Twist and Whimper
David R. Kotok
June 21, 2012
We have regular morning email exchanges with several media friends. Bloomberg TV reporter Dominic Chu asked about our post-Fed-meeting view of macro, Fed, China, and markets.
I sent him these bullets.
Fed: “Twist and Whimper” not “Twist and Shout.” The Fed action is minimalist. They are causing a market to worry that they may be out of bullets. It would have been better for them to change the text and keep policy constant. My colleague, Bob Eisenbeis, has a longer analysis of Fed action coming out today or tomorrow.
China: there are serious questions about the sustainability of the long-term Chinese growth rate. Moreover, the present situation is questionable, given reports of rising inventory stockpiles of commodities. Is the Chinese slowdown spiraling down or will it plateau and rebound? Jury is out.
Europe. The mess persists. The next focal point is the ESM. They will try to set up a two-tiered sovereign debt system with the ESM holding the “senior” sovereign debt. How they do it and if it will be credible remains to be seen. Europe is spiraling down.
Cumberland’s investment mix. Underweight Europe. The only eurozone country we own is Germany. We own UK, Sweden, and Poland. Total Europe is underweight benchmarks. Asia requires selectivity. China is the world’s second largest economy; and we are concerned about it.
US market faces a rising uncertainty premium. The 2012 political outcome is unknown. Fed outcome predictable now for rest of year and is essentially flat. Federal policy faces “fiscal cliff” issues. We like the US relative to the rest-of-world. America is the “least worst” option.
Lastly, we are holding a cash reserve. Cash earns zero. However, it does not decline in value and you need it to buy on weakness. We can commit at any time or stay with the cash reserve for indefinite periods.
Finally. I am going fishing this weekend in Maine. I’m very excited that my son, Mitch, is joining me. It will be cooler in Maine. The small mouth bass are off the beds and know what to do. Leen’s Lodge has wifi and satellite TV, so I can look at Dom Chu and my other friends on Bloomberg. Thanks to Dom for today’s email.
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David R. Kotok, Chairman and Chief Investment Officer
Twitter: @CumberlandADV
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