Vector Money Management

Stable Money Makes a Difference

vector — Mon, 26 Mar 2012 16:04:18 +0000

The chart below is offered as an example of top down insight on monetary policy and its effect on the S&P 500 benchmark. Even though the U.S. has operated with a fiat currency since President Nixon closed the gold window on August 15, 1971, gold is still a useful metric in assessing the job the Federal Reserve is doing in providing a stable dollar. Gold is, after all, history’s oldest form of money and still recognized around the world as money. The graph below charts the S&P 500 versus the value of the dollar in fractions of a gold ounce from August 15, 1971 through January 31, 2012. The chart is divided into a 10 year period of a falling dollar, a 20 year period of a relatively stable dollar and a 10.5 year period of a falling dollar: The gains shown for the S&P 500 for these three periods do not include dividends. The out-performance by the S&P 500 during the stable dollar period is dramatic. The data strongly supports the notion that the broad economy and the broad market (where the benchmarks focus) perform better with a stable dollar as measured against gold. Common sense also supports that notion. Tens of thousands of contracts, almost all denominated in dollars are signed every day between businesses for delivery or receipt of goods and services. Those contracts are much more likely to be profitable for all parties when the dollar is stable for the life of the contract. Change the value of the dollar and it will be a boon for one party and a bust for the other. Boom and bust is an apt description of the economies and financial markets in period 1 and 3.

Big Trouble for Big Crony

vector — Wed, 11 Jan 2012 17:12:12 +0000

Lobbying and lobbyists play a crucial role in our political system. Unfortunately, that role can lead to governmental intervention in our “free-market” economy. Too often this creates a scenario where the best connected are given special loopholes - be it through credits, exclusions, rebates, deferrals, or other special tax treatments – or what we call cronyism. Our thoughts on this were recently illustrated in an article published in the Clarion Ledger on January 8, 2012.

Failure Is A Market Necessity

vector — Mon, 10 Oct 2011 15:42:57 +0000

Our belief that failure in a free market economy is necessary for cleansing and future growth was highlighted in an article we had published in the Clarion Ledger on October 9, 2011. This article was also posted on the RealClearMarkets.com website and can be viewed here.

Currency Crisis

vector — Wed, 17 Aug 2011 16:52:35 +0000

It seems obvious to us that some part of the world’s ongoing financial and economic problems are due to the use (and abuse) of fiat currencies. Our thoughts were highlighted in an article published in the Clarion Ledger on August 14, 2011.

The Red-Tape Economy

vector — Wed, 20 Jul 2011 17:05:15 +0000

Congressional legislation aimed at regulation of certain industries can and does have unintended destructive consequences on the economy – whether we’re talking about an economy seemingly running efficiently or one trying to recover. Our thoughts on this subject were highlighted in an article published in the Clarion Ledger on July 17, 2011.

Shake up in the Energy Arena

vector — Tue, 05 Apr 2011 21:40:34 +0000

Innovation and the hard work of wildcatters is beginning to pay big dividends for consumers of natural gas as vast new streams of gas come on market dropping prices below $5 per mcf. The ramifications for the normally staid utility industry and electricity rates are huge. Our thoughts on this issue are covered in the commentary “US Gas Bonanza” which was published in the Clarion Ledger on 3 April 2011.

Tax Rate Implications

vector — Tue, 30 Nov 2010 19:04:51 +0000

The most important economic issue for the remainder of 2010 is the fiscal question regarding what tax rates will be in 2011 and 2012. Tax rates figure prominently into personal and business planning, and the fact that the issue is still unresolved with December upon us only adds to the economic uncertainty. Our thoughts on this vital issue appeared in an article we wrote for The Clarion Ledger, a Jackson, MS newspaper, on November 28th, 2010, and which has been posted on RealClearMarkets.com.

Mid-September Outlook and Portfolio Design

vector — Wed, 08 Sep 2010 21:07:42 +0000

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

Mid-August Outlook and Portfolio Design

vector — Thu, 19 Aug 2010 14:29:53 +0000

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 2^nd 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

“What’s Hot and What’s Not” Presentation at MTA Discovery Luncheon

vector — Wed, 21 Jul 2010 21:20:50 +0000

On Tuesday, July 13th, I was honored to be the guest speaker at the Discovery Luncheon sponsered by the Mississippi Technology Alliance (MTA). I was asked to prepare an updated version of a presentation I had done in Novemeber of 2009, addressing various paradigm shifts and aptly titled “What’s Hot – What’s Not.” The thrust of the comments that accompanied the power-point slides was that paradigm shifts matter mightily to investors and entrepreneurs – get on the right side of one and you can make above average returns – get on the wrong side and you can lose your shirt. Hot new trends, products or services aren’t necessarily paradigm shifts themselves but can often be early indicators of paradigm shifts underway. To get a better understanding of my thinking for each slide, I’ve uploaded my ‘talking points’ for each slide here.

Ashby Foote