Good evening to you all. In light of the current environment, we think
it is only fitting to revisit recent comments we made the with respect to
global economic conditions the role of US interest rates. Specifically,
we made the following comments in August:
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"As such, the United States must find a way to both weaken their economic
dominance and strengthen the economies of the world. The simple solution
is an interest rate cut. However, that would have the effect of
weakening the US dollar and driving up global demand for US products,
thus, seriously increasing the potential for inflation. On the other
hand, doing nothing would continue to increase current global
deflationary pressures as weak currency economies continue to export
"cheap" products and import very few finished goods.
Given the fact deflation is considered to be the greater of both
evils,<underline> perhaps a little inflation would be welcomed."
</underline>___________________________________________________________________
The point of the exercise is not to illustrate our prediction of a cut to
interest rates. In fact, that may not even occur tomorrow, as most
investors have speculated.
Rather, it is to illustrate the fact that some months ago it became
obvious that US interest rates would have to be cut if the global economy
was to avoid plunging into a deflationary spiral. More importantly,
<underline>it illustrates the fact that cutting interest rates is not a
solution to the global economic situation</underline>, otherwise it would
have been done months ago.
Having said that, Wall Street has felt the need to drive equity markets
higher in anticipation of an interest rate cut. The logic is that
cheaper interest rates will spur growth through increased borrowing at
the consumer and corporate level which, in turn, will increase
consumption.
We say, hogwash. The only way you can feel good enough about an interest
rate cut to move markets higher, is to feel good about being thrown a
life preserver while the Titanic sinks behind you. Make no mistake about
it, there is no joke intended here. This is a real analogy. If you want
to accuse us of being too pessimistic, than substitute a smaller ship for
the Titanic. Either way, you don't start celebrating until you've
returned safely back to land.
In our opinion, there is no doubt the global economy faces issues the
gravity of which has not been seen in decades. The President of the
United States himself stated the global economic crisis was the most
serious one the world has faced in over 50 years. Much like a person who
has reached obesity, you don't just reach these levels overnight, nor do
you solve them overnight. More importantly, that same person does not
inherit the will to solve those problems overnight. It takes some time
and there will have to be sacrifices made.
To that end, we repeat our comments made in late July:
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CONCLUSION
"The forecast, as we see it, for the next 6 months is not set in stone.
World economies and politicians have the ability to make the type of hard
decisions necessary to minimize the damage, which has been caused by
years of bad credit policy and banking policies. We are just not
convinced they have the conviction.
Thus, it remains to be seen if these tough decisions are made. Nations
are no different from individuals like you. You can be irresponsible
with your finances but sooner or later, you are going to have to pay.
This usually means an individual declares bankruptcy, or makes the hard
sacrifices necessary to stay afloat.
What remains to be seen is what degree of pain and sacrifice several
important nations are willing to make. This is the unknown
variable...and the most important variable, in the next 6 months."
___________________________________________________________________
This is the logic you must deploy in thinking about your investment
strategy in the coming months. If you invest your money in already
expensive equities just because interest rates are cut, you are the
"sucker" in the "suckers rally". The term suckers rally is the term
commonly applied to the recovery period shortly after a stock market
decline but just before an even bigger decline. The more common term for
suckers rally is the "bear market trap", which we have used on several
previous occasions.
If you need more evidence of real concern in the future of this market,
the consider the following:
1] As reported a couple of weeks ago, Warren Buffet's investment
company, Berkshire Hathaway, is holding more cash today than at any time
in its history. If the greatest investor of our time was a strict
adherent to "buy and hold", then why is he now holding so much cash?
2] It was reported only hours ago that Goldman Sachs & Co., Wall
Street's last remaining large private securities firm and one of the
largest underwriters of IPO's, has abruptly canceled plans to go public.
Originally, it was thought the Goldman IPO would only be delayed a few
months but the firm's co-chairman stated "we made this difficult decision
after full consideration to the volatile state of global financial
markets".
If the biggest players in the markets are holding their cards to their
chest, what should you be doing?
Have a good evening.
Regards,
Agora.
The Investor's Investor. Published by Agora International Enterprises Corp.
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