“Planned a mission to Mars lately? Ever replaced a gyro on an orbiting telescope travelling at 17,600mph in a full vacuum?”

There just aren’t enough recruitment ads like this. These are the opening lines of NASA’s guide to employee benefits for its next intake of astronaut candidates – which is open for applications right now. Being an astronaut has been a dream to young people ever since the dawn of the Mercury and Vostok programs, but for a select few, it can be a reality.

But have you got what it takes to be an astronaut? And just what is it that you need to become one? To find out, DCM assembled some of the most knowledgeable voices imaginable: the head of astronaut selection at NASA, and two of the nine surviving men who have not only gone into space, but walked on the surface of the moon. You can’t get better advice than that.

To see this article as it ran, as Discovery Channel Magazine’s cover story, click here: Discovery_How to become an astronaut

THE GLAMOUR

“I was naked, lying on my side on a table in the NASA Flight Medicine Clinic bathroom, probing at my rear end with the nozzle of an enema. Welcome to the astronaut selection process, I thought.” So wrote Mike Mullane, who flew three times on the Space Shuttle.

For astronauts, the rewards of their missions are almost unimaginably good: sights that few others will ever see, and a chance to be part of the history of human endeavour. But all who have worked in the space corps are keen to stress that there is a lot of hard work, discomfort and a surprising amount of boredom involved in getting there.

Consider this: Alan Bean had one of the most stellar careers of all astronauts. He flew on Apollo 12 and was the fourth man to walk on the moon. He was mission commander on the second manned flight to the Skylab space station, and set a then-record for time in space. But in an 18-year career at NASA, he went to space just twice. Many fly once in an entire career. Vastly more time is spent waiting than adventuring.

“It was very frustrating,” Bean recalls from the Houston studio where, today, he paints pictures of his memories of the lunar surface. “Other people in my group were flying and I wasn’t. I felt that I wasn’t measuring up to the guys who were being selected.” But it was the same for all potential astronauts, even in the Apollo era when they tended to be fearless and hot-blooded “right stuff” test pilots from the Navy and Air Force who wanted nothing more than to get airborne. “Even in the early days there was a lot of preparation that went into a flight; it wasn’t just ‘let’s go strap it on’,” recalls Charlie Duke, the 10^th man to walk on the moon, on Apollo 16, who had been selected while a test pilot under legendary aviator Chuck Yeager. “So for an astronaut patience was a good character trait, because you needed to wait your turn.” He waited six years between selection as an astronaut candidate and flying in 1972 – his only ever flight into space.

But how to get into the queue in the first place? It’s no longer like Bean and Duke’s time, when you had to be a pilot (and a man) to stand a chance. For NASA at least, a surprisingly broad range of people are considered. And it really all starts with education. “To get to this astronaut selection office, you have to come through the door of the Johnson Space Center,” says Duane Ross, head of the astronaut selection board at NASA. “But that’s the second door. The first is the door to the school building.”

While NASA no longer requires doctoral level degrees, as it did when the focus started to shift from pilots to scientists in the late 1960s, it does require an undergraduate degree in engineering, science or maths. You no longer need to have flight experience – that can be trained later – and you certainly don’t need to have been in the armed forces. “As the Shuttle progressed, fewer and fewer who were selected were pilot astronauts,” recalls Duke, who was around for the early years of the Space Shuttle program. “There were more mission specialists and payload specialists. Plus, of course, 50% of the competition was cut out for my generation – because no women were allowed.”

In fact, you’re more likely to be restricted by health – which obviously must be good – and by height than ability to fly a plane: the earliest Mercury and Gemini-era astronauts could be no taller than five feet eleven, so as to fit into the tiny one-man capsules, and even today the height limit for the latest NASA intake is between 62 and 75 inches, to ensure you can fit in the Russian Soyuz capsules that NASA currently has to use to take astronauts to the International Space Station (ISS). “If you’re going to fly in space, you’ve got to fit in the spaceship,” says Ross. More than just height, he says NASA assesses what are called anthropometric requirements, such as the lengths of your arms and your legs, as spacesuits are also constrained by size.

Nationality is still an issue; NASA only accepts American citizens. But it’s no longer like the 1960s, when only a Russian or American could hope to go into space. Today, people from 38 nations have flown in space – and there’s every chance that the next person to set foot on the moon could be from China.

Don’t give up

The next thing you need is persistence. The first time Bean applied for the Apollo program, he was rejected. “They didn’t ever tell me why,” he recalls. But he noticed everyone who was selected was older and more experienced than him, so he just got more experience and applied again, this time successfully. In his view, it wasn’t just a question of being top of the class – which he was not, either academically, or as a pilot. “You need to be a certain IQ so you can learn things quickly, but you don’t have to be the smartest guy in the class. You’ve got to be able to get along with all sorts of other people, and not everybody can do that either. You don’t just hire a valedictorian and hope they work out.”

Some NASA intakes have attracted 8,000 applications, and the last time, 3,500 applied. 113 were interviewed, 48 got to a second interview – and just nine were hired. “There are two messages,” Ross says. “One, it’s very competitive. But two, the one guarantee is that if you don’t apply, you can’t get picked.” Like Bean, he stresses that being a genius isn’t the whole point. “It’s pretty simple: you need nice people. The world’s best scientists or pilots may not be the team players you need to go fly in space, particularly now we’re flying six months on the International Space Station. There is a huge personal aspect to this.”

Study once selected is intense. Ross calls it “kind of like getting a doctorate degree in being an astronaut in a two year period.” Since most space travel in the world today is geared around the ISS – and Russia’s Soyuz craft are currently the only way of reaching it since the Space Shuttle stopped flying – it is thought that astronaut training is fairly similar in Russia, Europe and the US today. On the menu are training to understand ISS systems, competence at flying (in NASA’s case in T-38 jets), land and water survival training, spacesuits, EVAs (extra-vehicular activity, or spacewalks), robotics on board, and mastery of Russian.

Parts of this are guaranteed to set the pulse racing: the jet flying, the simulators, the so-called Vomit Comet flights that simulate weightlessness. There’s plenty of work in 300-pound spacesuits in deep swimming pools.

There is, though, a lot of repetition. “In our lunar module simulator I probably landed on the moon 2,000 times over the time I was there,” recalls Duke. “I crashed it a few times too. But in the one that counted, we pulled it off.” In his case, one almost unique branch of training was the lunar rover, which he and John Young spent much of their three days on the moon driving around at what looked a fair old clip (in fact 11 miles an hour – the record for the fastest land speed attained on the moon).

Life in space

So you’ve waited the best part of a decade for your chance; you’re on the launchpad, ready to go. What should you expect about life in space?

OK, let’s deal with the obvious one first. Apollo veterans say the question they still get asked most frequently today is how you go to the bathroom. “When you’re on the moon and you’ve gotta go, you’ve gotta go,” Duke says. “You don’t run over to the nearest rest room and say ‘excuse me’.” In Duke’s day, when he was getting dressed in the lunar module to prepare to step onto the moon, the first thing he had to put on was something called an FCD, basically a diaper, followed by another similar gadget for urine, followed by a set of long underwear filled with plastic tubes to distribute cold water around the body and keep him cool. “One of the most efficient air conditioners I’ve ever had the pleasure of being associated with.”

By the Shuttle era, flight suits for take-off and spacewalks featured a sort of condom male astronauts would roll on before flight to take care of their urine; creating a similar system for women has been an enduring challenge. One of the biggest problems shuttle astronauts talk of is when they’re still on the ground, strapped on their backs, facing upwards, for several hours as the various checks are conducted during countdown. That condom device is all well and good, but try urinating directly upwards when strapped on your back. On board orbiting craft or space stations things are a little easier, with functioning toilets that never existed in the Apollo era, where they had to try to persuade their waste to descend into bags in a zero-gravity environment. “This bag,” says Duke, “is not a triumph of technology, believe me.”

Zero gravity is said to be a magnificent, freeing, euphoric experience, but it brings some curious reactions. Duke recalls zero gravity as “really fun, but at first very uncomfortable. Your head throbs with every heartbeat, your sinuses fill up; it’s like having a headcold. But within hours, everything adjusts.” And spacesickness has been a challenge ever since Apollo 8, when mission commander Frank Borman vomited and had diarrhoea, filling the cramped capsule with globules of vomit and faeces. Tricky to maintain mission camaraderie in those circumstances.

Odder still, astronauts routinely get taller in space, a consequence of the vertebrae of the back stretching out. “I grew about an inch and a half on my way to the moon,” Duke recalls.

Bean went into uncharted territory when he went 59 days in space on Skylab. “My concern to begin with was that we would get weaker and weaker as time went on,” he says. Much effort was spent on working out an exercise regime. “We began to understand what humans can do, which is why now they can go up on stations for six months or more and be OK when they come home.” This has given him some useful ideas about space tourism. “Someday when passengers go up in space, they’re going to have to spend an hour a day with a physical trainer. If one says ‘I feel sick today’, the captain’s going to say: ‘you got a choice. Exercise, or you go in the brig. Otherwise when you get back you’re going to die and then blame it on me.’”

NO FEAR

One thing early astronauts speak very little about is fear. It’s very much the Apollo-era way to be dead-pan about death (Duke on the parachutes on his returning capsule after re-entry: “Without those chutes, we would hit the water at a great rate of speed that would spoil your whole day.”) But both Duke and Bean had every reason to be fearful. Bean’s ship was hit by lightning in the first minute of its ascent, prompting Pete Conrad’s famous remark: “The flight was extremely normal for the first 36 seconds and after that it got very interesting”. One of its guidance systems was knocked out. And before his flight, Duke had seen the dangers while on the back-up crew of Apollo 13, which suffered an explosion and came within a whisker of losing its crew before a rescue even more remarkable than the flight itself.

But they were well trained and knew the odds. “We knew about risk before we joined up; we’d been doing things like that in airplanes for our whole career,” says Bean. “Some who weren’t so good at it got killed. You have to have luck. Look at Challenger: no matter how good an astronaut you are, you’re going to get killed.”He recalls Neil Armstrong saying he had a 90% chance of coming back alive and a 50% chance of making a landing; asked about his thoughts ahead of his own mission, Bean says his odds were “about the same. You have in your head these thoughts, but you think: is it worth it? Obviously, to us, it was worth it.” Chillingly, he adds: “Losing two crews on the shuttle [Challenger and Columbia] was better than we thought. We thought we’d lose more.” It’s a price crews are willing to pay to do what they love. “When you want to explore, it’s not like the American public think it is. You are on the cutting edge of what you can do.”

For Duke, the one moment he recalls fear was somewhat comical. He and John Young had spent three days on the moon and had achieved a great deal; it was almost time to go home, and with all their work done, in one-eighth earth gravity, they decided to conduct their own Lunar Olympics and set the record for the high jump. They began bouncing, then Duke fell flat on his back. You’ve probably seen the famous footage of Duke falling on his front earlier in the mission when attempting to conduct a drill experiment; his bouncing, press-up attempts to get upright again added to the sense of fun and humour of that whole mission. But falling on your back was a very different deal. “That was scary,” he says now. “That backpack was not designed for that kind of impact. If I’ve split my suit open, I’m dead.” He survived – and his high jump record still stands.

Nevertheless, acknowledgement of potential danger is essential. Mullane says that during his training, astronaut candidates for the Shuttle program were played the tape recording of Gus Grissom, Ed White and Roger Chaffee as they burned to death in the testing of Apollo 1 in January 1967, just to remind them what they were getting into. And, indeed, many members of Mullane’s class did die on the Space Shuttle Challenger in 1986.

There are sacrifices, too; separation from family is taxing, and not just on the astronauts. When Duke wrote his autobiography he did so in partnership with his wife, who wrote openly and movingly about how the depression she felt in being neglected during Duke’s career led her almost to suicide.

SO NOW WHAT?

For the Apollo moonwalker astronauts in particular, another question is just how you find meaning in your life after having done something extraordinary. “After Apollo I was standing on top of the mountain,” Duke says; “…there was nowhere else to go.” It’s fascinating to see the variety of paths their lives took. Buzz Aldrin suffered clinical depression and alcoholism after his return before successfully beating both; Armstrong became something of a recluse. Edgar Mitchell found belief in the paranormal and faith healing, while Harrison Schmitt became a Republican senator in New Mexico, and something of a sceptic about climate change.

For Duke, after a few years in the space shuttle program and a shift to business, he found meaning in religion. “I found peace and a purpose through my faith,” he says. And Bean found perhaps the most distinctive next phase of all: he has spent the later years of his life painting images from the Apollo missions, using small amounts of moondust from his mission patches, and applying texture through a bronze cast of his moonboot and the hammer he used for experiments while on the moon. “When I’m dead and gone these paintings will remain, and tell stories that would be lost any other way,” he says. When DCM calls, he is painting Neil Armstrong and Buzz Aldrin’s lunar module, the Eagle, flying over a crater looking for its landing site.

Have we put you off with this list of challenges, sacrifices and negatives? The final word, then, to a positive, to remind you what it’s all about. We asked Charlie Duke to cast his mind back 40 years to the Descartes Highlands of the moon and tell us what image stayed most clearly in his head. He thought for a moment.

“On our second EVA, we drove the rover to the south and up the side of Stone Mountain,” he says. “When we got up two or three hundred feet off the valley floor, we turned the rover around on a little bench on the hill and looked across the valley of the Cayley Plains. There was a distinct gap between the lunar surface and the blackness of space, with the lunar module sitting in the middle of the valley. It was a very dramatic sight… the beauty of the moon.”

It is for memories like this that people will always dream of being an astronaut.

Sidebars

Charlie Duke’s famous line

If you don’t know Charlie Duke by name, you know his voice. One of the most famous radio exchanges in history took place when Neil Armstrong piloted Apollo 11 on to the surface of the moon for the first time in 1969. Having found his planned landing site unsuitable, he flew over a crater and was almost out of fuel when he finally landed. “Houston, Tranquility Base here, the Eagle has landed,” said Armstrong. A broad southern drawl responded: “Roger, Twanq… Tranquility, we copy you on the ground. You got a bunch of guys about to turn blue. We’re breathing again.”That was Duke, serving as CAPCOM on the ground in Houston.

Today, he recalls: “The actual moment of landing was one of intense relief. I remember the tension in mission control was the highest I have ever felt it. There was dead silence, which was extremely rare, as people focused on their consoles. When Neil came back and said ‘The Eagle has landed’, it was like a balloon popping in mission control. I was so excited I couldn’t even pronounce ‘tranquility’. And it was true: we were holding our breath waiting for that landing.”

Charlie Duke’s famous measles

Charlie Duke had one of the world’s most famous cases of German measles. In inadvertently exposing Ken Mattingly to the illness, he caused Mattingly’s withdrawal from the Apollo 13 mission just three days before its ill-fated launch; it would have been him, rather than replacement Jack Swigert, who flicked the switch that caused the craft’s oxygen tank to explode, triggering the most audacious rescue in history. In real life Mattingly still got to fly to the moon, but on Apollo 16 instead – with Duke, the man who exposed him to the measles in the first place (which, incidentally, he never got).

Office politics on the moon

Even in the glorious Apollo era there were office politics when astronauts were jostling for assignments on to lunar crews. Alan Bean, prior to his assignment on Apollo 12, decided he must have been failing to show his good qualities to Deke Slayton and Alan Shepard, the Mercury 7-era astronauts with the greatest power in assigning Apollo crews. “If I had my time over, I would learn to hunt and go hunting, because Deke was a big hunter,” he says. “There’s politics in everything, it’s just the way it is.”

Looking back he thinks he was impeded by his tendency to go to Shepard and Slayton with occasionally crazy ideas; his colleague and mentor Pete Conrad, who would be commander on Apollo 12, told him to keep the weirder ones to himself. “I learned to shut the f*ck up. It worked out OK.”

But today, Bean thinks the differences in his approach serve him well – in his painting, such as using moon boot soles and a lunar hammer to give texture to his creations.  “If Al and Deke had been on my committee as a painter and I’d told them that, they’d have said: that’s a crazy idea, Bean. They’d be looking at me like: that is really stupid.”

Record breaker

The man who has spent the most time in space is Sergei Krikalev, a Russian cosmonaut. He spent time on Mir – he was up there when the Soviet Union disintegrated beneath him – flew on the first US/Russian joint space shuttle mission in 1994, and was one of the first two men to enter the International Space Station in 1988. By the end of his sixth mission in 2005 he had spent 803 days, 9 hours and 39 minutes in space.

Changing politics

It’s no secret the Apollo missions were launched primarily to beat Russia at something: they were a function of the cold war. “Apollo was a political decision in the beginning: a race to space with the Russians,” Duke recalls, although he said once selected, it was never really an issue. “The political context quickly changed to a scientific one.”

Today US-Russia relations have improved so much that American astronauts must use Russian Soyuz capsules to get into space, and are expected to learn Russian in their basic training. Russian cosmonauts must learn English and do parts of their training in the USA.

Instead, if there’s a space-race competitor today, it’s China. “I don’t have a sense of what China does at all,” says Ross. Well, the China Manned Space Engineering Office didn’t return DCM’s calls, but we do know this: the first Chinese man, Yang Liwei, flew to space onboard Shenzhou 5 in 2003; China launched a module called Tiangong 1 into space in September, then an unmanned ship, Shenzhou 8, to dock with it in October; and the first section of a permanent space station should be in place by 2015, with the full station complete by 2020 – when the International Space Station is due to retire. Further ahead, China has announced plans to send a man to the moon by 2025, to build a lunar observatory, and to send missions to Mars.

But increasingly, politics aren’t going to matter at all as the business of space travel – particularly cargo and space tourism – passes from state-backed agencies like NASA to the commercial world of groups like Virgin Galactic. Once it becomes viable to earn a profit from these ventures, expect space to become very crowded with private sector businesses.

Passport in Senegal

When Space Shuttle flights departed from Cape Canaveral in Florida, they had an option of a transatlantic landing if one engine failed, which on some launches would put them in Dakar, Senegal. To deal with this possibility, one astronaut would be sent all the way to Dakar International Airport to help air traffic control – with their entire crew’s passports and pre-arranged Senegal visas. Mike Mullane wrote: “I had a vision of standing in the customs line at Dakar airport in our shuttle flight suits with our helmets in the crook of our arms while a bureaucrat asked: ‘Anything to declare?’”

What’s next?

Since NASA no longer has a shuttle, why apply? In the short term, astronauts are being trained for the International Space Station. But a new multi-purpose crew vehicle is being designed (known as Orion), capable of taking humans beyond earth orbit. Further afield are plans to visit an asteroid.

But for Ross there’s one ambition that matters above all others. “For me, since I was a kid, all I think about is going to Mars,” he says. “That’s got to be one of the first destinations we go to. That’s the next hill we’ve got to go climb.”

Other missions will include developing and deploying a successor to the Hubble space telescope, and exploring what is probably the most exciting celestial body in our solar system – Jupiter’s moon of Europa, an ice-covered moon believed to have a water ocean beneath it. If there’s life elsewhere in our solar system, Europa’s our best candidate.

Advice from the man

Nobody’s advice is more relevant than the man in charge of astronaut selection. So, Duane Ross, what should budding astronauts do? “Don’t do anything just for the sake of getting to be an astronaut. A good education will help you whether you get to be an astronaut or not. Getting in to science and engineering is a good place to be. Also, it’s not just academics; be well rounded, do a lot of things, show teamwork, and enjoy working with other people in different situations and environments.” So far NASA has selected 330 astronauts since 1959.

[Facts and figures]

1. $45,360: The minimum price to commission an Alan Bean original.
2. 130-140: the measured heart rate of Alan Bean and colleagues when lightning struck Apollo 12 at launch.
3. 12: number of men who walked on the moon, in six successful missions. 24 men have been to the moon – three of them twice – but only half landed on it, and none more than once.
4. 1963: year Soviet Valentina Tereshkova became the first woman in space. 20 years later Sally Ride became the first American woman in space on the Challenger Space Shuttle.
5. 100: kilometres to the Kármán Line, where space officially starts (though NASA designates anyone who reaches more than 50 miles in altitude as an astronaut). Either way, it’s not far: you could drive there in an hour if your car would go straight up.
6. US$64,724 to US$141,715: pay scale for NASA’s latest intake of astronaut candidates (most new recruits will be at the bottom).
7. Charlie Duke left a picture of his family on the moon, including a dog called Booster – which provided a paw-print.
8. Among the benefits NASA lists for becoming an astronaut are “free parking”.
9. Transcripts of Bean’s flight are filled with Pete Conrad’s country and western music, starting with San Antonio Rose.
10. Apollo astronauts underwent not only the incomparable thrust of a Saturn Five rocket, but the jolts when one stage of the rocket stopped and was discarded and the next one fired up. Duke said it was “like a train wreck. So violent my first thought was we’d blown up.”
11. Apollo 16 was nearly aborted just a few miles from the lunar surface.
12. The first thing Duke and Young were ordered to do after landing on the moon was sleep.
13. Duke had a leaking valve in the drink bag within his space suit as he walked on the moon. Frequently a globule of orange juice would come out and start flying around his helmet. “It was very frustrating. It would hit my nose and start crawling up my head.”
14. Some found moonwalking easier than others. “John [Young[ could run like a gazelle,” Duke says. “I just waddled around like a duck.”
15. When Bean opened and Conrad opened their checklist on the moon, they found a picture of a naked woman had been added, presumably by a back-up crew, with a note: “See any interesting hills or valleys?”
16. On the way home Apollo 16’s Ken Mattingly did a space walk. As he did so his wedding ring, which had earlier been lost, drifted out of the capsule and into space – but bounced off the back of his helmet right back into Duke’s hand.
17. The last man on the moon was Eugene Cernan, who flew with Harrison Schmitt on Apollo 17 in December 1972. The youngest remaining moonwalkers are in their late 70s; Bean believes there will one day be nobody alive who has walked on the moon.

Discovery Channel Magazine, 2011

Interview with Stephen Cave – author of Immortality: The Quest to Live Forever and How it Drives Civilization

You argue that mankind would cope better physically than psychologically with immortality. If we were unprepared, would productivity drop, you think? Would we fall into a “longevity funk”?

Yes, we would fall into a longevity funk. The deep problem is this: the value of a thing is related to its scarcity — someone conscious of their mortality values their time and aims to spend it wisely because they know their days are numbered. But if our days were not numbered, this incentive disappears: given infinity, time would lose its worth. And once time is worthless, it becomes impossible to make rational decisions about how to spend it (eg, when to stop studying and start work; or just when to get out of bed. Life as we know it may be too short to watch daytime TV, but eternity wouldn’t be). The consequences of this for an individual would be bad enough; for a civilisation of such ditherers it would be disastrous.

If this speculation of infinite time sounds a little abstract, we can look at the experience of those who suddenly realise their time is very finite. People who narrowly escape death frequently experience a realisation of the shortness of life and at the same time a new found joy in its preciousness. The psychiatrist Irvin D. Yalom who works with the terminally ill has noted that even those diagnosed with diseases such as cancer experience an “enhanced sense of living… a vivid appreciation of the elemental facts of life… and deeper communication with loved ones.” So evidence suggests that life is already so long that we fail to appreciate it — more time, or indeed infinite time, could only exacerbate this.

You suggest death plays an important part in our motivation levels to act, and reinvent ourselves. Is death like the ultimate deadline that provokes us to act now?

Yes, death is the source of all our deadlines. It enables us to shape a life and make decisions about how to spend it. Given indefinite time, such decisions become meaningless or even impossible.

Yet surely eventually, without the immediate focus on death, people might spend more time on making this planet a more liveable place? Wouldn’t we see more long-term thinking and planning from people and companies, knowing that we’re not going anywhere else, any time soon?

This seems to me unlikely. People today are short-termist, even though they can reasonably expect to live for eighty years, and even though the world they create will be inherited by their children. People will always prefer jam today. And given finite resources and infinite time, this could get the human race into a lot of trouble.

If immortality is not the good news we expect, might science better focus on improving the lives we have, rather than prolonging them?

Prolonging lives is a worthy cause — but not at any price. Longevity is increasing at the impressive rate of two years per decade (meaning those born in 1970, say, can expect to leave two years longer than those born in 1960). But only one quarter of this additional time is spent healthy. In other words, of those additional two years, 18 months are spent in ill health or disability. We can all expect to spend many of those extra years unable to wash or dress ourselves, unable to recognise loved ones, our senses fading and our strength gone. We are not so much living longer as dying slower.

There are two revolutions we need before a new longevity revolution: the first is the one that brings long life to the disadvantaged of the world — we should worry about whether children in poorer countries are living to see their first birthday before we worry about whether we will see our hundredth. Second, we need a revolution in care for the very elderly, including both better facilities and more research into diseases such as dementia that will soon be affecting a huge proportion of the population.

Your recent article said that you weren’t worried about the ability to cope from a resources perspective. Why not?

The point is perhaps not that we would definitely be able to cope materially if everyone became immortal, but more that if a resource-crisis is coming, then it is coming regardless. This is the maths: If people stopped dying, the world would start to fill up a little faster. Currently, some 135 million people are born each year. At the same time, every year around 57 million people die. So 78 million more people per year are coming than going — hence population growth, at a rate of about 1.1%. Now imagine nobody dies: instead of a mere 78 million extra people each year, the world is burdened with all those 135 million babies with no one shifting over to make space for them. The growth rate is therefore instantly pushed up to 1.9%.

But this is lower than the population growth rate seen for most of the 1960s and 1970s, when it was over 2% — and we coped then (albeit with ups and downs). Immortality for all would mean that instead of reaching the 10 billion mark in 2083, as currently predicted by the UN, we might hit it at the slightly earlier date of 2050.

So if we are going to hit a resources crunch, immortality would mean we would hit it a bit sooner. But people who live longer tend to have fewer children (this is the real world trend) — and indeed a fifth of women in many developed countries are already choosing to have no children. So it is possible that we would adjust to immortality by foregoing offspring. (Not that I’m advocating such a world, having two small daughters who I would not want to forego!)

Lake Vostok is one of the largest freshwater lakes in the world: about the area of Lake Ontario, and much deeper. But you’ve never seen it. Neither has any other human being. That’s because it’s almost four kilometres under the East Antarctic Ice Sheet, kept liquid by the pressure of the ice above it. And it’s been in complete isolation from the rest of the world for millions of years – since before the evolution of mankind.

But we are probably just weeks away from penetrating this lake for the first time. In November a team of Russian scientists and engineers will return to Antarctica to take the last step in a decades-long effort to drill to the lake. They are just metres away already. And when they break through, the secrets of the most pristine and remote wilderness on earth will be revealed – a discovery that many in the scientific community wish could be left unmade.

To see this article as it ran in Discovery Channel Magazine, click here: 21. BIG DRILL

Vostok is so remote we only became certain of its existence after analysing satellite data in the 1990s, following curious British radar soundings 20 years earlier. It so happened that it was directly underneath Vostok Station, a facility the Russians had set up in the 1950s.

The Russians, without knowing there was a lake there, had been conducting deep drilling for ice cores since 1970, and continued towards the lake before stopping in 1999 amid concerns about contaminating the lake. Progress would be halted for eight years of debate with the international community, but drilling resumed in 2005 and last February reached 3,720 metres – probably about 50 metres from the surface. Then, tantalisingly close, they had to fly out on February 6 to get the last plane out before the winter set in.

So what do we know about Vostok? “We know this is the largest sub-glacial lake in the world,” says Valery Lukin, head of the Russian Antarctic Expedition. “We know the character of its coastline, the thickness of the ice sheet, the thickness of the water and the sedimentary rocks.” He says the lake has been untouched by any external force for “many millions of years. I believe the lake was formed before the glaciation epoch in the Antarctic – and that took place 35 million years ago.”

We don’t know, but can estimate, exactly what the water is like: Lukin believes there is an upper layer of fresh water, and beneath it a layer of mineralised water, with geothermal activity beneath it. “We assume the surface layer is very rich in strongly dissolved oxygen, which kills all living organisms.” But not the layer beneath. And that’s where things get interesting.

Ice cores taken from above the lake – so formed from frozen lake water below, not glaciations above – have shown some very strange findings. “In the cores we have detected bacteria – the same sort of bacteria which inhabits very hot water,” Lukin says. It’s similar, he says, to bacteria found in the geysers of Yellowstone national park, or the smoking underwater cones along the mid-Atlantic ridge. Not what one would expect here: Vostok Station is home to the lowest temperature ever recorded on earth, minus 89.2 ̊C.

Reaching the lake, and learning from it, brings together an eclectic cast of characters. Lukin, who has headed the Russian Antarctic Expedition for 21 years and has had direct involvement with Vostok since 1994, spent the first 20 years of his career as an oceanographer, once leading a landmark US-Russian expedition to the Weddell Sea that established a station on drifting ice. Today he is more of an administrator, co-ordinating matters from St Petersburg, and will not be at Vostok for the breakthrough.

The team on the ground is typically of 10 people, eight drillers and two glaciologists, who will work in shifts 24 hours a day on the drilling (if you stop, it freezes in the borehole). The man in charge of the drill, and of all operations on the ground, will be Nikolay Vasiliev – not a scientist or a polar explorer but a drilling specialist from the St Petersburg State Mining Institute. The two glaciologists assist the drillers with knowledge about the ice, and then examine the cores. “I make preliminary measurements to determine the total length of the ice core, and the depth of the borehole,” says Alexey Ekaykin of the Arctic and Antarctic Research Institute, one of the glaciologists who has served on previous teams and should go back in November. “Then I cut the ice core into samples, and measure properties such as electrical connectivity.”

Another key man, not on the ground in Vostok, is Sergey Bulat, a molecular biologist from the Petersburg Nuclear Physics Institute. Pulling bacteria out of an ice core is a treacherous business: there’s the constant risk of contamination from drilling fluid and from the handling of ice on the surface. Interesting things are often found in ice cores, but unless it can be proven that they are not caused by contaminants, they are not much use. Bulat created a database of contaminants so as to eliminate them; it’s through his approach that we know about the hot spring-like bacteria in the lake, suggesting hydrological activity and the likelihood of life. “If we find something, it will be a real discovery,” says Ekaykin. “On the other hand, we do not know of any ecosystem on our planet which does not contain any kind of life. So if we do not find anything in the lake, that’s also a great discovery.”

There are plenty who believe we shouldn’t be looking at all – or not yet. Claire Christian of the Antarctic and Southern Ocean Coalition acknowledges the great scientific merit in understanding Vostok. “However, because these lakes have been isolated from the outside world for so long, there is a real danger that the act of exploration itself will damage the very characteristics or organisms that researchers are most interested in,” she says. “There is no rush to penetrate any of the lakes.” Vostok is actually one of dozens of sub-Antarctic lakes, though by far the biggest; ASOC advocates technologies be tested on smaller lakes first. It also questions why Russia is using “an old dirty borehole” rather than a new one drilled with the latest technology.

There are four methods of deep drilling in the world: Russian, European, American and Japanese. The first two are more or less the same and use a mixture of kerosene and Freon as drilling fluids, whereas the US system uses hot water – the system ASOC would rather see used, citing US-led academic findings. Lukin disagrees. “I am certain hot water drilling is more harmful, and brings more contaminants, into the sub-glacial lake,” he says. He explains that when the drill finally breaks through to the water’s surface, it will immediately be withdrawn, and pressure will push lake water up the borehole. Since kerosene and Freon are lighter than water, and cannot mix with it, the contaminants will not enter the lake. Lukin cites the accidental breach of a sub-glacial lake in Greenland by Danish drillers, who were also using kerosene, as an illustration the technology works.

The drilling itself has got a lot more difficult at greater depth. “The properties of the ice are changing as the temperature changes and we approach melting point,” says Ekaykin. Lukin says crystals here can reach three metres in diameter. “Nobody in the world has faced crystals of such size,” he says. “It is very difficult.” Indeed, in an event that worries environmentalists, in October 2007, a drill was irretrievably lost, requiring a new divergent borehole to the sunk. That original drill’s still there, trapped in the ice.

So what’s next? In November the team of drillers and scientists will begin a long, long journey south from St Petersburg, first to Cape Town, then by plane or ship to Novolazarevskaya Station near the Antarctic Coast, then by small Canadian planes to Progress Station, and finally on to Vostok. “They will spend some time reactivating the borehole and install new instrumentation in the drill system,” says Lukin. “In the beginning of January we will start the drilling operations proper. We believe we will be successful this season.”

When the water rushes from the lake into the borehole, it will swiftly freeze. It will probably be the next season, 2012-13, before the team can go back, extract a core and learn about the lake’s secrets. The following season, the intention is to lower some measurement systems into the lake to learn more. That’s when we should discover if there’s life down there – possibly something we’ve never encountered before.

The team are trying to remain sanguine. “For me, I am not in a hurry,” says Ekaykin. “If we have one more year to prepare, that’s not a tragedy at all.” He also manages to make life at this most desolate of locations sound bearable. “It’s not that harsh in the summer. Minus 15-20 in the daytime, minus 25 at night. And it’s not very windy.” But there’s a palpable sense of expectation.

Arguments about the ethics of the program will rage long after breakthrough takes place, but the Russians are not cowed. “It is human nature that we want to explore unknown objects,” says Ekaykin. And Lukin has a different take. His interview has been conducted through a translator, but at the contamination question he grabs the phone and speaks in English. “Tell me,” he asks. “Did the Americans worry about contamination when they went to the moon? Please write this.”

SIDEBAR: How others do the drilling

The Russians are far from the only group to have tried drilling in Antarctica. Many recent initiatives have been led by New Zealand, which runs the Scott Base that supports much of the scientific research conducted in Antarctica during summer months.

One of the most significant is ANDRILL, for ANtarctic geological DRILLing, a collaboration between New Zealand, Germany, Italy, the UK and US involving more than 200 scientists and researchers so far. This project’s mission is to drill back in time: it extracts cores to reveal the history of glacial and interglacial changes that have taken place in Antarctica – and to help model scenarios of global warming for the future.

Antarctica New Zealand manages operations and logistics for Andrill, while the scientific research is coordinated through the University of Nebraska-Lincoln. In 2006 and 2007 near McMurdo Station it drilled through ice, water, sediment and rock to recover two cores of up to 1,200 metres, representing some 20 million years of geological history. Scientists have been analysing the cores ever since, and have learned that the West Antarctic Ice Sheet was much smaller during a period of warm global climate – “similar to those projected to occur within the next 50 to 100 years,” says Richard Levy, senior scientist and Andrill project leader. Andrill is now preparing to drill to ice and sediment reflecting conditions 24 to 45 million years ago at a new project called Coulman High, with drilling expected to begin in 2014-15.

One notable characteristic of the Andrill program is that is uses hot water drilling, as opposed to the kerosene and Freon mix used by Russian drillers. At Coulman High they will melt a hole through the 260 metre Ross Ice Shelf. “We melt snow to produce the initial water required to melt the hole through the ice shelf, and then pump sea water through the system to maintain an open hole once we have penetrated the bottom,” Levy says. They then lower a steel pipe through the hole down to the sea floor, to accommodate the drill.

INDONESIA

Indonesia dominated the Asian dollar capital markets this week, with a well-received $1 billion sovereign sukuk rapidly (some would say alarmingly so) followed by another $1 billion benchmark from state electricity company Perusahaan Listrik Negara (PLN).

The seven-year sukuk was priced on Tuesday morning Asia time and gave a clear demonstration of how positively Indonesia is now seen in world markets. It priced at 4% (strictly speaking this is a profit rate rather than a yield, since this is an Islamic security), the tight end of 4-4.125% guidance. It was widely agreed that the tight pricing reflected an assumption that Indonesia, rated Ba1/BB+/BB+, with a positive outlook in Fitch and S&P’s cases, will be upgraded one more notch to investment grade. It formed a sharp contrast with the 6.29% Italy paid for a Eu3 billion five-year bond on Monday – Italy is rated A2 by Moody’s.

“The good news is in the price with regards to the rating,” said one banker. “Indonesia certainly trades like an investment grade sovereign. People feel very positive about how the future looks down there. But an upgrade is not going to result in a dramatic tightening of yields again; ratings need to catch up with reality.”

Those close to the deal say it attracted a $6.5 billion order book. “4% was an excellent outcome for them considering their last deal was 8.8% in 2009,” said one. “Seven years is a respectable maturity profile. Everybody is pretty happy with that.” The choice of maturity reflects the fact that Middle East investors, who were key to the transaction, prefer shorter-dated bonds, ideally five years; since the issuer wanted funding of up to 10 years, seven was seen as a sensible compromise. Middle East investors accounted for 30% of the deal, and had been a clear target, with a roadshow that visited Riyadh, Doha, Dubai and Abu Dhabi. Indonesian investors took 12%, the rest of Asia 32%, the US8% and Europe 18%. Funds took 59% of the deal. Citi, HSBC and Standard Chartered were lead managers.

It is harder to demonstrate that the deal’s success was down to a growing conventional investor appetite for sukuk, though some believe that it was a contributory factor. “There was a strong bedrock of interest from Middle East and Asian sukuk-specific funds, but conventional players also recognised the quality of the issuer,” said one person close to the deal, who estimated that 40% of the book were conventional investors but stressed there was some guesswork in that number.

The PLN deal was a $1 billion 10-year offer which priced on Wednesday morning Asia time, led by Barclays Capital and Citi as joint bookrunners. It priced at a yield of 5.625%, the tight end of 5.625%-5.75% guidance (a coupon of 5.5% with notes reoffered at 99.054). Some in the market considered this cheap, particularly in light of the sovereign sukuk; but S&P rates it one notch below the sovereign at BB (unlike Moody’s and Fitch, who have it at Ba1 and BB+ respectively), suggesting a slightly weaker credit than the sovereign, in addition to which the PLN deal carried a longer tenor. It is the lowest coupon PLN has ever paid for a dollar bond and represents a 150 basis point spread over comparable-tenor conventional sovereign debt.

Despite its proximity to the sovereign deal – something another banker in the market described as “breathtaking arrogance in timing” – it attracted considerable interest, with $5.5 billion of orders from more than 200 accounts. Those close to the deal say it was not simply a method of mopping up excess demand from the sukuk, since the two were marketed in very different ways as reflected in PLN’s final distribution: European investors took 21% and US investors 35%, far higher than in the sukuk, while the Middle East was not a significant source of demand for PLN. Fund managers accounted for 64%, insurers and pension funds 19%, banks 7%, private banks 6%, and central banks and others 4%.

Those close to the deal say the timing was partly coincidence; a necessary revision to the documentation had only come through late on Monday New York time, and the bond was issued swiftly thereafter to take advantage of a brief window. It did, though, probably have an impact on the aftermarket performance of the sukuk, which started out trading up and dropped below par in the wake of the PLN issue (which traded up).

Structurally, the deal was interesting because it did not use a special purpose vehicle, as most Indonesian companies do and as PLN previously has. The SPV structure avoids a withholding tax charge, but PLN’s government ownership rendered that somewhat irrelevant. Ditching the SPV opened it up to a greater range of investors, according to people close to the deal.

IILM

The International Islamic Liquidity Management Corporation, a body designed to issue short term Shariah-compliant instruments to foster better liquidity management among Islamic banks, will issue its first bonds within “the first six months” of 2012, according to Dr Zeti Akhtar Aziz, Governor of Bank Negara Malaysia.

Dr Zeti was interviewed on Tuesday in Kuala Lumpur, one day before a crucial IILM board meeting that was expected to move the body closer to its first issuance. She said the meeting should approve the parameters for issuance, including allocation of assets against which the issuance will take place, and the appointment of primary dealers who will make the market. “We are very close,” she said.

In the wake of the financial crisis, many Islamic finance leaders – Zeti prominent among them – conducted a study of the industry to establish what risks it faced and what to do about them. The lack of liquidity was one of the main findings and led to the formation of the IILM in late 2010. “We saw during this crisis that liquidity became an important issue,” she said. “With the internationalization of Islamic finance, cross-border flows require short term instruments to effectively manage, not only in stressful conditions but in normal times.”

Zeti said there will be a program of issues like to be around $2 billion to $3 billion apiece, with regular issues through the year. A first issue will be smaller, “to test the system”. Issues can come in a number of currencies but are initially expected to be in dollars; the first, pilot issue, is certainly expected to be in the US currency. “They will be high quality short-term liquid instruments and will be in demand by other funds managing portfolios – even conventional,” she said.

Issuance will be from IILM itself, which is a corporation established and backed by 12 central banks (Indonesia, Iran, Kuwait, Luxembourg, Malaysia, Mauritius, Nigeria, Qatar, Saudi Arabia, Sudan, Turkey and the UAE) and two multilaterals (the Islamic Development Bank and the Islamic Corporation for the Development of the Private Sector) as shareholders. It is understood that a formal rating will soon be announced for IILM, a vital precursor to issuance and something Zeti described as “a long process”.

The need for IILM is likely to become particularly acute if world capital markets lock up in the wake of problems in Europe. “Almost the entire world uses Treasury bills: they are highly traded and can be used to manage the liquidity of any portfolio or any financial business,” she said. “For Islamic finance, there is no sovereign that issues short term paper of that nature, and therefore IILM was established. It took us two years of work.”

Other founders agree the start line is near but that there is more to be done. “We are still crossing the Ts and dotting the Is,” said Malam Sanusi Lamido Sanusi, Governor of the Central Bank of Nigeria. “There are still issues in terms of the rulings of the Shariah Council on what we can and can’t do and how it will be structured. We’re still going through the process of structuring IILM to get the kind of rating we would like to have. It will take a little time for us to be out there.”

NIGERIA

Nigeria is set to become a fixture in the Asian debt capital markets with plans for a Malaysia-domiciled benchmark sukuk and possibly a dim sum bond next year.

In an interview in Kuala Lumpur, Malam Sanusi Lamido Sanusi, Governor of the Central Bank of Nigeria, said the country had been receiving advice from HSBC and CIMB on a sukuk, although the banks had not been formally appointed onto a deal. “We would like to see if we can issue a sukuk next year,” he said, probably in the second half. “We think that anything from five to seven years should be good for an initial offering, with the amount $700 million to a billion. That gives the kind of liquidity you want, and it also fits the tenor for most of the Arab funds who are not interested in 10-year instruments” – a consideration which also affected the choice of tenor in this week’s Indonesian sukuk (see separate story).

“The European funds tend to go for longer tenors, the Arabs for shorter, but given where Europe is, it makes a lot of sense to structure something to the areas that have a lot of liquidity,” he said.

But although Middle East investors would be targeted, Sanusi said the sukuk would “most likely” be issued out of Malaysia. “The central bank of Nigeria has had a very strong relationship with Bank Negara since I became governor,” he said, partly because Nigeria had recovered from a domestic banking crisis by studying Asian responses to the financial crisis there and had decided Malaysia was the best role model. “The Malaysian Islamic finance market is obviously the most advanced at the moment in terms of product, size and innovation, and the natural place to be.”

As with many sovereign sukuks, the hope in Nigeria is that it would prompt corporate issuers to follow. “Capital markets generally work better if you have a sovereign benchmark, that’s my view.” He also said that sukuk markets appeared to show better pricing than conventional finance. “Italy is paying 7%, so if Indonesia can raise at 4.125%, that’s a reflection of the liquidity in the sukuk markets. There is increasing interest: once conventional fund managers accept sukuk it is almost a no-brainer, as a sukuk targets both conventional and Islamic investors so you’ll probably have tighter pricing.”

He said the likely projects that would underpin the sukuk would be infrastructure, and could include aviation assets.

Sanusi also said that Nigeria’s recent decision to put 5-10% of its reserves into RMB could pave the way to a dim sum bond. The shift in reserves, he said, “is a strategic decision and recognizes the fact that China has become a major trading partner for us. It recognizes the possibility of Chinese investments in infrastructure coming in to Nigeria, and opens up for me, from a central bank perspective, the possibility of coming to the RMB market for dim sum borrowing.”

He said there was a natural argument for RMB funding. “Think of it theoretically. If we agree to accept RMB in payment for oil sales to China, you immediately generate RMB cash flows. If you have long term contracts to supply crude oil to China, you could securitize those, and raise dim sum bonds; that pays for what infrastructure investments you require from China.

“You hedge the currency risk, you get finance, and come to a very liquid market where the yields are lower and the spreads tighter than you would get in Europe at this point in time.”

A wish to avoid risk-averse European investors as a source of funding appears to be driving these moves towards Asian markets. “It is extremely important for the country to look to Asia as one likely source of borrowing,” he added. “That’s why the sukuk market in Malaysia and dim sum market in Hong Kong are markets we believe Finance [the Ministry of Finance] should be looking at.”

BEA

The Bank of East Asia’s China subsidiary has issued RMB3 billion of financial bonds in China’s interbank bond market – the second tranche in a RMB5 billion program, following a RMB2 billion launch in March.

The interest rate was set at 4.81% for the two-year bonds, which provides a reflection of how market sentiment has changed through the year; the first tranche, with the same tenor, priced at 4.39%, albeit for a larger volume.

The joint lead managers on the deal were ICBC, CICC, UBS Securities and Bank of Communications, with CICC as bookrunner. They sold the bonds only to institutional investors.

Gold is supposed to be the ultimate safe haven asset: the commodity that keeps its value when all around is falling. Why, then, did it fall through September when global markets were in their worst state since the global financial crisis?

Gold lost more than US$300 per ounce in the second half of September. Having hit an all-time high of US$1,900 an ounce in April, at the time of writing it was at US$1,627. There had been fears of a bubble following gold’s precipitous rise in US dollar terms (a crucial distinction – for Australians, the climb in their own currency wiped out much of those gains) over the last two years; does this represent the popping of the bubble, and time to get out?

Gold professionals think not. Terry Hanlon, president of Dillon Gage Metals, a US commodity dealer, says declines in gold (and also silver and platinum) were a consequence of people taking profits to offset losses they had made in equities. “Investors who needed to raise cash quickly sold liquid assets, like metals, to do so,” he says. Another reason is that oil prices have fallen, reducing concerns about inflation, which is usually a driver of gold prices since gold is seen as an inflation hedge.

Hanlon believes gold will recover its lost ground, since it is still seen as a hedge against economic downturns in the US and elsewhere. He notes that in October 2008, as the world entered the worst of the financial crisis, gold fell 18%, before gaining it all back and moving up 23% in the subsequent two months.

The private banking community is working out how to position its clients. “Our advice is that gold was bound to have a bit of a correction, because it was becoming exponential in terms of its price appreciation in the last few months,” says Arjun Mahendra, managing director for investment strategy for Asia at HSBC. “But our basic advice is to start accumulating below US$1500 for another burst upwards. It remains in demand as central banks are debasing their currencies and facing inflation.”

Fund managers tend to see the balance of risks to the upside as well. Speaking before the sharpest decline, Blackrock’s director Malcolm Smith, who handles much of the manager’s commodity portfolios, told Smart Money there were four things that could end the bull run in gold, and that he didn’t see any of them on the horizon: a rapid reduction in uncertainty in the financial markets, a rise in real interest rates around the world, a reassertion of strength in the US dollar, and a rapid increase in the supply of gold. “None of them seem particularly likely, therefore the gold price seems supported,” he says. “The question on gold is: do you believe the world economy gets better or worse? If you think worse, then gold is potentially quite interesting. There are lots of investment banks pointing to a gold price about $2,000.”

BlackRock gets its gold exposure through mining names, including Australia’s own Newcrest Mining, which he says has “incredibly strong growth potential, with cash cost of production below industry averages.”

For investors who do want to position themselves for a rebound in gold, equities are worth considering. “There are three reasons you would look at a gold equity over gold,” says Smith. “One is operational leverage: a movement in gold can mean a lot more” for a gold stock. Another is growth potential. “A lot of our focus tends to be on companies that have potential for improvement.” The third is dividends. “Many gold companies to not have a track record of dividends, but you’re seeing it start.”

The other side of the argument is that gold was in a bubble and has further to fall to get out of it. “Gold and precious metals as a safe haven are somewhat overplayed,” says Lee Boon Keng, head of the investment solutions group for Asia for the Swiss Bank Julius Baer, again speaking before the sharpest part of the decline. “They have become not safe havens but speculated commodities. Would I put gold as an important part of my portfolio right now? At this price, probably not.” While gold has fallen since his comments to Smart Money, it probably hasn’t fallen enough to change that view.

So, buying opportunity or the start of a fall? The jury is out – but if you believe gold thrives in periods of economic uncertainty, then the outlook is surely good.

Smart Money was in Washington DC last week for the IMF/World Bank annual meetings. We could describe the mood as toxic, miserable, scared, grim and hopeless. But that would be putting too positive a spin on it.

If the world had been hoping for leadership, and a clear sense of direction out of crisis, then they didn’t get it. There is no shortage of gatherings, groups and institutions in the world today – the G7, the G20, the World Bank, the IMF, the various European bodies, plus of course all of the national sovereigns – but none of them gives any impression of being in charge. Markets, lacking any roadmap they can rely upon to fix the world economy’s many problems, are panicking and falling.

One moment encapsulated the meeting. With the mood at its worst, late on Friday night the G20 – led by France – hosted a press conference. It was packed, as the world’s media waited to hear a message of reassurance and the concrete steps the group would set out for recovery. France’s finance minister and development minister took to the stage and started talking. They talked about a new financial transactions tax; about infrastructure development in the emerging world; about transparency. After half an hour they stopped; they hadn’t mentioned the growing financial crisis once, and became visibly irritated when anybody asked about it. It was like watching an ostrich bury its head in the sand. If the sand was on the Titanic. And the Titanic was on a different planet.

It summed up the sense that the world economy is a car going downhill on a steep mountain road with no driver.

But what does all of this mean for investments? Several themes came out of the meeting, and of market behavior around them:

1. Not only could Greece default, the euro really could collapse. It probably won’t, but the possibility can no longer be ignored. The precise consequences of this are unclear, but anybody thinking of buying into European equities because they look good long-term value might want to wait a little longer for some certainty – and maybe a lot longer.
2. Just because emerging markets have better economic fundamentals than the developed world, it doesn’t mean their markets are invulnerable to global shocks. This perverse logic applied in the 2008 financial crisis and it is happening again: the Singapore dollar, for example, having fallen 8% against the US dollar in about a week having previously soared; and the Indonesian stock market plunging despite the fact that Indonesia has one of the world’s most vibrant economies, built almost entirely on domestic consumption. The US dollar, for all its troubles, remains a safe haven asset and money is returning there during difficult times.
3. Traditional safe havens are not behaving like they used to. Gold fell with all other asset classes, presumably because people have had to liquidate their holdings just to get cash.
4. On its own, the US economy probably wouldn’t go into recession; there’s nothing happening there to suggest the economy would shrink, just grow sluggishly. But the crisis in the eurozone on top of America’s other problems – unemployment, fiscal deficit – may be enough to create the so-called double dip, with the US returning to recession barely two years after coming out of the last one.
5. Remember what happened to the Aussie dollar in 2008? As the world economy floundered, demand for commodities suffered, and assets moved to US dollars for safety, causing the Australian dollar to decline. It’s already starting to do so again, dropping below parity last week, and if we do go back into global recession there will likely be further to go. That said, this time around Australia is a higher rated sovereign credit than the United States, and the case for it as a safe haven is better than ever. If the world investment community does decide the Australian dollar is a safe haven, that should push the currency up, not down.
6. In the medium term, fund managers tend to see good prospects for Asian bonds. Some say Asian equities too, but there’s also a fear that things are going to get worse before they get better.
7. In the meantime, cash is looking rather attractive.
8. And how about Australian equities? Investors will have fresh memories of the market halving over 2007 and 2008. Just like last time, the crisis has very little to do with Australia – arguably even less so. The last crisis was about the banking system, and Australia did have some problems in that area. But the current crisis is about sovereign debt, and Australia has no problem at all in that respect: it is one of the most robust economies in the world. But as we learned last time, when a global stock rout takes place, pretty much everyone suffers, fairly or otherwise. Analysts are already pointing to the good long term value in the Aussie market: Aussie shares now carry a grossed up dividend yield of 7.3%, which looks attractive. But the mood is very much buyer beware.

The architect of the Doha development round has said it would “break the heart of the world” if the Doha agenda is not implemented.

Mike Moore, who was Director-General of the World Trade Organization when the Doha round was launched, and is the former prime minister of New Zealand, said “it would be a great folly to declare the Doha round dead. You’ll never get it up again.” He said that the scope of the Doha round should be increased, without abandoning the original agenda. “We have to keep Doha, and widen it to represent the new realities of the economy,” he said. “We must face 21^st century issues, but not at the expense of 20^th century issues.”

Others backed his claim. “We will literally be crying because we didn’t complete Doha,” said Ernesto Zedillo, Director of the Yale Center for the Study of Globalization, and former President of Mexico. “We will regret that the Doha agenda, which is not only about agricultural and non-agricultural products but about discipline in other aspects of international trade, has not been fulfilled.” But he agreed the agenda needed to be modified.

But Arvind Subramanian, senior fellow at the Peterson Institute for International Economics, said what was needed was a new agenda reflecting the influence of China on the world economy. “No emerging country wants to take down its tariffs when China has its undervalued exchange rate,” he said. “The big development in the trading system is the rise of China, and it’s potentially a threat, which I think we have to respond to. Essentially we need a new China round of trade negotiations that can take on board the Doha round.”

Zedillo said that any trade agenda had to focus on agriculture, which was a driving element of the Doha round. “Agriculture today is more important than 10 years ago because we are creating new middle classes in the world that want to be fed better, and we face demand for food that we have not faced before in history,” he said. “We need the market economy to provide solutions to that.” He bemoaned the “rich countries [that] complain and accuse developing countries for demanding special and differential treatment,” arguing that the rich countries had in fact invented preferential treatment, for themselves, on agriculture in the past. “We will not be able to feed the millions of people that will be living in the next years if we don’t get serious about agriculture,” he said.

Zedillo also called for greater discipline on preferential trade agreements – or “discriminatory trade agreements”, as he called them. “I want a rule-based, reciprocal, universal, zero-tariffs system. That’s the best system for humanity,” he said.

And he warned of the perils of neglecting trade imbalances. “Fundamentally, trade is about international peace and security,” he said. “Economic incompetence can destroy geopolitics and but at risk that international peace and security,” he said.

We all know about gold: it’s hovering around record highs, adopted as a safe haven by investors the world over looking for a place to escape from global market volatility. But what about other precious metals? Australians can also invest in silver, platinum and palladium, but their outlook – and the dynamics that drive their prices – are far less well known here.

Aside from gold, ETF Securities offers exchange-traded funds over silver, platinum, palladium and a basket combining them. While its funds in the less celebrated metals are popular globally – it has holdings worth US$1.8 billion for its global silver ETFs, $1.7 billion platinum and just over $1 billion for palladium – Australians have so far had much less interest in them. The Australian ETFs hold A$75 million for silver, $8 million for platinum and just $2 million for palladium.

Should more investors take a look? First it’s important to understand what drives prices. “Silver is very interesting,” says Danny Laidler, head for Australia at ETF Securities. “It’s 50-50 between being a store of value and industrial usage, whereas gold is predominantly just a store of value asset which goes well when there is volatility in equity markets. So silver has safe haven aspects, like gold, but also offers exposure to economic recovery.” Silver is used in a host of industrial applications, particularly around technology and photovoltaic applications, so any increase in global economic activity is to the benefit of the metal. “Lots of investors are taking a bar-bell approach to recovery: they want to participate in that recovery but are also concerned about risk,” Laidler says. “Taking that approach, silver fits well.”

Silver has, though, had a volatile year. “Earlier this year we saw it go from 30 to 50 [US$ per ounce], and then the margin to invest in silver on the futures market was changed, which caused a reduction in the price,” says Malcolm Smith, Director at BlackRock in London, and in charge of commodity-related portfolios. “Short term movements are quite fitful and it is difficult for investors trying to trade around that. We don’t try to do that: we take a medium to long run view.” His view is positive, although as a fund manager he typically expresses that view through holdings in stocks, particularly in Mexico, which traditionally has dominated silver production. As he points out, the cash cost of production of silver is around $10 to 15, so with silver trading at around $40 per ounce (US$40.58 at the time of writing), they’re making good money.

Platinum and palladium are both vital for automobile production, and specifically the catalytic converters used to reduce vehicle emissions; catalysts in diesel engines usually use platinum, and gasoline engines palladium. Platinum also has a certain precious-metal allure to it – it’s 15 times rarer than gold. Both are particularly concentrated in certain markets: Smith says South Africa is responsible for 75% of world platinum supply, and Russia for much of the rest, while much of the world’s palladium (how much is a debated point) is held in stockpiles in Russia. Smith says platinum in particular, with the uncertainty of supply that comes from one dominant market in Africa, is susceptible to supply issues, which in turn impacts the cost of the metal. Laidler adds that some people buy these metals “to get exposure to BRIC markets,” but notes that the biggest impact in recent months has actually been the earthquake in Japan, since so much automotive production is handled there.

Whatever the drivers, the metals do offer diversification, lacking an obvious correlation to other asset classes. They all tend to perform well during periods of inflation and so, like gold, are commonly used as a hedge against that.

Australians appear to be beginning to show some interest: Laidler says half of the inflows into the silver product have taken place in the last six months or so.

Apart from ETFs, Australians can buy equities exposed to these metals. Australia hosts one of the largest silver mines in Cannington, run by BHP Billiton, although clearly buying BHP gives exposure to a lot more than silver. Pure-play silver miners are more frequently Latin American. Seeking platinum exposure through stocks really requires investing in South African equities, which may be beyond many investors’ risk profile.

It’s also possible to buy silver through the Perth Mint, which sells a wide range of coins and bars in silver, and also offers depositary and storage services. These coins and bars are valued according to spot market prices and there is a ready and liquid market for them.

Also, from next month, a new option will enter the market. On October 4, the Australian Bullion Exchange (ABX), the first physical bullion exchange in Australia, will open its doors.

Similar to the UK’s London Bullion Market Association, the ABX will not immediately be something where retail investors can log in and buy and sell; it is instead an over-the-counter market that seeks to connect buyers and sellers, with that buying and selling only conducted through approved brokers called members. ABX won’t be setting prices in its own right – it will go off international spot prices – but aims to provide “a large liquid market that has not existed in Australia before now,” according to Thomas Coughlin, CEO of the new Brisbane-based exchange. Initially the market will offer gold, silver and platinum bullion, and will offer custodian and storage services as well, with metals secured in a Brisbane vault.

Where this will be relevant to retail investors, Coughlin says, is that “by launching a centralised market, what we’re intending to do is foster competition, which should lead to increased cost effectiveness and accessibility. Our view is that costs in the physical bullion industry in Australia are way too high.” The market’s first phase will link brokers, financial advisors and other institutions; it’s in the planned phase two, a programme called ABX Connect that will link up to trading platforms, that this will probably have greater impact to Smart Money readers. ABX appears a small enterprise at first, launched by a fund manager, an accountant and a lawyer and with just three members of the board at launch (floor members will be offered directorships along the way); but it will be interesting to see how it is used and what investment products come off the back of it.

A major fund manager says he expects a 25% shrinkage in the developed world’s banking systems, as market turmoil increases pressure on an already beleaguered financial sector.

“The financial system has to shrink,” said Peter Fisher, Senior Managing Director of BlackRock, which had $3.66 trillion of assets under management as of June 30. “We want to inject more capital into it to make individual firms stronger, but the system is too large, and my guesstimate is 25% shrinkage in North America and Europe.”

Global banking is in a perilous state. The International Monetary Fund this week calculated that the euro area sovereign credit strain had had a direct impact of around Eu200 billion on banks in the European Union since the outbreak of the sovereign debt crisis in 2010. The European Central Bank has had to lend to banks struggling to borrow in private markets, and downgrades have taken place on both sides of the Atlantic, most recently for Citi, Wells Fargo and Bank of America earlier this week.

The strain is already prompting bankers, fund managers and policymakers to consider how the next bank failures should be resolved, with a range of different opinions on whether any banks should be considered too big to fail, and what the role of the taxpayer should be in any subsequent restructuring.

Thomas Huertas, a member of the executive committee of the UK’s Financial Services Authority, said that previous methods of failed bank resolution had to be changed. “Better resolution is the key to financial stability,” he said. “Old methods don’t work. New ones are needed. Bankruptcy does not work for banks.” Bankruptcy for banks was tantamount to liquidation, he said, with severe impacts on creditors, financial markets and the economy. “Repeating Lehman is not a good idea,” he said. “Nor, in our view, is continuing ‘too big to fail’. This is a policy too costly to continue.”

Huertas called for a “middle way, to resolve failing banks without putting them into liquidation and without taxpayer support.”

His call was challenged by Peter Fisher, senior managing director of Blackrock. “Something that concerns me greatly is whether we can really achieve a point where a major institution may be resolved without any recourse to taxpayer support,” he said. “I know that’s a consummation devoutly to be wished. But at the same time, it doesn’t seem to be practical to both do that, and address ‘too big to fail’. If we round to zero the likelihood the authorities ever have to reach into their own pocket, we will have created a class of institution that can never fail.”

In particular, he said, seeking capital to shore up banks was going to be difficult without confidence about banks’ futures. “Getting investors to pony up the capital is going to be tricky unless you give us the assurance that banks are too big to fail. So we’re bootstrapping ourselves into a position in which we are doubling down on too big to fail, not removing it.”

Both men were speaking at an Institute of International Finance session within which Wilson Ervin, Senior Advisor to the CEO at Credit Suisse, called for wider use of the so-called bail-in approach to bank resolution, an intended middle ground between taxpayer bailouts and systemic financial collapse. Bail-ins would involve giving regulators authority to force banks to recapitalize using private capital from within the bank rather than public money.

Ervin argued that such an approach would not only make for better resolutions, but help to stop bank failures happening in the first place by reassuring investors. “If you can get to a resolution regime that is clear and predictable and preserves value, I think the markets will value it,” he said. “If we can provide assurance we can get to that type of outcome [a bail-in rather than a bail-out or collapse] that would help to calm some of the issues around the financial sector.”

Investors have mixed views about the practicality of bail-in securities, but clearly want no repeat of 2008. “The events of September 2008 that were most traumatic for investors were the treatment of institutions that came into the grasp of authorities,” Fisher said. “It was not simply the loss of value, or that investors lost money. Each time they touched an institution, they touched it in a different way with a different outcome. That created chaos for investors.”

Former Federal Reserve Chairman Alan Greenspan has called upon the US to prioritize reducing debt over stimulus, calling the debt position “the most extraordinarily difficult fiscal problem the US has ever had.”

“There has never been a question about the quality of American sovereign debt since we started in 1791,” he said. “If we had the luxury of waiting, I would say we could probably find a theoretical construction in which we would stimulate today and pay off the debt later.” But he said waiting was not an option.

“My view is, when confronted with an issue like this, you have to ask yourself in a policy sense what are the consequences if you are wrong?” If the US were to pay down debt and to find it wasn’t necessary, he said, “that is relatively easy to readjust. If, however, we assume we have time to counter this problem and we are wrong, then it is very dangerous.”

“I don’t think we can take the risk of not coming to grips with our debt problem fairly quickly,” he said.

Dr Greenspan said that if the US were to return to recession, it would be a consequence of problems in Europe. “If it weren’t for the existence of the euro problem, I would say it would be very unlikely. Though the American economy is confronted with a high degree of uncertainty, it isn’t the type of uncertainty that creates economic declines: it just suppresses growth.”

He described Europe as “the major problem” in the world economy, and appeared to question whether the euro’s existence had been sensible. “It turns out that 1999 [when the euro was formed] was one of those very rare periods in a boom when everything is working, including the euro,” he said. “I recall when the euro was about to go into play, I said: I don’t believe it, they made it work.” But it was predicated, he said, “on the conventional wisdom that Italians would henceforth behave like Germans. And here, I think, was a gross underestimation.”

“What we’re seeing now is a pulling apart of northern and southern Europe,” he said. “Northern Europe is essentially lending to southern Europe, and the question is, either there is fiscal consolidation – which implies political consolidation – or something breaks.

“Markets are telling us they are fearful that something will break, and Greece is weeks away from default unless there is a new tranche of funding.”

In light of problems with the euro, Dr Greenspan said there were lessons for emerging economies. “I would say it’s essential that they maintain flexible exchange rates,” he says. “If your exchange rate is weakening because investment policy is not good, then adjust that, but don’t try to artificially lock yourself into a stronger currency in expectation that the benefits of the stronger currency will flow to you without cost.”

In other remarks, Dr Greenspan criticized Obama administration policies based around job creation. “I have a problem defining a goal of government policy as jobs in the private sector,” he said.  “Corporations try to keep their workforces as slim as they know how. They work very hard not to create jobs, but to destroy them.” Government should instead create economic conditions in which businesses have to hire people to meet demand.

Asked about the internationalization of the renminbi, he said “I think it’s many years in the future… At this stage I don’t see the Chinese will perceive it to their advantage to do what is required for the RMB to become an international currency.”