Why have we not heard any acceptance of the ideas of Paul Volcker? Why are we hearing more about the ideas of Tim Geithner, who has thus far been a poor Treasury Secretary? Mr. Volcker, the former U.S. Federal Reserve Chairman, a democrat, and the man who stopped the inflation of the 1970’s, is a U.S. economic hero.
President Obama has appointed him as chairman of a presidential economic advisory council, but thus far, the administration has not accepted or implemented any of his ideas. Rather, they have been going with the confused and inadequately described plans of Mr. Geithner. This has given rise to the view by many seasoned observers that the U.S. government does not know what to do!
The administration has thus far been unwilling to allow the ideas of Mr. Volcker to be shared on a national stage. In our opinion, Volcker is one of the best people to formulate and implement the plan.
Recently, he has given a couple of speeches outlining his plans; one speech in Canada and one in the U.S. To us, his plans appear to be concise, logical, and workable. Rather than go into the details of his plan in this missive, let us say it involves returning to the rules that existed prior to 1999; in effect reinstating much of the old Glass-Stegal act, and disallowing commercial banks from taking on as much risk as they were able to take after that date.
In contrast, Secretary Geithner’s plan seems to allow the miscreant big banks to return to the way of doing business that created the problems after the crisis ends. We do not understand why the current plan, which appears confused and inadequate is being pursued.
THUS FAR THE MARKETS ARE TERRIFIED OF PRESIDENT OBAMA’S BUDGET AND HOUSING PLANS
We speak with many professional and individual investors. The great majority of those with whom we have spoken believe that there is a good chance that they are going to be hurt by the administration’s budget and housing proposals.
Since the plans were announced the stock markets have practically been in freefall. This has led to the world stock markets becoming oversold, and we would not be surprised to see a rally.
CLASS WARFARE RHETORIC IS HARMFUL
Global investors are also terrified of the class warfare rhetoric which is more and more frequently being heard in parliamentary bodies worldwide and in the global media. This type of negative rhetoric can only weaken the world economy, and the future economic well being of everyone.
THIS IS NOT A TRIVIAL ECONOMIC DECLINE WORLDWIDE
Many countries are experiencing severe suffering. This is inexorably leading to more protectionism everywhere. Jeffrey E. Garten, a professor at the Yale School of Management who held economic and foreign-policy posts in the Nixon, Ford, Carter and Clinton administrations argued in a Wall Street Journal articled titled “The Dangers of Turning Inward” how countries’ attempts to protect their own companies and workers from the economic crisis will cause severe financial and political damage. The article can be found here: http://online.wsj.com/article/SB123577692593997401.html
CHINA AND THE GLOBAL DEPRESSION
China grows, and everyone acts as if it is a surprise. We have followed China for many years, and have been calling for strong Chinese growth in 2009. This is not due to our personal wisdom. It is largely due to the work of our three favorite economists based in China, who have been remarkably accurate in the past. We also have seen the work of twelve or more China based economists who have not been accurate in the past. Our bullish outlook for the Chinese economy is being corroborated by the economic data and from the statements from their government officials.
China will grow in 2009. It will grow much more than any other country of any size.
Realistically however, China’s growth alone, or even when combined with slower growth from India, will not be enough to create any semblance of growth in Europe andNorth America.
The global depression in Europe and the U.S. will continue and accelerate in coming months.
We continue to see a repatriation of overseas money by frightened U.S. investors back to the United States, which has strengthened the U.S. dollar versus most other currencies. In our opinion, the dollar will eventually decline in value and we recommend that everyone watch to be sure that they are out of U.S. dollars when this takes place.
We believe that the U.S. and much of the world could see a stock market rally soon. This rally could be an opportunity for those investors who still own a lot of U.S.stocks to create liquidity for their portfolios. Longer-term, we believe the agriculture and gold sectors will perform well, and for those who sell short, we will continue to look for overvalued situations to sell short after the market rallies.
Many have asked us if we think inflation will return. We definitely do think it will return, but not in 2009. It will return because many governments worldwide are increasing their money supplies, and once the banking system returns to operating effectively, the velocity of money will rise. In our opinion, this will lead to a rise in inflation, and when inflation returns to the U.S., it will make itself felt worldwide.
It is interesting to note that in an interview yesterday, Warren Buffet agreed with the inflation thesis. He is joining a group of prominent economists and business people who believe that the current world economic policy, will lead inexorably to worldwide inflation.
REMINDER, FOR A LIMITED TIME…
For no charge, as a service to our readers, we will be happy to examine your current investment portfolio, and explain how we might restructure it to meet your needs for income and capital appreciation in the current environment. In recent weeks, we have received a number of requests to review investment portfolios and have been responding to them as time permits. In order to provide a more meaningful evaluation of your portfolio, we will need additional information about your overall financial picture. Please give us a call if we can help you in this regard.
Thanks for listening.
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