Capital Ideas Newsletters



January/February 2011

This is the net interest rate on the 10-year U.S. Treasury Note as of mid-day on the first business day of 2011. Where this rate goes is really indicative of almost everything that happens in the financial world and is reflective of so many factors.

If interest rates move higher, it will either portend an economic recovery or a dollar crisis. Obviously, we prefer the former.

The problems that were with us in 2010 have not gone away. Neither has the enormous stimulus and tax relief that is being extended to all of us.

Clearly, the hope is that we “grow” our way out of this mess. We believe that growth alone will not do the job. There needs to be massive and serious restructuring of not only our fiscal approach, but also our philosophical approach to these issues. Consistently high unemployment is unacceptable in our society and will lead to social unrest.

America must do its own restructuring to accommodate the change in our society, and we are truly “behind the curve.” As our population ages, we need to address what we can and cannot do. And we cannot do it all.

Our culture has fostered a weak underbelly and we will need to toughen up to effectively compete in a world marketplace. The good news is that we CAN do it.

I am writing to you on a plane returning from a ten-day visit to China. During this visit, I was privileged to meet with both businessmen and politicians. One thing is crystal clear—the Chinese are not just about business. In my view, they have a maturity in their government leaders that seeks to truly take care of their population (1.3 billion approximately).

Thirty years ago, the city of Shenzhen was an agrarian town with a population of 200,000. Now it is one of the miracles of the industrial age. Apple has a factory there with 400,000 workers! Shenzhen has been transformed into a thriving city with approximately 10 million hardworking, industrious and motivated people.

There is clearly a balance in China between building the economy and lifting millions out of poverty each year along with increasing freedoms on a limited basis.

In China more and more people are moving to the cities in search of a more prosperous life. They are earning money and becoming consumers. In some sense, the rest of the world is relying upon this increased consumption to drive their economic growth.

In a meeting with one particular senior government advisor, he said to me, (and I paraphrase) the United States and China are inextricably linked. Ultimately, world order may very well depend on this partnership. This gentleman had been in the recent meetings in Washington between President Obama and President Jintao of China. His view was that they went very well.

In other parts of the world, particularly in the Middle East, crisis has erupted. Tunisia and Egypt are undergoing political upheaval. Soon, Yemen and others may follow. This instability adds to the anxiety of the markets.

Does the “new normal” mean consistently high unemployment and massive U.S. deficits? We do not think it has to be this way. Good leadership can change the direction of our nation both economically and philosophically.

U.S. companies will not hire until they are convinced the recovery is real and, lately, we have seen some evidence of this growth. Congress must not act precipitously to inhibit government stimulus. However, the administration MUST be serious about cutting waste in entitlements and defense expenditures. Americans must understand that there is no free lunch. Governor Chris Christie is leading the way in this dialogue and “the people” are responding to his call to action.

Beef prices are moo-ving higher as are other agricultural products. This trend may continue because weather patterns have created difficult farming environments in many parts of the world, particularly as demand from developing nations escalates.

Food price increases have the potential to cause political upheaval in developing and emerging economies… we must be vigilant about this problem as the negative ramifications could be quite dangerous in politically unstable parts of the world.

The President has hired a practical centrist as chief of staff, Bill Daley, who has the trust of the business community. Clearly, President Obama has been lacking in this aspect of his administration. We are encouraged by this positive change in the top levels of government.

The markets have been leaning positively as bond yields have been creeping higher. We are of the belief that interest rates will slowly nudge up and that the U.S. stock market can have a year of positive returns in the 5-10% range. As we flirt with a 12,000 Dow, let us not forget the problem that got us here. There is still a housing crisis, and our financial institutions continue to hold plenty of toxic assets.

There is a lot to celebrate in returning from the edge, but so much more needs to happen to feel really good about the direction of the economy and nation.

As developing nations move to slow their economies, larger U.S. companies may find it more difficult to sell their products abroad. It may very well be a great year for the small capitalization companies.

Remember though, whatever your opinion, it is imperative to focus on your own short and long term needs and have a plan for both. At the end of the day each of us lives in our own world and having a solid plan in place is usually the best road. Without a map, it is always more difficult to reach our destinations. Come talk to us.

Stay warm.

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