Vector Money Management

September 8, 2010

Mid-September Outlook and Portfolio Design

Filed under: Market Comments,Outlook,Uncategorized — vector @ 9:07 pm

As mentioned in our August outlook (see post below), the economy and financial markets continue to struggle with what we call irregular conditions.  One consequence of such conditions that is proving both problematic and annoying for investors is the lack of any return on traditional savings vehicles such as Treasury bills, CDs and money market funds.  As the rates on these instruments drop below the 1% threshold, they begin to act more and more as virtual mayonnaise jars.  Savings and savers have always been a vital and integral part of America’s system of capitalism.  That they should now receive next to nothing for their participation is a sure sign of dysfunction in the system. It should, then, be no surprise that citizens are grumbling, the economy is sputtering and that uncertainty reigns. 

 As you may recall, a key economic mantra of the ‘80s and ‘90s was that government deficits would push interest rates up – now that logic has been thoroughly discredited by next-to-nothing rates coinciding with all time high government spending and borrowing. 

 This paradox of almost “no-cost” money and a lethargic economy is stark evidence of the complexity of the national and global economies and the myriad interdependencies therein that create unforeseen challenges and problems when policy makers meddle as boldly in the financial system as they have over the past several years.

 What is today’s reality?  That the Federal Reserve’s primary concern is a further drop in commercial and residential real estate prices – assets that represent trillions of dollars in collateral on bank balance sheets.  Their first priority has become preventing another downturn in real estate prices.  The empty return for savers is a discouraging side effect. 

 While the Fed may be able to offer “no cost” money to banks that qualify, there is still no free lunch.  History shows that the usual result of predicaments such as this is inflation.  Savers beware.

 Ashby Foote

August 19, 2010

Mid-August Outlook and Portfolio Design

Filed under: Market Comments,Outlook — vector @ 2:29 pm

The financial markets continue to struggle with what we consider to be irregular conditions – record low interest rates, record high gold prices, record government borrowing, record government spending and a 9.5% unemployment rate.  At times like these, it is crucial to understand, as best you can, the real situation and not default to a standard plan developed for more normal conditions.  The real situation, as we see it, is that the U.S. economy is slowly recovering from the financial crisis of 2007-08, a crisis caused by a gross misallocation of capital into residential and commercial real estate.  The reaction of government policy makers from both parties has been to focus on minimizing failure – from the largest organization to the individual home owner.  The unintended consequence of their (often ad hoc) actions has been to create an unusual and unproductive policy mix (monetary, fiscal and regulatory) that is severely limiting the expansion of the economy during this recovery period.  With little foreseeable change in the current predicament, we have focused our “portfolio design” process on sectors, industries and companies that stand to benefit from opportunities outside the U.S. where economic growth is much more robust.

 On the Defensive Side:  This is the most challenging period we can recall when it comes to preserving capital while also generating a reasonable return.  There is a growing debate over whether Inflation or Deflation is a bigger risk.  Both can wreak havoc on investment portfolios, so the issue is a crucial one for investors.  We have focused on and studied the issue for a long time and it is our considered opinion that Inflation is the much more likely outcome of the current policy mix and, thus, rates as the more serious risk for investors.  The U.S. Treasury Department and the Federal Reserve have run a weak dollar policy for almost ten years and there is no indication that they will adopt a strong dollar policy any time soon.  It is no coincidence that during this weak dollar decade the Periodic Table of Elements (metal commodities) has easily outperformed the S&P 500 Index.  For these reasons, our portfolio design continues to include a significant weighting in natural resource related companies.  A weak dollar is a tail wind for the businesses of these companies, so they provide some hedge against the risk of rising inflation in the months and years ahead.

   Continuous Assessment: The upcoming election on November 2nd could very well shake up the policy mix coming from Washington, especially in the fiscal and regulatory arenas.  More certainty on the issue of future tax rates could be an important catalyst to putting some of the $2 trillion on corporate balance sheets to work in the U.S. economy.  The latent potential of the American entrepreneur should not be underestimated.

 If you have any questions or feedback please let us know. 

 Ashby Foote