Where There’s a Will, There’s a Way...

In January 2009, the U.S. and global economy was on the precipice: the international financial system was in near-meltdown, global unemployment was soaring, world trade was in a freefall, the housing market was devastated and economists were warning that a turnaround was nowhere in sight. Governments faced the prospect of widespread social instability and popular unrest. Ominously, historians were recalling that the Great Depression had set the stage for World War II. In fact, in February of 2009, the director of national intelligence, Dennis Blair, told the U.S. Congress that the global economic crisis had replaced terrorism as "the primary near-term security concern of the United States."

What a difference a year makes. As 2010 begins, we are starting to see signs of a recovery, including a growing global economy that appears to have accelerated in the fourth quarter. Unemployment has leveled off, world trade has picked up, businesses are starting to invest again, consumer confidence and spending are on the rise and the housing market is more stable. In addition, intelligence officials are no longer describing global economic problems as the paramount U.S. security concern – even as an apparent Al-Qaeda attempt to take down a Northwest Airlines jet on Christmas Day reminds us that terrorists are an ongoing threat. Looking back, the biggest economic story of 2009 may well be what did not happen – the Great Recession of 2008-2009 did not, in fact, lead to another Great Depression.

Just over a year ago, the bankruptcy of Lehman Brothers pushed the already weary financial markets to the brink of collapse. Credit markets simply stopped functioning and the markets looked to the government for some policy response. Looking back a year later, that response (despite a few flaws) was very effective. In fact, in contrast to the Great Depression, the decline was halted within months by an extraordinary coordinated worldwide governmental response to the financial crisis. Big banks were rescued with a multi-trillion-dollar life raft of public cash and guarantees, and central banks around the world slashed interest rates while embracing creative strategies and dramatic expansions of their balance sheets. In addition, this global monetary response was accompanied by tremendous global fiscal stimulus which accomplished the goals of stopping the panic, stabilizing the financial system and offsetting a good measure of the collapse in private economic activity. Big emerging economies recovered first and fastest and by mid-year, most of the developed world had started to expand again. As the New Year begins, only a few are still in recession.

Governments around the world showed us in 2009 that they’ve learned what doesn’t work when combating a deep recession – overly tight monetary or fiscal policies and beggar-thy-neighbor protectionist measures. The impact of this global financial crisis was significantly limited because on each of these fronts, the policy mistakes of the past were strenuously and knowingly avoided. When all of this is committed to the history books, we believe the primary lessons will center on the power of coordinated government intervention, their determination to do what was necessary and the robustness of the human spirit – not just the boom-bust tendencies of the global economy or the extent of human greed.

Despite our positive outlook, we’re keenly aware that the collateral damage of the bust remains in plain sight. After their gut-wrenching plunge, capital markets are still not close to regaining their 2007 peaks. Unemployment in the U.S. has doubled to 10% and home foreclosures have decimated communities across the country. Perhaps the biggest and most damaging casualty of the Great Recession has been confidence in the future, particularly in the ability of the U.S. economy to grow and compete.

But in retrospect, 2009 will likely look more like a puffed-up version of prior recessions rather than something without precedent. Once again, the peak of fear and uncertainty in March turned out to be - at least for now – simply a market bottom. And once again, fears of the U.S. becoming irrelevant appear overblown. To rebut that concept, we refer you to the comments made by a panel of clients – including one whose company recently broke ground on a $4.2B semiconductor plant in upstate New York – that recently shared their perspectives on how innovation and globalization will continue to drive growth in the U.S.

As we look ahead, we are confident the global economy will recover. We share a view that global economic fundamentals support a high probability of good long-term investment performance, regardless of what short-term gyrations occur. The source of our confidence is an overarching belief in the power and will of the human spirit, which has always proven to be stronger than any events which attempt to destroy it. The power of creativity and innovation, expressed through the efforts of free, well-educated individuals applying scientific knowledge and human ingenuity to the development of new technologies, products and services designed to improve material well-being, appears unstoppable. John Maynard Keynes articulated this belief in the 1930’s, and he predicted then that the standard of living in advanced capitalist countries would increase by a factor of four to eight over the next century. In fact, in the nearly eighty years since 1930, the per capita gross domestic product in the United States, adjusted for inflation, has increased by a factor of six.

We believe the potential for material advance is no less abundant in the United States today than it was two years ago or even eight decades ago during the Great Depression. We also believe U.S. business will continue to enjoy the net benefits of increased “globalization” as hundreds of millions of people across the globe, especially in developing economies, evolve into full-fledged participants in the global economy. The recovery may be subdued and may take longer than we would like but because past is prologue, the upheaval of 2009 will surely pave a path for an even brighter future.

The articles in this quarter’s Insight provide additional perspectives on the past year and our expectations for the future. Our Chief Investment Officer, Jason Thomas, explains why, despite the incredible government response, we shouldn’t expect runaway inflation anytime soon. We have also provided a legislative income and estate tax update, guidance on whether a Roth IRA conversion is for you and suggestions for how to mitigate the risks associated with participating on a Board.

Rob Francais
Interim Editor

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