Silver Linings

Does every cloud have a silver lining?

We’d like to hope so. We’d like to hope that bad experiences can build strength of character or push us to make needed decisions so that in the end we’re better off. Is that what the global stock markets are facing?

First, the bad news: the Fed botched its two-day meeting, and came up with a confusing, contradictory statement that satisfied no one and resulted in a global equity rout. Inflation hawks don’t like the time-focused low-rate guarantee. Inflation doves think that inflation is too low now—what’s needed is 3% or 4% price increases (along with wages) to get animal spirits going again. Neutral observers read the statement and asked, “Is that all there is?”

The truth is we’re in a debt-deleveraging slowdown; consumers are saving more, businesses are saving more, and political gridlock means that government is saving more. Increased investment isn’t the solution: it runs the risk of creating capacity where there’s no demand—like quirky solar energy tax-credits for installing panels in cloudy climates. How do we get out of this funk?

The good news is that the debt crisis could push both Europe and the US to reform our retirement systems. Longer life-expectancy means that people can work longer, and that’s a good thing. More experienced workers tend to be more productive. And we will need that productivity, because continuing development in Asia, South America, and Africa will shift global demand from the North to the South. And as that happens, global incomes will rise.

Not every cloud has a silver lining. But hopefully, the current crisis does .

Douglas R. Tengdin, CFA
Chief Investment Officer
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