Q3 2011 Newsletter
My 14 year old came to me in the midst of studying and relayed the following principle: that as an object increases in mass its strength proportionally cannot keep up. For instance, if an ant were the size of an elephant it would not have the strength to stand. It was what she said next that surprised me. She said, “That sounds a lot like the federal government”.
The third quarter left us with much to be desired. The close on September 30th brought us near bear market territory, as defined by a 20% drop from the high. The concerns over the eurodebt situation weighed heavily as did fears of a global recession exacerbated by the Japanese earthquake and tsunami.
The world is waiting with bated breath for a solution to the European bank situation. Under-capitalized banks in Europe are faced with the problem of a potential Greek default and reluctance by others to lend to them. As of this writing, the European bank Dexia has just been bailed out. Hopefully this will jump start a European Union that, at best, has brought band-aid fixes to this debacle. Besides this, there are other concerns that the financial markets must sort out: the threat of a US recession, slowing growth in China and the US government debt situation to name some big ones.
The headwinds against further stimulus activities i.e., easy monetary policy and increased government spending, are strong. Furthermore, it is not clear that additional easing will have the desired effect. In their research paper, “Growth in a Time of Debt”, Carmen Reinhart and Kenneth Rogoff show that when government debt to Gross Domestic Product (GDP) goes above 90% this puts a significant strain on future growth. Hence, the growing government (its debt to be exact) is potentially the ant becoming the elephant. This is why we believe the Joint Select Committee on Deficit Reduction (JSCDR) has a very important role to play in shaping how this country moves forward.
I want to say that I am not a glass half empty person. In fact, while there are concerns over world economic growth, not all is negative. For example, manufacturing surveys, retail sales and payroll gains are trending positive. In addition, strong corporate earnings could help dispel fears about the economy. However, for us to have sustainable long-term growth we need to see political leadership and clarity on fiscal and monetary direction. As such, we have reduced our exposure in certain assets to accommodate this stance while still maintaining a proper weighting to good quality growth companies. I would be happy to discuss any of this in more detail with you. As always, we thank you for your trust.
Best Regards,
Marc Henn CFP ®, President
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