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| Greek mythology held that the
person who untied the Gordian Knot would rule all of Asia. The person
who unties today’s Gordian Knot will rule the World – not just Asia - as
did Alexander the Great, who defying topological logic, decided to “Cut
to the Chase” despite the fact that no one had claimed the puzzle was
unsolvable. He solved the problem his way, and we will have to solve it
our way. |
Well, even Warren Buffett had a
rough 2008 as Berkshire Hathaway's stock
was down about 30% for the year, and its
book value per share was down 9.6%. It
proved to be his worst year ever. An
admirable characteristic of Mr. Buffett’s is
that he will own up to it. Even the “Sage of
Omaha” is human.
It has been said that Mr. Buffett was
held hostage by his strong belief that stocks
should be bought and held. Although we
believe that the 2008 markets’ experience
largely discredits that theory, the Sage has
always maintained he is unconcerned by
short-term market movements because of his
long-term outlook. This is a luxury that is not
practical for everyone as indisputably proven
in the last year and a half. We are also a bit
curious as to what “long-term” really means
for someone who is 78-years old.
These comments are not meant as a
criticism of Mr. Buffett; they are simply a
reminder that he also has human frailties and
that there is no such thing as a perfect
formula for investing.
Exxon, IBM and Johnson & Johnson,
to name only a very few, have been excellent
long-term investments whereas General
Motors, Chrysler, Citigroup, American
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International Group,
Lehman Brothers*,
Fannie Mae, Freddie Mac, Pan American
World Airways and one of the most widely
held common stocks ever - Pennsylvania
Railroad - have not. Investments, like orchids
and children, require constant supervision.
*Note that bankruptcies are not necessarily
“bad” for everyone. “Weil, Gotshal & Manges
LLP earlier this week asked a federal
bankruptcy judge in New York to sign off on a
$55.1 million payment for its work representing
Lehman”. And that is just for the quarter.
“Mr. LoPucki estimates that Weil stands to
bring in more than $200 million in fees by the
end of the case. That would exceed the nexthighest
debtor counsel fee, the $159 million
that Weil earned during the Enron bankruptcy.
A Weil spokesman did not respond to a request
for comment.” Wall Street Journal, April 16, 2009.
Any guesses as to Chrysler and
possible General Motors bankruptcy fees?
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With regard to today's stock markets,
we believe they should be approached with a
great deal of caution because despite several
recent and most welcome rallies, the
fundamentals necessary to support a
sustainable bull market are not yet visible.
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Furthermore,
as pointed out in our
last letter, percentage gains while numerically
correct can be misleading. Citigroup, for
example, traded as high as 54.77 in January
2007 and as low as 1.03 in March 2009.
Citigroup’s shares closed on May 1st at 2.97 -
-- an increase of 1.94 or 188% above its low.
It is reported that the bank may still need an
additional $10 billion or more to meet the
government's Stress Tests.
The traders and investors who have
cash yielding next to nothing have been
“trying out the waters” in these extremely
volatile markets because the economy has not
been falling as fast as it had been.
The reality is that over a period of
many years the US consumer has been the
engine of economic growth in the United
States and the rest of the world. At this time it
is very difficult for the consumer to borrow
money and virtually impossible for him to
take more equity out of his home. In other
words, he can no longer use his home as an
ATM machine. His credit card is maxed out;
and, people on unemployment ordinarily do
not have much discretionary income. These
are a few of the reasons why the American
consumer is not spending, and why he is no
longer the engine of US and world growth.
Until the economy and the credit
markets are reversed these conditions will
continue. That is the reason the US economy
has contracted violently - declining 6.1% in
the first-quarter --- nearly matching the 6.3%
decline in fourth-quarter of 2008. These two
quarters’ contraction was the worst in more
than 60 years.
This chicken and the egg problem
accounts in large part for the complexity of
the economic problems. We are reminded of
the Knot.
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President Obama and his
administration are attempting to spend
America’s way out of these problems thus
producing the largest deficits in this country's
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history. The questions now are not only
whether this strategy will be successful but at
what price the rest of the world will be willing
to buy the US dollar.
Issuance of exorbitant amounts of
dollars and dollar equivalents will ultimately
produce not only a weaker dollar –
“Monopoly money” – but also the likelihood
of severe inflation. It's only a matter of time.
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On April 24, 2009 the
Financial Times
reported: “China reveals big rise in gold
reserves. China has quietly almost doubled its
gold reserves to become the world's fifthbiggest
holder of the precious metal, it
emerged on Friday, in a move that signals the
revival going on after years of fading
importance.” The FT continued: “…the head
of the secretive administration of foreign
exchange, which manages the country’s
$1,954bn ($1.954 trillion in American
English) in foreign exchange reserves,
revealed China had 1,054 tonnes of gold, up
from 600 tonnes in 2003.”
“Paul Atherly, Beijing-based
managing director of Leyshon Resources,
said that even after the latest purchases
China had a very small percentage of its
reserves in gold, far below the US or other
developed countries.
“Those [gold] holdings are still too
low in terms of the size of its economy and the
growing significance of its currency.”
Since the US is a financial hostage as
a result of its debt held by China, we wonder
if they know something that we do not.
We
think not.
There is no question as to the
direction the Chinese are taking. It's not a
tough call, and it is the strongest signal we
think we can ever recall. Do you know where
your currency is or the direction it is headed?
The issuance of more paper money will only
hasten the outcome.
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Buying property is one alternative to
owning currency and on that front there is
good news for prospective buyers. On April
21st the price of the Helmsley estate in
Greenwich, CT was reduced by $50 million in
one fell swoop. This reduction, probably the
largest ever for any U.S. house, lowered the
offering price to $75 million from the original
$125 million when the 40-acre property was
first put on the market a little over a year
ago.
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Some observations regarding China’s
relevance today from an address “The
Dragon Rising” given at the Virginia Military
Institute in April 2009:
“
England doubled its Gross Domestic
Product in 48 years, starting in 1780. The US
took 47 years to double starting in 1839;
Japan 34 years from 1885, South Korea in 11
years from 1966 with America's help, but
China doubled its GDP in 9 years from 1978,
and then doubled it again by 1996 in 9 more
years. From a third world country to the
world's 4th largest economy in 28 years. This
is unprecedented in world economic growth.”
“It's assumed that within 10 to 15
years China's global metal consumption will
be 50% larger than the US. A change of this
magnitude in finite global commodity
demand and trade will have vast political
consequences. China is developing intimate
partnerships with countries worldwide and is
creating ownership interests in critical
commodity production and exploration. The
US has not developed any long-term strategy
for managing the overwhelming consequences
of China's new and ever growing ownership
positions”
“China's promises to move toward
democracy are solely for the benefit of
business relations with the US. Neither the
majority of the Chinese people nor the
Chinese government has as any intention or
desire for creating a democracy.” |
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“China is developing a
foreign-policy
and military strategy to protect its access to
and the transport of their vital raw materials.
China is producing a very large Navy to
protect shipments of oil from the Middle
East, iron ore from Latin America, and
liquefied natural gas from Australia.
“The Chinese advisors to China's
President Hu Jintao say that today China
needs the US economically more than the US
needs China. But by 2015, only five years
from now, China will have economic parity
with the US. We will then need China
economically as much as China needs the
US.”
The author concludes: “That will be
the prime mover for the tectonic shift in the
world balance of power which will take place
in the next 20 to 30 years.”
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We recall that it is an ill wind that bloweth no man good and will continue our
efforts to unravel today’s Gordian Knots in
these most challenging times. This time we
will need a really sharp sword!
John W. Hamilton
April 7, 2009
John W. Hamilton
jwh@hamiltonadvisors.com
Deborah J. Hamilton
djh@hamiltonadvisors.com
J. Brock Hamilton
jbh@hamiltonadvisors.com
WEB SITE
www.hamiltonadvisors.com
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PRIVATE WEALTH MANAGEMENT SINCE 1980 |
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This article contains the current opinions
of Hamilton Advisors and does not represent a recommendation of any
particular security, strategy or investment product. Such opinions are
subject to change without notice. Information contained herein has been
obtained from sources believed to be reliable, but is not guaranteed.
This article is distributed for educational purposes and should not be
considered as investment advice or an offer of any security for sale. ©
2009 Hamilton Advisors, Inc. All rights reserved. Tel: 203 629 1112.
Fax: 203 629 1469
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