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Thursday, July 20, 2006

Insights from the Smartest Man


Just a summary of interesting commentary from Byron Wien of Pequot Capital Management (published by Morgan Stanley), on his interview with the so-called "smartest man". The smartest man supposedly was one of the earliest to recognize the enormous profit opportunities of emerging markets, unmistakably the best investment to be made in the past few years.

The smartest man basically has these thoughts:
1) World economic power is shifting from US/Europe to Asia/Middle East.
2) US is entering a period of stagflation, thus a cautious US equity outlook.
3) However he is not bearish on the US market, he thinks the US$ will go down and US assets will look cheap.
4) The US market will run into trouble in the short term but it won't be a classical bear market, maybe only a 10% decline. The cause will be an economic slowdown, but no recession.
5) The Fed is either done tightening or close to it. To prevent a recession the Fed may have to cut rates to 2%-3%. The Bush administration will do anything to prevent a recession, because if the Republicans lose in 2008, they can be out of power for 15 years.
6) Russian, Indian and Chinese companies are becoming global powers, taking over companies globally.
7) Asia and Middle East economic power will threaten US and European political dominance, eventually the former will look to their own political ambitions. US and Europe will have to form an alliance.
8) Growth and technological advances will drive China's power, but India is also to be reckoned with, since he thinks India can grow faster, its judicial and banking systems are more stable and its doing something about infrastructure weaknesses.
9) The most interesting point by the smartest man is that "we should realize, however, that ten years from now there will be one billion Islamic people who have awakened. They believe they have been taken advantage of by Western powers for centuries, and they will have the economic power to develop a meaningful military capability." Thus all these potential conflicts makes the smartest man BULLISH ON GOLD. People who are distrustful of financial markets, especially unsophisticated investors from developing markets, will only trust this hard asset which will never lose its intrinsic value when all else is in chaos.

TERENCE

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