From the Desk of Richard Esposito

We start our mid-summer letter with the latest headlines from the ongoing financial crisis, and how it will change our lives, followed by some special insights from China as the Summer Olympics begin. Finally we wrap up with a 30 year-old prophecy come true – made by a most unlikely prophet – which no one seems to have noticed.

True to our summer tradition, we’ll keep it short – and as light as we can. Here goes.

The financial crisis deepened over the last few weeks. It started last summer, right around this time, with what came to be known as the “sub-prime” crisis. (Remember that?) But it’s mushroomed now and continues to grow. The latest local and national highlights include:

We haven’t even mentioned Fannie Mae and Freddie Mac (more on them at the end of our letter). And to think that it wasn’t too long ago that the President, Treasury Secretary and Chairman of the Federal Reserve were saying that the sub-prime crisis was ending and things would be looking up! By now, we suspect they’ve awakened from that dream.

Perhaps more in touch with reality, Peter Bernstein, consultant, economic historian and writer, wrote in a recent New York Times article: “The economy teeters on the edge of not just a recession, but also a more profound decline where trouble in any single sector can spread breakdowns throughout the system, driving unemployment to intolerable levels. To sit back and let nature take its course is to risk the end of a civil society.”

He’s saying we have no choice but to accept the government bailouts and their inevitable consequences. Yes, you and I will bear the brunt of the cost of these bailouts, no matter how you slice it. Expect further deterioration in the value of the U.S. dollar. To be more specific, if the value of everything you have is in dollars, expect that value to go down in the coming months and years.

We said we’d try to keep this letter light, so we’d better leave the financial crisis behind. (We’ll have more to say in future letters.) So it’s on to China, home of the upcoming Olympics.

The “new” China’s continues to make its presence felt in all our lives. We shouldn’t be surprised, since 1 in 5 people in the world live in China. It wasn’t so long ago that our picture of China was one of people riding on bicycles wearing those funny “Communist” suits. Where have they all gone? Now “they” look a lot like “us.”

They may look like us, but there’s a lot about Chinese culture and civilization that’s different. In his recent book, “The Bitter Sea,” Charles Li recalls being born and raised in the Confucian tradition of pre-Communist China, his experiences with Chinese Communism and the fascinating journey that brought him to the U.S. The book makes for an enjoyable summer read and will help you understand some of the differences as well as the similarities between China and the West, as well as the fundamental Chinese character and culture that even an often brutal Communist regime has not been able to erase even after over 50 years of trying.

With the Presidential election in full swing, and talk about politics dominating the news, we thought you’d appreciate this insightful description of the nature of politics by Li’s father:

Rule #1: Keep everyone in the light while you yourself remain in the shadow.

(Find out everything there is to know about everyone without divulging anything about yourself.)

Rule #2: Find out who is connected to whom.

(Everyone has an inner circle. Know everyone’s circle of confidant’s. How to do this? Tell a person a sliver of scintillating gossip. It will spread to the person’s inner circle!)

Rule #3: If you wish to strike in the west, make noise toward the east first.

Rule #4: Never attack anyone unless you’re positive that you have the means and intention to finish him off.

Rule #5: Always make time to listen to others.

Rule #6: Patience, patience, patience.

When I read this I thought not only of politicians like McCain and Obama, but also of people in school, in the neighborhood and in business. Politicians are all around us, not just in government – for better or for worse.

Finally, we get to a prophecy made over 30 years ago by Robbie Robertson. You may remember him as the lead guitarist and song-writer of The Band. (If you’ve never seen it, “The Last Waltz,” Martin Scorcese’s film of their last concert, captures the essence of the 60’s and 70’s music scene – again, for better or for worse.)

But it’s the chorus of The Band’s signature song “The Weight” that concerns us here. As we were struggling to capture in a sentence or two the meaning and impact of the government’s bailout of Fannie Mae (and Freddie Mac), we suddenly remembered those lyrics. Written over 30 years ago, Robbie Robertson’s words never made much sense to me then. But I think you’ll see now how they perfectly identify who will bear the expense of the government bail out:

With that little caveat, remember it’s summer, the Summer Olympics start this week and the fresh Jersey tomatoes will soon be ripe and juicy. Relax and enjoy.

Rick

P.S. – We’ve got a new telephone number: 212-907-6583. Email remains the same: resposito@lighthousewm.com.