>Enough Blood in the Streets?

Almost everything on world markets from stock prices, oil, other commodities, non-dollar currencies, then proceeded into a near panic sell-off while the usual safe-haven assets such as the U.S. dollar, Treasury bonds and gold rose. This was not a happy performance for most investors and those, like us who have been relatively positive on risk assets for some time (new readers can check out our views for the past 18 months on our website www.BoeckhInvestmentLetter.com which provides back issues). So let’s back up a bit and see whether our relatively positive view needs to be reconsidered. The first point is that readers of this publication and of our recently released book, “The Great Reflation” will know that we are not exactly oblivious to the deep and scary problems of the financial, economic and political world (discussed below). These continue to call for a clear focus on wealth preservation, a profound understanding of risk and return prospects and some sense of timelines and benchmarks to watch closely. So far, the key benchmarks of stability in U.S. Treasury bonds, the U.S. dollar, U.S. corporate bond spreads and low to zero price inflation are still flashing green. This means that the Federal Reserve can continue to pump liquidity into the banking system and economy.

The overall environment, particularly in North America, should remain positive for risk
assets. We think the recent panic in financial markets has been overdone. Having said that, the
economy and financial systems are fundamentally unsound and confidence is fragile, vulnerable
to periodic shocks, like the recent Greek/euro crises. However, recovery from the near collapse
of 2008-2009 is still underway, driven by improving balance sheets and liquidity, the exact
opposite of conditions in 2007-2008 when the economy and financial systems were unravelling.
Further shocks will no doubt occur and will have a significant impact on markets. The rollercoaster ride is still intact and the great reflation has added some steroids. Eventually, the piper will have to be paid, but we think that this can be put off for a while longer. But this view must be tempered with the notion that anything can go wrong at any time with little or no warning— like the euro crisis of recent weeks. Brittle confidence snaps easily and causes financial bloodshed. We think the recent sell-off qualifies, in good part, for Baron Rothschild’s quip about when to buy. While this is no time for complacency, it is probably not the time to lose your nerve.

The big negatives for financial markets are well documented, as are many of the smaller
ones. Frightening news sells well when people are scared and this obviously creates a feedback
loop. The coverage in the press, investment research and subscription services, blogs and TV
have done an excellent job of thoroughly informing us all as to the world’s problems. (Where
were they in 2006-2007 when the problems were being created?). There is no need to cover the
same ground, so we will instead provide our own take on some of the issues.

To read the full report: ENOUGH BLOOD IN THE STREETS?