April 2003 Newsletter
Issue Four, Volume Four

THE WORLD WE LIVE IN

By Mike Gasior

I thought I would spend some time this month discussing global issues as well as some important economic developments that occurred during the past few weeks. Needless to say, I am impressed and somewhat surprised that the war in Iraq actually managed to begin and end in between my monthly newsletters. I was stuck in the middle of a fairly miserable commute from Manhattan to Connecticut the other night when I heard a pretty funny line from a comedian on the radio about the "Shock and Awe" campaign, although I don't know if me writing it for you will be nearly as funny as his delivery but I'll give it a shot.

With regard to the "Shock and Awe" campaign: the Iraqis were shocked, and the Iranians, Syrians, North Koreans, French and Germans said "Awe MAN!! We forgot what bad a**es those Americans are!!"

A note I received from a friend in Grand Cayman summed up the amazing world we are all living in. Could you have ever imagined a time when:

--The best golfer in the world would be a black man.
--The most popular rapper in the world would be a white man.
--The tallest guy in the NBA would be a Chinese man.
--That the French would be accusing Americans of being arrogant.
--That the Germans actually wouldn't want to go to war.
--And that the three most powerful men in the U.S. would be named Bush, Dick and Colin?

Even though the conflict in Iraq has eased some of the uncertainty that seems to plague the world at the moment, there are still lots of things worth thinking about, and I'll get right to work on a few of them.

A FIFTH TERM FOR GREENSPAN

Although I called for Chairman Greenspan's resignation in my December 2002 edition Mr. Greenspan is still squarely in control at the Federal Reserve and President Bush made comments last week that seemed to signal that Mr. Greenspan will be offered a fifth term as Chairman.

I made my beef with Mr. Greenspan clear in December and I don't want to rehash all my reasoning here four months later. The summary of my thoughts is that I believe that Mr. Greenspan is now too concerned with what his legacy will be and not with what might actually be best for the United States economy.

In my seminars and in this newsletter I have been trying to warn my American friends that there are important lessons to be learned from what has happened in Japan over the past 15 years. Mr. Greenspan is well aware of the Japanese condition and yet he seems to be following some of the same drastic paths that they have followed. Currently the Fed Funds rate hovers around 1.25%, which is the lowest it has been in basically 40 years. The economic reason that central banks like the Federal Reserve drop interest rates is to help stimulate individual consumers as well as corporations into borrowing money to spend on goods and services, thus perking up the economy.

The interest rate that Japanese banks can borrow directly from the Japanese Central Bank is currently 10 basis points, or .10% and has been hovering at nearly zero for almost 5 years now. Even with rates this low Japanese consumers and corporations have not been lured out of the spending hole they have crawled into and their economy continues to show no earnest sign of recovering anytime soon. My belief is that there are definitely lessons for Americans to be learned from this but it has so far been largely ignored.

It completely baffles me to see the Fed continue to make noises that they will drop rates further if there are not signs of economic recovery soon, and I worry that with so few interest rate bullets left in their gun they should be more cautious in using them. My comments in December mentioned that between 1997 and 2001 the Fed has injected over $3 trillion newly minted dollars into the money supply. The only reason to do this that makes any sense is to try and create some sort of inflation. This would simply mean that Greenspan was already concerned in 1997 that consumers (who make up about 66% of the economy) would not be able to sustain their spending long term. I never accused the man of being stupid and I actually believe quite the contrary. What I do believe, however, is that he might actually be too smart for his, and our own good.

Dropping rates to induce further levels of debt will only exacerbate an already scary situation. Let me remind you of some simple statistics.

Combined Federal, Federal Agency, Municipal, Mortgage Related, Asset Backed, Corporate and Money Markets debt:

1990 - $7,745,400,000,000
2002 - $20,170,100,000,000

That change represents a 260.4% increase in the debt these institutions are carrying.

Unfortunately the level of consumer debt increased during this identical period in excess of 300%.

All of this borrowed money is going to leave the United States with an extended hangover and unwillingness to go into further levels of debt. This is why I predicted almost three years ago that we were not only going into recession, but that the recession was likely to be a prolonged "L" shaped recession and not the down and dirty "V" shaped one that passes quickly.

This might also cause the U.S. stock market to suffer for an extended period somewhat like our friends in Japan who have been bleeding badly for 15 years. As a matter of fact, if you overlay the beginning of the Japanese bear market starting in 1989 with our stock market performance since 1999 they look like twins...at least for the first three years and change. I hope the chart does not continue to follow the Japanese pattern for the next 10 years because we will then learn what real pain feels like. I don't honestly believe that is what is going to happen, but I do believe there are LESSONS to be learned from the Japanese even if our situation is not exactly a parallel one to theirs.

But we all know those who don't know history are doomed to repeat. Mr. Greenspan is keenly aware of these histories yet seems to think there is no application for the U.S. economy. I happen to disagree and continue to hold the opinion that Chairman Greenspan must go and the sooner the better. The U.S. financial markets seemed to take comfort in the news that he would be staying on for a few more years, but my voice was not among the cheers.

JAMAICA GOING OUT OF BUSINESS?

It was reported last week that there is imminent worry that Jamaica may default on their debts and the value of their bonds tumbled in response to the worry. When you read the statistics they sound extremely scary and very grim. The national debt of Jamaica has grown to 152% of their GDP and 65% of ALL the money their government spends is on interest for the debt. Standard & Poor's already has B+ rating on the debt (junk level) and Moody's just announced that they were putting the bonds on "watch" for a possible downgrade. Like most politicians, the Jamaicans are considering raising taxes to help their financial situation.

People will read this story and think that it isn't that shocking that a little, teeny country like Jamaica might find it’s self in a dire financial situation like this. Let me tell you a little secret that not enough people are aware of. In recent years Canada, Italy and Japan have had their national debts rise to levels that now exceed the size of their economies, and just last year Moody's dropped the rating on Japan's sovereign debt to a junk level.

When Mike keeps trying to tell you that we are facing a potential debt crisis and that we had better start paying some attention to it, I mean it. Current events only seem to provide more evidence that any economic recovery will be difficult with this lead balloon of debt hanging over our heads.

SARS AND THE ECONOMY

While the World Health Organization clearly has made SARS its "public enemy number one", there is no clear statistics this early to determine what the economic impact will be worldwide. So far the concentration of the outbreak has been in the area of Hong Kong and China and the Chinese managed to shoot themselves in the foot once again by not being forthcoming regarding the number of cases of the disease they were reporting. Very respectable scientists have called for quarantines and these suggestions have been taken fairly seriously in some parts of the world (like Hong Kong) and less seriously in other parts (such as Canada).

Americans tend to forget how many of the things they use every day are manufactured in China and that plant closings there could begin to affect the cost of many different items. Consider these statistics regarding China's share of a few particular import markets in the United States:

64.1% of all Footwear
64.0% of all Toys
63.3% of all Non-Textile Household Goods; like Buckets and Laundry Baskets
54.1% of all Stereo Equipment
53.2% of all Camping Gear

This is not to mention their huge shares of the clothing and electronics import markets.

If the best economists in the world cannot yet determine the impact of this virus on global markets, I will venture my 2 cents that there will certainly BE an impact and a negative one for sure.

THE AIRLINES

Before I begin, I remind you that this commentary is being written by someone who spends usually 100 days a year flying somewhere, so I may have a jaded tone. I know that will strike you as hard to believe.

First I will state what is obvious to anyone who has flown for some time and that is simply that the flying experience of today is not the same as it was 25 or even 10 years ago. I have made the comment to many friends and audiences that the airport has simply become the bus station of the 21st century with crushing crowds, too small seats, crappy food and sometimes cranky airline staff. Not much about the experience is anything I find particularly enjoyable and that wasn't always the case.

More important for the industry to consider however, is that the airline industry as you see it today will not exist for very much longer. It has always been difficult to make a living in air travel (Southwest Airlines being the only glowing, long-term exception) and to make any real money has always required basically perfect conditions. The current situation for the airlines is far from perfect and even drastic help from the Federal government will not be enough to save it.

Some of the airlines have managed to squeeze huge pay concessions out of some of their unions and the ones that haven't had better get some soon. On a separate note I must already nominate the CEO of AMR for "Bonehead of the Year" for asking his unions to accept hundreds of millions of dollars in pay cuts and then announcing the executive bonus amounts a day after. Without concessions from the unions the big airlines have no prayer in competing in the long run with the Southwests and Jet Blues.

So here is my prediction for you to print out and put in your desk drawer to see if I end up right in the next few years. Of the following airlines:

American
United
USAirways
Northwest
Continental
Delta

At least one of the six will DEFINITELY not exist in any form within the next three years. I would give one in four odds that two of them will not to exist. There are simply too many inefficient and overpriced airlines and some of them are going to be gutted quickly by the efficient ones. You may also end up surprised at the speed at which the losers may disappear.

SORT OF ON THE SAME NOTE

Two Southwest Airlines pilots just got fired for being naked, or at least almost naked in the cockpit while flying their plane. They were found out when a flight attendant was summoned to the cockpit with soda water and paper towels because one of the guys supposedly spilled hot coffee on himself. I can't help but ponder what caused the other guy to get naked too.

Personally, if the airlines are going to start having employees get naked while flying they should do it in the back of the plane where we might be able to enjoy it. Oops, I forgot…HootersAir is already flying plenty of routes everyday.

AN EXCELLENT MOVIE

Although this film might be difficult to find outside any of the major markets, I recently got to see City of God on a trip to New York.

The film is set in the slums outside of Rio de Janeiro and follows the path of a group of kids growing up in these projects and how some of them devolved into a life of violence, crime and drugs. The cinematography is unusual and a director who is prone to improvisation made the film with all non-professional actors. I will warn you that the movie is 2 hours and 15 minutes long, is in Portuguese with subtitles and shows some fairly graphic violence. As surprising as it might sound, the movie is so outstanding that it overcomes all of those things. Drop me a note if you get to see it since I would love to hear your opinion.

GRAND CAYMAN AND BERMUDA SEMINARS ARE SET

After much consultation with my friends on both islands, we are pleased to announce two completely new programs to be held in both locations this year.

The Managing Portfolio Managers Seminar was specifically designed for anyone who must hire, audit, manage or in any way interact intelligently with the professionals who manage money. It will give the attendee a chance to understand the concepts of portfolio management, fiduciary responsibility, asset classes, world securities markets, performance measurement and perhaps most important, risk management. This seminar is a three-day program.

The other program is also brand new and is titled Securities Operations, Processing & Accounting. For anyone who handles securities transactions after the trade occurs, this seminar was designed for you. It will literally cover how the financial industry handles the initial settlement of securities trades, the security master set up as well as the many accounting and administrative issues that affect institutional investors of both "buy side" and "sell side" firms. This seminar is a two-day program.

Grand Cayman Programs will be held - July 14th through 18th, 2003

The link for Grand Cayman is http://afs-seminars.com/cayman.html

Bermuda Programs will be held - November 10th through 14th, 2003

The link for Bermuda is http://afs-seminars.com/bermuda.html

THE APRIL BRAINTEASER

I actually happen to really, REALLY like the brainteaser question this month and I'm tempted to actually make you write me for the answer since I think it will be pretty hard to figure out without peeking at my answer page. Give it some serious thought before being a weenie and going to look at the answer.

Consider this: Are there at least two questions that no one can answer with yes, but only with no?

If you want to check how you did with your answer, just go to the following URL:

http://www.afs-seminars.com/brainteaser_Apr2003.html

http://www.afs-seminars.com

Copyright 2003, Michael Gasior. All Rights Reserved.

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