2007 - Predictions Part 4

And the Nasdaq? Oh, the Nasdaq. The only good news about the Nasdaq is that inflation losses aren’t significant. That’s because losses due to inflation are as nothing, compared to the 55% nominal loss in the Nasdaq index since it hit its record of 5132 in March 2000. A buy-and-hold investor in the Nasdaq index would be even with the all-time high, adjusted for inflation, if it were at 6075.
Earlier we hinted at currencies; now let’s look at them in more depth. Warren Buffet’s USD24 billion investment against the dollar was done for extremely good reasons. Just consider...
The Bank of Japan holds more than $668 billion in U.S. Treasury Securities. The Federal Reserve holds a little over $675 billion. This means that Japan alone holds nearly as much U.S. debt as America does itself. This then gives Japan nearly as much influence over the U.S. economy as America does itself. Thirteen leading Asian banks own more than $2 trillion (trillion with a “t”) in dollar reserves. And the more debt those central banks control, the greater their control over the U.S. dollar - and over the standard of living in the United States. In fact, Asian banks own such vast dollar reserves means that they will determine how much inflation takes place, and also where it takes place.
Despite Bernanke’s efforts, it can be claimed the Fed has literally lost control of its own financial future. “I’m short the dollar. The ol’ dollar, it’s gonna go down.”
On to one Mr. Bill Gates “...the dollar will lose 40 percent of its value against foreign currencies in the coming months” and “will cause the Chinese and Japanese, who own 36 percent of all U.S. foreign debt, to sell their bonds and mortgage obligations and take their money out of the country.”
What about Sir John Templeton? “I think, over time, unless we have a major change in trade policies, I don’t see how the dollar avoids going down. I don’t know when it happens. I don’t have any idea whether it will be this month or this year or next year, but we are force-feeding dollars on to the rest of the world at the rate of close to a couple billion dollars a day, and that’s going to weigh on the dollar.”
The Sage of Omaha, Warren Buffet, is betting billions that the U.S. dollar is in an irreversible nosedive. And when it crashes, everything you own goes with it. The U.S. dollar has never been weaker. The smart money may react to a so-called rally here and there. But the economic fundamentals remain virtually the same. So when the dollar rallies, it’s driven by wild-eyed sentiment - not common sense.
It’s the world’s richest men know that America is suffering the longest sustained period of financial decadence in history because never before has the “Reserve Currency” of the world been so burdened by debt and delusion.
Uncle Sam spends it like a drunken sailor. America’s outstanding debt now stands at nearly $8 trillion - and it’s growing at $1.64 billion per day. That’s the worst it’s ever been. The American Dream is bankrupt. Personal bankruptcies have doubled in the last decade. About 43% of American families pathologically spend more than they earn each year - meaning that the average household carries some $8,000 in credit-card debt that is nearly impossible to pay off. America’s trade deficit has been hit out of the ballpark. At a record $55.3 billion, the rally cry “Buy American” is nothing but a fading memory.
So, how should we avoid a plummeting market when it comes? In an inflationary period there are five things to look at:
1. Tangible assets and TIPS are much more favourable than nominal financial assets. If we are entering a bull market and a period of secularly rising inflation, a successful portfolio will need more tangible assets. It will also need Treasury Inflation-Indexed Securities (originally “Treasury Inflation-Protected Securities,” commonly called “TIPS”), which did not even exist in the 1980s. TIPS are T-bonds whose principal value is adjusted to reflect actual inflation, a feature that makes them compare favorably with nominal bonds, whose yields reflect only the market’s estimate of inflation. Although TIPS performed well in the past several years as real yields fell, they still offer relatively cheap insurance against inflation. TIPS valuations are supported by the fact that real rates have been lower during reflationary, government-oriented periods than during disinflationary, private sector-dominated times.
2. Balance the shares and stocks owned with bonds. Unfortunately, both stocks and bonds are going to offer lousy returns in the years ahead because rising inflation is both a damper on P/E multiples and a corrosive for total returns on bonds. Shares/stocks and bonds had their glorious two-decade run, but now they face a headwind. If I were forced to choose, I would overweight bonds in relation to shares/stocks. Ideally though, get out if you can and follow the tangible asset path.
3. If you cannot easily extract yourself then look at value in relation to growth. The coming environment is not one in which growth stocks will perform well. They were strong performers in the late 1990s, but that rally was about the American people re-embracing the U.S. enterprise as a going concern. Now, we must think in terms of normalized relative valuations and performance, which means a bias toward value.
4. Look at private-sector dues. A bull market in government is actually a bull market in credit quality. Current valuations are rich in the corporate bond market, but secularly speaking, investors should shift from government debt to private debt.
5. Get out of the US Dollar as much as you can. In the United States, rising inflation and a more government-controlled economy will weigh heavily on the dollar’s value over the secular horizon. What is more, the sheer size of the U.S. current account deficit - an inevitable consequence of “successful” reflation - implies a surplus of dollars globally relative to private global demand.
Without doubt a shift in stock market direction is at hand. Long global equities have been leading the way now for almost 5 months. But now this forecast rally peak is approaching. Fancy odds and sods that have propped markets and individual stocks up should soon fade (private equity LBOs, etc.). Since this is a gradual process, we wouldn’t rule out a slightly higher stock market peak but then expect things to slide.
Based on the lessons of history, success in portfolio management depends on adjusting appropriately to the prospective weights in our mixed economy, not to the weights as they used to exist. Investment managers cannot afford to extrapolate from returns of the prior regime to project returns into the future. The returns of the 1980s and 1990s arose from a bull market in capitalism and falling inflation, and those conditions do not appear on any horizon. If investment managers take seriously their fiduciary mandate to anticipate the future and not simply extrapolate from the past, they cannot use the returns of the 1980s and 1990s as the foundation for a prudent, forward-looking efficient frontier. They must take the contrarian view.
So, who to believe? The equity strategists who are forecasting a reasonably rosy future, those who are bragging about the success of the American markets or the likes of Warren Buffet? The latter has seen it all and has continued to make money for his clients in all scenarios. And if he reckons the world is in for tough times, then that is good enough for me. I know where I will be putting my money, do you?

The above data and research was compiled from sources believed to be reliable. However, neither MBMG International Ltd nor its officers can accept any liability for any errors or omissions in the above article nor bear any responsibility for any losses achieved as a result of any actions taken or not taken as a consequence of reading the above article. For more information please contact Graham Macdonald on [email protected]

Snap Shots: by Harry Flashman

Photography for retirees

Photography is an excellent pastime for the senior members of your family. They have the time to indulge themselves, they have endless grandchildren to photograph growing up, and it gives them something to keep themselves active. A most important part of growing old(er).
Photography is an ideal pastime for our seniors, as it is something that can be picked up and put down at will, it is not too physically demanding, and modern cameras can assist in some areas where age has taken some toll. And the end result is something that can give them great joy, be that award winning sunsets or just pictures of the grandchildren.
So what camera should Granny get? The first pre-requisite is autofocus (AF). There are many reasons for this, but since sharp focus is necessary for a good final print, why not let the camera do it for you, when sharpness in vision is something that becomes very problematical as you get older. Since most people need reading glasses by the time they are 45, and at least half the population has mild cataracts by the time they are 60, AF is the way to go! Provided you can point the camera in the right direction, the camera will do the rest.
Actually there are two types of camera which can do this. They are called Auto Focus (AF) or Fixed Focus. The AF ones are the more expensive, and work by moving the lens in and out electronically to focus on the subject in the middle of the viewfinder, just as if you were doing it yourself. They do this quickly and accurately and will even give an audible ‘beep’ to let you know the focus has been set.
The Fixed Focus types are generally satisfactory for all but close-up shots. They rely on the lens design to keep the entire picture in focus. Their zone of sharpness extends from about two meters away to infinity; however, do not be afraid to try the new advanced cameras, they make life easier, just use them to your advantage.
Another problem often associated with aging is stiffening of the fingers. This made it difficult to thread the film into the take-up spool. Forget it! A digital compact does away with film and any of the problems associated with it. Nothing could be simpler or more fool proof.
Zoom lenses save you having to go the distance. Is it just too much of a hassle these days to walk up to distant objects to get close-up details? Then a zoom lens will do it for you. With a zoom lens it is no problem at all to get a close-up, a wide angle and a distant shot from the same camera position. Maybe an autofocus digital compact camera with an inbuilt zoom lens is just the camera for you. Just push a button to make the zoom bring the subject closer or farther away.
As we get older, we are also more prone to the shakes. Today’s digital cameras can even compensate for the tremor, with anti-shake technology, which was covered in this column three weeks back. This makes photography for seniors even easier.
Today’s camera manufacturers have taken the tears out of flash too. Most new cameras have their own in-built flash which comes on when the light levels are too low, will set their own flash power and give you perfectly lit indoor night shots every time.
So there you have it, Grey Power. There are cameras available now which can get you into photography! If you once had the ‘photographic eye’, then that ability is still there. All you have to do is get the equipment to let you use and enjoy it again. Look for suitable AF digital compacts with built in zoom, anti-shake technology and auto flash.
Pricewise you are looking at spending something over B. 10,000. The Canon Power Shot A 540 has six megapixels and a good zoom, and it is not too small for older hands to hold comfortably. A hint to the family around birthday should suffice.

Modern Medicine: by Dr. Iain Corness, Consultant

Sliced, diced and cheaper priced

This week’s item is really for males over the age of 50, though all you ladies do not need to stop reading. What follows is not some secret older male right of passage involving farm animals and trouser legs! However, it does directly address the leading cause of death in males over the age of 50 (and it is also one of the factors that today’s lifestyle is now showing up in women as well).
This factor is known as Coronary Heart Disease and refers to the gradual build up of ‘plaque’ (and it is not the dental kind) in the inside of the coronary arteries, the arteries that ‘feed’ the heart muscle.
What is often not realized is that the heart muscle does not get its oxygenation from the blood inside its chambers, but through separate arteries that run around the heart and supply the heart muscle directly. These are called the coronary arteries. If the inside diameter of the coronary arteries is reduced by 50 percent, it means that the oxygen required cannot be supplied in enough quantities to keep the heart muscle alive when it is called to perform extra work, such as running to (or out of the way of) a baht bus, for example. Constriction greater than 50 percent means that the heart muscle ‘starves’ of oxygen even more quickly.
We know these days that the ‘plaque’ build-up is made of cholesterol and calcium, and that the likelihood of deposits depends on many factors, including diabetes, high blood pressure, high cholesterol levels, stress and cigarette smoking. This is why we advocate regular testing for those physical factors, and strongly advise you to give up smoking! We actually do want you to live a little longer, with a good quality of life.
To diagnose coronary artery disease, we will evaluate a patient’s risk factors and perform some tests and then divide the patients suspected to be at risk into the two groups; high and low risk. After that, there are two main diagnostic procedures that will usually be performed, conventional coronary angiography or the 64-Slice CT.
Conventional Coronary AngioGraphy (CAG because we medico’s love acronyms, as you know): This is probably the ‘gold standard’ to accurately assess the coronary arteries, and gives an immediate clinical evaluation of known or suspected coronary artery disease. At this time, if blockages are found, the patients are already prepped and balloon and stent can be inserted. An immediate treatment which gets the patient quickly out of danger in the short term.
However, whilst it may be the gold standard, it is also expensive (like gold) and time consuming, as it requires a stay in hospital of four to six hours. Being a direct intervention, with cardiac catheters, there can also be a risk of hemorrhage, though this is not usually the case. But it can happen.
The alternative is the 64-Slice-CT. This is the latest variation of CT scanning, with the original known as 16-slice CT. This was fine for assessing organs which did not move, but was not as accurate in demonstrating coronary artery problems, because the heart is moving and beating inside the chest (unless, of course, if you have died already). However today, with the advent of the most advanced form of this imaging, the multi-slice detectors and high powered computer programs called the 64-Slice CT, we can efficiently get information on the coronary arteries in as few beats as possible, in around 4 seconds. And this comes with 90 percent accuracy.
The 64-Slice CT has many advantages. First off, nobody is actually slicing you open to insert cardiac catheters into your arteries. The 64 ‘virtual’ slices are done of your cardiac image and the coronary arteries by the computer program, not physically. Each slice is 0.625 mm, so will be able to pinpoint calcium deposits. It is a quick and painless procedure. You do not have to wait around in hospital afterwards, other than perhaps wait for the radiologist’s report. A boon for the busy businessman (the group most at risk). And finally, it is much cheaper than having a coronary angiogram.
If you have no risk factors, other than being over 50, I would seriously consider the 64-Slice CT.