May Letter To Clients {Part III}
The Great Reset
We mentioned last year long before the Presidential election that 2008 would be viewed as a change year. Much like Kennedy’s win in 1960, FDR’s win in 1932 and Reagan’s win in 1980, we think investors will look back on this era and notice a fundamental break in many ways with the past. We also think for better or worse the world will be a much different place a decade from now.
Demographically and culturally the United States is changing. So are our views regarding a whole host of issues from energy to the environment to foreign affairs. Two areas that are currently seeing change are the role of governments and how securities markets function.
Governments at every level are becoming more assertive versus the private sector. Often this is simply motivated by the need for money. In case you haven’t noticed almost every institution and governmental entity is broke and screaming for cash. However the main thrust of this has come in response to the current economic crisis and a belief that there are many parts of the private sector that need more regulation or control.
From its response to the financial crisis to its firing of General Motors CEO and signaling of its intent to remake the healthcare sector, the new Obama Administration desires to revamp many Federal policies and bring the government into many sectors of private life. It is too soon to know how these policies will shake out. Usually too much governmental involvement in business leads to tepid economic growth and stock PE contractions. Such control usually brings about a higher tax burden which must be born by somebody at some point.
Securities markets are also changing. Not only are there many more types of instruments traded today such as Exchange Traded Funds {ETFs} but it is often unclear how some of these interact with trading. For example very few people had heard of Credit Default Swaps {financial instruments for swapping the risk of a debt default} until a year ago. Most cannot explain them even today. Fewer still could have predicted that these instruments would have the potential to wreck the financial system.
One thing that is clear is that markets now react instantaneously to information. As such we are forced to develop new tactics to these changes. Our development of our “Playbook" is a response to this. In it we constantly ask “What If….?”, we try to develop responses based on those results and then look for ways to tactically implement these ideas in client portfolios based on what we understand to be their unique risk/reward equation. We always have an investment game plan. We constantly evaluate our plan and stand ready to change it when conditions change.
We mentioned last year long before the Presidential election that 2008 would be viewed as a change year. Much like Kennedy’s win in 1960, FDR’s win in 1932 and Reagan’s win in 1980, we think investors will look back on this era and notice a fundamental break in many ways with the past. We also think for better or worse the world will be a much different place a decade from now.
Demographically and culturally the United States is changing. So are our views regarding a whole host of issues from energy to the environment to foreign affairs. Two areas that are currently seeing change are the role of governments and how securities markets function.
Governments at every level are becoming more assertive versus the private sector. Often this is simply motivated by the need for money. In case you haven’t noticed almost every institution and governmental entity is broke and screaming for cash. However the main thrust of this has come in response to the current economic crisis and a belief that there are many parts of the private sector that need more regulation or control.
From its response to the financial crisis to its firing of General Motors CEO and signaling of its intent to remake the healthcare sector, the new Obama Administration desires to revamp many Federal policies and bring the government into many sectors of private life. It is too soon to know how these policies will shake out. Usually too much governmental involvement in business leads to tepid economic growth and stock PE contractions. Such control usually brings about a higher tax burden which must be born by somebody at some point.
Securities markets are also changing. Not only are there many more types of instruments traded today such as Exchange Traded Funds {ETFs} but it is often unclear how some of these interact with trading. For example very few people had heard of Credit Default Swaps {financial instruments for swapping the risk of a debt default} until a year ago. Most cannot explain them even today. Fewer still could have predicted that these instruments would have the potential to wreck the financial system.
One thing that is clear is that markets now react instantaneously to information. As such we are forced to develop new tactics to these changes. Our development of our “Playbook" is a response to this. In it we constantly ask “What If….?”, we try to develop responses based on those results and then look for ways to tactically implement these ideas in client portfolios based on what we understand to be their unique risk/reward equation. We always have an investment game plan. We constantly evaluate our plan and stand ready to change it when conditions change.
*Long ETFs related to the S&P 500
{Tomorrow Part IV}
posted by CR English at 6:34 AM
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