The Anonymous Analyst

Commenting on technology & communication issues around the world with focus on USA and India. Also ramblings on other subjects.

Friday, February 25, 2005

Another issue I have been grappling with for some time now is the dire warnings of turmoil ahead for US and the world markets in 2005-2006 due to the unwieldy fiscal deficits. Pundits from Stephen Roach of Morgan Stanley, N Roubini, Financial Sense online have been warning of this for the past 6 months or more.

In summary, the US current and fiscal deficits are financed by foreign central banks, who have been buying dollars like crazy. The US is the demand for the products of these countries (chiefly China, Japan, Europe, south Asian countries). With low/zero savings, tax cuts and increased Govt spending, the US is living on money borrowed from the savings of Chinese and Japanese. This can vanish any time, though it will cause enormous trouble to these economies too if the dollar crashes in value - a 20% drop in the dollar can cause them to lose 20% of their assets (dollars), and their currencies will become stronger, which could adversely affect their exports. Financial Sense online has a blood chilling account of what could happen.

The US also has a peculiar problem of no savings - the average american is not saving, he/she is putting money into assets like property, which cannot go up to stratospheric limits and can come crashing down. In fact a property bubble has been talked off for months by various people including Fortune magazine. My personal experience has been that the rental prices are real low, my apt Mgr stated that he has never given such deals on rentals in the past 20 yrs.

While the US average joe happily goes on splurging on iPods, camera phones, plasma tv and the latest gizmo, charging his credit card merrily, opening a home equity loan, Alan Greenspan is not doing much, slowly increasing the lending rate, which can cause troubles in the mortgage market in the next 6 months or so. Meanwhile the sharp brains in the country have already sensed something wrong - Warren Buffet is betting against the dollar and so are a lot of rich people here. A run on the dollar will increase lending rates, inflation and costs (of gas, imports etc). Equities in the US will suffer, so the pundits say. This is giving me sleepless nights, for I have a few stocks and though they are of the best performing companies, I cannot accept a drop in prices. You would tell me, move into cash, but I see no value there.

So you see, it is a very uncertain future today. I am thinking of moving most of my funds offshore so that I can gain a lot in case of any dollar depreciation. Am evaluating all options and will keep you posted on my actions.

I really like to comment on the US urge for spending; I think it is a reflection of not having any adversities for the past 20-25 yrs. Other countries like China, Japan, Europe, India have seen a lot of adversities, which are still sharp in people's minds and hence they have a natural tendency to save. Savings is good, it builds up a kitty for a rainy day. Here, no savings. Naturally they have to depend on Social Security in their old age, which is going bankrupt just due to the changing demographics.

I think US is faced with multiple problems (multiple whammies) now:
  • Demographics - Social Security becoming bankrupt.
  • Burgeoning fiscal deficit.
  • Lack of savings
  • Corporate world manipulating the system for their own benefit.

What should the US do
  • Start a program to bring more people here - not by illegal immigration of the hispanics - but legally and from all over the world; otherwise Spanish will soon become a major language. The US should go back to the old times of how the italians, scots, irish settled this country; this time from all around the world.
  • Start production here of goods, not just imports.
  • Stop this culture of bullshit reality TV, rampant consumerism, stupid lawsuits.
  • Focus on education.
  • Increase taxes for the rich.
  • Do not allow CEOs to be paid like what is done today. CEOs of public corporations should be paid a high salary, but not as high as is done today. This will boost morale like anything. Today Enron, MCI, Tyco, HP are all solid examples of CEOs who have been paid exhorbitantly. There are a lot of companies which have performed well even though the CEO was not compensated so richly. If Japan and Europe can do this, why can't US?
Comcast has come out with their results and CMCSA and CMCSK have started surging - partly also due to the disclosure that Warren Buffet has doubled his stake in CMCSK - to 10 million shares (~320 mn USD). It is good times for Comcast.

Positives going for them
  • Their competitors are going in for huge investment when they have completed it.
  • SBC, Verizon will take quite some time - 4-5 yrs, several billion dollars and several fights before they have the infrastructure that Cable MSOs have
  • CableWorld magazine reports that higher speeds are possible on Cable without any change in infrastructure.
  • Verizon and SBC will have also the added pressures of the mergers with MCI (if it goes through) and AT&T resp.
Heartily recommend CMCSK and CMCSA to everyone.