First Quarter, 2006

Judging from the positive price action of domestic stock markets during the first quarter, all appears to be going quite well. Indeed, investor complacency seems to be the rule as evidenced by the low level of the volatility index and the continuing decline in risk premiums for all types of low-quality investments. Even concerns regarding rising domestic and global inflation and interest rates are (for the moment, at least) of no concern to equity investors. Credit for this presently optimistic state of affairs should be given where it is due. The domestic economy is growing at a solid rate. Perhaps most important in this regard are the employment figures which present an encouraging picture of strong corporate growth.

Client portfolio have experienced an extraordinarily strong first quarter in this current environment as the various investment themes and strategies we have described in previous quarterly letters continue to work in our favor.

How long these trends will continue is impossible to predict. It seems to us that the explosion in the price of gold and other precious metals is reflective not only of rising inflation, but also diminishing faith on the part of our global neighbors in the reserve currency status of the dollar. Around the world there is a growing trend to begin diversifying countries’ reserve currencies away from the dollar. As global demand for the dollar begins to decline (as may now be happening), domestic interest rates are likely to increase to entice foreigners to continue lending us money. We think there is a high probability this trend will continue with eventual negative implications for domestic stocks and bonds.

Last quarter we discussed the yield curve inversion with its negative implications for GDP growth six to nine months into the future. We are happy to report now that the inversion risk has receded. You see, for the first time since the Fed began raising short-term interest rates approximately two years ago, long-term rates are now moving higher in line with short rates. Thus, domestic recession concerns (based upon the yield curve) are no longer influencing stock market behavior.

Every six months the International Monetary Fund (www.imf.org) updates its economic databases of world economic growth by regions and by countries in a document entitled "World Economic Outlook." This study enables an interested observer to get their arms around the big picture of capital flows between countries. Why is this important? Perhaps the reason is best explained by the old investment maxim which says that in order to make money with your investments you’ve got to "follow the money." The "World Economic Outlook" puts into clear perspective where "the money" is going. Here is a summary of some interesting facts from the most recent report dated September 30, 2020.

For us, this Economic Report is akin to peeking into a window and observing fundamental changes in the dynamics of the world’s economies as they unfold before our eyes. The information has served as the impetus for our recent increases in the proportion of client portfolio holdings of non-U.S. equities.