| 2009 1st Quarter Newsletter |
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January, 2009 Over the holidays, I found myself having an extremely good time with friends and family, which seemed incongruous with the global events going on all around us. Having just experienced the biggest downward market swing since the Great Depression, and a crisis in consumer confidence, the challenges being posed are the greatest that this generation has ever experienced! Imagine any government pulling out all the stops possible to divert an ocean liner headed for an iceberg, and you have a visual of what the new President is facing as he takes office. I’ve lived through four bona fide recessions before this one: 1973-75, 1980-82, 1990-91 and 2001. I remember well the “stagflation” and wage and price controls of the early 1970s. My generation was too busy preparing to change the world, marching in demonstrations, growing our hair and generally reveling in the Age of Aquarius to have our spirits dampened by rising unemployment and falling stock prices, which seemed inconsequential compared to the revolution at hand.1 Now, world financial markets are in the middle of their worst sell-off in decades after problems in the U.S. subprime mortgage market spiraled into an unwinding of leverage that has afflicted all asset classes. Stocks, bonds, currencies and commodities have all taken their lumps, as investors who extended themselves to invest in these assets are forced to liquidate positions. Even commodities, including gold and oil, have seen their prices fall as leverage is wrung out of the system. The U.S. dollar has been one of the few beneficiaries of the chaos, as investors seek safety from market instability. The financial turmoil prompted an unprecedented, coordinated response from global policymakers in early October. Global policymakers appear to have finally accepted that the credit crisis is not just a U.S. problem. The interconnectedness of the world financial systems require collective action. Even with such action, it will take a long period of time to unwind the massive amount of leverage in the financial system and to restore investor confidence.2 One of the biggest stories we will agonize over in 2009 will be the current massive government borrowing being utilized to prop up teetering financial institutions. The growth in the monetary base has been phenomenal, and it’s just a matter of time before the government borrowing turns into inflation. I expect monetary inflation to be returning and to be a major issue in the not too distant future. Inflationary concerns will be reflected in the growth of asset values and stock market valuations for years to come. As your investment advisory team, we are responding to the uncertain global financial conditions that I’ve just outlined in several ways:
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