China and America's Future

Business Leaders and Top Hedge Fund Managers discuss the latest issues facing the economies of the US and China

by Bruce Fenton

Recently I had the pleasure of attending this year’s Committee of 100 Annual Conference at the Waldorf Astoria in Manhattan. The Committee of 100 is a group of Chinese-American business and social leaders whose impressive membership list includes: Yahoo co-founder Jerry Yang, Cellist Yo-Yo Ma, and YouTube co-founder Steve Chen.

You don’t have to be a Committee of 100 member to attend the annual conference; the conference is open to the public at a very reasonable price, particularly after considering the incredible list of speakers in attendance. Individually, any of the dozens of speakers would be worth listening to for an afternoon. Featured speakers included: US Treasury Secretary Hank Paulson, New York City Mayor Michael Bloomberg, Quantum Fund co-founder Jim Rogers, Hedge Fund Legend Daniel Och, Hedge Fund Manager Richard Perry, and Yahoo’s Jerry Yang.

This year’s conference had an electric excitement with the smiling attendees extremely interested in the topic at hand. The audience members, like the speakers, were as diverse as any ‘who's who’ guide to business, but the subject was always the same: China and its growth, its economy, its change, its influence, its buying, its selling and its future.

Hearing our best and brightest speak about China can be quite whelming. The immensity of the information was so great that that during a few presentations I found myself entering a sort of "short circuit" mode and where I would then have to catch up. I began to look forward to having time to sit down after the conference and digest the magnitude of the ways in which China is changing the face of the globe.

One common complaint voiced by speakers was about China's lack of desire to both accept US investments and relinquish control to US investors. Top investment professionals, men and women who make the financial ground shake with their footsteps in New York or Chicago, have increasingly complained about getting a cold shoulder from Chinese companies. I wonder if this is a series of isolated incidents or if it is simply the fact that we in the US need China more than China needs us. Did French and English barons of previous centuries expressed the same frustrations as America became more self sufficient and less reliant on their capital?

While the conference was mainly about the big changes in China, perhaps most impressive is the "smaller" things, the little known and less quoted statistics that hammer home just how immense the growth of China has been. While many people talk about Beijing, Shanghai and Hong Kong, what might come as a surprise is the fact that China has over 100 cities with populations in excess of 4 million people each.

With such a staggering population, even the tiniest percentile of change translates into some very large numbers. One of the speakers, Wilbur L. Ross of WL Ross & Co, raised a few great points in regard to these vast numbers: if China’s automobile penetration per 1,000 citizens increases by 1% it would equal the total output of the US auto industry. Mr. Ross added that Chinese universities are now graduating seven times the number of engineers that the US: “Unless American engineers are seven times smarter”, he points out, “most future innovation will come from Chinese engineers”.

We are truly interconnected in a global economy and the US economy still influences both China and the rest of the world, but our influence is weakening relative to China's strengthening economic independence. The US Government indicates that China’s Gross Domestic Product (GDP) is roughly US$10 trillion and ours is US$12 trillion, in terms of purchasing power parity. Nominal GDP is also very close.

When asked about China’s decisions in managing the Yuan, US Treasury Secretary Henry Paulson said, “I have learned over the years not to ascribe motives. What I do is say they clearly see the principle.” He further commented, “It’s a big advantage for us if China does well economically” and “My own concern is that China has the right goal, which is stability; economic stability and growth.”

Most striking of all is a look at the Chinese trade surplus in comparison to the US’s increasing trade deficit. In terms of real dollars (when adjusted for currency value and debt), China’s surpassing of the US economy may not be in the 5 to 15 years projected by many economists, in fact it may have already occurred. Furthermore, China owns over US$380 billion in US debt, when this debt is sold it could surely harm the US economy greatly.

Given the magnitude of the discussion, it is no surprise that Committee of 100 attracts such an incredible list of members, speakers and attendees. In terms of the future of our global economy perhaps the audience should have had another million members. With the effect of China on our own future, maybe everyone in the US needs to learn more about this future leader of the global economy.

I am glad to have attended the conference; the question now is what to do about our place in the world relative to the world’s newest economic superpower? I suggest visiting the Committee of 100 website (www.Committee100.org) and attending next year’s conference. Additionally, perhaps we should pursue the often quoted advice of investor Jim Rogers: “Learn Chinese”.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Adventure Capitalist Jim Rogers on US Isolationism

China, Dubai, the US and Globalization from the man who may know it best

by Bruce Fenton (watch Globalization Video)

Like many things to do with global change, my conversation with legendary investor, adventurer and traveler Jim Rogers may be scary to most Americans. This fear is exactly the kind of thing Mr. Rogers sees as potentially harmful to the US. His thoughts make one wonder if the US is like the General who asks where his troops are so he can go lead them. As striking as the changes in our world are, even more striking is how few Americans are aware of and participating in these changes. Could isolationism cause the US to miss the boat? Worse yet, will it place us aboard a sinking ship?

The experiences of Jim Rogers seem to make him uniquely qualified for such questions. Co-founder of the Quantum Fund with George Soros (among the most successful funds of all time), Mr. Rogers is recognized by John Train in Money Masters of Our Time as one of today's leading investors. His extraordinary track record and insights set him apart from his peers but possibly most interesting is Mr. Rogers's view of the global economy and his Guinness World Record travel adventures.

In 1990-1992, Jim traveled over 100,000 miles on his motorcycle chronicling his adventures in his book, Investment Biker. At the turn of this century Jim and his wife Paige undertook an even more ambitious journey: 152,000 miles and 116 countries in three years. More than an exciting adventure: this trip was another learning experience for a man who already may have known more about our global financial system than anyone.

Jim and Paige saw up close the changes in our international economy, absorbing details and the feel for places that cannot be gleaned from economic reports. If an uneducated teenager with no investment background traveled such a journey, he would emerge a wise expert on the world. When you place a leading authority with a decades-long travel and investment record on such a journey, the exponential growth in Rogers's already extensive knowledge base is nearly incomprehensible.

Travel Channel star and Chef Anthony Bourdain says "travel makes one smarter". If so, Jim Rogers may be the smartest person on earth. In any event, his travels, insights as an investor and his uncanny track record make Mr. Rogers someone very worth listening to.

Jim's latest book, Hot Commodities, praises commodity markets and his view of their strong potential. Jim and Paige's daughter, born not long after their return from their journey in 2002, is now able to speak both English and Mandarin Chinese, the language that Jim Rogers believes represents the future of business in this century.

Jim's website, www.jimrogers.com, includes a chronicle of his adventures as well as some fascinating discussions with experts like the brilliant Daniel Yergin, author of The Commanding Heights: The Battle for the World Economy. Mr. Roger's books are available at Amazon.com or from his website.

Bruce Fenton: You may have seen our article about Dubai.

Jim Rogers: Yes

Bruce Fenton: One of the things that really surprised us was how staggering the misconceptions are. Most Americans seem to think [Dubai] is a terrorist state and they envision Al Qaeda.

Jim Rogers: You don’t have to tell me.

Bruce Fenton: Why do you think that is? Why is there such a staggering difference from perception and reality? And what do we do about it?

Jim Rogers: There is a staggering misconception about China about Japan, about Europe, about everywhere. Most Americans can't even find Japan on a map and don’t even know why they should be able to find Japan on a map. Most Americans can't find the Pacific Ocean on a map and don’t know why it's of any interest to them to find anything on a map. They can't even find Oklahoma on a map! [laughs]

It's unfortunate because of our history and our geographic location we are very isolationist and always have been, we have very little knowledge of the rest of the world. Our press doesn’t help. Most press companies don’t even have foreign offices anymore.

I mean, if the middle of Africa blew up we wouldn’t know about it for two or three weeks…the rest of the world might, but we wouldn’t.

Bruce Fenton: You see oil going up to $100 a barrel in the future; that seems to bode well for places like Dubai. What are you thoughts on Dubai and the rest of the Middle East?

Jim Rogers: Dubai doesn’t have much oil, you can see this from doing your homework, Dubai will be out of oil in five years or something. Dubai is doing their best to become a center for the Middle East: for shopping, for finance, for technology, for everything else, because they are running out of oil. Abu Dhabi has plenty of oil but that’s a different world. We'll have to wait and see what happens with Dubai.

They are certainly doing a brilliant job of what they're trying to do. As you know they have the best horse race in the world and the best golf tournament in the world and the best everything in the world. So it’s a question of "will it be successful down the road". I don’t know…who knows. I have no idea if all these massive investments are going to pay off in the end. You might be a better judge of that since you've been there more recently.

They are certainly investing large amounts of money on the idea that they will become the major center in the Middle East. If it works, then clearly it will be great. If it doesn’t work, or if there is a war, they are a sitting duck. I don’t know whether it's going to work. Bahrain is trying to do the same thing, Qatar is trying to do the same thing, Kuwait is trying to do the same thing so well have to wait and see. And all the others by the way have much more money than Dubai does because, as I say, Dubai is running out of oil, the others aren’t.

Bruce Fenton: Also Saudi Arabia has King Abdullah Economic City, and they are trying to copy it.

Jim Rogers: Well said. Even the Saudis are now trying to copy. Everyone is trying to copy what Dubai set out to do before. Dubai had to do it out of necessity because they were running out of oil. The others are trying to do it because they are now trying to compete.

Bruce Fenton: Obviously commodities are what you are recommending now. They are still terrifying to most investors and even most people on Wall Street. What would you say to those people? Are they really just missing the boat?

Jim Rogers: First of all I'd say that the fact that it's still terrifying to most people is a great sign because that means it is still an un-invested and untouched asset class. In the world there are something like 70,000 mutual funds containing stocks and bonds for the public and fewer than 50 for the public to invest in commodities. So this has a long way to go, a huge way to go.

And I would point out, as I do in my book, that you can invest in commodities the same way you buy IBM. If you buy IBM most people put up 50 or 100% of the money, well you can do that if you want to buy cotton as well. Most of the terrifying stories about commodities are because of huge leverage that people have used and gotten wiped out with short term fluctuations. So don’t buy it that way.

I would also point out that everybody knows a lot more about commodities than they know about stocks. I mean nobody had a clue about dot com stocks: what they were, what they did or anything else, yet they were rushing out there buying them in a big way. Most people don’t even know anything about IBM or Toyota for that matter. Toyota's got hundreds of thousands of employees and operations all over the world etcetera.

Everybody before they get to work uses most commodities. Before you get to work you use sugar, coffee, orange juice, rice, wheat, corn, rubber if you go running, wool, cotton silk, zinc, lead, gasoline. We know what this stuff is. It's a lot easier to analyze commodities than it is stocks. I did not say it was easy. I just said it was a lot easier. So people have no reason to be terrified, in fact they should be embracing it enthusiastically. They'd probably make a lot more money.

Bruce Fenton: Now on to China. Most of the focus has been on how China will change. How to you see us changing? Do you think that there will be a lot more Americans like you daughter learning to speak Chinese? Are we going to change or will we remain the same and shrink global market share?

Jim Rogers: A little of both. Certainly more Americans are going to learn Chinese for many reasons partly because so very few speak Chinese now. But I'm afraid we'll go the way of Great Britain. The UK: in 1918 they were the richest most powerful country in the world; their currency was the major world's currency at the time etcetera, etcetera. Well, they sort of were over the top. They were over extended and there were many flaws within the underlying system. We're sort of there too at this stage: over extended in every way and unfortunately I don’t see anything that’s going to change. Certainly no attitude here: you've already pointed out some of our shortcomings and that’s going to get worse, not better.

The best opportunities I know are in Asia and in commodities. Learn Chinese and start investing in commodities. Commodities are the single best way I know to protect yourself from the things you have come up with in your analysis. That’s where the money is going to be made in the next 10 or 15 years. If you're clients don’t invest in commodities, they should be. There are plenty of ways to do it, you can buy indexes, you don’t have to buy specific commodities. These days there are a lot of structured products in commodities where your principal is guaranteed if your clients are worried about that kind of thing.

Urge your clients to get their money out of the US Dollar, whether that’s commodities or foreign currency or what. I've told you where the opportunities are.

Bruce Fenton: Thank you very much for your time, we appreciate it.

Bruce Fenton is Managing Director of Atlantic Financial Inc., which specializes in investments and global wealth management and is based outside of Boston, Massachusetts. Atlantic Financial advises corporations, endowments and individuals on international investing including Asia and the Mid East region.

Bruce welcomes comments and is available for speaking engagements, interviews and consultations. Bruce can be reached at 800-559-2900 or email Bruce Fenton.

Please Note: Commentary in this interview may not be appropriate for all investors. Always consult an investment professional before investing.

This information does not represent a recommendation to buy, sell or hold any security. The views and opinions expressed are the author's own and not necessarily those of Cantella & Co., Inc., there is no implied endorsement by Cantella of any advice or trading strategy.

Please carefully consider your own investment objectives and all risks, charges and expenses before investing. Cantella & Co., Inc. does not offer futures or commodities.

Wild Bill and the NYSE

Originally published September 15, 2003

The flap over the pay of New York Stock Exchange chief Richard Grasso is reminiscent of times past, when the NYSE was run by the “good old boys” of American high finance. They were in control until “Wild Bill” Douglas appeared on the scene as head of the SEC in 1936 and forced the Exchange to make stock trading a more democratic institution.

Grasso is Chairman and Chief Executive Officer of the Exchange. He is an employee of the corporation, tasked with overseeing the world’s largest open auction exchange of financial securities. His recently announced one-time payment of $140 million of deferred compensation has raised a number of eyebrows.

According to an article in the Sept. 12 Wall Street Journal, the Exchange hired executive compensation consultants in 1994-95 to review its executive’s compensation. Since the Exchange is a not-for-profit entity, it cannot reward exemplary performance with stock or stock options. Therefore, the Exchange set performance targets for its executives and rewarded them with deferred compensation and bonuses, retirement supplement plans and other target bonuses.

Nobody is questioning the job done by Mr. Grasso. By all reports, he has done an outstanding job of running the NYSE. However, brokers who pay a fee to operate on the Exchange were surprised to learn that while their income has been declining with the falling stock market and the fees they pay the Exchange for the right to do business have risen, Mr. Grasso’s income has shot up.

Prior to Douglas, the President of the NYSE was a member of the Exchange. Perhaps the most famous NYSE President was Richard Whitney, who during Black Thursday in 1929 calmly walked down to the floor of the Exchange and began purchasing blue chip stocks (spending over $20 million in the process) in a single-handed attempt to stop the panic crash. Whitney was later convicted of stealing from the Exchange and ultimately went to jail for his troubles. But Whitney’s affair was not the only problem the NYSE was facing in the mid-1930s.

William O. Douglas arrived on the scene as the third commissioner of the newly formed Securities and Exchange Commission. Appointed by President Roosevelt, Douglas was nicknamed “Mr. Trouble” by the New York press. He was not a friend of the big business/money interests that dominated American finance in that era.

Douglas was ruthless in his drive to reform this venerable institution of American capitalism. During his tenure at the NYSE and later as a Supreme Court Justice, Douglas was criticized by conservatives for his extremely liberal views. Author Bruce Murphy, in his biography Wild Bill, the Legend and Life of William O. Douglas, points out that Douglas was concerned with the preservation of capitalism and the Exchange, and he believed the best way to accomplish this was to ensure that the Exchange remained “above suspicion.”

Whitney’s disgrace gave Douglas the opening he needed to use the SEC to reform the NYSE. The Exchange soon had a new constitution aimed at furthering its public responsibilities, not just its members’ interests. The president became a paid employee, not a member of the Exchange. Brokers were forbidden to have margin accounts for themselves if they did business with the public. From that point forward, the SEC, not the NYSE, would set margin requirements, a powerful tool for dampening speculation and preventing another bubble like the one in 1929.

The Exchange has operated relatively unchanged since the days of Douglas. The Grasso situation is once again calling public attention to the affairs of this private institution. Perhaps it is time, as some floor brokers would attest, for another “Wild Bill” to ride onto the scene.

Who Is George Soros?

by Bruce Fenton

Born Soros György Budapest, Hungary on August 12, 1930, George Soros has risen to the top echelons of global superinvestors.

George Soros survived the Nazi occupation of Budapest and left communist Hungary in 1947 for England, where he graduated from the London School of Economics (LSE). While a student at LSE, George Soros became familiar with the work of the philosopher Karl Popper, who had a profound influence on George’s thinking and later on his professional and philanthropic activities. After selling souvenirs in Wales, Soros joined London stockbrokers Singer & Friendlander before moving to the United States in 1956.

Currently, George Soros is the chairman of Soros Fund Management, which had its beginnings in 1969 as the Quantum Fund. It returned more than 4000% during the next 10 years, and created the bulk of the Soros fortune.

Soros’ Quantum Fund was established in 1969 as one of the world's first hedge funds. With an initial investment of $1,000, the fund was registered in Curacao in the Caribbean, but was operated from Manhattan. Soros’ approach to investing was simple, yet controversial at the time. The fund took money from rich individuals and invested in risky, but potentially highly profitable international deals. According to the BBC, the fund profited hugely during the 1970s from the collapse of fixed exchange rates as well as the deregulation of global capital markets.
By 1980, George Soros was worth $25 million. His fund had grown the initial investment of $1,000 to approximately $100 million.

Today, Soros Fund Management LLC, is a privately held corporation that offers financial services and investment strategies for various funds, including some well known and often controversial hedge funds such as the Quantum Group of Funds. The company's investment strategies have usually been based on analysis of real or perceived macroeconomic trends in various countries.

Soros’ innovative wildly successful investment moves have a profound impact on the way investors view wealth management today. Drawing from strategic lessons learned from effectively managing and leveraging risk, investment and money management firms are able to provide a wide array of investment options and opportunities for individual and institutional investors alike. George Soros and the Quantum Fund have also been partly responsible for the wide growth of hedge funds of the last decade.

In addition to his contributions to the financial world, George Soros also has been making his mark on international policy and issues. He has been active as a philanthropist since 1979, when he began providing funds to help black students attend the University of Cape Town in apartheid South Africa. Currently, he is Chairman of the Open Society Institute (OSI), a former member of the Board of Directors of the Council on Foreign Relations, and the founder of a network of philanthropic organizations that are active in more than 50 countries. During the 2004 US Presidential Election, George Soros was an active critic of President George Bush and his policies. Soros provided funding to the political group MoveOn and other groups opposed to President Bush.

Based primarily in Central and Eastern Europe and the former Soviet Union—but also in Africa, Latin America, Asia, and the United States—Soros’s foundations seek to build and maintain the infrastructure and institutions of an open society. They work closely with the Open Society Institute to develop and implement a range of programs focusing on civil society, education, media, public health, and human rights as well as social, legal, and economic reform. In recent years, OSI and the Soros foundations network have spent more than $400 million annually to support projects in these and other focus areas.

Soros is the author of eight books, including The Bubble of America Supremacy: Correcting the Misuse of American Power (Public Affairs, January 2004); George Soros on Globalization (2002); The Alchemy of Finance (1987); Opening the Soviet System (1990); Underwriting Democracy (1991); Soros on Soros: Staying Ahead of the Curve (1995); The Crisis of Global Capitalism: Open Society Endangered (1998); and Open Society: Reforming Global Capitalism (2000).

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Who is Warren Buffet?

by Bruce Fenton

Born in Omaha, Nebraska in 1930, Warren Buffett is a wealthy businessman and considered as the world’s most successful stock market investor. Through intelligently executed investments, Warren Buffett has amassed an enormous fortune. With an estimated net worth of $40 billion as of 2005, Warren Buffett is ranked by Forbes among the richest people in the world, often listed second only to Bill Gates.

Known as the “Oracle of Omaha,” Warren Buffett is the son of a stockbroker and Congressman. As a young child, he endeavored to make extra money by delivering Washington Post newspapers. At age 17, Warren Buffett has already earned $5,000: the equivalent of $47,320 in 2005. He attended the Wharton School at the University of Pennsylvania, and then transferred to the University of Nebraska. In 1951, he earned as Master's degree in economics at Columbia Business School, studying under Benjamin Graham, chairman of a small, still unknown insurance company named GEICO.

From 1954-56, Warren Buffett worked for Graham as an investment salesman and securities analyst. In 1956, he became a partner in the investment firm Buffett Partnership, Ltd. In 1965, he acquired the textile manufacturer Berkshire Hathaway and became chairman and CEO in 1970.

Warren Buffett’s prodigious gift as a stock market investor enabled him to identify prime investments led to successful acquisitions of insurance companies and manufacturing and service firms. For Berkshire Hathaway, his strategy is simple, yet genius: he purchased or built insurance or reinsurance companies and used them as “super margin” accounts to buy equities.

Today, Berkshire Hathaway is worth more than $75 billion, and oversees and manages a number of subsidiary companies. Warren Buffett has been known to stay away from high-tech investments, saying he prefers to invest in businesses he understands. Berkshire Hathaway owns a diverse mix of companies, including: Borsheim's Fine Jewelry, a large Omaha jewelry store; Dairy Queen; Nebraska Furniture Mart; The Pampered Chef; See's Candies; Helzberg Diamonds stores; H.H. Brown shoes; The Buffalo News; Benjamin Moore paints; clothing manufacturer Fruit of the Loom; vacuum cleaner manufacturer Kirby Corporation; and several insurance companies, including GEICO.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

William O. Douglas

by Bruce Fenton

William O. Douglas’ father died when William was 6, and from that point on he worked to help support his mother. At twelve he was stricken with polio and told he would never walk again—something his indomitable spirit would not allow him to accept, for soon he was hiking in the mountains near his home.

At 18 he went off to college, living four years in a tent while he both worked full-time and went to school, graduating with honors. Penniless, he worked as a shepherd. He took a herd of sheep to Chicago, where he hopped freight and rode the rails into New York with 6 cents in his pocket to enroll at the Columbia Law School. But first, he had to get a job to pay for school and support his mother.

When law school was completed, Douglas attracted the attention of President Franklin D. Roosevelt, and was appointed to the newly formed Securities and Exchange Commission (SEC), and by 1937 became chairman. In 1939, Douglas was nominated to the U.S. Supreme Court by Roosevelt where he will be forever remembered for his liberal opinions on freedom.

Today, we all live with another of his legacies as a result of his role with the SEC. The SEC was organized to administer three Acts: the 1933 Act, which regulated the offer and sale of securities; the 1934 Act, which regulated stock exchanges and various practices of brokers; and the 1935 Act, which called for the dissolution of public utility holding companies. Later, the 1934 Act was amended to allow—under general supervision of the commission—the self-government of brokers and dealers in the over-the-counter market. The self-governing organizations became known as the NASD and the OTC market became the NASDAQ.

At the time, Douglas was concerned with the fact that less than one percent of the total number of stockholders held fifty percent of all securities listed on stock exchanges. He made it his mission to see that the large percentages of stockholders on the small side were protected. In his book, Go East Young Man, he describes the situation as reminding him of the “golden-mantled ground squirrel in the Cascades who is the anchor man in the food chain. He is to predators what hamburger is to man. His enemies are many… in the capitalistic system the unsophisticated small stockholder is the ground squirrel… hamburger for predators!”

As a jurist, Douglas could be counted on to protect the rights of the small and the weak. His was the opinion that “man’s age-long effort has been to be free. And we can keep that freedom only if we are self-reliant enough to be free. We cannot become self-reliant if our dominant desire is to be safe and secure; under that influence we could never face and overcome the adversities of this competitive age.”

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Who Is Alan Greenspan?

by Bruce Fenton

Alan Greenspan, Chairman of the Federal Reserve Board, is arguably the most powerful person on the national scene. As we have seen in the past week, his every move, his every word, his every expression is scrutinized, analyzed and fed back to us by the national press.

As we have learned during the terms of the past three presidents, market bubbles up and down, and currency crises here and abroad, this is a man who can truly move markets. At his word, interest rates move up or down. From his position on the Fed, money for economic growth can be put into the economy or taken out to slow down growth. For investors, no other single person’s actions can so quickly raise or lower the value of investment accounts.

As Chairman of the Federal Reserve System Board of Governors, the central bank of the United States, Greenspan oversees a network of twelve Reserve banks scattered across the country along with the Board of Governors and the Federal Open Market Committee.

The Fed’s mission is to ensure a secure banking system for both consumers and the government, foster a healthy economy and keep inflation under control.

The Fed Chairman serves at the whim of the President. Now in his fourth term as Chairman, Greenspan has worked for four Presidents, managing to do his job as apolitically as possible. Despite answering to the sitting President, Greenspan and the Fed are not required to gain the approval of any branch of the government for their decisions. They operate as an autonomous private-sector banking corporation. And while the Fed is a government entity, it does not operate on tax dollars; it meets expenses with interest earned on investments in government securities and bank loans.

Greenspan’s longevity is partly the product of his calm, careful, conservative approach to dealing with the nation’s economy. He prefers the subtle to the heavy-handed approach when solving problems. In part, this could be attributed to his upbringing.

He was a child of the Depression, the son of a stock broker and a retail worker. He parlayed his early love of music into his first job as a clarinet and saxophone player in the Henry Jerome swing band. The $64 a week that he earned enabled him to go back to school at 19 as an economics student at New York University. In the early ’50s, Greenspan, short on cash, dropped out of a doctoral program at Columbia University to become a professional economist. (NYU later conferred his PhD in 1977 without a dissertation.)

He entered politics in 1968 as a member of the Richard Nixon campaign staff. He became Gerald Ford’s top economic advisor during the economic woes of the mid-’70s, continuing to serve in various economy-related posts in the early Reagan years. He was appointed to his current post by President Reagan mere months before the stock market crash of 1987.

Greenspan is currently married to his second wife, NBC News correspondent Andrea Mitchell, and is an avid tennis player. He also spent sixteen years in the inner circle of Ayn Rand and her philosophical group, the Objectivists. Rand, author of The Fountainhead (1943) and Atlas Shrugged (1957), was a conservative thinker who celebrated rugged individualism and capitalism in her works.

It is a tribute to his guidance and leadership that since his appointment to his present position, inflation has fallen, interest rates are at all-time lows, and this nation remains the dominant economic engine of the world.

Alan Greenspan’s term expires at the end of this year. There is much speculation surrounding his eventual replacement if he decides to forego another term. He will certainly be a tough act to follow.

Bruce Fenton is a financial consultant, a writer, and the president and founder of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Scam Artists

by Bruce Fenton

The headlines of the Wall Street Journal® feature were eye-catching . . . “Confessions of a Scam Artist.” This August 9th piece by Glenn Ruffenach featured a lengthy prison interview with Eric Stein, a scam artist who bilked 1,800 investors out of $34 million.

Financial scams have a way of popping up when regulated markets for stocks and bonds offer investors little return or less hope. The granddaddy of scam artists, Charles Ponzi, realized this when he bilked investors out of $15 million in 1920 (that’s about $150 million in today’s dollars). At that time, the stock market was in a dive, and the country was going into a very sharp, but short depression.

Ponzi sold investors a “too good to be true” investment scheme. He made it work by using new money coming in to pay off earlier investors. Eventually investigators discovered the fraud, his house of cards collapsed and he went to prison. His technique of enticing new money into a fraud by paying off earlier investors bears his name, a “Ponzi,” and is at the heart of most modern day scams.

Eric Stein started out with a legitimate business proposition that needed money. He discovered that he could raise money by employing sophisticated telemarketers and promoters, and by packaging his idea into a glamorous, can’t-miss, proposition.

While his business faltered, his fund raising prospered. He paid original investors their promised returns from new money coming in. But, like Ponzi, he soon caught the eye of investigators and wound up in prison.

His promoters found the new money by targeting groups they considered the most vulnerable . . . people close to retirement or who had recently retired. These are folks who have been hammered by the stock market, perhaps never had a business opportunity when they were younger, and dreamed of an easy income source.

The French have a slang term for these targets . . . “mooches.” A mooch is someone with the right personality traits . . . they’ve got to have a deal. Typically, they’re in their 50s, or they’re entrepreneurs who have accumulated some wealth. Their names can be purchased from list companies.

List companies find mooches by soliciting information in shopping malls, for example, where one might be asked to fill out a simple questionnaire, or off the Internet where the unsuspecting are asked for information in return for free products or services. These names are sold for up to $100 a name to professional sales promoters.

Stein found that it was not necessarily the unsophisticated or economically uneducated that made easy targets. His favorite mooches were white-collar types with lots of cash . . . doctors and particularly dentists were at the top of his list. Small business owners who are risk takers also were easy marks.

As he told the WSJ, it’s all in the packaging. Make it easy to understand, make it glossy and professional, make it sound good, wrap it in phony testimonials, pay off the first ones in the door and soon their neighbors will follow with cash in hand.

Mr. Stein left the author with these tips. Never talk to a financial salesperson on the phone whom you don’t know personally. Don’t respond to unsolicited business promotions sent through the mail or by email. Never purchase unregistered securities. Never purchase any financial product that is described as “low risk, high yield,” or “safe” because a friend, relative, religious leader or fellow parishioner has recommended the opportunity to you. Finally, never answer any survey or enter a contest while shopping in a mall or while online.

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Witch of Wall Street

by Bruce Fenton

Contrary to the widely held belief, Meg Whitman, CEO of eBay, is not the first “World’s Richest Lady to Make It on Her Own.” Arguably, that title may rest with one Hetty Green.

Had there been a Forbes Four Hundred list when she died in 1916, she surely would have been among the top twenty. According to some historians, she remains to this day one of the forty richest Americans ever.

Hetty made her money the old fashioned way . . . never spent a penny she didn’t have to, and invested wisely in businesses she understood.

Her family came from Mayflower stock. In the early 19th century, they built a fortune in the New England whaling industry. She inherited a piece of the family fortune, including some from her father who learned early in life that the easier money could be made on Wall Street. It was from him that she inherited a love and a nose for trading properties and stocks.

Even though her inheritance provided a handsome annual income, it wasn’t enough for Hetty. Never, it seems, would she have enough. Stories of her miserly, penurious ways abound. This was a lady obsessed with money itself—not the power of money, not what it would buy, but simply bigger piles of money.

No matter how minor the sum, she would part with none of her money without a huge emotional sacrifice. A story is told that she spent most of a night tearing apart a carriage to find a two-cent stamp that had fluttered from an envelope. During the time she spent looking for that stamp, Hetty’s vast fortune earned enough in interest to equal an average family’s annual income.

As good as she was at not spending money; she was equally adept at making it.

In their book The Witch of Wall Street, Hetty Green, authors Boyden Sparkes and Samuel Taylor Moore quote her views on investing: “I don’t believe in stocks. I never buy industrials. Railroads and real estate are the things I like. Before deciding on an investment, I seek out every kind of information about it. There is no great secret in fortune making. All you have to do is buy cheap and sell dear, act with thrift and shrewdness and be persistent.”

In 1885 Hetty just barely survived the failure of the investment bank of Cisco and Son, holders of her vast sums of currency, stocks, bonds, real estate deeds, and certificates of deposit (CD). She quickly moved her money to Chemical Bank in New York. They were kind enough to offer her an office to work from, but Hetty wouldn’t risk being called a New Yorker and being made subject to New York taxes. So the world’s richest woman, when visiting her money, would work at whatever desk or counter was available. If none were available she would sit on the floor, clipping coupons. She would even bring her own lunch, which she heated on the radiators.

She was a familiar sight on Wall Street in her later years, dressed in drab utilitarian clothes, trudging from bank to bank, brokerage to brokerage, conducting her business. She refused to pay for a cab . . . “Couldn’t afford one,” she would complain.

She spent her last days moving through a succession of rooming houses and cheap hotels, all to avoid paying New York taxes. Fortunately, she died before the income tax became a staple of American economic life!

Bruce Fenton is a financial consultant, a writer, and the Managing Director of Atlantic Financial Inc. Bruce welcomes inquiries, comments, and questions. He can be reached by contacting The Fenton Report.

Bull vs. Bear

by Wendell Cayton

In a tradition that dates back 150 years to the California gold rush, a bull and a bear were thrown into a ring to do battle as entertainment for the miners. The modern “miners” in this spectacle were a group of stockbrokers and financial service professionals from the United States and Canada. The furry critters providing the entertainment were two widely followed stock market prognosticators—one an unapologetic bull and the other an unabashed bear.

These two opposites shared a stage in a debate at an Atlanta conference I recently attended. Bearing fangs and sharpened claws was “Bear” Robert Prechter, Jr., an avowed advocate of the Elliott Wave system of technical stock market analysis. Dueling with pointed horns and slashing hoofs was “Bull” Harry Dent, famous for his optimistic views of the stock market.

Prechter is widely recognized as an advocate of a form of technical analysis known as the Elliott Wave Theory. Users of this theory predict future market movements based on charting prior patterns of market performance. Elliott Wave theorists generally believe the stock market will move in a five-wave pattern. A correcting down wave follows each upward wave. By the fifth wave, the correcting event is generally thought to be a downward market fall to below the levels of the start of the first wave.

According to Prechter, the market is approaching the top of a fifth wave in a pattern that began with the market crash of 1929. Therefore, he is predicting a major correction, with the Dow pulling back to a 60 year low. Prechter has made similar claims in the past, one as recent as May 1997 when he inaccurately forecasted such a drop. Despite that missed call, he remains convinced the markets are poised for a serious correction.

For those more interested in fact than fantasy graph models, Dent provided hard evidence and research based on consumer spending pattern. His models project a Dow roaring ahead to the range of 40,000 before he sees a major correction, which he predicts will hit sometime between 2007 and 2010.

Dent, best selling author of The Roaring 2000s, makes no apologies for his optimistic future for the next seven to 10 years. Using models based upon demographic trends, Dent sees a stock market continuing to climb into the later part of the first decade of the new millennium. He first unveiled his analysis in 1993 in his book The Great Boom Ahead. He based his predictions for stock market movements on the spending and savings habits of the population. He theorizes that the economy is driven by spending and savings patterns that are a function of the age of the population.

According to Dent, a younger population is likely to spend heavily for establishing a household formulation, using a considerable amount of credit in the process. This will drive up interest rates and inflation, similar to what the country experienced in the late 1970s when the BabyBoomers were young and establishing households.

Spending patterns change later in life. As children grow and leave home, parents enter their peak earning years and begin to concentrate on the accumulation of financial assets. Buying patterns change and saving increases. Interest rates and inflation fall as the mature work force becomes more productive.

In my opinion, Dent provided readily understandable facts and fundamental arguments to back his argument while Prechter relied on theories based upon fitting lines to charts of past market movements. I would have to say the “Bull” in this case won over the crowd…but one could also say that is a little like preaching to the choir!