After a discussion this afternoon with loved ones, I thought
I would write up questions that would be useful for a discussion
with investment advisers and brokers about investment strategy
given the rising risks related to the general economic picture.
These questions would be useful for anyone managing family retirement
savings and other assets. For those who do not have savings or
financial assets, these questions are useful in understanding
the financial and political implications of recent events.
Interest Rate Risk
Alan Greenspan, chairman of the US Federal Reserve warned recently
in a meeting in Frankfurt that rate rises "have been advertised
for so long in so many places that anyone who has not appropriately
hedged his position by now is obviously desirous of losing money".
What are the implications for the fixed income investments in
our portfolio, particularly the long term maturities as well as
the credits that are dependent on the health of the US mortgage
market? What is the implication of higher interest rates to our
Where will the risks and opportunities be in a rising interest
Risk of Falling US Dollar
The US dollar has fallen in recent months. Given the significant
federal deficit and trade deficit and the report of significant
corruption in the federal finances (the refusal to comply with
laws for audited financials, more than $4 trillion of undocumented
adjustments to balance unaudited financials and the truth of 9/11,
etc) there is a chance that the US dollar could continue to fall
against the Euro and other world currencies.
What can we do to protect our principal and portfolio from the
impact of a falling dollar? Should we shift a portion of our assets
into precious metals and European currency denominated high grade
fixed income? What are the potential risks and opportunities of
a falling US dollar?
America has experienced significant growth in consumer debt and
mortgage debt. A recent report by Northern Trust showed a record
household deficit of $342 billion [*].
Essentially, households are liquidating their home equity to make
ends meet. They can do this only as a result of continued real
estate value growth. As this growth slows, as more jobs are shipped
abroad and if interest rates rise, the inability of households
to carry their debt load could have a ripple impact on the mortgage
markets and consumer markets.
What are the implications of a downturn in the US mortgage markets,
whether because of a rise in interest rates or continued household
deficits in the face of greater movement of high pay jobs abroad--
or both. In particular, Fannie Mae is under criminal investigation
related to accounting irregularities. Should we be invested in
Fannie Mae and any of the GSE's in the mortgage markets?
Where will the risks and opportunities be in a slowing mortgage
America's dependency on fossil fuel has continued to grow while
our domestic reserves have peaked. We are in a position of funding
very expensive foreign military occupation and wars to ensure
the flow of middle eastern and foreign oil. What are the implications
of "peak oil" to our investment portfolio -- both risks
Legislation and appropriations enacted since 9/11 give the federal
government far more centralized control of the economy and far
greater supra-constitutional powers. This is antithetical to free
and liquid markets and respect for individual liberties and property
rights. In addition, disturbing information is now coming to light
around the events of 9/11. What are the implications to our portfolio
and investment strategy?
What is the Worst Case Scenario We Need to Prepare For?
Here are selected articles related to some of these trends. In
particular, there is a report and then article from Stephen Roach,
economist at Morgan Stanley, that describes his concerns about
a severe economic scenario. In a worst case scenario such as the
one Roach describes, what is the ideal investment strategy? What
are the risks and opportunities?
In addition to these articles, it might be useful to recommend
that they read Mike Ruppert's Crossing
the Rubicon: The Decline of the American Empire at the End
of the Age of Oil (New Society Publishers, 2004).
Lex: US treasuries
Sunday November 28, 2:55 pm ET
Alan Greenspan hardly minced his words. The chairman of the
US Federal Reserve warned recently that rate rises "have
been advertised for so long in so many places that anyone who
has not appropriately hedged his position by now is obviously
desirous of losing money". Has the US Treasury market done
enough to factor in the monetary tightening still to come? more>>
By Brett Arends, Boston Herald, November 23, 2004
Stephen Roach, the chief economist at investment banking
giant Morgan Stanley, has a public reputation for being bearish.
But you should hear what he's saying in private. Roach met select
groups of fund managers downtown last week, including a group
at Fidelity. His prediction: America has no better. more>>
The Armageddon Foil
By Stephen Roach, Morgan Stanley, Nov 15, 2004
Spinning a tale of global imbalances does not exactly make me
the most popular person in the investment community. In large
part, that's because many take great umbrage at the implications
global rebalancing have for the US economy. Current-account
adjustments, dollar weakness, deficit reduction, and a rebuilding
of national saving are widely perceived to be an unusually painful
price for America to pay to put itself and the world back on
a sounder footing more>>
By Stephen Roach, Morgan Stanley, Dec 03, 2004
December 1, 2004 could well go down in history as yet another
important milestone for America’s bubble-prone economy.
No, I am not referring to the 162-point surge in the Dow Jones
Industrial average that occurred on that day. Instead, my focus
is on two widely overlooked statistical reports put out by US
government statisticians -- the latest tallies on home prices
and personal income. Collectively, these reports paint a worrisome
picture of an asset economy that has now truly gone to excess.
As was the case in early 2000 when Nasdaq was lurching toward
5000, denial is deep over the potential downside of yet another
post-bubble shakeout. That’s what worries me the most.
Ambushes the U.S. Dollar
By Jim Sinclair, MineSet, Sunday, November 21, 2004, 12:16:00
Is the Chairman spending too much time in Basel? It almost seems
that he’s falling back to his Ayn Rand roots. Maybe Alan
is going to change his name to "Our Crowd." Maybe
Alan is part of "Our Crowd?" Maybe I am related to
by Doug Noland, PrudentBear.com, November 17, 2004
Dollar Consternation Watch: (exerpt)
November 17 – UPI: As the Muslim world yearns for the days of
the caliphate, the Islamic Mint is bringing back a piece of
it by issuing the Islamic Gold Dinar. The gold coins are available
in the United Arab Emirates and the Dubai Islamic Bank. This
is the first time in recent history that gold dinars are circulating
through established and officially recognized channels. The
Islamic Gold Dinar was the currency of the Muslim community
from its beginnings up to the abolition of the Ottoman Caliphate
in 1924. The coin could well come into rapid use if for no other
reason than zakat, the charity giving which is one of the five
pillars of Islam, cannot be paid using a promissory note but
instead must be paid using gold, silver or certain categories
of merchandise. more>>
Households Run Record $342 Billion Deficit!
Positive Economic Commentary, Northern Trust, October 29,
With today's release of third quarter GDP data, we see that
households outdid themselves by spending a record $342 billion
at an annual rate on consumer goods and services and residential
investment more than they received in disposable (after-tax)