he makes some verygood points. Moreover, we not onlyhave “a gang of clueless bozossteering our ship of state right over acliff”; we have the same gang incharge of our economic policies.

Iacocca asks in vain for the nameof “one leader who emerged from thecrisis of Hurricane Katrina” andlaments that “Congress has yet tospend a single day evaluating theresponse to the hurricane ordemanding accountability for thedecisions that were made in thecrucial hours after the storm”. Headds: “Everyone’s hunkering down,fingers crossed, hoping it doesn’thappen again. Now, that’s just crazy.


Storms happen. Deal with it. Make aplan. Figure out what you’re going todo the next time…”

Like storms of nature, economicand financial storms happen.However, it seems to me that thecurrent gang of clueless economicpolicy makers who brought about thecrisis in the first place has no plan fordealing with it, let alone figuring outwhat to do the next time we’re facedwith such an event.

Now, I am aware that a numberof my readers will disagree with myharsh assessment of the economicpolicy team in the US. According toBloomberg, “Global investors giveFederal Reserve Chairman Ben S.Bernanke top marks for combatingthe worst financial crisis since theGreat Depression andoverwhelmingly favor hisreappointment amid optimism thatthe world economy is on the mend.”(Sixty-one per cent of investorssurveyed in the first QuarterlyBloomberg Global Poll say the worldeconomy is stable or improving, andalmost 75% take a favourable view ofthe 55-year-old chairman. By almosta three-to-one margin, they sayBernanke has earned another four-year term when his current oneexpires in January 2010.) Inparticular, Mr. Bernanke is beingapplauded for having “countered thecredit crisis with actionsunprecedented in the central bank’s95-year history. He cut thebenchmark lending rate to as low aszero and expanded credit to theeconomy by $1.1 trillion over thepast year.” Adds a financialconsultant: “The U.S. economy maybe ailing, but these financial leadersagree the man at the helm of theeconomy is the right guy for the job,for now and for another term.”

There are some points to considerbefore supporting and endorsing thefavourable view of Mr. Bernanke by“these financial leaders”. Thesefinancial leaders are basicallyinterested in only one thing: thatstocks go up, which will then enablethem to earn higher fees! So,whoever can engineer a rally inequities through monetary measuresis a hero. Second, one should take

the judgment of these “financialleaders” with a grain of salt, since95% of them had no clue about theunfolding crisis until late 2008. Butwhat is most depressing for me is that75% of these portfolio managers whohave a favourable opinion ofBernanke don’t seem to have a clueabout what really caused the crisis inthe first place. I admit that I havesome sympathy for the argument byfund managers that, over the last fewmonths, the US Treasury and the Fedhave stabilised the financial systemand the economy. However, weshould consider two points in thisrespect. No one (including me)knows for sure what the longer-termand unintended consequences ofthese asset market support measureswill be. As Michael Steinhardtsuccinctly says, “It is very difficult totell what the future will be.”Personally, I think the future will bea total disaster, with a collapse of ourcapitalistic system as we know ittoday, wars, massive governmentdebt defaults, and theimpoverishment of large segments ofWestern society. But what I don’tknow is whether this final collapse,which is inevitable, will occurtomorrow, or in five or ten years, andwhether it will occur with the Dowat 100,000 and gold at US$50,000per ounce or even confiscated, orwith the Dow at 3000 and gold atUS$1,000.

“How are you so sure about thisfinal collapse?” the reader may ask.Of all the questions I have about thefuture, this is the easiest one toanswer. Every successful society orcentre of prosperity (city) began froma base of thrift, frugality, hard work(also in warfare), innovation, and asa result of some kind of pressure,either from nature (cold winters,floods, droughts, or some otherinhospitable environment) or fromsocial or political adversaries(powerful enemies, competition,oppressive regimes). In short,successful societies and centres ofprosperity (cities, regions) grow outof some kind of “challenge”. Once asociety becomes successful it becomesarrogant, righteous, overconfident,corrupt, and decadent. It then

overspends (usually on costly wars toprotect its interests); wealth inequityand social tensions increase; andsociety enters a secular decline,which leads to state bankruptcies(frequently initially postponed bymonetary depreciation — read“inflation”), decay, and a loss of itspolitical and economic power relativeto other nations. According toScottish jurist and historian Sir AlexFraser Tyler (1742–1813), theaverage life span of the world’sgreatest civilisations has been 200years. These nations progressedthrough the following sequence: frombondage to spiritual faith; fromspiritual faith to great courage; fromcourage to liberty; from liberty toabundance; from abundance toselfishness; from selfishness tocomplacency; from complacency toapathy; from apathy to dependence;and from dependency back intobondage!

Very few societies aged gracefullyby recognising early that eternalprosperity was unattainable. Mostsocieties decayed because the cost ofmaintaining their high level ofprosperity increased (overspending).

In my opinion, it is most unlikelythat Western societies — andespecially the US — will be anexception to this typical “societycycle”. In fact, I guess that the US issomewhere between the phase whereit moves “from complacency toapathy” and “from apathy todependence”.

Second, as opined above, I havesome sympathy (though not much)for the view that the Fed under Mr.Bernanke has contained theeconomic contraction and financialcrisis (at least for now). However,within the context of Bernanke’smonetary policies, which were largelyresponsible (along with those of Mr.Greenspan) for the current economicand financial crisis, his recent marketsupport measures are completelyinsignificant. Mr. Bernanke remindsme of a ship’s captain who, throughnegligence and by ignoring warningsignals from the coastguard, sinks acruise-ship, resulting in the deaths of1,000 passengers and crew, but gets amedal for bravery because he


manages to get the ship’s top fiveofficers, all dressed in their elegantuniforms, into a lifeboat.

A reader of Mish Shedlock’s blogabout his unfortunate experiencewith a house he bought in 2005(http://globaleconomicanalysis.blogspot.com) wrote recently: “Ipurchased a house in 2005. It was anew build that was completed in May2006, and I have been living in itsince. The house is in Scottsdale, AZ(a non-recourse state). I purchased itfor $740K with minimal money down($40K). The house is now worthmaybe $450K ... maybe.”

I feel sorry for this man. The only

thing is, I don’t know whether Ishould feel more sorry for his currentdire financial condition or for hisstupidity! But the wider issue relatesto the question of how on earth couldthe regulatory bodies allow someone(and there were millions more likehim) with $40,000 in equity topurchase a house worth $740,000 andfail to see that there was a giganticcredit bubble. In fact, I am deeplyconcerned that our society has cometo the point where this kind ofleverage is still encouraged by thegovernment (and the Fed) and isregarded as the norm. That the policymakers couldn’t see the danger of

such leverage everywhere (not just inhousing) is beyond my understandingas a simple, commonsense economist.(I should add that total credit as apercentage of the economy is stillgrowing!)

So, even if the Fed did a good jobof containing the crisis, we need tolook at its longer-term performancein order to make a judgment. In thisrespect, I am very indebted to myfriend Fred Sheehan for having takenthe time to read Mr. Bernanke’sEssays on the Great Depression and forexpressing some criticisms of hispolicies and actions prior to thecrisis.

Simple BenFrederick J. SheehanTel: (1-617) 875 8150; E-mail: [email protected]

Fred Sheehan’s book, Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession, will be publishedby McGraw-Hill in November 2009.

Federal Reserve chairman Ben S.Bernanke lives in a simple worldwhere exchanges of opinion don’texist. This, from a man who oftenreminds his audiences that he wrote atextbook, and a macroeconomictextbook at that. The Investopedia.com website explains that“[m]acroeconomics is focused on themovement and trends in theeconomy as a whole.” Yet, BenBernanke didn’t understand that thelevel of debt produced during therecent, mortgage-driven financialeconomy could never be paid back bythe real (non-financial) economy.Today, his money printing segregatesthese two economies to an evengreater degree than before the Fedimposed his MIT thesis on the world.

His macroeconomics, at least inhis Essays on the Great Depression, isstatistical. He inputs his chosenvariables and outputs his solution toprevent another great depression:print more money. Bernanke doesn’tconsider that a future (or current)depression may take another formthan Great Depression I. He appearsto think that falling prices (he would

call this “deflation”) is synonymouswith an economic depression.Bernanke knows that debt became agreater burden as income fell in the1930s, but his book doesn’t consider,other than in side comments andfootnotes, the possibility that theenormous growth of debt in the1920s was the reason these loanscouldn’t be paid back in the 1930s.He is convinced that falling prices —even the possibility of falling prices —are the enemy and can be defeated byprinting more money.

His Essays gives the impression ofa man devoid of curiosity. A tellingcomment on page 6 of the book: “Iam a macroeconomist rather than ahistorian, my focus will be oneconomic issues rather than details.”The former head of the PrincetonUniversity economics departmentmentions 139 names in his Essays –135 of whom are economists, mostlymacroeconomists, and most havingwritten after 1980. He nevermentions or cites Robbins, Hayek,Mises or Roepke — economists whowrote in the 1930s that the cause ofthe debt bust in the thirties was thedebt boom of the twenties. From

what I am told, this is ignorancerather than wilful exclusion — he hasprobably never read from theseauthors. Most of what he has readwas produced by like-mindedeconomists on other campuses wholikewise have mostly read eachothers’ papers and textbooks.

He writes about money, but notmuch about banking. He mentionsonly one US bank in the book, butgets its name wrong. It was the Bankof United States, not the Bank of theUnited States. A small error, but itpersists in the paperback edition. (Togive him his due, Bernanke noted hislack of interest in historical details.)

His input-output, money-printingtheory has failed. His equations treatthe banking system as a perpetual,never-varying conveyor belt. Heseemed (and seems) not tounderstand that undercapitalisedbanks don’t lend. Confusing bankswith robots, he doesn’t grasp theconnection between a healthybanking system and a healthyeconomy. (Even odder for someonewho studies the “economy as awhole”, he doesn’t seem to noticehow finance has come to dominate


the American economy.) Heexpresses reverence for hismathematical findings even thoughhis explanation of inputs leaves thisnon-economist wondering how hecan be so sure of his conclusions.(From page 102 of his Essays: “[I]t ispossible an additional factor such asdebt deflation should be considered.”)

In Bernanke’s simple world, morenumbers solve our ills. From page 5 ofhis Essays: “[B]y … expanding ‘thedata set,’ there is ‘the potential tobring the profession into agreementon the causes of the Depression.’” Hisessays give the impression that hisreal objective is to suffocatedisagreement with him and his fellowapparatchiks. Bernanke’s essays cross-reference essays by Frederic Mishkin,Christina Romer, and Janet Yellen;those who dominate academia andgovernment bureaucracies.

This lack of oxygen in economicdiscussion isn’t lost on an elderstatesman of the field. PaulSamuelson, President Kennedy’sprimary economic adviser, author ofthe textbook Economics (now in its19th edition), and retired MITprofessor, was recently interviewed byThe Atlantic: “The 1980s trainedmacroeconomics — like … BenBernanke and so forth — became avery complacent group, very illadapted to meet with a completelyunpredictable and new situation,such as we’ve had…. I looked upBernanke’s PhD thesis [written whenBernanke was a student at MIT —author’s note], which was on the GreatDepression, and I realized that whenyou’re writing in the 1980s, andthere’s a mindset that’s almostuniversal, you miss a lot of thenuances of what actually happenedduring the depression.” (This showswhy the argument of whetherBernanke should be reappointed asFed chairman isn’t too important. Areplacement would be anothereconomist trained in the 1980s, suchas Paul Samuelson’s nephew, LarrySummers.)

On February 20, 2004, Bernankegave a speech that should havedisabused any notion that he couldthink of the “economy as a whole”.“The Great Moderation” was the title

of his address. Bernanke offeredinterpretations of the “remarkabledecline in the variability of bothoutput and inflation” over the pasttwo decades. He left no doubt that“improved performance ofmacroeconomic policies, particularlymonetary policy”, should receive theNobel Prize. [Bernanke’s italics.]

Bernanke’s “great moderation” hassince exploded. He was ignorant ofthe financial mayhem thataccompanied his economicmoderation. In 2008, researchers atthe IMF identified 124 internationalbanking crises since 1970. Four werein the 1970s; 39 were in the 1980s;74 in the 1990s; and seven thisdecade. The current worldwidebanking crisis isn’t included. It wouldbe premature to quantify it. Bernankeseemed — and seems — blind to howthe banking system, lurching towardsmeltdown, had absorbed theinstability that was missing from hisremarkable macroeconomic data.

That speech came before hischairmanship. (He relieved AlanGreenspan on February 1, 2006.)Greenspan handed Bernanke abanking system that was possiblybeyond saving. Notable though is howthe excesses of the banks and brokersaccelerated after Bernanke’s accession.

The nominal value of derivativecontracts held by US commercialbanks (over which the Fed hasregulatory authority) leapt from $33trillion at the end of 1998 to $101trillion at the end of 2005, about thetime Greenspan left office. This wasroughly a 17% annual increase. ByJune 30, 2007, 17 months intoBernanke’s chairmanship, thenominal value had risen another 50%— to $153 trillion.

The problems with supersonicderivatives were evident. CDO(collateralised-debt obligation)indexes were collapsing. By the end ofMarch 2007, some of the largestvacuums that sucked in borrowers hadleft the mortgage business or enteredbankruptcy: HSBC MortgageServices, Ameriquest, ACCWholesale, New Century, WachoviaMortgage. New Century alone hadmade over $60 billion in mortgageloans during 2006.

Bernanke, still living on his ownplanet, couldn’t see how such a turnof events might slow an economythat was driven by an increasinggrowth of mortgage debt. (Homemortgage debt rose by $380 billion in2000. In 2005, it increased by $1.1trillion.) On May 17, 2007, hethought all was well: “[W]e believethe effect of the troubles in thesubprime sector on the broaderhousing market will likely be limited,and we do not expect significantspillovers from the subprime marketto the rest of the economy or to thefinancial system.” Northern Trusteconomist Asha Bangalore hadcalculated that 43% of the rise inprivate payrolls between 2001 andearly 2005 were housing-related jobs.Car dealers also knew better than theFed chairman: when New Centurywent under, all the Lamborghinidealers in Orange County flew theirflags at half-mast.

The macroeconomist (Bernankeloves referring to himself as that) notonly missed the macro mortgage data;he also didn’t understand howoverdrawn were those who held themortgages. He rationalised chaoswith such abstractions as the “globalsavings glut” while, in the samespeech, he stated: “Increases in homevalues, together with a stock-marketrecovery that began in 2003, have[aided] … [t]he expansion of U.S.housing wealth, much of it easilyaccessible to households throughcash-out refinancing and home-equity lines of credit.” That speechwas delivered in March 2005. Hislesson in home economics was nomore enlightened a month later:“[T]he recent capital inflow into thedeveloped world has shown up inhigher rates of home constructionand in higher home prices. Higherhome prices in turn have encouragedhouseholds to increase theirconsumption. Of course, increasedrates of homeownership andhousehold consumption are bothgood things.”

An adroit attendee at aNovember 2006 Bernanke speechwould have known the bankingsystem was a short sale: “[T]heexpansion of subprime lending has


contributed importantly to thesubstantial increase in the overall useof mortgage credit. From 1995 to2004, the share of households withmortgage debt increased 17 percent,and in the lowest income quintile,the share of households withmortgage debt rose 53 percent.” Thiswas good news in Bernanke’s view,although he did advise “greaterfinancial literacy” for “borrowers withlower incomes and education levels”.

The lowest quintile was the lastgroup that needed a financial lesson.It was already neck deep in the muck.ACNielsen had recently published areport that described Americans as“among the world’s most cash-strapped people”. With 22% ofAmericans having no money leftafter they paid for essential livingexpenses, the US ranked number oneamong 42 countries for “savingfutility”.

The rise of mortgage debt amongthe poorly educated was not, in itself,a reason to rein in the bankers, butBernanke was surrounded bydisturbing trends. For the periodending June 30, 2006, the FederalDeposit Insurance Commission(FDIC) reported 32% of UScommercial bank assets wereconstruction loans, land developmentloans, and direct mortgages. Another11% of bank assets were mortgagesecurities. And who were theylending to? By July 2005, 42% offirst-time home buyers were puttingno money down.

In every category, bank lendingwas diving off the precipice.Bernanke’s banks were closingleveraged syndicated deals at anaccelerating pace: from $220 billionin 2005 to $360 billion in 2006 to$570 billion in the first half of 2007.Please note again how recklessnessskyrocketed after Bernanke replacedGreenspan. Maybe the trend wouldhave been no different, but to leaveBernanke in charge of the bankingsystem today is a sign of senileleadership.

There was practically no spread(profit) on these leveraged deals.(Leveraged loans are made tocompanies with heavy debt burdens.The growing leverage in private-

equity deals needed the risingquantity of bank loans.) A novicecould see the buyout binge wasloading companies withunsupportable debt, since manynovices lost their jobs as thecompanies entered bankruptcy. Anon-novice, Steven Rattner,managing principal of QuadrangleGroup LLC, was quoted by Reuters inApril 2007: “Of all the bubbles, thebubble in the credit market today isone of the greatest — it is beyondany rational measure.” Did Bernankeread the newspapers?

To clarify the Fed’s authority: ithas direct supervisory authority overUS bank holding companies. TheFed cannot direct the banks where tolend (although, who knows whatadditional authority it has usurped inthe past 24 hours), but, as regulator,it has the ability to halt dangerousexcesses. The Fed had restricted bankcredit used for acquisitions in 1980. Itwould have been worth the trouble todo so again. Banks wrote off $3.8billion of leveraged loans in 2007 andanother $54.4 billion in 2008… It isa good bet the rise of write downsfrom 2007 through 2011 willapproximate the trajectory of newsyndicated deals from 2005 throughthe first half of 2007.

On it went. Bernanke saw clearskies in a June 5, 2007 speech: “[W]ehave not seen major spillovers fromhousing onto other sectors of theeconomy.” In October 2007, askedabout collapsing derivatives (CDOs),Bernanke admitted: “I’d like to knowwhat those damn things are worth.”This seemed a promising evolution inthe chairman’s mind, yet, in the samemonth Bernanke told a group ofcentral bankers and economists hedidn’t know if there had been ahousing bubble. (This was mentionedin a profile of Bernanke in theDecember 1, 2008, issue of the NewYorker, in which themacroeconomist’s strength appears tobe administration.)

Bernanke has shown similarweaknesses when addressing someelementary economic concepts. InNovember 2007, Congressman RonPaul berated Bernanke. The Fed’sloose money policy was devaluing the

dollar and causing consumer prices torise. According to the Fed chairman,this wasn’t the case: “If somebody hastheir wealth in dollars, and they’regoing to buy consumer goods indollars, for the typical American,then the deval-, the decline in thedollar, the only effect it has on theirbuying power is it makes foreigngoods more expensive.” What wasn’ta foreign good other than ham andeggs? Even these prices were risingfrom the energy consumed in theirproduction and transportation,energy that was being repriced byhigher economic activity in Chinaand India. Simple Ben sounded like atheoretical physicist who doesn’tknow that water boils but writestextbooks on the eighth dimension.

Bernanke threw in the towel onmoney. At a conference inNovember 2006, he told hisaudience: “It would be fair to say thatmonetary and credit aggregates havenot played a central role in theformulation of U.S. monetary policysince [1982], although policymakerscontinue to use monetary data as asource of information about the stateof the economy.” After he spoke, theformer college professor sat at theother end of a lecture. LucasPapademos, vice president of theEuropean Central Bank, questionedBernanke: “Is it really possible for apolicy described as ‘monetary’ to beformulated and implemented withoutmoney playing a central role in it?Indeed, the suggestion that monetarypolicy can be conducted withoutassigning a prominent role to moneyseems like an oxymoron — astatement containing apparentlycontradictory terms, if not worse: forthe literal meaning of the Greek word‘oxymoron’ is ‘pointedly foolish.’”

Foolish has been the FederalReserve System’s ballooning balancesheet — from around $800 billion ofassets in December 2007 to $2trillion today. The Fed’s balancesheet is what stands behind thedollar, a reason its assets were (until2008) predominantly US Treasurysecurities. The rise in Fed assets wasaccomplished by machinations,including the sale of Treasurysecurities to buy dubious bonds and


derivatives from financial institutionsthat are probably insolvent. Many ofthese securities are probablyworthless. At least, that is the strongsuspicion and will remain so as longas the Fed resists the Congressionalinitiative to audit the FederalReserve.

Bernanke’s Great Depressiontheory was a flop, but he may notrecognise his failure. He has spent hiscareer following a single train-of-thought. That will persist: a debt-deflation can be prevented byprinting money, ever-increasingmountains of money, if the incidence

of mortgage defaults, consumer loans,and leveraged loans continues to rise.We can expect Simple Ben to boostthe Fed’s balance sheet from $2trillion to $4 trillion, and, if giventhe time, to $10 trillion. Maybe100% inflation will solve themortgage problem.

* * *

Some readers will find Fred Sheehan’sobservations to be overly critical. Butbefore passing a judgment I suggestyou watch the footage of Mr.Bernanke being questioned byCongressman Alan Graysonconcerning the Fed’s central bankliquidity swaps. (It’s hard to beimpressed by the current Fedchairman.) There is simply nodenying that, by neglecting theimplications of excessive creditgrowth and the worsening quality ofcredit, people like Alan Greenspan,Ben Bernanke, Tim Geithner, andFrederic Mishkin, supported byeconomists such as Paul Krugmanwho believe that another bubblewould help the global economy, werethe principal architects of anunsustainable credit-driven economicboom that had to burst at some point.

Now, if we accept that the Fed waslargely responsible for the creation ofthe credit bubble, then it is mostdepressing that the very same people,with the same policies and surroundedby the same cronies, are still in chargeof the world’s (still) most importantfinancial institution. As GeneralSchwarzkopf observed, “There’s morethan one way to look at a problem,and they all may be right.” That, asFred Sheehan makes clear above, doesseem to have escaped the attention ofMr. Bernanke, Geithner & Co. Isuppose this explains my depressedstate of mind and why I think thatthe ultimate crisis still lies ahead ofus. As long as policy makers have nobetter ideas “for homeland securitythan making us take off our shoes inairports and throw away ourshampoo” (Lee Iacocca), and thancreating another bubble to bail outthe system, I cannot be optimisticabout the future.

I have so far in this reportrefrained from commenting on theObama administration. However, itincreasingly looks to me as if Obama& Co. makes Mr. Bush and his seniorstaff members look like geniuses. Toprovide our readers with just a tasteof the quality of some of Obama’speople, we need look no further thana favourite story (sent to me by afaithful reader) of Dr. David Cole,chairman, Center for AutomotiveResearch (CAR), and a professor atthe University of Michigan, which herecounted as a guest speaker at abreakfast meeting. According to asenior Chrysler executive whoattended the meeting, Dr. Cole foundit very difficult to work with the folksthe Obama administration has sent tosave the auto industry. According toCole, there have been many meetingswhere automotive experts with 30+years of experience have had to listento a newcomer to the industry —someone with zero manufacturingexperience, zero auto industryexperience, zero business experience,zero finance experience, and zeroengineering experience — tell themhow to run their business. (This isn’tto say that a savvy industry outsidercannot occasionally make animportant contribution to acompany’s success by introducingentirely new and refreshing ideas.)

There was also a team of Obamapeople who explained to Dr. Colethat the auto companies needed tomake a car that was electric andutilised liquid natural gas (LNG)with enough combined fuel to go 500miles so that we wouldn’t “need” somany gas stations (a whole othertopic). They were quoting the BTUsof LNG and battery life that they hadlooked up on some website.

Dr. Cole explained that, in orderto do this, the trunk would need to befilled with batteries, and the LNGtank would need to be as big as thecar. There were also problems relatedto the basic laws of physics, he beganto say, that prevented them from...

The Obama person interruptedand said (and I am quoting here):“These laws of physics? Whose rulesare those? We need to change that.[Someone diligently wrote down thename so they could look it up later.]We have both the Congress and theadministration. We can repeal thatlaw, amend it, or use an executiveorder to get rid of that problem.That’s why we are here, to fix thesesorts of issues.”

I hope my readers understand nowwhy I cannot be optimistic aboutwhat lies ahead of us and why the USis in big trouble!

INVESTMENTCONSIDERATIONS

I started to write asset marketcomments in the early 1970s. One ofmy first commentaries was in August1971, entitled “Dollar DevaluationBeneficiaries”. By coincidence, a daylater Mr. Nixon closed the goldwindow and a long bear market inthe US dollar followed. (I instantlybecame White Weld’s currencyexpert.) Over the years, my emphasishas always been on longer-termtrends in asset markets and onidentifying excesses — both in termsof under- and overvaluations. I amalso far more interested in — andconcerned about — the historicaland social aspects of economics thanare the current economic policymakers and opinion leaders in theUS. However, this year I have


become more mindful of short-termtrends because of my belief that botheconomic and financial volatilitywill be extremely high due to theunprecedented and coordinatedgovernment interventions in themarket economy. Just look at theperformance of the Shanghai stockmarket since late last year (seeFigure 3). Between a low of 1664 onOctober 28, 2008 and its recent highon August 4, 2009 the Index morethan doubled, but subsequently lost20% very quickly. Since theShanghai Index led the world on theupside (the low was at the end ofOctober 2008, and when the S&P500 made its March 6 low at 666 theShanghai Index was already up10%), its recent downturn may be anearly indicator for a global correctionin stocks and commodities. Volatilitywill also stay high because we haveall become momentum players andare, as Michael Steinhardt recentlyopined, “a product of the last tick”.

As mentioned in last month’sreport, the holding period hasdeclined in recent times to less thanone year and for some stocks it is lessthan half a year (see Figure 4). Whatare the consequences of such a shortholding period? In my opinion, itmeans that portfolio managers willfrequently rebalance their portfoliosand in rapid sequence shift from onegroup of stocks into another, whichwill lead to very high volatilitywithin the market even if the indicesdon’t reflect such volatility. Rapidshifts between asset markets shouldalso be expected, with portfoliomanagers continuously moving theirfunds between bonds and equities.

As at the end of August, stockswere probably as overbought as theywere oversold earlier this year.Gerard Minack of Morgan Stanleyrecently showed that emergingmarket stocks in mid-August weremore overbought (in terms of tradingin percentage above their 200-daymoving average) than at any timesince 2002 (see Figure 5). Inaddition, the percentage of S&P 500stocks above their 200-day movingaverage is now at the highest levelsince 2007 (see Figure 6).

Add to overbought stock market

Figure 3 Shanghai Stock Exchange Composite Index (EOD) ($SSEC),2004–2009


Figure 4 Everybody Has Become a Trader

Source: Alan Newman, www.cross-currents.net

conditions heavy insider selling as apotential problem for equity. InAugust, company executives wereselling stocks at the heaviest rate intwo years. This was in stark contrastto insider buying in early March,which recorded its fourth-highestreading. Particularly heavy wasselling in semiconductor and retailshares, whereas financial insiders

were on balance net buyers (seeFigure 7). Finally, Nasdaq volume asa percentage of New York StockExchange volume is at the highestlevel since 2001 and indicates thatspeculative intensity has beenbuilding.

By themselves, these technicalfactors don’t imply that a sharpcorrection is necessarily imminent,

Current Holding Periods (Top Dow Stocks (months held))


now for reducing the exposure toretail and semiconductor stocks andincreasing the weighting of financialstocks, which is also one of the fewsectors where insider buying is high(see Figure 7). Similarly, it wouldmake sense now to underweightemerging markets, whichsignificantly outperformed the USstock market this year, andoverweight the US. The impact ofstrong and unsustainable moneysupply and loan growth in China isbeginning to wane and will likelybring about relative weakness toemerging markets (see Figure 8). Thisdoesn’t mean that I am turning awayfrom emerging markets from a longer-term perspective, where plenty ofopportunities are still available eitherbecause valuations have becomereasonable, such as in Vietnam, orwhere a large number of stocks haverecently broken out on the upsidewith very heavy volume (see Figures9 and 10). (I still consider Thaistocks to offer some of the best long-term value.) Also, investors wishingto take advantage of Vietnam’s long-term potential should be interested toknow that there is now a VietnamStock Market Index ETF (VNMUS). I am a director of the VietnamGrowth Fund run by Dragon Capitaland an adviser to Indochina CapitalVietnam Holdings, which is listed inLondon (ICV LN). However, asidefrom some pockets of value, emerging

Figure 5 MSCI Emerging Market Index, 2001–2009

Source: Gerard Minack, Morgan Stanley

Figure 6 Stocks: More Overbought Than at Any Time since 2007!

Source: Ron Griess, www.thechartstore.com

but they suggest that the risks ofbuying stocks right now arebeginning to outweigh the potentialnear-term rewards.

Also, in light of the short holding

period, investors will increasinglyneed to focus on sectors that developrelative strength, and to move out ofsectors that underperform. As anexample, a case could be made right


the prices of oil and other industrialcommodities are far too high! Theproblem, however, for individualinvestors is to find a suitable naturalgas investment vehicle aside from thefutures. I have mentioned in the pastPioneer Natural Resources (PXD)or the First Trust ISE RevereNatural Gas Index Fund (FCG) asprobably the best plays. There arenatural gas ETFs (UNG, GAZ), butcosts are high.

The relationship of strong equitiesand commodities = weak US dollar,and weak equities and commodities =strong US dollar, still seems to exist.As of mid-August, equities wereoverbought and investors’ sentimentbecame overly optimistic andcomplacent. At the same time, theUS dollar has become oversold andinvestors’ sentiment is extremelynegative. Since early June the USdollar has traded in a very narrowrange against the Euro and a “bigbreakout move” is increasingly likely.My suspicion is that this breakoutmove could be in favour of the USdollar, with the Euro andcommodity-related currencies suchas the Canadian and Australiandollars weakening — at leasttemporarily (see Figures 13 and 1).

I still recommend the gradualaccumulation of physical gold, and ofgold exploration companies onweakness.

I should like to stress that Icontinue to believe that we haveseen major stock market lows inMarch 2009 and that on weaknessequities should be accumulated forthe long term. In Asia I recentlyincreased, or initiated, positions inParkway Life REIT (PREIT SP),MobilOne (M1 SP), KingsmenCreatives (KMEN SP), QualityHouse Property Fund (QHPF TB),and Thai Airways (THAI TB).

Below you will find two reports.My friend Bill Leavitt writes firstabout “Water: Cycle of Life”. WilliamLeavitt is the president of LeavittCapital Management, Inc., aregistered investment advisory firmestablished in 1985 (www.leavittcapital.com). His firmspecialises in identifying andinvesting in unique investments,

Figure 7 Insider Buying in the Financial Sector

Source: Alan Newman, www.cross-currents.net

Figure 8 China: Money Supply and Loan Growth, 1998–2009

Source: Andrew Orchard, ABN AMRO, Hong Kong

markets seem to be near-termoverextended (see Figure 5).

In fact, I think that investorsshould shift money from the lowest-quality and highest-volatility stocksto more defensive sectors. In the US,I find pharmaceutical companiessuch as Pfizer (PFE), Merck(MRK), Bristol Meyers Squibb(BMY), and Johnson & Johnson tobe attractive.

In the commodities space, our longsugar recommendation has performedwell (see Figure 11). A furtherincrease in prices to around 30 centsper pound is possible, but I am nowout of the market. (Traders should usetight stops.) Incidentally, as acontrarian, one of the few investmentsthat has attracted my attention isnatural gas (see Figure 12). Either theprice of natural gas is far too low or

Financial Insiders (Insider Activity for Top 10 “IYF” Cos.)


Figure 9 Vietnam Stock Exchange Index, 2004–2009

Source: Bloomberg

Figure 10 Thailand: TMB Bank (TMB TB), 2004–2009

Source: Bloomberg


Figure 11 Sugar Prices, 1973–2009

Source: Bloomberg

Figure 12 Natural Gas ($ per MMBtu), 2003–2009

Source: Bloomberg


Figure 13 Euro Index ($XEU), 2007–2009


and China. His most recentexcursion was a summer research tripto Africa, which included a visit to awater bottling plant in Ghana. Theproblem for investors is that,according to Bill, the most attractiveopportunities exist in private equityinvestments. He has promised tofollow up sometime in the future withsome specific recommendations. Mypersonal investments in water arethrough Thai Tap Water Supply(TTW TB) and Glow Energy(involved in power and waterutilities) in Thailand and inSingapore through Hyflux (HYF SP)and Hyflux Water Trust (HYFT SP— see Figure 14).

As depressing as the ultimateeconomic and political outcome mayappear, I find solace when I read thereports my friends Marc Jenni andDaniel Siegriest send me periodicallyabout the activities of Child’s Dream— a charity they set up in order tosupport refugee and orphanedchildren. My decision to supportthem right from the start, and tocontinue to do so, along with manyof my readers, has been my bestinvestment! Their August newsletterfollows at the end of this report.

Figure 14 Hyflux Water Trust, 2007–2009

Source: Bloomberg

affording clients exposure to amultitude of opportunities, includingwater, food, agriculture, energy,environmental solutions and timber,among others. Bill’s research has

taken him to virtually every corner ofthe earth, including sugarcaneethanol plants in rural Brazil, timberharvesting sites in New Zealand, andmanufacturing facilities in Vietnam


Water: Cycle of LifeWilliam Leavitt, Leavitt Capital Management3000 Dundee Road, Suite 101, Northbrook, IL 60062, USATel: (1-847) 205 1300; Fax: (1-847) 205 1350; E-mail: [email protected]; Website: www.leavittcapital.com

“We sing to the waterbecause it is alive, it hears,it has feeling. It is a livingthing. We are drops fromthe same river, part of thesame water cycle.”

Arhuaca (Colombia),female tribe-member

Morning comes quickly for thewomen of Kutch, a village on theedge of the desert in the state ofGujarat, India. At 4.30 a.m., dailychores begin, often including walkingfour hours to collect water. They are,according to the World HealthOrganization (WHO), among thealmost 900 million (one-eighth of theworld’s population) people withoutaccess to safe drinking water. TheOrganization for EconomicCooperation and Development(OECD) estimates that 2.5 billionpeople (almost half of the world’spopulation) don’t have access toproper sanitation. By 2025, theWHO estimates that approximatelytwo-thirds of the world’s populationwill live in “water stressed” areas.

While those reading this reportare not likely to experience a lack ofclean water, it is likely that all of ourlives will be impacted by water, inone way or another. Besides our dailywater use, water is critical in foodproduction and energy.

Ninety-seven per cent of theearth’s water is saltwater in oceans.Of the 3% of the earth’s 35 millioncubic kilometres (km3) of freshwaterreserves, most is inaccessible tohumans, buried in glaciers,permanent snow cover, or in verydeep groundwater. Humans use waterfrom rainwater, surface andgroundwater stocks, soil moisture, aswell as other sources. In aggregate,less than 1% of the earth’s water is“available” for our use. While much

of the water is renewable, a great dealof the available water is used in waysthat diminish its quality so that itbecomes essentially worthless. Due tothe inefficient usage, contaminationand overuse of renewable and non-renewable sources of water, as well asthe disparate distribution of theearth’s water sources, many areas areessentially “running out” of water.Over the last century, the globalpopulation has doubled, while wateruse has grown four times. By 2050,the world’s population is expected togrow 50%, from six billion to ninebillion people.

Total global freshwater use isestimated at approximately 4,000cubic kilometres per year,supplemented by 6,400 cubickilometres of rainwater per year. Ofthis freshwater supply, approximately

70% is used for agriculture, with thebalance used by industry (including20% for energy), and domestic usage.Population growth, as well as rapideconomic growth, particularly indeveloping nations, has created adislocation between water resourcesand water requirements (seeChart 1).

Water withdrawals have tripledover the past 50 years as a result ofpopulation growth and increaseddevelopment of irrigation for fooddemand. As developing populationsgrow wealthier, they consume moreprotein, which further stresses water.The United States Department ofAgriculture (USDA) estimates that ittakes seven pounds of grain toproduce one pound of beef. Manycommonly used products requiresignificant amounts of water during

Chart 1Global Demand (in millions ofcubic metres), 1900–2030

Sources: Pacific Institute; The World’sWater, 2008–09

Chart 2Litres of Water Necessary toForm Various Products

Beverages Per litre

Glass of water ~ 1

Bottled water 3-4

Glass of beer 300

Glass of wine 960

Milk 1,000

Cup of coffee 1,120

Roasted coffee 21,000

Assorted produced goods Per kilo

Finished cotton textile 11,000

Hamburger 16,000

Microchip 16,000

Leather shoes 16,600

Assorted crops Per kilo

Soybeans 1,100–2,000

Rice 1,900–5,000

Assorted animals Per kilo

Beef 15,000–70,000

Sources: The World’s Water, 2008–09;www.waterfootprint.org


the production process, which mostpeople don’t realise. Such dramaticincreases have created conflictsbetween urban and rural demand forwater, as well as regional disputes (seeChart 2).

According to the University ofTechnology in Sydney, Australia,2008 was the eighth year in a rowthat the six billion inhabitants of theplanet consumed more food than wasproduced by farmers. The Food andAgriculture Organization (FAO) ofthe United Nations (UN) estimatedthat there was only sufficient food instorage, globally, to feed the planetfor 55 days, less than half the supplyin the 1990s and the lowest level in37 years. According to the UN, in1960 there were 1.1 acres of arablefarmland per capita throughout theworld. By 2000, that number haddropped to 0.6 acres (see Chart 3).

Chart 3 Precious AcresGrowing population and widespreaddevelopment are shrinking the amount offarmland per person.

Arable land per capita worldwide

Source: Food and Agriculture Organizationof the United Nations

Drought, or water scarcity, is aproblem on every continent. Demandfor water has particularly stressed thesouthwestern United States, wherepopulation growth and foodproduction is incompatible with waterresources. California is a primeexample of this phenomenon. Thestate, which produces more than halfthe nation’s fruits, vegetables, andnuts, faces severe water shortages.Reuters recently reported that somefederal sources of irrigation water willbe dry this year and the top state water

project will not fulfil more than 15%of requested water. Recently, the citiesof Sacramento, San Diego, and LosAngeles introduced water rationingprograms limiting water for lawnwatering and car washing. California,like many other western states,receives its water from the ColoradoRiver, which faces increasing demandand depletion. Farmers of thousands ofacres of agricultural land inCalifornia’s important Central Valleywere forced to leave land fallow, asauthorities cut off water deliveries tothe valley due to low reservoir levels.This February, California governorArnold Schwarzenegger declared astate of emergency (the first since1991) requesting residents of thenation’s most populous state to reducewater use by 20%.

Las Vegas, an oasis constructed inthe middle of the Mojave Desert, alsohas severe water problems. For years,Las Vegas was one of the fastestgrowing cities (and Nevada one ofthe fastest growing states) in the US.An example of a growing populationpitted against limited resources, LasVegas receives an average of only fourinches (10 cm) of rain per year, 10%of that received by the city ofChicago. Amid the worst ten-yeardrought in recorded history along theColorado River, Las Vegas haslooming water problems. The citydepends on Lake Mead, a 110 mile-long reservoir that feeds off theColorado River, for its water. LakeMead’s level has dropped 1% per yearsince 1999. By 2012, the surface ofthe lake could fall below the existingpipe that delivers 40% of the city’swater. That would also cause thefederal government to cut the supplyof water to the seven states thatdepend on the Colorado River forwater. The Hoover Dam, constructedin 1935, which regulates the riverand forms Lake Mead, would also beunable to supply electricity to750,000 residents of Los Angeles.

The arid southwest isn’t the onlyarea impacted. The Ogallala Aquifer,which supplies water to the GreatPlains and the Midwest (breadbasketsof the US), is at record lows in someareas. The aquifer, the largest in theUS, is depleting at the rate of 12

billion cubic metres per year.Pumping from the aquifer began 60years ago and since then, water levelshave dropped 100 feet (30.48 metres)in some places. The withdrawal rateis far in excess of the rate ofreplenishment. Other areas of the USare water stressed, as well, as seen bywater restrictions being imposed byauthorities in Texas, Florida, NorthCarolina, and Georgia.

Globally, the situation is just asdire. Australia is in the midst of asevere drought. Last year, the onemillion ton rice crop in the Murray–Darling Basin failed, driving up priceswhich, among other crop priceincreases, resulted in food riots in 34countries. Australia, which was theworld’s sixth-largest exporter ofwheat the last two years, managed toharvest a little more than 50% of themillion tons of grain it normallyproduces.

Argentina, the world’s third-largest exporter of corn, recentlyexperienced its worst drought in 38years. Estimates are that the nation’scorn harvest will be reduced by 25%,and wheat production will be downby 50%. Chile experienced a springdrought that increased the risk ofblackouts in its most populous regionsand at copper mines. The MexicoCity Water System cut water servicefor a third time this year. Accordingto Global Water News Watch, waterfrom the Lerma System, which alsosupplies the Mexican Federal District,has dropped from 4,000 litres persecond to 1,000 litres per second.Further, dry weather this year willlead to a decrease in Colombiancoffee production by an estimated13%.

Africa has also been harshlyimpacted by drought and watershortage. This year alone, droughthas stressed Ethiopia, Somalia,Kenya, Eritrea, Djibouti, andUganda, among other nations. Incentral Africa, Lake Chad, once thethird-largest source of freshwater inAfrica, is disappearing, threateningmillions of people in Chad,Cameroon, Niger, and Nigeria. Dueto long-term drought and excessivewithdrawals, the lake is a mere 5% ofits previous size.


The Middle East consumes morewater than it receives from renewablesources. Kuwait consumes 22 times itsannual rainfall, according to a reportby UBS. Saudi Arabia, which willexhaust its aquifers within the nextten years, announced that it willbecome 100% reliant on food importsby 2016. Also, in July of this year,Israel restricted water use for eachhousehold, with penalties forexceeding the limitations, in an effortto reduce water consumption. TheMiddle Eastern governments ofQatar, Abu Dhabi, and Saudi Arabiahave begun acquiring or leasing largetracts of farmland in Asia and Africa(including in war-torn Sudan).

Of course, the poster child forwater stress is China, one of theearth’s most arid regions, with 20% ofthe world’s population and only 7%of the world’s water supply. Followingan economic growth rate averaging20% per year for the last 20 years,China’s water resources are over-allocated, inefficiently used, andterribly polluted, according to TheWorld’s Water 2008–2009 (TWW)(see Chart 4).

Much of China’s water is beyondreclamation, with many dead riversand lakes polluted by industrial andhuman waste. The TWW reportnotes that of the 20 most pollutedcities in the world, 16 are in China.Three hundred million of thenation’s people lack access to safedrinking water. The Chinese StateEnvironmental Protection Agency,the WHO, and the OECD reportthat 40% of Chinese surface water isfit only for industrial or agriculturaluse, even after treatment.Approximately 20,000 chemicalfactories, half along the YangzteRiver, discharge untreated or partiallytreated contaminants into Chineserivers. Only 69% of China’s largestcities meet national potable waterstandards. Drought and floods alsodevastate China. According toChina’s State Flood Control andDrought Relief agency, annual lossesfrom drought since the 1990s havebeen the equivalent of 1.1% of GDP,while annual losses from floodsaveraged nearly 2% of GDP. (USlosses from floods, for the comparable

Chart 4 Emissions of Organic Water Pollution (’000 kilos per day),2003

Sources: World Bank; Independent Strategy

period, were 0.25% of GDP.)Within China, the uneven

distribution of water resources andthe transfer of water between regionshave led to regional conflicts.Violence over allocations of waterfrom the Zhang River has beenescalating for over 30 years betweenvillages in Shexian and Linzhoucounties, according to TWW. BothBeijing and Hebei provincial officialshave diverted water from the JumaRiver, leading to conflicts betweenthe two governments. Perhaps themost significant conflict is the onebetween the Chinese governmentand Tibetan protesters. The TibetanPlateau has plentiful water and servesas the headwaters of many of Asia’smost important rivers, including theYellow, Yangtze, and Mekong. Whileroutinely thought of as a religiousdispute, some observers think theconflict may also result fromdisagreements over the managementof Tibet’s freshwater. Industrialactivities and deforestation havealready impacted Tibet’s freshwaterreserves, according to the ChineseAcademy of Science.

Other regional conflicts, some inalready unstable regions, could betriggered by water stress as well.Shrinkage of the HimalayanMountain glaciers could trigger

conflicts between China, India, andPakistan. According to a report bythe Asia Society, 77% of Pakistan’swater emanates from beyond itsborders. India and Pakistan have awater treaty, in effect since Pakistangained independence, but the twonations have been arguing aboutviolations of the treaty. Israel, Jordan,Lebanon, and Syria have all divertedwater upstream from the JordanRiver.

Contaminated water is asignificant issue. Where freshwater isscarce, brackish water and wastewater are also utilised to meet waterdemand. According to the WorldWater Development Report (WWDR),in 2006, 54% of the world’spopulation had piped waterconnections to their dwelling, plot,or yard, while 33% used otherimproved drinking water sources. Thebalance, 13% (884 million people),were forced to use unimproved watersources. In a recently published studyby the WHO, it was estimated thatChina suffers 750,000 deaths peryear, in excess of normal mortalityrates, due to pollution (see Chart 5).

Some potentially long-termharmful effects of watercontamination have recently beennoted. The Associated Press reportsthat many pharmaceutical products,


years ago, is critical to conserving ashrinking resource.

Ironically, few people have anysense of the “cost” of water. Althoughit is a necessity, water is generally notcompetitively priced between regionsand is certainly not priced accordingto its “value”, as it is often subsidisedby governments (see Chart 6).

Perhaps the most significantimprovement that would lessen thestress on the global water supply ismore efficient usage and recycling.As we continue to overburden afinite freshwater system, any meansto reduce demand or increase supplyis paramount. For example, manyresidents of the US and other nationsuse water that is partially treated, aswell as recycled sewage. The practiceis growing. Although the conceptmay not be appetising, it is quiteeffective. After treatment, recycledsewage allows the 2.4 millionresidents of Santa Ana, California toenjoy water with a measure of purity(TDS — total dissolvable solids) of30 parts per million, less than manybrand-name bottled waters. SantaAna’s system also allows it to providewater to meet the needs of 500,000more people, without taxing its ownsupply.

More efficiency in transportingwater is a critical solution to waterstress. Water is very expensive totransport (estimates for water pipeproduction and installation are from$1 million per mile in rural areas to$10 million per mile in urban areas inthe US), so preventing leakage andwater loss (which can be up to 40%of transported water) is critical.Leaking pipes in the US lose anestimated seven billion gallons ofdrinking water per day, according tothe American Society of CivilEngineers. The group states thatwater systems in the US face anannual shortfall of $11 billion toreplace crumbling water facilities.Over the next five years, 70% of theone million-mile US water systemwill have surpassed its useful life.Some water pipes in the US predatethe 1860s. Over the next 20 years,over $1 trillion will be required toupgrade the US water infrastructure.

Water is also transported by

Chart 5 Mortality Rates for Diseases Associated with WaterPollution (per 100,000) in China in 2003 and WorldAverages in 2000

Sources: MoH, 2004; WHO, 2006

including antibiotics, anti-convulsants, chemotherapy products,mood stabilisers, and sex hormones,as well as veterinary medications,have been detected in the drinkingwater supplies of the US, Europe,Asia, Australia, and Canada. Thepresence of so many medications,which are partially absorbed by thebody, but mostly pass through aswaste, raises concerns about the long-term consequences of even smalldetectable amounts. With advancesin pharmaceutical products, globalwater systems are not designed todetect or eradicate thesecontaminants. A huge market existsfor those creating techniques toprotect the integrity of water. Thereare also indications that addingchlorine, one of the most commonmethods of treating drinking water,elevates the toxicity of some of thesepharmaceuticals.

Malnutrition is anotherconsequence of water stress andcontaminated water. According tothe WWDR, malnutrition accountsfor approximately one-third of diseasein developing nations. Anotherconsequence of lack of water andmalnutrition is “stunting” (lowheight for age), also more prevalentin developing nations.

While we have only touchedupon some of the problems associated

with water, we will offer a fewsolutions to the gloomy picture.Obviously, significant public andprivate resources will have to bededicated to relieving some of thewater stress, particularly given thestressed financial status of manycities, villages, states, and nations.

Interestingly, bottled water isn’t areal solution to water problems.While travellers from developednations don’t leave home without it,bottled water is at least 2,000 timesmore energy-intensive than tapwater. Much of the energy is involvedin the production of plastic bottles, aswell as the energy required totransport the bottles over longdistances. Generally, the bottles endup in landfills, presenting otherenvironmental issues. With morethan one unit of water used toproduce one unit of bottled water,one solution to water stress is toreduce the amount of waterconsumed in bottled waterproduction. Nestlé SA, maker ofPerrier and San Pellegrino water, hasannounced that it has reduced theamount of liquid it requires toproduce one litre of bottled water to1.76 litres, 26% less than in 1999.Safina, a Ghanian bottled waterproducer, has managed to produce itsproducts with only a 30% loss ofliquids. Such thinking, unheard of


canals. Lining irrigation canals, alongwith smaller opening gates andnarrower channels, has reducedagricultural water loss by 50% inparts of Australia’s Murray–DarlingBasin. Hardwood from Cameroon isprocessed and shipped to theNetherlands to line the canal systemsthere, also to prevent leakage. Chinahas constructed a new system ofcanals and pumps to transfer waterfrom the southern region of thecountry to the north. However,transporting water by pipe is not onlyexpensive, but energy intensive. TheNew York Times estimates that 20% ofCalifornia’s energy use is for thetransporting of water from the northto the south. Nevertheless,investments in water infrastructurehave been effective (see Chart 7).

Often simple ideas, such ascatchment (retaining and storingwater) and conservation, aresignificant. Using existing deltas(low-lying level areas of terrain), orexcavating the deltas to createreservoirs, is quite effective atcatching groundwater or mountainrunoff, which would otherwise be lostat sea or to evaporation. This isparticularly effective in centralCalifornia. According to theInternational Union forConservation of Nature, based inSwitzerland, cities like Caracas,

Chart 6

Product Average price ($/gallon)

Tap water $0.0025

Gasoline $2.20

Coca-Cola $2.64

Organic milk $4.25

Tide liquid detergent $8.39

Imported beer $12.00

Evian bottled water $21.19

Pepto-Bismol $58.52

American whisky $150.00

Revlon nail enamel $983.04

Chanel #5 perfume $45,056.00

Source: The Environmental Benchmarkerand Strategist

Chart 7 Investment in Water Infrastructure (1999 US$ billions,adjusted using Construction Cost Index), 1928–1999

US government investments in water infrastructure during 1930–96 yielded $6 in damagesaverted for each $1 invested.

Source: Based on Delli Priscoli and Wolff, 2009

Venezuela, are protecting local waterbasins, as a method of reducing newinvestments in pipes and pumps.Jakarta, Indonesia is among manycities preserving forests, as treesshield streams and rivers fromevaporation and erosion, providingcheap water for the city and avoiding$1.5 billion per year to transportwater from distant reservoirs.

As irrigation use continues togrow, more efficient techniques arenecessary. Netafim, an Israelicompany that started as anexperiment in 1965, has grown into alarge enterprise controlling over one-third of the global drip irrigationmarket. Drip irrigation is a system oflow-volume irrigation that is lesswater intensive. Recently, thecompany launched a low-pressureirrigation system that is suitable forareas where water pressure orelectrical generation isn’t conduciveto high-pressure systems.

The concept of “virtual water”, orreplacing uses of water from areas ofwater scarcity to areas where water ismore plentiful, or “externalising”water usage, is growing.Approximately 80% of virtual wateris related to trade in agriculturalproducts and the remainder toindustrial products. The globalvolume of virtual water flows incommodities each year accounts for

approximately 40% of all waterconsumption, according to WWDR.As an example, Mexico importswheat, maize, and sorghum from theUS, which requires 7.1 billion cubicmetres of water per year in the US toproduce. If Mexico was to producethe imported crops domestically, itwould require 15.6 billion cubicmetres per year. Global water savingsthrough international trade ofagricultural products has beenestimated by the WWDR atapproximately 350 billion cubicmetres of water per year (6% of waterused globally for agriculturalproduction). In the first four monthsof 2009, China, which had toabandon its policy of food self-reliance, imported a record 13.9million tons of soybeans. A numberof countries, including Japan,Mexico, most of Europe, the MiddleEast, and North Africa, are netimporters of virtual water.

A final example of solutions tofreshwater stress is desalination.Although an expensive option(estimated cost $1,700–$2,200 peracre foot) versus treated water(approximately $600 per acre foot, inthe same region) and energyintensive, as well as creating anenvironmental footprint(desalination chemicals can beharmful to marine life), its use is


increasing as a measure of last resort(see Chart 8). China will be forced touse desalination as a source of coastalwater supply. Due to the high cost oftransporting water, desalination isn’tthe answer for water-stressed inlandareas.

Many countries allow thepurchase of water rights either withor without the land under which thewater flows. Distressed real estatedevelopers, and banks offloading badloans, often are compelled to sellassets with embedded water rights.Also, allocation of water can be soldor adjusted. For example, agriculturalland can be removed fromproduction, and its accompanyingwater allocation can be sold to abuyer willing to pay dearly. We havefound this activity to be a veryinteresting investment. Often, thereis additional optionality, such asusing the fallow land to generatewind or solar power.

Water, which we often take forgranted, is a finite resource and weare using it up or contaminating it. Itisn’t only future generations who willbear the consequences — even now,wealthy and developing nations have

Chart 8 Cumulative Installed Desalination Capacity, 1945–2004

Source: The World’s Water, 2006–07

been forced to confront theconsequences of misuse of one of ourmost precious resources. As with allproblems, the solutions aren’tnecessarily easy. However, withrecycling, better infrastructure, moreefficient allocation, and otherremedies, as a world of water users,we can better address the issue. So,

the next time you take a leisurelyshower, leave the water runningwhile you brush your teeth, or eat asteak, think about the women ofKutch, or the farmers in theMurray–Darling Basin, or thechildren of stunted growth inAfrica. After all, we are all dropsfrom the same river.


Child’s DreamMarc Thomas Jenni and Daniel Siegriest, Co-founders, Child’s Dream Foundation/diversethics Foundation238/3 Wualai Road, T. Haiya, A. Muang, Chiang Mai 50100, ThailandTel: (66-53) 201 811; Mobile: (66-86) 6723 430; Fax: (66-53) 201 812;Website: www.childsdream.org; www.diversethics-foundation.org

AUGUST 2009Daniel Siegfried

I cannot believe that it has alreadybeen six years since Marc Jenni and Iembarked on a journey thattransformed our lives forever. In 2003,we made a conscious decision tochange our lifestyles in pursuit ofhappiness and fulfilment. At the time,we had no idea what we were gettinginto, but we found exactly what wewere looking for in Child’s Dream: ourown charity organisation with asimple mission and enthusiasticemployees who share our passion andmotivation, despite their diversebackgrounds and educationattainments.

As our uncomplicated, hands-onapproach and our “let’s do it” attitudeattracted more and more donations,Child’s Dream grew bigger and bigger.As our primary goal is to help as manychildren as possible, we were thrilledabout the influx of these funds.However, earlier this year we realisedthat we had reached our optimal size.It is now time to consolidate ourorganisational structure and focus onour mission and geographicalcoverage.

We once again want to putchildren’s health and education at theheart of our work, while seekinggreater involvement of thebeneficiaries and their communities inour efforts. This will allow us to buildstronger relationships withcommunities and create a strongersense of responsibility among thechildren and youth towards theirsocial origin and the society ingeneral. In this way, we hope to givethe children the opportunity tobecome responsible and productivemembers of their communities. This isour vision of sustainable development.

We plan to spend more time in ourtarget communities; we therefore needto narrow our geographical scope. Forthis reason, we have decided not to

start new projects in southern Laos butfocus on the north, which can beaccessed more easily from Chiang Mai.We will, of course, fulfil ourcommitments to existing and ongoingprojects in the south.

In hiring three senior staff membersin 2008, we hoped that their expertiseand knowledge would complement thestrong motivation and drive of ouryounger staff. However, weunderestimated the cultural respect forthese three new staff members and wesoon realised that the very heart ofChild’s Dream, the spirit and goodwillof our younger staff, was at risk. Werecognised our mistake and asked thesethree employees to leave theorganisation. We now strive again for aflatter organisational structure,whereby the true motivation anddedication of our staff rates higherthan experience or technicalknowledge.

Our new structure includes threefocus groups; health, basic education,and higher education. This structureencourages the sharing ofresponsibilities and greaterinvolvement of our administrative staffin field work, which ultimately leads toa higher job satisfaction and fosters astronger team spirit. We have alreadyobserved that the younger staff haveregained their confidence, motivation,drive, and “let’s do it” attitude.

Highlight:Grant from Credit SuisseWe are thrilled to announce that theAsian Pacific Philanthropy Committeeof Credit Suisse has awarded Child’sDream a grant of US$250,000 to build30 new classrooms in Laos. We want totake this opportunity to sincerelythank Credit Suisse for thisoutstanding support and trust. Wecongratulate Credit Suisse forrecognising that its success not only

depends on the skills and resources ofits own people, but also on the healthand prosperity of the communities inwhich it operates. More informationwill follow as soon as we startconstruction.

Recent activities

CDC school opening, ThailandOn May 26, we celebrated theopening of the Children’sDevelopment Center (CDC), ourlargest project ever! The sheer scale ofthe opening ceremony attracted anaudience of nearly 2,000 peoplecomposed of students, parents,teachers, government officials, andNGO workers. The diversity andstrength of the audience attests to theimportance of the project.

CDC is a school for the children ofmigrant workers, predominantlyBurmese, residing in Thailand. Overthe years, the old school has steadilygrown from only including thechildren of workers at the nearby MaeTaew Clinic into what is quite possiblythe largest migrant learning centre inThailand, with approximately 1,200children. Before Child’s Dream’ssupport, the school was operatingacross several buildings, including anold wooden two-storey house and adisused factory. The school now has abeautiful and spacious campus,consisting of two two-storey buildingswith a total of 38 rooms for classes andoffices, a school canteen/assemblyhall, and three separate buildingshousing toilets and hand washingstations. The campus also includes alarge grassy assembly field and threesports courts for basketball, takraw(cane ball, a local favourite), andvolleyball, as well as three separateplayground areas complete withswings, see-saws, climbing towers, andbridges.


The landscape design has ensuredthat shade-giving trees will quicklygrow to provide cool spaces forchildren to take refuge from the hotsun during their breaks throughout theday. Overall, the campus provides awell-balanced environment forchildren to further their development,both inside and outside of theclassroom.

Two months into the school year,the enthusiasm of the students andteachers continues to be apparentupon entrance through the main gate.The campus is teeming with masses ofstudents and teachers busily movingbetween classes.

Our sincere gratitude goes again toSK Dream Japan for the generoussupport in realising this tremendousproject.

Baan Tonhan High School, LaosThe village of Tonhan is located about40 kilometres from the town of Xenoin Sawannakhet Province in SouthernLaos. The village secondary school wasbuilt in 1978 by a group of 12 villages.They managed to fund and constructfive buildings, with three classroomseach, without the help of thegovernment. The school now offerseducation to 790 students, but giventheir limited financial means, thevillagers have been unable to maintainthe facilities properly, and two of thebuildings are now in such bad repairthat it is very unsafe to continueclasses. Child’s Dream agreed toconstruct a new building with sixclassrooms, with the participation ofthe Tonhan community. The plansinclude provisions for four new toiletsand new school furniture for allclassrooms.

The community agreed to helpwith the preparation of the land and tocontribute the earth, stones, sand, andbricks required for construction. Thelocal education ministry will provideall teaching materials, and the parentswill be responsible for school uniformsand books. Child’s Dream will providesupplementary stationery if and whenrequired. All additional constructionmaterial will be purchased directly byChild’s Dream from a shop in Xeno.

This project is scheduled to becompleted by October 2009.

We are also very happy to havereceived support from Julius BaerBank and its employees in HongKong. Thanks to this joint initiativeby the staff and the bank, this projectwas made possible.

University Scholarship ProgramSince we launched our universityscholarship program in May 2006, ithas grown considerably: our firststudent intake had eight Burmesestudents, and the program now has 79students in total. Most of our studentsare Burmese nationals, but startingthis year, we accepted our first twoLaotian scholars. Perhaps the biggestchallenge of this program is notsupporting students during theirsemesters through to graduation, butgetting them admitted to theuniversities in the first place. This is asituation of “shifting sands”, whereuniversities change admission criteriafrom year to year and according to thenationalities of students, even afterofficially admitting them. Universitiesoccasionally even invent additional“compulsory courses” in internationalstudy programs for financial gain.

For almost a year now a verycommitted volunteer — BryanClapper — has been workingalongside us on this program. Bryan isa professional IT programmer whodesigned a fantastic new scholarshipdatabase that makes the financial andacademic management of our scholarsa lot easier. We highly appreciate hisoutstanding patience with us when wechange database requirements as wego along! Perhaps we are his “shiftingsands”?

Over the years, only five studentshave left our scholarship program.Two students have resettled to theUSA under UNHCR resettlementinitiatives, one student had a baby,and one student disappeared forreasons unknown to us. Only in onecase have we discontinued ascholarship because the student didn’tcomply with mutually agreed rules.We feel that our retention rate in theuniversity scholarship program is highby any standard, despite the verydemanding circumstances. We trustthis positive trend will continue in theyears to come.

Minmahaw Higher EducationProgram (MHEP)One of the many hurdles of gettingBurmese students into university is thattheir education is often non-formal ornon-accredited, and they are thusineligible for university admission.Minmahaw Higher Education Program(MHEP) is an exam-focused coursethat aims to fill this gap by legitimisingBurmese students’ education. Studentswithout accredited high schoolcertificates compete to be admitted tothe year-long MHEP course, wherethey will prepare to sit aninternationally recognised andaccredited high school exam in orderto make them eligible for universityeducation. If students pass the exam,they receive a high school diploma andcan therefore advance to university.

In early 2009, we trialled theMHEP by supporting nine students.The trial was very successful, with allnine students passing. Child’s Dreamhas therefore decided to fully fund thecourse on an annual basis. This coursewill provide an academic pathway forstudents we currently support acrossour schools in refugee camps, as well asthose in migrant learning centres. Weanticipate the school will accept 20–30students annually at full capacity.

Cyclone Nargis — EAT Burma(update)It seems long ago that the devastatingpower of Cyclone Nargis swept overthe Irrawaddy, Rangoon, and Pugadivisions in Burma, causing death anddestruction in a country alreadysuffering under one of the mostrestrictive and repressive regimes in theworld. In fact, this catastropheoccurred just over a year ago. Many ofthe survivors of this cyclone, one of thedeadliest natural disasters everrecorded, continue to suffer, strugglingto meet their basic needs and to copewith all that they have lost. Long afterthe attention of the world steered awayfrom the misery of the aftermath of thecatastrophe, that misery remains.

Soon after Nargis hit, theEmergency Assistance Team — Burma(EAT-Burma) was established toprovide aid and assistance to thepeople affected by the cyclone.Coordinated by the Mae Tao Clinic,


EAT-Burma is a collaboration ofseveral Burmese community-basedorganisations working at the grassrootslevel. As we were confident thiscooperative model would be effective,we decided to financially support theiractivities. The first phase of the reliefeffort focused on emergency aid in theimmediate aftermath of the cyclone.Child’s Dream and our sisterorganisation, diversethics Foundation,contributed US$200,000 to this phase.During the second phase emergencyaid continued, but the activitiesexpanded to include the rebuilding orinfrastructure and restoration of foodproduction and livelihood activities.Our contribution here was anadditional US$150,000. A fewexamples of what EAT-Burma, withour support, has achieved:

• 106 boats and 112 fishing netswere provided to groups of one tothree families to share.

• Seven villages were providedwith a large boat with an engine toassist them to fetch clean water five tosix hours away. 4,050 gallons of dieselwere also provided to run the engines.

• 513 students received supportfor uniforms, school fees, andstationery.

• 100 children, mainly orphans,in three boarding houses weresupported with a stipend of 3,000THB per child.

• 20 villages received prenataland child health support in the formof nutrition, medicine, and newbornsupplies.

• 500 pregnant women wereprovided with “maternity kits”.

• Eleven water pumps wereprovided to ten villages with a totalpopulation of 7,600.

• 236 families were givenmaterials to rebuild their houses.

• Support for the construction offour bridges enabled over 15,000villagers from seven villages to bereconnected to the main road to gainbetter access to health care, education,and supplies.

• 15,200 people were providedwith emergency food relief.

Plans are under way to begin athird phase focusing mainly onsustainable development andcommunity participation. We are

currently awaiting the final proposalbefore committing to funding thisphase.

Update: Baan Gua Fan,ThailandBaan Gua Fan (“Dream House”) inChiang Mai was a boarding house for11 teenagers, mostly from the Akhahill tribe and all from extremely poorbackgrounds. They moved to BaanGua Fan after the closure of ourChildsArt project in Mae Sai, inFebruary 2007. Their financialhardship, lack of education, andabsence of a support network put themin a very vulnerable position in anenvironment where the dangers of drugtrafficking, prostitution, and crimewere an everyday reality. Baan GuaFan gave them the opportunity toattend non-formal education andvocational training and, consequently,improve their employability and lifeopportunities. Having achieved most ofour goals, we decided to close thehouse in April 2008.

We now have some excellent newsabout five of our former protégés. Allare doing great. One of the formerstudents receives a Child’s Dreamscholarship for his secondary schoolstudies in Chiang Rai. He is in his finalschool year, and his results last yearwere very good. Two other young menand one young lady work in barbershops in Chiang Mai and make decentlivings. A fifth former-student, whoduring his time in Baan Gua Fanshowed an interest in motorbikes, nowworks in a motorbike repair shop notfar from Chiang Mai. He told us he isvery happy there and continues tolearn a lot. He and the three barbers allearn a salary that allows them even tosend some money home to supporttheir families. They told us thatalthough they don’t go to schoolanymore, they still practise theirreading and writing skills and aregrateful for their time at Baan Gua Fan.

Project updates

Loi Tai Leng, BurmaWe visited the project in July. After alengthy delay in implementing thisproject due to transportation problems,we were very pleased to see good

progress. The school building, as wellas the attached office, is complete.The toilets and the canteen will befinished when the rain recedes and thematerial can be transported to thevillage again.

Prasath Bei School, CambodiaWe visited the construction site andeverything is going very well. Theschool looks nice and strong. About90% of the work is done. Thecontractor told us that the school willbe finished within the next few days.

VolunteersSince our last newsletter waspublished, we have hosted severalvolunteers, each of whom supported usgreatly. Bryan Clapper has constructedan incredible database for ourscholarship program; BenjaminCavalli helped us in our office inChiang Mai during April and May;and Sarah Rajkumar spent threemonths with our team in Siem Reapand is now succeeded there by KasparWeilenmann. Patrizia Carbone,Massimo Marletto, and MagdalenaFrydrych all taught English in TomatoVillage. A very big “thank you” to allof them!

European tax domicilesconfirmedAs reported in the April newsletter,over the past many months we havebeen working on offering tax breaksfor donors living in a number ofEuropean countries. Today we arehappy to let you know that tax-efficient giving is now possible inGermany, France, Italy, and the UK.Please visit the donor section of ourwebpage for more information.

Thank you very muchA big “thank you” again to all ourdonors, small and big! The currenteconomic crisis is difficult for all of us;hence, we are even happier to see somany of our friends and supportersliving up to their commitments andcontinuing to support us. We are fullyaware that this is difficult for many ofyou and we therefore appreciate yourtrust and support more than ever.

Your Child’s Dream Team

Subscriptions and enquiriesMARC FABER LTDUnit 3311–3313, 33/F Two International Finance Centre, 8 Finance Street, Central, Hong KongTel: (852) 2801 5410 / 2801 5411; Fax: (852) 2845 9192;E-mail: [email protected]; Website: www.gloomboomdoom.com

Design/Layout/ProductionPOLLY YU PRODUCTION LTDTel: (852) 2526 0206; Fax: (852) 2526 0378; E-mail: [email protected]

Author & PublisherDR MARC FABER

Research Editor & SubscriptionLUCIE WANG

CopyeditorROBYN FLEMMINGwww.robynflemming.com.au

THE GLOOM, BOOM & DOOM REPORT© Marc Faber, 2009

DISCLAIMER: The information, tools and material presented herein are provided for informational purposes only and are not to be used orconsidered as an offer or a solicitation to sell or an offer or solicitation to buy or subscribe for securities, investment products or otherfinancial instruments, nor to constitute any advice or recommendation with respect to such securities, investment products or other financialinstruments. This research report is prepared for general circulation. It does not have regard to the specific investment objectives, financialsituation and the particular needs of any specific person who may receive this report. You should independently evaluate particular investmentsand consult an independent financial adviser before making any investments or entering into any transaction in relation to any securitiesmentioned in this report.

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21700502 Gloom Boom Doom September 2009