The hottest headline this week is President Obama's war in Afghanistan. After his speech Tuesday night, critics, pundits and beltway know-it-alls have been giving their two cents across the airways, printing presses and online. On issues such as this, I eliminate the noise and go straight to my favorite source of intelligence. In the article I'm sending, my friend, and STRATFOR CEO, George Friedman spells out the key to winning this war - and it's not a troop surge. U.S. forces and a U.S.-trained Afghan army will need solid intelligence to quash the Taliban.
We all need solid intelligence - from fighting wars to buying a house to creating an investment portfolio. Knowing what happened yesterday is useful, and you can get that information at any newsstand. Understanding what may happen tomorrow - whether it's a Taliban attack or a market crash - is priceless... and harder to find. Click here to sign up to receive STRATFOR's free weekly intelligence reports - and discover the benefits of understanding the global system of tomorrow.
I have been writing about sovereign debt risk for some time. Japan, Spain, Italy and Portugal are all facing serious fiscal deficits and funding problems within a few years. But Greece may be the first country to hit the wall. In today's Outside the Box, we look at a short column by Ambrose Evans-Pritchard of the London Telegraph on the problems facing Greece. Greece will soon be faced with deciding which bad choice to make among a very small set of really bad, difficult choices.
And then we turn to a piece by Edmund Andrews in the New York Times about the funding problem facing the US. The US is going to have to borrow at a minimum $3.5 trillion in the next three years according to Obama administration officials, and it is likely to be much higher. And rates are likely to be rising. As Andrews notes "Even a small increase in interest rates has a big impact. An increase of one percentage point in the Treasury's average cost of borrowing would cost American taxpayers an extra $80 billion this year." If interest rates were at the same level as a few years ago, interest costs on the debt this year would be $221 billion more than they actually were.
We are not yet Greece or Japan. But we are working on it given the current direction. At some point the bond market is not going to "go along" for the ride. Read these pieces and think about them.
As I often write, if something cannot happen then it won't. Greece cannot go along the same path they are on. While today we are blithely ignoring the debt problem, the US cannot continue with massive deficits without serious consequences.
With that being said, for those in the US, I wish you a very Happy Thanksgiving. My intention is to write a letter this Friday as usual, assuming I can roll out of bed after the feasting. I am told by very reliable sources that thanksgiving calories do not count, and I intend to take advantage of that.
Your still hopeful we will find a way to Muddle Through analyst,
The closed-door meeting is a prime indicator of unpredictability. It's one of the most difficult elements for even the most savvy investors to encounter and plan for - or against. Usually we know the preemptive measures we need to take in order to protect our assets, and even make a few dollars in auspicious instances. But what about the information we can't access?
Luckily, we have options. Today I'm including an excellent video from my friends at STRATFOR, a global intelligence company. They shed light on a closed-door meeting between the Obama administration and 3 top Israeli officials. When speculation is rampant, there's only one source I trust for reliable insight, and that's STRATFOR. I encourage you to watch this video. Also, sign up to get their two free weekly intelligence reports for more door-opening insights on critical issues.
Long time readers know that I am a huge fan of the work of Neil Howe. His book, The Fourth Turning, was one of the seminal pieces of my reading over the last 30 years. And it has turned out to be stunningly prophetic. Uncomfortably so. A roughly 80 year cycle has been repeating itself for centuries in the Anglophile world, broken up into four generations or turnings. We have begun what Howe called many years ago The Fourth Turning.
Neil Howe is the co-author, with the late William Strauss, of a number of seminal works on the impact of generations on cycles of history. Howe is a founding partner of LifeCourse Associates (lifecourse.com) which provides research to institutions looking to capitalize on generational research.
The June 2009 edition of The Casey Report, the flagship publication of Casey Research, featured a comprehensive 23 page interview with Neil Howe as well as suggestions on how to position your portfolio to profit during a Fourth Turning crisis. I persuaded my friend David Galland to at least summarize it for my Outside the Box this week, and he graciously did so. David is the managing editor of The Casey Report and has had a long career in the financial services industry; as a founding partner of the successful Blanchard Group of Mutual Funds and, before joining Casey Research, as a founding partner of EverBank, one of the big success stories in independent online banking.
Casey Research is offering readers of Out of the Box the opportunity to read the full edition of The Casey Report featuring the Howe Interview, and receive the publication for the next three months with a 100% satisfaction guarantee. For details click here... http://www.caseyresearch.com/crpmkt/crpSolo.php?id=144&ppref=JMD144ED0609A
I trust you will find this week's Outside the Box to be helpful. The more things change.....
I send you Outside the Box each week not to make you comfortable but to make you think. Usually it is on some financial topic, but life is more than investments. Economics is not an isolated discipline (more like an art form I think) so we have to have a real understanding of the world around us. This week I offer two essays which made me both think and reflect. We live in a world which wants easy solutions to complex problems, and wish as we may, will not get easy solutions which will work.
The first essay is by Pewter Huber on the reality of energy production. We all want to be able to "go green." How realistic is that? The second is by my friend George Friedman on torture and US intelligence failures.
Peter Huber is a Manhattan Institute senior fellow and the coauthor, most recently, of The Bottomless Well. His article develops arguments that he made in an Intelligence Squared U.S. debate in January. George is well known to OTB readers. He is president of Stratfor and was with the CIA (as was his wife Meredith) before they founded Stratfor, what I think of as the premier private intelligence agency in the world.
I suggest you put on your thinking caps and take some time to read both of these very important essays, and enjoy your week. I am off to Orlando and the CFA conference.
A long-time religious land bridge between the Islamic and Western worlds, Turkey now finds itself an economic gatekeeper, a US-backed contender for the EU and the only key that could unlock Europe from dependence on Russian resources. The value of your dollar is intrinsically linked to last weekâ€™s summitsâ€”the most important multinational summits in history.
Iâ€™d like to share with you an article by my friend George Friedman at STRATFOR. It delves into the Summits (G20, NATO, bilaterals) and explores the connections between finance and geopolitics. In this case, it boils down to two string-holding puppeteers: Germany and Russia. Germany, the largest exporter in the world, is happy to up its production while the US spreads its dollar paper-thin by contributing to an IMF fund that will bail out countries who will in turn spend their money in Germanyâ€™s already tremendous export sector. Russia, the largest supplier of natural gas to Europe, too stands to benefit from US contributions to the IMF pot, as their slice of the pie gets bigger with the panâ€”as long as Turkey keeps her pipes closed.
The decisions made and policies enacted at the Summits trickle down to you and me. To make sense of it all, I encourage you to read STRATFOR. George has arranged a special offer for my readers: click here to take advantage of a 2-for-1 deal; you get a 2-year Membership for the 1-year price of $349. STRATFOR is the best global intelligence service in the world, and their unbiased coverage of the G20, NATO, and other extracurricular summits is unmatched by anyone else.
This week's writer of the Outside the Box is no stranger to long time readers. Michael Lewitt writes the HCM Market Letter and is one of my favorite writers and truly deep thinkers. He has recently decided to turn his letter into a subscription based model and is meeting with some success, as he should. So, sadly, he will no longer be a regular feature of OTB, but he did allow me to use the current letter, as I think it is one of his more provocative letters.
This is a piece you want to think through. Michael discusses the continuing series of bailouts, the consequences of the stimulus package, the various policy options and the likely response of the economy to all of the above. Plus he makes a few market calls and some interesting observations. I am truly pleased to be able to send this to you.
This week I came across two items that I think are worthy of being in Outside the Box, so I am going to give you both. The first is an essay by good friend Paul McCulley, Managing Director of PIMCO, called "Saving Capitalist Banking from Itself." The second is a recent speech by Paul Volker, former Fed Chairman and a (hopefully very) influential member of President Obama's economic advisory team. This speech is a must read. Taken together they provide a cautionary tale of what the world of banking will need to look like when we get to the end of the process. This OTB is a little longer than most, but I think it is important reading. If you don't know where we are headed, it is hard to imagine the journey.
I get a lot of newsletters from money managers around the country, which I try and read as they are written by people who are —in the trenches,— actually making decisions on behalf of their clients. It broadens my perspective. Frankly, most are not all that well written and unimaginative, but who ever said writing was easy? But some really strike a chord with me. Today's Outside the Box I have read twice, which is unusual for me. Cliff Draughn is a wealth manager in Savannah, Georgia (Draughn Partners) and a good friend. His letter is a wide ranging tome on a variety of topics, but is full of common sense and one that I think will resonate with readers. I trust you will enjoy this.
There is an ongoing debate on the current nature of the economic environment and what should the response be by government. Today's Outside the Box by Paul McCulley takes up one view, arguing that we need a federal response and stimulus package to protect the overall economy and save capitalism from itself. Tomorrow, I am going to send yet another view arguing that by doing so we are hurting the prudent investor and businesses that did not over-leverage and behaved responsibly. Both are important to understand. And as I will argue on Friday in my 2009 Forecast Issue, both are right. And that is one of the great economic paradoxes that we are faced with today. Navigating through this period is particularly challenging, but I think it is critical that you understand what Paul says today and what Bennet Sedacca will say tomorrow. Understanding what is going to happen, whether or not we agree with the philosophy behind it should be our goal, as it will make us better able to respond with our own portfolio and business decisions.
By the way, Paul McCulley, the Managing Director of Pimco, always features a "conversation" he has with his pet rabbit at the end of each year. Not only is it instructive, but it can also be downright funny. I think you will enjoy this letter a lot. And sorry about the Outside the Box coming later this week. We lost power for the day yesterday due to a mild ice storm here in Dallas.
What is fair value for stocks? Are they now cheap? You can certainly make that argument by comparing valuations based on past performance. But repeat after me, "Past performance is not indicative of future returns." The investment climate of today is almost certainly going to be quite different than that of the 80's and 90's. Thus, to expect stocks to repeat the performance of the last bull market in a climate of government intervention, deleveraging and increased regulations may not be realistic?
This week Bill Gross, the Managing Director of PIMCO (and one of my favorite analysts) moves away from his familiar neighborhood of bonds and offers a few thoughts on stock market valuations. This is not a lengthy read, but it is one you might want to read twice, as the concepts are important. And not just for stocks but for investments of all types. I trust you will enjoy this week's Outside the Box.
Caroline Baum is one of my favorite financial columnists, who writes with a voice of calm reason. She writes for Bloomberg, and I encourage you to read her regularly. This week she touches on the problems in the markets and the continuing calls for government intervention.
Things are coming loose in an ever-widening array of markets in the financial world. No one is suggesting that the subprime problems will be contained, as almost every authority figure did last summer. We now know that everything is seemingly connected, a theme that I have written about for years.
So, what should be done now? Read Caroline's brilliant note for one surprising answer.