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BLASPHEMY By Mike Gasior I cannot believe that three years have elapsed since I began writing this newsletter and that this is my third year-end edition. Without a doubt, it has been a historic 36 months in both the financial markets and the economy and I frankly believe that there is much more excitement still ahead of us whether any of us feels up for the excitement or not. As is my habit I will review how I did on some of my predictions from a year ago and make more foolish prognostications about what I think might happen in the coming twelve months. I definitely also want to touch upon some major themes which are affecting, or will affect the markets and the economy at large in the near future. Now let me get to the explanation for what seems a peculiar choice for the title of this newsletter. ALAN GREENSPAN HAS TO GO Thousands of readers of this missive have seen me live and have likely heard me not only explain what the Federal Reserve is and had me explain the role of central bankers, but have also heard me sing the praises of Fed Chairman Alan Greenspan. Even in these writings of mine I have been prone to gushing words about him and would sing halleluiahs about how lucky we all have been that he has been on standing guard for the past 15 years. This is what makes what I am about to say next extremely hard for many of you to believe, including myself to a large degree. Alan Greenspan has to go and the sooner the better. As much as I continued to pray at the alter of Chairman Greenspan even throughout this past year, a new word had begun to creep into my vocabulary regarding actions recently taken by the Fed with monetary policy: hysterical. Most Americans and other people around the world did not appreciate that 2001 was EASILY the most historic year ever in the way in which the Federal Reserve dropped interest rates in an effort to stimulate a dying economy. They dropped rate seven times prior to September 11th and then dropped them four more times after the attacks for a total of 11 cuts within the calendar year. If Greenspan was a pilot and the economy was an airplane, Greenspan clearly thought the economy was in a 90-degree dive straight down. For me, the most recent move by the Fed to drop rate another 50 basis points (half of a percentage point) was the straw that broke the camels back for. For the life of me I could not, and can not, figure out who exactly that decline was supposed to benefit since consumers have enjoyed basically 0% financing on vehicles for the past 18 months and the lowest mortgage rates in 30 years. Corporations have used the lower rates to more than double their outstanding level of debt to almost $4 trillion by the end of this year, versus under $2 trillion at year-end 1995. So if the 50 basis point drop in rates was not to benefit consumer or corporate borrowers, then who was it supposed to benefit? Well my thought is simply Chairman Greenspan himself. Obviously nobody wants to become President of the United States or Chair of the Federal Reserve for the money. No doubt much more money would be available in the private sector for former Presidents and Chairs. The issue that I believe is driving Alan Greenspan right now is what his legacy will be after he leaves the Fed and how history will treat him. I have said many, many times that he is already held up as one of, if not THE best Chair the Federal Reserve has ever had, and I am not alone in those feelings either. Alan Greenspan himself has seemed to enjoy taking the credit for the wonderful world we enjoyed during the 1990's where even morons got rich, the stocks of horrible companies went up and unemployment almost didn't exist. The problem in all this is that the market and economy we are experiencing right now had to happen, but it should have happened much earlier than now and didn't have to be nearly this bad. The decline in corporate profits are suddenly of large concern to nearly everyone, but people forget that the peak in these profits occurred five years ago in 1997 and have profits have been declining since then. As manufacturing hours also began to decline starting in 1997, unemployment has begun to increase in lockstep. In 1998 several Asian economies and markets unraveled and the U.S. stock market dropped 20% during the summer of that year. Then the Long Term Capital Management hedge fund in Greenwich, Connecticut busted and threatened to take several large banks and investment banks down with it. Many of them had negative market exposures of their own in addition to their links to this hedge fund. Chairman Greenspan, who was determined not to let such a catastrophe happen on his watch started printing money and flooding the markets with credit and liquidity and the crisis was averted for a while. I recently read a terrific quote from a gentleman by the name of William McChesney who was Fed Chairman from 1951 until 1970. His thought was that the role of the central banker was to take away the punch bowl right before the party really gets rolling. Well, Alan Greenspan didn't take the punch bowl away at all. In fact, he poured a liter of vodka into it instead and the world gave him plenty of excuses to do it. First the Asian and Russian crisis's of 1998. Then 1999 provided him with Y2K as another excuse. An excuse to do what you ask? An excuse to inject a brand new $3 trillion dollars into the economy between 1997 and 2001 at a time when companies profit levels were in steady decline. If you look at the money supply as measured by M3, which includes literally ALL currency in circulation, it increased 61% during that time period. This massive inflow of cash into the economy allowed questionable companies to limp along for a few extra years before the inevitable bankruptcy of so many of them and made their ultimate fate worse than it would have been. This policy also allowed the stock market to inflate further, and avoid the inevitable decline we are witnessing right now. Now we've arrived at the point where:
I have been telling you readers for months that real estate prices are hugely overvalued and will begin to drop. Much of the credit for this belongs directly at the feet of Alan Greenspan due to the infusion of new money into the markets that allowed for severe asset inflation. The stock market became a house of cards that I felt VERY strongly would collapse and I feel the EXACT same way about residential real estate right now. The next two collapses you are going to witness up close and personal are the market for houses and the load of consumer debt, which has accumulated during the past five years. The Federal Reserve is basically out of bullets in this gunfight, which is monetary policy. With the Discount Rate at .75% and the Fed Funds Rate at 1.25% there clearly isn't much room to move on the downside and no one can imagine him raising rates anytime soon and we look a little bit more like Japan every day. I stand fast that I don't think the United States is going down the exact same road that Japan has gone down, but it is, at the very least, a similar one. Getting rid of Alan Greenspan may not be an immediate cure for all that is currently wrong since actions of three and five years ago are having effects on us right now. I'm just saying that this recent reduction in interest rates by the Fed was pouring just a little more vodka into the economy's punch bowl and the revelers at this party are plenty drunk already. Giving them more money at cheaper rates will only increase the hangover when this credit bubble bursts, as I'm certain it will. Happy New Year Chairman Greenspan, and goodbye. THE RESULTS ARE IN What was funny to me as I review the results of my predictions from last year end is that LOTS of you people wrote to me and told me "you suck", but also expanded on that theme by telling me how overtly negative my predictions were. This is funny because in nearly every circumstance I was not negative enough, and overall I think I did okay, but I'll run them all by you and see what you think. Prediction - "Dow Jones Industrials - Lower than it is right now. If you make me pick a number, I'll say under 9,000, which would be a 10% decline from here." Reality - Pretty decent if I do say so myself. The Dow Jones is around 8,303 which is just about a 15.5% decline. What made me want to pee my pants was watching Louis Rukeyser's Wall Street on CNBC Friday night. Ms. Alison Deans was the champion of stock picking on the program because she forecasted the Dow Jones would close at 10,000. I wonder when our friend Mr. Rukeyser will decide to leave the JV team at home and call in some varsity players. Prediction - "NASDAQ - Somewhere around 1,750, also a little over 10% lower." Reality - As negative as I was on the NASDAQ I still wasn't negative enough. With the NASDAQ at around 1,348 it's down almost another 30% in 2002. Do you remember who told you the day it hit 5,000 that it would go down and not return to 5,000 for at least 10 years and that he told you that almost three years ago? Yeah...me neither. Prediction - "Ten-Year Treasury Note - 4.75%" Reality - Ten-Year Treasury Note - 3.81% and it might actually even get a teeny bit lower too, but I'll leave that until my predictions about next year. Again, most people couldn't believe I was predicting longer rates to get as low as 4.75% and I actually needed to go lower here too. Prediction - "Fed Funds - 2.00%" Reality - Fed Fund - 1.25% and given my feelings about Chairman Greenspan I continue to be shocked that I was wrong here since I never would have expected the 50 basis points that were cut in November. Without that cut I would have only been off by 25 basis points on this prediction. Prediction - "Yield Curve - Finally beginning to flatten as long term yields drop" Reality - The yield curve was flattening very nicely as I thought it would thanks to long rates dropping, but once again, I was blindsided by the decline in shorter rates. Overall though, it is flatter than it was a year ago. Prediction - "30-Year Mortgage Rates - 6.00%" Reality - 30-Year Mortgage Rates - 5.62% and people thought I was totally insane with the forecast of mortgage money being available at 6.00%, which sounded outrageous, but once again I was too optimistic. Prediction - "The Economy - Continuing to worsen into the second quarter for the U.S. and beyond that timeframe in many other parts of the world. Any recovery at all in 2002 will occur very late in the year." Reality - The economy never showed any actual recovery at all in my eyes with profits still soft, unemployment rising, debt defaults on the rise and the worst retail holiday season in over 30 years. If anything, I had my prediction backwards. The better end of the year economically was the first half and the worse end was the second half. Truthfully, both halves were fairly bad. Predictions - "Real Estate - Continued softening" Reality - The commercial real estate market did continue to get worse throughout the year, but I badly misjudged the residential marketplace, which was very, VERY strong well into the third quarter. The residential market showed no real signs of weakness until the fourth quarter and even that was subtle. Prediction - "Oil Prices - Continuing to decline as the global recession worsens and demand for petroleum slows. OPEC will try to support prices but members will break from the group due to the economy." Reality - Thanks to all the unsettling news out of the Middle East and Iraq, this was a pretty bad miss for me. After starting out 2002 at around $24 per barrel, light sweet crude oil rose to almost $32 per barrel, which is where we find it right now. Prediction - "Unemployment - Spikes higher in early 2002 and finishes the year somewhere above 6.50%." Reality - This was one of the few predictions where I was actually too negative. The unemployment rate did rise from around 5.7% did just a bit over 6.0% in 2002. All I can claim is that I got the direction correct. Prediction - "U.S. Inflation - A negative number." Reality - According to The Department of Labor, inflation as measured by CPI was running at a 2.2% annual rate as of November so I was incorrect here as well, although the increase in the cost of energy increased between two and fours times as much as any other component of CPI. So if you were to remove energy from the calculation inflation would have been much lower. Prediction - "Tiger Woods - Two majors, which will include his third Masters and the British Open at Muirfield. Also watch for John Daly to win something important this year." Reality - Tiger Woods - TWO MAJORS! Including his third Masters and the U.S. Open. No one, including myself and Mr. Woods thought he would shoot a round in excess of 80 at the British Open, but he did. And so it goes. John Daly started out the year with hope but finished with only two top 10 finishes. What still baffles me is how Phil Mickelson is ranked number two in the world without winning a single tournament outside the United States and no major championships either. He has never even had a really good showing in the British Open. Prediction - "Me - Perhaps a better planned travel schedule. I always seem to end up in Des Moines in January and Grand Cayman in August." Reality - No luck here either...still a crappy and tough travel schedule. MIKE'S PREDICTIONS FOR 2003 Dow Jones Industrials - Lower than it is right now. If you make me pick a number, I'll say it will decline at least 10%, which will put us under 8,000 or likely closer to 7,800. The truth is that I think it might actually be even a little bit lower. NASDAQ - Somewhere around 1,100, although NASDAQ has recently revamped the makeup of the index so it now includes less technology. I'm basically expecting between a 15% and 20% decline from current levels. Ten-Year Treasury Note - 3.75% Fed Funds - 1.25% Yield Curve - More flat than now due to declines in longer rates. 30-Year Mortgage Rates - 5.25% The Economy - The word "recession" will be used heavily by the media by late summer and you will hear the word "deflation" being used nightly by mainstream news anchors. Remember where you heard it first please. I expect the economy will stall in the second quarter and perhaps begin to spiral downward before year-end with GDP actually beginning to shrink, much less grow. Real Estate - Declines in commercial real estate values will be substantial. The residential market will begin to decline early in the year and continue for several years to follow. Oil Prices - With the potential war in Iraq and the other uncertainties it is hard to imagine prices declining anytime soon. If Saddam Hussein is removed from power we may actually see a steep decline in oil prices and see them drop quickly. Unemployment - Rising toward 7.00% by year-end. U.S. Inflation - Negative 1.00% Tiger Woods - Three majors, which will include his fourth Masters, the British Open and the PGA Championship. His near miss at the U.S. Open will eliminate all the speculation about the Grand Slam and make winning the other championships easier without the pressure. Me - A cutback in Diet Coke consumption and since I'm sharing this "inside information" with you, it's a terrific opportunity for you to sell Coke stock short!! MY FAVORITE THINGS FROM 2002 BEST WORD - Evildoers BIGGEST MORON - This is always a pretty competitive category for me and the winner managed to squeak out a victory in the waning hours of the year. This year's champion clearly has to be Senator Trent Lott of Mississippi. First of all, I will rip off Jay Leno's question for Hugh Grant a couple of years ago: "What were you thinking?" Second of all, I don't know which is worse in his case. That he might actually harbor the feelings that his comments convey, or even if he DOES feel that way, that he was stupid enough to say it knowing that television cameras were rolling in the room. THEN, after he steps down from his leadership role he tries to blame the whole thing on his political enemies who were "out to get him", bringing back visions of Hillary Clinton and her "vast right wing conspiracy". MORON RUNNER UPS - This was a close race between Martha Stewart and Hootie Johnson. Martha managed to lose hundreds of millions off of her net worth over a stock trade that amounted to a total of about 40 grand and has to be thinking she'd like a "do-over" for the entire year. Hootie Johnson, who is the chairman of the Augusta Golf Club which hosts the Masters, should have known better than to rise to the bait when he received that letter from the woman who thought the club should admit women members. I don't recall the women's name who wrote, but she probably sends out 25 letters a day making such demands and even she was likely shocked that Mr. Johnson responded to her giving her a national stage for half the year. Since I'm now thinking about it, I should an honorable mention Moron Award to the editorial writer for the New York Times who suggested Tiger Woods should boycott the Masters because of the controversy. I would rather that writer boycott writing any more editorials. CLASSIEST EXIT - Believe it or not, I think Al Gore made about the classiest exit you could have ever scripted when he bowed out of the 2004 presidential race on 60 Minutes. It only makes me wonder why he was not anywhere near this classy when he was running for president. TOTAL FREAK - I believe the time has come for Michael Jackson to catch the next Space Shuttle out of here since he clearly no longer belongs here with normal earth people. What was the deal with dangling your infant child over the balcony railing or showing up for court dressed like you were going to the MTV Music Awards. Here was a hugely talented guy who the public loved and adored and he just totally squandered it and it's a shame. A close runner up in this category were Liza Minnelli and David Guest. He frankly scares me and could use to join Michael on the Space Shuttle trip. OUTSTANDING ALBUM - Believe it or not, I just love The Eminem Show by our friend Marshall Mathers. While I have to admit that by the time affluent, middle-aged white guys like me are enjoying his album his 15 minutes of fame must be ending, this guy is an amazing songwriter. Some people have a difficult time with the cuss words and some of the subject matter, but this guy belongs in a class of songwriter with Lennon/McCartney (the traditional order), Bob Dylan, Joanie Mitchell, Carol King, Lieber and Stoller, Bruce Springsteen and Neil Young. I have every album this kid has put out and every song grabs you by the collar and doesn't let go. This is something I can seldom say about modern artists, but was always true of the great artists 30, 20 and sometimes 10 years ago. Most modern albums are lucky to contain two decent songs. To me it was a breath of fresh air in this vapid Britney Spears era…although she is a lovely young lady. PRETTY GOOD MOVIE - I saw the movie Secretary with James Spader and Maggie Gyllenhaal and would have to give it two thumbs up. The subject might be a bit racy for some, but it was a nice, low budget, story-driven movie that kept your attention and kept you thinking. It was certainly a stark contrast of my movie review of last year, which was Vanilla Sky that cost over $100 million to make and couldn't suck more than it did. Secretary is out of theaters but catch it on video if you can and Maggie Gyllenhaal was just nominated for a Golden Globe that she richly deserves. GOD-AWFUL HORRIBLE TELEVISION SHOW - The Anna Nichole Smith Show. It makes me sad that society has sunk to the level where this horrible woman has a TV show. My advice to her with regard to her next career move? Choke on your own vomit Nichole. GREAT GOLF COURSE - Three terrific new friends of mine invited me to play Mid Ocean in Bermuda this year and although the course slapped me around pretty good, it was a fabulous track. Many thanks to my friends Diane, Bruce and Terry. THE HAPPY NEW YEAR BRAINTEASER I thought this one is pretty decent, but I'm sure plenty of you will complain that it was too easy, but here goes. You have two containers, one holds five gallons, the other holds three. There is a faucet available and you can have as much water as you want. Your task: measure exactly four gallons of water into the five-gallon container. For the answer just follow this URL: http://www.afs-seminars.com/brainteaser_Dec2002.html WEBSITE UPDATED I am very excited about the slate of seminars I will be offering throughout the United States as well as Bermuda and Grand Cayman this year. I will once again be in midtown Manhattan for the New York courses, as well as Hartford, Boston, Chicago and Los Angeles. I am VERY excited about my newest offering call "Managing Portfolio Managers" which provides three days of insights for anyone who needs to better supervise, audit, hire or control portfolio managers. I will offer this program in New York, Bermuda and Grand Cayman. The full slate of programs I will offer in 2003 are as follows:
Finally, the investment glossary and links page are among the best I have ever found on the Internet and I hope you will use these resources to help you out during the workday. You can also view all past issues of this newsletter by visiting the site. The web address is: We also still have some time available if you would like to host any of our seminars in-house for 10 or more of your people. If you would like more information on this, or would like a hard copy of our 2003 schedule mailed or faxed to you, please call my office at (860)347-6568. I wish you all the happiest, healthiest and most profitable New Year! Hope to see you soon. Copyright 2002, Michael Gasior. All Rights Reserved. |
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December
2002 Newsletter
