Thoughts from the Frontline

Last week we looked at how technology has the potential to slow and possibly reverse aging within the next two decades. Marvelous cures for the main reasons of death like cancer, heart disease, dementia and Alzheimer's, not to mention the potential to manage weight, are in our future. Amazing innovations in communications are rapidly coming at us, as is an increased ability to process information. Hunger and malnutrition are in our sites, as we increase the ability to find harvests which yield more, as well as biotech and nanotech processes to manufacture food. Further down the road, the ability to manipulate molecules at the quantum level will mean we can produce the materials we need at much lower costs. As we map and reverse engineer the software which runs our brains, powerful new software can be developed on machines which can aid in the development of whole new technologies, as well as allow us to directly access information and communicate with each other. It will mean I can get rid of this annoying keyboard, which is bouncing around as the plane I am on is in a little turbulence.

What will the world look like in 10-20-30 years? What might future technological advances allow us to do? What will medicine look like? Can we solve the age old problems of food shortages and disease? How will we solve the problems of environmental clean-up? Where will we get our energy? How will we communicate? Travel? Research? Invest? And speaking of investing, which is the usual subject of my weekly missive, is there an investment theme in all of this? Is there a way we can better our bottom lines as we better our technology?

This week, after a few brief thoughts on central bank buying of the dollar, and a very interesting observation about dopamine addiction in the US from Jim Williams (this you absolutely must read!), we will start what will be a 2-3 week foray into the future. I am going to use Ray Kurzweil's new book "The Singularity is Near " as the launching point for our discussion. We are going to peer over the next few valleys and look into where technology is taking us over the next 20-30 years. For some of you, this will be profoundly uncomfortable, for others very exciting and some of you will wonder if I have taken leave of my senses. But first, there are those dollar bears who just keep wondering when will the dollar crash? The answer, of course, is when people stop buying it. Fairly straight-forward proposition. And we have long known that central banks have been major buyers of the dollar. But last year, rumors began to circulate that central banks were diversifying away from the dollar, especially as the dollar began to drop. But then it has come back. What happened? It looks like the rumors of foreign central banks buying fewer dollars were just that - rumors. I got both these notes today from independent sources. Comments come after these quotations. First, Dennis Gartman brings us this note:

This week I let you peek over my shoulder while I try to find some new money managers. Like the old army ad, I am looking for a few good men and women who have figured out some part of the investment world. How does one go about the task of finding and sorting? How can we figure out who deserves to get our money and who we should set aside? It's not as easy as you would think. But first, a follow-up to my letters of the past few weeks. I think it is looking less and less like the Fed will raise rates at the September 20 meeting, even though recent speeches by Fed governors would suggest they are still thinking that way. The calls from all quarters for a one meeting pause to assess the damage from Katrina are quite loud, and the bond market is certainly indicating they expect the pause.

This week we once again look at Fed policy, the economy and some very interesting statistics and commentary from some very thoughtful commentators. We are coming to a critical juncture. Future Fed policy making decisions are rather murky at this point, and we examine why, and why it is important to you. Also, last week, in response to some ad hoc comments in my weekly letter about why it took so long to get soldiers into New Orleans, I received a thoughtful, articulate response from Brigadier General Gregory Zanetti of the New Mexico National Guard. I think you will find the full unedited letter to be of some interest. I think this is a letter you might want to forward to your friends, and at least suggest they read the letter at the end. All in all, it should make for an interesting weekly letter.

Nearly all eyes are on the terrible devastation caused by Katrina, and rightly so. I can do little to add to the amount of news you already doubtlessly have, but in today's letter we will look at some of the economic implications from this tragedy, as well as how they fit into the larger picture of what is already unfolding, and specifically Federal Reserve policy. We will look at a lot of individual items up close, and then see if we can then step back and see if we can make some sense of them. One of my favorite moments in Dallas Cowboy football was when Hall of Fame quarterback Roger (the Dodger) Staubach would come up to the line, see the problems in front of him, and call an audible. (For foreign readers, that means he changed the play at the last second, shouting out a code for a new play.) Let's see if I can make a case where Fed quarterback Greenspan needs to come to the next Fed meeting and call an audible.

What is the relationship between housing prices and stock market forecasting? What will happen if the housing market begins to falter? Exactly what did Greenspan say about housing at Jackson Hole? We explore these topics and a whole lot more and hopefully we can tie them all together by the end of this letter as we meditate on the potential risk of the recent housing boom. Let's start with forecasting. Every few weeks I get a wonderful letter from good friend James Montier, who is the global equity strategist of Dresdner Kleinwort Wasserstein. James is an expert on behavioral psychology and investing. This week's letter is lamenting the rather poor track record of forecasting by economists and analysts.

It's a race to see what will be the cause, or maybe better put, what will be blamed for the next economic slowdown. Will it be oil and rising energy prices? What about a slowdown in the housing market? You can't count out the Fed raising interest rates as source of economic slowdown. If China slows down and thus has less money to invest in our bonds, will rates rise? There are so many potential culprits. We run through them and more as we try to peer into 2006. One of my favorite cartoons is a picture of two scrawny vultures sitting on top of a cactus in the middle of the desert. One turns to the other and says, "Patience, hell. Let's go kill something." Patience is what we are going to need for the rest of this year.

This week we revisit our old friend, the Yield Curve. We look at what it may or may not be telling us, how the Conference Board has changed how they look at the yield curve as part of their leading economic indicators, and muse upon what Greenspan is really doing. There's lot of very important and interesting ground to cover, not the least of which is my concern about Fed policy. But first, let me invite you to meet me in New Orleans at the New Orleans Investment Conference October 30-November 3. This is the grand-daddy of all investment conferences, and they always have a great line-up of speakers. This year Steve Forbes, Ann Coulter, Jim Rogers, Marc Faber, Dennis Gartman and for fun P. J. O'Rourke will be there, along with your humble analyst, as well as scores of great speakers. There is a great deal of emphasis upon gold and natural resources, as well as other types of investments.

I got home late last night from two weeks with the kids in Europe, and jet lag is kicking in. Since I should not be allowed to make any investment observations in this state, I am going to do something for which I constantly get requests and that I have wanted to do for quite some time. This week I give you my list of recommended books along with a little commentary on them, starting with a few new ones. Let's jump right in.

Last week we looked at China, and this week we look at India, the next rising superpower in Asia. I have asked my friend (and fellow Texan) George Friedman of Stratfor to give us his insights on the political implications of what appears to be a closer US-India relationship. Stratfor has been described by folks like Barron's as being a private CIA. I find their daily letters plus his in-depth analysis to be as solid as anything I read. When George writes, I listen. George now thinks we may be seeing opportunities like those in China in 1980. I will be back from Europe next week, but want to thank George for stepping in while I am gone.

Last week I said that for this week's letter we would look at the US trade deficit and China, and in particular the possible revaluation of the currency and its effect upon the trade deficit. China obliged by revaluing the yuan (Renminbi). This is both more, and less, than it seems. There is a lot to cover, so let's jump right in. Let's first look at what China did. They allowed the yuan to rise by 2%, with a daily 0.3% trading band based on the price of the previous day. While in theory this could allow for a significant price increase over a period of several months, in practice it is unlikely to do so. Allowing the yuan to rise too rapidly would be highly destabilizing to the Chinese economy. You can take it to the bank, even an undercapitalized Chinese one, that the Chinese government will do everything in its power to maintain stability.