Market Commentary

Babies with Hammers

October 2013

"Home life ceases to be free and beautiful as soon as it is founded on borrowing and debt." –Henrik Ibsen

"This country has come to feel the same when Congress is in session as when the baby gets a hold of a hammer." –Will Rogers

We write not knowing if an 11th-hour deal to work to keep our country's full faith and credit as solid as it has been for the past few generations will be struck, or not. We hope that a deal will be struck and that we can all breathe a sigh of relief very soon.

The past weeks have been nerve-wracking from the point of factoring in a view of a government closure that will gradually slow the economy. Even more so for the issue of a potential default on U.S. debt which has heretofore been deemed only a remote, contingent possibility that through dint of Congressional brinksmanship we now seem quite close to realizing.

Ultimately, we think there's a good chance cooler heads will prevail and we will find some way out of this potentially disastrous situation come Thursday. But, we think regardless of what headline agreement is reached Thursday by midnight, gradual damage is being done to the credibility of the United States as this issuer of the world's reserve bond investment and currency. In an environment where U.S. Treasury Bonds are no longer presumed to represent the risk-free rate of return, many potential outcomes, not all of them linear and some of them unintended, are possible. We further expect that in the aftermath of this crisis, even with an outcome where the debt ceiling is raised, we are likely to see further credit agency downgrades of U.S. debt. Volatility related to these phenomenae will continue to present both frustration and opportunity.

What to do? We've for some time expected some weakness in the U.S. dollar and possible weakness or even strength in the U.S. bond market related to these issues. In fact a similar debate in Congress in 2011 had us deciding to pull in overall risk profiles pending better values in the marketplace given a wide range of risks we saw developing. We like that your significant foreign bond holdings offer you ballast in your portfolios that is not denominated in U.S. dollars nor held in U.S. bonds. Your cash positions, while in most cases small, are not money market positions but privately insured cash, meaning that we are confident that there are no short-term debt instruments at risk in your ready liquidity in your portfolio. Additionally, we think even in the face of price declines earlier this year that your gold investments offer additional ballast in the portfolio in these uncertain weeks.

We think it's possible that the stock market either recovers in a strong rally if a deal is announced, in which case we'll wait as we have to discover better values at better prices to become more constructive on heavier stock investment. If the stock market corrects suddenly or over a period of days following bad news on the outcomes in Washington, D.C., we and your managers may decide to pursue select stock-oriented buying opportunities in your portfolios. Over the past months, we've put together a shopping list of specific investments we want to make for you should the right opportunity open up. We're excited about these potential investments but want to find the right price points at which to engage. We'll keep you posted.

This is a general assessment of client portfolios and does not reflect the specific circumstance of every client.

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