Letter to Our Clients - January 2009

January 2009


Dear Clients and Friends,


The year 2008 will be written up in history books. The two biggest stories, in my opinion, will be the presidential election in the US, and the global financial meltdown. Regarding the financial markets, we saw the stock market experience its worst performance since the 1930’s. Bonds and commodities also suffered tremendous losses, and the worst of it all came so quickly, with most of the damage from mid-September to mid-November.

As a consequence, Wall Street has been radically restructured and the SEC has come under the scrutiny it should have received decades ago. A consequence of the meltdown of 2008 is likely to be more regulation and less risky behavior on the part of the major Wall Street players, at least for many years. Eventually people will complain about too much regulation, it will be loosened, and we may return to the boom and bust cycles notable in “free-market” economies such as ours is supposed to be.

The economy is clearly in trouble and likely will struggle for some time. Whether it will take months or years to rebound is debated, and we will not know for certain until it is already old news. The stock and bond markets normally move down and up before the economy seems to justify it, and there are record amounts of investment “cash” available throughout the world which could push the markets upward – when investors finally decide to accept risk again.

The key, in my opinion, is in the credit markets. It appears that banks and other major lenders remain unwilling to lend to each other. I am told the two reasons world-wide credit is so tight are that organizations are anxious to be certain their balance sheets appear strong, and they are fearful that their borrowers will not re-pay on a timely basis, if at all. In the meantime, governments all over the world, ours included, are pumping huge amounts of money into their economies. Eventually this will create enough liquidity so that businesses will be willing to loan money to each other on a more normal basis. Once this happens commerce can begin moving again, businesses can start generating profits, employment will improve and the economy will again become just a background topic.


Will 2008 be a “watershed” year, or will we return to normal – whatever that is – when the economy recovers and the Dow Jones Average hits 14,000 again?

My belief is that things will be different, for the following reasons.

1. The Wall Street restructuring and renewed emphasis on regulatory oversight will last for at least a decade and perhaps two or three. The destruction from this cycle was too great to be permitted to occur again in one working lifetime. I think this will mean less risk will be allowed. One way this could happen would be less or no creation of the exotic investment vehicles such as those that caused the 2008 meltdown. If so, we should get less return in good times, but less loss in bad times.

2. Some studies have shown that, following World War II, our economy was carefully orchestrated to become a consumer economy. Consumer spending now constitutes 70% of our GDP. Whether deliberate or accidental, in my opinion, this is crazy. It means the only way out of economic doldrums is for all of us

to go out and buy more, and more, and more. This conflicts with prudent financial management and is called the Paradox of Thrift. We should save enough monthly so that we build up reserves for short-term needs and opportunities, and so that we end up able to support our own retirement and health care needs. We cannot do this if we buy new cars every three years, move up in the housing market every five years, buy new wardrobes every year and eat out 3 times a week.

I am reading and hearing that Americans are coming to this same conclusion. If this new frugality sticks, it will mean a restructuring of our core economy, and likely will change the winners and losers in the stock and bond markets.

3. While I keep saying it is foolish to predict the future, I am going to do so anyway. I don’t see any way to avoid significant inflation over the next 10 years. It may not show itself for two or three years, but what governments world-wide are doing is printing money. Historically this has always resulted in inflation, especially for food and for commodities such as oil, copper, steel, aluminum, etc.

4. Previous watershed years for the last century, in my opinion, were 1929, 1946, 1966 and 1982. I would be happy to share with you why only those years, but call me so I don’t fill up more space here. Why 2008? This year Baby Boomers started drawing on Social Security. The spending patterns which began when this group entered the work force in the late ‘60’s are changing. More importantly, the earnings this age group were generating will be reduced dramatically.

5. Finally, in 2008 issues relating to climate, pollution and energy have become universally accepted as problem areas. New technologies and new behaviors will change the way we deal with all three issues. In turn these will create new investment opportunities and risks. How it will turn out is unpredictable; the fact that things are changing is certain.


I do not believe our economic system is coming to an end. Ten and twenty years from now we may look to 2008 as a year when things changed dramatically, but there will still be banks and businesses making money in entertainment, health care, consumer and industrial goods and services, and communications. There will still be firms dedicated to managing investment money. Cities, states and the federal government will likely look much the same.

My point is that stocks, bonds, money markets and other traditional types of savings and investments will probably still be mainstream ways to invest for the future. The decision-making process we have been using will likely still be valid. We will continue to balance the need to keep pace with inflation with the need to protect investment principal, and to own the appropriate insurance coverages. I anticipate that I will still be working with you, and that our firm will be positioned to work with your children and grandchildren.

My hope is that 2009 will bring you health, prosperity and happiness. Thank you again for the opportunity to work with you.

Best wishes,

Robert K. Haley, JD, CFP®, AIF®