Blog - October 2012 Market Letter

Jeff Cedarholm
Chief Investment Officer

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“Well, Armageddon is not around the corner. I don’t believe in the imminent demise of the U.S. economy and its financial markets. But I’m afraid for them.”

Bill Gross, October 2012

A week or so ago, during one of my bi-weekly early morning trips to the gym, a client commented to me that the markets seem to be doing pretty well. I shot back, “you would be doing pretty well too if you were in the hospital and the doctors had just ordered a constant morphine drip, and had given you assurances that it would be there until you were all better!” The U.S. Federal Reserve and Ben Bernanke’s team have done just that; they have assured us that with QE3, they will be there to supply an unlimited amount of credit to our banking system and hence to us. The Fed has a dual mandate: 1) to keep interest rates appropriate and stable, and 2) to control unemployment. It is this last mandate that seems to worry Ben. This is what he still sees: bank deleveraging = household deleveraging = low consumer demand = high unemployment = threat of deflation. Therefore, QE Infinity!

The positive result of the Fed QE programs has been to stabilize the economy and the markets, taking the threat of financial Armageddon away. But the loose money, like water, flows along the lines of least resistance; in this case, into the stock and bond markets first and more slowly into the residential real estate market. Over the last quarter, stock markets around the world have outperformed their respective economies and in many cases, even their underlying companies. I am a believer in the “reversion to the mean” theory, but feel this reversion has yet to happen. Will it be economies coming up to meet their markets, markets coming down to meet their economies, or somewhere in between?

Writing these letters (or now blogs) used to be easier. Asset price correlations were more historically normal and not continuously manipulated by the central banks around the world. This manipulation has muted some risks and created others, making us seriously rethink our role as caretakers of your investment funds. Being mindful of all the risks we can see and understand, whether with investing or planning, has always been part of our process. Yet, the demand now is for a much, much sharper focus. As always, thank you for your confidence in the people of Longview.

Best regards,

Jeff Cedarholm


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