September 2004 Newsletter
Issue Nine, Volume Five

MY CASE AGAINST GLOBALIZATION

By Mike Gasior

With all the current political rhetoric railing against the exporting of high paying jobs to other countries that provide a lower cost labor pool, I thought it might be appropriate to attack this subject myself since it seems extremely timely. Not to mention that my viewpoint, as usual, is the opposite of the current, conventional wisdom that expects the world's economies to continue to blend into a massive, homogenous coalition. We may, in fact, be at a crossroad where the momentum that has been building for decades toward globalization will begin meeting some friction. More about that in a little while.

THE VIDEO COMMENTARY IS UP

I took advantage of a more exotic backdrop to film my video commentary this month, and many of you will relate to the topic as well. It seems to happen more and more often, that I will try to reinforce a point I am trying to make with some historic anecdote, and receive nothing but blank stares. What set me off recently was using Evel Knievel as a metaphor for someone who is willing to take an enormous amount of risk, and rather than making my point more poignant, I only wound up having to explain who Evel Knievel was to my audience.

I'm just a believer that knowing something about history can help give you perspective about what is happening currently as well as a window into what might happen in the future. It just seems there is an increasing lack of interest about anything that happened in the past. This is my lament.

You can view both high-speed and dial-up versions of the commentary by visiting the homepage at:

http://www.afs-seminars.com

HURRICAN IVAN AND THE CAYMAN ISLANDS

As I write these words, I was supposed to have been boarding my American Airlines flight on Grand Cayman, having completed my three-day hedge fund sessions there and returning to the U.S.

Unfortunately, Hurricane Ivan has temporarily postponed my sessions, but much more sadly has caused untold destruction, loss and heartache to the many friends I have made in Grand Cayman over the years. I have been shocked at the lack of coverage in both the U.S. and the U.K. media regarding the extraordinary level of losses suffered on this island of 45,000 people. Frankly, I have been unable to get any substantial information about exact damage or news from Cayman media outlets. Most of the information I have gotten is from people in Grand Cayman who sent me photos and personal accounts of their experience.

Although it is difficult to get definitive information, several people who have written to me estimate that 40% of the islands residents suffered a total loss of their home and all their possessions, or damage rendering their home unlivable. It is a miracle that there was only one fatality, and relatively light casualties generally. Some of the photos I have seen were horrific. Although I was in Bermuda shortly after they were struck by Fabian a couple of years ago, the damage to Bermudian buildings overall seemed fairly light compared to what seems to be the case in Grand Cayman.

I look forward to hearing more about what the situation currently is, and my office is working with the hotel in Grand Cayman to get the sessions rescheduled. We have also invited anyone who was supposed to attend in Grand Cayman to attend the seminar in Bermuda on October 12th, 13th and 14th.

As we know more, we will post any updates or changes on the website at:

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

In the meantime, my heart and prayers go out to those who have lost so much.

WHY GLOBALIZATION ISN'T WRITTEN IN STONE

As I have admitted too many times, my background and fascination is economics, and the more macro the approach, the better I like it. There have been moments in my life where I have succumbed to the common mantra of so many fellow economists who believe (with all their hearts I might add) that the world is a very efficient place and that globalization is the natural order of things and is therefore, unavoidable.

While I might agree that nature and the world tend to be, for the most part, efficient, this is not to be confused with perfect. We do not live in a perfect world and often live in one quite the opposite. The current worry by Americans and Europeans that jobs will continue to migrate to India and China makes some degree of common sense, but is unlikely to continue unfettered. I even believe the tide may already be turning against the trend, and it isn't all because of a change in political will. The true reasons may lie far deeper and be cause for serious concern.

Admittedly, the current political climate in the U.S. is changing and becoming more and more protectionist, which is upsetting many of America's trading partners. George W. Bush might very well be the most protectionist U.S. president since Herbert Hoover, and John Kerry has promised to hunt down those "Benedict Arnold CEO's" who have been exporting American jobs overseas. The political seeds have clearly been sown that shows that the U.S. intends to put its own economy first.

There is even a case to be made that some countries might become agitated enough to launch a full-blown currency war at any moment against the U.S. due to the "weak dollar" policy in place at the Treasury Department and Federal Reserve. This may be subject better dedicated to a newsletter of its own, but I feel compelled to address it somewhat because it contributes heavily to the current level of global friction that exists between some major countries.

Remind yourself that the U.S. economy has been stuck in a weak patch, and that the government and Federal Reserve have been taking every possible step necessary to help stimulate the economy. These steps included massive tax cuts by the government, accompanied by unprecedented interest rate reductions by the Federal Reserve. Anyone who has ever watched the evening news is aware of these actions.

Getting much less press has been the efforts made by the Treasury and Federal Reserve to weaken the value of the dollar around the world. To most Americans, the idea that these institutions would even want the dollar to weaken seems counterintuitive. Would a country actually WANT its own currency to go down??

The answer is yes.

Take a company like John Deere. John Deere makes tractors and other equipment that they sell domestically, and abroad. I myself am the proud owner of two John Deere tractors, and they receive constant use. For those of you finding this Mike Gasior/John Deere tractor situation odd, or incongruent, I must tell you that I live on a 60 acre parcel of land and the only companies who make "lawn" equipment for property like mine are named John Deere and Caterpillar.

Now lets say that John Deere is trying to sell a tractor in Europe and hope to bring back $10,000 to the U.S. for the sale. Back in 2003 each Euro was worth $1.00 U.S.; John Deere could sell the tractor for 10,000 Euros and bring home the $10,000 they wanted. Now, with the Euro trading at around $.80 U.S., John Deere can sell the tractor for 8,000 Euros and STILL bring home the same $10,000. The weaker dollar has suddenly made a U.S. exporter like John Deere VERY hard to compete with outside the U.S.

On the home front, one of John Deere's competitors is Kubota. For this example let us say that Kubota would like to bring back to Japan, 1,250,000 Yen for the sale of a tractor in the U.S. market. Well, back in 2003 when the dollar converted into 125 Yen, Kubota could prices its tractor in the U.S. at $10,000 and bring home the 1,250,000 Yen they desired. Now with the Yen down to 110 Yen per U.S. dollar, Kubota now has to price their tractor at around $11,360 in the U.S. in order to take home the 1,250,000 Yen. Thanks to the weaker dollar, John Deere is suddenly kicking in Kubota's teeth in the U.S. market.

To summarize the story, the weaker dollar makes U.S. produced goods more difficult to compete with both at home in the U.S., and abroad.

So it might strike you as a "no lose" situation for the U.S. to pursue, with there being only upside in it for the U.S. Right?

Wrong.

Certainly there is a short-term boost to the profit levels of some U.S. companies, but one must imagine how the Japanese, German and Chinese governments are feeling about the situation. Most of those economies are already more protectionist than the U.S., but now likely to become more so.

Secondly, remember that the United States currently has over $6.8 trillion of publicly held debt floating around across the globe.

Thirdly, keep in mind that almost precisely a third of that is held by the Japanese, and another decent sized chunk held by the Chinese.

Fourthly, all of that U.S. Treasury debt is denominated in dollars.

Now imagine what this decline in the value of the dollar has done to these holdings by the Japanese and Chinese. You would have to figure that there are some pretty annoyed investors in the Far East right now who might be thinking of repatriating some of this money to use to fund their own growth and consumerism.

Obviously, the current state of the currency markets may serve as an impediment to the globalization trend.

Economies and markets also tend to operate most efficiently when there is a solid framework of security that allows them to work freely. Clearly this has changed much since 9/11, and bodes poorly for friendly and unfettered relationships between countries.

Many economists love to point out that the massive increases in computing and telecommunication power since 1970 makes globalization unable to be stopped. It is truly amazing to consider that computing power has increased one thousand fold in the years between 1970 and 2000. This information revolution has made it possible for co-workers who are thousands of miles away from each other capable of working together as if they were in adjoining offices.

It is, however, this explosion of technological advances, which enabled a nickel and dime outfit like Al Qaeda to become organized in 60 countries worldwide and ultimately kill more Americans in one day than the Japanese government could at Pearl Harbor back in 1942. This brings me to my final point about what will make the rush to globalization difficult to maintain.

Whether you like it or not, the blood that pumps through the veins of the world's economies is oil. The most important resource in the world, that makes every economy operate every day is oil. Try to imagine your own personal life if there was no longer oil available in the world and you will quickly picture yourself rubbing two sticks together to make fire.

With oil prices suddenly hovering in the range of $50 a chill will begin to descend on variety of countries, dividing up the "haves" and the "have nots". It has always been more difficult and more expensive for smaller, poorer countries to acquire oil. As oil prices continue to escalate higher (as I feel they will) the growth some of these developing countries will suddenly be choked off and will lead to violence and conflict in those nations, and they will be looking to point a finger at who is to blame for all this hardship. Many of those fingers will point to the United States.

I must begin this paragraph by CLEARLY stating that I do not for one second think that the reason the United States went into Iraq was because of oil. I do, however, think that the United States felt it necessary to intervene and inject a show of strength into a region that controls a massive amount of the world's oil reserves. France, Germany and China didn't vote against a military invasion in Iraq out of any humanitarian reason whatsoever. France, Germany and China voted against going into Iraq because they all have HUGE demand for oil, and literally no domestic oil reserves of their own. All of them need to secure massive amounts of oil each any every year to sustain their own economy, and Iraq and Saddam Hussein was a very good friend to all three countries.

As countries begin to worry more and more about where their oil is coming from, tensions will begin to mount. The rise of Islamic fundamentalism in the past decade provides us with a picture of what the future might hold with regard to increased terrorism. Add into the equation a nuclear North Korea, Iran, India and Pakistan and now we see the possibility of a massive cataclysm somewhere in the future.

This doomsday discussion now brings us back to my statements about a solid framework of security making it possible for economies and markets to operate efficiently. I have always likened security to health and money. It has always seemed to me that peoples concern about any of the three was perfectly proportional to how much the thing was lacking in their life. Nobody EVER thinks about their health, money or security when they have lots of it. It is only when it is lacking that they become concerned about it.

In summation, I think that eventually, the major countries and economies will band together to snuff out the rogue individuals and countries that threaten the peace and prosperity that most want. At this moment, however, every country is looking out for themselves and not worried about the greater good. The process of getting to this peaceful, future promised land will be a long, painful and arduous one that has just begun, and that is the reason I believe that recent trend toward globalization is about to hit its first major roadblock.

A SAD FACT OF LIFE

Everyone knows that the human body is as far from perfect as the economy is, but even I was surprised to find out that the human body is at its most efficient and optimum health when we are about 10 years old. Unfortunately that means the deterioration of our body that will ultimately kill most of us (the other group will be killed by injury or disease) is already underway at age 11.

Scientists studying life expectancy and extension now believe they have developed a sophisticated enough understanding of the processes of the human body where they might be able extend life further through antiaging medicines, preventitive and regenerative techniques, as well as replacing or repairing worn out body parts. Perhaps even defeat aging all together one day.

Not to potentially bore you with science you may not find readable or interesting, but I would like to introduce you to the Gompertz Law of Mortality. Back in 1825 a gentleman by the name of Benjamin Gompertz (an actuary by trade) observed that the logarithm of death increase linearly with age, simply meaning you become more and more likely to die as you got older. Basically, as a human, your chances of dying double every eight years for most of your life. Oddly, once you reach extreme old age the law no longer seems to apply, meaning that the odds of a 100 year old dying are basically identical to the odds of a 115 year old.

Now if we could slow down this process even somewhat, the expansion of life expectancy would grow exponentially.

To illustrate what I mean, if we could ever get the human body to heal and reproduce cells with the efficiency of a 10 year old, human life expectancy would suddenly increase to 5,000 years!!

Pretty cool, huh? Bet you won't be able contain yourself when showing off this new knowledge to friends and relatives.

ONE MORE SCIENCE TREAT - NUCLEAR BATTERIES

Yep. You heard me right. Nuclear batteries.

The technology on this front is much further along than you could ever believe, and there are only issues of cost and safety to be overcome before we see commercially available nuclear batteries.

But imagine this if you would. If we could successfully use Polonium-210 to power an electrical battery, rather than the common Lithium-ion battery found in most cell phones, PDA's and laptop computers today, we can expand the life expectancy of a battery to increase thousands of times. In the case of the Polonium-210 powered battery, we would be talking about a battery whose charge would last 190,000 TIMES as long as a Lithium-ion battery.

What this would mean to you, is your future cellular phone or laptop would come in its original packaging from the manufacturer fully charged. You would use the phone or computer for several years without EVER charging it, and then simply dispose of the equipment when its useful lifespan has ended.

Hey...if we're going to be living for 5,000 years at a time, someone had BETTER start designing some longer life batteries dammit.

DON'T GET TOO CRAZY ON ME ABOUT THIS ONE

But as hard to believe as this is even for me, my favorite new song is by Gretchen Wilson titled "Redneck Woman". Now I haven't gone country and western here, and I know some of you might accuse me of weaving violently from one music lane to another without using my signals (Eminem, The Who, Prince and too many others to mention), but I just like music that rocks and this song surely does. I dare you to listen to this song and not bob your head or tap you foot at least a little bit. Sure, you'll try to resist because you'll tell me "Mike, I just don't like country music."

While this is no description of an ideal woman to me, nor do I endorse this as a lifestyle choice, how can you not immediately like ANY song whose opening lyrics are:

Well I ain't never Been the barbie doll type No I can't swig that sweet champagne I'd rather drink beer all night In a tavern or in a honky tonk Or on a 4 wheel drive tailgate I've got posters on my wall of Skynard, Kid and Strait Some people look down on me But I don't give a rip I'll stand barefooted in my own front yard with a baby on my hip

For a complete set of lyrics and to actually listen to the tune, you can visit this link:

http://www.hit-country-music-lyrics.com/redneck-woman-lyrics.html

The video is even more fun on CMT (Country Music Television for those of you unenlightened ones) with cameos from Tanya Tucker, Kid Rock and Hank Williams Jr.

Also, if you get to catch a special on CMT with Kid Rock and Hank Williams Jr. playing a bunch of tunes in front of a live audience, put the clicker down and sit back and enjoy the show. I actually hope I get to ultimately buy the session on DVD sometime down the road.

YOUR MONTHLY BRAIN TEASER

A lot of you seemed to enjoy the question last month since it was a departure from the usual math test, and instead addressed a real life situation. Well, I will repeat that theme again this month since the answer to this one was as surprising to me as last months.

"As measured by paid circulation, what is the most popular magazine in the world?"

http://www.afs-seminars.com/brainteaser_Sep2004.html

And the answer to LAST month's brainteaser is:

"The Post Office of Japan"

They have over 280,000 employees and more than $3.6 TRILLION (U.S.) under management.

Since the United States of America is about $6.5 trillion in debt, the Japanese Post Office has an impressive financial position totaling over half that amount."

http://www.afs-seminars.com

Copyright 2004, Michael Gasior. All Rights Reserved.

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