September

The Laurel Comment

“The modern conservative is engaged in one of man’s oldest exercises in moral philosophy: this is to search for a superior moral justification for selfishness.”
John Kenneth Galbraith
Commentary

There seems to be little question that the opening decade of this, the third millennium has been frought with unforeseen difficulties. There is also little doubt that the present dearth of competent world leadership has served to magnify rather than to alleviate or resolve these growing negatives.

In our view however the major long term event that has overshadowed all others is not the absurd Iraq war but the China growth story and that of the other emerging economies in Russia, Brazil and India. These economic stories are the basis upon which our future world will develop and their potential will not be consumed but enhanced by Middle Eastern misadventures.

While America remains the world’s most powerful economy it is no longer the engine of international growth that it once was, as the diminishment of its national treasure and global reputation is now reaching unprecedented proportions. The arrogance of power, as Senator William Fulbright once called it, has truly been perfected by the Bush administration.

The final cost of the Iraq war is now being estimated at 1 to 2 trillion dollars while a recent paper on the need for an infrastructure rebuild in America calls for a 1.6 trillion expenditure over 5 years.

Although we Canadians have become acutely aware of our own such basic infrastructure failures in recent years, our needs pale when compared with the creaking underpinnings of major U.S. cities and the interstate highways that were constructed 50 years ago. The tragedies are multiplying monthly if not weekly and they are each so unnecessary.

Bombs, guns and the equipment of war are indeed stimulants to short term economic growth but aside from the obvious issues of morality and waste they are essentially, unless you are Halliburton, a non-productive use of public funds.

When a bridge, a sewer system, a hospital or a school is built the money spent is regenerated within the community and taxes are paid by both the companies contracted and the workers employed. Better still, at the end of construction society may have a useful facility or a safer environment instead of an exploded bomb, a flag draped coffin and an enriched defence contractor with an offshore account.

Put your two palms up and weigh these alternatives in the balance of life.




Markets

It has taken far longer then we ever expected for world markets to recognize the potential dangers inherent in the most recent policies of many of their central banks. Led by the once monetarist U.S. federal reserve, money supply growth has soared beyond any historical measure, save the Weimar Republic, while access to fast money and easy credit has abounded.

The surprise so far however, has not been the volatility of the market’s reaction but the facility with which it recovered from its August 16th flirtation with disaster, wherein the Fed, which had created the problem in the first place temporarily solved the liquidity crisis by creating more liquidity. This addendum policy was highly necessary as a short term solution and effectively added trading stability, but in the end we must ask…for how long?

We are now over 5 years into this present cyclical bull market and the time to pay heed to history has become imminent. The problem of a credit expansion and an inflated stock market can only be resolved by a contraction in both. The bigger the bubble grows, the greater the bursting will be, when not if it occurs.

The sub prime mortgage and “teaser” loan crisis has yet to work its way though the economy because the big jump up in U.S. mortgage rates will not take place until January. Markets however, will not wait until then to discount a possible recession in 2008.

September and October are the two worst market months of the year in normal times and these are not those. Please pay attention to the seasonality of what is happening and continue to take serious precautions as this summer’s action has a familiar 1987 look about it. For those of you who are either short of years or memory Google 1987 crash and look at a chart of the period, then move a large portion of your investments to cash or short ETF’s and sleep like a baby until all this passes; as it surely will.

Remarkably

Breaking news has Toyota taking over second place from Ford in U.S. car sales but the real economic and moral news is written beneath the headline number. BMW and Lexus sales have risen over 20% this past quarter while mid-sized cars, light trucks and compacts sales are all down. Get it, the rich are doing okay while everyone else is heading into the tank. Welcome to Bush world.

The ATM machine that closely resembled the average American’s house these past four or five years has stopped functioning and the aftermath wrought by tighter credit is about to begin…and no, cutting taxes to the already wealthy is not even on Bush’s agenda although it may be on Harper’s.

The Laurel comment may be wrong about all this but why take a chance.

Some months ago this letter noted a possible shift in Bush Administration policy towards Iraq. This transition of support from Shiite to Sunni now appears to have crystallized with the Bush Labour Day visit to Anbar province where a courtship of Saddamites appears to have been furthered. This situation bears watching.


Geoff Ryan
September 4, 2007
GeoffreyRyan@hotmail.com
514-795-8450
http://thelaurelcomment.blogspot.com/