US Dollars, On the Edge of a Knife: Capital Flight Emerging!

By: Ty Andros | Fri, Apr 20, 2007
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In This Issue

US Dollars, On the edge of a Knife, Capital Flight emerging
Inflation, Runaway Freight Train

US Dollars, On the edge of a Knife: Capital Flight emerging!

As US politician's angle towards the protectionist policies guaranteed to blow up in their faces, dollar holders around the world are voting with their feet. The emerging picture from the economic, monetary and trade flow numbers in the first quarter are unmistakable, and the "VERDICT" is one of "CAPITAL FLIGHT". The noises coming from the salons of Washington DC and the presidential campaign trail make it clear that the United States has no intention of honoring its promises to dollar holders. Those dollar holders are going to be stiffed. So, it's unanimous, everyone is selling at the margin, except the Japanese. The dollar is holding its own versus the Japanese currency, but this could reflect dollar dumping as well, as dollar holders sell Yen and use the money to buy assets denominated in anything but dollars on the buy side. The US is about to undergo a fire sale of epic proportions, destined to go down in history as one of the most flagrant examples of political and monetary moral breakdown ever seen.

As I outlined in the previous edition of Tedbits (see archives for "The Bomb, er, Bond market at www.TraderView.com) we outlined the critical nature the US bond markets current price points are. It represents a breakdown point which represents a critical long term point which investment decisions are made by the biggest money in the world. For these investors price is everything from which they their long term decisions (monthly, quarterly, and yearly), a breakdown here will signal a spiraling higher of US interest rates, and massive capital losses for dollar denominated fixed income paper. Pushing them to take negative positions into the markets to protect the values of their massive fixed income holdings. Meanwhile, Washington widened the attacks of the Chinese exporters in several areas. Sparking outrage from our largest lenders. Exacerbating the problem was the revelation of the exploding of the size of the Dollar reserves they hold.

In the first quarter their Dollar reserves exploded over 135.6 billion dollars, more than half the increase from all of 2006. Taking their reserves from slightly over 800 billion at the start of 2006 to over 1.2 trillion in March. Take a look at these Charts from a recent Wall Street Journal:

And this is not an isolated instance, India, Russia, Western and eastern Europe are all seeing explosive "DOLLAR DENOMINATED" inflows of Foreign direct investment, inflows from their citizens living abroad and trade surpluses. Look at India and Russia in the first quarter, They saw a similar jump in reserves that China did. I am sure it occurred in all the capital markets worldwide, London, Moscow, Hong Kong, etc. Adding to this rush to get money outside the US capital markets is the "smart money" US investors buying record amounts of foreign securities of all types, stocks, bonds and Real estate in foreign countries. To insulate themselves from the foolish US politicians living in bygone days of American hegemony of capital markets. More than 50% of all treasury issuance is usually taken down by foreign buyers, aka central banks, institutions and "miscalculating" hedge funds. Mostly to defend the values of their reserves and park the enormous inflows of dollars as they flee the US. As people rush to get their money outside the grasp of the US government. This is AKA (also known as) as Capital flight!!!

Now that flow of foreign dollars into the US is collapsing, Exasperating the explosive growth in Reserve holdings of foreign central banks, is the emerging trend of declining foreign direct investment into the United States (see the "Clock is "Tic"king on the US dollar in Tedbits archives at www.traderview.com). In February net foreign buying of securities with maturities of more than a year plummeted to $43.2 billion from $83.7 billion in January, net buying of long term US securities would have totaled $58.1 billion in February, down from $98.8 billion in January. A subset of these numbers is the total collapse in net foreign purchases of debt issued by US government sponsored companies Fannie Mae and Freddie Mac which plummets to $2 billion in February down from $35.8 Billion in January. Those dollars are now staying at home or seeking opportunities in markets with more growth potential. And the prospects in the US are just declining on a daily basis as the Congress sets to strangle the US economy with their tax and spending plans.

The elephant in the room is known as the US dollar and it is in general disrepute, and the "smart money" such as the people who read this newsletter are moving towards the exits and the wave is enormous. And it's only begun a little bit, at the margin: it is only the first several percent of the wave to come. It doesn't matter which currency you view versus the Greenback: Russian ruble, Indian Rupee, Malaysian Ringgit, Aussie dollar, Kiwi dollar, Philippine Peso, Euros, Swiss Francs, Thai Baht, Chinese Yuan, Canadian Dollar, these currencies and their foreign currency brethren are unanimous in their strength and appreciation. Oh, and What a chorus of opinion we are seeing!

Please someone show me a currency which the dollar is strong against? You may be looking quite a while, (in fact I couldn't find one) and when you do find it compare the perceived image of the government that stands behind it and compare it to Washington DC, at that point you will know where the perception of the US government, US economic prospects, and financial authorities lies in the eyes of the world. Can you imagine the US government held in lower esteem then the military "Junta" in Bangkok? "IT IS A DISASTER", but also a big, big investment opportunity so don't be scared. Move swiftly and "smartly" into carefully considered and "structured" alternative investments of all types, a "finger of instability" is flashing a profit opportunity. (Let me show you how: www.TraderView.com).

Adding to the interesting first quarter picture is that of "GOLD". Little noticed by the world was the fact that gold finished at three consecutive monthly closing highs in excess of the closing monthly high we witnessed in May of last year. It turns this whole chart into a great big technical formation flashing an immediate move $190 dollars higher. Then in addition take a look at Gold on a quarterly chart, as it finished at "all time highs", including the June 1980 peak. Take a look at this quarterly chart of Gold stretching from then to now.

WOW, what a picture it tells, any technical analyst will tell you as of the March gold close, it is flashing a buy signal and a 650 dollar move higher "RIGHT NOW"! Gold is also moving higher against "EVERY" asset class and currency I could find. The European sold over 45 tons of gold recently and couldn't dent the gold prices as they always could in the past: they are running out of ammo quickly. At what point do they finally decide to hold onto their highest quality reserve holding? Gold is emerging as a far higher quality asset then the dollars and US treasuries they hold. My guess is soon. Gordon Browns presumed and assumed ascension to Prime Minister of the UK will not survive his decision to sell the Gold Reserves of the Bank of England at the lows of the gold market in 2001-2003. European bankers, politicians and finance officials will see this soon and stop their gold sales. To try and preserve their future job security.

Normally when the dollar has been at his Juncture in the last 30 years it has represented a "HUGE" buying opportunity as anyone that purchased US denominated investments from abroad were generously rewarded with the double bonus of currency appreciation along with the returns on the whatever asset they purchased. Take a look at this chart going back to pre 1970:


Chart courtesy of John Mauldin, John can be reached at John@FrontLineThoughts.com

Based on history this is a time to buy US assets and dollars, and from the looks of this chart, now could be one such time. Will these investors make a bet on recent (last 37 years) history? Normally these foreign buyers come out of the woodwork at times like these, gobbling up US assets, will they change their behavior this time? We will see, as it is now or never for the dollar, because a break below those lows spells "TROUBLE" with a capital T. The IMF and World Bank held their annual meetings this last weekend. It is the biggest and greatest assembly of financial mandarins on the planet, as the coterie of governments who have membership in these behemoths meet, plan and discuss the economic and monetary future of the world. It is interesting to note here that China refused to participate! And the bureaucrats at the World Bank continue to set their sites on the President Paul Wolfowitz, trying to destroy his position because his girlfriend worked there, as she did BEFORE he started there, the real reason he is under attack is he installed "Paul Volker" to clean up the place and he has found a lot of "RATS" among the bureaucrats. Paul is one of the few "GOOD GUYS" in the world that will take on governmental, and institutional corruption at all levels and "succeed" against the forces of darkness and corruption, both at the bank and the recent UN food for Oil corruption.

(Authors note; looking for assistance in creating portfolio diversification that can survive and thrive in what I am outlining? In fingers of instability? If so contact me through www.TraderView.com. Subscriptions to this newsletter are also free at this address; send it to a friend, Thank you)

Along with their discussions of the US bond market (the 10 year Euro bund market broke down hard this week, see Tedbits archives: The bomb, er, bond Market at www.TraderView.com), I am sure this was also a major topic of conversation in the smoke filled rooms where these government finance officials and central bankers plot the future of these markets which they believe they can control through their market manipulations and PLUNGE PROTECTION TEAMS. It is them versus every private dollar holder in the world and we will see who wins. I am sure the printing presses around the world are all well oiled and the computers are all humming in preparation for the epic battle unfolding before our eyes. Government Market Manipulators, Demi gods, and would be "masters of the universe" versus Private Capital. If the dollar slips below those THIRTY FIVE YEAR

LOWS AND BUYING PATTERNS, it is a signal that the world's capital assumptions are changing for many generations going forward. It will happen whether now or in the near future. We are on the cusp of the decision point, it can be easily seen. You can make big bets using that chart and how it unfolds. WOW. Got Gold? And because of this...

Inflation, A Runaway Freight Train

It has been interesting for me to watch other governments around the world slowly but surely follow in the footsteps of former Federal Reserve Chairman Alan "Greenscam" er Greenspan and the US government. Slowly but surely they succumbed to the siren song of steady US growth and rising asset prices fathered by Greenspan during his tenure as head of the most powerful central bank in the world. Growth in Government spending and economies with out the cost of the economic cycles disrupting their reelection aspirations.

WHAT A WONDERFUL ELIXOR, they came to believe. Central European, Japanese, Chinese, Indian, and Russian governments slowly embraced more and more fiat money printing and credit creation trying to recreate the perceived US growth miracle of steady growth with virtually no recessions, slowdowns were OK, but recessions were to be avoided at all costs, slow downs were OK, but negative growth and the "ECONOMIC" cleansing that takes place during them were virtually banished. It was also a great recipe for reelection, so it was easily embraced by incumbent politicians and pushed onto previously independent central banks. Economic Spring, summer and fall seasons were OK, but winter was never allowed to emerge. Approaching economic winter was the signal for the printing and credit issuance to go into high gear. The world now practices this as normal operating procedure. They came to believe in the tooth fairy and something for nothing wealth creation. Contrary to history and all economic history!

Economic winters known as recessions are very important and healthy events, they clear out the weak hands and enterprises that are no longer economically viable, allowing new enterprises to take root in the spring and blossom into more effective suppliers of the goods and services then the recently demised old guards. It is the creative destruction of capitalism and entrepreneurs, and it and they invented new, faster, and more efficient ways of production. Globalism is this written large, where whole group's of industries and old ways of doing things are replaced by more nimble and productive new competitors. It is the laws of nature written globally. Globalism is where old business and political models go to live and thrive or die as plants do in nature.

Greenspan tried to reign in the punchbowl 3 times during his tenure: 1987 to defend the dollar, 1991-2 to reign in an inflationary episode (causing the loss of the presidency by George Bush senior), and an attempt to reign in the Y2K (a huge injection of fiat money to overcome the perceived Technical glitches in computer programs which he expected to disrupt financial markets around the world), which backfired and fathered the NASDAQ bubble. All these episodes created crashes of one sort or another (see "fingers of instability" at www.Traderview.com ). The last crash and the required mopping up reflation to support plummeting economic activity resulting from the pricking of the Stock bubble and capital spending bubbles. He also redoubled his previous two years reflation after the attack on the world trade center. He and Central bankers around the world rode to the rescue, to prevent a perceived risk of a Japanese style deflation moving more broadly to US and foreign markets in 2001-2002.

Those risks were real in my estimation: a Kondratieff winter was avoided (or postponed?). The US economy at that time was still the economic locomotive to the world, a US decoupling was inconceivable and impossible at that time. But they went too far in liquidity generation then and globally are doing so now. It was a balancing act, and now these problems are written more widely. US budget and trade deficits have gone up five fold since 2000, moving the wealth of the United States to the Capitals of our trading partners and energy suppliers around the world. This profligate spending by the government and the population of the US does not include the theft of Medicare and Social Security trusts funds by US politicians to fund their spending which now are approaching 8.5 trillion dollars of missing deposits from their constituents.

I still vividly remember Al "the Goracle" Gore talking about lock boxes knowing that his own party would embrace them over their dead bodies. G.W. saw the same thing and proposed private accounts outside the government's greedy hands but was foiled by politicians on both sides of the aisle as they counted and spent the funds to finance the biggest expansion of government, spending and entitlements in the history of the world, not to mention their reelection plans. US Government spending has skyrocketed in 6 short years by 60%, and unfunded entitlements have gone from 20 trillion to over 47 trillion dollars. Now those "set in stone" spending plans are the father of the previous "Tedbit".

Since natural resource, manufacturing and Energy development in the United States has been virtually halted over the last 28 years, the United States now has no capacity or infrastructure to provide for its own needs in these areas. Also destroying future job prospects for future generations in these vital sectors of any economy. We have no capacity to increase oil, natural gas or energy production, we have no capacity to generate electricity or process oil into gasoline and heating oil, and we have no domestic manufacturers period, for the most part, and last but not least we don't have the savings in the bank to finance their future development. Slowly but surely these activities have been moved off shore as politicians pandered to the "DUMBEST AMONG US" to fuel their reelections, by promising that we could have something for nothing. Avoiding preparing for the future in the United States. And what money we are saving is being diverted to fund non-productive activities like higher tax's, military boondoggles, government spending and entitlements. Now those "Failures to plan" are setting in motion "plans to fail" consequences for the citizens of the US.

If you now count the trade and budget deficits the United States must generate 3 billion dollars a day to fund the deficit, it must come from one of three places. Domestic savings/investors, foreign savers/investors or the federal reserves printing press. In order to attract the money it must expect a return in excess of inflation. In order to do so we will have to pay more to our suppliers. Whether it be raw materials, or capital these lenders expect to be paid in excess of their cost of production.

The recent PPI release from Friday's is interesting to say the least: it details a huge acceleration in prices on all levels. Core raw materials (ex food and Energy) soared rising over 7.7% month over month, driving the year over year rate up at 24.6%, Raw materials including food and energy rose at +15.7 yoy (year over year) rate. Friday Michigan's consumer sentiment survey indicated inflation expectations rising to 3.5% yoy from 2.5 at the beginning of 1st of the year. We thank Greg Weldon www.weldononline.com and Greg's insightful "Money monitor" for these numbers. These core input inflation pressures are directly responsible for the unfolding wolf wave of collapsing corporate profit growth outlined in the "fingers of instability" series available in the Tedbits archives at www.TraderView.com . It's only going to get worse as foreign suppliers of capital and raw materials must factor in the inflation of the monetary supply to meet the needs of the United States embedded spending plans. Spending plans that no US politician dares to touch, it is a recipe for early retirement as the something for nothing mentality is now the majority of the electorate. And the wealth building parts of the US economy are now located elsewhere, so additional new spending must be met from the Credit issuance bought by the federal reserve.

Now lets look at the money and credit creation now practiced Globally by these emerging and developed economies: (Thank you Gary Dorsch of www.sirchartsalot.com for these numbers)

Euro zone M3: up 10.0 per cent

US reconstructed M3: up 11 percent

United Kingdom M4: up 13 per cent

India M3: up 20.3

China M2: up 17.2 per cent

Australia: up 12.7%

South Korea M3: up 11.3 per cent

New Zealand: up 18%

Australia M3: up 13 per cent

Japan M3: up 6%

Russia M2: up 49 per cent

 

This is future inflation, written globally, it will be offset somewhat by oceans of cheap labor as the emerging nations 3 billion people step into the chain of production. It is also an indication of a booming global economy, which will be great for those nations running savings and trade surpluses and unending unfolding misery for those nations that do the opposite (the United States). Boom-times for the Global economy in general and stagflation for the US and parts of Central Europe.

Since the United States has no surplus capacity in any respect and no plans to really build out new industries (manufacturing, raw materials production, savings, energy production, etc. these activities are punished in the United States, you are attacked by the government for attempting them) except Military manufacturing as its firepower has been seriously diminished by years of wars around the world. Additional resources will be diverted from the global economic wars towards refurbishing and rebuilding the military. Further impeding future growth prospects and requiring lots of new money printing by the Federal Reserve. Every major domestic political and spending priority in the US is misdirected. Whether it is Ethanol (see Tedbits archives at www.TraderView.com), entitlements, energy production, manufacturing infrastructure, or whatever. It no longer pays to take these initiatives.

So we will be forced to buy them from others and the only source of purchasing them is a printing press or loan from the Banks. Borrowing money to consume rather than produce. The US government issues a bond and the Federal Reserve buys it. Shackling the taxpayer with the debt, as the politicians pursue their misdirected spending plans and priorities to fuel their reelection. A recipe for always-higher obligations, always-declining income and standard of living. Debt is a call on future income. It transfers future buying and demand to debt service. It is a recipe for inflation, indentured servitude and "financial" slavery. Add that to the calculus of our off shore suppliers of "everything", (raw materials, consumer staples, energy supplies, etc.) that the source of the funds to pay them is always going to be a printing press and it leads to a conclusion that they must raise their prices to us in everything. And they are doing so.

(Authors note; looking for assistance in creating portfolio diversification that can survive and thrive in what I am outlining? In fingers of instability? If so contact me through www.TraderView.com. Subscriptions to this newsletter are also free at this address; send it to a friend, Thank you)

The money and credit creation in foreign countries domestic economies is exploding as well. As are all the inflation numbers in most economies around the world. Creating the future requirements of higher interest rates in those countries. Since they have booming economies, lots of savings and bank reserves they can do so.

The US really can't raise rates as the slowdown in the US could turn into a recession and exacerbate the Housing problems. Creating systemic threats to the financial system, as the US is so loaded with debt on all levels: Federal, State, Municipal, and private that it can't really contemplate further rate rises. It is verboten. Talk like a hawk, but bail water as fast as you can i.e. "PRINT MONEY", to try and underpin the sinking ship that the US economy is. The US is now in a strait jacket constructed over the last 40 years, it will not be easily escaped from except through "illusion" just as a magician does it. They will inflate like mad, Inflate or die as Richard Russell of www.dowtheoryletters.com puts it.

The illusion of stock market growth through inflation of money, as any observer of stock prices priced in gold rather than dollars will tell you (see Tedbits archives www.traderview.com for this chart in the "fingers of Instability") exposes the true reality of dollar purchasing power. If you factor real inflation into US GDP numbers the US is already in a recession (ie. Negative quarterly economic growth), only the Newspapers don't report it as the headline numbers are so massaged by phony inflation reports as to create the illusion of growth in the reported real GDP numbers. Take a look at this chart from a recent money monitor by GregWeldon of www.Weldononline.com:

Notice how the roaring "Twenties" was a brief period of dollar strength, that period of strength was one of the reasons the depression was so bad as liquidity contracted until the mid thirties. It is why Bernanke will not let liquidity growth slow, his studies tell him the Federal Reserve withheld too much money printing causing a scarcity of dollars thus driving up its value and purchasing power. He is determined to prevent that spike with every part of his being. So the dollar is destined to spiral lower from excess liquidity and credit creation. This chart illustrates the central theme of US central banking, and banking worldwide, growth through the illusion of higher "paper" priced assets. While if goods and services are priced in gold they are now the same price as they were at that time. A good suit cost an ounce of gold in the twenties, it does so now, its price has not changed in real money "GOLD", only the purchasing power of the dollar has declined. You can do this exercise with a barrel of oil, the price of a car, a house etc. they are almost the same price in ounces of gold as they were historically. The only nominal price changes have come from the loss of purchasing power of the dollar, Euros, British Pounds, etc. that they are priced in.

The central banks, sovereign finance officials and politicians have worked hard to keep the price of gold from unmasking their irresponsible inflation buy selling their reserves into the markets, they are failing. They will continue to fail as more and more people realize what's unfolding and move into things that cannot be stolen with the printing presses. This theft of the purchasing power of your currencies is accelerating as the table above illustrates. As inflation measures worldwide are clearly signaling this reality. It is why asset prices are soaring, as that is the only place you can escape the onslaught of the printing presses, as they just reprice in the lower "purchasing power" of the script. But these refuges are only available to the owners of capital, not the masses: they are saddled with paying the bills for the politicians who have promised them something for nothing. The same politicians they vote for over and over because they cannot figure out this reality. They see the reality of ever decreasing pay every time they go to the grocery store! And believe it is the Capitalists who are doing this to them, when in reality it is their own chosen POPULOUS LEADERS! Inflation is here to stay at this point as the money and credit creation have reached a point where is cannot be withdrawn with a deflationary depression such as the great depression in the thirties. So learn to invest properly to reflect reality and thrive.

In conclusion : Cash is Trash, and it is set to get worth less and less. The dollar is at a critical point, watch it closely right here. If it slips below those lows easily seen on the chart above understand that the dollar is set to lose even more of what little value it still has. It will become a debacle below that low, because there are now so so many of them worldwide, and the exits are actually quite small in comparison to the number of them. The exits are things that can't be printed, other currencies suffer the same problems the dollar does and foreign banking officials are doing everything they can to catch up to the irresponsibility of US officials before them. Currencies as a depository for wealth will be replaced with unprintable assets as depositories wealth. That includes stocks, commodities, real estate, etc. Bonds are set to become the guaranteed confiscation of wealth that the currencies they are constituted in do so. Inflation is set to run away as more and more people come to realize this reality and flee to the safety of unprintable assets. AT THE MARGIN. Bull markets anyone?

Thank you for reading Tedbits, don't miss the next edition as it will be a real shocker. If you enjoyed this edition of Tedbits then subscribe - it's free, and we ask you to send it to a friend and visit our archives for additional insights from previous editions, lively thoughts, and our guest commentaries. Tedbits is a weekly publication that comes out on Thursdays or Fridays.

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Ty Andros

Author: Ty Andros

Theodore "Ty" Andros
info@TraderView.com
www.TraderView.com

7800 Southland Blvd. #110 Orlando, FL 32809
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Tedbits is authored by Theodore "Ty" Andros, and is registered with TraderView, a registered CTA (Commodity Trading Advisor) and TraderVest Clearing LLC a GIB (Guaranteed Introducing Broker). He currently is the principle of TraderView, a managed futures and alternative investment boutique. Mr. Andros began his commodity career in the early 1980's and became a managed futures specialist beginning in 1985. Mr. Andros duties include marketing, sales, and portfolio selection and monitoring, customer relations and all aspects required in building a successful managed futures and alternative investment brokerage service. Mr. Andros attended the University of San Diego, and the University of Miami, majoring in Marketing, Economics and Business Administration. He began his career as a broker in 1983, and has worked his way to the creation of TraderView of which he is the sole owner. Mr. Andros is active in Economic analysis and brings this information and analysis to his clients on a regular basis. Ty prides himself on his personal preparation for the markets as they unfold. Developing a loyal clientele.

For greater insight into the philosophy behind Tedbits, have a look at the Tedbits Overview - To help understand our mission in serving you, the TedBits Overview gives a broad description of what's unfolding globally and what you can expect from Tedbits as a regular reader.

DISCLAIMER AND TERMS OF USE: While TedBits strives to present accurate and useful information, we make no guarantee of accuracy or completeness. All information and opinion expressed herein is subject to change without notice. Opinions and recommendations contained herein should not be construed as investment advice. Under no circumstances does the information in this column represent a recommendation to buy or sell any securities or commodities. Do not assume that any recommendations, insights, charts, theories or philosophies will ensure profitable investment. The information contained herein is for personal use only.

Gold and silver backed means that various commodity options strategies in gold and/or silver may be used. When buying options, you may lose all of the money paid for the option. When selling options, you may lose more than the funds received for selling the option. Strategies using combinations of positions, such as spreads or straddles, may be as risky as taking a simple long or short position. A high degree of leverage is used to buy or sell a sufficient quantity of options and/or underlying futures contracts equal to the value of the entire portfolio. The high degree of leverage can work against you as well as for you and lead to large losses as well as large gains. Absolute-return is not meant to imply that a positive return can or will be achieved. Absolute-return describes investment strategies which are designed to have the potential to succeed in rising, market-neutral and falling market conditions. Gold and silver backed and absolute return investments do not mean the investor will take actual physical possessions of any precious metal. Nor should any promise or guarantee be implied that such investments will perform better than any other investment in any possible future scenario described herein nor that such investments can or will preserve or protect in such possible future scenarios.

TedBits may include information obtained from sources believed to be reliable and accurate as of the date of this publication, but no independent verification has been made to ensure its accuracy or completeness. Many of the statements and views made are the opinions of the author. Opinions expressed are subject to change without notice. This report is not a request to engage in any transaction involving the purchase or sale of futures contracts or options on futures. There is a substantial risk of loss associated with trading futures, foreign exchange and options on futures. This letter is not intended as investment advice, and its use in any respect is entirely the responsibility of the user. Past performance in never a guarantee of future results.

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Source: The Contrarian Take http://blogs.forbes.com/michaelpollaro/
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