I guess I can post the full contents of my newsletter from last week:
Long Term Plans
The days since September 11, 2001 have almost been a blur. On one hand so much has happened in so little time that the past month seems like an eternity. At the same time, the mood of the world changed in an instant. As news races around the globe 24/7 at breakneck pace, many of us have re-evaluated everything, from our lives to our investments. The fact is that in less than 18 months, life as we know it in North America has gone from Heaven to Hell. It's almost as if we are living day to day in some kind of diabolical plot that could only be hatched by a James Bond-style bad guy. It's almost hard to believe that what we see on TV is even real.
No matter what happens, we still have our lives to live. And for those who have investment portfolios and retirement accounts, the foreseeable future is going to provide challenges that we have not seen in at least a decade or more. Short-term interest rates are plunging, adding to the suffering of those who live on fixed income investments. At the same time, moving to long-dated Treasury bonds in search of yield might not be a solution either, as the eventual result of monetary and fiscal stimulus could be quite inflationary a few years down the road. What is the investor to do?
After twenty years of disinflation, the chief beneficiary of which was financial assets such as stocks and bonds, we are likely turning the corner. While I know that there are many doomsayers out there who are predicting the end of the world in a gigantic depression, observations of how other countries have dealt with their economic problems suggest overwhelmingly that if given a choice, governments almost always take the path of least resistance - inflation. We don't have to go over the list of countries for the fact is that austerity/depression is not as politically acceptable as printing money/inflation. While both are bad, the pain of inflation is less, certainly at the beginning. Also, central bankers know exactly how to stop inflation, but it is not so clear for deflation. This brings us to what investors need to do. We need to prepare for the worst case scenario. It's no different from trading - expect the worst, hope for the best, and deal with whatever comes. In order to make a plan, we need to assess the current world situation. While I am obviously not qualified to render a geopolitical opinion regarding the present conflict, there are some simple observations that can be made, and we can use this to project some scenarios.
All of us have read the newspapers and watched CNN. It is quite apparent that there is no common ground between the combatants. There are differences in language, culture, religion, race, political system, values and wealth. How much more diametrically opposed can the two sides be? There will be no political solution possible, which only leads to one other question - how long will this go on for, and what are the consequences of protracted, and even broadened military action. This is the worst case scenario.
THIS WAS THE SUBSCRIBER PORTION:
All Hands to Battle Stations
Many of us in North America have been fixated on questions such as "why do they hate us so?" but perhaps the indoctrination is so old that nobody even really knows the reason anymore. Perhaps a long time ago, people simply stopped explaining the reasons to successive generations and institutionalized hate. It somehow become, "hate, because we told you so." In order to justify the position, maybe some B.S. reasons where made up on along the way as a smoke screen.
Even in the Arab world, there seems to be confusion. For example, the rejection and uproar over the $10 million check for the Twin Towers Fund shows us that even the nephew of the Saudi king, the sixth richest person on the planet, might not really "get it". Not only did he not understand the psyche of Americans by blaming the rejection on "Jewish pressure", he did not demonstrate any understanding of the mission of Osama bin Laden by asking the U.S. to re-examine it's foreign policy towards Palestinians. The idea that the roots of terror begin with the Arab/Israeli conflict and the lack of a homeland for the Palestinians has somehow caused Osama to bomb New York is echoed by the region's leaders over and over again. While they are absolutely correct to say that that the problem needs to be solved, and indeed should have been solved years ago, I bet you anything that if I could wave a magic wand and all is healed in Palestine, the Taliban will still be at it. With each new tape aired by al Jazeera, more demands are made - stop the sanctions against Iraq, and the latest one is the resolution of the problems in Kashmir. This is not a beauty pagent where contestants chant the mantra of "Peace on Earth" before the terrorizing of America stops. The demands seemed to be designed to pander a la Robin Hood to the long-suffering people in many Islamic countries so that he can gain support for his real agenda - the creation of a global Islamic state where only their brand of Islam is allowed, and woe to others. Notice that the opposition Northern Alliance is made up of Muslims too. How does he explain that one?
I have read many things this month, but no one has addressed what I am about to discuss, and this is one of the reasons why this war will likely be a long one, and that will change the economic landscape as far as the eye can see. If we look at most of the "West", we find governments that are selected by the people. While the system may not be perfect, those who are unhappy with it have to admit that it's not bad. One person, one vote, and we overthrow the government on a scheduled basis. By extension, we can infer that these duly elected governments, while they might have their own agenda from time to time, generally act on the behalf of and largely reflect the aims of the citizens that put them in power. The leaders are held accountable at the next election. Between elections, people agree to disagree and compromise in order to get things done. I believe this is called democracy the last time I checked the dictionary.
Enter the likes of the Saudi Prince and other rulers of the Middle East. Maybe the problem is in the leaders themselves. After viewing countless images of violent demonstrations in countries like Egypt, Nigeria, Indonesia, Iran and Pakistan, don't you wonder why it is that their leaders say one thing while the population apparently thinks otherwise? Sure, perhaps the CNN cameras seek out the vocal minority, but what if they actually reflect the majority view? Last week, in a poll of middle-class Saudis, it was found that 100% of the women and 85% of the men actually approved of Osama bin Laden, while the Saudi government stripped him of citizenship years ago and sent him into exile. Last night, I saw on CNN that a poll of Pakistanis found 83% of the respondents sympathized with the Taliban rather than the U.S. and 82% considered Osama bin Laden to be a holy warrior, while their dictator simply switched sides a few weeks ago as the Taliban they helped rise to power became uncontrollable.
Let's think about this. We ask ourselves a simple question: How many Islamic nations have duly elected democratic governments? BINGO! You mean, could it be that the rulers of most of these nations might actually be guilty of not acting on behalf of its citizens or reflecting their will? Many of the rulers even come from ethnic minorities. If their citizens had a choice, would people like Saudi King Fahd, the uncle of Prince al-Waleed bin Talal be in power? Or King Abdullah of Jordan? Or Pakistan's General Pervez Musharraf? Or Indonesian President Megawati Sukarnoputri? They have sided with the U.S. on the world stage on the issue of terrorism and Osama bin Laden, but are they doing it at the behest of their citizens, or is it because their wealth and power depends on U.S. support? Could it be that mass demonstrations accurately reflect what's on the minds of their poverty-stricken citizens who don't support their government in any way, shape or form? This reconciles what we see before our very eyes on TV. They have to say one thing to keep the people happy, and something else to keep the U.S. happy, because the truth is that they have become dependent on the U.S. And that makes them sworn enemies of Osama bin Laden. This gives new meaning to the words "caught between a rock and a hard place" and sets the stage for what could be a domino effect all over the Middle East as the Taliban begins their call to arms for believers to "defend their homeland and Islam". Of course, they should think twice before answering the call, and seriously consider the lifestyle of the folks in Afghanistan, since this is what they'll be getting should the Taliban win. However, this line of logic will not appeal to the ordinary citizen as they are already oppressed, hopeless and have nothing to lose. It's starting to look like an old fashioned civil war, albeit a global one - a war between the haves and have-nots. Arguments based on differences in culture, religion, race will be used to polarize individuals, used to invoke hate and fury in order to justify killing, but it will not change the fact that these are mostly rationalizations.
That's my analysis in a nutshell, and it would appear that no solution will present itself any time soon. The elimination of the Taliban might buy us some time, but this will not be easy. For the foreseeable future, the war will be on and perhaps even escalate. One feels a sense that it's a war of the worlds that has just begun. I certainly hope that I am wrong. For the U.S., should its citizens decide that the war is a big waste of time, at least we are living a continent away, and could theoretically quit, seal ourselves off, and let them kill each other. The Europeans won't be so lucky, and so, in the end, the West will be called upon to defend itself. This demands our continued involvement until the "bitter end", and that is something both sides can heartily agree upon.
During the economic expansion and the Net Bubble days, a lot was said about the change in the amount of economic output from industrial production to knowledge work and the service sector economy. After the Net Bust, the web sites died, and so did the jobs of the graphic designers, programmers, system administrators, and it took the entire tech sector with it. After September 11, the jobs in the service sector supporting the consumer lifestyle shut down. Say goodbye to travel, eating out, next season's fashion craze, etc. Discretionary spending died on the spot. At the same time, demand for security has skyrocketed, and in a protracted conflict, the supplies of war will need to be produced en masse. Even without a long war, the people of North America will demand a military buildup.
Could this be the start of the old-economy kind of industrial production that allegedly became extinct in the New Era? If so, we can turn the clock back nearly thirty years to the early 1970s. Long time readers of our opinion will know instantly that we consider the top of the market in 2000 to be a "secular" one, a once in a generation kind of thing. We have repeatedly made comparisons of present day market action to the 1966 - 1973 secular top. Over the next few weeks, we will examine two terms long forgotten: inflation and deficit spending. |
