Blog - July 2012 Market Letter

Jeff Cedarholm
Chief Investment Officer

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“Elvis is dead and I don’t feel so good myself.”

-Lewis Grizzard, Jr.

My neighbor Lewis’ quote pretty well sums up my feelings on the global economy and markets, as well as the state of global politics.  While I will express an opinion on the economy and markets, I’ll leave the politicians to Lewis as fodder for his jokes.

In the U.S., we are experiencing one of the worst recoveries after a major recession ever!  The growth in Gross Domestic Product (GDP) has been muddling along at 1.5 – 2.0% instead of the normal 3.5 – 4.0% you see in most recoveries.  Job creation has been disappointing and the Federal Reserve has maybe only one more bullet left in their gun.  Throw in the pending tax resets, also known as the “fiscal cliff,” combined with slowing corporate profits and it’s easy to be negative about our prospects.  And globally, that’s the good news. Thanks to the Federal Reserve, the U.S. has clearly done a better job of solving its economic problems when compared to other developed countries.  Chugging along at anemic growth levels may be the best we are going to get until some of the political and policy uncertainty is removed.

The bad news continues to be related to the European Union and their seemingly never-ending debt and banking crisis.  The Eurozone is in recession, with Spain, Portugal and Greece in full- blown depression.  The European politicians don’t seem to be as well equipped to deal with this crisis as their American counterparts (not implying that we have done a stellar job).  The risk here is whether European problems will precipitate a recession in the emerging countries because of diminished trade, or whether the Asian and Latin American economies will also find a way to muddle through.  Certainly there is a risk that even the U.S. slides back into recession due to the Eurozone problems.

As I have stated in the past, I think we may have a period of unusually high volatility.  However, as Longview has shied away from most foreign equities and now foreign bonds, I don’t think the volatility our portfolios may experience will reflect as much actual risk as just shorter-term fluctuations.  In addition, we are seeking returns from other sources such as high yield bonds, where the overall risk / return ratio currently appears to be much better than stocks.  All in all, we are in an environment where the Eurozone debt crisis and weak growth probably will sustain a higher sense of risk, but this should be offset from time to time by continued monetary policy efforts, lower energy costs and generally good (but waning) corporate profits.

And Lewis, who certainly created a lot chaos of his own, died back in 1994.  It is his ghost who is my neighbor, Lewis having owned a cabin close by in the mountains.  In his memory, the current owners have left one of his pink flamingos on their porch.  While a pink flamingo is not exactly a clown, it comes pretty close to describing the craziness we see in the global economy!


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