November 25, 2003

A World of Uncertainties

The stock market continues to reflect the growing doubt that encompasses seemingly high valuations placed on current and future earnings as well as the worsening situation in the Middle East. As American casualties mount with no end in sight one is reminded of the French and its long war with Algerians. As one veteran of that conflict remarked, “If they want you to leave, it is better to leave sooner than later.” Not only is the growing list of fatalities undermining equity prices, but also the dollar has decreased to an all-time low against the Euro. This latter development is a sign that a gradual shift from the dollar to the Euro, as a viable and desirable reserve asset, may be gathering strength buttressed by Europe’s aversion to American foreign policy in the Middle East.

Under the circumstances, gold and foreign denominated assets will prove worthwhile investments in the years ahead. Domestically, the war will result in growing dissension among Americans with much finger pointing that will accomplish little. Meanwhile, the Federal Reserve is flooding the system with liquidity to soak up the mounting U.S. Treasury deficit. On top of out-of-control domestic spending, the cost of the war effort will become an ever-larger burden. We may well experience another period of stagflation in the next two to three years.