Despite some weakness in the manufacturing sector, the overall economy continues to grow. The markets on the other hand have been wandering aimlessly at the same level as that of one year ago. Our accounts similarly show a small gain over that same twelve month period. Despite rising deficits, all of the inflation indicators are soft or declining. The Fed, having clearly overshot its interest rate targets, has been in retreat by recently reducing interest rates and are likely to reduce rates further as insurance and given slow growth and declining inflation.

We have recently written about the recession predictive power of an inverted yield curve as the yield curve began to invert but which failed to fully deliver. The curve has been partially inverted for the last six months, but now with the recent reductions in short-terms rates by the Fed, has flattened and appears to be returning to normal. Our best interpretation of this unique set of circumstances is that the economy will likely continue to soften somewhat into next year, but that recent media dire warnings of an imminent recession appear to have been overblown.

And now that we are officially in the longest economic expansion in history, it has also become apparent that economic prognosticators were simply starved for something to prognosticate, namely a recession. This is not to say that risks to growth do not remain, as they always will, but it also appears that we are beginning to overcome a major impediment to growth, our inherent fear of deficits and so-called national debt. I use “so-called” to mean the substantial amount of debt which is held by the Federal Reserve or that which is owed to ourselves.

The 2008-09 financial meltdown together with the subsequent massive deficits, no inflation and sub-par growth have painfully demonstrated that which should have been obvious all along, that the money supply must grow in conjunction with and in sufficient quantity to accommodate economic growth. Hopefully we can now begin to re-direct future deficits and money production towards better and more efficient growth that will stimulate aggregate demand and consumer spending instead of towards relatively idle savings for the wealthy. Current economic measures indicate that we are in a resilient and stable economy, but the leading indicators (those with predictive properties) are perking up such that we anticipate a slowly re-vitalizing economy and a modestly growing market.

We remain cautious and vigilant. We continue to maintain significant cash balances while always on the lookout for opportunities but given conditions are in no hurry. Please also remember that because these quarterly thumbnail sketches are very brief, do not hesitate to call me if you wish to discuss your account or our outlook in greater detail.

Very Best Regards,

Joseph L. Toronto, CFA

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