March 2010 - Forecasts & Trends

I felt really bad about sending out last week's E-Letter in which I predicted that we will face another serious financial crisis and perhaps another depression sometime in the next several years. But later that same day, the latest poll by Fox News/Opinion Dynamics showed that 79% of registered voters believe that an economic collapse is still possible. 84% of Republicans, 80% of Independents and 71% of Democrats all agree that the worst may not be over. Obviously, there are a LOT of Americans that agree with me that Obama's trillion-dollar deficits and the skyrocketing national debt represent the biggest threat to our economic and financial futures.

This week, we take a look at the latest economic reports, most of which suggest that growth this year will fall well short of the 5.6% rise in GDP in the 4Q. We also review the recent actions in the stock and bond markets, both of which have had their share of surprises. And finally, we will review how the non-partisan Congressional Budget Office 'scores' major pieces of legislation in terms of their overall cost. You may be surprised to learn that Congress can game the system and get just about any CBO score they want - as was the case with ObamaCare.

This week, I'm going to hand the reins over to Roger Schreiner, one of the early pioneers of active money management, and allow him to fill you in on a challenge he made last year to John Bogle of Vanguard Funds fame. Roger has studied and observed active and passive management strategies for decades and feels, as I do, that active strategies can provide superior risk management. Roger's conviction is so strong that he challenged Mr. Bogle to a contest that would prove which strategy would come out on top over a given period of time, with $100,000 going to the winner's charity of choice. Mr. Bogle didn't accept, so Roger later widened the challenge to any passive money manager. Still, no takers.

While most active managers put their 'money where their mouth is' by investing in their own programs, Roger has gone one step further by issuing a direct challenge to one of the most prominent adherents of buy-and-hold strategies, and risking $100,000 of his own money in the process. I think you'll enjoy reading Roger's challenge as well as his arguments in favor of active management. After his discussion, I'll debunk a few of the more common rebuttals that Roger has received since issuing his challenge. If you are struggling with deciding how to get back into the market, I think you'll find this week's E-Letter to be very interesting.

Two economic/financial reports last week were shockers and support my view that we may be facing a double-dip recession. First, consumer confidence unexpectedly plunged in January - no analysts that I read saw this large a drop coming. Second, the Federal Deposit Insurance Corporation (FDIC) released its quarterly report which showed that lending by US banks plunged last year in the sharpest decline since 1942. We also saw new unemployment claims spike higher for the week ending February 20.

What does this all mean? For one, the economy is not improving and more and more Americans are coming to know this. And banks are still not lending - what else is new? Are we indeed headed for a double-dip recession? Maybe, maybe not, but the odds are increasing. This week, we go over the latest reports, and try to come to some conclusions. And we end on a personal note from me. Let's get started.