January 2004 Newsletter
Issue One, Volume Five

POLITICS AND MONEY

By Mike Gasior

Two things that I always find interesting and fun to talk about are politics and money. Most commonly they are separate conversations, but I’ve decided to weave the two together into what I hope is an interesting tapestry. The economy still seems to be showing outward signs of improvement, but the pending question remains how robust is the health of this previously ill patient, and what are the odds for it being back at full-strength soon. This is another topic I will weave into this month’s edition.

THE VIDEO COMMENTARY IS UP

The seed for this idea was planted almost four years ago by several readers who thought an audio or video commentary might be more interesting than this newsletter. While I don’t know if I agree with that, I have decided that I would give it a whirl this year and see what you think of it.

Just visit the homepage of my website and you will see the link for viewing the January 2004 video right on your desktop using Windows Media Player. I thought this first clip was okay, and I expect that I will improve at doing them as time goes on. There are two versions of the clip depending upon whether you have a high-speed connection to the Internet or you are on a dial-up connection. I will be curious to hear your thoughts.

Go here to view the video:

http://www.afs-seminars.com

THE UPCOMING PRESIDENTIAL RACE

The 2004 presidential race in a little over nine months away, and it is already becoming fairly clear that George W. Bush will likely be facing John Kerry of Massachusetts.

Howard Dean has evaporated from the scene, no doubt due to his lack of electability that I’ve cited in a couple of past newsletters and he is officially "done". You can put a fork in him. I watched his speech in Iowa live, and my mouth hung open in disbelief at what I saw. I said to myself then that his "people" had no control of him, or he has not yet acquired a sense of how such a speech would play out on television. Personally, I wasn’t all that bothered at the speech and didn’t think it was a very big deal except that it would make him the toast of late night television. He didn’t do anything bad, or say anything wrong. He just looked silly, but that was all that it took. Clinton can play saxophone on Arsenio and Nixon can show up on The Tonight Show, and that is perfectly fine. Just don’t look silly doing it. So far Gephardt and Dean have chosen to participate in David Letterman’s Top Ten List and both were amusing. Let me know if either of them ends up with the nomination. Voters don’t tend to vote for the most amusing candidate.

John Edwards gave the media reason to think he was for real in Iowa, but has sputtered since and I don’t think he is electable either. Yes, he’s southern, young and good looking, but he has no chance of beating Bush even in the south, and Democratic primary voters know that. He might be vice president material for this election, or laying groundwork for another push in 2008, which I think is more likely. If Kerry ends up the nominee and offers Edwards the VP slot, I feel Edwards will turn it down so he won’t suffer the "loser" baggage I think Joe Lieberman is currently carrying around.

Wesley Clark frankly scares me and seems like the biggest weasel of the lot, which is no easy prize to take given the circle of other candidates he is surrounded by. His chances are zero and dropping. I don’t think he’d make a very good VP choice for Kerry either. Hopefully, his political career is over as fast as it started.

None of the other candidates is doing well enough to even get discussed so we will move on.

So now we have George Bush versus John Kerry in November.

I will quickly say that Kerry’s chances of beating Bush are very slim. Extremely slim. There is certainly a scenario where I could see Kerry winning as few as 5 to 8 states in total. I’m not saying Bush is a LOCK to win. I simply state that he is LIKELY to win, as any incumbent politician is. Obviously, there is always a chance of Kerry pulling this off, but what would have to occur for this to happen?

An interesting thing to consider is the possible scenarios, which might make Bush weaken, and a Kerry victory possible. I find four areas worth considering.

THE ECONOMY

If the economy were to weaken considerably and dramatically as the election draws close that might give Kerry some traction, but this is unlikely. My personal viewpoint on the economy is that it isn’t as robust as the media and White House would like us to believe, but I cannot foresee a situation where it weakens adequately to get Kerry elected in the next nine months.

Now if the stock market were to collapse, I’m not certain how much blame voters might lay at Bush’s feet. It could be a serious blow for the president, but difficult to assess. I will admit that I feel a serious downward move in the stock market is much more likely than a serious deterioration of the economy in the near future.

IRAQ

Iraq is easily Bush’s most fragile area.

The majority of American’s still feel that the U.S. was right to go into Iraq and it was right to take out Saddam Hussein. I think Howard Dean’s candidacy began to unravel when he said that catching Saddam was no big deal and that the world was not safer because of it. Most American’s disagreed with that viewpoint.

My feeling is that American’s will be patient with Iraq as long as the administration seems to have a plan for getting us out of there, and that American casualties stay moderate.

If the U.S. suddenly lost hundreds of soldiers in one massive single attack in Iraq, I think you would start to see American’s resolve begin to fade and I believe this is the single biggest risk for Bush’s reelection. If Iraq were to suddenly get much uglier, it would make this a closer contest for sure.

TERRORIST ATTACK

I feel bad for saying this, but I think that if there were another large-scale terrorist attack against the U.S., this makes the election a lock for Bush. Whatever he might be, Americans know he does not play, and will track down and get these people. I still marvel that there has not been one death due to terrorism in the U.S. since 9/11. That, quite frankly, is amazing and Americans know it.

SCANDAL

I don’t see any scandal already on the radar that could alter the election. The missing weapons of mass destruction are a non-starter because England and Bill Clinton also were under the impression that the weapons were there. There might be a scandal about shoddy intelligence (seems like an oxymoron, doesn’t it?) but that wouldn’t be a scandal for Bush himself. It would be a scandal for the intelligence community. Senator Kerry voted for the war based on the same intelligence the White House had. I don’t see this as much of an actual issue.

So unless there is some sort of "October Surprise" in store for Bush, I don’t see scandal getting him before the election.

THE CAMPAIGNS AND THE ECONOMY

It was just announced that the economy grew at a 4% rate in the fourth quarter of 2003, under what most economists expected of 4.9%. It was expected to slow down after the dramatic 8.2% annual gain in the third quarter, but this was weaker than expected news.

I don’t want to go into all the economics since that is better saved for a newsletter of its own. Suffice it to say that I feel this "recovery" is weak and will remain a jobless one for the near term. The more significant growth is still taking place in China, and also in Japan, which finally seems to be crawling out of the hole it has been mired in for so long.

Here is the issue. During the 1990’s, the Asian economies were growing thanks to an enormous appetite for Asian products from American consumers. Whenever the U.S. Dollar began to weaken back then, you would have the Asian Central Banks buying Treasury Securities like crazy in an effort to keep the dollar strong, and the Asian goods cheap in the U.S. marketplace. This was in effect a quasi-vendor financing arrangement. Asian savings were being used to make American consumption possible.

Now suddenly there are few supporters of the dollar (the U.S. themselves included) and the dollar has weakened significantly. I personally think it could go down quite a bit more from its current level too. At that point all those Treasuries currently being held by the Chinese and Japanese begin to look less attractive by the moment, and they begin to sell them off. This is unfortunate since the U.S. Government is in the middle of a huge budget deficit and is issuing an enormous amount of new debt. In a supply and demand marketplace, the price of Treasuries will begin to drop and rates will begin to drift higher. It will be increasingly difficult to attract foreign capital to finance U.S. consumption with the dollar falling like a stone, and the Asian savings will now be used to finance their OWN renewed consumption.

Part and parcel with the exploding growth in the Pacific Rim we may also face a shortage of raw materials for many industries, risking a commodity bubble that might spark an inflation scare. This could also cause somewhat of a spike in interest rates.

Back at home in the U.S., Americans sit around the television set every day watching the coverage of the presidential election hearing constantly how many jobs are being sent off to China and India, and how NO ONE is safe from losing their job in America. They hear about how many million jobs have been lost since Bush took office in 2000 and how this recovery is a jobless recovery. Throw into the mix a possible drift lower in the stock market causing people, once again, to see their retirement evaporating right before their eyes. More bad karma for the U.S. consumer. Not to mention with the drift up in interest rates, the housing market slumps and American consumers drift into a fearful funk of not spending and, God forbid, SAVING.

So as hard to imagine as this might be, there might come a point in the next 12 to 24 months where Americans decide the time has come to de-leverage themselves in a very meaningful way and get out of some of this debt they incurred during the 1990’s. The savings rate for Americans jumps dramatically, and economic growth stalls as consumers put their money in the bank instead of spending it. If this all happens fast enough, you might even start hearing calls for protectionism from the Presidential candidates to keep us safe from those damn foreigners.

NOW WHAT?

This is an excellent question, about what could be done to help in this situation, because there would seem to be very little.

Remember that the single biggest line item in the U.S. Federal Budget is the interest paid on the debt. Also remind yourself that over the past 10 years the government has moved the majority of their borrowing to the shortest maturities in order to reduce the interest expense since short-term debt carries lower coupons. In fact, less than 20% of the Federal debt now exceeds 10 years to maturity. Now whenever these securities come due, the government simply refinances by issuing new debt.

If rates increase even modestly as I suggest in my scenario, then the U.S. Government could get caught with their pants around their ankles when they refinance this debt. This would blow a huge hole in the Federal Budget and we could watch the deficit explode beyond anyone’s imagination.

With that said, there is already absolutely NO room for any more tax cutting. The Republicans are already fairly aggravated at Bush for the spending spree he has been on of late, and there is no chance of the President receiving support for more cuts. All of the Democratic candidates in the race have stated that they will raise taxes.

Over at the Federal Reserve, they have just changed their language to make it appear that a rate increase might be coming sooner than people expect. I personally cannot see rates increasing in 2004 at all based on the economic outlook. But what is the Fed supposed to do if the U.S. consumer drops their credit card and decides saving is a better idea? There certainly can’t be much in the way of interest rate cuts since rates are at 45-year lows already. So what will the Fed be able to do? The answer is simply nothing.

No tax cuts.

No rate cuts.

No stimulus available of any sort.

This is the frightening scenario I am suggesting, and much of it is derived from the potential mentality of U.S. consumers, and that is always a sucker’s game. But nothing ventured, nothing gained on my part. Let’s just tune in and watch what happens.

ANOTHER SIGN OF THE APOCALYPSE

I just read today Georgia’s state superintendent of schools is removing the word "evolution" for the Georgia science curriculum and is replacing it with "biological changes over time."

So here we are in the middle of what is easily the most scientifically and mathematically exciting and challenging time in man’s history. A time when we really ARE losing jobs to China and India because they are graduating legions of scientists and engineers, while American students struggle to compete in this global marketplace. And in the face of all that, the superintendent of schools in Georgia wants to devolve the education of her students at this critical juncture. Unbelievable actually.

If she is truly serious about taking such a position in the year 2004, I suggest she take her belief to the only logical, next level. I think she should go out and gather all the children’s textbooks that contain the vile word "evolution" and burn them on the Capitol lawn in Atlanta. That would make for good television viewing.

ONE LAST NOVEL IDEA

I’ve been thinking about this a lot lately, especially after the President of the United States decided to dedicate part of the State of the Union address to the topic of steroid use by professional athletes, and what a terrible problem it is, and how horrible an example it sets.

My thought is: who cares?

I say let professional athletes use WHATEVER kind of performance enhancing drugs they want. What do we care? I’d love to see a bunch of 400-pound guys who can run the 40-yard dash in 4 seconds playing some smash-mouth football on Sundays. Of course the amateur levels of high school, college and the Olympics would be off-limits, but let the professionals go see the doctor and get everything available pumping through their veins. Then we wouldn’t even have to worry about who might be cheating because EVERYONE would be cheating. The next thing you know the sporting events themselves might be exciting enough to justify the cost of tickets. I like this idea the more I think about it.

MY ONLY SUPERBOWL PREDICTION

With P. Diddy one of the scheduled, halftime performers, watch for him to sneak J-Lo onstage for the show. Check the timestamp on this newsletter and remember who told you.

AN EXCITING NEW SEMINAR THIS YEAR

I have been very pleased with the response to a brand new seminar we are offering across the U.S. for 2004 called Securities Operations, Processing & Accounting. This program was designed for, and is ideal for, anyone involved in the securities area of an institutional investor.

I will be presenting this program this year in New York, Chicago, Los Angeles and Hartford. For more information on the precise course content and dates, just visit:

http://www.afs-seminars.com/securities-operations.html

YOUR MONTHLY BRAIN TEASER

Given the geekish nature of many of my regular readers who eat up my mathematical brainteasers, I want to offer you one that involves simple logic instead. Like most of these, once you figure the thing out it strikes you as extremely easy. It’s just getting to that point of figuring it out. Good luck.

Here is this month's brainteaser:

"Three playing cards taken from a standard deck, are placed facedown on a table in a row. To the right of a king there are one or two queens. To the left of a queen there are one or two queens. To the left of a heart there are one or two spades. To the right of a spade there are one or two spades.

Which three cards are we talking about?

You can view the solution at this URL:

http://www.afs-seminars.com/brainteaser_Jan2004.html

And the answer to LAST month's brainteaser is:

There IS no coincidence. JFK was assassinated in 1963. If a person's year of birth is added to the age this person was in 1963 the result will always be 1,963. The same thing will occur if the year in which an activity began is added to the number of years that this activity had been going on in 1963. 2 X 1,963 is not a particularly astonishing 3,926.

http://www.afs-seminars.com

Copyright 2004, Michael Gasior. All Rights Reserved.

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