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"Freedom of movement of capital is fundamentally good and positive for the world, provided it applies to economies in good shape." --,
~ Michel Camdessus
managing director of the International Monetary Fund,
in National Journal, Feb, 14, 1998

Welcome to the Blue Money Report

Today's Commentary: 08.20.02
Code Breaker

Last week, at age 89, Meredith Gardner passed away. In all likelihood, he lived a long and pleasant life, doing crossword puzzles until his time was up. But his impact as a puzzle solver became legendary in the forties as he deciphered the code that brought the Rosenbergs to trial. You remember the Rosenbergs, those notorious spies who sold info to the Russians about the Manhattan Project.

His FBI partner, Robert Lamphere considered him a marvel not just for his skill with linguistics and sense of logic, but for what his obituary recalls as "his magpie attitude for facts". He was reputed to store facts with little or no connection, using those tidbits for future reference. The effort has been recently released by the National Security Agency.

What do you suppose, Mr. Meredith would make up of our current economic and market situation? The puzzle has certainly eluded some of the best economic minds, and in doing so, has led investors on a wild chase for the answers.

Today, the figures for imports and exports were released. While trending slightly higher, the import number is masked with all sorts of confusion. The numbers, like so many other indicators, are cloaked in mystery. The figures show increases, but for what. Are we importing increased quantities of oil in preparation for the President's ill fated policy of attacking Iraq, or are retailers purchasing more goods overseas because the price tag is far cheaper in economically depressed countries? If the later is the case for the rise in imports, two things could happen. If the economy doesn't start to turn around soon, retailers could get left with increased inventories, which may sit in warehouses. If indeed this is the reason for the added imports, who will purchase these goods? There is no doubt these goods were purchased overseas because of their attractive cost. This, unfortunately also has a negative effect on the production of similar goods domestically and the employment of the workers who produce them.

No work, no purchasing power and the economy won't respond.

But that is only part of the puzzle left unsolved. Other pieces of the conundrum come from the lenders. Seven major banks have become more vocal about the reduction of short term interest rates. The Federal Reserve Board has been reluctant to do lower the rate for two reasons also. It flies in the face of the wisdom that Greenspan has (somewhat) successfully espoused over the last decade or so, both in front of Congress and through his actions. In 1987, he lowered rates with perfect timing, and he feels as though he has done something similar in the post-bubble stock market. His legacy will remain intact if he proves correct, lowering rates and increasing the flow of money into the economy. If he is wrong, however, he will be questioned as to why he didn't call all of those aggressive investors on their methods sooner. He knew that policy was the reason for failure of the economy in 1929 and was going to make sure that policy would save the economy this time. He can be credited with orchestrating one of the mildest recessions in memory.

Secondly, lowering rates again also admits defeat. Admitting defeat basically would concede to the possibility that another recession is an inevitability. We are hearing increased comparisons to the Japanese economy which lowered rates to zero to no real result. Their economy continues to struggle, but their markets are starting to show signs of returning. We are under the belief that we are somehow different than our Asian brethren. We aren't.

The Japanese had poor long term budget outlooks with little chance for any type of fiscal help to stimulate the economy. And they had a really bad case of corporate governance, which took any chance of investor confidence out of any kind of quick recovery. So Mr. Greenspan can relax there. America has neither of those problems, now do we?

And then the stock market, the former shell of itself, the previous nest egg of millions has turned into one of the last alternatives for any kind of real return. The risk continues to be too high as the erratic fluctuations have proven. Bonds in the long and mid-term range have all but become not worth the time or money. Housing is being called the next big bubble that needs no help from the Fed for its continued growth. But even in housing, the market for new has begun to slow in months that are normally supposed to be stronger. Companies aren't buying anything they can't use in the immediate future, and that means they are buying little or nothing.

Mr. Gardner, or perhaps a windtalker, those famous Navajos of WWII could be of great use to everyone right now. So many conflicting pieces of information can only be the result of some sort of complicated puzzle. We need a good code breaker and we need one now.