Founder & Chairman
Goodbye and good riddance 2010. Hello 2011. Last year was a tough year, we probably don’t need to tell you that. From our vantage point, it was bifurcated between people who understood the risks and were content to forgo some potential upside in exchange for some stability and peace of mind, and those who simply could not stand to sit and watch the markets melt up as they mostly watched from the sidelines. From a motivational standpoint, it was clear to us, greed is still a bigger motivator than fear. Bill and I aren’t what you would necessarily call religious in nature; however, if we were at a confessional right now I think we would confess to underestimating the tenacity and impact the government would have on the markets in 2010. The lesson learned here, if the governments (really more like central banks) want the markets to go up (inflation) chances are pretty good that they will. Understand that domestically, the Federal Reserve committed to printing 2.3 TRILLION DOLLARS of new money that has or will be pumped into the system by summer of this year. Make no mistake, in doing so, they robbed you of purchasing power by making the dollars you own worth less. Period. Of course, if they hadn’t done that we would have higher unemployment, lower equity prices and disruptions in the financial markets. And we would have had deflation which would have actually put you in a better position today. Lesson learned.
The bigger question today is for how long can governments around the world, more specifically here in the U.S. continue to artificially support their economy? The answer is nobody really knows, but I suspect it’s longer than many people think. That leaves us with the tricky task of having to allocate our clients assets across various different investment vehicles with the idea of growing the account, but not taking too much risk in the process. The conventional wisdom would suggest that after seeing a more than 20% increase in the S&P500 since September, it would be logical to assume a short but steep correction might be right around the corner. But when has conventional wisdom applied to these markets over the last couple of years? It is possible that the markets just continue their melt upwards until the end of the Fed’s asset purchase program later in the second quarter. The Federal Reserve is committed to purchasing more than 100 Billion dollars per month of Treasury securities from the banks through June, so it’s likely that will continue to bolster the markets.
The bigger risk for the time being, we think, comes out of Europe. We have been discussing this for many months that the Sovereign debt issues across the pond have not been solved (probably can’t be solved), and that at some point defaults will inevitably ensue. Theoretically, that would cause a significant decline in the Euro dollar, possibly bringing it back to parity with the U.S. Dollar. It’s impossible to say exactly when that might happen, but to us it seems a likely possibility that it could occur this year, more likely in the second half. Our view is that if significant problems occur in the Euro zone this year, specific assets like gold, oil and other dollar denominated commodities would likely benefit. Only time will tell, but rest assured we are constantly collecting data from many independent sources and will make modifications accordingly.
For the time being, we remain cautiously optimistic on the equity markets, given the massive amount of Government stimulus, and our portfolios will continue to have decent equity exposure. At this point, we don’t think increasing equity exposure is prudent, but maintaining your present level seems to make sense.`
Finally, we should talk about bonds. There is no question that the intent of the Federal Reserve is to suppress interest rates to induce consumer borrowing and spending. Some would argue that for the amount of money committed to the cause, we haven’t gotten much bang for the buck. Interestingly, even in the face of printing 2.3 trillion dollars worth of new money, interest rates have recently edged a little bit higher. To us this is a clear indication that rates would be much higher if the Fed wasn’t interfering. The risk, we think, is having exposure to anything other than very short-term high quality bonds. If the Euro zone finally starts to crumble, or when the Fed stops printing money, we believe the bond market will experience serious negative consequences for a number of months before it stabilizes at rates of at least 1.5-2% higher than where they are today. The good news is that once it happens, savers will actually start to see some higher income. Until then, however, we agree that there is risk in owning anything other than very short-term high quality bonds.
We have made some updates to our models. Please refer to our website to view the modifications. As always, you must notify us that you want the changes made. We cannot and will not make changes without your permission. The best, most accurate way to handle this task is by email, that way we all have a record of what was supposed to occur.
Visit www.sawchukwealth.com to review past issues of The Marketview.
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