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Archive for April, 2012

P.O.N.R

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This is so good it is worth re-printing in full  (from MISH).

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Point of No Return: “Australia is Screwed”

Point of No Return

My friend “Brisbane Bear” from down under says …

Hey Mish,

I think we are well past the point of no return.

Woolworth’s, one of our biggest retailer/supermarket companies, just had their worst quarter in 13 years. Woolworth’s is about as bullet proof a company as you can get in Australia. It is the bluest of blue chip companies.

The banks aren’t lending and will pay one hell of a price when the economy implodes.

Regards
Brisbane Bear

“No One Is Borrowing”

Brisbane Bear passed along this article on The Age by Ian Vettender:Banks playing risky game with rates

Put yourself into the shoes of thousands of Australians who own small businesses across the country right now.

You’re faced with a serious drop in demand for your product, and you need to get turnover moving quick smart, to start shifting that product off the shelves.

What do you do? You don’t need to be versed in the subtleties of economic theory to work it out. The answer is simple. You cut your price, or at the very least offer a better, more competitive service.

That is exactly what is happening across Australia and throughout the developed world.

Our retail malls, once proudly displaying two discounted sales a year, now are permanently emblazoned with discount banners, promising 30 per cent, 50 per cent or even more off the “regular” price.

Our banks are faced with the very same dilemma. Month after month, the Australian Bureau of Statistics unveils figures detailing a drop in lending for new housing and for business, falls to levels not seen in decades, sometimes of a magnitude never before recorded. No-one is borrowing.

But the response from our lending institutions has run counter to the most fundamental laws of economics and logic and, in so doing, they may well be laying the foundations for serious financial problems for themselves and the nation.

Rather than cut their margins, and lower their interest rates in an effort to spur demand for new lending, they have spent the past few years raising the cost of money to existing customers to compensate for the lack of growth in their lending.

Misunderstanding Fundamental Laws of Economics

Vettender bemoans “lending has run counter to the most fundamental laws of economics”.

Mish says, what a bunch of nonsense. Australian banks will not admit so, but they are capital impaired or soon will be (and they likely know it). I suggest banks have loans on the books that will not be paid back and they do not have adequate loan loss provisions.  [emphasis mine: make hay while the sun shines ~R.]

Vettender notes: “a drop in lending for new housing and for business, falls to levels not seen in decades, sometimes of a magnitude never before recorded. No-one is borrowing.”

Mish Theory of Unsound Businesses and Unsound Minds 

Yes indeed “No-one is borrowing”. Vettender cannot figure out why.

I offer this explanation to Vettender: Any Australian businesses in good shape (and in sound mind) would be out of their freaking mind to expand now. And they aren’t.

However, desperate businesses deep in the hole as well as businesses struggling to stay afloat, just might want loans. The sad reality is many of those businesses will not survive, and some would not survive even on interest rates of zero percent.

Raising rates is the smart thing to do because only unsound businesses or unsound minds want loans!

Unfortunately this surge in rational behavior by banks is too little, too late, exactly the opposite of what Vettender proposes.

Australia is Screwed

In short, Australian banks are screwed, retailers are screwed, home owners are screwed, home builders are screwed, those long Australian stocks will be screwed, and those expecting strong commodity prices to bail out Australia will also be screwed.

For more on the latter, please see 12 Predictions by Michael Pettis on China; Non-Food Commodity Prices Will Collapse Over Next Three to Four Years; Nails in the Hard Landing Coffin?

Note that things would be worse, not better, if banks listened to Vettender, because at this point the greater the lending, the greater the losses.

So, if you get the general idea that “Australia is Screwed” then you have come to the correct conclusion.

Mike “Mish” Shedlock
http://globaleconomicanalysis.blogspot.com

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Good article Mish.  Spot On.

And if Aussie is screwed – guess what – so is New Zealand, for EXACTLY the same reasons.

R.

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Timelines and Walls

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When the Global Financial Crisis first reared its head in 2008, I initially thought that it would quickly lead to financial implosion and another Great Depression.  Then after a year or two had passed and nothing much had changed, I had to re-evaluate.

In consequence, my assessment changed to reflect the experience of the 1930’s Depression. That was a slow motion train wreak that ground on for years and years and into greater and greater depths. (For some countries at least: those countries that made radical changes bounced back pretty quickly, those that tried to sustain the status quo just dug themselves in deeper)

There is plenty of commentary on the web about how this current situation can’t end well… and how that which can’t be sustained – wont be… and the lunatics are running the asylum, etc etc.

While that may all be true, look out the window and actually very little has changed on the ground. The world still rolls along, we all live our lives much as we ever did.  Cars still clog the roads, food is still on supermarket shelves, TV still broadcasts American Idol.  Society, the economy, the world, hasn’t collapsed or stopped.

Things are tighter, balancing the budget a bit tougher, but we don’t have legions of beggars on the streets.  So what’s the story?

As I say on my home page, the Great Depression wound on for years, for over a decade in the case of the United States. And they only came out of it with the advent of the second world war – saved by war (and there’s your answer by the way, if anyone ever asks you what war is good for).

However, war isn’t my point here – a decade of depression is.

And the question of: how long can this farce keep going for?

A LONG time, assuming people don’t start shooting first.

A decade from 2008… is 2018.

As we are only up to 2012 currently, then that would indicate we are in for another six years at least of pain.

Followers of Finance and Markets always go on about how you can or can’t Time it.  The point being that timing is the only metric which really matters.  If you could time it, then it doesn’t matter if things rise or fall, you would buy or sell just in advance of it, and viola you win either way.

The problem arises when you have no idea when it will break.  Do you ride it a while longer, or bail out early.  Timing is everything, and ultimately, a complete gamble.  Whatever you may know, or think you know about a situation, especially a chaotic one like world financial markets, you don’t really.  Old hands will attest to that.  You just do the best you can, the winners get lauded and the losers get forgotten.

So whatever our opinions about the world economy and the the crisis in global finances, really we just make our best guess, place our bet and take our chances.

My guess is that we are in this dive for the long haul. A decade or more, and that is assuming we start getting smart at some point about solving it.

As for whether the slide continues indefinitely or hits the wall with an explosive crisis, I really couldn’t tell you.  There are good arguments either way.

However – on the positive side, for me at least, I just read an article that pretty much articulated my basic position.  It is good to get affirmation.

Here it is.   [ heavily edited to pull out the points I want to focus on ]

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How Far to the Wall?     

~ Terry Coxon of Casey Research

Decades of manipulation by the Federal Reserve (through its creation of paper money) and by Congress (through its taxing and spending) have pushed the US economy into a circumstance that can’t be sustained, but from which there is no graceful exit.  With few exceptions, all of the noble souls who chose a career in “public service” and who’ve advanced to be voting members of Congress are committed to chronic deficits, though they deny it.  For political purposes, deficits work.   [There and here equally. ~R]

The people whose wishes come true through the spending side of the deficit are happy and vote to reelect. The people on the borrowing side of the deficit aren’t complaining (yet), and taxpayers generally tolerate deficits as a lesser evil than a tax hike.

Deficits are politically convenient for a second reason. They can take a little of the sting out of a recession. That effect is transient, and it’s not strong – but it can be enough to help a struggling politician get past the next election.

Balance the budget to the penny, but later.  No one proposed anything close to dealing with the deficit now.  So stay up as late as you like on election night to see who wins, but the deficits aren’t going to stop anytime soon.  And the debt mountain will keep growing (that part of it that the government actually acknowledges).

Obviously, the debt can’t keep growing faster than the economy forever, but the people in charge do seem determined to find out just how far they can push things.

Inflation as Savior

At some point, the government will be forced to pay higher and higher rates – and the accelerating interest cost will make the deficits that much bigger. When that happens, the problem will be feeding on itself. The only way for the politicians to buy time will be through price inflation, to reduce the real burden of the debt, and whether they admit it or not, inflation is what they will be praying for.

In short, the cost of postponing the bankruptcy of a government engaged in nonstop deficit spending will be progressively higher rates of inflation. There is no inherent stopping point in the process short of hyperinflation and the destruction of the currency.

Will it actually go that far?

My guess is that it won’t, but that’s a guess about politics, not about economics. At some point, perhaps at an inflation rate of 30% or 40%, the turmoil that comes with runaway inflation will become so painful that the public will accept, and the politicians will find it wise to deliver, a balanced budget and a return to a stable currency. But even a year or two of such high inflation rates, while not a Weimar experience, would be a calamity. Most people’s savings would be destroyed. Most businesses would be badly damaged, and most investment portfolios would be ruined. It would be like the economy hitting a wall.

But when will the economy reach the wall toward which it is headed?

Not soon, I believe, but in the meantime there will be plenty of excitement.

Japan’s ratio of government debt to GDP, to cite an extreme example, is over 230%.  The US may outdo Japan’s ratio before hitting the wall.  How rapidly the US ratio of debt to GDP will grow depends on a list of barely-guessables, including how long the recent recession drags on, and the level of the public’s tolerance for deficits.

Assuming that the recent level of deficits continues indefinitely, it would take on the order of ten years for the US debt-to-GDP ratio to get where Japan’s is now, which would bring us near 2022. After that, several factors could still buy the government a few years more.

That adds up to a long time to wait for the end of the world.

What the Fed will be doing, what the effects will be, and when they will be felt, all can be anticipated with a bit more clarity than the doings of Congress – although it remains guesswork.

Approaching the Wall

The M1 money supply has grown by 52% since the Federal Reserve opened the spigot in October of 2008.  The holders of that 52% are becoming more and more disposed to think of it as excess cash that should be spent on something. That feeds a (slow)recovery.  Given the slow pace, it should be perhaps two years until the economy seems more or less normal, but the excess cash will still be at work.

Give it one more year, and price inflation will emerge as a noticeable complaint.

Then the Federal Reserve will let interest rates rise, but only slowly at first. By the time it tightens in earnest, price inflation will be approaching double-digit rates. It will look like the 1970s.

And despite all the statistics it publishes, the Fed will only be feeling its way in the dark, since there is no reliable, real-time indicator of how much excess cash there is in the system.

So inflation will keep rising, and the Fed will keep tightening until it produces a rerun of 2008-2009, with crashing investment markets announcing a new recession.  But there will be two important differences vis-à-vis 2008-2009.

First, it will be happening with the US government far deeper in debt than it was when the last recession began, and in a tightening phase, the government’s interest expense will jump to new record highs.

Second, it will be happening with the rate of price inflation already at a troubling level.

Another round of the monetary therapy the Fed applied to cure the last recession would push price inflation to levels beyond those reached in the 1970s.  They’ll do it anyway.

This gets us to 2016 or 2017 with the system in turmoil but still functioning. No wall yet, and there will be room for at least one more cycle of reflation. But it will be a fast cycle, since in an environment of already high inflation, people will be quick to spend the newly created cash. That means a quick recovery from the 2017 recession and a catapult into the 20% plus range for price inflation.

Then the wall may be in sight.

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Yup, that is the best cogent summary and timeline I have seen.  And fairly nicely matches my best guesstimate as well.

So there you go, if you want an indicator of how to time this, then there it is. Place your bets.

(dependant on Black Swans and other unknowns of course)

R.

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[edited/extracted – from Zero Hedge  ~R] 

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There Will Never Be A Failed US Treasury Auction… Until There Is

~ Brian Rogers

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Asymmetric Trades

One thing I’ve learned from my 14 years of working on Wall Street is that no matter how much you think you know, no matter how certain you are of something or how well you know how to “play the game,” reality inevitably comes along and shows you just how ignorant you were, are and probably always will be.

It can be a very humbling business no matter who you are.  And if you’re in it long enough and doing anything of any relevance whatsoever, you too will one day eat a big heaped helping of humble pie.

Just look at some of the modern investing “legends” or “masters of the universe” littering the side of the road.   [consider: Fooled by Randomness  ~N M Talib]

But one thing to look for, that can and often does lead to outsized returns, is when everyone in the market is “certain” of something.  Regardless if you agree or disagree with the thing that everyone is “certain” of – if you can spot an argument like this, where nearly everyone has piled on to one side of the boat – you should do some homework because this is usually precisely the thing that can cause assets and even entire markets to make big moves.  A good example of this is the recent collapse of the US housing market and the associated collapse of mortgage-related securities.

As a former mortgage and CDO salesman at a [2B2F] Too-Big-To-Fail (forgive me Father, for I have sinned), I had a front row seat to watch not only what was happening in the industry but also the overwhelmingly prevalent attitude that investors had about the asset class at the time.

The Bernank summed things up nicely in July, 2005 when he said, “We’ve never had a decline in house prices on a nationwide basis…”

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Now I love to give our monetary fiat ponzi central planner in chief as much grief as the next critical thinking monkey, but his statement absolutely reflected the prevailing attitude of almost every major market participant at the time. Yours truly included.

Nearly everyone and their brother agreed with the Bernank. Strongly agreed.  Has never happened, will not happen, will not change. …Next question.

Of course, if it does happen – things will go to hell in a handbasket.  But don’t you worry your pretty little head about that, it will not happen.  Everyone says so.

Authors note: for those curious, the answer is no, I did not predict the collapse of housing, despite my place at the table.  Like most others around me, I had been drinking giant gulps of Kool-Aid.  I have since gone on a massive Kool-Aid 12-step program.  In fact, realizing how economically and politically naïve I was has been one of the critical turning points in my life.  Recognizing, acknowledging and dealing with my own cognitive dissonance has been nothing short of a journey towards personal enlightenment. 

If you had recognized that everyone was sitting on one side of the boat, you would have found the trade of the OO’s.

Which brings me to the US Treasury market.

Paul McCulley and Zoltan Pozsar presented a paper at the Banque of France on March 26.  McCulley expresses a view in his paper that completely sums up the key assumption on which the entire global financial fiat ponzi system hinges.  Namely, the casual assumption that there will never be a failed US Treasury auction, or even reason to fear rising US rates.

I’m not going to go into a big discussion about Modern Monetary Theory, the Great Depression, or Japan.  Despite what information may or may not be gleaned from previous events, we are absolutely in uncharted territory from an economic and geo-political perspective.

No one really knows what’s going to happen next, and that’s exactly the point.  Neither I nor any other person on the face of the planet knows exactly what’s going to happen to interest rates in the next 2 seconds, let alone 2 months or 2 years.

So much is happening and changing at such a rapid pace, thinking that anything will “never” or “always” happen strikes me as pure, unadulterated hubris.  The madness of crowds.

And yet everything in modern finance hinges on the assumption that US rates will remain low, and buyers plentiful enough to dilute and mask the Fed’s own forced buying.

Essentially, the entire market is betting that the Fed will always and forever be able to manipulate Treasury rates and ensure successful Treasury auctions.  TPTB (the-powers-that-be) are absolutely all-in on this concept.

It underlines the “confidence” that our current crop of bought-and-paid-for politicians can keep feeding at the government trough.

Sound a bit asymmetric?  You bet it does.

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Will Atlas Shrug?

– Do you think the US will always and forever be able to pay for our over-bloated military-industrial complex and our wars of choice?

– Do you think the federal housing agencies will always and forever be able to subsidize the real estate industry with money losing, non-economic mortgage loans?

– Do you think the government will always and forever be able to pay on the promises they’ve made regarding Social Security, Medicare and Medicade?

– Do you think the government will always and forever be able to extend subsidized student loans to anyone with a pulse?

– Do you think the fiat ponzi central planners at the Fed will always and forever be able to manipulate the Treasury curve to whatever levels the Oracles of Delphi decide?

Ask yourself this: how would all of these things be affected if the average interest rate paid by the US was to rise to 5%? 

At today’s debt level of $15.6 trillion, the interest expense would be approximately $780 billion or about 35% of total government revenues.  Welcome to the United States of Greece.  Next stop, bankruptcy.

Housing will collapse as mortgage rates approach 8%.  Every aspect of federal, state and local government spending will have to be slashed.  Police, fire, schools, medical services, mail delivery, trash delivery, road maintenance and every other kind of social service will be cut dramatically as capital is diverted to pay interest on our debt.

And these sudden rate rises can happen brutally fast in our uber-connected global ponzi.  Just ask Italy.  [or Greece, or Spain, or Portugal, or… ]

I think it’s no exaggeration at all to say that keeping US rates low (ZIRP low) for the foreseeable future (ie, forever) is key to maintaining the semblance of stability in the current global fiat ponzi.  Nearly every major financial player on the planet is counting on this being an a-priori piece of knowledge.  Everyone is betting on this one idea – that the Fed will never lose control of interest rates and the US Treasury will never have a failed auction.

The same way nearly every major financial player on the planet was willing to bet that US Real-Estate could never fall for an extended period of time.  And we all know how that trade worked out.

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Timing, please?

Of course, the big question is – when.

No one knows.

These abnormal, asymmetric situations have a tendency to go on longer than anyone suspects.

I recall hearing in 2009 that legendary hedge fund investor Julian Robertson was making a big bet that longer-term interest rates will rise more than short-term rates.  I completely agreed with him.  And at least in the short run, we have both been more or less wrong.  Again, this business can be humbling.

But eventually, just like the guys who bet against housing in 2005, 2006 and 2007, eventually I think Mr. Robertson will be proven right.  Big time right.

And TPTB, the Bernank, 2B2F, market consensus and everyone long 30-year Treasuries, will be wrong.  Completely wrong.

There will never be a failed US Treasury auction.  Until there is.

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Actually, my take is that it is a bit of a chicken and the egg situation: which comes first, the failed auction or rising interest rates.

But one way or another, rates will rise – and so will inflation. Hugely.

The only question is the Timing.

Place your bets.   🙂

~ R.

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In the “What If…” category:

What if Japan had to evacuate much, or all, of its population?

– Say What…?

What if Japan had to be evacuated?

– Why?

Well – here is why!

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The Greatest Single Threat to Humanity: Fuel Pool Number 4

Asahi noted last month that – if Unit 4 pool gets a crack from an earthquake and leaks, it would be the end for Tokyo..

Former U.N. adviser Akio Matsumura … warned during his speech at the World Economic Forum in Davos – that such an accident would force the evacuation of the 35 million people in Tokyo, close half of Japan and compromise the nation’s sovereignty. 

Hmmm.

What do you do with 35 million people?

You put them where there is space and resources for them to live.

– And where is that you ask?

Actually – I suspect it is here in New Zealand.

The 4-5 million people that currently live here will have to give-up half the country.

As in for instance; the South Island could be cut away from the North Island politically, the population that wants to relocate would be assisted to do so, and the whole South Island would become Japan Mark II.

It would have the power, water and agriculture resources necessary to sustain 35 million people.

And it would be similiar enough physically/geologically to where they come from to make the transition as easy as possible.

Would anyone like that  solution…?

NO

But in the face of an uninhabitable Nihon, what other option is there?

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Name even one other place on the face of the planet where you could reasonably and suddenly dump 35 million people – with any chance of surviving?

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If Japan HAS TO EVACUATE – then they will have to come here.

And we should welcome them.

~R

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 Nihon Zealand.

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CAVEAT:

Japans Criminal Elite Kleptocracy can never again be allowed to rule the Japanese people.

The Zaibatsu and Keiretsu are, for all intents and purposes, exactly the same thing. They controlled Japan before WWII and continued to do so afterwards – anyone who imagines differently is a fool. The LDP and the “Lost Decades” are all part of the same complex. Revolving-chairs and Crony-Capitalism, institutionalized looting(fascism by the Mussolini definition). The only things that matter are connections/power/money – at any price (including war and nuclear disaster)

The purge that never-was following WWII, would be essential in any settling of refugees in Nihon Zealand.  That Clique and their Minions must be forever excluded – and any subsequently found here would be promptly deported back to Fukushima…

Period.

(ps.  you don’t get to this point without some world-class corruption going on)

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take 2

second try at Facebook…

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Facebook

With any luck, I have now linked my WordPress RECISION blog with my Facebook RECISION page.

Maybe…  fingers crossed.

In theory, these posts should link onto the facebook page.

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Thinking is the hardest thing in the world to do – that is why so few people do it.

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The trick is not to feel, but to think. Everyone can feel.

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When you can’t see a solution to your problems – it isn’t that there is no solution – the problem is that YOU can’t see it..

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The genesis of solving a problem, is to know how to solve problems.

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Solve for X

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Analyse  > Define > Identify.

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Know thy enemy.

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We have met the enemy – and they are us.       (There is no need to sally forth, for it remains true that those things which make us human, curiously enough, are always close at hand.   Resolve then, that on this very ground, with small flags waving and tinny blast on tiny trumpets, we shall meet the enemy, and not only may he be ours, he may be us.   ~Walt Kelly, June 1953)

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Know thyself.   γνῶθι σεαυτόν       (“There are three things extremely hard: Steel, Diamond, and to know one’s self.”   ~ Benjamin Franklin  1750.)

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Built into every cell of your being is the DNA which will do with you as it will.  Your intelligence, such as it is, comes afterwards – make of that what YOU will.

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For I see the mote in another’s eye, but cannot see the beam in mine… in that, I am blind.

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We do not see things as they are – we see things as WE are.     ~Anais Nin.

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Most people do not by thinking, but by instinct.  By that very nature, they may be understood and dealt with – or to.

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It is in the nature of a trap, that it uses our nature to trap us.

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Most of us are having enough trouble dealing with our own problems, to be sparing any time, thought or energy for anybody else’s.

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Those that fail to learn from history, are doomed to repeat it.

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The world is filled with promise, opportunities, signs and warnings – if only we could recognise what we are looking at.

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Most things are a choice. if we but knew it.

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There are none so blind, as those that will not see.

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Wisdom, and knowledge, can only come if we are ready for it.

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Playing catchup is a losing game.

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Fair?  What is this “fair” you speak of?

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Why would anyone care what you think?

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Success is 1% inspiration, 99% perspiration – even the smartest people have to work at it.

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My biggest triumph, and failure, is me.

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~ R.

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(ps.  feel free to add any more you can think of in the comments section)

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