5 years later, NOTHING has changed

Dear Partners,  

As we start the last quarter of 2009 we have increased our cash position.  The market looks vulnerable and Treasury bonds are suspect.   Why you ask?  Plenty of reasons.   Here’s a few.

The recovery is not real.  Deep structural problems have not been solved and it’s unclear how we will create jobs and get the economy growing again.  It is very hard to build consumer confidence when employment prospects and job markets are shrinking.  Governments do not create income or wealth and current stimulus equates to future tax liability.

It may seem like common sense that you can't borrow your way out of debt because we apply that principle to our household budgets. But, since the financial crisis began, many states increased their spending despite the plain evidence that stimulus packages have done nothing to ward off the recession.  On any measure, it hasn't worked.  The trouble is that, politically, stimulus packages take on their own momentum. Leaders cannot go back to their voters and sheepishly admit that the money has been wasted. They have to pretend that they are almost there, that another few billion dollars will do the trick. And so, like rogue traders, they end up doubling up and doubling up in an attempt to save themselves.

We still have massive state government implosions poised to tip over.  Bank balance sheets are shrinking by hundreds of billions every quarter.  Georgia bank failures lead the nation. Budget holes are starting to gape again, infrastructure is crumbling and all the while tax revenues are dropping.  These stimulus projects do not generate revenues for these starved states.  They can keep dispensing sugar shots to the economy, but I fail to see how we keep from drifting lower. The highest taxed states are the “most” bankrupt if anyone cares.  

The scale of fraud is immense.  I see failed bankers giving advice to failed regulators on how to deal with failed assets.  The only result can be failure.  The truth is we have a multi-trillion dollar cover-up by banks which amounts to felony fraud on a massive scale.  To me, the biggest obscenity was the bail-outs to the European banks via AIG and of course the $13 billion that Goldman Sachs received in AIG counter-party payments.   The Ken Lewis, Bank of America fiasco says a lot and the SEC won’t address naked short selling and Wall Street fraud.   And today only 2 people are in jail, Ponzi Madoff and Sir Allen Stanford.   Go figure.

It certainly feels to me like we are starting to undergo a major shift and am positioning accordingly, but this market has consistently punished anyone who dares to question it.  The market has ignored the negatives and did a great job of embracing some very shaky positives.  Is the strength of the market based on solid fundamentals or from dark pools, high-frequency trading and robots trading algorithms at nearly the speed of light?  We will find out soon enough, maybe this quarter.

We’ll also find out if America can take personal responsibility and work our way out of this quagmire.  We have become a country of blamers and excuse makers and it’s amazing that we’ve gotten away with it as long as we have.  I am still amazed the public has any money left from the salesmen they entrust their serious retirement assets too.  Our approach provides  honest intellectual analysis, straightforward risk management and independent perspective.  We may not know how to make money at times, but more importantly, we know how not to lose it.  And one thing is certain, hope is not a strategy.  Yet, there’s a bull market ahead.  Some day.

Enjoy your fall, 

dean