Fall 2009

Interesting Times

“May you be cursed to live in interesting times” goes the Chinese proverb and we have been cursed in spades. We are in the midst of shifting global economic forces which have important implications for investors. We are living through a major transition in the world economy from one centered on the U.S. and its dollar to one where economic growth and influence is spread more evenly around the world. As long term investors, we believe this is an unambiguous positive.

Chinese reference aside, the current story is not a story of U.S. decline, but of quickening global growth and a triumph of the different variations of democratic capitalism. There is increasing competition from fast growing economies in the East and Latin America as they exploit their natural advantages. There are hundreds of millions around the world moving from a subsistence existence toward what we call “middle class.” The world is bursting with opportunity for well managed globally oriented firms that rise to the challenge and serve the needs of a growing world. U.S. corporations dominate the list of firms that will likely thrive in this environment.

At the same time, this shift away from a U.S. centered uni-polar world will not proceed without consequences, both anticipated and unforeseeable. As fans of unfettered markets and capitalism, it is difficult for us to admit how critical wise decisions from our public policy makers will be over the next decade. The role of our dollar in international trade, the effect of our long-term fiscal deficits and the ability of our central bankers to operate in the fallout of last year’s market meltdowns will all be tested over the next few years with potentially big consequences for investors in the public markets. 

We fall into the camp which believes the U.S. economy will suffer a multi-year hangover from the debt fueled boom of 2002 to 2008. Consumers with shrunken wallets and home equity will save more keeping a lid on growth from that sector of the economy. However, the U.S. should fare better than Western Europe or Japan. We believe the secular trend for the dollar is to weaken against other currencies, which should prove to be supportive for efficient U.S. manufacturers. So an economy which saves more, makes more and is not as dependent on consumption is in the cards and that is a long term positive.

Stocks Bonds & Cash

With the markets’ dramatic decline in 2008 and the sharp rebound since the spring, the U.S. stock market is at a level which renders it modestly undervalued.  At the depth of the decline in March, the market reached a level that was moderately undervalued but nowhere near the rock bottom values reached in 1974 and 1981-82. We maintain an emphasis in the highest quality U.S. stocks and stocks of emerging economies in Asia and Latin America, which we believe offer the best prospects for growth.   The highest grade bonds are a little rich but exposure to the highest quality credits still makes sense. Treasuries are significantly over valued but likely to remain that way for the next few quarters.

The Altavista Investment Team-Fall 2009