News & Insights
The Mighty Money League of Super Acquaintances
Ben Bernanke, Henry Paulson, Chris Dodd, Barney Frank, George Bush and Hillary Clinton all watched too many super hero cartoons as children. In our view that is the only plausible explanation for why they are before the cameras pledging to rid the economy of their arch enemy The Sub-Prime Monster and his henchmen Foreclosure Guy, No Income Mortgage Weasel and The Investment Bank Imploder Virus. This epic conflict between the forces of "good" (government intervention in the markets) and "evil" (markets which punish those who make bad decisions), is not as exciting as, say, the one between Superman and Lex Luthor but it is just as inane. Perhaps the cartoon-like narrative we are treated to each night on cable news is the price we pay for raising generations of drama addicted children who we now elect and appoint to high office. The communication style that our leaders and media have appropriated from the Saturday mornings of their childhood is not helpful when subtly and nuance are needed to analyze and understand the issues.
In our view, the only force capable of equaling the damage done by the imprudent and massive issuance of bad mortgages and their derivative securities is the massive and clumsy intervention response of policy makers. Certainly, some of the worst ideas exist only in the two dimensional rhetoric of desperate presidential candidates and grand standing congressmen. However, the massive intervention of the Fed in the engineered takeover of an investment bank, Bear Stearns, going beyond its mandate of riding herd on commercial banks, is a substantial change in the status quo. In order to keep the doors of a second tier investment bank open, the Fed had to initially commit over 20% of its balance sheet. Imagine if the imprudent institution had been the size of Goldman Sachs or Merrill Lynch. Would the Fed have committed 50% or more of its reserves? Would that have worked? The avoidance of financial chaos that would have been unleashed by the failure of Bear was probably a good move by the Fed, but we are struck by the extraordinary resources necessary to accomplish the task.
We believe that policy makers will do what they must to relieve short term pain even at the expense of future growth and inflation. This prescription of lower rates and easier money will work, as it has in the past, but this time it will take a more herculean effort to engender a weaker response. We believe that at some point in the next 10 to 20 year time frame there will be a financial disruption that cannot be remedied by easy money and government meddling. The prepared investor will take this into account when selecting investments.
Stocks, Bonds and Cash
Stocks appear to us to be an attractive value when compared to other investment options. While the broad market is not statistically cheap, it is certainly easier to find attractively priced stock than it was six months ago. The highest quality stocks outside of the financial sector are being rewarded by those investors seeking a safer haven than the dodgier stocks that were favor in the 2003-2006 time-frame. Signs of weakness are starting to emerge in the developed international markets while the emerging markets growth prospects seem to be on surer footing.
On the fixed income side, the flight to safety has pushed treasuries into overvalued territory. Consequently there are opportunities developing in higher grade corporate bonds and municipals.
The bull market in commodities, particularly in precious metals has stalled but we believe this is a pause in a long term revaluation upward and so believe that an allocation to this asset class should be considered by the long term investor.
These are extraordinary times. The world’s economies are linked more than ever before and chronically poor nations such as China, Brazil and India are steadily becoming more affluent with more of their citizens enjoying a modicum of prosperity. The spread of capitalism is an unambiguous positive for good U.S. businesses. Quality firms that recognize these opportunities will prove to be winning investments. Let us hope our politicians and policy makers do not unintentionally create obstacles for these positive trends.
The Altavista Investment Team - Spring 2008