2) I spent a delightfully entertaining evening with University of Chicago economics professor Steven Levitz and journalist Stephen Dubner, authors of the wildly popular Freakanomics, and the just released 'frequel' Super Freakanomics. I love these guys, because they do the same thing as I for a living, looking at raw data, absent of preconceived notions, and drawing iconoclastic, out of consensus conclusions that cause a huge public ruckus. No surprise that they are pals with New Yorker magazine columnist, Malcolm Gladwell (see my interview with him by clicking here ). I learned that Chicago prostitutes are like department store Santa's because they greatly raise prices during periods of seasonal high demand, like around the fourth of July. And while on that theme, I also learned that pimps add far more value than real estate agents, about 25% more. Furthermore, Ford Motors fought mandatory seat belt legislation in the fifties because they were afraid it would advertise the dangers of driving. Drunken walkers suffer eight times more injuries and five times more fatalities than drunk drivers. Also, child car seats offer no safety advantage over conventional seat belts whatsoever, and are just a racket created by the sellers of such seats. The safest thing you can do with a baby is simply place them on the floor of the back seat (They did the crash dummy tests to bear this out). While 100% of hospital doctors admit they should wash their hands, only 73% admit to doing so, while covert monitoring reveals that a scant 9% actually do it, leading to untold numbers of often fatal infections. The evening brought home a truth that I have been pounding into my trainee research analysts for decades; that raw data and facts will trump opinion and spin every time.

3) The anniversary of the fall of the Berlin Wall, the 20th of which passed yesterday, has always been an emotional time for me. I lived in the American Sector in Tiergarten, a mile from the hated wall at Brandenburg Gate, and recall with some dread being kept awake at night by the angry growl of AK 47's wasting desperate, but helpless families as they attempted to flee to the West. To make extra money, I used to escort small groups of nervous Americans across Checkpoint Charlie into East Berlin for a day of lunch, a visit to Queen Nefertiti at the spectacular Pergamon Museum, and the opera, all paid for with Ostmarks purchased at a huge discount on the black market, and smuggled in my boots. That was my first currency arbitrage, and led to a pattern of ever greater risk taking that could eventually lead nowhere else but the hedge fund industry. About one third of East Berlin still awaited reconstruction from the Allied bombing and the 1945 Russian invasion that laid waste to the city, with every East facing wall still standing absolutely pock marked with bullet holes. That was at least until the Stasi caught me trying to sneak in a copy of the banned Berliner Zeitung, which landed me in the communist lock up for a day. The hapless people I met there!?? Thank goodness they let me out because I was only 16! Some 21 years later, tears streamed down my cheeks as I watched the wall fall on a TV at a Swiss Bank Corp trading desk in London. As much as I wanted to fly over and join in the party, I was running a pretty sizeable book then, and if you recall, 1989 was a year with some pretty awesome volatility. It turned out to be the first domino that led to the end of the Soviet Union, and two thirds of the world's population joining the global economy. That created the peace dividend, which contributed to the nineties dotcom bubble, and opened up new international trading opportunities on which hedge funds feasted to the point of gluttony. Ahhh! Those where the days.

Featured Trades: (GOLD), (EEM), (TAIWAN), (EWT), (TBT)

1) I have worshipped at the altar of? the legendary Paul Tudor Jones for the past 25 years, since he was a client of mine at Morgan Stanley. A once savvy, boy cotton trader from the South, I rate him as the best natural talent in the industry. We all knew he would do well, but the $17 billion he has amassed in a stable of macro hedge funds boggles the mind. Paul?s Greenwich, CT based Tudor Investment Corp. has had one of the bigger sticks in the market for a long time now. I perused his most recent letter to investors to get his current world view, which to my relief, I find remarkably similar to my own. ?The Great Liquidity Race? is the dominant theme of the markets today, with hot money pouring into gold, emerging markets, and commodity stocks. Taiwan is a particular favorite, greatly benefiting from closer relations with the mainland. Incredibly aggressive monetary and fiscal policy could drive US GDP growth as high as 3.5% in Q4 2009 and 5.5% in Q1 2010. Then the recovery runs out of gas and we fall off a cliff. If stock markets discount economic activity six months in advance, doesn?t that mean they should be topping out about??.now? We are about to relive the stagflation of the 1970?s. Central banks will begin a global tightening by next summer, knocking Treasuries off their perch, and giving some insight into timing for the legions of investors in the TBT, the leveraged bet that long interest rates are going to rise. There are few investments now with attractive risk/reward ratios. Bravo! Dollar weakness may accelerate as we approach year end, and that could prompt another run up in equities. While Paul?s growth forecasts for Q4 09 and Q1 10 are a tad high, and project a more vertical ?V,? before a collapse, I happen to know that Paul does his spadework. But it would not be the first time that Paul was right and I was wrong about a trade. It?s amazing how articulate you can be when you are backed by 345 in-house research traders, research analysts, and support staff. At least if I?m wrong, I?ll have distinguished company.

It?s Back to the Seventies

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2) Paul nicely summed up the fundamental argument in favor of gold.? The yellow metal is accumulated, and not consumed, and is the ultimate store of value. Gold does particularly well during times of excessive monetization, inflation, and instability of the banking system, as we are seeing now. Central banks, which have been consistent sellers for the last 20 years, are about to flip to net buyers. If non G7 central banks, like China, want to increase their gold holdings from the current 20% of reserves to the 35% weighting now owned by the G7, it will require 1.3 billion ounces of new purchases, or 20% of the total world supply. Certainly they are getting fed up with their ever depreciating dollar holdings. Witness last week?s Bank of India purchase of 200 metric tonnes. ETF?s now own $50 billion worth of the barbaric relic, about 3% of the world total, making them the sixth largest holder in the world, and retail demand for these gold proxies is expected to explode in coming years. Private investors, mutual funds, and pension funds are all underweight gold. This is all happening in the face of declining production from traditional gold suppliers like South Africa. It all adds up to a whole lot of new gold buyers and a shrinking body of sellers. Paul didn?t give any specific price targets other than ?up.? Long time readers of this letter know I have been banging the table about gold all year. Time to salt away more American eagles for those college funds and grandkids.

3) The handful of Chinese army officers I huddled with in the underground bunker all stared intently at their watches. Three, two, one, then KABOOM! At exactly 12:00 noon, the blast of distant artillery sent a five inch shell screaming over our heads and exploded into the hill above us, shaking the ground under our feet and causing dust to drift down from the concrete ceiling above us. It was 1976, and The People?s Republic of China just let lose its daily symbolic protest against its errant rebellious province, known locally as the Republic of China, and to you and I, as Taiwan. Fast forward 33 years later and the Middle Kingdom is sending salvos of money raining down on that prosperous island. China Mobile (CHL), the world?s largest cell phone company, has bought 12% of Far Eastone Telecommunications (4904.Taiwan). Although a small deal, it represented the first ever direct investment from China into Taiwan. The move could trigger a takeover binge by big Chinese companies of their offshore cousins. It was only a few years ago Taiwanese businessmen suffered long prison terms for just visiting, let alone investing in China, which they have done in a major but surreptitious way for 30 years. Readers of this letter are well aware of my aggressive recommendations to buy emerging markets China and Taiwan since the beginning of the year (click here for my April recommendation). Now you have another reason to buy both. Closer ties between China and Taiwan auger well for the stock markets of the two high growth countries. The iShares MSCI Taiwan fund ETF (EWT) at one point were up an impressive 92% from the March lows, so if you see a substantial dip it might be a good idea to double up. I guess Beijing figured out that if you can?t beat them, buy them. The proxy takeover bid is mightier than the sword.

QUOTES OF THE DAY

?I have never been a gold bug. It?s just an asset, like everything else in life, that has its time and place. And now is that time,? said legendary hedge fund manager Paul Tudor Jones.

Global Market Comments
November 6, 2009

SPECIAL DEMOGRAPHIC ISSUE

Featured Trades: (EEM), (VNM)

1) Desperate homeowners counting on a 'V' shaped recovery in residential real estate prices to bail them out better first take a close look at global demographic data, which tells us there will be no recovery at all. I have been using the US Census Bureau's population pyramids as long leading indicators of housing, economic, and financial market trends for the last four decades. They are easy to read, free, and available online at http://www.census.gov/. It turns out that population pyramids are something you can trade, buying the good ones and shorting the bad ones. These graphical tools told me in 1980 that I had to sell any real estate I owned by 2005, or face disaster. No doubt hedge fund master John Paulson was looking at the same data when he took out a massive short in subprime securities, earning himself a handy $4 billion bonus in 2007. To see what I am talking about, look at the population pyramid for Vietnam. This shows a high birth rate producing ever rising numbers of consumers to buy more products, generating a rising tide of corporate earnings, leading to outsized economic growth without the social service burden of an aged population. And what happened 40 years ago? The Vietnam War, where two million young people were killed who otherwise would have been enjoying their gold years now. This is where you want to own the stocks and currencies.

2) Now look at the world's worst population pyramid, that for Japan. These graphs show that a nearly perfect pyramid drove a miracle stock market during the fifties and sixties which I remember well, when Japan had your model high growth emerging market economy. That changed dramatically when the population started to age rapidly during the nineties. The 2007 graph is shouting at you not to go near the Land of the Rising Sun, and the 2050 projection tells you why. By then, a small young population of consumers with a very low birth rate will be supporting the backbreaking burden of a huge population of old age pensioners. Every two wage earners will be supporting one retiree. Think low GDP growth, huge government borrowing, deflation, and a terrible stock and housing markets. Dodge the bullet.

3) If demographics truly is destiny, then America's future sucks. Brace yourself. We are turning into Japan. As a silver tsunami of 80 million baby boomers retires, they will be followed by only 65 million from generation 'X'. The intractable problems that unhappy Japan is facing will soon arrive at our shores. Boomers, therefore, better not count on the next generation to buy them out of their homes at premium prices, especially if they are still living in the basement. They are looking at best at an 'L' shaped recovery, which means no recovery at all. The only thing that can possibly save us is a rising tide of immigration, bringing in more young workers. Oop's! The last administration did everything it could to shut out immigrants by building huge, multibillion dollar walls on our borders. What are the investment implications of all of this? Get your money out of America and Japan, and pour it into Vietnam, China, India, Brazil and Mongolia and other emerging markets with healthy population pyramids. You want the wind behind your investment sails, not in your face with hurricane category five violence. Use this dip to load the boat with the emerging market ETF (EEM).

4) Now that we have figured out that Vietnam is a great place to invest, we welcome the news that the Van Eck group has launched its own Vietnam Index Fund (VNM). The venture will invest in companies that get 50% or more of their earnings from that country, with an anticipated 37% exposure in finance, and 19% in energy. This will get you easily tradable exposure in the country where China does its off shoring. Vietnam has been one of the top performing stock markets this year, at its peak rising by an amazing 110%.?? It was a real basket case last year, when zero growth and a 25% inflation rate took it down 78% from 1,160 to 250. This is definitely your E-ticket ride. Vietnam is a classic emerging market play with a turbocharger. It offers lower labor costs than China, a growing middle class, and has been the target of large scale foreign direct investment. General Electric (GE) recently built a wind turbine factory there. You always want to follow the big, smart money. Its new membership in the World Trade Organization is definitely going to be a help. Until now, the only way to get involved with this country was to go through the tedious process of opening a local currency brokerage account, or buy a region sub emerging market ETF. I still set off metal detectors and my scars itch at night when the weather is turning, thanks to my last encounter with the Vietnamese, so it is with some trepidation that I revisit this enigmatic country. Throw this one into the hopper of ten year long plays you only buy on big dips, and go there on vacation in the meantime. Their green shoots are real. But watch out for the old land mines.