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The Sandy Spring Way

July Observations

July 31st, 2013 | By Beau Mercer

FredericBurkeYou can’t hide your lyin’eyes; And your smile is a thin disguise; I thought by now you’d realize; There ain’t no way to hide your lyin’ eyes. ”

—The Eagles

Several years ago the late Johnny Carson emceed a television show entitled Who Do You Trust. The challenge for the contestants was to determine if it were better to trust themselves or another with respect to the answer to a question. The challenge we face daily is making a determination if we should trust another individual or provider or if we should rely singularly on our ability to make the right decision. Trusting another individual or provider in the age of technology and ready information is particularly difficult. At times, slightly connected parties believe we are not capable of dealing with the complexities of this modern world. A prime example is the Dodd-Frank legislation which dictates how certain financial services can be delivered. To date, the draft regulations have emphasized disclosure with minimal recognition of personal responsibility or financial literacy.  Battle lines have been drawn as to who attains fiduciary status with no resolution in sight. What intellectual skill set enables one individual to determine how to trust another and how long will that confidence last?

President Obama trusted Federal Reserve Board Chairman Ben Bernanke to ward off what could have been “an economic crisis of epic proportions” and then later declared “he’s already stayed a lot longer…than he was supposed to.” President Obama’s decision that Ben Bernanke had served too long could not have come at a worse time from an investor’s perspective. The markets understand why ‘helicopter Ben’ is closing the hatch on quantitative financing. As a result of the uncertainty, however, more than $61.7 billion flowed out of bond funds, a record rush for the exits that was nearly 50% larger than the prior record. Only $400 million –less than 1% of the bond outflow-was transferred into equity funds. Uncertainty or a lack of understanding is the hobgoblin of trust. In the current environment, cautiousness has conquered careless optimism. President Obama now needs to explain who will be driving the bus when the Fed determines to taper off the bond buying exercise.

In the economic history of the United States, June 6, 2013, will occupy a special place. On June 6 the Federal Reserve disclosed that the net worth of American households-the value of what they own minus what they owe-hit $70 trillion. Higher stock prices and a housing recovery are restoring lost wealth. We have recently entered the fifth year of the bull market that began in March 2009. Ironically, the US real gross domestic product growth has averaged a less than stellar 2% growth since the recovery began in mid-2009, yet the stock market has continued to rise. The Dow Jones Industrial Average rose 2.4% in the second quarter and logged its best performance for the first half of a year since 1999. Equity valuations are not stretched. Consequently, the risk/reward ratio continues to favor equity investors and will until inflation returns to historic levels and the Federal Reserve stops bond buying.

On July 4 America celebrates a unique event in history-a moment when individuals who possessed governing power chose not to use that power for their benefit but rather to dedicate their lives and prospective fortunes to the principle that all men are created equal and are endowed with certain unalienable rights. Thomas Jefferson expressed confidence in the experiment of democracy when he stated,” The flames kindled on the 4th of July 1776 have spread over too much of the globe to be extinguished by the feeble engines of despotism. On the contrary they will consume those engines, and all who work them.” Congratulations to all of us who were “Born in the USA”.

—Fred