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8:30 AM EST, Monday, September 10, 2007: Upstate New York where we have a country house has had the driest summer in eons -- until Saturday when my wife wished for rain for her newly-seeded lawn. On command, the skies opened up. Two days later it's still raining. My wife is now worried her lawn will wash away. There are several obvious morals in this. If God listens to my wife, how to get my wife to be my conduit? Suggestions welcome.

Things economically remain squirrely. Which is why I keep saying, "he who has cash will be king." See below.

Two pieces worth reading. First from my friend Donald Luskin who runs an investment advisory consultancy, Trend Macrolytics, with lots of institutions as high-paying clients:

Rate Cuts Could Lead to Ugly Inflation Woes

September 7: LAST WEEK I made the bold, if not downright crazy, prediction that that the Federal Reserve would not cut interest rates at the upcoming FOMC meeting on Sept. 18, despite widespread panic in credit markets.

But then again, it probably seemed crazy when I said to buy stocks three weeks ago when it looked like they were going to zero. At this point stocks have recovered half their losses in this correction, and stand less than 5% below all-time highs.

I still love stocks here. But as we get closer and closer to the FOMC meeting day, I'm getting more and more nervous about that rate cut prediction. The expectations embedded in Treasury bond and fixed income futures markets are clearly calling for a rate cut — in fact, they're screaming for a rate cut. I'm getting concerned that when push comes to shove, the Fed 's not going to want to disappoint those expectations, and take the risk of setting off another bout of volatility.

And this morning's report of four thousand net payroll jobs lost doesn't help my cause very much.

But at the same time, there's one thing we know for sure: The Fed doesn't want to cut rates. If it did, it would have cut them already. The simple fact that the Fed is waiting for the official FOMC meeting speaks volumes. It means expectations or no expectations, a rate cut is not a sure thing. I can still dream!

So let's do some scenario modeling. What if the Fed does cut rates, and then again what if it doesn't?

If the Fed doesn't cut rates, then an awful lot of people will be surprised, disappointed and scared. I would think there would be an immediate and severe negative reaction in stocks, and a general hue and cry that Ben Bernanke isn't half the man that Alan Greenspan was.

But then I think cooler heads would prevail. The reality is that Bernanke doesn't really need to cut rates. The Fed is pumping billions upon billions of dollars every day into the economy through ordinary open market operations at the existing fed-funds rate of 5.25%, so no lower rate is really needed.

And if anyone looks carefully at the real record of Greenspan, they'd realize that Bernanke has already done more in this panic than Greenspan did in 1998 in the Long Term Capital Management crisis. Then stocks fell 19.5% before Greenspan cut the fed-funds rate. In this panic, Bernanke has already cut the discount rate — and stocks never fell even 10%, based on closing prices.

And if Bernanke hangs tough, I think soon it would be understood as a sign of strength, confidence and leadership. After the initial shock, I think stocks would quickly recover.

So what happens if the Fed does cut rates? Because that's what everyone expects, it probably won't have a lot of impact. If the cut is 25 basis points, then some people will carp that it should have been more. But other than that, it probably won't make much immediate difference unless the FOMC puts out a statement that radically changes the Fed's long-term outlook in some unexpected way.

If anything, I would think the news of a cut would be somewhat of a stimulant to stocks. At least the risk that there would be no cut will be off the table. The Nervous Nellies out there will understand that Bernanke is on the job.

But at the same time, I think that a rate cut will have other effects — and less benign ones. In fact, with the market so completely expecting a rate cut right now, we're already beginning to see some of those effects.

Have you seen what's happened to the price of gold this week? As I write it's over $700.

Have you seen what's happened to the price of oil this week? It's up to within a percent or two of all-time highs.

Have you seen what's happened to the dollar on foreign exchange markets this week? As I write it's making new all-time lows.

There's just one word for all that: inflation.

The fact is that we got into the present credit crisis because of inflation. I know it hasn't shown up much in the official statistics like the Consumer Price Index, although that is higher than the Fed would like. But for the last several years, the Fed has been printing way too much money. So much, in fact, that banks practically gave it away in — you guessed it — subprime mortgage loans, where the borrower barely had to even be alive to qualify.

Now, with the Fed already injecting billions into the troubled markets every day — even before interest rates are lowered — the fires of inflation are being stoked all over again. The Fed seems to think that the only way out of the mess that too much money created is to print even more money.

If the Fed does cut rates, then the problem gets even worse. And if it cuts rates more than once — which is exactly what all the markets and the brand-name Wall Street economists are predicting — then it will get a lot worse. I've written in this column about inflation often over the last three years. I've said gold was going to $1,000. If the Fed cuts rates, then I'm going to have to admit I was wrong.

Then gold isn't going to $1,000. It's going to $2,000.

And oil is going to $200. And the dollar is going to collapse against the yen and the euro.

And I think in their heart of hearts, many members of the FOMC actually know this. That's the reason I say they don't want to cut rates, and haven't already.

But fear and temptation are ugly things. Under pressure, the best of us can go against our better judgment.

I'm still hoping the Fed will stand tough here. But in case they don't — and I have to admit it's looking like they won't — I want to be long gold, oil, energy stocks, and basic materials stocks.

If the Fed doesn't cut rates, those are good growth plays anyway. But if the Fed does cut rates, they're your insurance policies against an ugly inflationary future.

There are some very smart people on Wall Street. And it's not you or me. One clearly is Steve Schwarzman, chairman of the Blackstone Group that went public recently and whose shares have not done well:

But remember, Steve wasn't buying his own shares. He was selling them to public investors and China. The country’s investment arm put $3 billion into Blackstone as part of the I.P.O. On paper, at least, that investment has been a huge loser: The value of China’s stock (which it bought at a slight discount to the offer price) has fallen by about $840 million in fewer than three months. Which once again proves the old adage: What is the fastest sure way to a small fortune? And the answer? Start with a large fortune.

Is Blackstone now worth buying at its much cheaper price? For the answer to that, read Andrew Rose Sorkin's piece in The New York Times:

The Ranks of the Comfortable Are Still Thinning

BY now, all of Wall Street understands that the private-equity gravy train has jumped the tracks. But few seem to realize how ugly the pile-up could become.

With the buyout market in free fall, lots of attention has focused on a few obvious pressure points, like which investment banks will rack up big losses on the $330 billion in debt that they committed to pay for leveraged buyouts over the last year.

For the most part, though, Wall Street seems to be taking it all in stride. James Dimon, the chief executive of JPMorgan Chase, said last month that he was “comfortable.”

Comfortable? Let me offer a more dour view: wide swaths of Wall Street, and many of the industries that serve it, are in for some serious collateral damage. Not only has private equity been out of business for the last two months, but that activity is not likely to resume with any significance soon. And when it does, it will be at a fraction of its recent peak.

So what does that mean? For much of Wall Street, a severe case of withdrawal. Forget about cutting the size of bonuses: let’s start really thinking about the possibility of slashing jobs.

Virtually every major investment bank in recent years had staffed up its “financial sponsors group” — which serves private equity firms — and many now have dozens, if not hundreds, of people devoted to the effort of calling on Henry Kravis every day.

Here’s the thing: Mr. Kravis won’t have much business going on, so the bankers won’t, either. Even if you redeployed a large number of them to other activities, many jobs would have to go.

Further down the line, the private equity firms themselves may begin to cut personnel, or at least stop hiring. That goes against the grain for most private equity firms, because their limited partners have pressured them to have increasingly larger staffs, not smaller ones.

Why is that? Well, it is hard to justify how the 2 percent management fee from a $20 billion fund — that’s $400 million for those of you doing the math — is going to be divided among only 50 people. (Yes, if it was evenly distributed, that would be $8 million a person, which doesn’t even include possible performance fees.) If private equity firms stop hiring, the ecosystem of irrational compensation packages across Wall Street will also change.

In recent years, private equity helped artificially inflate the market by hiring talent at astronomical prices, pushing up pay scales at banks, law firms and hedge funds — anywhere that private equity tried to take talent from. Then there are the support systems, which may also be taken apart.

Consider the management consulting industry: It’s a dirty little secret, but most of the big-name private equity firms had been outsourcing some, if not much, of their due diligence on deals to firms like McKinsey & Company and the Boston Consulting Group. The consultants, in turn, built up their own groups to handle the enormous work flow.

(In case you’re wondering why private equity doesn’t do all of its own spadework, here’s another secret: It’s cheaper than hiring talent and — get this — some of the cost of outside consultants can be charged back to the investors as a deal expense.)

So, whoops, there go the consultants.

All those starry-eyed M.B.A.’s are in for a shock, too. For the last four years, M.B.A.’s have been clamoring for jobs in the private equity industry. About 11 percent of Harvard’s M.B.A. class of 2006 secured private equity positions, up from 7 percent in the class of 2004. And the number from the class of 2007 is even higher.

That alone should probably have been a sign of a market top. In any case, the party’s over, and it’s not clear where all these M.B.A.’s will go.

Many M.B.A.’s were former bankers who had taken jobs at private equity firms and hoped to return to the equity shops afterward. Now the door to private equity and banking — and don’t forget hedge funds — may be shut, too.

THE collateral damage may keep mounting.

Consider the ultimate bellwether: a little company called SeamlessWeb. As an online food-ordering service used by the major banking houses and law firms, SeamlessWeb does a brisk business with young analysts who get stuck late at the office. Without all those buyout deals requiring all-nighters, SeamlessWeb’s messengers may not be as busy, either.

So what’s the upside?

The analysts who still have jobs may finally get a good night’s sleep.

Two happy stories. From two of my friends:

I just bought a house. The elderly couple used to winter in Florida and summer in New Jersey. They originally had no real plans to sell it. I was going to rent it from them for a year, while waiting for the home next door to go up for sale, but then the values dropped, so I made them an offer. Their son (my "inside man") told me what minimum offer they would accept from anybody. I got it partially furnished for $130,000. My CPA hooked me up with a mortgage broker and now Citibank just approved my loan (5% down, but I don't know what the rate is yet -- the original rate quote was 6.85%, but I'm sure that has gone up a bit). Not bad, considering that I went bankrupt in 2003, thanks to my four dud IPOs. Six months ago, the house was $147,500, so I saved 12%.

I just got a loan on a what might be a 62-story combination hotel/apartment building. The lender called me, said they were going out of the mortgage business, but wanted to close my loan -- if I signed that afternoon. The height of my building will depend on my being able to buy air rights. I think I got the loan because I've been in the real estate business for a long time. I'd hate to be starting up at this time.

Now is not the time to build a house. Building one is far more expensive than buying. Trust me on this one.

While the cost of building goes up, the cost of buying is going down -- perhaps even in tony towns. From Bloomberg today,

Home values in America's ritziest areas may decline by as much as 11 percent in the next 3 1/2 years, said Mark Zandi, co- founder of Moody's Economy.com, an economic forecasting agency and unit of Moody's Corp. in New York. The last time these markets fell was a dozen years ago when the Federal Reserve raised interest rates seven times in 11 months.

Don't you just love the precision of Mr. Zandi's prediction? My economics professor once told me there are three types of economists: Those who can count, and those who can't.

As I've written before, having a little cash is good thing. Serious bargains are beginning to appear. Just remember to avoid Wall Street pressures "to put it work." Which is a euphemism for losing money. Look what happened on Friday. The Dow dropped 250 points -- nearly 2%.

I continue to remain unimpressed with home builders, most of whom still represent a great short. I'm making money on those Toll Brothers shorts I recommended a while back in this column.

Morning sex
She was in the kitchen preparing to boil eggs for breakfast.

He walked in; She turned and said, "You've got to make love to me this very moment."

His eyes lit up and he thought, "This is my lucky day."

Not wanting to lose the moment, he embraced her and then gave it his all; right there on the kitchen table.

Afterwards she said, "Thanks," and returned to the stove.

More than a little puzzled, he asked, "What was that all about?"

She explained, "The egg timer's broken."

How to win a bet
A man from Texas walks into a pub in Ireland and declares "I bet I can outdrink you with your Guinness. Ten pints in one hour!"

Old Paddy McFierney goes up to him and says "I'll tink about it" and walks out of the pub.

"Huh!" says the Texan "These Irish think they're big drinkers but he's just a yellow belly!"

So, the Texan sits down to a meal with his wife. An hour later Paddy McFierney turns up again and says "I been tinking 'bout yer challenge and I tink I'll take you up on it."

So Paddy and the Texan drink pint for pint and an hour later the Texan is completely under the table. As he can no longer talk his wife says to McFierney "you sho' beat him fair and square, but why did you go away for an hour."

McFierney replies: "Well I had to go to the pub down the road and drink ten pints to check I could still do it!"

Another horrific pun
Okay, a farmer was stranded in freezing weather with a flock of sheep in winter. He needed to get them to safety in a barn a few hundred yards away. Problem was the footpath to the barn was blocked due to a tree collapsing under heavy snowfall.

The only way he could get them to the barn was by taking them across a neighboring (and not very friendly) farmer's field which was already like a slippery skating rink due to movements of said farmer's own sheep.

Our farmer donned his spiky boots, devised a sled and hauled his flock across the field first thing in the morning, so as to avoid detection.

However, the other farmer was already awake and came out of the farmhouse, fists raised, accusing our friend of trespassing.

"I didn't trespass," our farmer protested.

"Oh come on!" said the evil angry farmer, "you can't pull the wool over my ice!"

This column is about my personal search for the perfect investment. I don't give investment advice. For that you have to be registered with regulatory authorities, which I am not. I am a reporter and an investor. I make my daily column -- Monday through Friday -- freely available for three reasons: Writing is good for sorting things out in my brain. Second, the column is research for a book I'm writing called "In Search of the Perfect Investment." Third, I encourage my readers to send me their ideas, concerns and experiences. That way we can all learn together. My email address is . You can't click on my email address. You have to re-type it . This protects me from software scanning the Internet for email addresses to spam. I have no role in choosing the Google ads. Thus I cannot endorse any, though some look mighty interesting. If you click on a link, Google may send me money. Please note I'm not suggesting you do. That money, if there is any, may help pay Claire's law school tuition. Read more about Google AdSense, click here and here.
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