Stormy Economic Forecast Persists          27 September 2002

Japanese Government Bank Policy

An interesting development transpired in Japan this month that could have tremendous implications for your savings and asset allocation strategies. The Japanese government disclosed it will attempt to strengthen the capital structure of its banks by purchasing the banks’ stock holdings. These holdings comprise a large portion of the capital of Japanese banks. Where will the Government get the huge sums of money to carry out this endeavor? It is highly likely they will simply print it. These actions could lead to further destabilization of Japan, a substantial investor in both the US stock and bond markets. This is another in a series of continuing bailouts that have little to do with the “survival of the fittest” concept of capitalism and threaten the intrinsic value of an investor’s assets

Capitalism and Recession

Alan Greenspan this month claimed he could not do anything about the stock market bubble for fear of bringing about a recession, which was exactly what he was trying to avoid. Since when does avoiding a recession at any cost have anything to do with the concept of capitalism? Recessions are a vital part of the capitalistic system, which provide the ebb and flow of the economy to weed out the uncompetitive firms and to rebuild balance sheets.

Cheap Capital and Higher Risk

Upon observing the economic scene, one must ponder over the very low level of interest rates and the very high levels of borrowing. Interest rate charges are supposed to reflect the additional costs of obtaining capital for immediate consumption versus the alternative of waiting until the money is procured through earnings. As the amount of credit and risk expands, one would also expect that the providers of such capital demand higher interest rates as the higher levels of leverage entail greater risk of repayment. This clearly is not the case - witness the 0% interest being provided by automakers and 0% interest for cash advances for six months from credit card companies. Borrowing for the purpose of investing in something that produces a tangible return has been replaced by borrowing to consume (which has been trumpeted as the key "strength" of this economy). There is a worldwide campaign of excessive money printing and seemingly unlimited availability of credit providers in an attempt to sustain economic and corporate growth. The battle is clearly being lost, as more and more debt is required to add smaller and smaller increments of growth. According to noted economist Dr. Kurt Richebacher, in the three decades following WWII, each dollar added to GDP resulted in $1.40 added to debt. During the bubble years of 1997-2001 $2.60 was added to debt for each dollar of added GDP. In 2001 this ratio soared to $4.30 added to debt for every dollar of GDP. Interest expense is eating up a bigger and bigger chunk of potential earnings. The danger is that a rise in the very low, and in some cases 0%, interest rates will implode a system operating on already reduced margins, resulting in massive defaults.

In view of these developments, you should seriously consider the impact these reckless economic policies could have on your choice of assets for investment and wealth preservation. Thunder Capital Management continues to invest and trade its assets under management with a keen eye on these issues. In our next update we will discuss some specific strategies we feel can be used to strengthen your portfolio. Look for our upcoming review of the pros and cons of your asset class options.

Please feel free to respond to our letters at rgreene@thundercapital.com.

Richard J. Greene CFA