Summer 2009 Market Commentary

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Who could help themselves from getting cautious and conservative in the Fourth Quarter of 2008 when the fires of the crisis were raging?  With credit markets frozen, many companies slashed jobs and all but necessary spending in preparation for a long dark liquidity winter.  Then came spring.  People found that life continued on, perhaps with some new challenges but for the most part, it carried on uninterrupted.  As spring warmed into summer, these less impacted characters are getting back to business as usual. Fire sales are no longer causes for fear, but opportunities for bargains.  It matters not whether you are shopping for a sofa, or a division of a less fortunate company.”

“Again in April, we reminded you that it is the constant of human behavior that creates these predictable patterns of collapse and violent recoveries.  As difficult as it may be to perceive at this moment, the rapid appreciation of security values that we are witnessing today is completely and predictably…typical.  The equity and credit markets began to heal as the smoke cleared on the questions of the stimulus policy, the fate of the auto makers health of corporate earnings.

In the worst case, we have entered into a ‘fits and starts’ recovery that will include some decent quarters followed by more moderate ones.  If that becomes the case, we will likely see mass optimism trade places with pessimism regularly as we continue the hangover phase of the cycle.”

How do you spell ‘inflation’? D-E-V-A-L-U-A-T-I-O-N

Warren Buffet thinks that an “onslaught of inflation” is in the cards.

“Reflating nominal GDP by increasing asset prices is the fundamental, yet infrequently acknowledged, goal of policy makers.  If they can do that, then employment and economic stability may ultimately follow”-PIMCO Investment Outlook, August 2009.

There seems to be a consensus though, at least between Bill, Warren and me, that the Fed and the Treasury will delay this from happening at least for the coming year or two.  Although I do see longer term interest rates creeping up about another 100 basis point +/- over that period. The policy maker will do this through the continued manufacturing of artificial demand for government debt, as needed.  Once the economy is clearly stable ground, however, this pressure on yields must lift.  When it does, interest rates will likely rise quickly. At the same time, the global flight to quality trade will be come less attractive, thus further pressuring the dollar and U.S. government debt.  The 10-year Treasury could easily trade to 7%-8% by the end of 2011.

Sadly, this is setting up a grim scenario for the average Baby Boomer nearing retirement.  As an attempt to “Save whatever was left.” ,am moved into the only market that was ‘sure’ to weather the storm….U.S. Treasuries and government guaranteed investments like CD’s.  So big was the stampede into these investments in Q4, that short-term Treasuries and money market accounts were yielding practically nothing.  ”But that’s O.K.; at least you’ll get your money back, right”?  Well…sort of.

If we see a devaluation in the purchasing power of the U.S dollar comparable to that which occurred in the early 80′s, these already wounded investors may see the buying power of what little they have left decline by a third in just the next 10 years.  And this time, it could be worse than the 80′s.  Ironically, it’s the house that was just foreclosed and the stocks that were just liquidated that would likely perform the best for these pre-tirees if such a scenario were to materialize.  But that’s just my PIERspective.

Jim Scheinberg

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