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AND THE BAND PLAYED ON By Mike Gasior
AS I enter the ninth year of writing these newsletters, I can honestly say that I have never written one when my primary emotion was anger. Agitated or annoyed perhaps, but never angry. I'm very angry right now. Very. To make this sort of like the Jeopardy gameshow, let me give you the answer first: Everything that has been done and is going to be done by the Federal Reserve and the United States government regarding the economy and the financial markets is wrong. Everything. Wrong. The markets and the economy are going to sink. Soon. And yet the band plays on. The politicians are slapping each other on the back with the announcement of this ridiculous tax rebate plan. The Federal Reserve is positing that they are the rational model of monetary policy with their hysterical 75 basis point cut in short-term interest rates last week. It is almost assuredly going to be followed by more cuts after the FOMC meets this week. Yet I believe we are all now doomed and there are going to be a LOT of people aggravated with the United States in the very near future. The world has been somewhat annoyed by America's possibly arrogant foreign policy decisions, but when they realize that we've submarined the global economy they will be much more than annoyed. The European Central Bank, which the Fed probably assumed would follow them into this arena of foolishness by cutting rates, is standing fast and has so far not taken any action with officials making strong statements that they won't. I would propose the ECB is already pretty flustered at the pickle the Fed and U.S. has gotten them into. Japan's Finance Minister went as far as to publicly say that the United States has gotten the world into this mess and that the United States had better get us out of it. To be my usual abrupt self, the situation that I will detail for you below is that the Federal Reserve has actually now officially lost control of the economy and that they no longer have significant influence over the economy at large, or what will soon transpire in the financial markets. The government has always had fairly small impact, but this stupid rebate plan is like peeing on a forest fire. Sure, it can't hurt, but it isn't going to amount to very much or fix anything. At this point, the problem is bigger than the Fed or government have the ability to fix and we are now hurtling into the unknown. But before I get to make my arguments, let quickly take care of a little business. MY JANUARY VIDEO COMMENTARY IS ON THE WEBSITE This month I have also placed the commentary on YouTube and issued a press release to the media regarding my opinions about the events of the past week. Please feel free to share these links for my video with friends, family and colleagues so they might be better informed of the looming crisis I feel is now inevitable. The links to watch the video, which I've titled "Fed Up" are on my website at: High Speed: http://www.afs-seminars.com/video/2008-February-768K.wmv Dial-up: http://www.afs-seminars.com/video/2008-February-56K.wmv The link to view the video on YouTube is: http://www.youtube.com/watch?v=lIkaGZDx2a4 If you can't tell, I have very strong feelings on the topics I am about to expound upon, and I want other rational people to consider these thoughts and ideas too. Please spread the word around. 2008 SEMINAR SCHEDULE I thought that before I depart very shortly on my 2008 "World Tour" that I would remind you of the array of VERY timely sessions I will be presenting this year. We are offering more complex topics in 2008 than we ever have before in New York, Bermuda and Grand Cayman, and you can view those offerings at the following links: http://www.afs-seminars.com/schedule.html http://www.afs-seminars.com/offshore.html Dates are beginning to dwindle but we still have time available if your organization might be interested in holding an in-house session for your staff or have me speak at your function. You can view our course catalog, which details all of our "standard" sessions at the following link, but please remember that we are also happy to create a custom program for you at no cost that will be perfectly tailored to your audience's needs: http://www.afs-seminars.com/documents/Catalog2008.pdf To inquire about either in-house seminars or speaking availability, please call my offices at (860)347-6568 or write us at info@afs-seminars.com Finally, we are offering a brand-new program for our New York, Bermuda and Grand Cayman programs for organizations that have larger groups of staff looking to attend our programs. Simply buy 50 "training days" or more (meaning you can send 25 people to 2-day sessions, 50 people to 1-day sessions and so on, use the days in any combination you desire) and the discount is substantial. Please contact my office for details about this program as well. THE ANGRY MOB I struggled mentally with the approach I should take to properly lay out what has recently become clear to me, which is that Federal Reserve and U.S. Government policies have brought us to the brink of an unprecedented financial crisis in our lifetime. Many of you have read this newsletter for a very long time, and some of you have personally known me for well over a decade. That said, I am generally an extremely optimistic person and tend toward a happy go lucky disposition. I don't trend toward a gloomy outlook about things, but instead attack life through the examination of facts and figures to arrive at reasonable decisions as to what to do in any situation. So while I expect many of you have already begun to discount anything I might say given what is apparently my outlook, let me make you aware of what a few pretty smart guys have said in the last few days. And I quote them with precision here: Speaking from the World Economic Forum in Davos, Switzerland; George Soros said that Alan Greenspan, the former chairman of the U.S. central bank, "will not look good in retrospect," and that this is "not a normal crisis but the end of an era." He went on to predict, "I'm not looking for a worldwide recession," Soros said. "I'm looking for a significant shift of power and influence away from the United States in particular and a shift in favor of the developing world, particularly China." Mr. Soros said: "I think we do have to rescue markets, otherwise we would go into a depression like we did in the 1930s." Regulators, the financier said, have not yet fully appreciated the portent of these developments. "Systemic failure" may be upon us. Speaking to my friend Roger Lowenstein in an interview for the New York Times, former Fed Chairman Paul Volker told Roger that "I think Bernanke is in a very difficult situation," Volcker said. Volcker was the Fed chief who preceded Greenspan and who conquered, painfully, the great inflation of the 1970s and early '80s. (He was chairman from 1979 to 1987.) "Too many bubbles have been going on for too long," Volcker added. "The Fed is not really in control of the situation." John Studzinski, head of Blackstone, the private equity giant, who was also in Davos, was quoted saying, "The thing that markets are desperate for right now is leadership, whether globally or regionally, and it seems this is lacking." Going further back in time, in my December 2002 newsletter I stated bluntly that "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." I continued to say that "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." Finally, I wrote "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." Let me state to you that in retrospect, the past couple of weeks will be looked back upon as the inflection point when it became apparent to many that the excesses of the past are now going to haunt us for quite a long time into the future. Over my career, I have often spoken and written about Alan Greenspan in very glowing terms as well as recalled above, not so glowing terms. I've now completed reading his somewhat self-congratulatory book titled "The Age of Turbulence" and will honestly report that I enjoyed it very much. It literally chronicles my entire lifespan and I was familiar with almost every character he mentioned in the biography. I even recommend wholeheartedly that you should give the book a read. While Mr. Greenspan, and all of us, has the ability to tell our story via an autobiography, Mr. Greenspan is a historic figure and ultimately history will tell his story. In this regard, I'd have to agree with Mr. Soros that history may treat Alan Greenspan somewhat badly and that the "Age of Turbulence" was actually a horrible legacy Greenspan left for his replacement at the Fed. I was very much for the appointment of Benjamin Bernanke to the Fed upon the retirement of Chairman Greenspan and I'm not quite certain yet what sort of Chair he will be. It's still a bit early and I can't yet discern how much is his fault versus how much of this nightmare was inherited from his predecessor. One thing I can be sure of is that the two gigantic investment bubbles in stocks and now real estate that have popped during the past 10 years were not Mr. Bernanke's fault. Those clearly lie at the feet of Alan Greenspan. You should begin to ask yourself in the coming years whether you really are better off because of Greenspan's 18 year tenure at the Fed. I will predict in the very near future that you will think not. The simple fact of the matter is that for the past 20 years, the solution the Federal Reserve employed for bailing out the economy and markets when there was trouble, was cutting rates to levels that were too low and flooding the economy with money. People might write me and tell me how fabulous the economy has been and how well many individuals have done thanks to the markets and the economy of those decades. Certainly there are those who prospered and got ahead, but I will suggest to you that the whole thing at its heart was fake. It's been a phony prosperity built on an ocean of dollars hitting the system and cheap interest rates, which made it possible for unworthy individuals and corporations to borrow money they should have never been lent. This is the future we face now. All these people and companies need to be flushed out, the losses taken by investors, before we find out what is real versus what is illusion. If you're honest with yourself right now, you know that I'm right. Nobody knows for certain what the losses are going to be when this subprime thing actually unwinds. Nobody knows how much will be lost when all these CDO's, CLO's, SIV's run their course, and what is amazing to consider is that there hasn't been an actual default in one of these products yet. All the hysteria we have already witnessed has been in anticipation of losses that haven't even happened yet. A company the size and scope of Societe Generale's managed to have an employee build up a position worth some $73.5 billion - which was eventually closed down with a loss of $7.21 billion without anyone knowing a thing about it. Also, another guy who I would argue is probably the smartest guy in any room he occupies, Robert Rubin, Director and Chairman of the Executive Committee of Citigroup, claims he had no idea of the scope of losses in Citi's portfolio of structured investment vehicles. Well, if he didn't know, how can any outsider ever know? So in the past week as world markets spun wildly out of control, what did the Federal Reserve do? They threw more raw meat to the angry mob that were calling for more of the same policy that has led us to this moment and executed an emergency rate cut in between scheduled meetings. The Jim Cramers of the world were shouting and screaming for blood and the Fed actually capitulates and gives them the blood. I wonder if this is the sort of "leadership" John Studzinski of Blackstone was talking about. So far other central banks around the world must not think so since they have followed along. Ben Bernanke is a brilliant man, but that may not matter. Lower interest rates can only serve to induce foreigners to switch out of dollar-denominated investments like Treasuries and into currencies with higher yielding opportunities. Even Main Street America is aware of the steep decline in the dollar and they don't need an economics degree to assess whether the rate cut of last week was a smart move, or if another cut this week is either. Lately there has also been non-stop talk about a return of "stagflation", which I remember vividly as a student in the 1970's. A wage-and-price spiral anything like that would not only be a political nightmare, it would also be a crushing blow to Bernanke's legacy as a Fed chief. Oil and food prices are already going through the roof and inflation is a huge worry. Year-end statistics showed that the consumer price index (CPI) surged 4.3 percent during 2007. This is more than twice the inflation rate that Bernanke has stated as the upper range of his comfort range. Once more, one needn't be an economist to know that cutting interest rates is going to promote less inflation and will only make it worse. And yet the band plays on. The simple truth is that the Federal Reserve doesn't honestly know how big the problems within the economy are. Robert Rubin doesn't know. George Soros doesn't know. And I don't know. But what I do know is that the actions being taken by the Fed run counterintuitive to everything I have studied about economics over the past 30 years and nothing makes sense to me anymore. I once again feel like that kid in the movie The Sixth Sense; "I see dead people". I'm troubled because it doesn't seem like other people are seeing these dead people. We have to work through this situation and it's going to be painful, unavoidable and it will take time. People are going to lose their homes, which will be auctioned off. Housing prices will slide and investors will lose money. Corporations will fail from the debt they issued or bought. When all these things have happened, the storm will be over and we'll be able to go back in the water. But not before. You now live in a time when you will benefit by staying in harbor, safely tied up to the dock. The immediate future for you will be about not losing anything if possible. The Federal Reserve is pouring gasoline onto a volatile situation and I suggest that they don't have enough information to be making appropriate decisions, much less all the information. Nor do they have the capital to influence the monster that has developed over the past 10 years. The prosperity we witnessed during the past 15 years was fake, but now the bill is coming for the party and it's quite real. It's going to have to be paid. THIS STUPID TAX REBATE PLAN I'll try to be brief with this one, but leave it to the politicians to throw some more raw meat to the masses. Of course, I'm not one of the masses so there will be no rebate checks for Mikey. I'm happy and proud to be among the top couple percent of U.S. taxpayers and frankly guys like me don't really need a rebate. It fairly nauseating, however, the see an 18 year-old Starbucks employee on television (who has a three year old in government subsidized daycare, but I digress) gushing over how she's going to spend her money ($900 I would assume) on a trip to Jamaica. Oh, goody. There's some economic stimulus...for the Jamaican economy. So let's try to be honest with ourselves for even a minute here. Number one, we all know damn well that the government didn't increase taxes $150 billion to cover these rebates, nor have they reduced spending an iota either. We all know the truth is that the government will be borrowing the money to give out to these people who are going to spend it on crap. Mike Huckabee was 100% correct in the Republican debate the other night when he said that we're probably going to end up borrowing the money from the Chinese and that the people who get the money will then likely head to Walmart or Target to spend it on Chinese made goods. Once more, whose economy are we stimulating here? I have made the point on multiple occasions in this newsletter, and in speeches and seminars, that over the last seven years, foreigners have financed ALL borrowing by the U.S. government as well as buying $600 billion of Treasury securities that were already outstanding. The United States relies completely on foreign investors to lend it money. Much of that has to do with the fact that the U.S. savings rate has been in steady decline for 25 years and is now effectively at zero. There is no money here to lend. It is estimated that 40% of individual Americans do not have $500 in the bank. If you look at the age group between 25 and 34 years old, the number jumps to 55%. For 70% of Americans, if they were to suddenly go without four paychecks, they would be unable to pay their bills. I could go on and on and on, but I'll spare you more statistics. So what should the government be teaching these people? One would suspect to put money away for a rainy day, especially since the economic clouds are becoming thicker and darker by the minute. But the public relations message from the politicians is crystal clear: go take your rebate and piss it up on any order of crap. Probably crap you don't even need. I'll guarantee you that the 18-year-old Starbucks girl with the three-year-old child doesn't have a dime in the bank, money saved for retirement or a nickel put away for that kid's college education. She's going to Jamaica though. This is what the government has taught Americans for years now and their own deficit lifestyle is clearly not a shining example to the masses. It reminds me a little of those commercials where the parent finds some pot in their kid's room and screams at the kid "Where did you learn about this?!" and the kid shouts back "I learned it from watching you!". Sure, I'm annoyed that I probably paid in the $900 that the Starbucks girl is going to the Caribbean with and I find her life choices undesirable. But has the government been her teacher, or her enabler? Has the government taught her to live within your means, save for a rainy day, practice financial discipline? No. Perhaps she learned it from watching them. This rebate is stupid, irresponsible and economically immaterial. It will do nothing for the economy but it WILL grease a large component of an electorate who will be going to the polls in November to vote for their member of Congress and for president. Nothing more. I won't spend the time here making an inventory of substantial steps they could take and will save that for some future newsletter. In the meantime, the U.S. continues to sink deeper and deeper into trouble and the band plays on. ON A MUCH LIGHTER NOTE Readers of these newsletters and people who know me are aware of my deep love of all kinds of music and often engage me in debates over the "best ever" of different categories of music. I truthfully enjoy the fact that I share this common ground with so many people and that the subject gives me the opportunity to enjoy spirited conversations with people I may have just met. So very quickly, here is my personal list of who I think is the "best" at various things. Clearly, this is a VERY debatable list and some of my choices are based heavily on my own preferences and favorites. A few were extremely easy, while others were a coin toss even for me. I'd love to hear your complaints or choices. Here goes my list of the "best ever": BEST GUITARIST - JIMI HENDRIX This was one of the very easy ones, and while there have been plenty of great guitarists, there has only been one Hendrix. Everyone else is everyone else. BEST DRUMMER - JON BONHAM Not as easy for me on this one, so I went with who I personally prefer. The name that I will get the most emails about will likely Neil Peart of Rush, and rightfully so. Other names that floated in my head were Charlie Watts of the Stones and Max Weinberg of the E Street Band who are often overlooked because they were never flashy and play minimal sized drum kits. Keith Moon was a truly amazing drummer and Ringo Starr never gets enough credit for the success of the Beatles, which was thanks to his steady rhythm. The list of runners up could become quite long, so I'll quit here. BEST BASSIST - JOHN ENTWHISTLE Another easy one for me as a huge fan of The Who, but Entwhistle's name will appear near the top of any list of greatest bass players. The next time you hear a Who tune playing, remember that the band only contained one guitar. He was known for his complex, thoughtful, often counter-melodic bass lines that he delivered standing stone still while the rest of the band was a flurry of movement. Paul McCartney, while not the best, was damn good and better than he gets credit for and so is Sting. Flea is terrific and John Paul Jones is in the upper crust. Notice for yourself that the greatest bands in history tended to have a KILLER rhythm section that is often overlooked. Watts/Wyman, Moon/Entwhistle, Starr/McCartney, Bonham/Jones and the list goes on. BEST FRONT MAN - MICK JAGGER While a pretty easy pick for me, and while he wouldn't be a unanimous choice, he will also appear high on any list out there. The other contenders are all fairly obvious in Roger Daltrey, Freddie Mercury, Steven Tyler, Jim Morrison and of course, Robert Plant. I could list other names here but I won't. BEST SONGWRITER - MALE - BOB DYLAN There was no one else even close in this category so I'll spare you the runners up. BEST SONGWRITER - FEMALE - CAROLE KING Here I had some other serious contenders like Joni Mitchell, Dolly Parton and couple others, but my "best" was pretty easy. Just look up the songs written by Carole King and the volume of songs you'll recognize is staggering. BEST SONGWRITING TEAM - LENNON & McCARTNEY Another no brainer here, but a few really notable names were floating in my head here. Such as Jaggar/Richards, Lieber/Stoller and Elton John/Bernie Taupin. But who can truthfully compete with the Beatles catalog. Perhaps I'll explore other "bests" in a future newsletter and I look forward to hearing your thoughts on my choices. YOUR JANUARY BRAINTEASER Since the tone of this newsletter was basically financial and economic (as it should be) I thought for fun I would deliver you some trivia within the same vein. As everyone knows, I love everything that involves the economy, finance and investments and have been a coin collector for the better part of 40 years now. Now I knew the answer to this question, but I'll be curious to hear from you readers if you actually knew this. Here we go: "Why do the U.S. and other governments put groves on the edges of coins?" Good luck, and when you can't take it anymore you will find the answer at the following link: http://www.afs-seminars.com/brainteaser_Feb2008.html Copyright 2008, Michael Gasior. All Rights Reserved AFS Seminars LLC |
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January 2008 Newsletter
