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Questions to Inform Investment Strategy

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  Catherine Austin Fitts - December 10, 2004
 
 

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 equity portfolios?

Where will the risks and opportunities be in a rising interest rate environment?

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?

Mortgage Bubble

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 market?

Peak Oil

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 and opportunities.

9/11 Truth

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?


References

    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).

  1. FT.com 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>>
  2. Economic `Armageddon' predicted
    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>>
  3. Global: 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>>
  4. Bubble Day
    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. more>>
  5. Greenspan Ambushes the U.S. Dollar
    By Jim Sinclair, MineSet, Sunday, November 21, 2004, 12:16:00 PM EST
    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 Alan? more>>
  6. Credit Bubble Bulletin
    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>>
  7. * Households Run Record $342 Billion Deficit!
    Positive Economic Commentary, Northern Trust, October 29, 2004
    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) income. more>>