The Hunger Time
For the prehistoric ancestors of many of us,
springtime was the hunger time. Stores of food gathered
the previous autumn were depleted and new growth to
replenish them had yet to appear. Early spring was
particularly stingy with its offerings. It was a
perilous time especially for the young and old;
starvation was an ever-present possibility.
For many, now is the hunger time. Over the past two
years, the shocking decline in housing prices and the
stock market has depleted reserves and undermined the
real economy. Unemployment is rising and will continue
to do so for some time. Opportunities are scarce for
student summer jobs or more permanent ones for new
college graduates. Those who are retired worry that they
have the resources left to live out their lives in
Life is cyclical, something our most ancient
ancestors understood well though we moderns often
forget. No matter how bleak the early spring, they knew
that warmer weather and its abundance would return. Hope
and expectation of better times sustained them.
The dramatic rally of the stock market over the last
six weeks reminds us of the cyclicality of economic
life. Hope and expectation of better times seem to be
hard-wired into us by evolutionary forces to ensure
survival. Investors are feeling better though it is a
sign of the ferocity of the stock market decline that
the recent rally still leaves the S&P 500 Index somewhat
shy of where it started the year!
Despite the stock market rise, it is still the hunger
time on Main Street for the working-man. The economy
continues to decline, though it is no longer in a free
fall; it is declining at a slower rate. This
de-acceleration of decline is typically a sign that the
fall in economic activity is approaching a bottom. There
is some hope that the economy will start growing by
year-end. Positives include lean business inventories,
which will lead to an increase in production when demand
revives and pent-up demand from consumers who have
sharply curtailed consumption in the face of looming
unemployment, uncertainty and the fall in household
There remain many obstacles to a vigorous rebound in
economic growth and corporate profits which drive the
stock market over the long term. As the year progresses,
we expect multiple bankruptcies. The automakers are in a
perilous state and may well choose reorganization under
Chapter 11. Recently, we witnessed the largest
commercial real estate bankruptcy in history by a
well-respected operator of shopping malls. Expect more
failures as loans come due and lenders refuse to
And then there is Washington. Federal efforts to stem
panic in the credit markets have succeeded so far but
the system remains fragile and banks are reluctant to
extend loans to any but the highest quality borrowers.
The federal budget, which was passed by Congress almost
unnoticed, is a fiscal nightmare of trillion dollar
deficits containing a wish list of programs that the
country cannot now afford. By borrowing today, we limit
the prosperity of tomorrow. There is no free lunch. It
is ironic that the President talks of a new age of
responsibility and accountability when his budget, from
an economic point-of-view, seems highly irresponsibile.
We read in the media that consumers must exercise
frugality, pay down debt and repair their personal
balance sheets, but the same rules do not seem to apply
to the government.
The recovery when it comes is likely to be anemic.
Consumers will need to curb consumption to pay down debt
and replenish household savings. At some point when the
crisis in the banking system has passed, the Fed will
have to raise interest rates to drain the flood of money
they have injected into the economy or risk resurgent
inflation. This could cause higher interest rates, an
additional drag on economic growth.
Despite all the economic uncertainties, we are
cautiously optimistic about the stock market. In the
short term, the market likely has rallied too far too
fast and we may well see declines from current levels.
Yet it “feels” like the low of last March was a bottom.
We see many stocks that look attractive and advise that
positions should be built on weakness. Sentiment has
become extremely negative. We think that the market has
probably over discounted yesterday’s fears. We would
point out that two years ago nobody listened to the
small group of bears who “ got it right.” Today,
everybody listens to those same bearish forecasters and
is scared out of their wits.
Clients should consider a scenario where the market
doubles from its March low over a period of 10 years.
This would result in a 7% compounded annual rate of
return unadjusted for inflation. This is in line with
long-term historical experience and we find it
conservatively plausible. Furthermore, as an investment,
stocks are likely to beat bonds, which would suffer from
rising interest rates and/or resurgent inflation.
We remain acutely aware of our responsibilities to
clients and are sensitive to their concerns. We want to
make sure that everyone makes it intact through the
Please read our important notice
about these letters and the securities they mention.