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Dear ,
The roller-coaster ride that global capital markets embarked on at the end of July gets wilder by the day. Markets soar on news of robust corporate earnings or the injection of liquidity by central banks into the global financial system, then plunge on fears of a financial meltdown in the euro zone. The willingness to commit capital waxes and wanes with the news of the day.
The price swings are, indeed, unsettling. Governments in the U.S., U.K., and Europe seem intent on living up to Winston Churchill's description of Americans-that they eventually do the right thing but only after exhausting all other options. While policy makers stumble toward solutions to stimulating their economies in the short term and reducing their debt burdens in the long term, they are fraying the nerves of investors.
The most persistent concern is whether euro zone governments and institutions can agree on a course of action that will keep interest rates on sovereign debt in southern Europe low enough to allow those governments to make timely payments of interest and principal on that debt. Most observers want the European Central Bank to make massive purchases of Spanish and Italian debt to reassure markets that there will always be a "lender of last resort" to support countries who are overextended. Germany, the Netherlands, and other northern Europeans want those deeply indebted countries to balance their budgets by taxing more and spending less as a condition of being bailed out. Financial markets are pushing the euro zone toward a moment of truth.
If a compromise can't be reached, the consequences could be dire. If sovereign debt cannot be serviced or repaid, the holders of that debt-European banks, primarily-would suffer severe losses. Banks would be forced to reduce their lending; consumers would be forced to cut their spending; and global economic growth could grind to a halt. Asset values would decline to reflect the bleaker prospects for growth and social unrest could intensify and spread.
Such macro-economic uncertainty renders most investment disciplines ineffective in the short run. The miserable returns that even the most skilled and experienced investors have delivered this year are a testament to the difficulties they are encountering. One of the most successful of them in recent years, hedge fund manager John Paulson, sent his shareholders a letter at the end of October apologizing for his year to date performance-the worst in the seventeen year history of his firm.
We are, by common consent, in unchartered waters. The debts that have been incurred over the past three decades by governments and individuals hang like storm clouds on the horizon. When they will pass is anyone's guess. In the meantime, proceeding with caution is the only prudent path and the one which the managers to whom we have entrusted your money are following. They are sticking to their time-tested disciplines, weighing rewards versus risks, and operating under the assumption that this, too, shall pass. Such practices have worked for them in the past and we have every confidence they will work for them in the future.
If you want to discuss any of the macro issues currently weighing on the markets or how any of your accounts might be affected by them, don't hesitate to call.
If we don't speak before the holidays, please accept our wishes for a happy holiday season and a prosperous new year.
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