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Quarterly Report
Summer 2009 |
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Table of Contents:
Looking Back: Inflation, Deflation and Reflation By Jude Bedell
Looking Forward: It’s a Brand New World By Mike Frazier
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Looking Back: Inflation, Deflation and Reflation
By Jude Bedell
As quarters go, the last one was simply incredible. Stocks enjoyed the biggest
quarterly rally since 1998. It was magic. And exhausting and exhilarating and amazing. Municipal bonds also rose while Corporate bonds soared. The genesis of our euphoria is the story of how the world economy deflated nine months ago … then began to inflate … and now is working on re-flation.
Whew! What a ride and a round-tripper to boot. This positive investment performance was achieved despite the wall of worry created by GM’s bankruptcy; continued
unrest in both North Korea and Iran; and the Governator
of California re-enacted the OK Corral shoot-out with lawmakers over the unbalanced budget.
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Think of a balloon that has burst. Once round and robust it is now as flat as a pancake. This is deflation: when prices fall because buyers have disappeared. In the past year, the price of a barrel of oil deflated from $147 to $32. Many drivers
felt like they had just gotten a raise. They drove to the pump and filled-it-up without having to get a bank loan. In fact, private transportation costs tumbled 9.2%. Lower prices may seem like a good thing, but deflation can hamper growth by depressing company profits and causing consumers to postpone purchases, leading to production and wage cuts. We watch price movements in order to avoid investing in stocks that may suffer from the pressure of a deflationary spiral. |
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U.S. Presidents tend to have their own stimulus trademarks:
Kennedy sent a man to the moon; FDR built railroads, canals and bridges; Clinton invested heavily in the Internet. Obama’s stimulus
program creates new jobs through healthcare, infrastructure
and schools. Build, build, build is his mantra. Building can be inflationary if too much debt is used. But build we must to bring our economy back to life. Pessimists
are already warning of the danger of inflation but we trust an authority which tells us they are wrong. We look to the bond market which has rallied dramatically; and we know for a fact that bond investors fear inflation more than swine flu. The ebullient move in corporate bonds this Spring tells the truth: inflation is far away. It is okay to stop worrying about inflation for the balance of 2009 whilst enjoying the fat cash flow from your puffed-up bond portfolio.
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To save our economy from collapse government intervention
was vital. The bully pulpit of the U.S. President and the Federal Reserve Bank and the Congress had to step-up and act decisively to re-flate our economy. President Obama had to give daily Knute Rockne speeches. Federal Reserve Chair Bernanke had to travel to his home state of South Carolina in search of “green shoots.” Even the Congress took a break from their trademark bickering to pass some mighty legislation aimed at bailing out our banking system and rescuing home owners. Pump, pump, pump.
To kick-off the Summer, we will continue investing in safe, secure stocks and bonds while researching innovative
opportunities to re-flate portfolios.
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A complete financial recovery cannot occur unless investors
are not only willing to take risks, but feel comfortable
doing so. It’s clear that financial institutions took way too much risk, which created this mess to begin with. The danger now, is that they take too little. The government
is trying to absorb the risk by guaranteeing select assets while the economy heals.
Right now recovery is a double-edged sword. The consumer
represents 70% of our economy. Since many Americans were living well beyond their means, i.e. spending more than they earn, the time to clean-up the personal balance sheet is now. Responsible financial behavior,
by both banks and individuals, is the only way we can return to healthy organic growth. This will translate to a slower moving economy, however.
Ultimately, growth will return. But this time it will be real economic growth led by a more productive work force, innovative ideas and good old American sweat. We are building the bridge to the future where traditional rules and laws still apply, but new ways of thinking are required.
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Looking Forward: It’s a Brand New World
By Mike Frazier
What do we want to be when we grow up? The United States is looking at itself in the mirror and trying to figure out the answer to this age-old question. The challenge is, as always, how to get there.
Not only are we recovering from the largest Market collapse since the Great Depression, but this is the second Bear Market in a decade, just nine years after the dot-com bubble burst in 2000. It has been a painful experience and has shaken confidence to the core. Some investors don’t trust the Market now and, by and large, many of them have not participated in the recovery rally. This has created angst, confusion and frustration.
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Americans are living longer and need to ensure that their savings will comfortably get them through retirement. Historically, stocks and bonds have been the best vehicles to grow money; in our opinion, they still are. Stocks and bonds will benefit from significant investor demand. Real estate has created vast wealth over the decades, but the collapse in housing prices and the illiquid nature of real estate investments have investors now seeking alternatives.
Commercial real estate has more pain ahead.
This historic Market rally began in March and has largely come in the face of skepticism. At the bottom, sentiment is usually extremely negative if not panicky. That was certainly the case this time. Seeing stabilization in the Market and then its strength, demonstrated that investors
can make money again. This is psychologically critical.
This road to recovery that we are traveling will be long and steep. We have made significant progress but our final
destination is far beyond the horizon. We will have to open our minds to a new way of thinking and measuring success. Financial discipline is required, both for individuals
as well as governments. |
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For the better part of the decade, consumer
spending represented a whopping
70% of our economy. No longer. The world-wide global economic crisis has reset the game, wiping the slate clean and we are starting over again. A healthy rebuild requires it. During this transition, the use of debt should be contained and highly scrutinized. We will be forced to live within our means – what a concept. In the near-term, fiscal stimulus is likely to remain in the hands of the Government.
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While the American consumer continues to adapt to the new rules, she has put a lock-down on her wallet and savings have skyrocketed during the financial crisis. In fact, the U.S. savings rate is nearly 7% now, a 15-year high. This is incredible considering it was sub-zero a year ago. The result will likely be far fewer retail stores. We know there will be a substantial decline in car dealerships,
it’s already happening.
But we are working through the mess, and our economy is getting healthier little by little. We anticipate a return to growth by the end of the year. It will likely be feeble, but it will be growth nonetheless. We forecast our economy to grow in the 2% range for the next couple of years. It will take a while to get back to the 4%+ level, but we will get there. The key is to create new jobs, re-build our manufacturing capability, and finally get a sorely needed energy policy in place. Our belief is that all three of these issues can be addressed in the Silicon Valleys around the world where innovation and creativity reign.
The global economy is represented by both Old World and New World countries. The Old World, or developed market, leadership is represented by the U.S., Europe and Japan. The New World is comprised of the emerging market economies that have massive populations and are growing feverishly. China, Brazil and India are leaders of this pack. The so-called BRIC nations (Brazil, Russia,
India and China) represent the next generation of global economic strength. In fact, the BRIC nations now represent 42% of the world population, yet only 15% of global GDP. In comparison, the U.S. represents
4.5% of the world’s population but nearly 25% of global GDP.
These BRIC nations recently hosted their first summit meeting to discuss their roles and partnerships as rising stars in the global community. These four nations collectively
are expected to overtake the G7 in economic output by 2032.
There is great debate about the future of the U.S. dollar as the dominant currency in the global economy. China is the largest buyer of U.S. Treasuries and has openly criticized
its declining value and America’s bloated deficits. Despite this, China continues to buy the greenback. The Chinese Government has long been stockpiling reserves in other currencies, as well as a substantial supply of gold. However, the US Dollar will reign supreme for the foreseeable future, although its value may continue to decline
until our nation’s Federal Balance Sheet improves.
The World Bank just revised its estimate, and now forecasts
China’s economy to grow 7.2% this year, greater than the 6.5% forecast just three months ago. China contributed 19.5% of world growth in 2007, the largest of any nation. While China’s exports have been hurt by the global recession, domestic consumption remains on the rise. The early and aggressive Chinese Government stimulus package has proved very effective, and is decisively the catalyst thus far in the global recovery.
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Looking forward to the second half of 2009, our investment strategy is quite simple – we plan to invest in companies that produce products that Old World countries need and New World countries want. Taking it a step further, we want to own what China is buying. Demand for goods to build infrastructure,
like energy, steel, iron ore and copper
will only increase as these emerging market
countries continue their growth. China’s appetite for premium food, beverages, financial services, and smart phones are again on the rise. The global recession
hurt exports, but new wealth is driving its domestic consumption.
American ingenuity will survive. People need to eat, and life has expenses. Many products in the Food, Wireless Technology, and Health Care sectors are proving to be economically resilient and defensive in the Old World while representing significant growth opportunities in the New World.
We seek stable and defensive investments from the Old World, while we will aggressively invest in the dynamic growth of the New World. We still see great opportunities to grow money in 2009.
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Archive
Spring 2009 Newsletter
Winter 2009 Newsletter
Fall 2008 Newsletter
Summer 2008 Newsletter
Winter 2008 Newsletter
Spring 2008 Newsletter
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