Stephen’s Posterous

John Connor, who long ago visited Russia as a member of the Nixon administration and later started a life insurance company there, is portfolio manager of the Third Millennium Russia Fund (ticker: TMRFX).

Mr. Connor's fund is up more than 60% so far in 2009 and is outperforming the MSCI Emerging Markets Index by 52 percentage points. The fund underperformed the benchmark for the first time last year when it lost more than 70% of its value.

Given shifting appetites for risk, Russia is often "the last place [investors] would go and then it would be the first place you go," hence the sharp rally this year, says Connor. Mr. Connor recently spoke with Barrons.com to share his strategy and outlook.

When asked why an investor should consider investing in Russia with all of the inherent risks, Mr. Connors asks a question, "How many things have you owned that have given you a return of 13% a year (on average) for the last 10 years?" He says you have to keep your eyes open so that you can profit from opportunities.

Mr. Connor believes that oil and fertiziler are a couple of sectors that may outperform in Russia in the next couple of years. His best-performing stock is Uralkali (URKA). He believes that fertilizer is a good export industry that won't end. Silvinit (SILVP) is another stock he owns, but he is still losing money on this stock. Despite falling falling spot fertilizer prices, Mr. Connor says that Uralkali uses long-term contracts.

Mr. Connors says that Gazprom (OGZD) screwed itself because it committed to prices in which the company can not make a profit. It made the deal because the company was so focused on getting an arm on Turkmen gas, which is natural gas from Turkmenistan to supply Western Europe. Mr. Connor has about a 6% stake in the company, one of his fund's top holdings.

Mr. Connor says:

It's not my favorite company. But as my fund grows, I don't buy any more Gazprom. So my 6% [stake] becomes 5%, 4% becomes 3%. It gets better every year, but it's still not that well run. They are into a lot of unrelated businesses. What are they doing in the media business?

They are in 10 different businesses that they buy because the government told them to do something. That's not my idea of a company. They have not done a good job of developing their fields. I compare them to Novatek (NVATY.PK), which only has a domestic market, but it's a much better run company.

When asked about how to play energy in Russia, Mr. Connor said he likes Rosneft (ROSN) and Lukoil (LUK). He believes that Lukoil is a superior world-class company. Although private, they do have fears of being nationalized. Mr. Connor also likes Tatneft, an investment he is profiting from. He says that Russia has more private companies in oil than in other countries except for the U.S. and the U.K.

Mr. Connor believes oil will reach a peak of $80 and he believes there is a lot of speculation in oil bets. Mr. Connor also invests in supermarkets. His two supermarket investments are in X5 Retail Group and Magnit. Both are bigger than Walmart.

In telecom, Mr. Connor owns Vimpel-Communications (VIP) and Mobile TeleSystems. Mobile TeleSystems has less debt and Mr. Connor prefers it because of this fact. He is a big believer that Russian consumers need cell phones and use them.

As far as Russian financial stocks, Mr. Connor likes Sberbank Rossii (GDR: SBNA), one of the biggest banks in Russia. The personal balance sheets of most Russians have not been unlocked, Mr. Connor says. He says that Russian's don't have debt. The loans are generally 50% loan to value, very conservative underwriting.That's the only bank he likes in Russia.

Source.

Facebook Inc. announced that Digital Sky Technologies, a Russian Internet-investment group, has invested $200 million in the social-networking company, which represents almost a 2% equity stake at a $10 billion valuation as reported by the Wall Street Journal's Venture Capital Dispatch.

The Wall Street Journal first reported the offer on May 23, 2009. The article stated:

Digital Sky Technologies, a Russian Internet-investment group, has offered to invest $200 million in Facebook Inc. at a $10 billion valuation for the company's preferred stock, according to people familiar with the matter.

Venture Capital Dispatch said that Digital Sky is run by Russian businessman and Internet investor Yuri Milner. It owns pieces of a number of Russian Internet properties, including Russia’s largest Web site, Mail.ru, and a Polish social-networking site.

VentureBeat said that on a conference call with reporters on May 26, 2009, Mark Zuckerberg, the CEO of Facebook, said this about Digital Sky:

One of the things that’s most interesting about [Digital Sky] is in their portfolio they have a large number of social networks. Each is able to monetize in different ways but all are effective.

Yuri Milner, chief executive of DST, said on the call via VentureBeat about the reason he invested in Facebook:

We have a unique perspective on this investment because we see something that other people don’t see, because we see the monetization profiles of our other social networks. We’re fanatic believers in social networks. We’re investors in five in Russia and Eastern Europe — an area with 250 million people. Only 60-70 million are online. Facebook has a much bigger audience, while we have expertise in building smaller sites.

Russia has world-class programmers. Vkontakti [Ed. a site that launched as a Facebook clone] has launched features like search that have made it a top search engine in the country. Micropayments are also working. For example, a small number of people are willing to pay a lot of money for value-added services, like registration.

Venture Capital Dispatch ended by writing:

The company [Facebook] is forecasting revenue growth of at least 70% in 2009, putting revenue around $500 million or more, according to people familiar with the company's finances. The social network, which has more than 200 million active users, expects to be cash-flow positive in 2010, according to these people.

From Gary Kasparov, leader of The Other Russia coalition

It has become fashionable to speak of change and liberalization in Russia under President Dmitry Medvedev. May 7 marked his one-year anniversary in office. He has recently granted an interview with an opposition newspaper, allowed a few human-rights activists to criticize Russia's regime, and even started a blog. There is also a new administration in Washington that wants a fresh start with foreign powers.

However, Mr. Medvedev's gestures have not been matched by policy. It is more appropriate to think of Russia as living under Vladimir Putin's ninth year in power. Mr. Putin is now prime minister but still in charge. His agenda of oppression and plunder is still the course in Russia. The Kremlin's willingness to install its candidates in office and persecute its opponents remains undiminished.

Last month, the Putin government inserted itself into the mayoral election in Sochi, a resort town on the Black Sea that has been selected to host the 2014 Winter Olympics.

The International Olympic Committee (IOC) picked the subtropical Sochi after what must have been an extraordinary lobbying effort on behalf of the Russian government. Sochi has a near total lack of infrastructure needed to support an event as large as the Olympics.

Getting the city ready for the Games will result in a massive looting of the state treasury to construct, among other things, vast new developments on swampland. Russia is budgeting $15 billion for the project, while Canada is spending $2 billion on the 2010 Vancouver Games. Look for friends of Mr. Putin to benefit from the coming splurge on construction.

Sochi's residents are being pushed out of their homes and construction will proceed regardless of whether cemeteries or wetlands stand in the way. The construction will be an ecological as well as a human-rights catastrophe. Will the IOC intervene or say even a word? Will the leaders of the Free World be so eager to press the reset button with Russia that they too will say nothing?

Sochi's residents are speaking up and, surprisingly, in the mayoral election held there in late April there was a real opposition candidate. Sochi native Boris Nemtsov is a charismatic leader who served as deputy prime minister under Boris Yeltsin in the 1990s.

As has become standard practice in our elections, however, the United Russia incumbent, Anatoly Pakhomov, refused to debate or even mention his rival. Meanwhile, the media dutifully served up United Russia propaganda by publishing outlandish slanders against Mr. Nemtsov. (Including accusations that he tried to sell the Olympiad to the South Koreans, who lost the bid to Sochi.)

Mr. Nemtsov did appear on the ballot, a rare feat for an opposition candidate in Russia. But this was no demonstration of Mr. Medvedev's "liberalization." The Kremlin left nothing to chance. Early voting (which involves ballots being cast before Election Day and held in a "secure" location) is typically exercised by just a handful of voters in Russia.

But in Sochi, more than 25% of the ballots cast for mayor were early votes -- roughly 100 times higher than in previous Russian elections. More than 90% of these votes went to Mr. Pakhomov. He won the race with 77% of the vote. There were other irregularities. At one polling station the number of ballots tallied was 250 higher than the total number of ballots distributed.

Simply appointing mayors would violate the European Charter, to which Russia is a signatory, so elections will continue. But just in case United Russia ever comes up short, Mr. Medvedev is pushing a new law that will allow city councils to remove elected mayors by a two-thirds vote with no appeal to a court.

Some of Mr. Putin's opponents cannot be eliminated simply by rigging an election. The new show trial of Mikhail Khodorkovsky (once Russia's richest man) and his business partner, Platon Lebedev, is a case in point. Terrified by the scheduled 2011 release of this clearly unbroken man, the Putin regime has decided to extend Mr. Khodorkovsky's sentence. The new charges accuse Mr. Khodorkovsky's old company, Yukos, of stealing all the oil it ever produced.

The prosecution has no answer to Mr. Khodorkovsky's question why, if Yukos was a criminal organization, its properties weren't seized and investigated instead of quickly auctioned off to Mr. Putin's allies? Eager to see the surreal spectacle for myself, I attended the trial in Moscow last week.

It has been obvious from the moment of his arrest in 2003 that Mr. Khodorkovsky's prison term will be no shorter -- and I'd wager not much longer -- than Mr. Putin's reign. Knowing full well the court will deliver whatever verdict is demanded by the Kremlin, the prosecution must nevertheless read its lines in the play. And it does resemble a scripted drama, as the judge has precluded the defense from challenging documents presented by the prosecution during the trial.

One of the prosecutors attempted to insult the defense attorneys by quoting Blaise Pascal, who once wrote something to the effect that an advocate has much greater confidence in his cause when retained for a large fee. During the break I asked her if she knew another of Pascal's lines: "Unable to fortify justice, they have justified force."

There are optimistic rumors in the West of a potential rift between Messrs. Medvedev and Putin. With the steep drop in energy prices, the Russian economy in free fall, and the need to find a scapegoat, a clash is likely. But it will not be because the two men differ significantly in matters of morality and power. We have seen enough to recognize that they are both enemies of democracy, open competition, and free expression.

Gary Kasparov is a contributing editor of The Wall Street Journal.

Source.

From FT.com

Crude oil prices have drifted below $50 a barrel this year as the global recession has dented energy demand in the world’s biggest importers. As stockpiles build up, producers have cut capital expenditure on exploration and new production facilities.

But this could be sowing the seeds of the next bubble, some analysts say. Any failure to gear up output to meet the needs of a recovering economy, could create a gap between supply and demand similar to that which drove crude prices to $150 less than a year ago.

Francisco Blanch, head of global commodities research at Banc of America Securities-Merrill Lynch, answers readers’ questions on the impact of recession and recovery on oil prices.

Where will we see the increasing utilisation of alternative energy sources (such as electric powered cars) bring the price of oil to a permanent low, or will the continuous drainage of oil to a point where the resource is fast running out keep prices elevated?

This is the trillion dollar question. In my opinion, $50/bbl oil is not high enough to encourage a massive shift out of oil towards alternative energy. As an example, most biofuels plants around the world will lose money with oil prices below $60/bbl, while wind farms do not really make much sense in a low oil price world.

Will policymakers focus on energy efficiency when oil is a cheaper alternative and other political issues are more pressing?

We believe that continued upward pressure on energy prices will be needed to focus policy on energy efficiency. Limited spare capacity, strong underlying trend demand and the need for efficiency improvements all suggest that energy prices may have to increase again in the coming years relative to other prices in the economy. Our long-term WTI crude oil price forecast is $72/bbl in real terms.

In the midst of a global recession (depression?) with oil demand so low, one would expect prices to be low and remain low, and yet there still seems to be massive volatility in the price on a day to day and week to week basis. Why is this?

Fundamentally, price volatility in the commodity markets is linked to inventories. Commodity stocks, in effect, serve as a cushion to adjust supply and demand shocks in the physical market. In commodities such as oil and natural gas, where there storage constraints are a feature of the physical market, high levels of inventories can result in high levels of volatility.

Thus, we should not be surprised that the massive demand shock resulting from the global economic meltdown has pushed up oil price volatility. Similarly, low inventory levels can also drive volatility up in oil markets, as we saw last summer.

Technically, commodity price volatility is linked to volatility in other markets including equities, rates, credit or FX. I like to say that volatility is contagious. What will happen to oil price volatility going forward? In the second half of this year, we believe that the oil market will tighten and move from a very large surplus into a deficit, as demand stabilises and Opec maintains low output levels.

A tighter balance should mean that oil inventories could start drawing down in the coming months towards their 10 year average. In turn, a shift towards average inventory levels could help bring oil price volatility lower.

In 10 months, oil prices have decreased around 65 per cent. Do you see the recession as the one and only reason for this decrease?

Yes, we believe supply and demand fundamentals, and changes in the money supply and the velocity of money have been the key drivers of oil prices in the last five years. Industrial production across a broad range of developed and emerging economies came down very sharply in the fourth quarter last year and first quarter of 2009.

In the case of Japan, industrial output is now at the same level it was back in 1983, while German and American industrial activity has taken a step back of almost 10 years. These dramatic swings in economic activity are enough, in my judgement, to create such a large swing in prices.

Opec decided at its last meeting not to reduce output. After this decision, and coupled with poor demand and a move away from carbon fuels, can we seriously expect prices of $150+ ever again?

My simple answer to your question is yes, but a more important question perhaps is when. Due to their high exposure to the business cycle, oil prices have been seriously beaten by the current crises and are unlikely to stage a recovery until there are convincing signs that the global economy has turned the corner.

By then, another set of consecutive years of underinvestment in production capacity, coupled with a massive government debt overhang, will end up exacerbating the very same problems that created the most recent spike in energy prices, in my opinion. This situation could develop as soon as 2011 or 2012 and as late as 2015.

Another important factor that could push oil prices to $150/bbl in two to three years could be the tsunami of monetary and fiscal policy measures aiming to offset the recent private sector credit contraction. In our view, it is still uncertain how governments will be able to service the increased debt. In a world of fiat currencies and large government debts, higher inflation is not an unlikely scenario and a run-up in nominal commodity prices could develop.

In addition, with emerging markets poised to grow at a faster rate than OECD economies in the next decade and limited spare productive capacity, commodity markets could be among the first to experience inflationary pressures.

Is for example extraction of oil from the Alberta tar sands developments operationally economic at $50/barrel? What oil price is required to sanction capital expenditure on further tar sands projects?

It is important to differentiate between operational costs to maintain existing facilities and operational and incentive prices for new investments in productive capacity.

The current price level of $50/bbl will keep the existing tar sands projects in Alberta operational, but will not encourage new investment into the sector. As recently as 2008, our equity analysts estimated that new tar sands projects would only make sense financially at $90/bbl. Fortunately, improved labour productivity, lower steel and component pricing, and an end to the cost inflation environment of the 2006-2008 oil sands boom period are bringing incentive prices lower.

For oil sands projects, our equity analysts estimate that a cost reduction of 25 per cent in new projects is achievable over the next few years. If achieved, this could drive the required oil price to generate acceptable returns from $90/bbl back down to the $70-75/bbl range.

Our calculations suggest that the oil industry’s marginal source of supply will fall to US$70-75/bbl. However, we still expect to see continued price volatility around marginal costs particularly in periods of significant positive or negative divergence from trend levels of growth.

How much of the $150 per barrel oil do you feel was the result of institutional investors buying oil futures instead of, for example, asset backed securities as the crisis unfolded? If the impact of such speculation was significant then do you believe that speculators will continue to play a large role in a potential future oil bubble? Or have we learned our lessons for now?

The influx of investment in commodities sparked an intense and politically charged debate last year on whether speculation somehow caused the price of commodities to become disconnected from the fundamentals of supply and demand. Having analysed the available data in detail, we believe there is simply no evidence for that assertion.

Instead, we can find a clear link from sharp changes in monetary policy to abrupt commodity price movements. Looking back thirty years, our analysis concludes that a 1 per cent reduction in real interest rates results in a 17.5 per cent increase in spot commodity prices 10 months later. Our estimate thus suggests that loose monetary policy played a much more important role than speculators in the commodity price rally in the first half of 2008.

If the prospect of a future price bubble is so obvious why are not speculators already driving up the price, which in turn would encourage investment in oil exploration, extraction and refining?

The short answer is that long-dated oil prices are already on the rise. ICE Brent crude oil contracts for delivery in December 2017 closed last Friday at $78.71/bbl, a 60 per cent premium to current spot prices. The oil futures curve is currently pricing in nominal price appreciation of around 6 per cent per annum for the next 8 years.

I would like to clarify, however, that long-dated oil prices are not just driven by ”speculators”. Key participants in the oil markets include consumers, refiners, producers, inflation hedgers and speculators, defined here as investors that have the ability to go long or short any given contract to take advantage of market conditions). At the moment, a number of consumers have re-entered the market to take advantage of relatively low prices to hedge forward consumption.

Is it possible for the world to exceed more than 90 million barrels of oil production per day? If not, what alternatives is Merrill Lynch investing in to fill the demand gap of 10, 15, 20 years from now?

Perhaps 90 million barrels a day is a reachable target, but the chance of world oil production ever exceeding 95 million barrels a day is very low, in my view. On our estimates, if global GDP grows by 3.6 per cent every year over the next decade, annual energy demand will increase by 4 million b/d of energy in oil equivalent terms.

For oil, this figure could mean an annual net increase in global demand of 1 million b/d. Given the natural limits to supply, policymakers will have to shift their attention to energy efficiency. I can not really comment on what Merrill Lynch is investing, but I certainly see the need to increase global energy supply by 1.7 per cent per annum and global energy efficiency by 1.8 per cent per annum every year over the next decade.

What does that mean for investors? I think sectors such as energy productivity, alternative fuels, renewable electricity generation, but also conventional fuels such as coal or natural gas, will all provide very good opportunities over the next decade as we struggle to fill the ”demand gap” left by oil.

Is the persistent contango structure of the future oil market a sign of increasing dislocations in the oil market or is it just the result of normal market expectations? When do you think the curve will go back to its prevailing backwardation structure?

The persistent contango structure is primarily a function of the extremely high level of inventories, and the ongoing supply/demand imbalance. Keep in mind, however, that the second quarter of the year is the seasonally low point in demand. Thus, we should see a sequential improvement in global oil demand based both on seasonal factors as well as on a slight improvement in underlying economic demand.

In my opinion, with the oil market turning more balanced and Opec keeping over 3.5 million b/d off the market, inventories are heading for a draw in the second half of 2009. Thus, we believe that oil prices will likely continue to strengthen in the next six months.

However, long-dated prices are unlikely to follow suit, as the demand recovery will likely be very shallow in 2010. In a market with abundant spare capacity and a tightening balance, the pronounced crude contango should lead to a flatter curve or even to backwardation. Thus, we believe that the term structure of WTI crude oil prices will continue to flatten from here.

Given that some oil resources are uneconomic to exploit at current prices, what price does oil need to reach for post recession demand to be met?

We believe that two forces will need to be at work over the next decade to prevent further oil price spikes: (1) increased investment into the oil sector and (2) increased energy efficiency and substitution. Thus, oil prices need to be high enough to encourage a relatively slow oil demand growth path going forward and oil prices need to be high enough to encourage investment in marginal sources of supply, which we believe are Canadian oil sands and biofuels.

Keep in mind that commodity production utilisation rates are still high compared to other sectors, so any rebound in economic activity will likely have an impact on commodity prices before it hits other parts of the economy.

Low spare capacity availability on a relative basis, strong underlying trend demand and the need for energy efficiency all suggest that WTI crude oil prices may have to average $72/bbl in the long-term in real terms. In turn, a high oil price will keep energy’s share of global GDP above historical averages.

Did Peak Oil get it wrong and now it’s Peak Demand?

No doubt, global industrial production and economic activity has fallen sharply, with OECD economies contracting at an unprecedented rate in recent quarters. However, this extraordinary ”demand vacuum” created by the collapse of the credit bubble could be filled up quickly by demand for durables in Emerging Markets, in our opinion. We estimate that about 1.7 billion consumers sit on an annual GDP per head of $5,000 to $20,000, mostly in Emerging Markets and mostly unlevered.

This bracket of income is a sweet spot for the consumption of durable goods and for taking on leverage, as appetite for washing machines, freezers or cars rises rapidly when per capita income hits $5,000. As a reference point, Americans had a real GDP per capita of $12,000 in 1980 as the multi-decade long credit bubble began, while Portugal did not cross the GDP per capita mark of $10,000 until 1990.

Thus, as a higher consumption of durables comes with a substantial increase in energy use, supply constraints could soon resurface. As a reference point, global energy demand in oil equivalent terms increased by 6 million b/d in 2007. For China, India and other Emerging Markets to drive and fly, we need all the oil we can get, or a viable alternative to the existing transportation technology.

Given that the fall of oil prices have revealed that countries like Russia and Venezuela have failed to diversify their economies outside of commodities; do you see any oil producing economies making progress to diversify their economy in this climate?

Broadly speaking, I think commodity producers have been more cautious with their spending in the past business cycle than during the oil and commodity boom of the 1970s. In Latin America, Mexico, Brazil or Chile are good examples of oil price hedging, economic diversification, and precautionary savings ahead of the commodity price downturn.

In the Middle East, emerging trading centres in the United Arab Emirates or Qatar could well gain increasing traction in sectors such as finance with global taxation on the rise, partly thanks to heavy investment in infrastructure. Similarly, a broad range of commodity producers sit on large Sovereign Wealth Funds that should allow them to endure the oil price downturn.

There is a long-lasting dispute on the impact of speculation on oil prices. Has the relation between fundamental (physical) and financial (speculative) factors changed after the financial crisis, and are oil bourses (ICE, Nymex) gaining influence compared to OTC deals?

In our view, a global misallocation of capital sits at the heart of the current economic crisis. In simple terms, capital markets failed in recent years and channelled too much money into real estate, too little into energy. Having analysed the available data in detail a few months ago, we found no link between speculative activity and systematic price increases in commodity markets.

As part of a general growth in derivatives across all asset classes trading volumes and open interest in commodity derivatives surely increased, but only some commodities experienced significant price swings in the last two years. What has changed after the credit crisis?

Naturally, listed products are gaining ground across all asset classes, not just commodities, as regulators and market participants press for greater transparency and lower credit risk. Still, activity in the over-the-counter market continues unabated because it offers a customized angle that listed markets can’t provide. Having said that, market participants will now choose to clear trades on the exchange to limit counterparty credit risk, when possible.

Opec regularly states that they require an oil price around 70$/bbl to sustain projects. Where do you see Opec production cost at the moment and do you have an estimate of how many projects have already been postponed or cancelled?

Opec production cutbacks have been very significant. From a peak of 30.3 million b/d in July last year, Opec-11 crude oil production has come down to about 26 million b/d, helping create a floor to global crude oil prices. However, actual oil production costs for most Opec members are substantially lower than $70/bbl, perhaps as low as $10-20/bbl.

Similarly, social oil costs for Opec, or the oil price required to balance the member governments’ budgets, differ by country. For Saudi Arabia, Kuwait, Qatar or the Emirates, we estimate that $50/bbl would suffice to roughly bring government budgets into balance, while members such as Iran or Venezuela probably require higher prices of $70/bbl to break even. Then again, we are talking about social costs, not production costs or incentive prices for new supply.

Having said that, new investments in Canadian oil sands and biofuels production require a $70/bbl price tag, but these projects sit mostly outside Opec. So far, over half of all planned oil sands-related projects in Canada have been delayed or cancelled, while many biofuels producers have cut back on their investment plans.

With collapsing global oil prices and the rapidly increasing cost of funding, we expect delays on expensive development projects like Canadian oil sands to continue. Within Opec, we have also seen significant cutbacks in capital expenditures, as financial resources are being diverted to other sectors of the economy.

Currently there is well over 100 million bbls of crude and 25 millions barrels of products in floating storage. This, combined with record shore stocks will surely provide a buffer until production increases to meet any increase in demand and therefore prevent a price bubble?

I agree that there are very low chances of an oil price spike in the next 12 to 18 months, but I also believe the market could start to tighten again in 2011. Remember that 125 million barrels in floating storage is only 1.5 days of global oil demand, so this cushion is not as large as it seems if economic activity ticks up.

However, given the shallow demand recovery ahead, the high inventory levels, and the increased spare capacity in refining and crude oil supply within Opec, I do not see much upside to oil prices until the end of next year.

Our current forecast for WTI crude oil prices in 2010 is $62/bbl. Beyond next year, the limited growth prospects in rich OECD economies stand in stark contrast to the middle income emerging economies.

As I have pointed out in another question, we estimate that 1.7 billion consumers sit on annual GDP per head of $5k to $20k, a sweet spot for the consumption of durables and for taking on leverage. Thus, the medium-term energy demand prospects are a lot brighter as EM economies start to recover.

Source.

From Karl Rove, former Senior Advisor to President George W. Bush

President Barack Obama has finished the second leg of his international confession tour. In less than 100 days, he has apologized on three continents for what he views as the sins of America and his predecessors.

Mr. Obama told the French (the French!) that America "has shown arrogance and been dismissive, even derisive" toward Europe. In Prague, he said America has "a moral responsibility to act" on arms control because only the U.S. had "used a nuclear weapon."

In London, he said that decisions about the world financial system were no longer made by "just Roosevelt and Churchill sitting in a room with a brandy" -- as if that were a bad thing. And in Latin America, he said the U.S. had not "pursued and sustained engagement with our neighbors" because we "failed to see that our own progress is tied directly to progress throughout the Americas."

By confessing our nation's sins, White House Press Secretary Robert Gibbs said that Mr. Obama has "changed the image of America around the world" and made the U.S. "safer and stronger." As evidence, Mr. Gibbs pointed to the absence of protesters during the Summit of the Americas this past weekend.

That's now the test of success? Anti-American protesters are a remarkably unreliable indicator of a president's wisdom. Ronald Reagan drew hundreds of thousands of protesters by deploying Pershing and cruise missiles in Europe. Those missiles helped win the Cold War.

There is something ungracious in Mr. Obama criticizing his predecessors, including most recently John F. Kennedy. ("I'm grateful that President [Daniel] Ortega did not blame me for things that happened when I was three months old," Mr. Obama said after the Nicaraguan delivered a 52-minute anti-American tirade that touched on the Bay of Pigs.) Mr. Obama acts as if no past president -- except maybe Abraham Lincoln -- possesses his wisdom.

Mr. Obama was asked in Europe if he believes in American exceptionalism. He said he did -- in the same way that "the Brits believe in British exceptionalism and the Greeks in Greek exceptionalism." That's another way of saying, "No."

Mr. Obama makes it seem as though there is moral equivalence between America and its adversaries and assumes that if he confesses America's sins, other nations will confess theirs and change. But he won no confessions (let alone change) from the leaders of Venezuela, Nicaragua or Russia. He apologized for America and our adversaries rejoiced. Fidel Castro isn't easing up on Cuban repression, but he is preparing to take advantage of Mr. Obama's policy shifts.

When a president desires personal popularity, he can lose focus on vital American interests. It's early, but with little to show for the confessions, David Axelrod of Team Obama was compelled to say this week that the president planted, cultivated and will harvest "very, very valuable" returns later. Like what?

Meanwhile, the desire for popularity has led Mr. Obama to embrace bad policies. Blaming America for the world financial crisis led him to give into European demands for crackdowns on tax havens and hedge funds. Neither had much to do with the credit crisis.

Saying that America's relationship with Russia "has been allowed to drift" led the president to push for arms negotiations. But that draws attention away from America's real problems with Russia: its invasion of Georgia last summer, its bullying of Ukraine, its refusal to join in pressuring Iran to give up its nuclear ambitions, and its threats of retaliation against the Poles, Balts and Czechs for standing with the U.S. on missile defense.

Mr. Obama is downplaying the threats we face. He takes comfort in thinking that Venezuela has a defense budget that "is probably 1/600th" of America's -- it's actually 1/215th -- but that hasn't kept Mr. Chávez from supporting narcoterrorists waging war on Colombia (a key U.S. ally) or giving petrodollars to anti-American regimes. Venezuela isn't likely to attack the U.S., but it is capable of harming American interests.

Henry Kissinger wrote in his memoir "Years of Renewal": "The great statesmen of the past saw themselves as heroes who took on the burden of their societies' painful journey from the familiar to the as yet unknown. The modern politician is less interested in being a hero than a superstar.

Heroes walk alone; stars derive their status from approbation. Heroes are defined by inner values; stars by consensus. When a candidate's views are forged in focus groups and ratified by television anchorpersons, insecurity and superficiality become congenital."

A superstar, not a statesman, today leads our country. That may win short-term applause from foreign audiences, but do little for what should be the chief foreign policy preoccupation of any U.S. president: advancing America's long-term interests.

Mr. Rove is the former senior adviser and deputy chief of staff to President George W. Bush. Karl writes a weekly op-ed for The Wall Street Journal, is a Newsweek columnist and is now writing a book to be published by Simon & Schuster. Visit Mr. Rove on the web at Rove.com.

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There have been many pseudo reserve currencies through the ages. Now, the governor of the People’s Bank of China has called for a new global currency “disconnected from individual nations”.

Russia, too, wants to move away from a world dominated by the dollar. Kazakh president Nursultan Nazarbayev suggests such a currency could be called the acmetal, an amalgam of “acme” and “capital”.

But is there a case for one? In theory, yes. Although no one was banging the table for change when emerging growth rates were still being powered by deliberately undervalued domestic currencies. The reserve currency status of the dollar helped to create nasty global imbalances, one of the main culprits of the current downturn.

As China, for example, recycled export earnings back into dollar-denominated assets, the US could happily run profligate trade deficits with impunity. That helped push up the price of US assets, particularly house prices.

Now surplus countries are stuck. They cannot diversify fast enough and a rapid sell down of US assets would destroy their portfolios. Not only that, global central banks holding about two thirds of their reserves in dollars are hostage to the Obama administration.

Unsurprisingly, huge budget deficits and the Federal Reserve’s leap into quantitative easing have foreigners fretting over the longer term health of the dollar.

Theory is one thing, however. In reality, currencies live and breathe more than just short-term economic air. The two other life forces for a reserve currency are sovereign credibility and power.

China, Russia and India simply do not have long enough economic track records to justify backing a reserve currency. Find a single investor in this crisis that has panicked out of dollars into roubles. Of course, if China one day emerges as the dominant economic and military power, the status quo will change. Until then, investors cannot be rushed.

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The buzz for now is over for sugar bulls. After a rally at the start of the year, sugar prices are vulnerable due to weak import demand and will probably melt like cotton candy in the coming months.

From January through early March, 2009, raw sugar futures prices on the May contract rose by about 16%, hitting a 12-month peak of 13.77 cents a pound. But the market couldn't hold onto these levels. And while recent weakness in the dollar has buoyed prices, slow demand is expected to weigh on the market in coming months.

ICE Futures U.S. sugar ended at 13.42 cents a pound Friday, up 4.2% on the week, as the Federal Reserve's quantitative measures, which will effectively devalue the dollar, caused most commodity markets to rally. But analysts think prices could fall another cent in the near term.

There were hopes, now somewhat dashed, that higher prices would crystallize as production fell in some countries. India, a sugar producer and the world's largest sugar consumer, has seen a drop in domestic output. Normally a sugar exporter, it faces a supply shortage.

Expectations that it would have to import several million tons of sugar in 2009-10, spurring a rally, have faded, in part due to a 60% government-imposed import duty on white sugar. Jonathan Kingsman, who runs the Switzerland-based sugar and biofuel consultancy, Kingsman, says that even if India relaxed the tariff, imported sugar would still be more expensive than domestic.

The alternative, importing raw sugar, is also unlikely in the near term. The processing of India's crop is almost done, and the energy needed to power the refineries would have to be bought, rather than derived from the by-products of the cane crush, the preferred method.

Fresh imports by other big consumers such as Pakistan and Russia are also dubious. Brokers say Pakistan is price-sensitive, and the winter rally will have deterred shopping, while Russia's domestic sugar prices are low, and the weakening ruble could price Russians out of the world market.

"Talk that buyers from two of the world's current strong importers, Russia and India, are seeing current prices as very high due to weak currencies, has helped ease hopes of active near-term demand," says the European bank Fortis, in a recent commodities note.

Not only are buyers closing their wallets, but production from the world's top producer is rising. The International Sugar Organization estimates Brazil's main growing region, the center-south, will produce from 5% to 10% more cane in 2009-10 than in the 2008-09 sugar-cane crush of more than 500 million tons.

"We see a balanced supply and demand situation for the next month, until Brazilian mills start to churn out sugar, which will put prices under pressure," says Peter de Klerk, analyst at London-based sugar merchant Czarnikow.

The supply/demand double-whammy means prices will head south for a spell. Says Judy Ganes-Chase, president of J.Ganes Consulting in New York, "I think this market should eventually break back below 12 cents and head towards 11 cents, but it still could take some time to do so."

Once the market works through this rough patch, however, prices could strengthen again toward year end, as Russia, India and other importers can hold off for only so long.

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Financial markets have a new bogeyman. Economic nationalism, it is argued, will tip the world into a Great Depression, just as America’s Smoot-Hawley Act did 79 years ago.

This is a horrifying but, frankly, also a distant prospect. The disaggregation of global supply chains, the source of the huge efficiencies that companies pass on to consumers, will not be easily undone. The strained bonhomie at the World Economic Forum’s annual get-together was largely a symptom of the high stress levels among mostly elected leaders at a time when half the world’s top 10 economies are in recession and the other half are teetering on the edge.

For now, much of the protectionism is merely rhetorical and is likely to remain so. The controversial Buy American clause in the draft US fiscal stimulus package mandating use of locally produced iron and steel, for example, will be challenged by the EU and is anyway emasculated by a “public interest” opt-out. Actual measures have so far been minor. Take Russia’s 20 per cent increase in duty on imported cars. This has caused the odd street scuffle but is hardly likely to damage GM, Renault or Daimler, which all produce there.

Demagogues cannot dismantle decades-old commitments to freer trade overnight. Tariff protection has fallen consistently in all regions from the mid-1990s. Even if politicians wanted to favour local producers, disentangling national interests would be next to impossible. Witness the squall in England this week over a Lincolnshire refinery built 41 years ago by Total (France/Belgium), now employing Jacobs (America) to subcontract to IREM (Italy), which uses cheap Portuguese labour. 

In this context, state bail-outs are tolerable, provided governments only step in where the usual lenders have shut up shop, thereby compromising otherwise viable companies. Banks may be competing less on foreign rivals’ home patches but that reflects more the unwinding of previous excesses than ugly, government-dictated “national preference” lending policies. The 1930s are vivid enough in memory to stop history repeating itself. Stay short, deglobalisation.

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