Damn the Torpedoes,
Full Speed Ahead
So said Admiral Farragut, perhaps apocryphally, as he
swept into Mobile Bay in 1864 to capture a Confederate
port. Investors would have been wise to heed his words
and example over the last number of years as they fought
the battles of Bear Stearns, Lehman Brothers, Greece,
the Euro melt-down, the fiscal cliff and now the battle
Investors finally seem to get it. Policy fatigue has
set in. Over the past four years, many investors focused
on policy decisions in Washington as a reason to sell. A
dysfunctional Congress appeared to be the gang who
couldn’t shoot straight. Now the investors seem to have
come to the conclusion, that as long as the Fed keeps
money cheap, policy in Congress does not matter much.
“Let's get on with our lives”, the market seems to be
saying. If AT&T yields 5% and ten-year treasuries yield
2%, let’s not get too analytical about it; AT&T gets my
The market had a good year in 2012 and is off to a
good start in 2013. The notion that stocks with growth
and/or high dividend yields is the place to be is
starting to go mainstream. This is luring individual
investors reluctantly back into the market. It is a slow
process but could underpin the market for some time.
In each of the past three years, the market has
rallied into the spring only to be followed by a sharp
sell-off. Could this be the fourth year in a row to
follow suit? It is not unimaginable given the advances
so far this year and the abundant macro problems still
unresolved. But longer term, we feel that the flow of
money will continue into stocks. If there is a bubble
forming, it is in its nascent stage. Mr. Bernanke is on
record at a recent press conference saying that stocks
remain safely within a historical range of valuation.
Some even predict that there could be a “melt-up” in
stocks should investors fearful of missing a market
surge capitulate and pile into stocks indiscriminately.
The crise du jour, Cyprus, is an interesting
situation. The banking system there grew to
extraordinary size for such a tiny country on the back
of huge Russian deposits. These deposits in turn were
invested in Greek government bonds, which collapsed in
price as it became clear Greece was broke. This
subsequently wiped out the capital of the Cypriot banks
along with a substantial part of depositors' money
forcing the banks to close or otherwise face a panic of
withdrawals. Pity the poor Cypriots who are limited to
withdrawals of only about €150 a day, that is, if they
can find an ATM that has any cash available. Commercial
transactions and trade are grinding to a halt.
Any banking system is built on a foundation of trust.
Depositors need to have the confidence that they can
access their money on demand. If that trust is violated
and depositors seek to withdraw their money all at the
same time, the system is unable to deliver and shuts
down. The situation in Cyprus is sure to be a wake-up
call to depositors in weak European banks, particularly
Spanish and Italian ones. So far, contagion has not
spread beyond Cyprus, the argument being that the
country is too small to do damage to the Euro zone. But
trust and confidence are fragile qualities. The system
During periods when confidence erodes demand for gold
typically grows. Gold is a safe haven asset that
investors seek because it is money that exists outside
of the financial system. Banks generally do not take
gold deposits and lend against them as they do with cash
deposits. We continue to hold investments in shares of
gold mining companies as a hedge against an erosion of
confidence in both the soundness of banks and the
purchasing power of paper money.
In the meanwhile, we continue to follow the advice of
the good Admiral Farragut, though we remain watchful for
bubble valuations that easy money may encourage.
* * *
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about these letters and the securities they mention.