Global Reset

Spring 2009

Time magazine cover You’ve probably heard of the “Easy Button” – the slick marketing invention of a well known office supply company. A recent Time magazine cover mocked the button reference with their own version stating “RESET - The End of Excess. Why this crisis is good for America.” Good luck on those magazine sales. My local church even got on board with a six week series entitled “Reset”. It seems everyone wants to clean the slate and just start over and who could blame them?

The Global Reset button is unfortunately, a little more complicated to use. You see it requires precision timing, the restraint of the masses and the cooperation of global governments on a scale yet to be seen in human history. If we are to believe the media, we came close to financial Armageddon in the fall of 2008 because of the excesses of both private and corporate America, not to mention Iceland, Latvia, and the United Kingdom. I mean, can you really blame banks and the like for leveraging a $1.50 to say, $30 or $40?

According to those in the know, we have only one solution to keep us from looking down the pipe at Roosevelt II and that is “resetting” our global economy. If Econ 101 was in your past, John Maynard Keynes’ name would have graced at least one college lecture. His theory of how to survive periods of economic stress involves replacing the consumer with the public sector as the buyer and lender of last resort. I would say that America is doing fine with that right now, but the if (and it is a big IF) is whether the rest of world follows along with us. You see, everyone has to jump in the pool of increasing their debt exponentially at the same time for the theory to work. I know, to us common folk it seems like spending beyond one’s capacity to repay is what got us here, but that’s what the plan from headquarters is. Call me a fuddy duddy, but my guess is that most Americans will be saving a whole lot more as they watch the national debt clock try to find a new scale to run on.

News

Could it be any worse? Yes, but lately bad news is good news. After six quarterly declines, the broad markets have risen dramatically off the March 6th lows. In fact, March had the best monthly gain in 5 years! We will no doubt see deeper job losses, declining GDP and signs of social unrest, but remember what the early 80’s were like? Runaway inflation, high unemployment and a wrecked stock market. Somewhere around 1984, we left that behind and headed off on one of the longest expansions in history.

“I don’t mind tough questions but this is an impossible question.”
Bruce Berkowitz - President of the Fairborn Fund when asked what investors should expect from the markets in 2009.

No one, but no one, knows what is going to happen, but it will be different than what the ‘consensus’ crowd says is going to happen.

Speaking of the unexpected, Treasury Secretary Geithner’s recent comments to China, Inc. one-upped one of the Bush Administration’s worst habits: China currency bashing. No doubt, he innocently wanted to help out struggling US exporters, but this is the absolute worst time to undermine the US dollar as our Treasury is faced with issuance of trillions of new debt. Not to be pulled around by a nose ring, the Chinese began whispering to the G20 guys that the ol’ greenback was looking a little “ragged” and then promptly began promoting a new “world” currency. The US must play nice with a dance partner who holds about 10% of our $11 trillion debt. I can only hope the Obama administration is full of quick learners and this kind of bristling rhetoric, was just a rookie mistake.

In spite of bad news, there are some decent economic indicators popping up lately. The first of these green shoots is the rising Purchasing Managers Index (PMI). The trend over the past three months has been upward and while still well below the 50 level that would indicate economic expansion, inventories are down and the index is no longer falling. Secondly, fixed 30 year mortgage rates have dropped below 5%. Combine that with the huge volume of foreclosed homes, the $8,000 tax credit and you have some real opportunities for first time homeowners. The next piece of evidence comes from China, who may well lead in an eventual recovery. Manufacturing orders there are now above that breakeven line of 50 and export orders are trending that way. Finally, and impossible to overlook, is the gargantuan amount of federal stimulus that is beginning to work its way through the system. A preface of things to come or a head-fake? Only time will tell. You heard it here first.

Commentary

It’s hard to pick just one aspect of our present predicament to discuss that doesn’t appear to discount other ones of no less importance. The debate between inflation and deflation, the endlessly increasing and massive amount of government spending, the resulting national debt and exploding budget deficits and ever rising social unrest are all come to mind. However, I believe two things outside mainstream consciousness fill this bill. First is the disturbing trend of federalism. By that, I mean that the Necessary and Proper clause of the Constitution giving the federal government the implied power to pass any law necessary and proper for the execution of its enumerated powers, has been pushed into a parallel universe.

Think about it, we the People now own, Freddie and Fannie, AIG and a lot of Citibank and GM, not to mention that the Congress can tell most of the biggest banks in the country where to go and when to do it. Fear should not be a license to surrender hard won liberties despite the level of fear and loathing in this sad debacle, but capitalism is a messy thing. Booms run into busts. Our variety of capitalism depends on a free market, regulated but not too hot, not too cold. It will be a brighter day when we can refer to the oxymoron that is “managed-capitalism” as a momentary lapse of civic and personal responsibility.

The second topic of consequence relates to the need we humans have for our feelings to be validated. Sometimes the facts or truth of a situation don’t validate our “feelings” which we adjust to and then accept. Our current condition has few if any historical facts to find comfort from. It is dangerous though to focus on the “This time is different” philosophy at the exclusion of the past OR to bet on a repeat of the past and ignore the possibility that this time might be different. The paradox is that both are usually true, to some degree.

At a recent economic forum I attended, my “feeling” that this time WAS different was validated. What you have personally experienced, the gut wrenching market declines and endless string of bad quarters is unprecedented in its severity and breadth. The speaker Rob Arnott, described the first stage (roughly Jan through Aug 2008) as a “conventional” Bear Market. The next two months - Stage 2, he named “Take No Prisoners”. November and December were tagged as “Sorting out the damage”, followed by a repeat of Stage 2 in January and February of this year. To the surprise of all the attendees, we learned that what had happened in “Stage 2” had never happened before. Literally all investment asset classes went negative in September (most to all time record lows) for the first time in history!

Unfortunately the record didn’t last long as October brought on the 2nd time in history all 16 asset classes turned in a negative performance. So in the very short course of two months, something that had never happened had happened twice - back to back. February’s performance nearly made it a trifecta, but the damage to investments and our psyches had been done. Investment managers universally had nowhere to hide if they adhered to their mandates of being “invested”. The three market moves we just experienced had no precedent or antidote. While it is no solace to investment losses, knowing that we had collectively experienced an event that we could not prepare for nor hide from, validated, what was until then, “just a feeling.”

We continue to develop and deploy investment strategies that we see best suited to your investment goals and needs. You have no doubt seen new positions in your portfolios as we have assessed the investment landscape. Some of these new positions take advantage of a directionless market; others are defensive against inflation or deflation. We continue to favor dividend paying equities, cash and cash alternatives, municipals and high grade corporate bonds with a dose of precious metals. At this point in the cycle, we have already given adequate defensive postures to most portfolios and have reduced equity exposure. That exposure is only likely to increase when we see big picture improvements to the US and global economy.

As always, please feel free to call me with any thoughts, questions or concerns.

Ideas

Having lived and worked in NYC and LA in my younger years, I carry a mild suspicion of strangers and am regarded as vigilant in public places. I have also been careful not to let my personal information leak out, shredding and locking up documents as warranted. However, on March 6th, I joined the ever increasing ranks of identity theft victims. There were 813,899 complaints of ID theft and fraud nationally in 2007, up from 674,283 in 2006. With the economic stresses of 2008/2009, my guess is that these numbers have swelled.

To be forewarned is to be forearmed. So here are a few steps you can take to protect yourself:

  1. Add your phone number to the national Do Not Call Registry.
  2. Opt out of prescreened credit card offers permanently or for 5 years - Call toll-free 1888-5-OPTOUT (18885678688) or visit www.optoutprescreen.com for details.
  3. Request a free copy of your credit report for accuracy and to review any cards or lines of credit you think are closed that are not. Experian, Trans Union and Equifax are the 3 major providers in the US. Call companies that show open accounts to ensure they permanently close them. You may request a free copy of this report once a year from each of the services.
  4. Be vigilant on the Internet making sure the web address you are logging into secure sites is prefaced by 
    https
    and is the exact website the company sent to you by mail indicating their web address. Do not reply to emails asking for social security, driver’s license or credit card information.
  5. Buy a decent cross-cut shredder and use it - often.
  6. Collect your mail within a reasonable time after your normal delivery time. Especially if you live in a sparsely populated area or bedroom community, think about a PO Box. Thieves are using individual’s mail boxes, not just to get your personal information, but to receive mail from companies they have applied to using your information.
  7. Credit monitoring service such as Life Lock may be used, but I suggest taking these practical, free steps as a first line of defense.

If you do suspect ID theft or become a victim, report it to your police department. Only 27% of incidents were reported in 2007. No wonder this crime is increasing. Be safe!

the Clarus Group Greg Busch
Gregory T. Busch, CFP
Clarus Financial, LLC

 
 

Footnotes

1Wall Street Journal January 24, 2009 OpEd
2Institute for Supply Management, Report on Business 4/1/2009
3“China Signs of Recovery – already?” James Pressler, GreenLightAdvisor.com 4/4/2009
4“Global Tactical Asset Allocation in Highly Volatile Markets” a March 2009 presentation by Rob Arnott, Research Affiates, LLC.

This newsletter and the ideas expressed herein are my own and is provided for informational purposes only, and does not constitute an offer or solicitation to buy or sell any security discussed herein.

Information and any statistical data contained herein is obtained from other sources which we believe to be reliable, but we do not represent that they are accurate or complete, and they should not be relied upon as such. All opinions expressed and data provided herein are subject to change without notice.

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Winter 2010 »
Goodbye, Farewell, Auf Wiedersehen…

Autumn 2009 »
From Bear To Bull

Summer 2009 »
Age of Reason

Spring 2009 »
Global Reset

Winter 2009 »
Welcome to the De-conomy!

Autumn 2008 »
Maximum Optimist

Summer 2008 »
It’s Déjà Vu All Over Again

Spring 2008 »
March Madness

Winter 2008 »
Year In Review 2007

Autumn 2007 »
Roller Coaster Ride ’07

Mid-Summer 2007 » A Mid-Quarter Briefing From Clarus Financial

Summer 2007 » Mission Accomplished

Spring 2007 » Our Interests May Not Always Be The Same

Winter 2007 »
The Year In Review

Autumn 2006 »
FILL’ER UP

Summer 2006 »
Summer Doldrums?

Spring 2006 »
Presidential Cycle: market indicators for an uncommon 2nd term president