24/11: Slow and Steady
We have been following a "slow and steady wins the race" investment strategy for 2 years or more. In 2005 this paid off as our diversified portfolios outperformed US equities with a fraction of the risk. 2006 punished our conservative "bond heavy" stance as equities rallied sharply. Thus far in 2007 equities have underperformed bonds despite a sharp upturn in the second quarter. Our mix of short bonds and international bonds (benefitting from the falling dollar) has nicely balanced our underweight US equity /overweight international developed market equity position.
This is only the beginning however. From mid-2005 we have opined in this space that the coming fall in real estate prices would cause problems for US consumers who have spent more than they have earned for many years now. We did not forsee the problem created by the toxic waste known as CDO's (packages of sub-prime mortgages and/or other debt) which has been the trigger for this inevitable decline in real estate. Recent indicators have also suggested that the slowdown is beginning to have an impact on commercial real estate.
Will this real estate/consumer led recession be the wake-up call to the USA to live more modestly, save more aggressively and be better overall stewards of the earth's resources? Here's hoping! Our future prosperity depends on the answer being yes. It may be a painful transition. If we delay this move toward sanity however the pain will be temporarily delayed but ultimately intensified.
The Fed meets in two weeks to determine short term interest rate policy. They are in a bind. Illiquidity in credit and derivative markets threatens chaos. This suggests more easing and the continuing injection of money into the system to bail out the hedge fund specualtors and protect the US financial system. The problems created by past laxity in financial market regulation are becoming manifest. This bailout however also fuels future inflation and adds to dollar weakness.
Stay tuned. Sometime between now and 2009 we will know what choice has been made. Pain now followed by prosperity or delayed pain accompanied by major inflation and much, much more intense future pain. There are no fun choices here but the quick adjustment is the obvious choice - particularly if we assist those at the low end of the income scale to get though the difficulties to come.
OSF
November 24 2007
This is only the beginning however. From mid-2005 we have opined in this space that the coming fall in real estate prices would cause problems for US consumers who have spent more than they have earned for many years now. We did not forsee the problem created by the toxic waste known as CDO's (packages of sub-prime mortgages and/or other debt) which has been the trigger for this inevitable decline in real estate. Recent indicators have also suggested that the slowdown is beginning to have an impact on commercial real estate.
Will this real estate/consumer led recession be the wake-up call to the USA to live more modestly, save more aggressively and be better overall stewards of the earth's resources? Here's hoping! Our future prosperity depends on the answer being yes. It may be a painful transition. If we delay this move toward sanity however the pain will be temporarily delayed but ultimately intensified.
The Fed meets in two weeks to determine short term interest rate policy. They are in a bind. Illiquidity in credit and derivative markets threatens chaos. This suggests more easing and the continuing injection of money into the system to bail out the hedge fund specualtors and protect the US financial system. The problems created by past laxity in financial market regulation are becoming manifest. This bailout however also fuels future inflation and adds to dollar weakness.
Stay tuned. Sometime between now and 2009 we will know what choice has been made. Pain now followed by prosperity or delayed pain accompanied by major inflation and much, much more intense future pain. There are no fun choices here but the quick adjustment is the obvious choice - particularly if we assist those at the low end of the income scale to get though the difficulties to come.
OSF
November 24 2007
