Summer Update

These last several months have been full of differing views depending on which media outlets you watch or read. What is most interesting is how most investment professionals lack the quality of being open-minded and believe their opinion to be the only truth. In fact, many follow a herd mentality and anchor on their beliefs to be the only view and will go to any length to prove their point. Recently, I have read some suggestions that our Government along with Wall Street and the Banks have a conspiracy to lie about the state of our economy for their own gain. I would assert that if this conspiracy were to really exist (I doubt that it really does) it is really in the best interest of our people. Many managers have very short memories and tend to forget where we were last October. After the failure of Lehman, AIG and Merrill Lynch were next on the chopping block. If it weren’t for the foresight of Mr. Bernake and Mr. Paulson, we might have had a systematic failure. It is always nice to criticize after that fact but without the intervention, our markets would have failed. There are still many risks that still exist such as the mortgage resets and rising levels of housing inventories. Also, the labor markets are far from being rosy which really impacts the consumer but there is a turn in many leading indicators. The credit markets are the first place to look to see if we are still repairing after the shock we incurred. Spreads continue to narrow in the corporate debt markets and with many securitized products, although some would argue that it is due to the stimulus from our Treasury and Fed. Either way, there is substantial improvement in our credit markets from where we were just a year ago. As the economy improves, so will our stock market and confidence will return to both the consumer and our corporations.

Real Estate Today

Today, many people are talking about the rebound in the Real Estate marketplace that is emerging. I have thought about this and feel that Americans are still very much overextended. Most people have much more debt in the form of mortgages, credit card and auto loans than they do in assets. In Los Angeles, many people I know earn a modest $250,000 and have a house that exceeds $1MM. Their debt level as a function of income is probably around 400-600%. By comparison, we look at the United States with a GDP of $14 Trillion and debt of $11.2 Trillion. That is only 80% of debt to income! This is a great concern because our savings rate is still very small. As the baby boomers get older and need to sell assets to keep up their lifestyle, they will sell their liquid assets and homes. This will keep a long term damper on the prices of homes in the US. We might very well see a stabilization of Real Estate but don't count on a rebound.

Turn of the Millenium

For the last 5 weeks, I have been connecting with something much larger than what our world news agencies have been reporting. Life still goes on and the world still turns. What began in mid-2007 as the beginning of a depression, now looks like it will be a prolonged recession. The economy still looks very bleak although signs of life are springing up in many nooks and crannies. It will most likely be another 6-8 months of labor pains and real estate declines but the stock market has begun what appears to be a turn towards more positivity. It has been noted by many great investors that our markets are Bi-Polar and now we seem to be approaching a more manic stage. The depressive state is subsiding and America is asserting itself as the world leader for the next century. This quarter might mark a return to growth that had fallen off a cliff. We will most likely look back at what Mr. Bernake and Geithner accomplished with much comfort that they staved off a systematic failure. It has been a long time coming with regards to changes in accounting and short selling rules. These changes are necessary for us to move from our current state to a more elastic economy. Using the past to dictate the future is a bad presumption. Learning to live in the present and to stop using models built on past perfomance will no doubt help us out of the mess created by the old guard. With Hedge Funds, Private Equity Funds and Investment Banks all under new regulations, risk taking should take on new dimensions. The next decade will be without a doubt be better than the one we just lived through. Staying positve is the first step.