No doubt many of you have been watching the market recently make big swings.  Fortunately, many of you have been through this before and know that over time, the market will recover.

In my view, the primary trigger for this latest correction is the risk that Europe may undergo yet another recession as current policies enacted to date are proving insufficient to overcome inadequate private sector and consumer demand.  Similar to the problem the U.S. faced a few years ago, European households and companies are holding back consumption and investment to pay down debt. The resulting shortage of demand is impeding growth. Sanctions in place against Russia due to Europe’s strong trade ties with Russia are also not helping. In addition, the Chinese government is showing less inclination than before to stimulate via credit expansion, which is dampening prospects for other emerging market economies.

Some of this is cause for concern.  Having just returned from Europe myself, it is ever more clear how much Germany is against any kind of fiscal expansion (i.e., temporary government spending increases) to foster demand. Indeed, the German government is committed to have a completely balanced budget next year domestically, and holding other European countries to strict deficit reduction targets (over which France is currently in open revolt). In contrast, the U.S. government allowed its budget deficit to increase to almost 9% of GDP during the height of the crisis on the recognition that someone had to ‘get the engine running again’ when nobody else was spending, and worked quickly to rid the banks of non-performing assets.  These policies worked as is evident in our growing and healthy economy and our rapidly declining deficit (now down to less than 3% of GDP and still falling).  Indeed, just this week we learned that unemployment claims have dropped to a 14 year low.

But there is also some cause for hope. Germany is being hit quite hard and so might show some new flexibility. For example, it could allow the European Central Bank to undertake a decisive program of quantitative easing as was done in the U.S.,  and also enable the European government to enact a Europe-wide public investment program. I do anticipate a more comprehensive and forceful strategy will emerge in the coming days or weeks to calm sentiment. Finally, the weakening euro is very good news for Europe as it will help their export competitiveness and help them ‘import’ more inflation, which they desperately need.

We must also put into perspective that conditions here in the U.S. are much, much better than they were in 2008. Banks are healthy, bad assets have been removed from their balance sheets, and companies are literally swimming in cash. The economic recovery in the U.S. is accelerating and there are lots of reasons to be optimistic including healthy job growth, a recovering housing market, lower energy dependency and prices, complete recovery in household net worth, and so on.  Moreover, we are not in a stock market bubble, not even close to it.

We will be making a few changes to our investment strategy once the market calms down. I will be outlining these changes in detail in our quarterly market report but selling equities in the midst of a storm is certainly not one of them. Indeed, the only thing we plan to do in the very short term is put some of the cash we have to work as we are rapidly approaching a very good buying opportunity.

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