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Politics : Ask Michael Burke

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To: Mike M2 who wrote (60421)	5/23/1999 5:56:00 PM
From: Freedom Fighter	Read Replies (1) of 132070

Mike, I agree with everything you say. I just don't know how to apply that knowledge to the current environment. I can only describe my own thoughts from the bottom up and then from the top down. It's my view that many companies that are currently earning high margins will not be able to sustain them. They have no significant sustainable business advantage that I can find. They have lots of competitors or they are in a constantly changing business. I further think that a lot of companies aren't earning anywhere near what they are reporting. That plus the extremely high prices relative to reported earnings is enough for me to realize that what's going on is outrageous. You simply can't justify these prices on almost any present value, IRR calculation or model. I think the whole Austrian/credit cycle knowledge goes a long way to explaining why we are where we are. But I'm not sure how that helps me determine when or how these forces are going to play themselves out. I understand the deflation argument. But I also fear our debtor position and the fact that foreigners hold over a trillion dollars of our treasuries. I understand the political argument that credit deflation is simply not acceptable in this country and they will print whatever it takes to avoid it. It's also the belief of many of our top economists that you "can" simply print your way out of it. So I am sure they will at least try it. If you combine a flood of new money/reserves with an enormous debtor position I'm not sure you wind up with deflation. You could wind up with a rapidly falling dollar, higher interest rates, and inflation - basically a disaster. That's why I'm less sanguine about bonds than Mike Burke. The end game is not as clear to me as it is to him from an economics point of view. The overvaluation is crystal clear. If you or Mike B. could explain to me why deflation is the much more likely scenario, I might be able to use my limited understanding in a way that is beneficial. For now, almost all my long positions are in companies that I am fairly certain can survive whatever they are hit with. I try to limit my investments to companies with super strong balance sheets, lots of excess cash and essential businesses. I also have a high cash position and few short positions as a hedge. I will survive anything, be in a position to take advantage of anything, and still earn attractive returns as long as I identify the good values correctly from the very small area of possibilities I am looking at. That's been the case over the last 12 years including the last 2 or 3 when I first started getting real defensive. Wayne

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