In our last note to you, we discussed our growing concern about global economic growth and the increasing risk that we may already be in an economic recession. Though we continue to have these same concerns, we are encouraged by the Federal Reserve’s most recent decisive actions.
The Federal Reserve lowered the discount rate by ¼% over the weekend and by another ¾% today. In addition, the Fed has taken the bold and unconventional step of supporting and guaranteeing the bailout of investment bank Bear Stearns. These efforts go a long way to assist investor confidence and credit market liquidity – two important pillars of sound financial markets.
In our last note, we suggested that the only way to avert a full blown economic recession relied on the Federal Reserve taking decisive and possibly unconventional action. We think these recent actions are steps in that direction and could prove to mute the current economic downturn. That said, it is imperative that the Federal Reserve remains dedicated to this course of action over the next few quarters to avert further economic weakness.
The significant decline in housing prices is at the core of the current economic and credit market turmoil, and we would not be surprised to see the Federal Reserve take decisive steps to support the ailing mortgage markets. This would be a very significant, unconventional, and controversial move, but would go a long way to assisting the global economy.
We are encouraged by the Fed’s recent moves, but remain cautious in our strategy until we see an improvement in current conditions. As mentioned in earlier notes, in an effort to mitigate downside, we continue to hold more cash and bonds than normal, and manage risk through sector weightings and stop loss orders.
Though this period of financial and economic cleansing is unsettling, it will eventually (perhaps by year’s end) be followed by a new, reinvigorated, global economic expansion – something we can all look forward to.
If you have any thoughts, or would like to get together, please let us know at your earliest convenience.
Sincerely,
James E. Demmert
Managing Partner