Capital Ideas Newsletters


Earth, Inc.

May/June 2011

As The New York Times recently reported, federal safety regulations must take the weight of Americans into account when regulating air, sea and land travel. The National Center for Health Statistics has calculated the average weight of an American male as 194.7 pounds and 164.7 pounds for females. He’s (she’s) not heavy, he’s American!!!

America is a tale of two cities. On the one hand, corporate America’s profits are strong, borrowing costs are low, workforces are lean, and balance sheets are flush with cash. This contrasts with strapped underemployed Americans, higher taxes coming, political posturing at the expense of our country and a widening economic gap between the haves and have nots. The potential for social unrest because of these issues continues to rise, as does the percent of government responsible for GDP! We are not a fan of this prescription.

In a sign that “breaking up is no longer hard to do,” the U.S. divorce rate, which had dipped in the economic collapse, has rebounded. Along these lines, the royal wedding was met with much less fanfare than in the past. Just a matter of “Kate” expectations.

As an asset class, Hedge Funds eclipsed their previous high in assets under management, reaching an estimated $2 trillion, roughly $600 billion more than in 2008. Public pensions have been a big contributor to this increase.

As the budget crisis deepens every day, Washington wastes time, preoccupied with elections, sex scandals and old ideas for solving the problems of a new generation. It is foolish to think that what happened in the Middle East cannot happen here. New media is delivering unprecedented power to the people, and incumbents (of all types of governments) should be concerned with inaction.

We must all be concerned with what happens around the globe. The world has become so interconnected that no nation can prosper without the cooperation of Earth, Inc.

Under current projections, interest payments on the national debt will swell to above $650 billion by 2017—three times more than what the U.S. pays now. For the next 12 months, the U.S. will have to roll over $2 trillion in short term obligations. Just staggering!!!

In our view, the dollar will continue to fall, commodities (generally) will continue to become more valuable, in dollar terms, and strong large multinational corporations with predictable cash dividends will continue to perform well.

We still believe a 5-10% advance in the large indexes is a likely scenario for 2011, so the recent pull back was not unexpected.

Watch for second quarter earnings releases in July to see where the markets might go. Our view of bonds is to remain on the shorter end of the yield curve, but it is likely that no major interest rate increases will occur unless a crisis occurs or business and housing improve dramatically.

As said in the Financial Times, “Rebalancing our economic engine always makes for a bumpy ride.”

In our view, volatility in the markets will remain an issue for the balance of this year. It is our job to be a steady and calming influence on this otherwise rocky road.

If you need our guidance, we are here.

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