Educate Yourself

Week in Review
For the week 2/5/2007 - 2/9/2007
Brian Trumbore
President/Editor, StocksandNews.com

It would appear there will finally be a full and open debate in the U.S. Senate on non-binding resolutions over the troop surge in Iraq. It hasn't exactly been Profiles in Courage Week, while on the ground it's been nothing but further carnage, going back to last weekend and the market bombing that claimed over 130 lives. Americans are being blamed for the violence against Shia because the failure to 'surge' until now created a security vacuum. Of course the vacuum was the result of Moqtada al- Sadr telling his Mahdi Army to go to ground.

As for the "revelations" contained in the Pentagon/Douglas Feith report, I'm sorry if I see nothing new. We all know who is responsible for taking us to war, whether it was for the right reasons or not, but my own focus has been, and continues to be, on the aftermath and the inability of our president to recognize he was being ill-served by a generals corps that in turn was intimidated by the "best secretary of defense this country has ever had."

So moving on, there was an important item concerning Kirkuk in the Washington Post. As Glenn Kessler reports, Turkish Foreign Minister Abdullah Gul warned that a referendum on the status of the Iraqi city should be canceled as it threatens to widen the sectarian rift that heretofore has left much of northern Iraq untouched.

At some point this year, the people are slated to vote on whether to join the rest of Kurdistan. In Turkey's view, control of the key oil-rich city and region would allow it to separate itself from the rest of Iraq even more than it already is doing, and thus further fuel separatist fires in Turkey proper.

Separately, Gul told Washington Post editors that "strong U.S.- Turkish relations would be shattered if Congress passes a resolution to condemn as genocide the early-20th-century killings of up to 1.5 million Armenians," as reported by Kessler.

As for Iran, it appears I will have been right in noting long ago that Feb. 11 is a key date; one on which President Ahmadinejad will announce a new stage in Iran's uranium enrichment effort, which of course flies in the face of UN Security Council Resolution 1737 that demands Iran cease with its enrichment program by Feb. 21.

What is clear is the financial sanctions that have been levied on Iran are biting and that dissent is growing internally. But the U.S. is increasingly frustrated that Europe will not take the next step and tighten restrictions on doing business with Iran.

For its part, the Iranian opposition is speaking out more boldly against the rantings of Ahmadinejad, as the man I've been writing so much about the past few months, Hashemi Rafsanjani, leads the criticism of his confrontational approach.

But I could not disagree more with the camp in Washington that says we can not hold high-level discussions with Iran's leadership. You can do both; talk and show the stick. We'll get a big clue where the White House is headed this weekend as Iran's national security chief, Ali Larijani, attends a conference in Munich in which Secretary of Defense Robert Gates is also a participant.

For a different opinion, following are some thoughts by Rami Khouri of the Daily Star of Lebanon.

"The U.S. should be awarded a Cosmic Prize for Chutzpah and Chicanery for charging Iran with meddling in Iraq and threatening American lives. The reason is that the accusation makes little sense when the U.S. invaded Iraq, removed the former state structure, killed tens of thousands of people, unleashed ethnic-religious discord there, and allowed Iran to emerge as the dominant regional power. What does the Bush administration take us for, simpletons and idiots? Are the people of the Middle East supposed to applaud American military aggression, diplomatic adventurism, and national experiments with Arab societies? No wonder that huge majorities of Middle Easterners criticize U.S. policies and feel threatened by them.

"If we were asked to support an assault against Iran mainly in order to comply with American and Israeli hysteria, the likely response from most quarters in the Arab world, Iran, Turkey, and others nearby would be to resist and defy the U.S. and Israel, and fight them politically or militarily. This is the stage we are at now, as much of public opinion in the region rejects the American-Israeli position, while many Arab governments seek protection under Washington's wing.

"This is a recipe for continued violence and instability throughout the region. We should not play stupid and act surprised by the further collapse of regimes, states and societies in the years ahead. This will occur if current trends persist, in the context of an overarching U.S.-Iranian face-off that includes battles among local proxies, as we are now witnessing in Lebanon and Palestine."

Then there is Saudi Arabia, which has been coordinating a flurry of diplomatic activity, including hosting talks between Fatah and Hamas, as well as meeting with Iranian leaders on the regional situation in general. It's almost amusing how the Bush administration, which at one point was crying out for democracy across the Middle East, is simply a bystander as the autocratic Saudis push their agenda.

But is this good? Saudi Arabia can be a positive force in shaping events in Lebanon, for example. And one can almost envision a situation where in two or three years time there is relative stability across the region, a la the scene post-Gulf War I in the 1990s, at which point we'd all sit back, analyzing the war against Iraq, and say "what was that all about?" Tragically, there are some in Washington who would call this scenario victory, even if it is a return to the status quo.

In fact, at this point it probably would be a victory of sorts; like in returning to where we were with North Korea five years ago. But, oh, we have a long ways to go before we can even say this much.

As for the Saudi role in Mecca, it was more about letting the two representatives of the Palestinians, Fatah and Hamas, hash it out themselves. The Saudis just supplied the tea and snacks. In the end, the two sides signed a deal to form a national unity government but in the text, once again, there was no formal recognition of Israel, with Hamas just saying it would "respect" past peace deals. But will this be enough for the international community to lift the sanctions that have strangled the Palestinian government? My guess is it will, but give it another few weeks at least.

What is clear is that the recent fighting between Fatah and Hamas didn't help in shaping world opinion. As columnist Mahmoud Habbash told the Jerusalem Post:

"The world is watching how the Palestinians are destroying their institutions and achievements with their own hands. They see how we are mercilessly slaughtering innocent people. We are losing the sympathy of the world. I'm afraid the world will now view us differently."

And so we did. As to the tension between Israel and Iran, Israeli Prime Minister Ehud Olmert told a conference of Jews in America that "If the international community joins forces and applies the necessary restrictive measures on the economy of Iran, it will force Iran to reconsider its position." Olmert added he did not believe the Iranian threat "is as close as the Iranians want us to think. They are not as close to the threshold as they pretend to be. There is still time to fight in a comprehensive responsible manner." [Jerusalem Post]

But previously, Olmert was saying "The Jewish people, on whom the scars of the Holocaust are deeply etched, cannot allow itself to again face a threat against its very existence. In the past, the world remained silent and the results are known. Our role is to prevent the world from repeating this mistake." [L.A. Times]

One thing is clear. Should Iran acquire the bomb, people will flee Israel and its economy would tank.

Finally, I have been arguing for formal contact with Iran for the simple reason that of all those in the region, its people, particularly its youth, are the most literate in the Middle East and the nation is ready for a change. The Bush administration can help foster this, but it still seems to be too late to prevent Iran from getting the bomb.

Find me an 'expert' who says real estate has bottomed and I'll show you an idiot. How many times do some of us have to prove it? This week it was HSBC that admitted its overly aggressive salesmanship in going after the subprime mortgage market (i.e., those who can least afford it) had backfired in a huge way as it is writing off $10.5 billion in bad debts, or 20% more than the company itself expected just a short while ago. Delinquencies are accelerating in this segment and this is occurring in a strong economy.

How did this happen? One word. Affordability?and homeowners simply not understanding that they can't stretch beyond their means. It's a painful lesson everyone in life has to learn at some point, too much debt that is, but the problem in today's real estate market is that home values are not simply going to shoot back up and bail out those who are on the verge of going under today. Too many used their home as an ATM and the window has closed.

But it's not just a class of homeowners that are suffering. The real estate developers, who should know better, have been writing off land faster than the French did during World War II. So, no, we haven't hit bottom yet.

How did we get here, as if you needed a refresher course? The median price on a new home rose from $177,000 to $276,000 over the course of five years, from 2001 to 2006. That drew in a new class of speculators, who then accounted for up to 40% of new home purchases in the hottest markets, developers kept buying up land and throwing up homes and condos at an accelerating rate, the laws of gravity (and supply and demand) suddenly came into play, as they always do, and then homebuyers and developers threw up on themselves.

What's next? Even were real estate values to stabilize, the pain in the subprime market will continue. But a true crash can be avoided only if the overall economy stays strong, and don't you know the Federal Reserve knows this. There is absolutely no way they are raising interest rates this year, despite the Fed talk to the contrary. That would be financial market suicide. The bigger issue is will the Fed lower rates and it certainly doesn't look like that is happening anytime soon, either. Eventually, though, they'll be forced to when renewed signs of a slowdown hit.

Just a word on the federal budget submitted for fiscal 2008 (starting 10/1/07) by the White House. I do not harp on budget or current account deficits like some do because these aren't the kinds of things that suddenly bite you in the butt at 3:30 pm on a Friday. They aren't good, but there is no cause for panic?yet.

But what I do note from time to time, and which is flat out criminal, is the fact the latest budget highlights how our government is going to shell out about $260 billion in net interest expense, up from $220 billion just two years ago. That, friends, is why budget deficits should matter to each and every American. Why more isn't made in our national debate about that single figure is beyond me. $260 billion buys a helluva lot of new bridges and highways, that we desperately need, or better mass transit, let alone something like healthcare, even if it all went to medical research. Or alternative energy initiatives (but not ethanol?it already has its own tax credit). Or a permanent fix to the alternative minimum tax, which the White House and Congress keep "patching" up, thus avoiding the longer-term solution. You get the picture.

Three final items. Last week I wrote of how I couldn't get too excited about bird flu until we saw a major outbreak outside of Indonesia. No sooner do I write that when hours later we learn of the outbreak in Britain, a serious development, and the discovery of H5N1 in Pakistan; not a good thing there given the level of healthcare and prevention.

Another concern is protectionism. Japan is feeling the heat because of its weak currency. Europe is getting slaughtered on the trade front and is tired of currency manipulation, but the U.S. is defending Japan because it's not only a key ally, today in particular we need its support with regards to North Korea. But Congress, and the EU, won't be patient for much longer. Of course when it comes to China you can say "ditto," only here the White House is finally getting more aggressive as it filed a complaint at the World Trade Organization over China's alleged subsidies to manufacturers.

"The strong growth in the U.S. economy reported for the last quarter of 2006, and the year as a whole, had a lot to do with burgeoning American exports. In the first 11 months of 2006, they reached $1.1 trillion, a 13% increase over the same period in 2005. Though the U.S. trade deficit is still huge, recent figures show exports growing at three times the rate of imports; sales to China are up by a third. Moreover, U.S. exports to the handful of countries with which there are free-trade agreements are booming disproportionately: Though Mexico, Canada, Chile and other free-trade-pact partners make up only 7% of the non-U.S. global economy, they are buying 42% of the American goods and services sold abroad."

The Post goes on to argue this is the prime reason why Congress must renew President Bush's trade promotion authority, which expires July 1, but Congressional Democrats have other ideas.

Lastly, historian Francis Fukuyama of Johns Hopkins had some of the following thoughts in an op-ed for the Los Angeles Times.

"It is easy to get very discouraged when surveying the state of the world. Few Americans need to be reminded about the chaos in Iraq, Iran's ambitions as regional and potentially nuclear power or the possibility of Sunni-Shiite conflict spreading throughout the Persian Gulf?.

"(And) many would say, today's rosy economic picture masks huge vulnerabilities, particularly in the form of the twin American trade and budget deficits and the unsustainable buildup of U.S. dollars in foreign central banks?.

"Economic growth by itself will not guarantee stability, any more than the period of globalization before 1914 could prevent the outbreak of World War I. But there is good reason to think that we have consistently overestimated threats to stability since 9/11 and that it is our reaction to this overestimation that has created special dangers. At the time of the Sept. 11 attacks, there were probably no more than a few dozen people in the world with the motivation and potential means to cause catastrophic harm to the United States. Once our mighty national security apparatus was turned to focus on this problem, the likelihood of a successful attack dropped dramatically. It was in deciding that we had to 'make a statement' by invading Iraq that we created a brand new problem for ourselves, creating a new terrorist haven and shifting the power balance in the Persian Gulf in Iran's favor.

"But various equilibrating forces are at work. The Sunni world is not sitting by idly as Iran's influence grows, but is mobilizing to contain the threat. At home, there are many more measures we could take to lower the risk of catastrophic terrorism, such as better port security and an upgrading of our public health system to deal with biological threats. Far more likely than a catastrophic attack on the U.S. using weapons of mass destruction are bombings, attacks on airplanes, assassinations and the like - terrible events, but ones we can deal with?.

"There are real dangers to being excessively pessimistic at this juncture. Growing numbers of people in the U.S. and Israel believe that Iran represents an existential threat, that it will behave irrationally and therefore cannot be deterred - and that we consequently have no choice but to preempt. It is this same logic - that our backs are against the wall - that led us to the Iraq debacle. But assuming a worst-case outcome is likely to make it a self-fulfilling prophecy.

"For all of its stumbles in the last few years, the United States remains a rich and powerful country, with plenty of margin to absorb setbacks and make up for mistakes. The larger part of the world that is modernizing successfully is dependent on us for continued progress, and perhaps for that reason is far less anti- American than those regions mired in conflict and stagnation. There are real risks out there today, but it may help to take a deep breath and assess calmly where we stand. Terrorists use the tools they do because they are weak and have no others. Americans need to remember that we are the 800-pound gorilla: We have choices, but we need to take care when we throw our weight around."

--Yet another sanguine week in the financial markets with the major averages all losing a little over 0.5%. We have now seen the longest stretch since 1953-54 without as much as a 2% decline in the Dow Jones, so anyone under the age of 50, to put it into its proper perspective, has never witnessed such a phenomenon. The market has now also gone 987 sessions without a 10% correction, the longest of this kind since the period ending August 1997.

Rates were little changed owing in part to a light economic calendar. The latest data on productivity was strong, but the overall yearly trend is still down, somewhat worrisome as it can augur higher wage inflation which might cause the Fed to act.

--U.S. News & World Report's cover story for the Feb. 12 issue is titled "Overselling Ethanol: For All The Hype, Is It Really The Answer?" No. And as the industry itself acknowledges, even after a large ramp-up in production, it will still fall 20 billion gallons short of President Bush's renewable fuels target. And while some of us are willing to give "cellulosic" ethanol (utilizing materials such as cornhusks or fast-growing reedy crops like switchgrass) a shot, commercialization of this technology appears to be a long ways off. Actually, reader Chris C. had a good idea. Try to encourage some of the Latin American nations, like Colombia, to switch over from coca, though we'd obviously have to guarantee the market. Bottom line, as I wrote extensively last week, ethanol is simply not a panacea and as the USN&WR report adds, the debate boils down to "the nitty-gritty fuel economy and conservation issues politicians have been mostly avoiding for years. They'd rather feel good, for the time being, about ethanol."

--On a related topic, my favorite economist, Robert Samuelson of the Washington Post, weighed in on the global warming issue.

"Poor countries won't sacrifice economic growth - lowering poverty, fostering political stability - to placate the rich world's global warming fears. Why should they? On a per-person basis, their carbon dioxide emissions are only about one-fifth the level of rich countries. In Africa, less than 40% of the population even has electricity.

"Nor will existing technologies, aggressively deployed, rescue us. The IEA studied an 'alternative scenario' that simulated the effect of 1,400 policies to reduce fossil fuel use. Fuel economy for new U.S. vehicles was assumed to increase 30% by 2030; the global share of energy from 'renewables' (solar, wind, hydropower, biomass) would quadruple, to 8%. The result: by 2030, annual carbon dioxide emissions would rise 31% instead of 55%. The concentration levels of emissions in the atmosphere (which presumably cause warming) would rise?.

"What we really need is a more urgent program of research and development, focusing on nuclear power, electric batteries, alternative fuels and the capture of carbon dioxide. Naturally, there's no guarantee that socially acceptable and cost- competitive technologies will result. But without them, global warming is more or less on automatic pilot. Only new technologies would enable countries - rich and poor - to reconcile the immediate imperative of economic growth with the potential hazards of climate change."

--Personal bankruptcy filings are soaring in Britain, up 59% in England and Wales in 2006 over 2005. One specialist in such deals told the London Times' Steve Hawkes, "People are, without doubt, behaving irresponsibly with credit, blindly taking on debt without thinking about how they will repay it." Sound familiar?

--Federal Reserve Chairman Ben Bernanke on the growing gap between the haves and have nots:

"Although average economic well-being has increased considerably over time, the degree of inequality in economic outcomes has increased as well?for at least three decades."

In a rare foray into this kind of topic for a Fed chairman, Bernanke even talked about inequality related to baseball contracts.

"Two decades ago, the highest-paid player for the Boston Red Sox (and the American League), Jim Rice, earned (in inflation- adjusted terms) just over $3 million. In 2004, the highest-paid player on the Red Sox was Manny Ramirez, who received $22.5 million for the reason." [Wall Street Journal]

--The takeover battle for real estate mogul Sam Zell's Equity Office Properties, the biggest office landlord in the nation, was finally won by Blackstone Group in a private equity deal for $39 billion. Residential real estate may be taking it on the chin, but many continue to see a rosy future for the commercial variety. You have to love Zell. This was a guy who growing up in Chicago used to buy issues of Playboy off the newsstand and sell them at marked-up prices to his friends.

--While the YouTube acquisition by Google continues to have problems on a variety of fronts, such as in copyright infringements, it has been officially revealed that the two founders, Chad Hurley and Steven Chen, were awarded shares in Google worth $345 million and $326 million, respectively. [A 3rd founder is back in school and received shares worth $64 million.] Not bad for less than 24 months work. And if I'm these guys, I cash in my shares as quickly as possible because there are serous issues involved, including the fact Google has rivals that are circling overhead as well as my much-discussed musings on the whole online advertising environment.

--Michael Dell wasted no time in putting his imprint on the company in his return as CEO by eliminating bonuses for 2006. So those folks putting together your customized PC aren't happy campers, though Dell did say the company would budget for "above-market raises" this year.

--Canadian telecom-equipment giant Nortel said it would slash another 2,900 jobs. At its peak, the company employed 95,000. Today it's at 34,000 and heading lower still.

--Nortel rival Alcatel-Lucent is laying off 12,500?an increase from the 9,000 the newly-combined operation had said would be shown the door just a few weeks ago. Workers have called for a brief strike on Feb. 15, a Thursday, which could conveniently be stretched into a four-day weekend! [Five days if you're in the U.S. and you include Presidents' Day.]

--And the layoffs continue at Eastman Kodak, an additional 3,000 on top of 25,000 previously announced. But Kodak is introducing a new line of inkjet printers that promise to use a $10 black-ink cartridge, or about half the cost of rivals' offerings. As one who goes through a black-ink cartridge a week, I will be definitely checking out Kodak's product and I wish them the best. The whole cartridge business is the biggest rip-off going and I would urge Hillary Clinton to go after this cartel instead of Big Oil, mused the editor, tongue half in cheek.

--I was happy to see Cisco Systems issue another stirring profits report as revenue rose 27% from year ago levels. Congratulations to CEO John Chambers for leading one of the better comebacks in recent memory. I'll be the first one to admit I misread him years ago, and I also have to add he is now a StocksandNews favorite because of his efforts to promote positive change in Lebanon. But Cisco lost a key executive who is opting to spend more time with his friends. [I'm just tired of the "more time with my family" excuse, knowing the family can't stand half the guys opting for this.]

--Just last October, Ford Motor Co. ceased production of its once top-selling Taurus line after 21 years. But now the company is going to rename its slow-selling Five Hundred model the Taurus. For 10 years Ford let the Taurus die as it left the design virtually unchanged, which begs the question, why didn't they just focus on redesigning it? Heck, it was the best-selling brand in America back in 1992.

--Wal-Mart has a huge potential liability on its hands as a Federal Appeals Court ruled that a class-action consisting of 1.5 million past and present female Wal-Mart employees can go through amidst claims of gender discrimination. In a 2-1 ruling, the court held there is "significant proof of a corporate policy of discrimination." Back in 2001, six female employees alleged the retailer systematically paid women with similar qualifications less than men and denied them promotions otherwise warranted.

--Hyundai Motor Chairman Chung Mong Koo was sentenced to three years in prison for embezzlement and fraud, up to $100 million that he used for political payoffs and personal use. This is highly significant and a real positive for South Korea's economy as it shows the government taking a stance against the old boy, chaebol, network that condoned such behavior in the past.

--The investigation into Apple CEO Steve Jobs and his past options activity continues. On Friday, the Wall Street Journal reported that when Pixar reached a new employment contract with animated-film director John Lasseter, at a time when Jobs was chairman and CEO there, the grant was awarded at the lowest share price of the previous year, on a date that was three months before the contract was actually signed. It's not known exactly what Jobs knew at the time, but what is known is that Lasseter reported the grant to the SEC, as required by law, 84 days late.

--Meanwhile, Apple is warning iPod and iTune users to be wary of Microsoft's new Vista operating software because of compatibility issues. Vista's launch, by the way, has been underwhelming, to say the least, and shares in Microsoft have declined seven days in a row.

"The great technology bubble?brought financial pain to those involved with supplying capital (in the form of IPO purchases) or credit (in the form of corporate bond purchases) during the bubble's inflation. But it left an enormous glut of useful productive assets like IT hardware and fiber-optic lines that remained after the smoke cleared. In effect, Global Crossing shareholders' pain led to telecom users' gain?.

"But the financing of recent private equity transactions cannot be thought of in the same manner. Most of these transactions would not be possible in the absence of a global lending apparatus that's gone completely haywire. This should not be confused with 'wealth creation,' but apparently, many stock market traders are making this mistake, spurring rallies on the heels of each big buyout rumor or announcement. These 'going private' transactions represent little more than transferring ownership of a corporation from its previous, public equity holders to a mix of creditors and new, 'private' equity holders?.

"Real pessimism hasn't been experienced since the early 1980s, a time when all financial assets were in the doghouse. The next time financial markets fall victim to this type of pessimism, the asset classes that were pushed up by this wave of Fed-inspired liquidity will not leave behind a glut of highly useful productive capacity. Unlike railroads or fiber-optic lines, an investment bubble focused on M&A activity does not raise living standards after it deflates."

--The SEC is investigating insider trading in the hedge fund world. I'm shocked! As Jenny Anderson of the New York Times reported, the probe is about Wall Street brokerage firms leaking information to favored clients, the hedge funds, based on the former's knowledge of large block trades put in by mutual funds. The hedge funds then trade on the information, front- running, through another firm to hide the paper trail while the hedge fund is expected to reward the brokerage firm that gave them the info with future business. Hedge funds comprise up to 50% of Wall Street's trading revenues most days, but the practice in question is going to be exceedingly difficult to prove, as are all insider-trading cases.

--Except, that is, the shenanigans going on at New Jersey-based Taro Pharmaceuticals, where executives brazenly traded on their company's inside information, raking in more than $3.5 million, including one instance where they scored by buying 'puts' ahead of an earnings disaster. Vice President Zvi Rosenthal, along with two of his sons and a fourth accomplice pleaded guilty to conspiracy to commit securities fraud. The sons were both attorneys and worked the trades through a hedge fund that was established to conceal the activity. Mr. Rosenthal had previously been found guilty of defrauding the Pentagon in 1998 by using defective material in uniforms.

--Russell Read, chief investment officer of the $225 billion California Public Employees Retirement System, comments on the standard practice of hedge funds charging a management fee of 2% while keeping 20% of any investment gains. When the funds are doing nothing more than achieving market returns, it's like a charity "where you give these people lots of money, they make a really good living out of it, and they provide you with returns that are substandard." [Bloomberg News]

--Uh oh?legislation winding its way through the halls of Congress would put art and collectibles on equal footing with other investments when it comes to capital gains.

--If you could choose your father, these days you'd go for Rupert Murdoch over Warren Buffett, at least that's what the Murdoch children are saying. Buffett, you'll recall, said his kids have done just fine and he's leaving everything to charity, but Mr. Murdoch is leaving each of his six children $100 million.

--Jim Samples, president and general manager of Cartoon Network, was forced to resign following the idiotic ad campaign that resulted in a near panic in Boston. He was replaced by long- time number two, Deputy Dawg.

North Korea: As I write, there is optimism a compromise will be reached on Pyongyang's nuclear weapons program, with the North possibly agreeing to freeze activities at its main nuclear- related facilities within two months in exchange for significant shipments of fuel and a lifting of financial sanctions. It is then hoped the process of actual disarmament could begin.

[However, I just saw this comment from Japan's top envoy. "There are some parts in which we had progress but on others we ran into difficulty. We will continue with the talks, but at this point in time I don't feel there is a prospect of reaching an agreement." U.S. negotiator Christopher Hill added, "I want to stress in these negotiations, you think you're down to one thing and then nail it down and something else comes up, so it's never over until it's over."]

What is clear is that the Bush administration is now willing to make concessions it wasn't five years ago. As Gordon Chang wrote in an op-ed for the Wall Street Journal, "American policy makers apparently think that if the U.S. makes the first moves, China will persuade North Korea in the future to completely give up its nuclear arsenal."

But what's the real bottom line? The U.S. set out to prevent North Korea from developing nuclear weapons and yet today Pyongyang has done just that?develop nuclear weapons (up to 12 of them by one expert's estimate). While we all want some semblance of peace on the Korean Peninsula (permanent peace is impossible with an ever-rising China and its historic relations with the likes of Japan), any agreement you hear about has to be treated with a grain of salt until such time that Kim Jong-il and his cronies are no longer pulling the strings.

China: President Hu Jintao completed an eight-nation tour of Africa in yet another attempt to sign deals for the continent's natural resources so desperately needed by China.

But, in his visit with Sudan's leader, rather than pressuring Sudan to accept an expanded peacekeeping force in Darfur, Hu provided them with an interest-free loan to build a presidential palace. As the Washington Post's Sebastian Mallaby wrote:

"With that gesture, Hu demonstrated his contempt for the Western understanding of the world - and for Western policy toward his own country."

So forget the genocide in Darfur, instead Hu "used his trip to cancel $80 million of Sudanese debt, to announce a plan to build a railway line and to visit an oil refinery that China partly owns, basking in the fact that 80% of Sudan's oil goes to his country."

"What does China's policy toward Sudan say about the West's policy toward China? The West is engaging with China on the theory that economic modernization will bring political modernization as well; otherwise, the West would merely be assisting the development of a communist adversary. China's Sudan policy is an assertion that this link between economic and political modernization is by no means inevitable, even in the extreme case. You can construct oil refineries, educate scientists, build ambitious new railways - and simultaneously pursue a policy of genocide."

China will not radically alter plans to continue its reliance on coal and other dirty fuels, insisting developed countries are responsible for global warming. A foreign ministry spokeswoman took aim at the United States in highlighting the Kyoto Protocol.

"You need to point out that climate changes are the result of the long-term emissions of the developed countries and the high per- capita emissions of the developed countries. Currently the developed countries should make an example in shouldering the responsibility in reducing their emissions in accordance with the Kyoto Protocol."

Of course China and India are exempt from Kyoto, even though China is the second-largest emitter of greenhouse gases and will soon be number one. [Agence-France Presse]

The mangrove forests of Shenzhen are dying because of industrial pollution, according to the South China Morning Post. These lands represent one of China's most important wetland conservation zones, but with rapid development, half is already gone. The director of a Shenzhen environmental group said "We could face an ecosystem collapse at any time." Hong Kong's forests await a similar fate.

And a British environmental expert told the AP that water shortages in China are reaching "incredible" proportions, with Shanghai being particularly vulnerable. Shanghai will need to use desalinated water within ten years and build out an infrastructure to import water from southwest China.

Justin Mundy, an adviser to the British government on climate change added, "All the water in the southwest of China is fed by glacial melt. Glacial melt in about 25 years' time is not going to be there in anything like the capacity that is going to be required. What then?"

But Mundy also said 21 of the world's 33 largest cities face similar water crises. [Water is the new oil, sports fans.]

Meanwhile, China launched its first navigation satellite in four years in a renewed drive to rival Washington's GPS and Europe's Galileo. But on the issue of its recent successful test to bring down an aging satellite, the New York Times' William Broad notes that up to 1,000 pieces of detectable debris may now be floating around, the worst such episode in space history.

This is just a classic example of China's reckless behavior, whether you're talking about pollution, boom towns such as Shanghai where the development is often without logic, or blowing up satellites where debris then risks bringing down countless others.

But as William Broad notes in his piece, it's not just a matter of a satellite fragment taking down one of ours or a Russian craft; there is the potential for a cascading effect.

"It's inevitable," said Nicholas L. Johnson, chief scientist for orbital debris at NASA. "A significant piece of debris will run into an old rocket body, and that will create more debris. It's a bad situation."

Taiwan: President Chen Shui-bian wants to print the island's stamps with the name "Taiwan" instead of "Republic of China" in another move to please pro-independence forces, and piss off the mainland.

But since I have some readers from Taiwan, and as I've said that in all my travels, the Taiwanese are as friendly as any I have encountered, I thought they'd enjoy this blurb from a Wall Street Journal travel piece by Stan Sesser on the island.

"If you're surprised at the friendliness of the people of Taipei, wait until you see the rest of the island. At a tea shop in Jiufen, a young employee happily gave me an hour of free tastings to sell me $15 of tea. Then I asked him how to find the historic Fushan temple. He picked up an umbrella, led me on a 20-minute walk to the temple, up staircases and steep streets, then showed me how to light incense sticks and place them as offerings. He waved away any attempt to give him a tip for the hour-long tour."

Japan: Conservative Gov. Shintaro Ishihara, said Japan should "tear up" its pacifist constitution in order to meet the challenges of today, namely those posed by China. And he also said that instead of Japan's businessmen plowing money into China, they should turn instead to investing in India. Because it's time Japan stood up to China and supported its real friends.

The Kremlin is insisting that any cooperation in the investigation into the murder of Alexander Litvinenko be linked to the extradition of exiled critics such as Boris Berezovsky. Three times the Russians have attempted to grab Berezovsky and three times British courts have ruled in his favor. But it will be interesting to see what Britain does over the coming months in this regard.

Meanwhile, Mikhail Khodorkovsky, the former Yukos chairman, is facing new trumped up charges of money-laundering and embezzlement in an attempt by Russian prosecutors to keep both him and business partner Platon Lebedev in jail long after their originally scheduled release in 2008 or 2009. Media supporters of the Kremlin claim Khodorkovsky stole $23 billion, which his lawyers have labeled "absurd, even crazy." Khodorkovsky, from prison, said it was a "shameful farce." Of course the court will dutifully deliver a guilty verdict.

"We won't accuse Russian President Vladimir Putin of being subtle this week. On Monday, Russian prosecutors leveled charges against a pair of Putin's one-time political enemies that are beyond implausible. The outcome from Russia's pliant legal system is all but inevitable: convictions and more jail time (for Khodorkovsky and Lebedev)?.

"Precisely why Mr. Putin wants to keep these two men in jail for another 15 years or so is still up for speculation. Observers of Russian energy politics see it as a way to assist the Kremlin in grabbing the remaining bits of Yukos's assets inside and outside the country?.

"Mr. Putin has systematically dismantled the institutions of democracy inside Russia while bullying his neighbors and jailing his opponents. After the new charges were announced, a State Department spokesman said that the proceedings 'raise questions about Russia's commitment to the responsibilities which all democratic, free market countries embrace,' and that American policymakers will discuss the issue with the Kremlin 'at an appropriate time and at the appropriate level.' We doubt that Mr. Putin will lose much sleep over that prospect."

Lastly, there is the issue of Kosovo, which I warned could be a real flashpoint in 2007. On Friday, Russia signaled it would oppose a proposal by the UN to set the breakaway Serb province on a path to independence. With its veto power in the Security Council, Russia can block the plan.

Recall, the ultranationalist Serb Radical Party won 28% of the vote in recent elections, while remember that Kosovo is majority Muslim. Serbia's President, Boris Tadic, said "Serbia will never accept an independent Kosovo." The Serbs slaughtered 10,000 ethnic Albanians in the province during the war.

Indonesia: If there wasn't so much other news, the flooding in Jakarta would be a far bigger story than it is. In a word it's a disaster of immense proportions and the government is in deep trouble over its handling of the crisis. I must say I didn't know 40% of Jakarta, a city of 8 million, is below sea level and there is only one flood canal. Various diseases could take hold in the squalid conditions many are now faced with (on top of the previously existing mess there) and with bird flu simmering that should scare the heck out of many in the entire region.

Zimbabwe: Oh yeah, things are just great here. Two weeks ago civil servants were awarded 300% pay raises. But inflation is running around 1,000%. According to Michael Wines of the New York Times, 8 in 10 are now destitute.

Venezuela: At the rate President Hugo Chavez is going, we could be staring at the future Zimbabwe of our hemisphere. Mary Anastasia O'Grady, the Journal's superb columnist on all things Latin American, offered:

"At least Mussolini made the trains run on time. Mr. Chavez, on the other hand, seems to possess a reverse Midas touch. Under his leadership the country has soaring murder rates, double-digit inflation, food shortages, oil-field depletion and a massive brain drain."

Mexico: New President Felipe Calderon has a real problem on his hands, soaring inflation; with eggs rising 46% in one year and tortillas 40%, the latter due to exploding corn prices. Overall, inflation is now running at an uncomfortable 4%, but it's Mexico's huge lower class that is suffering with the high cost of food and the potential for civil unrest is increasing. Mexico's farmers have been accused of price fixing when it comes to the corn crop.

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And Happy Birthday to my brother Harry, who also earned his black belt this week! So no messin' with the cartoonist.

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