December 2003 Newsletter
Issue Twelve, Volume Four

A TROUBLING TREND

By Mike Gasior

Anyone who reads this newsletter regularly already knows that I tend to lean toward macro thinking and my economic and financial viewpoints usually flesh that out. Although I may get sucked into making the occasional short-term prediction, those will most commonly be the ones that blow up in my face. I am sometimes early regarding some of my viewpoints, I am not wrong very often. More on that later.

For the past decade I have been telling the attendees of my seminars that the U.S. is in the middle of a revolution the likes of which it has only gone through once before. When the United States shifted from an agricultural economy toward an industrial economy in the latter 1800's it required millions of suddenly former agriculture workers to learn new skills to compete in the new marketplace. We are already two decades into the second major revolution taking us from an industrial economy to a service based one, and yet employers and employees seem to not see the forest for the trees. New skills and knowledge will be critical to compete in this new arena, and ultimately the future of many organizations will depend on how talented their personnel are; that is the subject I want to discuss this month.

The event that triggered this in my mind was the news several weeks ago that IBM was transferring around 4,700 programming jobs to India and China. A woman by the name of Linda Guyer who has been trying to organize a union for IBM employees claims that IBM plans to shift as many as 40,000 of their 160,000 employees offshore by 2005. Around that same time Morgan Stanley estimated that U.S. companies will outsource around 150,000 white-collar, high tech jobs to India during those same three years. Other analysts forecast as many as 2,000,000 technology jobs will be shifted to lower cost "offshore" centers by 2014. I'll try not to get dozens of U.S. corporations angry with me by naming all the companies who have already moved positions offshore, but suffice it to say the list is very extensive.

You will always find me to be the ultimate free market capitalist, and saving a few bucks is almost always a good idea. Almost. Then there are those times when it is possible to be "penny wise and dollar foolish", and I firmly believe that this is going to be one of those times. Those of you who actually know me know that nothing drives me crazier than seeing people repeat the same mistake over and over again. For example, I have been preaching the Nick Leeson/Barings story to thousands of people since Leeson crashed Barings in flames almost a decade ago. The reason I am so animated when I tell people the story is because the EXACT same story has unfolded many, many times since the Barings collapse. The exact same scenario that enabled a 28 year-old trader in Singapore to bankrupt one of the world's most respected merchant banks no doubt still exists in organizations today. I find this endlessly frustrating because it illustrates that the corporate learning curve can sometimes be immensely flat. Literally tabletop flat. One would have to imagine that management would want to avoid such a horrific fate by learning from Barings’ mistake, but there are obviously plenty of companies who have decided to ignore the lessons illustrated by the pain and suffering of others. Trust me, the minute I see you sear the flesh off your hand on the hot burner of the stove you will not see me slapping my hand on right afterward.

This brings me back to this current trend of moving jobs offshore. I mentioned in last month's newsletter that I have been witnessing a scary trend of companies cutting back on budgets for a variety of employee "perks" such as training and other "unnecessary" expenses. This is book that was already written in the 1970's and is also a book we should be reading to see how it ends since the finish is fairly ugly.

Back in the 1970's U.S. manufacturers became obsessed with financial engineering and totally lost their focus on product quality and continuing innovation. This is how we ended up with the Gremlin, Vega, Pinto and K-Car by the way. It was at this time that these U.S. companies began resorting to "human disinvestments" and began treating their employees as just another expense to be reduced or eliminated whenever possible.

At this time Japanese companies trusted their employees and viewed them as valuable assets giving them continuous training and trusting their opinions. The result was a host of higher quality, lower cost products in industries ranging from automobiles to consumer electronics. By the time the U.S. companies woke up to this landmark shift, some of them were unable to recover. For the companies who did survive it was only through a renewed commitment to worker growth and involvement. Eventually the quality and cost gaps closed after substantial investment in human capital.

If you ask the management of the U.S. companies shifting jobs overseas they will likely tell you that it is strictly a short-term strategy, and that longer-term they are committed to their people. Clearly this seems counterintuitive and it ought to seem that way. The only way to succeed in the longer term is through constant innovation and improvement, and the only way that results is if you have bright, motivated people working for you. How long before an Indian or Chinese company emerges offering better quality products than IBM at lower prices? What will IBM do then? No doubt they will scramble to innovate with new designs and improved efficiencies and hope they can achieve this before it is too late. But will they have the talent necessary to stop this runaway truck before they end up over the cliff? Only time will tell.

Since my business involves training people and trying to share as much current, cutting edge knowledge as possible with people, I am clearly jaded with regard to this subject. The audiences in my seminars range from CEO’s to brand-new hires getting their first jobs out of school. Innovation and ideas are required of all these people and the only way I have ever slept at night is knowing that I'm worth every dime my client companies pay me. I accepted long ago that there is no possible way to quantify the exact amount I save my clients every year through improved efficiencies and reduced errors, but I know the number is comfortably in the tens and tens of millions of dollars, perhaps some years hundreds of millions. Although it always sounds like a bumper sticker cliché, but it rings so true; "If you think education is expensive, try ignorance". Not many of my clients have been in the news in recent years in this spate of current financial scandal, and I like to think it's because people who have attended my programs "know better" because of things I've taught them. The list of companies who have sent their staff to my programs over the years is extensive, perhaps to the point of ridiculous. There is some smug satisfaction for me that Enron, WorldCom and Tyco have never appeared my list. When news of this recent mutual fund scandal began to break, I can frankly say that some of the names that made the news were not surprising to me. I can tell you first hand which companies had the cultures to prevent such things, and which ones did not.

So companies can continue to squeeze every nickel they can out of their employees skin, but they should remember the statistic I quoted in last month's edition that 85% of employees plan to seek a new job the moment the market improves. Once again, I can tell you which companies will have terrific retention and which will have 200% turnover. It's the oldest rule of life, that you reap what you sow, and I know who has been sowing seeds for their future.

THE RESULTS ARE IN

Well, at the very least this year is a fairly mixed bag regarding my predictions from one year ago. While I think I did darn good on my economic and bond market forecasts, my stock market views were a disaster, as were my golf predictions.

In truth, I stand by my feelings about the stock market and I will take the position that I was not wrong, but just early. I frankly don't see a single fundamental improvement to explain current stock valuations, and in fact I think things are worse this year-end than last. I will be the first to tell you that fundamentals do not always explain short-term stock market movements but I remain convinced that eventually stocks have to be "worth it" regarding their prices. Right now, stocks are not "worth it" and I cannot envision the economic situation improving enough any time soon to make this better. I have already expressed that long-term, I can see the Dow ranging between 7,000 and 10,000 and that this will likely continue for the coming 7 to 10 years. I expect very much the same historic behavior we witnessed between 1964 and 1981 when the Dow ranged between 500 and 1,000. Keep in mind that the Dow Jones closed out the years 1964 and 1981 at almost an identical level. This is the sort of period I think we have entered, and if you look at a chart of the past 3 years you will already see that pattern emerging.

With regard to my prediction of Tiger Woods winning three majors this year, this was a total disaster too. On the other hand, if you can show me anyone who predicted that the majors would be won by a bunch of guys named Ben Curtis, Mike Weir, Jim Furyk and Shaun Micheel I will show you a total and complete liar.

Here are the complete results.

PREDICTION - 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.

RESULTS - A total miss here with a Dow above 10,000. The Dow will finish around 10,500 and I can't spin this in any way to make me look less wrong. I will make it official also that I rode my QQQ puts all the way into the ground for a worthless expiration as punishment for myself and amusement for you. Although I will also confess to needing the losses to apply to gains made elsewhere (the bond market). Maybe next year.

PREDICTION - 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.

RESULTS - Even a worse disaster than my Dow Jones call with the NASDAQ around 2,000. No excuses to be made, but I will stick to my position that I wasn't wrong as much as I was early.

PREDICTION - Ten-Year Treasury Note - 3.75%

RESULTS - Ten-Year Treasury Note - 4.27%. This was a volatile year with the yield on the 10 year note ranging from about 3.17% to above 4.50%. Yields are beginning to slide again but it won't be fast enough to make me accurate here. We finished 2002 at 3.81% and my thought was that I didn't see the economy improving enough to really rise very much. I was looking pretty darn smart back in June when it looked like the yield might go below 3.00%. In the latter part of the year the unprecedented and record levels of stimulus provided by the Federal Reserve and massive tax cuts finally got a little traction and rates popped up. The steam already seems to be leaving the economy and rates are drifting down again and I expect them to stay down. Consumer confidence slipped in December more than analysts expected and holiday sales numbers were unimpressive. The economy will slow again and rates will drop further.

PREDICTION - Fed Funds - 1.25%

RESULTS - Fed Funds - 1.00%. I think a lot of people were surprised that I didn't expect the Fed to raise rates during 2003, but I would expect most would be surprised to see me wrong on the prediction with this rate LOWER than I had called for. What does that tell you about what our friend Alan Greenspan thinks about the economy. I continued to beat the deflation drum long after the term disappeared from the mainstream media and I still think it is an earnest threat. Since he would never say this publicly, I will speak for Chairman Greenspan here and tell you that he thinks that deflation is still a viable threat to the U.S. economy and the Federal Reserve has not made the slightest indication that they will raise rates soon. This current "recovery" is tenuous at best and the American psyche is fragile. All this fear of job losses, terrorism, mad cow disease, budget deficits, personal debt loads and so on will prevent U.S. consumers from returning to their spending habits of the 1990's any time soon.

PREDICTION - Yield Curve - More flat than now due to declines in longer rates.

RESULTS - Yield Curve is flatter than last year, but it was honestly due to short rates rising somewhat more than longer rates, so I was correct, but not the way I said it would happen. Frankly, I thought the economy would slow further (which it did by mid-year) and that long-term rates would catch up with the decline at the shorter end. The rebound in the economy in the second half of the year screwed this up on me, but things seem as though they will slow again.

PREDICTION - 30-Year Mortgage Rates - 5.25%

RESULTS - 30-Year Mortgage Rates - 5.38%. This is another case where most people were somewhat shocked that I predicted this rate would be lower than last year (5.62% was where we finished last year), but it is another case where I felt the slowing economy would cause rates to drop.

PREDICTION - 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.

RESULTS - The Economy - I was half right here regarding the first half of the year, and the second half of the year didn't resemble anything I predicted. I maintain my opinion that this "recovery" is weak, tenuous and already seems to be showing signs of sliding back into the abyss. I should have given more possibility to the chance that the massive supply of liquidity from the Fed and the huge tax cuts might actually get some traction, but that was my mistake. The extreme risk here is that these actions were not enough to begin a sustainable recovery and that will prove to be disastrous since the Fed has little room left for cutting and the likelihood of further tax cuts is remote. If you want to see what our economy might be looking like in the coming 5 to 10 years, go study what the Japanese economy has done for the previous decade. I envision a very similar pattern for the U.S. and Europe, just not quite as severe.

PREDICTION - 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.

RESULTS - Commercial real estate slid in value, but not as badly as I thought it would. Residential values began their slide also, but it didn't start until the latter part of the year.

PREDICTION - 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.

RESULTS - Oil Prices did start out the year fairly high and rose as the war in Iraq took shape, but oil prices have indeed declined further and should decline somewhat more. The thing that will keep prices somewhat inflated for the foreseeable future is the growing thirst that China is showing for imported oil. China just became the second largest importer after the United States. The International Energy Agency estimates that by 2030 China will be importing 10 millions barrels of oil, which is the level the U.S. is at right now. With very little in the way of their own strategic reserves, China is buying influence across the Middle East to secure contracts that will supply them with oil. We can only hope there are no weapons involved in these transactions, but clearly China has them to offer. During the next 10 years it is expected that China's automobile population will grow by 5 times its current level, to over 100 million cars. That is an increase of 80 million cars, so you can imagine what this will do to their oil consumption, but also to the world environment if these are not clean burning vehicles. Just another global worry that involves our friends the Chinese.

PREDICTION - Unemployment - Rising toward 7.00% by year-end.

RESULTS - Unemployment rising, but only reaching about 6.00%. Watch for a continued rise.

PREDICTION - U.S. Inflation - Negative 1.00%

RESULTS - U.S. Inflation remains very low, but never slid into negative territory so I missed this one too. There are a few pockets of deflation, which caused many retailers fits this holiday season, such as apparel and consumer electronics. Apparel is currently falling in price at a 5% annual rate, while consumer electronics are falling 15-20%. If prices are actually falling 20%, then retailers have to sell 20% more "stuff" just to keep their sales figures from falling. This is no easy task in any economy, but illustrates clearly why deflation is such a horrifying situation to economists, and one that Japan seems unable to escape no matter what they try.

PREDICTION - 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.

RESULTS - Tiger Woods was a bust in the Majors and this prediction was a disaster. I will hang my head in shame for this one.

PREDICTION - 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!!

RESULTS - Another disaster with me unable to even predict my own behavior. I'm still good for 30 to 40 cans of Diet Coke a week. Maybe next year.

PREDICTIONS FOR 2004

Dow Jones - Under 9,000

NASDAQ - Under 1,800

Ten-Year Treasury Note - 3.75%

Fed Funds Rate - 1.00% with no action at all by the Fed.

Yield Curve - Still quite flat, but with overall lower rates.

30-Year Mortgage Rates - 5.00%

The Economy - Slowing gradually with no more than 2.5% to 3.0% growth at best.

Real Estate - Both commercial and residential real estate experiencing continued softening.

Oil Prices - Relatively little change up or down.

U.S. Unemployment - Rising to around 6.5% by year-end.

U.S. Inflation - Low, with no more than 1.5% CPI.

Tiger Woods - Two Majors (The Masters and U.S. Open)

Me - Better prediction results for next year's edition.

A REVISED PREDICTION ON MY FRIEND HILLARY CLINTON

With Saddam Hussein captured and the U.S. economy showing signs of improvement, I retract my prediction that Hillary will voluntarily enter the Democratic race for President.

My revised prediction is that Howard Dean arrives at the convention with the delegates necessary to secure the nomination. A movement is already underway to draft Hillary Clinton since Howard Dean in unelectable and if he winds up the candidate he will win fewer than 5 states in the general election. With there being open contests for five U.S. Senate seats formerly held by Democrats, the Democratic Party cannot afford to lose even two of them if Dean gets crushed, which he certainly will. Hillary will be begged by the party to save them, and she will turn them down to keep her powder dry until 2008. This brings up my last prediction for this newsletter.

Presidential Election 2008 - Hillary Clinton versus Jeb Bush.

And Hillary will wind up beating Al Gore for the Democratic nomination and Jeb will barely squeak by Rudy Giuliani to secure the Republican nod. Remember where you heard it first.

THINGS I'VE LEARNED

As people sit around at the end of every year, thinking about changes they might make in their lives to improve themselves, I thought I'd take just a couple of minutes to share a few of the wisdoms I have acquired throughout my life. Maybe one of them might even help you out sometime.

--Just because it's a moving sidewalk, or an escalator, doesn't mean you have an excuse to abandon walking. When I'm traveling in airports nothing drives me crazier than these idiots who stand on the moving sidewalk and actually block the way of people who are going somewhere in their life. In case you are one of these people, I need to tell you something very important. This is the airport. Not Disney World. And this is a moving sidewalk, and not some kind of a ride where you might see some talking bears or something. My New Year's resolution is to put size 11 footprints up your back in 2004.

--Never use your hand for public doors or toilets. This is what God gave you elbows and feet for.

--When you consider the number of idiots in the general population, it is my experience that the percentage remains very constant.

--I have found that the ultimate in human achievement almost always occurs at "the edge". Very few great discoveries actually happened without being exceedingly critical to the person doing the discovering.

--Don't wait to buy anything until you actually need it, because you will never make a good decision or strike a good deal. Waiting for your car to break down before finding a new one is a formula for failure since you will most certainly be in some degree of panic, which any car salesperson or other human will sense. The exact same thing is true of jobs. If you think you might lose yours, find a new one NOW.

--I almost like insincere compliments and flattery more than the sincere version since the person giving it must feel beneath me and feel compelled to do such things. Weird, huh? And I can always tell the difference.

--I have always been in complete agreement with Benjamin Franklin who claimed, "success is going from failure to failure with great enthusiasm." If you really want to achieve anything of significance in your life, you've got to be ready fall down and get back up hundreds of times. I continually tell people that I am the biggest loser they will ever meet, which causes them to think I'm unhappy with my lot in life. What I'm really trying to tell them about is the part of my life that they didn't get a chance to witness. If being afraid of falling down prevents you from trying to do something great, then you have already failed. Take pleasure in the journey.

--Real frequent travelers take the aisle seat. I'm in my mid-forties now and at this point I am unprepared to ask strangers if I can pee. I'll pee whenever and wherever I feel like. The only exception to this rule, are those people that can actually sleep on planes and trains. God, I hate those people. I can barely sleep in my own bed at night when I'm exhausted.

--I don't regret a single thing I have ever done in my life. Nothing. The only regrets I have are for things I didn't do.

--I meet far too many people who think that doing interesting things, or traveling to interesting places will somehow make them more interesting people. Please believe me when I tell you that it doesn't.

--It completely baffles me that the diet "industry" is billions and billions of dollars in size, and that obesity is America's number one health epidemic. Please let me save consumers a few billion dollars and solve a national health crisis with four simple words: Put the sandwich down.

--There has always been an inherent distrust in me for people that walk, talk or drive slow. Don't they have anything exciting to do or go that they should be rushing to as fast as possible? Or is it that people who are going nowhere particular in life are in no particular rush to get there? If not, then please get out of my way on the moving sidewalk or escalator. I've got stuff to do.

COMPLETELY UPDATED AND IMPROVED WEBSITE

We have always tried to make our website user friendly and informative, but it was always difficult to make all the information timely up-to-date. I am extremely excited that in 2004 we are bringing many useful changes to the site and all the information will be updated continuously. We are offering 22 programs across the United States as well as a tremendously special and timely program tailored to the needs of our offshore clients in Bermuda and Grand Cayman. Details will be announced next month.

The glossary of investment terminology has been improved, as has the "Links" section. You can also view all 48 past issues of this monthly newsletter there.

A brand new addition to the website next month will be a 3 to 5 minute video commentary by me each month that you will be able to view. I'm going to try and make the topics timely, educational and as amusing as I can get away with. I'm confident you will let me know your thoughts whether I ask for them or not. That is my favorite attribute of my readers.

You can view all these exciting changes at:

http://www.afs-seminars.com

A FUN BRAINTEASER

Well, last month saw a return to accusations that the brainteaser was too easy. This month's is adequately difficult, but honestly does not require a mathematics PHD to solve. Give it a good go before resorting to peeking at the answer.

Here is this month's brainteaser:

"An Astounding Coincidence?"

John F. Kennedy was born in 1917. He became president of the United States in 1961. When he was assassinated he was 46 years old and had been in power for 2 years. The sum of these four numbers is 3,926.

Nikita Khrushchev was born in 1894. He became Premier of the U.S.S.R. in 1958. When Kennedy was assassinated, Khrushchev was 69 years old and had been in power or 5 years. The sum of these four numbers is 3,926.

Charles de Gaulle was born in 1890. He became president of France in 1958. When Kennedy died, de Gaulle was 73 years old and had been president for 5 years. The sum of these four numbers is also 3,926.

How can this astonishing coincidence be explained?"

You can view the solution at this URL:

http://www.afs-seminars.com/brainteaser_Dec2003.html

And the answer to LAST month's brainteaser is:

Pinion. Although many readers wrote to tell me than Nippon was also an answer if proper nouns were allowed. Words are words, so why not a proper noun. I accept both as proper answers.

http://www.afs-seminars.com

Copyright 2003, Michael Gasior. All Rights Reserved.

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